<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to ______________
Commission file number 012378
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CARLETON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1349953
- ------------------------------- -----------------------------------------
(State or other jurisdiction of (I. R. S. Employer Identification Number)
incorporation or organization)
10729 Bren Road East, Minnetonka, Minnesota 55343
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 238-4000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.25 par value 3,343,266
- ---------------------------- --------------------------------------
Class Shares outstanding on October 31, 1998
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statement of Operations - Three and Six Months
Ended September 27, 1998 and September 28, 1997............... 1
Consolidated Balance Sheets - September 27, 1998 and
March 29, 1998................................................ 2
Consolidated Statements of Cash Flows - Six Months Ended
September 27, 1998 and September 28, 1997..................... 3
Notes to Financial Statements................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources............................... 5
Results of Operations......................................... 5
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................... 7
ITEM 2. CHANGES IN SECURITIES................................ 7
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS..................................... 7
ITEM 5. OTHER INFORMATION.................................... 7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 7
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ------------------
Sept 27, Sept 28, Sept 27, Sept 28,
1998 1997 1998 1997
-----------------------------------------
<S> <C> <C> <C> <C>
Revenues
Sales $ 513 $ 433 $ 1,428 $ 624
Maintenance and Other 499 103 906 191
------- ------- ------- -------
Total 1,012 536 2,334 815
Costs and Expenses
Cost of revenues 671 418 1,297 857
Research, development and engineering 942 492 1,903 981
Selling, general and administrative 1,487 977 2,995 1,908
------- ------- ------- -------
Total 3,100 1,887 6,195 3,746
------- ------- ------- -------
Loss from operations (2,088) (1,351) (3,861) (2,931)
Investment income 108 109 260 236
Interest expense and other (15) (37) (31) (34)
------- ------- ------- -------
Loss from continuing operations before income taxes (1,995) (1,279) (3,632) (2,729)
Income taxes 0 3 0 5
------- ------- ------- -------
Net loss from continuing operations (1,995) (1,282) (3,632) (2,734)
Discontinued operations:
Income from operations of discontinued
Internet Solutions Division 0 303 0 1,228
------- ------- ------- -------
Net Loss $(1,995) $( 979) $(3,632) $(1,506)
======= ======= ======= =======
Income (Loss) per Share:
Continuing Operations $( 0.60) $( 0.45) $( 1.09) $( 0.96)
Discontinued Operations 0.00 0.11 0.00 0.43
------- ------- ------- -------
Total $( 0.60) $( 0.34) $( 1.09) $( 0.53)
======= ======= ======= =======
Weighted Average Shares Outstanding 3,343 2,846 3,333 2,839
======= ======= ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 27, March 29,
1998 1998
-----------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 7,764 $ 11,111
Cash in escrow 61 730
Accounts receivable - net 628 1,517
Other 150 76
-------- --------
Total current assets 8,603 13,434
Property and equipment 4,313 4,649
Accumulated depreciation (3,080) (3,256)
-------- --------
Property and equipment - net 1,233 1,393
-------- --------
$ 9,836 $ 14,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 366 $ 319
Accrued expenses 1,816 3,067
Deferred revenue 695 809
Note payable 1,000 1,000
-------- --------
Total current liabilities 3,877 5,195
Long-term Notes Payable 506 602
Shareholders' Equity
Common stock - authorized, 6,000,000 shares at $.25 par value;
issued and outstanding at September 27, 1998 - 3,343,266 shares
March 29, 1998 - 3,305,363 shares 836 826
Additional paid-in capital 62,768 62,723
Retained deficit (58,151) (54,519)
-------- --------
Total shareholders' equity 5,453 9,030
-------- --------
Total $ 9,836 $ 14,827
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------
Sept 27, Sept 28,
1998 1997
---------------------
<S> <C> <C>
Operating Activities:
Net loss $( 3,632) $( 1,506)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 221 1,070
Accounts receivable 889 892
Installment receivables 0 272
Inventory 0 20
Other assets (74) 13
Accounts payable, accrued expenses and deferred revenue (1,318) (4,514)
-------- --------
Net cash flows used in operating activities (3,914) (3,753)
Investing Activities:
Purchases of property and equipment (net) (61) (47)
Change in cash held in escrow 669 (20)
-------- --------
Net cash flows from (used in) investing activities 608 (67)
Financing Activities:
Repayments of debt (96) 0
Stock options/restricted stock activity (net) 55 157
-------- --------
Net cash flows from (used in) financing activities (41) 157
-------- --------
Net decrease in cash and cash equivalents (3,347) (3,663)
Beginning cash and cash equivalents 11,111 13,865
-------- --------
Ending cash and cash equivalents $ 7,764 $ 10,202
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 39 $ 26
Cash paid for income taxes 9 32
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT REPRESENTATION AND NAME CHANGE
The accompanying unaudited interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for any interim
period are not necessarily indicative of results for the year. These statements
should be read in conjunction with the financial statements and related notes
included in the Company's Annual Report on form 10-K for the year ended March
29, 1998.
The Company changed its name from Apertus Technologies Incorporated to Carleton
Corporation effective August 1, 1998. The Company's common stock continues to
trade on NASDAQ but the symbol changed from "APTS" to "CARL".
2. REVERSE STOCK SPLIT
The Company underwent a one-for-five reverse stock split effective with the
close of business on September 15, 1998. The reverse split was undertaken to
remain in compliance with NASDAQ's requirements for continued listing on the
National Market. All prior year comparative information has been adjusted to
give effect to the reverse stock split. The Company's trading symbol was changed
to "CARLD" for 20 trading days after the split. On October 14, 1998, the symbol
reverted back to "CARL".
3. DISCONTINUED OPERATIONS
The operating results of the Internet Solutions Division for the three and six
months ended September 28, 1997 have been reflected as discontinued operations
in the Consolidated Statement of Operations. The Internet Solutions Division was
sold to Computer Network Technology Corporation in October 1997 as previously
reported by the Company in Form 10-Q's and in Form 10-K for the year ended March
28, 1998.
<PAGE>
4. PRO FORMA RESULTS
The Company acquired a Massachusetts corporation then also known as "Carleton
Corporation" in October 1997. The transaction was accounted for under the
purchase method of accounting and the operating results of the former "Carleton
Corporation" has been included with the consolidated results subsequent to the
acquisition.
Pro forma consolidated results of continuing operations for the three and six
months ended September 28, 1997 as if "Carleton Corporation" had been acquired
at the beginning of fiscal 1997 are:
Three Months Six Months
------------ ----------
Revenues $ 1,559 $ 2,527
Net loss (1,924) (4,058)
Net loss per share (.59) (1.24)
5. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common stock
shares outstanding during the applicable period. There is no impact to the
calculation of the net loss per share resulting from adoption of Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share."
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the following: market acceptance risk and decreased
demand for the Company's products; heightened competition; risk of technological
obsolescence of the Company's products; failure to obtain new customers or
retain existing customers; problems with software programs; risks associated
with the Company's dependence on proprietary technology, including those related
to adequacy of copyright, trademark and trade secret protection; inability to
resolve Year 2000 issues; integration of operations concerns; inability to
attract and retain key personnel resources; risks associated with single sources
of supply for certain components used in the Company's products; longer sales
cycles; inability to manage cost structure; inability to manage cost structure
inability to carry out sales and marketing plans and changes in interest rates.
The forward-looking statements herein are qualified in their entirety by the
cautions and risk factors set forth under "Cautionary Statement" filed as
Exhibit 99 to this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
The consolidated balance sheet at September 27, 1998, shows net working capital
of $4,725 including cash and cash equivalents of $7,764. The Company currently
anticipates minimal capital expenditures in the near future. These expenditures
will be primarily for the purchase of computers for any new hires. The Company
believes the cash position will be adequate to support its anticipated short-
term operating losses, make capital investments and fund working capital needs
into fiscal 1999-2000. The Company currently does not have any outside credit
arrangements other than a $1 million note that is secured by investments. The
Company will need to achieve profitability and generate positive cash flow in
fiscal 1999-2000 and beyond to meet its expected future operating and capital
cash needs.
RESULTS OF OPERATIONS
The consolidated statements of operations reflect discontinued operations (see
Note 3 to the financial statements) by showing the operating results of the
Internet Solutions Division as a single line item.
The consolidated statements of operations for the three and six months ended
September 27, 1998 include the results of the former "Carleton Corporation"
which was acquired by the Company in October 1997 (see Note 3 to the financial
statements).
Revenues for the three months ended September 27, 1998 reflect a significant
increase over the historical revenues from the same period in the prior year but
reflect a decrease of $293 from the pro forma revenues for the same period in
the prior year. Note that the prior year pro forma revenues included
approximately $170 of funded development and $437 more in license revenue. The
revenues were below the Company's expectations (due primarily to lower license
<PAGE>
revenues) and resulted in an operating loss that was higher than planned. The
costs and expenses were lower than planned due to lower headcount and lower
sales and professional services expenses that more than offset increased
marketing costs relating to advertising. The increased costs compared to the
historical level of similar costs in the prior year resulted primarily from the
additional costs of adding the former "Carleton Corporation" infrastructure. The
Company expects its revenues to increase in the coming quarters so that the
losses become smaller until the Company again achieves profitability. The
Company plans to continue to invest in development and engineering to make
product enhancements to increase functionality, product integration and to
address ease of use issues. Additional investment will also be made in expanding
business partner relationships, implementing marketing programs and increasing
market image and awareness of the Company's Pure View suite of products.
During the current quarter, the Company continued to make progress as an early
stage company. Although revenues were below expectations, the Company
accomplished the following: expand its business partner base, continue to
provide quality implementation services on significant projects for its
customers, establish reference accounts, improve product performance through
increased functionality and features, and increase its marketing promotion and
clarify its market position. The focus going forward will be to continue to
improve its products and to build sales momentum through its sales force,
broaden business partner alliance programs and continue to increase marketing
promotion and awareness. The Company is focused on becoming the market leader
for customer data repositories.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations. The various software packages that the
Company uses for internal processing and to support its operations are obtained
from outside vendors. These software packages are Year 2000 compliant or are
expected to be Year 2000 compliant in the near future and made available to the
Company under maintenance contracts. The Company is also assessing Year 2000
compliance issues with companies with which it has third party outsourcing
relationships, such as banks, insurance companies, payroll processors and
telecommunications providers.
The Company believes that the products it sells are Year 2000 compliant. The
Company has developed a comprehensive suite of Year 2000 tests and continues
with its internal testing against those tests. The Company currently does not
anticipate significant problems in achieving Year 2000 compliance with respect
to the products being tested and hopes to have its testing completed by December
31, 1998. The products being tested for compliance include PASSPORT 5.1 release
CAL215, PASSPORT 5.7 and PURE INTEGRATE (formerly Enterprise Integrator). Any
releases newer than the above releases and any new products will also be Year
2000 compliant. Customers on older generation products will be upgraded.
Based on the its assessments and current knowledge, the Company believes it will
not, as a result of the Year 2000 issue, experience any material disruptions in
internal processes, information processing or services from outside
relationships. The Company believes that it will be able to manage its total
Year 2000 transition without any material effect on the Company's results of
operations or financial condition.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company met with representatives of Case Associates, NV and
Carleton Europe, NV on July 29 and 30, 1998 but was unable to reach
any settlement agreement. The Company continues to vigorously defend
itself against the claims made and to pursue its counterclaims. The
Company filed a Petition for Descriptive Relief in Belgium and was
able to seize the intellectual property being used by Carleton Europe
after distribution rights were canceled by the Company. The litigation
will continue in the United States and Europe with the discovery
period set to begin in the near future. Costs incurred by the Company
that relate to addressing any Carleton Europe issues can be offset
against the notes payable to the former Carleton Corporation
shareholders. See additional information contained in Form 10-Q for
the quarter ended June 28, 1998.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Previously reported. See Form 10-Q for the quarter ended June 28,
1998.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99 Cautionary Statement
(b) No reports on Form 8-K have been filed during this quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARLETON CORPORATION
Date: November 10, 1998 By /s/ Steven Thimjon
-------------------
Steven Thimjon
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-28-1999 MAR-28-1999
<PERIOD-START> JUN-29-1998 MAR-30-1998
<PERIOD-END> SEP-27-1998 SEP-27-1998
<CASH> 7,825 0
<SECURITIES> 0 0
<RECEIVABLES> 734 0
<ALLOWANCES> 106 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,603 0
<PP&E> 4,313 0
<DEPRECIATION> 3,080 0
<TOTAL-ASSETS> 9,836 0
<CURRENT-LIABILITIES> 3,878 0
<BONDS> 506 0
0 0
0 0
<COMMON> 836 0
<OTHER-SE> 4,616 0
<TOTAL-LIABILITY-AND-EQUITY> 9,836 0
<SALES> 513 1,428
<TOTAL-REVENUES> 1,012 2,334
<CGS> 671 1,297
<TOTAL-COSTS> 671 1,297
<OTHER-EXPENSES> 2,429 4,898
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15 31
<INCOME-PRETAX> (1,995) (3,632)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,995) (3,632)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,995) (3,632)
<EPS-PRIMARY> (.60) (1.09)
<EPS-DILUTED> (.60) (1.09)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT
Carleton Corporation (the "Company" or "we"), or persons acting on behalf of the
Company, or outside reviewers retained by the Company making statements on
behalf of the Company, or underwriters, from time to time, may make, in writing
or orally, "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement is for the
purpose of qualifying for the "safe harbor" provisions of the Act and is
intended to be a readily available written document that contains factors which
could cause results to differ materially from those projected in such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on the
business, financial condition, liquidity, results of operations or prospects,
financial or otherwise, of the Company. Reference to this Cautionary Statement
in the context of a forward-looking statement shall be deemed to be a statement
that any one or more of the following factors may cause actual results to differ
materially from those which might be projected, forecast, estimated or budgeted
by the Company in such forward-looking statement or statements:
SIGNIFICANT OPERATING LOSSES
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT OPERATING LOSSES. We acquired
Carleton Corporation, a provider of advanced data warehousing solutions, in
October 1997, and began refocusing our business. We have experienced substantial
operating losses since that time. During the quarter and six months ended
September 27, 1998, we had net losses of $1,995,000 and $3,632,000,
respectively. During these periods, our revenues were $1,012,000 and $2,334,000,
respectively. We expect to continue to incur net operating losses at least
through the end of the fiscal year ending March 28, 1999. In order to achieve
profitability, we must significantly increase our product sales. We cannot
assure you that we will be able to increase revenues or achieve profitability.
MARKET ACCEPTANCE OF PRODUCTS
WE NEED TO ACHIEVE GREATER MARKET AWARENESS AND ACCEPTANCE FOR OUR
PRODUCTS. Our products are relatively new and not widely known. We must improve
product functionality and features, build sales momentum, broaden business
partner alliances and continue to increase marketing promotion. Although we have
made progress in these areas, our products have not been widely accepted in the
marketplace. We cannot assure you that our products will achieve widespread
market acceptance.
WE DEPEND ON A LIMITED NUMBER OF PRODUCTS FOR MOST OF OUR REVENUES. Because
we depend on a limited number of products, our revenues may decrease if:
o our products are incompatible with our customers' hardware systems or
software applications.
o our products become obsolete.
o our products receive negative publicity or evaluations.
o we are unable to keep up with our competitors in the development and
marketing of improved versions of our products.
WORKING CAPITAL
OUR WORKING CAPITAL HAS BEEN DECLINING SIGNIFICANTLY. As a result of
operating losses, our working capital declined from $8,239,000 on March 29, 1998
to $4,726,000 on September 27, 1998. We believe that our current cash position
will be adequate to fund our anticipated future operating losses, working
capital needs and required capital expenditures through the fiscal year ending
March 28, 1999. If we do not achieve profitability and generate positive cash
flow during the following fiscal year, we will not have adequate working capital
to fund our operations.
INTENSE COMPETITION IN THE SOFTWARE INDUSTRY
WE FACE SUBSTANTIAL COMPETITION. Competition in the software industry is
intense, rapidly changing and affected by a continual stream of new product
offerings. A number of other companies offer products similar to ours, and
additional new competitors may emerge in the near future. Many of our existing
competitors have substantially greater capital resources, technical expertise,
marketing experience, research and development staffs, established customers and
facilities than we do. As a result, there is a risk that our competitors will
successfully develop similar technologies and products that will be more
appealing to our customers than our existing or future products.
<PAGE>
COMPETITION COULD AFFECT OUR PRICES AND MARKET SHARE. We expect competition
in our industry to increase as new companies emerge and as customers try to meet
their needs using internal resources. As a result, we may need to decrease our
prices, and our market share may not increase or may even decline. These factors
could adversely affect our financial performance.
CONSOLIDATION IN THE INDUSTRY MAY AFFECT OUR BUSINESS. Our principal
markets are highly fragmented and consist of a few large multinational
competitors and many small, regional competitors. We expect that the software
industry will experience additional consolidation as management information
systems become more complex and sophisticated. These developments may force
smaller companies either to specialize or merge with their competitors. As a
result, we believe that we must become a larger company to successfully compete
in this market. We cannot assure you that we will be able to grow and compete
effectively.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
WE MUST CONTINUE TO DEVELOP NEW PRODUCTS. In our industry, technology
advances rapidly and industry standards change frequently. To remain competitive
and achieve profitability, we must:
o Continually enhance our current products to prevent them from becoming
obsolete and unmarketable.
o Develop and introduce new products to meet the changing demands of our
customers.
o Anticipate technological trends and develop products to respond to
these trends.
In addition, our future performance will suffer if we experience delays that
prevent us from developing and marketing our products, particularly if such
delays prevent us from recovering the development expenses that we incur.
DEPENDENCE ON KEY CUSTOMERS
WE RELY ON A SMALL GROUP OF KEY CUSTOMERS. Since we began refocusing our
business in October 1997, we have sold our products to a relatively small number
of customers. During the six months ended September 27, 1998, each of several
customers accounted for more than 10% of our total revenues. Reductions in
orders from these or future key customers would adversely affect our business.
In addition, the timing of orders from major customers could cause substantial
fluctuations in our future results.
SOFTWARE ERRORS
PROBLEMS WITH OUR SOFTWARE PROGRAMS MAY AFFECT OUR SALES. Our products
contain complex software programs. We cannot be sure that the tests that we run
on our products will reveal all errors or "bugs" that these programs may
contain. Any failure to detect "bugs" in current or future versions of these
programs before we release them to customers would decrease our sales and
adversely affect our future business prospects. We may also encounter
unanticipated technical problems relating to the development and servicing of
our products. Some of these problems may be beyond our financial and technical
capacity to solve. The failure to adequately address any such problems could
have a material adverse effect on our business and prospects.
PRODUCT LIABILITY
WE COULD BE SUBJECT TO PRODUCT LIABILITY LAWSUITS. We may be found liable
if someone claims that our products are defective, provided poor service or
damaged a customer. So far we have not had any product liability claims brought
against us, but we cannot guarantee that we will be protected from claims in the
future or that the limitations on liability that we include in our contracts
will protect us. Our business could be adversely affected if someone brings a
product liability claim against us.
<PAGE>
DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
WE RELY ON OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS TO PROTECT OUR
PRODUCTS. It is important in our industry that intellectual property, including
new products, technologies and processes, be protected. We protect the ownership
rights in our proprietary software through a combination of U.S. and foreign
copyright, trademark and trade secret laws, as well as employee non-disclosure
and third-party confidentiality agreements. Our success will depend, in part, on
whether we can obtain, use and enforce these protections and whether we can keep
our trade secrets confidential.
OTHERS MAY INFRINGE ON OUR INTELLECTUAL PROPERTY RIGHTS. We cannot assure
you that our efforts to protect our intellectual property in the future will be
successful. For example, third parties may try to copy or reverse-engineer our
products. Similarly, our customers may take inadequate precautions to protect
our source code and other proprietary information. In addition, many foreign
countries' laws may not protect us from improper use of our proprietary
technology overseas. We may not have adequate remedies if our intellectual
property rights are breached or our trade secrets are disclosed.
FUTURE MARKET CONDITIONS COULD RESULT IN HIGHER INTELLECTUAL PROPERTY
PROTECTION COSTS. As the number of competing products in the market increases
and many products begin to perform the same tasks, the following could occur:
o The number of lawsuits alleging violations of proprietary rights could
increase.
o We could incur high costs to defend against claims alleging that we
have infringed someone's intellectual property rights.
o We may be required to sign royalty, licensing or other agreements to
use other products.
o We may be prevented from or delayed in developing, manufacturing or
marketing one or more of our products.
YEAR 2000
THE YEAR 2000 PROBLEM MAY AFFECT OUR INFORMATION TECHNOLOGY SYSTEMS AND
OPERATIONS. Many currently installed computer systems and software are coded to
accept only two-digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). The various software packages that
we use for internal processing and to support our operations are obtained from
outside vendors. These software packages are Year 2000 compliant or expected to
be Year 2000 compliant in the near future. We are also assessing Year 2000
compliance issues with companies with which we have third party outsourcing
relationships, such as banks, insurance companies, payroll processors and
telecommunications providers. If Year 2000 compliance is not achieved with
respect to our internal systems or by our vendors, our operations could be
adversely affected.
OUR CURRENT PRODUCTS MAY NOT BE YEAR 2000 COMPLIANT. The Company believes
that the products it sells are Year 2000 compliant. The Company has developed a
comprehensive suite of Year 2000 tests and continues with its internal testing
against those tests. The Company currently does not anticipate significant
problems in achieving Year 2000 compliance with respect to the products being
tested and hopes to have its testing completed by December 31, 1998. The
products being tested for compliance include PASSPORT 5.1 release CAL215,
PASSPORT 5.7 and PURE INTEGRATE (formerly Enterprise Integrator). Any releases
newer than the above releases and any new products will also be Year 2000
compliant. Customers on older generation products will be upgraded. We do not
believe we will incur material expenses in achieving Year 2000 compliance for
our products, and we currently expect that the costs for obtaining such
compliance will not exceed $100,000. If such compliance is not obtained, our
business and results of operations could be adversely affected.
BUSINESS DISRUPTIONS RESULTING FROM THE YEAR 2000 PROBLEM COULD OCCUR.
Based on our assessments and current knowledge, we do not believe that, as a
result of the Year 2000 problem, we will experience any material disruptions in
our internal processes, information processing or services from outside
relationships. However, if certain critical third-party providers, such as
providers of electricity, water or telephone service, experience difficulties
resulting
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in disruption of service to us, we could experience a shutdown at our
facilities. We plan to develop a contingency plan to provide for continued
operations if such a disruption of service occurs. Assuming no major disruption
in service from critical third-party providers, we believe that we will be able
to manage our total Year 2000 transition without any material effect on our
business or results of operations.
INTEGRATION OF OPERATIONS FOLLOWING MERGER
OUR MERGER WITH CARLETON CORPORATION MAY AFFECT OUR OPERATIONS. We must
continue to build on our efforts to integrate Carleton Corporation, which we
acquired in October 1997. The process of rationalizing management services,
administrative organizations, facilities and management information systems,
while managing a geographically expanded company, will continue to present
challenges to our management. We cannot assure you that the integration process
will ultimately be successful and that the anticipated benefits of the
acquisition will be fully realized. The dedication of management resources to
the integration process detracts attention from our day-to-day business
operations.
DEPENDENCE ON KEY PERSONNEL
WE RELY ON A LIMITED NUMBER OF KEY MANAGEMENT PERSONNEL. Our success is
highly dependent on the efforts and abilities of our senior management. If
Robert D. Gordon, our Chairman of the Board, President and Chief Executive
Officer, or any of our other executive officers or key employees leaves us, our
business could be adversely affected. In addition, we must continue to hire and
retain skilled personnel in order to compete effectively. We compete against
larger and better financed companies in recruitment. As a result of this
competition, it is possible that we will be unable to successfully attract and
retain skilled personnel in the future.
DEPENDENCE ON THIRD-PARTY SUPPLIERS
WE DEPEND ON PRODUCTS SUPPLIED BY OTHER COMPANIES. We use software products
provided by other companies. We cannot assure you that these companies will
continue to sell and support the software that we need to design and manufacture
our products. If any of these suppliers ceases to do business with us or if
these software lines become unavailable to us in the future, we may need to seek
other suppliers or change our products. We may experience production delays or
decreased sales volumes as a result of these factors.
ADDITIONAL BUSINESS RISKS
SEVERAL OTHER FACTORS COULD ADVERSELY AFFECT OUR BUSINESS. The additional
business risks include the following:
o Longer sales cycles.
o Higher administrative and service costs due to increased expenses in
the areas of advertizing, marketing, administration or management
information systems.
o Our inability to carry out our marketing and sales plans.
o Changes in investment income due to changes in interest rates.
POTENTIAL NASDAQ DELISTING
WE COULD BE DELISTED. If we no longer meet the requirements to continue our
listing on the Nasdaq National Market, our market value and liquidity of the
public float for our Common Stock may decrease. To remain listed on the Nasdaq
National Market, we must satisfy a number of requirements, including the
following:
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o Our net tangible assets must be greater than $4,000,000.
o We must have a public float of at least 750,000 shares with a minimum
market value of $200,000. o We are required to have at least two
market-makers in our stock.
o We must have at least 400 holders of our stock.
o We must have a minimum bid price of $1.00 per share.
To continue meeting these requirements, we effected a one-for-five reverse stock
split of our Common Stock on September 15, 1998. Although we currently comply
with the Nasdaq National Market's listing requirements, our Common Stock in the
future may be ineligible to trade on the Nasdaq National Market and may only be
traded on a less liquid over-the-counter market. As a result, investors in our
Common Stock would be less able to sell stock holdings or receive accurate stock
price quotations. Consequently, the market value of our Common Stock could
decrease.
POSSIBLE VOLATILITY OF STOCK PRICE
LIKE OTHER TECHNOLOGY COMPANIES, OUR STOCK PRICE MAY BE VOLATILE. We may
experience volatility in our stock price due to the following and other factors:
o Announcements of new product developments.
o Events or disputes relating to intellectual property rights.
o Fluctuations in financial performance from period to period.
These and other factors may adversely affect the market price of the Common
Stock.
