<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 October 3, 1999
---------------
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
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(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
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(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
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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 3,349,804
- ---------------------------- ---------------------------------------
Class Shares outstanding on November 17, 1999
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<TABLE>
<CAPTION>
Part I. Financial Information
Page
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations - Three and Six Months Ended
October 3, 1999 and September 27, 1998....................................... 3
Consolidated Balance Sheets - October 3, 1999 and March 28, 1999............. 4
Consolidated Statements of Cash Flows - Six Months Ended
October 3, 1999 and September 27, 1998....................................... 5
Notes to Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources.............................................. 8
Results of Operations........................................................ 9
Part II. Other Information
Item 1. Legal Proceedings.................................................... 16
Item 2. Changes in Securities................................................ 16
Item 3. Defaults Upon Senior Securities...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................. 16
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
</TABLE>
2
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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
Oct 3, 1999 Sept 27, 1998 Oct 3, 1999 Sept 27, 1998
--------------- --------------- --------------- ---------------
(restated) (restated) (restated)
Revenues
<S> <C> <C> <C> <C>
License $ 396 $ 75 $ 611 $ 576
Professional services 595 595 1,261 1,116
Other services 331 342 577 642
-------- -------- -------- --------
Total Revenues 1,322 1,012 2,449 2,334
Costs of Revenues
License 313 170 498 445
Professional services 685 699 1,370 1,289
Other services 66 32 114 99
-------- -------- -------- --------
Total Costs of Revenues 1,064 901 1,982 1,833
-------- -------- -------- --------
Gross Profit 258 111 467 501
Operating Expenses
Research, development and engineering 804 902 1,576 1,830
Selling, general and administrative 1,390 1,448 2,643 2,833
Other charges 511 506 1,021 1,015
-------- -------- -------- --------
Total Operating Expenses 2,705 2,856 5,240 5,678
-------- -------- -------- --------
(Loss) from Operations ( 2,447) ( 2,745) ( 4,773) ( 5,177)
Other Income (Expense)
Investment income 13 108 40 260
Interest expense and other ( 17) ( 19) (37) ( 37)
-------- -------- -------- --------
Total Other Income (Expense) ( 4) 89 3 223
-------- -------- -------- --------
(Loss) from Operations before Income Taxes ($2,451) ($2,656) ($4,770) ($4,954)
Income tax expense - - - -
Net (Loss) ($2,451) ($2,656) ($4,770) ($4,954)
======== ======== ======== ========
(Loss) per Common Share - Basic and ($.73) ($.79) ($1.42) ($1.48)
Diluted ======== ======== ======== ========
Weighted Average Shares Outstanding 3,348 3,343 3,347 3,333
</TABLE>
See accompanying Notes to Financial Statements
3
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Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
(unaudited)
Oct 3, 1999 March 28, 1999
----------------- ------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 191 $ 3,168
Cash in escrow 67 65
Accounts receivable - net 1,270 2,016
Other 241 296
-------- --------
Total Current Assets 1,769 5,545
Property and Equipment
Property and equipment 2,683 2,666
Less accumulated depreciation (2,008) (1,845)
-------- --------
Net Property and Equipment 675 821
Other Assets
Intangible assets - net of accumulated amortization 2,863 4,184
Capitalized software - net of accumulated 192 231
amortization -------- --------
Total Other Assets 3,055 4,415
Total Assets $ 5,499 $ 10,781
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 934 $ 183
Accrued expenses 1,308 1,421
Deferred revenue 677 962
Note payable 120 1,000
-------- --------
Total Current Liabilities 3,039 3,566
Long-term Notes Payable 180 174
Shareholders' Equity
Common stock - authorized 6,000,000 shares at $.25 par
value; issued and outstanding at:
October 3, 1999 - 3,349,244 shares
March 28, 1999 - 3,345,918 shares 837 836
Additional paid-in capital 62,786 62,779
Retained deficit (61,343) (56,574)
-------- --------
Total Shareholders' Equity 2,280 7,041
Total Liabilities and Shareholders' Equity $ 5,499 $ 10,781
======== ========
</TABLE>
See accompanying Notes to Financial Statements
4
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Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Oct 3, 1999 Sept 27, 1998
----------------- ------------------
(restated)
<S> <C> <C>
Operating Activities:
Net Loss ($4,770) ($4,954)
Adjustments to reconcile net loss to net cash (used in)
Operations:
Depreciation 162 221
Amortization 1,360 1,321
Accounts receivable 535 889
Other assets 55 ( 74)
Accounts payable, accrued expenses and deferred revenue 565 ( 1,325)
-------- --------
Net cash (used in) operating activities ( 2,093) ( 3,922)
Investing Activities:
Purchases of property and equipment ( 17) ( 61)
Change in cash held in escrow ( 1) 669
-------- --------
Net cash flows from (used in) investing ( 18) 608
activities
Financing Activities:
Notes payable ( 873) ( 95)
Other stock transactions including option 7 62
exercises -------- --------
Net cash flows from (used in) financing ( 866) ( 33)
activities -------- --------
Net (decrease) in cash and cash equivalents ( 2,977) ( 3,347)
Beginning cash and cash equivalents 3,168 11,111
-------- --------
Ending cash and cash equivalents $ 191 $ 7,764
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest 35 39
Cash paid for income taxes 18 9
</TABLE>
See accompanying Notes to Financial Statements
5
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Notes to Financial Statements
(Unaudited)
1. Management Representation
The accompanying unaudited interim financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of
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 interim
periods 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 and Form
10-K/A for the year ended March 28, 1999.
2. Fiscal Year
The Company's fiscal year ends on the Sunday nearest March 31. Fiscal 2000
is a 53-week year. Fiscal 1999 was a 52-week year. The quarter ended October
3, 1999 is a 14-week quarter. The quarter ended September 27, 1998 was a 13-
week quarter.
3. Net Loss Per Share
Net loss per share was computed using the weighted average number of common
stock outstanding during the applicable period. There was no impact on the
calculation of the net loss per share resulting from adoption of Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share."
4. Reclassification
Certain prior year items have been reclassified to conform to current year
presentation.
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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: decreased demand for the Company's
products; heightened competition; market acceptance risk; risk of lengthening
sales cycles; risk of technological obsolescence of the Company's products;
inability to manage the Company's cost structure; risks associated with sales of
products outside the United States; increased expenses; failure to obtain new
customers or retain existing customers; inability to carry out marketing and
sales plans; loss or retirement of key executives; risks associated with the
Company's dependence on proprietary technology, including those related to
adequacy of copyright, trademark and trade secret protection; risks associated
with single sources of supply for certain components used in the Company's
products; and changes in interest rates. The Company cautions that any forward-
looking statements made by the Company in this Form 10-Q or in other
announcements made by the Company are further qualified by important factors
that could cause actual results to differ materially from those in the forward-
looking statements, including without limitation the factors set forth on
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended
March 28, 1999.
Merger Agreement
On November 9, 1999, Oracle Corporation and Carleton Corporation jointly
announced a definitive merger agreement whereby Oracle Corporation will acquire
Carleton Corporation. Under terms of the agreement, Oracle Corporation will
acquire the common stock of Carleton Corporation for approximately $2.45 per
share or $8.7 million in the aggregate. The transaction is intended to be
accounted for using the purchase method. Completion of the merger agreement is
subject to the approval of Carleton Corporation's shareholders and certain other
closing conditions.
Restatement of Financial Statements
On October 31, 1997, the Company acquired the former Carleton Corporation in a
transaction accounted for using the purchase method. In accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations," the Company allocated costs of the acquisition to the assets
acquired and liabilities assumed based on their estimated fair values using
valuation methods believed to be appropriate at the time. The Company expensed
in-process research and development (IPR&D) ($9.5 million) related to the
acquisition in accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase Method."
In response to the Securities and Exchange Commission letter to the American
Institute of Certified Public Accountants dated September 9, 1998 regarding its
views on IPR&D, the Company re-evaluated its original IPR&D charge taken in
connection with the acquisition. As a result of the re-evaluation, the Company
revised the purchase price allocation and restated its financial statements for
the fiscal year ended March 29, 1998. The effect of this restatement on the
reported consolidated financial statements as of and for the fiscal year ended
March 29, 1998 is disclosed in Note 4 to the Consolidated Financial Statements -
"Acquisition of the former Carleton Corporation" included in Exhibit 13 to the
Company's Annual Report on Form 10-K for the year ended March 28, 1999.
7
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The Consolidated Statement of Operations for the three months and six months
ended September 27, 1998 and the Consolidated Statement of Cash Flows for the
six months ended September 27, 1998 included in this Quarterly Report on Form
10-Q differ from the statements originally filed in the Company's Quarterly
Report on Form 10-Q for the quarter ended September 27, 1998 due to the
retroactive effect of the restatement. As a result, the Company has increased
the net loss for the three months and six months ended September 27, 1998 by
$661,000 and $1,322,000, respectively, to $2,656,000 from $1,995,000 and
$4,954,000 from $3,632,000, respectively, and increased the amount of
amortization of goodwill and developed technology by $661,000 and $1,322,000,
respectively, to $661,000 from $0 and $1,322,000 from $0, respectively, from the
amounts previously reported.
Additionally, the Consolidated Statement of Operations for the six months ended
October 3, 1999 includes a reclassification of the amortization of the developed
technology acquired in the acquisition of the former Carleton Corporation to
costs of license revenues from other charges taken in the quarter ended June 27,
1999. The effect of this reclassification on the Consolidated Statement of
Operations for the three months ended June 27, 1999 is to increase the costs of
license revenues reported by $150,000 to $185,000 from $35,000 and to decrease
the amount reported as other charges by $150,000 to $511,000 from $661,000.
Liquidity and Capital Resources
The Company had cash and cash equivalents of approximately $191,000 and
$3,168,000 at October 3, 1999 and March 28, 1999, respectively. The Company does
not anticipate any significant capital asset investment in the short term.
On August 27, 1999 the Company repaid its $1,000,000 note with U.S. Bank. The
note was secured by investments of the Company. The note was repaid because the
value of the investments that secured the note exceeded the amount of the note
and the Company needed the excess for working capital purposes.
On August 23, 1999 the Company entered into an Accounts Receivable Purchase
Agreement (the "Purchase Agreement") with Silicon Valley Bank (the "Bank").
Under terms of the Purchase Agreement, the Bank may purchase up to $2,000,000 of
the Company's eligible accounts receivables, on a revolving basis, and advance
cash to the Company against those purchased receivables at an annual interest
rate of prime plus 4%. Pledged accounts receivables and certain other assets of
the Company secure the line of credit balance. Additionally, the Company issued
warrants to purchase 47,059 shares of the Company's common stock with an
exercise price of $2.1250 per share to the Bank to secure the line of credit. On
October 3, 1999 the balance of the loan was approximately $120,000, including
accrued interest.
The Company has a negative working capital position as of October 3, 1999. The
Company's current cash balances are not sufficient to fund operations of the
Company through the end of fiscal 2000. The Company is currently relying upon
funds available from Silicon Valley Bank under terms of the Purchase Agreement
and extended payment terms with its trade vendors to maintain operations in the
short term. In addition, the Company's worsening financial condition has become
a concern to prospective customers of the Company's products. This concern has
lengthened the sales closing cycle and required extra effort by the Company to
close sales. Several prospective customers have eliminated the Company's
products from consideration due to their concern about the Company's long-term
viability. The Company has been working diligently toward resolving its long
term liquidity needs during the past six months. To that end, as previously
disclosed, the Company retained Dougherty Summit Securities LLC, an investment
banking firm that specializes in financing emerging growth companies, to advise
the Company on strategic financing alternatives. The Company has explored and
evaluated several long-term financing options including the issuance of
additional stock of the Company through a private placement, venture capital
financing and the sale of part, or all, of the Company.
The Company eliminated the option of issuing additional stock primarily because
projections of future working capital requirements showed that cash requirements
needed to reach positive cash flow were far in excess of what the Company
believed that it could reasonably expect to raise through a private placement
and thus this option was not a long-term solution.
8
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The Company explored the venture capital option in great detail. From the start,
the pool of prospective investors was narrowed to those that are willing to
invest in publicly held companies. Several investors indicated an interest in
working with the Company, but the Company was unable to secure a lead investor.
Similar to the option of issuing additional stock of the Company, management
believed that the Company could not reasonably expect to raise enough capital
through an initial infusion of venture capital financing to fund the Company's
operations through to positive cash flow and therefore, the Company would need
to obtain additional financing in twelve to fifteen months after the initial
infusion.
In addition to pursuing a possible private placement of stock and venture
capital financing, the Company also worked with Dougherty Summit Securities LLC
to explore the possible sale of the Company. Management and Dougherty Summit
Securities LLC began the process of contacting prospective buyers and generating
interest. Three prospective buyers indicated enough interest to require some
preliminary due diligence on their parts. After conducting due diligence with
these parties, the Company determined that pursuing a possible merger with
Oracle Corporation was the best strategic fit and offered the best potential
value to the Company's shareholders. As a result, the Company entered into
extensive discussions with Oracle regarding the terms of a possible merger. The
lengthy due diligence and negotiation process with Oracle culminated with the
signing of a definitive merger agreement on November 8, 1999 under which Oracle
Corporation will acquire all of the outstanding common stock of the Company for
approximately $2.45 per share or $8.7 million in the aggregate. Management of
the Company believes that the merger agreement with Oracle is in the best
interests of the Company's shareholders, customers and employees, and the
Company expects to complete the transaction by February 2000. If the Company is
unable to complete the transaction, it will need to obtain additional financing
in order to maintain operations. There can be no assurance that the Company will
be able to obtain additional financing on satisfactory terms, or at all. If the
Company is unable to obtain additional financing, it will be forced to cease
operations and may be forced to seek protection under bankruptcy laws.
Results of Operations
Three Months ended October 3, 1999
Revenues and Costs of Revenues
- ------------------------------
Total revenues for the Company in the quarter ended October 3, 1999 increased by
$310,000, or 31%, to $1,322,000 from $1,012,000 in the quarter ended September
27, 1998. Increased license revenues more than offset the decrease in other
services revenues and caused total revenues for the quarter to increase from the
level of the comparable prior year quarter. Professional services revenues were
flat between the two quarters compared. License revenues accounted for 30% of
total revenues in the quarter ended October 3, 1999, compared to 7% of total
revenues in the quarter ended September 27, 1998. Professional services revenues
accounted for 45% of total revenues in the quarter ended October 3, 1999,
compared to 59% of total revenues in the quarter ended September 27, 1998. Other
services revenues accounted for 25% of total revenues in the quarter ended
October 3, 1999, compared to 34% of total revenues in the quarter ended
September 27, 1998. The Company believes that licensing revenues must grow
significantly in total and as a proportion of total revenues in order to achieve
profitability.
License revenues increased by $321,000, or 428%, to $396,000 in the quarter
ended October 3, 1999, from $75,000 in the quarter ended September 27, 1998. The
Company derived $190,000 of the license revenue in the quarter ended October 3,
1999 from its internally developed software and $206,000 from third party
software that the Company sells under reseller agreements. License revenues were
significantly less than the Company's forecast. Although the Company's products
are increasingly well received by prospective customers, including a significant
sale to Blue Cross and Blue Shield of Michigan that closed in the quarter, the
Company continues to face a difficult and lengthy sales cycle that now includes
overcoming prospective customer concerns regarding the Company's worsening
financial condition. Costs of license revenues increased by $143,000, or 84%, to
$313,000 in the quarter ended October 3, 1999, from $170,000 in the quarter
ended September 27, 1998. The gross profit margin for license revenues increased
to 21% from -127% in the previous year. The amortization of the developed
technology acquired from the former
9
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Carleton Corporation is the largest component of costs of license revenues in
both quarters and is the cause of the negative gross profit margin in the
quarter ended September 27, 1998. Unless license revenues increase significantly
and the proportion of license revenues derived from the Company's internally
developed software becomes the primary source of license revenues, the Company
does not believe that the gross profit margin for license revenues will improve
from current levels. The Company believes that in order to achieve
profitability, license revenues must increase significantly over current levels
and the gross profit margin from license revenues must improve significantly.
There can be no assurance, however, that the Company will be able to realize
either of these objectives.
Professional services revenues were flat in the quarter ended October 3, 1999,
compared to the quarter ended September 27, 1998 at $595,000 in each quarter,
which was consistent with the Company's forecasts. Costs of professional
services decreased by $14,000, or 2%, to $685,000 in the quarter ended October
3, 1999, from $699,000 in the quarter ended September 27, 1998. The gross profit
margin for professional services improved slightly to -15% from -17% in the
previous year. Although professional services revenues showed gains in the
latter part of the quarter ended October 3, 1999, the Company expects
professional services revenues for the remainder of fiscal 2000 to lag behind
those of the comparable periods in fiscal 1999. The Company expects the negative
gross profit margin for the remainder of fiscal 2000 to improve slightly from
that of the quarter ended October 3, 1999, although it will remain negative.
Other services revenues decreased by $11,000, or 3%, to $331,000 in the quarter
ended October 3, 1999, from $342,000 in the quarter ended September 27, 1998,
which was consistent with the Company's forecasts. The decrease was primarily
the result of non-renewals for the Company's maintenance and support services by
Passport customers that were acquired in the acquisition of the former Carleton
Corporation. The Company believes that many of the non-renewals were due to
computer hardware upgrades that customers have undertaken in connection with
Year 2000 compliance because the non-renewals related primarily to the Company's
older mainframe product. The Company expects other services revenues to increase
above second quarter levels during the remainder of fiscal 2000. There can be no
assurance, however, that the Company will be able to control the loss of
customers through non-renewal of maintenance and service agreements and replace
that loss through new installations at levels above the rate of attrition. Costs
of other services revenues increased by $34,000, or 106%, to $66,000 in the
quarter ended October 3, 1999, from $32,000 in the quarter ended September 27,
1998. The gross profit margin for other services revenues decreased to 80% from
90% between the two quarters compared. To improve customer support for the
Company's Passport products, the Company increased the staffing level for its
technical support group in the quarter ended June 27, 1999, and had anticipated
that this action would result in a decreased gross profit margin. The Company
anticipates that gross profit margins for other services revenues will remain
stable at second quarter levels for the remainder of fiscal 2000.
Expenses
- --------
Research, development and engineering expenses decreased by $98,000, or 11%, to
$804,000 in the quarter ended October 3, 1999, from $902,000 in the quarter
ended September 27, 1998. Research, development and engineering expenses consist
primarily of personnel expenses, facility expenses and equipment and software
expenses. The decrease in expenses is primarily the result of decreased
equipment and software purchases ($18,000), decreased travel expenses ($14,000)
and decreased facility-related expenses ($22,000) between the two quarters. If
the Company can sustain operations, the Company anticipates continuing to invest
in research, development and engineering at current expense levels during the
remainder of fiscal 2000. The focus of the Company's fiscal 2000 investment in
research, development and engineering will be in the areas of ease of use and
increased functionality of the Company's existing products. No software costs
were capitalized either in the quarter ended October 3, 1999, or in the quarter
ended September 27, 1998.
Selling, general and administrative expenses decreased by $58,000, or 4%, to
$1,390,000 in the quarter ended October 3, 1999, from $1,448,000 in the quarter
ended September 27, 1998. Selling, general and administrative expenses consist
primarily of personnel expenses, facility expenses and marketing and other
professional fees. The decrease in expenses is primarily the result of the
following factors: marketing
10
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expense reductions that were realized between the two quarters ($34,000); and
decreased facility-related expenses ($25,000). The Company expects selling,
general and administrative expenses to remain under comparable fiscal 1999
levels for the remainder of fiscal 2000.
Other charges increased by $5,000, or 1%, to $511,000 in the quarter ended
October 3, 1999 from $506,000 in the quarter ended September 27, 1998. Other
charges consist primarily of amortization of goodwill recorded in connection
with the acquisition of the former Carleton Corporation.
Other Income and Expenses
- -------------------------
The Company experienced net interest expense of $4,000 in the quarter ended
October 3, 1999, compared to net interest income of $89,000 in the quarter ended
September 27, 1998. The decline from net interest income to net interest expense
is due to the decrease in funds that the Company had available to invest between
the two quarters due to its need to fund its operating losses.
Six Months ended October 3, 1999
Revenues and Costs of Revenues
- ------------------------------
Total revenues for the Company in the six months ended October 3, 1999 increased
by $115,000, or 5%, to $2,449,000 from $2,334,000 in the six months ended
September 27, 1998. Increased license revenues and professional services
revenues more than offset the decrease in other services revenues and caused
total revenues for the current period to increase from the level of the
comparable prior year period. License revenues accounted for 25% of total
revenues in both the six months ended October 3, 1999 and the six months ended
September 27, 1998. Professional services revenues accounted for 51% of total
revenues in the six months ended October 3, 1999 compared to 48% of total
revenues in the six months ended September 27, 1998. Other services revenues
accounted for 24% of total revenues in the six months ended October 3, 1999
compared to 27% of total revenues in the six months ended September 27, 1998.
The Company believes that license revenues must grow significantly in total and
as a proportion of total revenues in order to achieve profitability.
License revenues increased by $35,000, or 6%, to $611,000 in the six months
ended October 3, 1999, from $576,000 in the six months ended September 27, 1998.
The Company derived $405,000 of the license revenue in the six months ended
October 3, 1999 from the Company's internally developed software and $206,000
from third party software that the Company sells under reseller agreements.
License revenues were significantly less than the Company's forecast. Although
the Company's products are increasingly well received by prospective customers,
including a significant sale to Blue Cross and Blue Shield of Michigan that
closed in the second quarter, the Company continues to face a difficult and
lengthy sales cycle that now includes overcoming prospective customer concerns
regarding the Company's worsening financial condition. Costs of license revenues
increased by $53,000, or 12%, to $498,000 in the six months ended October 3,
1999, from $445,000 in the six months ended September 27, 1998. The gross profit
margin for license revenues decreased to 18% from 23% between the six months
compared. The amortization of the developed technology acquired from the former
Carleton Corporation is the largest component of costs of license revenues in
both periods compared. The royalties due to third party vendors for the software
that the Company sells under reseller agreements is the cause for the decreased
gross profit margin in the two periods compared. Unless license revenues
increase significantly and the proportion of license revenues derived from the
Company's internally developed software becomes the primary source of license
revenues, the Company does not believe that the gross profit margin for license
revenues will improve from current levels. The Company believes that in order to
achieve profitability, license revenues must increase significantly over current
levels and the gross profit margin from license revenues must improve
significantly. There can be no assurance, however, that the Company will be able
to realize either of these objectives.
Professional services revenues increased by $145,000, or 13%, to $1,261,000 from
$1,116,000 in the six months ended October 3, 1999, compared to the six months
ended September 27, 1998. Costs of professional services increased by $81,000,
or 6%, to $1,370,000 in the six months ended October 3, 1999,
11
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from $1,289,000 in the six months ended September 27, 1998. The gross profit
margin for professional services improved to -9% from -16% in the prior year.
The improved gross profit margin in the six months ended October 3, 1999 is the
result of an increased utilization rate of the professional services consultants
during the first quarter ended June 27, 1999. The Company expects professional
services revenues for the remainder of fiscal 2000 to lag behind those of the
comparable periods of fiscal 1999. The Company expects the negative gross profit
margin for the remainder of fiscal 2000 to decline slightly from that of the six
months ended October 3, 1999 because it anticipates that the utilization rate of
the professional services consultants will improve over the rate experienced in
the quarter ended October 3, 1999.
Other services revenues decreased by $65,000, or 10%, to $577,000 in the six
months ended October 3, 1999, from $642,000 in the six months ended September
27, 1998. The decrease was primarily the result of non-renewals for the
Company's maintenance and support services by Passport customers acquired in the
acquisition of the former Carleton Corporation. The Company believes that many
of the non-renewals were due to computer hardware upgrades that customers have
undertaken in connection with Year 2000 compliance because the non-renewals
related primarily to the Company's older mainframe product. The Company expects
other services revenues to increase above current levels during the remainder of
fiscal 2000. There can be no assurance, however, that the Company will be able
to control the loss of customers through non-renewal of maintenance and service
agreements and replace that loss through new installations at levels above the
rate of attrition. Costs of other services revenues increased by $15,000, or
15%, to $114,000 in the six months ended October 3, 1999 from $99,000 in the six
months ended September 27, 1998. The gross profit margin for other services
revenues decreased to 80% from 85% between the two periods compared. To improve
customer support for the Company's Passport products, the Company increased the
staffing level for its technical support group in the quarter ended June 27,
1999 and anticipated that this action would result in a decreased gross profit
margin. The Company anticipates that gross profit margins for other services
revenues will remain stable at current levels for the remainder of fiscal 2000.
Expenses
- --------
Research, development and engineering expenses decreased by $254,000, or 14%, to
$1,576,000 in the six months ended October 3, 1999, from $1,830,000 in the six
months ended September 27, 1998. Research, development and engineering expenses
consist primarily of personnel expenses, facility expenses and equipment and
software expenses. The decrease in expenses is primarily the result of personnel
expense savings ($85,000), decreased equipment and software purchases ($39,000),
decreased travel expenses ($21,000) and decreased facility-related expenses
($48,000) between the two periods compared. If the Company can sustain
operations, the Company anticipates continuing to invest in research,
development and engineering at current expense levels during the remainder of
fiscal 2000. The focus of the Company's fiscal 2000 investment in research,
development and engineering will be in the areas of ease of use and increased
functionality of the Company's existing products. No software costs were
capitalized either in the six months ended October 3, 1999, or in the six months
ended September 27, 1998.
Selling, general and administrative expenses decreased by $190,000, or 7%, to
$2,643,000 in the six months ended October 3, 1999, from $2,833,000 in the six
months ended September 27, 1998. Selling, general and administrative expenses
consist primarily of personnel expenses, facility expenses and marketing and
other professional fees. The decrease in expenses is primarily the result of the
following factors: marketing expense reductions that were realized between the
two periods ($67,000); and decreased facility-related expenses ($93,000). The
Company expects selling, general and administrative expenses to remain under
comparable fiscal 1999 levels for the remainder of fiscal 2000.
Other charges increased by $6,000, or less than 1%, to $1,021,000 in the six
months ended October 3, 1999, from $1,015,000 in the six months ended September
27, 1998. Other charges consist primarily of amortization of goodwill recorded
in connection with the acquisition of the former Carleton Corporation.
Other Income and Expenses
- -------------------------
12
<PAGE>
Net interest income decreased by $220,000, or 99%, to $3,000 in the six months
ended October 3, 1999, from $223,000 in the six months ended September 27, 1998.
The decrease in net interest income is due to the decrease in funds that the
Company had available to invest between the two periods because of its need to
fund its operating losses.
Year 2000 Compliance
Introduction
- ------------
The Company relies heavily on sophisticated information technology ("IT") and
non-information technology ("Non-IT") for its business operations. In addition,
the Company's products consist of sophisticated software products that interface
directly with customers' information technology systems. The Company's Year 2000
(Y2K) compliance issues are, therefore, broad and complex. The Company
established a Y2K Committee in December 1998 to coordinate and support the
Company's Y2K compliance effort.
The Company's Y2K compliance efforts are focused on business-critical items.
Hardware, software (including the Company's software products), systems,
technologies and applications are considered "business-critical" if a failure
would have a material adverse effect on the Company's business, financial
condition or results of operations. The Company's Y2K compliance effort was
sidetracked during the quarter ended October 3, 1999 primarily because of the
effort to obtain a long-term solution to the Company's financial problems. Two
key members of the Company's Y2K Committee were also involved in the due
diligence process that culminated with the November 8, 1999 signing of a
definitive merger agreement between the Company and Oracle Corporation whereby
Oracle Corporation will acquire the Company. Because of this conflict, the
Committee was unable to complete its written contingency plan by September 30,
1999 as planned. The Company still believes that it will achieve Y2K compliance
prior to January 1, 2000.
Carleton Corporation Software Products
- --------------------------------------
The Company has, and continues to, take significant actions to ensure Y2K
compliance with customers' use of the Carleton family of data integration tools.
The Company has developed a comprehensive suite of Y2K tests and has performed
those tests against its products. The testing of Enterprise Integrator 4.3.1
(now named Pure Integrate), Passport 5.1 for the Mainframe, Passport 5.7.02 (now
named Pure Extract) and Pure Dimension has been completed, and these products
meet the Company's Y2K compliance requirements. The Company completed the
shipment of Y2K compliant versions of its software products to all customers
current on their support agreements during the quarter ended June 27, 1999.
Although the Company believes its Y2K testing has been extensive and rigorous,
in the event that unforeseen compliance issues arise, they will be corrected and
delivered to customers as part of the support agreements between the customer
and the Company. The Company will also take steps to ensure that all releases
subsequent to the above releases and all new products will also be Y2K
compliant.
Internal Business-Critical Infrastructure and Applications Software
- --------------------------------------------------------------------
The Company's compliance efforts for all business-critical infrastructure and
applications software ("IT Systems") had been substantially completed as of June
27, 1999. The Company has inventoried all of its IT Systems. All of the
Company's internal hardware systems are Y2K compliant. The software packages
that the Company uses for internal processing to support its operations and to
support its ongoing development efforts are obtained from outside vendors. The
Company has acquired and installed Y2K compliant versions of all of its
externally supplied software packages. These products are in operation.
Interfaces with Material Third Parties
- --------------------------------------
The Company is making concerted efforts to understand the Y2K status of third
parties, including property owners of the Company's leased office facilities,
telecommunications vendors, utilities, banks, payroll
13
<PAGE>
processors and the trustee of the Company's 401(k) Investment and Savings Plan.
The Y2K non-compliance of any of these third parties could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company is actively encouraging Y2K compliance on the part of
third parties and is developing contingency plans in the event of their Y2K non-
compliance.
The Company's vendor and product compliance program includes the following
tasks: assessing vendor compliance status; tracking vendor compliance progress;
addressing contract and lease language; developing contingency plans, including
identifying alternate suppliers and assessing the availability of redundant or
backup sources; and sending questionnaires. The Company is requesting assurances
from its vendors and other third party suppliers that they are addressing Y2K
issues and that the products and services purchased by the Company from these
vendors and suppliers will function properly in the year 2000 and beyond. If
third parties fail to respond to these questionnaires, the Company sends further
mail or phone correspondence. Continued failure to respond to these
questionnaires could lead to replacement of these vendors or other third party
suppliers. The Company is satisfied that its material third party vendors are or
will be Y2K compliant by January 1, 2000.
Costs to Address Y2K Compliance
- -------------------------------
The total estimated cost for resolving the Company's Y2K issues is not expected
to exceed $110,000, of which approximately $100,000 has been spent through
October 3, 1999. This includes the cost of testing the Company's products for
Y2K compliance and costs relating to internal processing systems or vendor-
provided systems that may be incurred in making such systems Y2K compliant.
Estimates of Y2K costs are based on numerous assumptions, and there can be no
assurance that the estimates are correct or that actual costs will not be
materially greater than anticipated.
Contingency Planning and Risks
- ------------------------------
The Company has begun developing contingency plans for Y2K non-compliance. These
plans include identifying alternate suppliers, vendors, procedures, conducting
staff training and developing communication plans. Any significant incremental
costs associated with these plans will not become known until these plans are
fully developed. The Company's standing Y2K Committee has been assigned the task
of developing and coordinating the Y2K non-compliance contingency plan. The
Company's goal is to complete its Y2K non-compliance contingency plan by
December 15, 1999.
Based on its assessments to date, the Company does not believe that it will
experience any material disruption of its internal information processing,
interfacing with customers or processing of orders and billing due to Y2K non-
compliance. However, if certain critical third-party providers, such as those
providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
certain of the Company's operations at individual facilities could occur for the
duration of the disruption. The Company believes that the greatest Y2K exposure
exists in the following areas: failure of the electric infrastructure and
failure of the telecommunications (both voice and data) infrastructure. All of
the Company's major utility and telephone service providers have assured the
Company that they are or will be Y2K compliant by January 1, 2000. A temporary
slowdown or cessation of operations at one or more of the Company's facilities
could result in delays in meeting customers' orders, the timing of billings to
and receipt of payment from customers and could result in complaints, charges or
claims. The Y2K non-compliance of customers could potentially delay the receipt
of orders for the Company's products and also the timing of payments for
products already delivered.
The Company believes that its Y2K compliance program, including related
contingency planning, should significantly lessen the possibility of significant
interruptions of normal operations. While costs related to the Y2K non-
compliance of third parties, business interruptions, litigation and other
liabilities related to Y2K issues could materially and adversely affect the
Company's business, results of operations and financial condition, the Company
believes its Y2K compliance effort will enable the Company to manage its Y2K
transition without any material adverse effect on its business, financial
condition or results of operations.
14
<PAGE>
The most reasonably likely worst-case scenario of failure by the Company or its
suppliers or customers to resolve Y2K issues could potentially be a temporary
slowdown or cessation of operations at one or more of the Company's facilities
and/or a temporary inability on the part of the Company to process orders in a
timely manner and to deliver finished products to customers. Delays in meeting
customers' orders could potentially affect the timing of billings to and
payments received from customers and could result in complaints, charges or
claims. Customers' Y2K issues could potentially also delay the receipt of orders
for the Company's products and also the timing of payments to the Company for
products already delivered.
15
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Carleton Corporation filed a Current Report on Form 8-K dated
November 8, 1999, in which it reported that it had entered into a
definitive merger agreement under which the Company would be
merged with and into a wholly owned subsidiary of Oracle
Corporation.
16
<PAGE>
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 22, 1999 By /s/ Robert D. Gordon
--------------------
Robert D. Gordon
President and Chairman of the Board,
Chief Executive Officer,
Chief Financial Officer and
Chief Accounting Officer
17
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