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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The fiscal year ended November 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 1-8846
CALTON, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2433361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2013 INDIAN RIVER BOULEVARD 32960
VERO BEACH, FLORIDA (Zip Code)
(Addresses of principal executive offices)
Registrant's telephone number, including area code: (732) 212-1280
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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Common Stock American Stock Exchange
$.05 par value per share
Rights American Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value (based upon the last sales price reported by the
American Stock Exchange) of voting shares held by non-affiliates of the
registrant as of February 20, 2001 was $10,789,152.
As of February 20, 2001 4,132,356 shares of Common Stock were outstanding.
The Company's Proxy Statement for the annual meeting of shareholders is
incorporated by reference into Part III hereof.
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DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form
10-K, including in Part II, Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the statements under
"Business" are, or may be deemed to be, "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and variations of such words and
similar phrases are intended to identify such forward-looking statements. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-K. Such potential risks and
uncertainties, include without limitation, matters related to national and local
economic conditions, the effect of governmental regulation on the Company, the
competitive environment in which the Company operates, potential adverse affects
of acquisitions, the ability of the Company to identify suitable acquisition
candidates, changes in interest rates, and other risk factors detailed herein
and in other of the Company's Securities and Exchange Commission filings. The
forward-looking statements are made of the date of this Form 10-K and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Calton, Inc. (the "Company" or "Calton") sold its principal
operating subsidiary, Calton Homes, Inc. ("Calton Homes"), on
December 31, 1998. See "Sale of Calton Homes." Since the
completion of the sale, the Company has been engaged in providing
consulting services to the purchaser of Calton Homes and analyzing
potential business and acquisition opportunities. In July 1999,
the Company acquired substantially all of the assets of iAW, Inc.,
an Internet business solutions provider in its early stages of
development. In January 2000, the Company acquired a controlling
interest in PrivilegeONE Networks, LLC ("PrivilegeONE"), a
newly-formed company engaged in the development of a co-branded
loyalty credit card program. In June 2000, the Company acquired a
controlling interest in Innovation Technology Partners ("ITP"), a
newly-formed entity established to provide management and
consulting services to entrepreneurial and development stage
companies. In August 2000, through its interest in ITP, the
Company acquired a controlling interest in MindSearch, Inc.
("MindSearch") a company which is developing technology to provide
consumer research to businesses on a faster and broader basis than
existing research approaches.
Effective at the close of business on May 31, 2000, the Company
effected a one-for-twenty-five share combination or "reverse
split" of the Company's Common Stock. Contemporaneous with, but
after giving effect to the share combination, the Company effected
a five-for-one forward split of the Common Stock. As a result of
this Recapitalization (the "Recapitalization"), each twenty-five
shares of Common Stock outstanding was combined into one share of
Common Stock and the resulting share was split into five shares.
All Common Stock, stock option, warrant and per share information
has been adjusted to give effect to the Recapitalization.
Calton was incorporated in 1981 for the purpose of acquiring all
of the issued and outstanding capital stock of Kaufman and Broad
of New Jersey, Inc., a New Jersey corporation, from Kaufman and
Broad, Inc., a Maryland corporation. After the acquisition, the
name Kaufman and Broad of New Jersey, Inc. was changed to Calton
Homes. Calton maintains its corporate offices at 2013 Indian River
Boulevard, Vero Beach, Florida 32960 and its telephone number is
(732) 212-1280. As used herein, the term "Company" refers to
Calton, Inc. and its subsidiaries, unless the context indicates
otherwise.
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SALE OF CALTON HOMES
On December 31, 1998 (the "Closing Date"), Calton completed the
sale of Calton Homes, its wholly-owned homebuilding subsidiary, to
Centex Real Estate Corporation ("Centex" or the "purchaser"), the
homebuilding subsidiary of Centex Corporation (NYSE:CTX), one of
the nation's largest homebuilders (the "Sale Transaction"). The
purchase price for the stock of Calton Homes, which was paid in
cash at closing, was $48.1 million, subject to a $5.2 million
holdback, and certain post closing adjustments. The Company
recorded a pre-tax gain of approximately $6.9 million and a net
gain of approximately $3.7 million after recording a non-cash
provision in lieu of taxes of $3.2 million as a result of the Sale
Transaction in the first quarter of fiscal 1999, and adjusted for
a provision of approximately $650,000 recorded during fiscal 2000.
Calton has entered into an agreement to provide consulting
services to purchaser which entitles the Company to payments of
$1.3 million per year over the three year period ending December
31, 2001.
STRATEGIC PLAN
At the time of the Sale Transaction, the Company announced that
the Sale Transaction was part of a strategic plan designed to
enhance shareholder value. Pursuant to its strategic plan, the
Company commenced a stock repurchase program and announced its
intention to (i) shift the Company's primary business focus from
homebuilding to providing various services to participants both
within and outside the homebuilding industry, including consulting
services, equity and debt financing and financial advisory
services and (ii) seek to invest in, acquire or combine with one
or more operating businesses within or outside the homebuilding
industry. In April 2000, the Company announced that its strategic
plan would focus on acquiring controlling interests in information
technology companies.
Pursuant to its stock repurchase program, the Company has, since
October 31, 1998, acquired approximately 1,615,000 shares of
Common Stock at an average price of $6.03 per share. The timing
and number of additional shares purchased pursuant to the stock
repurchase program will depend on a variety of factors, including
the market price of the Common Stock.
In July 1999, the Company acquired substantially all of the assets
of iAW, Inc., in January 2000, acquired a 50.4% interest in
PrivilegeONE, in June 2000 acquired a 51% interest in ITP, and in
August 2000 ITP acquired a 51% interest in MindSearch. The Company
continues to analyze potential acquisitions and other business
opportunities. Pending further implementation of the Company's
strategic plan, the Company's cash will be temporarily invested as
management of the Company deems prudent, which may include, demand
deposits, money market accounts, or United States government
securities; provided, however, that the Company will attempt to
invest the net proceeds and conduct its activities in a manner
which will not result in the Company being deemed to be an
investment company under the Investment Company Act of 1940, as
amended, or a personal holding company for federal income tax
purposes. See "Certain Risks."
CERTAIN RISKS
RISKS ASSOCIATED WITH POTENTIAL BUSINESS COMBINATIONS
The Company is seeking to enhance shareholder value by investing
in, acquiring or combining with one or more operating businesses.
Management of the Company will endeavor to evaluate the risks
inherent in any particular target business; however, there can be
no assurance that the Company will properly ascertain all such
risks. In many cases, shareholder approval will not be required to
effect such a business combination. The fair market value of the
target business will be determined by the Board of Directors of
the Company. Therefore, the Board of Directors has significant
discretion in determining whether a target business is suitable
for a proposed business combination. The success of the Company
will depend on the Company's ability to attract and retain
qualified personnel as well as the abilities of key management of
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the acquired companies. As a result, no assurance can be given
that the Company will be successful in implementing its strategic
plan or that the Company will be able to generate profits from
such activities.
CONTINUED LISTING ON AMEX
The Company's Common Stock is currently listed for trading on the
American Stock Exchange ("AMEX"). Under AMEX's suspension and
delisting policies, AMEX will normally consider suspending
dealings in, or removing from listing, securities of a company if
the company has sold or otherwise disposed of its principal
operating assets, has ceased to be an operating company or has
discontinued a substantial portion of its operations or business
for any reason. AMEX has indicated that the Common Stock may
become subject to delisting if the Company is not engaged in
active business operations within a reasonable period of time
after the closing of the Sale Transaction. Although the Company is
engaged in active businesses as a result of its consulting
agreement with purchaser and its acquisitions of iAW,
PrivilegeONE, ITP and MindSearch, no assurance can be given that
AMEX will not commence proceedings to delist the Common Stock. If
the Common Stock is delisted, it would trade on the OTC Bulletin
Board or in the "pink sheets" maintained by the National Quotation
Bureau, Inc., which are generally considered to be less efficient
markets.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended ("1940 Act"),
requires the registration of, and imposes various substantive
restrictions on, certain companies that engage primarily, or
propose to engage primarily, in the business of investing,
reinvesting, or trading in securities, or companies that fail
certain statistical tests regarding the composition of assets and
sources of income and are not primarily engaged in a business
other than investing, holding, owning or trading securities. The
Company intends to conduct its activities in a manner which will
not subject the Company to regulation under the 1940 Act; however,
there can be no assurance that the Company will not be deemed to
be an investment company under the 1940 Act. If the Company were
required to register as an investment company under the 1940 Act,
it would become subject to substantial regulation with respect to
its capital structure, management, operations, transactions with
affiliates, the nature of its investments and other matters. In
addition, the 1940 Act imposes certain requirements on companies
deemed to be within its regulatory scope, including compliance
with burdensome registry, recordkeeping, voting, proxy, disclosure
and other rules and regulations. In the event of the
characterization of the Company as an investment company, the
failure of the Company to satisfy regulatory requirements, whether
on a timely basis or at all, could have a material adverse effect
on the Company.
CERTAIN TAX MATTERS
Section 541 of the Internal Revenue Code of 1986, as amended (the
"IRC"), subjects a corporation which is a "personal holding
company," as defined in the IRC, to a 39.6% penalty tax on
undistributed personal holding company income in addition to the
corporation's normal income tax. The Company could become subject
to the penalty tax if (i) 60% or more of its adjusted ordinary
gross income is personal holding company income and (ii) 50% or
more of its outstanding Common Stock is owned, directly or
indirectly, by five or fewer individuals. Personal holding company
income is comprised primarily of passive investment income plus,
under certain circumstances, personal service income.
INDEMNITY OBLIGATIONS
On the closing date of the Sale Transaction, the Company deposited
approximately $5,200,000 in escrow, $3,000,000 of which provides
security for the Company's indemnity obligations and approximately
$2,200,000 of which was deposited to fund costs associated with
certain specified litigation. The purchaser has asserted indemnity
claims of approximately $2,300,000 against of the Company and an
arbitration proceeding is scheduled for March 2001 to resolve
these claims. See the section of this report captioned "Legal
Proceedings" for a more detailed description of this matter.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by this item is presented in Note 9 of
the 2000 Financial Statements located on page F-20 of this report.
(c) DESCRIPTION OF BUSINESS
GENERAL
With the sale of Calton Homes, the Company discontinued its
homebuilding operations. Since the completion of the Sale
Transaction, the Company has been engaged in providing consulting
services to the purchaser of Calton Homes and analyzing potential
acquisitions and other business opportunities. In July 1999, the
Company acquired substantially all of the assets of iAW, Inc., an
Internet business solutions provider. In January 2000, the Company
acquired a 50.4% interest in PrivilegeONE, a newly formed company
which is developing a co-branded credit card program for the
automobile dealer industry. In February 2001, the Company acquired
an additional 25% of PrivilegeONE. In June 2000, the Company
acquired a 51% interest in ITP, a newly-formed entity established
to provide management and consulting services to entrepreneurial
and development stage companies. In August 2000, through its
interest in ITP, the Company acquired a controlling interest in
MindSearch, a company which is developing technology to provide
consumer research to businesses on a faster and broader basis than
existing research approaches.
ECALTON.COM
GENERAL
In July 1999, the Company acquired substantially all of the assets
of iAW, Inc. an Internet business developer. The Company conducts
the acquired business though a wholly-owned subsidiary that has
changed its name to eCalton.com, Inc. ("eCalton"). eCalton
provides Internet strategy consulting and comprehensive
Internet-based solutions. By combining business and Internet
knowledge with creativity, eCalton provides its customers with the
resources and tools to optimize, monitor, and measure the
effectiveness of their e-business. eCalton provides Internet-based
solutions to small and medium size companies in various
industries, as well as to two prime vertical markets - the Florida
Agricultural industry and the Homebuilding and Construction
industries.
In July 2000, eCalton entered into a second line of business, a
technology based consulting and staffing service specializing in
network design and management. Through its technical staffing
business, eCalton assists clients in managing and improving their
IT systems and networks. This division employs approximately 20
employees and consultants, and operates in the Houston, Texas
market.
SALES AND MARKETING
The eCalton sales force is comprised of professionals that market
and sell its services on a nationwide basis. eCalton's national
marketing office is headquartered in Vero Beach, Florida. It
markets eCalton's services through print advertising, face to face
interviews with client executives, trade show attendance and
through its website, www.eCalton.com.
THE FLORIDA AGRICULTURAL INDUSTRY
The Florida Farm Foundation has engaged eCalton to develop an
Internet Hub, AGMARKETING.ORG, to provide farmers, ranchers, and
allied organizations access to the Internet in a cost-effective,
user-friendly way. The Web site will enable the user to buy and
sell products and services, to connect with vendors and suppliers,
and access technical information. In addition, eCalton is offering
sponsorships and advertising opportunities to the agriculture
business community through this Internet site.
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THE HOMEBUILDING AND CONSTRUCTION GROUP
eCalton has designed a Web site package for Homebuilders and
Developers offering a customized "look and feel" that reflects
their company, logo, corporate colors and image, using predefined
templates. The site is intended to help homebuilders reduce
operating costs, improve customer service levels, and improve
communications with clients, vendors, employees, and investors.
These sites will be designed so that employees with only basic Web
browser/user skills can add, edit and update content through the
use of eCalton's EasyRemoteAdmin Tools(TM).
COMPETITION
The market for Internet professional services is relatively
saturated, intensely competitive, rapidly evolving and subject to
rapid technological change. The market is already highly
competitive and characterized by an increasing number of entrants
that have introduced or developed products and services similar to
those offered by eCalton. The Company expects competition not only
to persist, but also to increase. Increased competition may result
in price reductions, reduced margins and loss of market share.
eCalton's competitors and potential competitors have longer
operating histories, larger installed customer bases, greater name
recognition, longer relationships with their clients, and
significantly greater financial, technical, marketing and public
relations resources than eCalton. As a result, eCalton's
competitors may be better positioned to react in the ever-changing
market place. eCalton expects competition to persist and intensify
in the future.
Competition in the technical staffing industry is intense, with
little barrier to entry. The industry is highly evolved with
competitors who have much greater access to capital and
significantly greater name recognition. In addition, competitors
may be better positioned to offer a superior benefits package than
can be offered by the Company, and provide a much larger client
base allowing for better continuity of work flow for the employee
or consultant.
PRIVILEGEONE
GENERAL
In January 2000, the Company acquired a 50.4% collective direct
and indirect interest (through ownership in a parent company) in
PrivilegeONE Networks, LLC. PrivilegeONE was formed in 1999 to
develop a customer loyalty program through the use of a co-branded
credit card related to the automotive industry.
The purchase price for the Company's interest in PrivilegeONE was
comprised of $105,000 in cash and a five-year warrant to acquire
240,000 shares of the Company's Common Stock at an exercise price
of $12.50 per share. The warrant becomes exercisable only if
PrivilegeONE surpasses certain specified earnings targets. In
addition to its equity interest, the Company agreed to loan up to
$1,500,000 to PrivilegeONE pursuant to a note which bears interest
at the rate of 10% per annum and becomes due in January 2004. As
of November 30, 2000, $1,486,000 has been advanced to
PrivilegeONE. The Company has entered into agreements with the
other owners of PrivilegeONE and its parent company which obliges
each of the owners to offer its equity interest in PrivilegeONE or
its parent to the other owners in the event that the owner wishes
to transfer its equity interest.
In February 2001, the Company made an additional $50,000 equity
investment in PrivilegeOne which increased its direct and indirect
ownership interest to 75.4%. The Company has also agreed to lend
PrivilegeOne up to an additional $1,450,000 if PrivilegeOne
achieves certain milestones related to the development of its
proposed credit card program. The Company has granted the other
owners of PrivilegeOne an option to purchase the interest in
PrivilegeOne acquired by the Company in February 2001 at a price
of $10,000,000. This option, which expires in February 2004, may
only be exercised if all of the loans made by the Company to
PrivilegeOne are repaid in full. The Company has the right to
designate a majority of the Board of Directors of PrivilegeOne
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until all loans made to PrivilegeOne by the Company are repaid in
full or December 31, 2004, whichever is later. After that time,
directors will be elected by the majority vote of the owners of
PrivilegeOne based upon their percentage ownership interests.
In order to execute the PrivilegeONE business plan, PrivilegeONE
management is currently negotiating an arrangement with a
financial institution to issue and process credit cards marketed
by PrivilegeONE. If such an arrangement is not secured,
PrivilegeONE will be unable to execute its business plan.
SALES AND MARKETING
PrivilegeONE intends to market its program directly through a
national sales force. PrivilegeONE is seeking to develop customer
acquisition and loyalty strategies centered on the acceptance and
use of its cards, including reward programs from automobile
dealers designed to promote card use. PrivilegeONE also intends to
develop an Internet site through which it will seek to develop
strong relationships with, and provide services to, customers of
the automobile dealership.
COMPETITION
The credit card industry is characterized by intense competition.
PrivilegeONE will compete with numerous co-branded credit card
programs, including reward-based programs. Most of these programs
are sponsored by entities with greater resources and name
recognition than PrivilegeONE. As a result, PrivilegeONE's
competitors may be better positioned to react in a changing market
place.
INNOVATION TECHNOLOGY PARTNERS
GENERAL
In June 2000, the Company acquired a 51% interest in ITP, a
newly-formed entity established to develop businesses and provide
management and consulting services to entrepreneurial and
development stage companies. In the original business plan, ITP
was to focus on providing technology hosting and infrastructure
services such as human resources management, finance and
accounting functions, and Internet/application service provider
services. For its efforts, ITP charges cash fees, accepts equity
positions in its clients, or a combination of both. ITP will
continue to perform services as described in the original business
plan, but due to changes in the technology and internet related
environment, ITP will place increased emphasis on developing and
acquiring controlling interests in businesses which have a
possibility of providing the Company with a greater return on its
investment.
In exchange for its controlling interest in ITP, the Company
contributed $1,500,000 in cash and agreed to loan up to $3,500,000
to the new venture. The loan, which bears interest at a rate equal
to prime plus one percent per annum, is due in June 2004.
Executive management of ITP contributed $500,000 in cash and
certain assets, including existing client contracts, in exchange
for their collective 49% interest. Certain owners of ITP have been
issued warrants to acquire an aggregate 11.1% interest in ITP at a
value to be determined by appraisal if certain events occur,
including the completion of a public offering, a merger or other
business combination, a change of control of the Company, or if
Anthony J. Caldarone ceases to be Chairman of the Company. ITP
management has been granted options to acquire up to 150,000
shares of Common Stock of the Company at an exercise price of
$5.56 per share if ITP surpasses certain specified earnings
targets. As a result, the Company could be subject to expense
recognition in the event it becomes probable that ITP will achieve
its target earnings.
In addition to its management and consulting services, ITP also
intends to acquire controlling interests in certain entities that
it manages and consults with. The first initiative for this line
of ITP business was the acquisition of a 51%-owned subsidiary,
MindSearch, Inc. ("MindSearch"), a company which has developed
technology to provide consumer research to businesses on a faster
and broader basis than existing research approaches. ITP borrowed
$500,000 under its $3,500,000 credit facility with the Company to
finance the acquisition of the controlling interest in MindSearch.
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SALES AND MARKETING
At this time, the sales and marketing efforts of ITP are focused
primarily on the operations of MindSearch and general business
consulting services. MindSearch marketing efforts revolve around
customer survey and data gathering. The general consulting
services are marketed primarily by referrals and personal business
contacts of the executive management of ITP.
COMPETITION
Competition in the financial and business consulting industry is
intense, with businesses such as national accounting firms and
investment banking firms better positioned and better capitalized
to attract and retain significant clients. The limited number of
professionals employed by ITP, and its limited financial
resources, will likely require ITP to focus its attention on
smaller clients and projects.
CONSULTING SERVICES
The Consulting Agreement executed in conjunction with the Sale
Transaction requires the Company to provide certain consulting
services to purchaser, including information, advice and
recommendations with respect to the homebuilding market in New
Jersey and Pennsylvania. The Company has agreed that it will not
provide similar services to others in New Jersey or Pennsylvania
during the term of the Consulting Agreement and for a four-year
period after the expiration of the three-year term of the
Consulting Agreement.
The Consulting Agreement requires Anthony J. Caldarone, the
Company's Chairman, President and Chief Executive Officer to
participate in the performance of the consulting services to
purchaser and for so long as he remains employed by, or associated
with, the Company.
In consideration for the services provided by the Company under
the Consulting Agreement, purchaser is required to pay the Company
a consulting fee of $1,300,000 per year, payable in equal
quarterly installments during the three-year term of the
agreement, which expires on December 30, 2001.
EMPLOYEES
As of February 20, 2001, the Company and its subsidiaries employed
61 full time personnel, and 1 part-time employee. None of the
Company's employees are subject to collective bargaining
agreements. The Company believes that its employee relations are
satisfactory.
ITEM 2. COMPANY FACILITIES
The Company currently leases approximately 1,000 square feet of
office space located in Red Bank, New Jersey, for approximately
$3,100 per month. The term of this lease is on a month-to-month
basis. The Company also leases approximately 3,800 square feet of
office space in Vero Beach, Florida at a monthly rate of
approximately $6,800 for a term of 5 years ending August 31, 2005.
The Company's subsidiary, eCalton, currently leases approximately
12,000 square feet of office space in Vero Beach, Florida, for
approximately $10,700 per month. This lease expires on July 31,
2001, but eCalton has an option to renew this lease for three
one-year terms. eCalton also rents approximately 2,400 square feet
of office space in Houston, Texas for approximately $2,700 per
month. The term of the lease is on a month-to-month basis.
PrivilegeONE currently leases 2,000 square feet of office space in
Rhode Island at a cost of $900 per month on a month-to-month
basis. ITP currently leases 3,500 square feet of office space in
Houston, Texas at a cost of approximately $6,200 per month through
January 31, 2003.
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Management believes that these arrangements currently provide
adequate space for all of the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
On December 31, 1998, as a condition to the sale of Calton Homes,
the Company entered into a holdback escrow agreement with the
purchaser pursuant to which approximately $5,200,000 of the
closing proceeds were deposited into escrow. Of this amount,
$3,000,000 (the "General Indemnification Funds") were deposited to
provide security for the Company's indemnity obligations and
approximately $2,200,000 (the "Specific Indemnification Funds")
were deposited to fund costs associated with certain specified
litigation involving Calton Homes. During 1999, the Company
refunded $700,000 to the purchaser, out of the General
Indemnification Funds as a part of a settlement agreement and
related post-closing adjustments.
The Amended and Restated Stock Purchase Agreement ("Agreement"),
pursuant to which the Company sold Calton Homes on December 31,
1998 requires the Company to indemnify the purchaser for, among
other things, certain liabilities that arise out of events
occurring prior to the closing of the sale, including the cost of
warranty work on homes delivered if such costs exceed $600,000.
In January 2000, the purchaser asserted a $253,000 claim for
indemnification related to certain alleged liabilities arising out
of the events occurring prior to the sale of Calton Homes. The
purchaser has agreed to reduce the claim to $205,000. On December
28, 2000, rather than permit the release of the remaining General
Indemnification Funds, which were to be disbursed to the Company
at year-end, the purchaser asserted that it had sustained losses
of $770,000 as a result of matters allegedly arising from events
prior to the sale of Calton Homes, including the cost of warranty
work in excess of the $600,000 reserve established upon the
closing of the transaction. In addition, the purchaser requested
the escrow agent to set aside $1,139,000 for damages which it
believes it will sustain in the future, including the cost of
anticipated warranty work and other matters. An arbitration
proceeding to resolve these issues is currently scheduled for
March 2001. The Company believes that many of the claims made by
the purchaser are without merit and intends to vigorously contest
these claims in the arbitration. In certain instances, the
purchaser has not provided sufficient documentation to enable the
Company to assess the merits of the claim. With regard to claims
for warranty work performed, the Company believes that the
purchaser has failed to comply with the provisions of its
agreement with the Company related to the performance of the work
and did not demonstrate reasonably prudent business judgment in
administering warranty claims. At this time it is not possible to
accurately predict what the Company's liability will be related to
the claims asserted by the purchaser. However, at this time the
potential additional claims asserted by the purchaser against the
General Indemnification Fund total approximately $2,300,000. As of
November 30, 2000, the balance in the General Indemnification Fund
amounted to only $1,434,000. No amounts will be released from the
General Indemnification Funds until the indemnity claims are
resolved. The Company's indemnity obligations are not limited to
the amounts deposited in escrow.
The Specific Indemnification Funds are to be disbursed, to the
extent not otherwise utilized in the resolution of litigation, on
a case-by-case basis, as the litigation is resolved. As of
November 30, 2000, there were $1,055,000 of Specific
Indemnification Funds remaining in escrow. With the exception of
two matters, each of the matters for which the Specific
Indemnification Funds were deposited have been resolved, subject,
in certain cases, to the finalization of settlement agreements.
Under the terms of its agreement with the purchaser, the Company
is required to deposit additional Specific Indemnification Funds
for any matters that remain unresolved at December 31, 2000. As a
result, the Company may be required to deposit an additional
$189,000 in escrow until the resolution of the remaining two
matters.
The Company has filed a counter claim against the purchaser
alleging that purchaser has breached the Agreement and holdback
escrow agreement. The Company contends that purchaser did not
comply with its express obligations under the contract and its
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obligations of "good faith and fair dealing" implied in all New
Jersey contracts. Among other things, the Company alleges that
purchaser failed to handle third party indemnification claims in
good faith and in a reasonable manner using prudent business
standards, and failed to provide the Company with requested
information on certain claims to allow the Company to make an
intelligent assessment of the claim. At this time, there can be no
assurance that the Company will prevail in this counter claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matter was submitted to a
vote of security holders through the solicitation of proxies or
otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 22, 2001 are
listed below and brief summaries of their business experience and
certain other information with respect to them are set forth in
the following table and in the information which follows the
table:
NAME AGE POSITION
---- --- --------
Anthony J. Caldarone 63 Chairman, President and Chief Executive Officer
Kelly S. McMakin 39 Senior Vice President of Accounting
Christopher J. Burk 37 Vice President of Acquisitions
Maria F. Caldarone 37 Vice President of Corporate Development
Laura A. Camisa 38 Vice President of Strategic Planning
Mr. Caldarone was reappointed as Chairman, President and Chief
Executive Officer of Calton in November 1995, having previously
served in such capacities from the inception of the Company in
1981 through May 1993. From June 1993 through October 1995, Mr.
Caldarone served as a Director of the Company.
Mr. McMakin was appointed Senior Vice President of the Company in
January 2000. From 1993 through January 2000, Mr. McMakin served
as Controller and Treasurer of Florafax International, Inc., a
publicly traded floral wire service and credit card processor
headquartered in Vero Beach, Florida. Mr. McMakin is a Certified
Public Accountant.
Mr. Burk was hired as Vice President of Acquisitions by the
Company in March 2000. From 1990 until March 2000, he was the
principal at a privately held investment management firm which
invested in both large and small emerging growth companies. In
addition, Mr. Burk has served as Chairman of a closely held
telecommunications firm he founded in 1993.
Ms. Caldarone served as the Director of Business Development from
January 1999 until she was appointed as a Vice President of the
Company in February 2000. From 1995 through January 1999, Ms.
Caldarone was a non-practicing attorney. Prior to 1995, Ms.
Caldarone was employed by Trafalgar Homes from December 1993 to
November 1994, where she served as Director of Land Acquisition.
Ms. Caldarone is a licensed attorney in the state of Florida. Ms.
Caldarone is the daughter of Mr. Caldarone.
Ms. Camisa was hired as a Financial Analyst by the Company in
February 2000. In April 2000, she was appointed Vice President of
Strategic Planning. She held the position of Director of Investor
Relations and Financial Analyst at Hovnanian Enterprises, Inc.
from June 1998 through February 2000. Following her completion of
the Analyst Training Program at Kidder, Peabody & Co., Ms. Camisa
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also held the position of Financial Analyst - International
Mergers and Acquisitions at Marsh & McLennan Companies from
January 1995 through May 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Calton, Inc. common stock is traded on the American Stock
Exchange ("AMEX") under the symbol CN. The following reflects the
high and low sales prices of the common stock during fiscal 2000
and 1999.
FISCAL 2000 High Low
------------ -------------
1st Quarter $28.75 $ 7.50
2nd Quarter 33.75 5.31
3rd Quarter 6.88 4.00
4th Quarter 4.69 3.25
FISCAL 1999 High Low
------------ -------------
1st Quarter $ 1.50 $ 1.00
2nd Quarter 1.38 1.00
3rd Quarter 1.56 1.31
4th Quarter 1.88 1.19
At February 20, 2001, there were approximately 3,000 record and
"street name" shareholders of the Company's common stock, based on
information obtained from the Company's transfer agent and number
of requests from brokers and dealers for the Company's proxies and
annual reports. On that date, the last sale price for the common
stock as reported by AMEX was $3.86. The Company did not pay any
dividends on its Common Stock during fiscal 2000 or 1999.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical selected financial
information of the Company as of the dates and for the periods
indicated. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto include elsewhere in this
report.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended November 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
SELECTED OPERATING DATA
Revenues $ 3,534 $ 1,351 $ -- $ -- $ 1,292
Net income (loss) from continuing operations (5,158) 661 (1,960) (1,901) (1,736)
Net income (loss) from discontinued operations(1) (84) (240) 6,315 1,646 2,189
Gain (loss) from sale of operating businesses (654) 4,418 -- 369 --
Extraordinary gain, net of income taxes -- -- -- 1,263 --
Net income (loss) $ (5,896) $ 4,839 $ 4,355 $ 1,377 $ 453
Basic earnings (loss) per share:
Net income (loss) from continuing operations $ (1.21) $ 0.15 $ (0.37) $ (0.35) $ (0.30)
Net income (loss) from discontinued operations(1) (.02) (.05) 1.18 .30 .40
Gain (loss) from sale of operating businesses (.15) .97 -- .05 --
Extraordinary gain, net of income taxes -- -- -- .25 --
---------- ---------- ---------- ---------- --------
Net income (loss) $ (1.38) $ 1.07 $ 0.81 $ 0.25 $ 0.10
========== ========== ========== ========== ========
Diluted earnings (loss) per share:
Net income (loss) from continuing operations $ (1.21) $ 0.14 $ (0.37) $ (0.35) $ (0.30)
Net income (loss) from discontinued operations(1) (.02) (.05) 1.18 .30 .40
Gain (loss) from sale of operating businesses (.15) .92 -- .05 --
Extraordinary gain, net of income taxes -- -- -- .25 --
---------- ---------- ---------- ---------- --------
Net income (loss) $ (1.38) $ 1.01 $ 0.81 $ 0.25 $ 0.10
========== ========== ========== ========== ========
At November 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
SELECTED BALANCE SHEET DATA
Total assets $ 35,100 $ 40,441 $ 40,082 $ 35,142 $ 70,895
Total debt (2) -- -- -- -- 39,500
Shareholders' equity 32,887 38,654 38,221 32,850 28,086
(1) As a result of the sale of Calton Homes, Inc. that occurred on
December 31, 1998, the financial statements presentation treats
the Company's homebuilding business and results as discontinued
operations in accordance with APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business." The Company recognized a gain of
$4,418,000 that is net of a provision in lieu of taxes of
$3,173,000 on the sale.
(2) Debt is included as part of discontinued operations subsequent to
June 1997 since Calton Homes, Inc. became the primary obligor and
borrower of a revolving credit agreement entered into at that
time.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW - SALE OF CALTON HOMES
On December 31, 1998, the Company completed the sale of Calton
Homes, Inc., its primary operating homebuilding subsidiary to
Centex Real Estate Corporation. The purchase price for the stock
of Calton Homes was approximately $48,100,000, which resulted in a
pretax gain of approximately $6,900,000, inclusive of a provision
of approximately $650,000 recorded in fiscal 2000, and was subject
to a $5,200,000 holdback. The Company has entered into an
agreement to provide consulting services to Centex that requires
payments to the Company of $1,300,000 per year over a three-year
period, ending December 30, 2001.
The sale of Calton Homes was completed as part of the Company's
overall strategy to enhance shareholder value. Since the
completion of the sale, the Company has been engaged in providing
consulting services to the purchaser of Calton Homes and analyzing
potential business and acquisition opportunities. In July 1999,
the Company acquired substantially all of the assets of iAW, Inc.,
an Internet business solutions provider. In January 2000, the
Company acquired a 50.4% interest in PrivilegeONE, a newly formed
company which is developing a co-branded credit card program for
the automobile dealer industry. In February 2001, the Company
acquired an additional 25% of PrivilegeOne. In June 2000, the
Company acquired a 51% interest in ITP, a newly-formed entity
established to provide management and consulting services to
entrepreneurial and development stage companies. In August 2000,
through its interest in ITP, the Company acquired a 51% interest
in MindSearch, a company which is developing technology to provide
consumer research to businesses on a faster and broader basis than
existing research approaches. The Company's consolidated financial
statements included the accounts of the Company and its
majority-owned subsidiaries, including eCalton, PrivilegeOne, ITP
and MindSearch.
The Company continues to actively analyze other opportunities to
deploy the funds generated by the sale of Calton Homes.
The following discussions included in the Results of Operations
are based on the continuing operations of Calton, Inc. The
financial statements present the Company's homebuilding business
as discontinued operations in accordance with APB Opinion No. 30,
"Reporting the Effects of Disposal of a Segment of a Business."
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2000 AND
1999
Revenues for fiscal 2000 increased to $3,534,000 compared to
revenues of $1,351,000 for fiscal 1999. The primary reasons for
the increase were a full year of operations for eCalton in 2000,
compared to four months of operations in 1999, as well as the
addition of the technical staffing division at eCalton, which
commenced operations in July 2000. Revenues for the Web
development division at eCalton were $1,109,000 compared to
$157,000 in 1999, and revenues for the staffing operation at
eCalton were $936,000 in 2000, with no similar revenues in 1999.
Also included in 2000 revenues was $189,000 from ITP, which was
acquired in June 2000.
Project personnel expenses for eCalton were $1,514,000 in 2000
compared to $116,000 in 1999. The increase is attributable to a
full year of operations for the eCalton Web division in 2000,
compared to four months of operations in 1999, as well as the
addition of the technical staffing division which began operations
in July 2000.
Selling, general and administrative expenses experienced an
increase from $1,966,000 in 1999 to $8,015,000 in 2000. During
1999 the Company sold its homebuilding business and had minimal
operating expenses, and a greatly reduced corporate office. In
addition, eCalton was a much smaller operating unit and was not
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acquired until late in 1999. During fiscal 2000, the Company
expanded its operations at eCalton, including commencing
operations of a technical staffing division. In addition, the
Company acquired controlling interests in PrivilegeONE and ITP,
and through ITP, acquired a controlling interest in MindSearch.
The Company also relocated and increased staffing at its corporate
office. As a result, selling, general and administrative expenses
experienced a significant increase during fiscal 2000 attributable
primarily to payroll and payroll related expenses, professional
fees, and abandoned acquisition costs.
Research and development costs associated with MindSearch's
efforts to develop technology to provide consumer research
amounted to $315,000 in 2000, with no similar costs in 1999.
The acquisitions of eCalton and PrivilegeONE resulted in goodwill
in the amount of $237,000 and $138,000, respectively. However,
during 2000 management concluded that the goodwill for both
eCalton and PrivilegeONE had been permanently impaired, and
charged the entire unamortized balance to operations. This
conclusion was reached because of sustained losses since inception
for both entities, and the lack of certainty at November 30, 2000
as to whether these businesses would ever become profitable. The
amount charged to operations for eCalton and PrivilegONE amounted
to $205,000 and $119,000, respectively.
Interest income increased from $1,845,000 in 1999 to $2,144,000 in
2000, primarily due to higher interest rates in effect during
2000.
The Company recognized a loss on securities in the amount of
$1,708,000 for fiscal 2000. During fiscal 2000 and the prior year,
the Company acquired 518,000 shares of CorVu Corporation (OTCBB:
CRVU) common stock. The Company had previously valued and reported
these securities based on the closing price of CorVu common stock,
as reported on the "Over-the-Counter" Bulletin Board. In
accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has assessed the carrying value of these
shares and concluded that the decline in the value of these
securities is not temporary. This conclusion was based on, among
other things, CorVu's financial condition and sustained losses
from operations, the low per share value at which CorVu common
stock is trading, the Company's inability to liquidate its shares
in CorVu, and other factors that management considered relevant
under the circumstances. The loss associated with this other than
temporary impairment amounted to $990,000 for the current year. In
addition, the current year loss on securities includes a capital
loss on the sale of common stock of two publicly traded New York
Stock Exchange companies in the amount of $508,000, and a charge
for non-readily marketable securities in the amount of $210,000.
The credit to income for minority interest represents 49% of the
net loss of ITP, which had a capital contribution of $552,000 from
minority shareholders upon its formation in 2000. The Company may
record only up to a cumulative $552,000 of minority interest
credit against losses of ITP. If the cumulative loss incurred by
ITP causes the ITP associated minority interest to decline to
zero, the Company will be required to absorb all additional losses
until such time, if ever, that ITP begins to generate a profit.
The current year income tax benefit consists of a $579,000 benefit
related to a loss carryback to prior years and a current state tax
expense of $26,000. The 1999 income tax expense from continuing
operations of $453,000 is a result of income from continuing
operations in 1999 of $1,114,000.
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1999 AND
1998
Income from continuing operations before taxes was $1,114,000 for
the year ended November 30, 1999 compared to a loss of $2,085,000
for the year ended November 30, 1998. Revenues of $1,351,000
during fiscal 1999 were primarily derived from the consulting
agreement with the purchaser of Calton Homes, and also included
revenues of $157,000 from eCalton. There were no comparable
revenues for fiscal 1998.
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Selling, general and administrative expenses included in
continuing operations were approximately $2,000,000 during both
fiscal 1999 and 1998. General and administrative expenses
decreased approximately $500,000 at the corporate level. The
decrease is attributable to a significant reduction in corporate
fixed costs related to the sale of Calton Homes, including
personnel reductions, leasing costs and other overhead items.
However, the reductions were offset with the expenditures of
eCalton as part of the strategy to ramp up its operations during
1999 and 2000.
As a result of the circumstances described above, the Company
recognized income from continuing operations, net of taxes of
$661,000 for fiscal 1999 compared to a loss of $1,960,000 for
fiscal 1998. Included in the 1999 results is a pretax loss of
$427,000 from eCalton, $256,000 net of taxes.
Loss from discontinued operations for 1999 was $240,000, net of a
$373,000 tax benefit for the year ended November 30, 1999. The
loss includes approximately $1,000,000 related to legal costs and
the resolution of certain litigation matters in excess of amounts
previously reserved by management related to the Company's former
homebuilding business. As a condition to the sale of Calton Homes,
the Company is required to indemnify the purchaser for certain
specified litigation pending against Calton Homes. There is no
assurance that the ultimate resolution of the pending litigation
will not result in additional charges. Partially offsetting the
loss is pre-tax income of $429,000 from one month of operations of
Calton Homes and a commercial land sale. In addition, included in
the tax provision for discontinued operations is a tax benefit
related to the reduction of a state tax reserve in the amount of
$550,000 due to the resolution of certain state tax issues.
Income from discontinued operations for the year ended November
30, 1998 was $6,315,000, net of a tax provision of $2,363,000. The
results primarily include the operations of Calton Homes.
Taxes for the year ended November 30, 1999 reflect a provision for
income taxes of $3,253,000 resulting in an effective rate of
thirty-nine and one- half percent (39.5%). The increase in the
effective tax rate from thirty-four percent (34%) for the year
ended November 30, 1998 was primarily due to the future tax
benefits recognized in 1998 which were significantly higher than
those recognized in 1999, coupled with a significantly larger
amount of 1999 expenses for which the Company will not receive any
tax benefit. In 1998 a provision for income taxes of approximately
$2,200,000 was recorded. The net operating loss carryforwards and
certain other deferred tax assets are subject to utilization
limitations as a result of the changes in the control of the
Company that occurred in 1993 and 1995. The Company's ability to
use the net operating loss ("NOL") to offset future income is
$1,100,000 per year for 14 years. This amount has been reduced
from 1998 by $500,000 per year as a result of the sale of Calton
Homes (see Note 4).
The effective rate from continuing operations for the years ended
November 30, 1999 and 1998 is based upon a provision of $453,000
and a benefit of $125,000, respectively. The effective rate for
1998 is influenced by the tax expense associated with intercompany
charges from continuing operations to discontinued operations.
As of November 30, 1999 the Company was reporting a $518,000
unrealized loss on marketable equity securities in comprehensive
income.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1998 the sale of Calton Homes liquidated a
substantial part of the Company and resulted in the payoff, by the
purchaser, of the Company's revolving credit facility with
BankBoston which had an outstanding balance of $19,500,000. The
sale generated approximately $43,400,000 of cash including the
receipt of an additional $1,800,000 related to the post closing
adjustments that were finalized in September 1999. In addition, a
$5,200,000 holdback was established at closing as part of the sale
as a condition to indemnify the purchaser against existing
litigation and other warranties.
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As part of a post-closing settlement agreement, $700,000 was
refunded to the purchaser in the fourth quarter of 1999, which was
paid out of the General Indemnification Funds. The Company
collected $592,000 out of the Specific Indemnification Fund during
1999 as a result of certain litigation settlements, and legal fee
reimbursements.
As of November 30, 2000 there was $1,055,000 in the Specific
Indemnification Fund and $1,434,000 in the General Indemnification
Fund. Receipt of the remaining holdback money will be determined
in an arbitration proceeding to resolve pending issues with the
purchaser in March 2001. If the Company does not prevail in
arbitration the Company may receive no further disbursements from
the General Indemnity Escrow Account. The Company's indemnity
obligations are not limited to the amounts deposited in escrow.
As of November 30, 2000 the Company had approximately $32,190,000
of cash and cash equivalents compared to $33,786,000 at November
30, 1999. The majority of this cash was invested in money market
funds, which were earning approximately 6.3% at November 30, 2000
compared to 5.0% at November 30, 1999.
The Company believes that cash on hand, interest income, and funds
provided under the remaining year of the consulting agreement with
the purchaser of Calton Homes, which provides for another payment
of $1,300,000, will provide sufficient capital to support the
Company's operations for the upcoming year.
As of November 30, 2000 the Company had repurchased an aggregate
of 1,615,000 shares of treasury stock for a total of $9,739,000,
at an average price of $6.03 per share. Management continues to
buy back shares of the Company's common stock, as the stock
continues to trade at a price that is below both cash and book
value per share. If the Company's stock experiences an increase in
its trading price, management may suspend purchasing shares of the
Company.
CASH FLOWS FROM OPERATING ACTIVITIES
For the year ended November 30, 2000 the Company incurred a net
loss of approximately $5,900,000. However, cash used by operating
activities amounted to only $2,937,000. There were a number of
operating activities that did not use cash, such as a loss on
securities in the amount of $1,708,000, a loss on the sale of
Calton Homes of $654,000, tax related items of $647,000, increases
in accounts payable and accrued expenses of $710,000, as well as
other less significant items. Conversely, other operating
activities that did not provide cash were minority interest of
$464,000 and an increase in receivables of $545,000.
Cash flow from operating activities generated approximately
$1,000,000 during 1999, which includes $1,700,000 of interest
earned on money market funds, and approximately $1,000,000 from
the consulting agreement with the purchaser of Calton Homes.
Partially offsetting the increases was cash utilized for general
and administrative costs and the funding of eCalton's operations
as it proceeded in the initial stages of business.
Cash flow from discontinued operations during fiscal 1999
primarily consisted of the payment of legal settlements and
litigation costs related to the indemnification obligations
arising from the sale of Calton Homes in the amount of $1,500,000.
Offsetting the uses of cash were the collection of a mortgage
payable in the amount of $442,000 and the sale of a commercial
land parcel of $240,000, among other items.
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CASH FLOWS FROM INVESTING ACTIVITIES
For the year ended November 30, 2000 the Company received proceeds
from investing activities from the sale of marketable securities
in the amount of $1,366,000 and from the collection of the
holdback receivable in the amount of $2,104,000. Significant items
of cash used by investing activities included the purchase of
securities in the amount of $967,000 and the purchase of property
and equipment in the amount of $622,000.
In addition to items disclosed on the face of the consolidated
statements of cash flows, the Company also made certain
acquisitions, which are described in the following paragraphs. The
acquisitions discussed below have been consolidated in the
Company's financial statements and, consequently, they are not
reflected in the statement of cash flows.
In January 2000, the Company acquired a collective direct and
indirect (through ownership in a parent company) 50.4% equity
interest in PrivilegeONE Networks, Inc., a newly formed company
engaged in the development of a co-branded loyalty credit card
program. The purchase price for the Company's interest was
comprised of $105,000 of cash and a warrant to acquire 240,000
shares of Common Stock. In addition to its equity interest, the
Company has agreed to loan up to $1,500,000 to PrivilegeONE
pursuant to a note which bears interest at the rate of 10% per
annum and becomes due in January 2004. As of November 30, 2000 the
outstanding principal balance on this loan was $1,486,000.
In February 2001, the Company made an additional $50,000 equity
investment in PrivilegeOne which increased its direct and indirect
ownership interest to 75.4%. The Company has also agreed to lend
PrivilegeOne up to an additional $1,450,000 if PrivilegeOne
achieves certain milestones related to the development of its
proposed credit card program.
In June 2000, the Company acquired a 51% interest in ITP. In
exchange for its controlling interest, the Company contributed
$1,500,000 in cash and agreed to loan up to $3,500,000 to the new
venture. Executive management of ITP contributed $500,000 in cash
and certain assets, including existing client contracts, in
exchange for their collective 49% interest. In addition to its
management and consulting services, ITP also intends to acquire
controlling interests in certain entities that it manages and
consults with. The first initiative for this line of ITP business
was the acquisition of a 51%-owned subsidiary, MindSearch. In
August 2000, ITP borrowed $500,000 of its $3,500,000 credit
facility with the Company to finance the acquisition of a
controlling interest in MindSearch.
The Company generated approximately $43,400,000 of cash in fiscal
1999 from the sale of Calton Homes including the receipt of an
additional $1,800,000 as part of the post-closing settlement. As a
part of the post-closing agreement, the Company refunded to the
purchaser $700,000 in September 1999, paid out of the General
Indemnification Funds that were deposited in escrow and classified
as Holdback receivable. In addition, the Company collected
$592,000 of the holdback established to secure the Company's
indemnity obligations to the purchaser.
In July 1999, the Company acquired substantially all of the assets
of iAW, Inc., an Internet business solutions provider. The
purchase price for the acquisition was $250,000. In addition to
the purchase price, at the time of acquisition the Company
contributed $750,000 of capital to fund operations.
The Company purchased marketable equity securities for an
aggregate amount of $4,000,000 in fiscal 1999, of which
approximately $1,400,000 was outstanding as of November 30, 1999.
In November 1999, the Company loaned $250,000 to CorVu Corporation
in exchange for a convertible note with a warrant attached. The
note has been subsequently converted to 143,000 common shares of
CorVu Corporation under the terms of the loan when the borrower
became a publicly held company through a reverse merger. As
consideration for making the loan, the Company obtained a warrant
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that permits the purchase of 253,000 shares at a per share price
of $.01 per share. The fair value of the warrant was $16,000 based
upon the allocation of the relative fair values of the convertible
note and warrant at the time of issuance.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities in 2000 include cash
contributed by the minority owners of ITP in the amount of
$500,000 and proceeds from the exercise of stock options in the
amount of $149,000.
Cash used by financing activities in 2000 include the repurchase
of 235,000 shares of the Company's common stock in the amount of
$1,051,000. These repurchases were consistent with the Company's
repurchase program to repurchase up to two million shares of its
Common Stock.
For the year ended November 30, 1999 the Company repurchased
approximately 1,400,000 shares of its Common Stock on the open
market and in privately negotiated transactions for an aggregate
price of $8,600,000, an average of $6.14 per share. In June 1999,
the holder of a warrant (the "Warrant") to purchase 200,000 shares
of Calton Common Stock exercised its right under the Warrant using
the cashless exercise method. As a result, the holder was issued
136,000 shares which the Company repurchased for $750,000 that is
included in the aggregate numbers above. As a result, the Warrant
was cancelled.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently has no outstanding indebtedness other than
accounts payable. As a result, the Company's exposure to market
rate risk relating to interest rates is not material. The
Company's funds are primarily invested in highly liquid money
market funds with its underlying investments comprised of
investment-grade, short-term corporate issues currently yielding
approximately 6.3%. The Company does not believe that it is
currently exposed to market risk relating to foreign currency
exchange risk or commodity price risk. However, a substantial part
of the Company's cash equivalents are not FDIC insured or bank
guaranteed. As of November 30, 2000 the Company is reporting no
marketable securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth
herein commencing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by
reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by
this report.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not
later than 120 days after the end of the fiscal year covered by
this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
PAGE
----
(a) 1. and 2. Financial statements and financial statement schedules F-1
Reference is made to the Index of Financial Statements and Financial
Statements Schedules hereinafter contained
3. Exhibits E-1
Reference is made to the Index of Exhibits hereinafter contained
(b) Reports on Form 8-K
No reports on Form 8-K were filed during
the quarter ended November 30, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the underwriter, thereunto duly authorized.
CALTON, INC.
------------------------------
(Registrant)
Dated: February 22, 2001 By: /s/ KELLY S. MCMAKIN
------------------------------
Kelly S. McMakin, Senior Vice
President and Treasurer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the underwriter, thereunto duly authorized.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anthony J. Caldarone Chairman, Chief Executive February 22, 2001
- ------------------------------------- Officer and President
Anthony J. Caldarone (Principal Executive Officer)
/s/ Kelly S. McMakin Senior Vice President of Accounting February 22, 2001
- ------------------------------------- (Principal Financial &
Kelly S. McMakin Accounting Officer)
/s/ Anthony J. Caldarone Director February 22, 2001
- -------------------------------------
Anthony J. Caldarone
/s/ J. Ernest Brophy Director February 22, 2001
- -------------------------------------
J. Ernest Brophy
/s/ Mark N. Fessel Director February 22, 2001
- -------------------------------------
Mark N. Fessel
/s/ Kenneth D. Hill Director February 22, 2001
- -------------------------------------
Kenneth D. Hill
/s/ Robert E. Naughton Director February 22, 2001
- -------------------------------------
Robert E. Naughton
/s/ Frank Cavell Smith, Jr. Director February 22, 2001
- -------------------------------------
Frank Cavell Smith, Jr.
/s/ Gerald W. Stanley Director February 22, 2001
- -------------------------------------
Gerald W. Stanley
20
21
CALTON, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of Independent Certified Public Accountants ................................................. F-2
Consolidated Balance Sheets as of November 30, 2000 and 1999 ....................................... F-3
Consolidated Statements of Operations for the Years Ended November 30, 2000, 1999 and 1998 ......... F-4
Consolidated Statements of Cash Flows for the Years Ended November 30, 2000, 1999 and 1998 ......... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended November 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements ......................................................... F-7
Consent of Independent Certified Public Accountants ................................................ F-23
Schedules:
II - Valuation and Qualifying Accounts ................................................... F-24
Schedules other than the schedule listed above have been omitted because of the
absence of the condition under which they are required or because the required
information is presented in the financial statements or the notes thereto.
F-1
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Calton, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1) on page F-1 present fairly, in all material
respects, the financial position of Calton, Inc. and its subsidiaries at
November 30, 2000 and November 30, 1999, and the results of their operations
and their cash flows for each of the three years in the period ended
November 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under item
14(a)(2) on page F-1 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Tampa, Florida
January 19, 2001
F-2
23
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 32,190,000 $ 33,786,000
Available for sale securities -- 1,355,000
Current portion of holdback receivable 1,289,000 1,205,000
Accounts receivable, net of allowance for doubtful accounts of
$122,000 and $0 at November 30, 2000 and 1999, respectively 760,000 337,000
Prepaid expenses and other assets 218,000 202,000
------------ ------------
Total current assets 34,457,000 36,885,000
Non-current portion of holdback receivable -- 2,842,000
Notes receivable -- 338,000
Goodwill, net -- 233,000
Property and equipment, net 638,000 143,000
Other assets 5,000 --
------------ ------------
Total assets $ 35,100,000 $ 40,441,000
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,384,000 $ 778,000
Deferred taxes 741,000 572,000
Net liabilities of discontinued operations -- 437,000
------------ ------------
Total current liabilities 2,125,000 1,787,000
------------ ------------
Commitments and contingencies (Note 7)
Minority interest 88,000 --
------------ ------------
SHAREHOLDERS' EQUITY
Preferred Stock -- --
Common stock, $.05 par value, 10,740,000 shares authorized;
4,132,000 and 4,295,000 shares outstanding at November 30,
2000 and 1999, respectively 207,000 215,000
Additional paid in capital 33,364,000 32,704,000
Retained earnings 9,055,000 14,951,000
Less cost of shares held in treasury, 1,615,000 and 1,380,000
shares as of November 30, 2000 and 1999, respectively (9,739,000) (8,698,000)
Accumulated other comprehensive loss:
Unrealized loss in available for sale securities -- (518,000)
------------ ------------
Total shareholders' equity 32,887,000 38,654,000
------------ ------------
Total liabilities, minority interest and shareholders' equity $ 35,100,000 $ 40,441,000
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
24
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue
Homebuilding consulting fees $ 1,300,000 $ 1,194,000 $ --
Web design and implementation 1,109,000 157,000 --
Technical staffing 936,000 -- --
Other 189,000 -- --
------------ ------------ ------------
3,534,000 1,351,000 --
------------ ------------ ------------
Costs and expenses
Project personnel and expenses 1,514,000 116,000 --
Selling, general and administrative 8,015,000 1,966,000 2,029,000
Research and development 315,000 -- --
Impairment of goodwill 324,000 -- --
------------ ------------ ------------
10,168,000 2,082,000 2,029,000
------------ ------------ ------------
Loss from operations (6,634,000) (731,000) (2,029,000)
Other expense (income)
Interest income (2,144,000) (1,845,000) --
Interest expense 3,000 -- 56,000
Loss on securities 1,708,000 -- --
------------ ------------ ------------
Income (loss) from continuing operations before
income taxes, minority interest
and discontinued operations (6,201,000) 1,114,000 (2,085,000)
Minority interest (464,000) -- --
Income tax expense (benefit) (579,000) 453,000 (125,000)
------------ ------------ ------------
Income (loss) from continuing operations (5,158,000) 661,000 (1,960,000)
Income (loss) from discontinued operations,
net of a provision (benefit) for
income taxes of ($373,000) in 1999 and $2,363,000
in 1998 (84,000) (240,000) 6,315,000
Gain (loss) from sale of Calton Homes, Inc. net of a provision
in lieu of taxes of $0 in 2000 and $3,173,000 in 1999 (654,000) 4,418,000 --
------------ ------------ ------------
Net income (loss) $ (5,896,000) $ 4,839,000 $ 4,355,000
============ ============ ============
Earnings (loss) per share
Basic:
Income (loss) from continuing operations $ (1.21) $ 0.15 $ (0.37)
Income (loss) from discontinued operations, net (0.02) (0.05) 1.18
Gain (loss) from sale of Calton Homes, Inc., net (0.15) 0.97 --
------------ ------------ ------------
Net income (loss) $ (1.38) $ 1.07 $ 0.81
============ ============ ============
Diluted:
Income (loss) from continuing operations $ (1.21) $ 0.14 $ (0.37)
Income (loss) from discontinued operations, net (0.02) (0.05) 1.18
Gain (loss) from sale of Calton Homes, Inc., net (0.15) 0.92 --
------------ ------------ ------------
Net income (loss) $ (1.38) $ 1.01 $ 0.81
============ ============ ============
Weighted average number of shares outstanding
Basic 4,276,000 4,554,000 5,337,000
------------ ------------ ------------
Diluted 4,276,000 4,799,000 5,337,000
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30,
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (5,896,000) $ 4,839,000 $ 4,355,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities, net of effects of business
acquisitions
Subsidiary options issued for services 35,000 -- --
Minority interest (464,000) -- --
Loss on securities 1,708,000 -- --
Impairment of goodwill 324,000 -- --
(Gain) loss from the sale of Calton Homes, Inc. 654,000 (4,418,000) --
Income (loss) from discontinued operations -- 240,000 (6,315,000)
Provision for uncollectible receivables 122,000 -- --
Provision for income taxes 647,000 422,000 --
Depreciation and amortization 226,000 17,000 164,000
Change in net assets/liabilities of discontinued operations (437,000) (657,000) 3,232,000
Increase in accounts receivable (545,000) (276,000) --
(Increase) decrease in prepaid expenses and other assets (21,000) 737,000 (895,000)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 710,000 77,000 (431,000)
Issuance of stock under 401(k) Plan and other -- -- 91,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,937,000) 981,000 201,000
INVESTING ACTIVITIES
Net proceeds from sale of Calton Homes, Inc. -- 43,440,000 --
Sale of available for sale securities 1,366,000 2,127,000 --
Decrease in holdback receivable 2,104,000 -- --
Purchase of available for sale securities (967,000) (4,000,000) --
Acquisition of business, net of cash acquired (138,000) (250,000) --
Increase in notes receivable -- (338,000) --
Purchase of property and equipment (622,000) (58,000) (18,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,743,000 40,921,000 (18,000)
FINANCING ACTIVITIES
Stock repurchase (1,051,000) (8,583,000) (115,000)
Capital contributed by minority owners of
Innovation Technology Partners 500,000 -- --
Stock options exercised 149,000 382,000 --
------------ ------------ ------------
Net cash used in financing activities (402,000) (8,201,000) (115,000)
Net (decrease) increase in cash and cash equivalents (1,596,000) 33,701,000 68,000
Cash and cash equivalents at beginning of period 33,786,000 85,000 17,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 32,190,000 $ 33,786,000 $ 85,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 2,000 $ 209,000 $ 3,970,000
Cash paid for income taxes $ 35,000 $ 1,640,000 $ 680,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
Holdback receivable $ -- $ 4,047,000 $ --
Acquisition of assets $ -- $ 54,000 $ --
Conversion of CorVu and PrivilegeONE notes receivable into investments $ 338,000 $ -- $ --
Property and equipment contributed by minority owners of
Innovation Technology Partners $ 52,000 $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-5
26
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Accumulated
Common Stock Additional Other Total
-------------------- Paid-in Retained Treasury Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Stock Loss Equity Income(Loss)
-------- -------- -------- -------- ---------- ---------- ------------ -----------
Balance,
November 30, 1997 5,323 $ 266 $ 26,827 $ 5,757 $ -- $ -- $ 32,850 $ --
Net Income -- -- -- 4,355 -- -- 4,355 --
Issuance of Stock under
401 (k) Plan 32 1 70 -- -- -- 71 --
Issuance of Stock under
stock option plans -- -- 20 -- -- -- 20 --
Income tax refund -- -- 1,040 -- -- -- 1,040 --
Less: Purchase of
treasury stock (28) -- -- -- (115) -- (115) --
-------- -------- -------- -------- -------- -------- -------- --------
Balance
November 30, 1998 5,327 267 27,957 10,112 (115) -- 38,221 --
Net Income -- -- -- 4,839 -- 4,839 4,839
Issuance of Stock under
stock option plans 176 9 373 -- -- -- 382 --
Issuance of Stock under
warrant exercise 143 7 (7) -- -- -- -- --
Modification of stock
option terms -- -- 525 -- -- -- 525 --
Income tax refund -- -- 3,788 -- -- -- 3,788 --
Less: Purchase of
treasury stock (1,351) -- -- -- (8,583) -- (8,583) --
Adjustment to reflect
par value -- (68) 68 -- -- -- -- --
Comprehensive Loss:
unrealized loss in
available for sale
securities -- -- -- -- -- (518) (518) (518)
--------
Comprehensive income 4,321
-------- -------- -------- -------- -------- -------- --------
Balance,
November 30, 1999 4,295 215 32,704 14,951 (8,698) (518) 38,654
Net Loss (5,896) (5,896) (5,896)
Issuance of Stock under
stock option plans 73 4 145 -- -- -- 149 --
Issuance of Stock and options
by consolidated
subsidiary -- -- 35 -- -- -- 35 --
Shares retired upon
recapitalization
of the Company (1) -- (10) -- -- -- (10) --
Income tax refund -- -- 478 -- -- -- 478 --
Less: Purchase of
treasury stock (235) -- -- -- (1,041) -- (1,041) --
Adjustment to reflect
par value -- (12) 12 -- -- -- -- --
Change in unrealized loss in
available for sale
securities -- -- -- -- -- 518 518 518
--------
Comprehensive Loss $ (5,378)
========
-------- -------- -------- -------- -------- -------- --------
Balance,
November 30, 2000 4,132 $ 207 $ 33,364 $ 9,055 $ (9,739) $ -- $ 32,887
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESSES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Calton,
Inc. and all of its wholly owned and majority owned subsidiaries (the
"Company"). The Company consolidates a subsidiary when it owns directly
or indirectly more than 50% of the outstanding voting securities. Under
this method, a subsidiary's results of operations, cash flows and
balance sheets are reflected in the consolidated financial statements
of the Company. All significant intercompany accounts and transactions
have been eliminated. Participation of other security holders in the
earnings and losses of consolidated majority owned subsidiaries are
reflected in the caption "Minority Interest" in the Company's
consolidated financial statements. Minority interest adjusts the
Company's consolidated results of operations to reflect only the
Company's shares of the earnings or losses of majority owned
subsidiaries. In certain circumstances where majority owned
subsidiaries incur losses, and the Company is unable to pass these
losses through to minority security holders, the Company records the
entire loss of the subsidiary.
DESCRIPTION OF BUSINESSES
On December 31, 1998, the Company completed the sale of the primary
homebuilding subsidiary, Calton Homes, Inc. ("Calton Homes") to Centex
Real Estate Corporation ("Centex" or the "purchaser"). As a result of
the sale of Calton Homes, the financial statements treat the Company's
former homebuilding business and results as discontinued operations in
accordance with APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business."
In July 1999 the Company acquired substantially all of the assets of
iAW, Inc, and subsequently changed the name to eCalton.com, Inc.
("eCalton"). eCalton is engaged in designing Web pages and providing
Internet strategy consulting and comprehensive Internet-based
solutions. In addition, eCalton is in the business of providing
technical staffing to assist and augment their clients' information
technology departments.
In January 2000, the Company acquired a collective direct and indirect
(through ownership in a parent company) equity interest in PrivilegeONE
Networks, LLC ("PrivilegeONE"), a newly formed limited liability
corporation engaged in the development of a co-branded loyalty credit
card program. PrivilegeONE has developed a co-branded credit card with
the name of individual automobile dealers, along with that of
PrivilegeONE, and will provide dealership-sponsored incentives for
consumers to use the card both at the dealerships, and at other
businesses that accept the cards.
In June 2000, the Company acquired a 51% interest in Innovation
Technology Partners, LLC ("ITP"), a newly-formed entity established to
provide management and consulting services to entrepreneurial and
development stage companies. In addition to its management and
consulting services, ITP also intends to acquire controlling interests
in certain entities that it manages and consults with.
In August 2000, through its interest in ITP, the Company acquired a
controlling interest in MindSearch, a company which is developing
technology to provide consumer research to businesses on a faster and
broader basis than existing research approaches.
Through December 30, 2001, the Company is to provide corporate
consulting services related to the sale of the homebuilding assets
under a consulting agreement with the purchaser. The eCalton Web
strategy division develops Web sites for customers throughout the
United States, while the eCalton staffing operation places staff mainly
in the Houston, Texas market. To date, ITP has consulted on projects
mainly in the south Texas area. PrivilegeONE has yet to generate any
revenues, but expects to operate in most regions of the United States
once operational.
F-7
28
RECAPITALIZATION
Effective at the close of business on May 31, 2000, the Company
effected a one-for-twenty-five share combination or "reverse split" of
the Company's Common Stock. Contemporaneous with, but after giving
effect to the share combination, the Company effected a five-for-one
forward split of the Common Stock. As a result of this recapitalization
(the "Recapitalization"), each twenty-five shares of Common Stock
outstanding was combined into one share of Common Stock and the
resulting share was split into five shares. All Common Stock, stock
option, warrant and per share information has been adjusted to reflect
the Recapitalization as if such Recapitalization had taken place at the
beginning of the periods presented. In connection with this
Recapitalization, the Company changed the par value of its common stock
from $.01 to $.05 per share.
REVENUE RECOGNITION
Revenues of Calton, Inc. are comprised of the consulting agreement
payments from the purchaser of Calton Homes. Revenue is recognized once
the consulting report has been delivered and the amounts due under the
contract become payable to the Company.
eCalton recognizes revenues for services as work is performed on a
project-by-project basis adjusted for any anticipated losses in the
period in which any such losses are identified. For projects charged on
a time and materials basis, revenue is recognized based on the number
of hours worked by consultants at an agreed-upon rate per hour. eCalton
also undertakes projects on a fixed-fee or capped-fee basis for which
revenues are recognized on the percentage of completion method of
accounting based on the evaluation of actual costs incurred to date
compared to total estimated costs.
Revenues of ITP are recorded once ITP consulting services have been
rendered.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits, United States Government
Treasury Bills, and highly liquid money market funds with original
maturities of three months or less. The Company places its temporary
cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the FDIC insurance limits.
The Company has not experienced any loss to date on these investments.
AVAILABLE-FOR-SALE SECURITIES
The Company classifies all of its short-term investments as
available-for-sale securities. Such investments are carried at fair
value based on quoted market prices, with the unrealized gains and
losses, net of tax, reported as a separate component of comprehensive
income (loss) in shareholders' equity. Realized gains and losses, and
declines in value judged to be other than temporary, are included in
the caption "Loss on Securities" (see Note 2).
PROPERTY AND EQUIPMENT
Property and equipment are primarily comprised of computer equipment,
office furniture and leasehold improvements. Computer equipment is
being depreciated over a useful life of three to four years, office
furniture is being depreciated over five years, and leasehold
improvements are being depreciated over the terms of the respective
leases, which range from one to five years. Maintenance and repairs are
expensed as incurred, while renewals and betterments are capitalized.
The Company periodically performs an assessment of fixed assets to
determine if the assets have been impaired. Impairments are recognized
in operating results to the extent that carrying value exceeds fair
value.
F-8
29
INTANGIBLE ASSETS
Goodwill consists of the excess of purchase price over the fair value
of assets and liabilities acquired in acquisitions accounted for under
the purchase method of accounting. Goodwill is amortized on a
straight-line basis over five to ten years. The Company periodically
analyzes the carrying value of its goodwill and other intangible assets
to assess the recoverability from future operations. Impairments are
recognized in operating results to the extent that carrying value
exceeds fair value. During 2000 the Company concluded that the goodwill
associated with the acquisitions of both eCalton and PrivilegeONE had
been impaired, and charged these amounts to operations. This conclusion
was reached because of sustained losses since inception for both
entities, and the lack of certainty at November 30, 2000 as to whether
these businesses would ever become profitable.
INCOME TAXES
The Company records income taxes using the liability method based on
enacted tax laws and statutory tax rates applicable to the period in
which differences are expected to affect taxable income. Under this
method, the Company records deferred taxes based on temporary taxable
and deductible differences between the tax bases of the Company's
assets and liabilities and their financial reporting bases. A valuation
allowance is established when it is more likely than not that some or
all of the deferred tax assets will not be realized. Income tax expense
is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable and unbilled revenue, other
receivables, accounts payable, accrued expenses and other liabilities.
At November 30, 2000 and 1999, the fair value of these instruments
approximated their carrying value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
PER SHARE COMPUTATIONS
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period.
Income (loss) per share assuming dilution is computed by dividing the
net income (loss) by the weighted average number of common shares
outstanding, increased by the assumed conversion of other potentially
dilutive securities during the period.
The effect of 979,000 stock options and warrants were not included in
the calculation of earnings per share for 2000, as they would be
antidilutive. There were 360,000 stock options that were not included
in the calculation of diluted earnings per share in 1999 as these
options were antidilutive. In addition, a warrant to purchase 200,000
shares of common stock was outstanding until June 1999 (see Note 5).
The effect of stock options and the warrant were not included in the
calculation of diluted earnings per share in 1998 as these options and
warrants were antidilutive due to the loss from continuing operations
during this period.
STOCK-BASED COMPENSATION
The Company measures compensation expense related to the grant of stock
options and stock-based awards to employees in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations.
Stock-based compensation arrangements involving non-employees are
accounted for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123") and
F-9
30
related interpretations. The Company provides the disclosure
requirements of SFAS 123 for employee arrangements.
ADVERTISING EXPENSE
The costs of advertising are expensed as incurred. Included in selling,
general and administrative expenses are advertising costs of
approximately $86,000 and $16,000 for the years ended November 30, 2000
and 1999, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on
the recognition, presentation and disclosure of revenue in financial
statements. The Company's policy of revenue recognition is consistent
with this bulletin.
In June 2000, the FASB issued Statement No. 138, "Accounting for
Certain Hedging Activities", which amended Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Statement 138 must be adopted concurrently with the adoption of
Statement 133. The Company expects to adopt these new Statements
effective December 1, 2000. These Statements will require the Company
to recognize all derivatives on the balance sheet at fair value. The
Company does not anticipate that the adoption of these Statements will
have a significant effect on its results of operations or financial
position.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements in order to conform to the 2000 presentation.
2. AVAILABLE-FOR-SALE SECURITIES
In November 1999, the Company made a $250,000 unsecured bridge loan to
CorVu Corporation ("CorVu") pursuant to a note which provided that all
principal and accrued interest would become due upon the earlier of (i)
120 days or (ii) the closing of a reverse merger transaction with
Minnesota American, Inc. Upon the occurrence of the reverse merger in
January 2000, the bridge loan was converted to 143,000 common shares in
the surviving corporation. As consideration for making the bridge loan,
the Company was issued a five year warrant to purchase 253,000 shares
of common stock in CorVu at a per share price of $.01 per share. Also
in January 2000, the Company purchased an additional 375,000 shares of
common stock and a five-year warrant for 225,000 shares of CorVu for
$750,000. The warrant entitles the Company to acquire certain
quantities of CorVu common stock at prices ranging from $2.00 per share
to $8.00 per share.
At November 30, 2000, the Company is reporting no Available-for-Sale
Securities, although the Company holds 518,000 shares of CorVu
Corporation (OTCBB: CRVU) as of the balance sheet date. The Company had
previously valued and reported these securities based on the closing
price of CorVu common stock, as reported on the "Over-the-Counter"
Bulletin Board. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" the Company has assessed the carrying value of these
shares and concluded that the decline in value was not temporary. This
conclusion was based on, among other things, CorVu's financial
condition and sustained losses from operations, the low per share value
at which CorVu common stock is trading, the Company's inability to
liquidate its shares in CorVu, and other factors that management
considered relevant under the circumstances. The loss associated with
this other-than-temporary impairment amounted to $990,000 for the
current year, and is included on the income statement as loss on
securities. In addition, the current year loss on securities includes a
capital loss on the sale of common stock of two publicly traded New
F-10
31
York Stock Exchange companies in the amount of $508,000, for which the
Company received proceeds in the amount of approximately $1,350,000.
The remaining $210,000 of loss on securities resulted from the write
off of non-readily marketable securities.
3. ACQUISITIONS AND INVESTMENTS
In July 1999 the Company acquired substantially all of the assets of
iAW, Inc., an Internet business solutions provider for a cash price of
$250,000. The acquired business is operated through a wholly-owned
subsidiary named eCalton.com, Inc. As a result of the acquisition, the
Company recorded goodwill in the amount of $237,000, which was
originally to be amortized over ten years. However, during the current
year management concluded that this goodwill had been permanently
impaired, and charged the entire unamortized balance of goodwill to
operations. In conjunction with the acquisition, the Company entered
into employment contracts with the three principal officers of eCalton,
and granted each officer options to acquire 120,000 shares of the
Company's common stock at a price of $8.15. During the fourth quarter
of 2000 one of these officers resigned, and 80,000 of these options
were cancelled.
In January 2000, the Company acquired a collective direct and indirect
(through ownership in a parent company) 50.4% equity interest in
PrivilegeONE Networks, LLC, a newly formed limited liability
corporation engaged in the development of a co-branded loyalty credit
card program. The purchase price for the Company's interest was
comprised of $105,000 of cash and a five-year warrant to acquire
240,000 shares of common stock at an exercise price of $12.50 per
share. As of the acquisition date, the warrant was determined to have
nominal value. As a result of the acquisition, the Company recorded
goodwill in the amount of $138,000, which was originally to be
amortized over five years. However, during the current year management
concluded that this goodwill had been permanently impaired, and charged
the entire unamortized balance of goodwill to operations.
The warrant becomes exercisable only if PrivilegeONE surpasses certain
specified earnings targets. In addition to its equity interest, the
Company has agreed to loan up to $1,500,000 to PrivilegeONE pursuant to
a note which bears interest at the rate of 10% per annum and becomes
due in January 2004. As of November 30, 2000 the outstanding principal
balance on this loan was $1,486,000. The Company has the right to
designate a majority of the Board of Directors of PrivilegeONE until
the later of the time that the note is repaid or January 2004. The
Company has entered into agreements with the other owners of
PrivilegeONE and its parent company, which obliges each of the owners
to offer its equity interest in PrivilegeONE or its parent to the other
owners in the event that the owner wishes to transfer its equity
interest.
In June 2000, the Company acquired a 51% interest in ITP, a
newly-formed entity established to provide management and consulting
services to entrepreneurial and development stage companies. In
exchange for its controlling interest, the Company contributed
$1,500,000 in cash and agreed to loan up to $3,500,000 to the new
venture. The loan, which bears interest at a rate equal to prime plus
one percent per annum, is due in June 2004. Executive management of ITP
contributed $500,000 in cash and certain assets, including exiting
client contracts, in exchange for their collective 49% interest. The
accounts of ITP have been consolidated along with those of the Company
with the executive management's interest shown as minority interest.
Certain owners of ITP have been issued warrants to acquire an aggregate
11.1% interest in ITP at a value to be determined by appraisal if
certain events occur, including the completion of a public offering, a
merger or other business combination, a change of control, or if
Anthony J. Caldarone ceases to be Chairman of the Company. ITP
management has been granted options to acquire up to 150,000 shares of
common stock of the Company at an exercise price of $5.56 per share if
ITP surpasses certain specified earnings targets. As a result, the
Company could be subject to expense recognition in the event it becomes
probable that ITP will achieve its target earnings.
F-11
32
In addition to its management and consulting services, ITP also intends
to acquire controlling interests in certain entities that it manages
and consults with. The first initiative for this line of ITP business
was the acquisition of a 51%-owned subsidiary, MindSearch, Inc., a
company which has developed technology to provide consumer research to
businesses on a faster and broader basis than existing research
approaches. In August 2000, ITP borrowed $500,000 under its $3,500,000
credit facility with the Company to finance the acquisition of a
controlling interest in MindSearch. The accounts of MindSearch have
been consolidated along with those of the Company.
During 2000 the Company also acquired certain interests in businesses
accounted for using the cost method in amounts totaling less than
$250,000 in the aggregate.
4. INCOME TAXES
The components of the provision/(benefit) for income taxes are as
follows: (amounts in thousands)
Years Ended November 30,
-----------------------------
2000 1999 1998
------- ------- -------
Federal
Current $ (605) $ 15 $ 1,785
Deferred 84 (28) (603)
Provision in lieu of income taxes -- 2,928 527
State
Current 26 28 16
Provision in lieu of income taxes -- 310 513
------- ------- -------
(495) 3,253 2,238
Less: Discontinued operations (provision) benefit (84) 373 (2,363)
Provision in lieu of taxes on the sale of Calton Homes -- (3,173) --
------- ------- -------
Continuing operations $ (579) $ 453 $ (125)
======= ======= =======
F-12
33
The following schedule reconciles the federal provision (benefit) for
income taxes computed at the statutory rate to the actual provision for
income taxes:
(amounts in thousands)
Years Ended November 30,
-----------------------------
2000 1999 1998
------- ------- -------
Computed provision (benefit) for income taxes at 34% $(2,266) $ 2,758 $ 2,242
Expenses for which deferred tax benefit
cannot be currently recognized 1,851 -- --
Expenses for which deferred tax benefit
is currently recognized -- (37) (399)
State and local tax benefit 26 594 529
State tax reserves -- (550) --
Expenses for which no tax benefit is available 15 488 --
Other (121) -- (134)
------- ------- -------
Total provision (benefit) for income taxes (495) 3,253 2,238
Less: Discontinued operation (provision) benefit (84) 373 (2,363)
Provision in lieu of taxes on the sale of Calton Homes -- (3,173) --
------- ------- -------
Continuing operations $ (579) $ 453 $ (125)
======= ======= =======
During fiscal 2000, the Company received a federal income tax refund in
the amount of $1,298,000 resulting from the carryback of certain losses
to years in which the Company incurred income taxes.
In 1999, the resolution of certain state tax issues resulted in a
$550,000 reduction to the 1999 provision for income taxes.
F-13
34
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at November
30, 2000, and 1999 are as follows:
(amounts in thousands)
Deferred Tax Assets (Liabilities)
-------------------------------------------
Continuing Operations Combined*
--------------------- -------------------
2000 1999 2000 1999
-------- --------- -------- -------
Income from joint ventures $ -- $ -- $ 93 $ 33
Federal net operating losses 7,214 5,594 7,214 5,594
State net operating losses 2,023 2,248 2,444 2,662
Depreciation 9 (6) 9 (6)
Deferred state taxes 177 5 368 131
Litigation reserve -- -- 188 187
Stock compensation -- -- 179 179
Intangibles, net 603 -- 603 --
Other 85 23 333 109
-------- -------- -------- -------
10,111 7,864 11,431 8,889
Valuation allowances (10,111) (7,864) (11,431) (8,805)
-------- -------- -------- -------
Total deferred taxes $ -- $ -- $ -- $ 84
======== ======== ======== =======
* Includes both continuing and discontinued operations
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the
financial statements. For federal and state tax purposes, a valuation
allowance was provided on a significant portion of the net deferred tax
assets due to uncertainty of realization.
The federal net operating loss carryforward for tax purposes is
approximately $21,200,000 at November 30, 2000 and $16,400,000 at
November 30, 1999. The Company's ability to use its deferred tax
assets, including federal net operating loss carryforwards, created
prior to November 21, 1995 to offset future income is limited to
approximately $1,127,000 per year under Section 382 of the Internal
Revenue Code as a result of the change in control of the Company in
November 1995. The limitation has been reduced by approximately
$500,000 per year as a result of the terms of the sale of Calton Homes.
These federal carryforwards will expire between 2007 and 2019.
F-14
35
5. SHAREHOLDERS' EQUITY
The Company's Certificate of Incorporation, as amended, provides for
10,740,000 authorized shares of Common Stock (par value $.05 per
share), 520,000 shares of Redeemable Convertible Preferred Stock (par
value $.10 per share) and 2,000,000 shares of Class A Preferred Stock
(par value $.10 per share), one million shares of which have been
designated as Class A Series One Preferred Stock. None of the Preferred
Stock is issued or outstanding.
During 1998 the Company commenced a stock repurchase program with the
intention to repurchase up to 2,000,000 shares of Common Stock in open
market repurchases and privately negotiated transactions. As of
November 30, 2000, there were 1,615,000 shares held in Treasury
totaling $9,739,000.
In May 1993, the Company adopted the Calton, Inc. 1993 Non-Qualified
Stock Option Plan (the "1993 Plan") under which a total of 299,000
shares of Common Stock were reserved for issuance. Under the terms of
the 1993 Plan, options may be granted at an exercise price designated
by the Board of Directors. The options granted under the 1993 Plan vest
in equal installments over a three-year period. The exercise price of
outstanding options at November 30, 2000 under the 1993 Plan range from
$1.55 to $6.10 per share. Options granted under the 1993 Plan have a
maximum term of ten years, with a weighted average remaining
contractual life of 7.5 years at November 30, 2000.
In April 1996, the Company's shareholders approved the Company's 1996
Equity Incentive Plan (the "1996 Plan") under which a total of 400,000
shares of Common Stock were reserved for issuance. Under the terms of
the 1996 Plan, options may be granted at an exercise price equal to the
fair market value of the Common Stock on the date of grant (110% of
such fair market value in the case of an incentive stock option granted
to a 10% shareholder). The exercise prices of outstanding options at
November 30, 2000 range from $1.70 to $13.90 per share with vesting
ranging from one to five years. The exercise period is up to ten years,
with a weighted average remaining contractual life of 6.1 years at
November 30, 2000.
In April 2000, the Company's shareholders approved the Company's 2000
Equity Incentive Plan (the "2000 Plan") under which a total of 800,000
shares of Common Stock were reserved for issuance. Under the terms of
the 2000 Plan, options may be granted at an exercise price equal to the
fair market value of the Common Stock on the date of grant (110% of
such fair market value in the case of an incentive stock option granted
to a 10% shareholder). Generally, the options granted under the 2000
Plan vest in equal installments over a five-year period. The exercise
prices of outstanding options at November 30, 2000 range from $3.65 to
$4.50 per share. The exercise period is up to ten years, with a
weighted average remaining contractual life of 9.6 years at November
30, 2000.
At November 30, 2000 there were 346,000 options exercisable under all
plans in the aggregate, with a weighted average exercise price of
$4.79.
In connection with the sale of Calton Homes, Inc. the Company made
certain adjustments to the terms of options to acquire the Company's
Common Stock previously granted and outstanding as of December 31, 1998
under the 1993 Plan and the 1996 Plan. Effective January 1, 1999, all
options that were previously granted and outstanding became
exercisable, regardless of whether the right to exercise the option had
previously vested. Employees of Calton Homes, Inc. had until December
31, 2000 to exercise any options, and options of employees of Calton,
Inc. will expire in accordance with their original terms. The effect of
the amendments to the stock option plans of approximately $525,000 is
considered to be severance costs and was therefore recorded as an
expense and included in the gain on the sale transaction in the first
quarter of 1999.
F-15
36
Stock option activity under each of these Plans are summarized as
follows (shares in thousands):
2000 1996 1993 Weighted Average
Plan Plan Plan Total Exercise Price
---- ---- ---- ----- --------------
Options outstanding November 30, 1998 -- 276 135 411 $ 1.99
Granted -- 17 120 137 $ 6.05
Exercised -- (104) (72) (176) $ 2.07
---- ---- --- ----
Options outstanding November 30, 1999 -- 189 183 372 $ 3.44
Granted 49 75 43 167 $ 10.29
Forfeited (2) (6) -- (8) $ 10.85
Exercised -- (29) (43) (72) $ 2.00
---- ---- --- ----
Options outstanding November 30, 2000 47 229 183 459 $ 6.04
==== ==== === ====
In July 1999, the Company entered into employment agreements with three
officers of eCalton pursuant to which each have been granted options to
acquire 120,000 shares of the Company's Common Stock, or an aggregate
of 360,000 shares. The non-qualified stock options granted have terms
similar to the 1996 Equity Incentive Plan, vest in three equal annual
installments beginning July 19, 2000, and have a term of ten years. The
exercise price is $8.15 per share. During 2000 one of these officers
resigned and, as a result, forfeited 80,000 of the options which had
not yet vested.
The Company accounts for stock option plans under APB 25. Accordingly,
no compensation expense has been recognized for its stock-based
compensation plans. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant
date for awards under these plans consistent with the methods
prescribed under FAS 123, the Company's net income (loss) would have
been reduced by (increased by) approximately ($269,000), $551,000 and
$141,000 for years ended November 30, 2000, 1999 and 1998,
respectively. On a pro forma basis, earnings (loss) per share would
have been reduced by (increased by) ($.06), $.02 and $.00 per share for
2000, 1999 and 1998, respectively. The estimated weighted average fair
value of the options granted in the years ended November 30, 2000, 1999
and 1998 is $7.34, $6.05 and $1.55, respectively, using the
Black-Scholes option-pricing model, with the following assumptions:
dividend yield - none, volatility of .8, .8 and .7, risk-free interest
rate of 6.54%, 4.56% and 5.49%, assumed forfeiture rate as they occur,
and an expected life of 5.8 years, 3 years and 4.7 years at November
30, 2000, 1999 and 1998, respectively. Compensation expense recognized
in providing pro forma disclosures may not be representative of the
effects on net income or loss for future years.
In June 1999, the holder of a warrant (the "Warrant") to purchase
200,000 shares of Calton Common Stock exercised the Warrant using the
cashless exercise method. As a result, the holder was issued 136,000
shares which the Company repurchased for $750,000 and the Warrant was
canceled. The 136,000 shares are held as treasury stock.
In July 2000 the Company's Board of Directors repriced 92,000 options
held by current employees of the Company. The options were repriced to
$4.50 per share, and had exercise prices ranging from $6.10 to $12.65
prior to the repricing. The effect of repricing options can trigger
compensation expense to the extent that the fair value of the Company's
common stock exceeds the new price of the options through until the
date they are exercised or expire. In 2000 no compensation expense was
recognized as a result of the repricing, as the price of the Company's
stock did not close above $4.50 at the end of any reporting period.
F-16
37
Effective November 30, 2000 the Board of Directors of the Company
adopted an Employee Stock Purchase Plan (the "Plan"), subject to
shareholder approval at the Company's 2001 Annual Meeting of
Shareholders. The stock subject to options under the Plan will
initially be 175,000 shares of the Company's common stock. This initial
number shall be automatically increased on January 1 of each year by
the lesser of (i) 2% of the total number of shares of common stock
outstanding on December 31 of the prior year or (ii) 75,000 shares.
Offering periods will be determined by the Compensation Committee, with
a maximum offering period not to exceed twenty-four months. Under the
terms of the Plan, the option price per share will be the lesser of (i)
85% of the average market price of the common stock on the first
business day of the offering period, or (ii) 85% of the average market
price of the common stock on the last business day of the payment
period.
In February 1999, the Company's Board of Directors adopted a
shareholder rights plan (the "Rights Plan") and declared a dividend of
one preferred stock purchase right (a "Right") for each outstanding
share of Common Stock. Under the Rights Plan, each Right represents the
right to purchase from the Company one one-hundredth (1/100th) of a
share of Class A Preferred Stock Series One (the "Preferred Stock") at
a price of $5.50 per one one-hundredth (1/100th) of a share. Each one
one-hundredth (1/100th) of a share of Preferred Stock has economic and
voting terms equivalent to those of one share of the Company's Common
Stock. The Rights will not become exercisable unless and until, among
other things, a person or group acquires or commences a tender offer
for 15% or more of the Company's outstanding Common Stock. In the event
that a person or group, without Board approval acquires 15% or more of
the outstanding Common Stock, each Right would entitle its holder
(other than the person or group) to purchase shares of Preferred Stock
having a value equal to twice the exercise price. Also, if the Company
is involved in a merger or sells more than 50% of its assets or earning
power, each Right will entitle its holder (other than the acquiring
person or group) to purchase shares of common stock of the acquiring
company having a market value equal to twice the exercise price. If any
person or group acquires at least 15%, but less than 50%, of the
Company's Common Stock, the Board may, at its option, exchange one
share of Common Stock for each Right (other than Rights held by such
person or group). The Right Plan may cause substantial dilution to a
person or group that, without prior Board approval, acquires 15% or
more of the Company's Common Stock, unless the Rights are first
redeemed by the Board. The Rights expire on February 1, 2009 and may be
redeemed by the Company at a price of $.01 per Right.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(in thousands)
As of November 30,
-------------------
2000 1999
----- -----
Computer, furniture and other equipment $ 670 $ 155
Leasehold improvements 159 --
----- -----
829 155
Less: Accumulated depreciation (191) (12)
----- -----
$ 638 $ 143
===== =====
Total depreciation expense for the years ended November 30, 2000, 1999
and 1998 was $179,000, $20,000 and $164,000, respectively.
F-17
38
7. COMMITMENTS AND CONTINGENT LIABILITIES
DISCONTINUED OPERATIONS
As part of the sale of Calton Homes on December 31, 1998, the Company
entered into a consulting agreement with the purchaser that requires
the purchaser to make payments of $1,300,000 per year over a three-year
period to the Company.
On December 31, 1998, as a condition to the sale of Calton Homes, the
Company entered into a holdback escrow agreement with the purchaser
pursuant to which approximately $5,200,000 of the closing proceeds were
deposited into escrow. Of this amount, approximately $3,000,000 (the
"General Indemnification Funds") were deposited to provide security for
the Company's indemnity obligations and approximately $2,200,000 (the
"Specific Indemnification Funds") were deposited to fund costs
associated with certain specified litigation involving Calton Homes.
During 1999, the Company refunded $700,000 to the purchaser, out of the
General Indemnification Funds as a part of a settlement agreement and
related post closing adjustments.
The Amended and Restated Stock Purchase Agreement ("Agreement"),
pursuant to which the Company sold Calton Homes on December 31, 1998,
requires the Company to indemnify the purchaser for, among other
things, certain liabilities that arise out of events occurring prior to
the closing of the sale, including the cost of warranty work on homes
delivered if such costs exceed $600,000.
In January 2000, the purchaser asserted a $253,000 claim for
indemnification related to certain alleged liabilities arising out of
the events occurring prior to the sale of Calton Homes. The purchaser
has agreed to reduce claim to $205,000. On December 28, 2000, rather
than permit the release of the remaining General Indemnification Funds,
which were to be disbursed to the Company at year-end, the purchaser
asserted that it had sustained losses of $770,000 as a result of
matters allegedly arising from events prior to the sale of Calton
Homes, including the cost of warranty work in excess of the $600,000
reserve established upon the closing of the transaction. In addition,
the purchaser requested the escrow agent to set aside $1,139,000 for
damages which it believes it will sustain in the future, including the
cost of anticipated warranty work and other matters. An arbitration
proceeding to resolve these issues is currently scheduled for March
2001. The Company believes that many of the claims made by the
purchaser are without merit and intends to vigorously contest these
claims in the arbitration. In certain instances, the purchaser has not
provided sufficient documentation to enable the Company to assess the
merits of the claim. With regard to claims for warranty work performed,
the Company believes that the purchaser has failed to comply with the
provisions of its agreement with the Company related to the performance
of the work and did not demonstrate reasonably prudent business
judgment in administering warranty claims. At this time it is not
possible to accurately predict what the Company's liability will be
related to the claims asserted by the purchaser. However, at this time
the potential additional claims asserted by the purchaser against the
General Indemnification Fund total approximately $2,300,000. As of
November 30, 2000, the balance in the General Indemnification Fund
amounted to only $1,434,000. No amounts will be released from the
General Indemnification Funds until the indemnity claims are resolved.
The Company's indemnity obligations are not limited to the amounts
deposited in escrow.
The Specific Indemnification Funds are to be disbursed, to the extent
not otherwise utilized in the resolution of litigation, on a
case-by-case basis, as the litigation is resolved. As of November 30,
2000, there were $1,055,000 of Specific Indemnification Funds remaining
in escrow. With the exception of two matters, each of the matters for
which the Specific Indemnification Funds were deposited have been
resolved, subject, in certain cases, to the finalization of settlement
agreements. Under the terms of its agreement with the purchaser, the
Company is required to deposit additional Specific Indemnification
Funds for any matters that remain unresolved at December 31, 2000. As a
result, the Company may be required to deposit an additional $189,000
in escrow until the resolution of the remaining two matters.
F-18
39
The Company has filed a counter claim against the purchaser alleging
that purchaser has breached the purchase agreement and holdback escrow
agreement. The Company contends that purchaser did not comply with its
express obligations under the contract and its obligations of "good
faith and fair dealing" implied in all New Jersey contracts. Among
other things, the Company alleges that purchaser failed to handle third
party indemnification claims in good faith and in a reasonable manner
using prudent business standards, and failed to provide the Company
with requested information on certain claims to allow the Company to
make an intelligent assessment of the claim. At this time, there can be
no assurance that the Company will prevail in this counter claim.
In the event that the Company elects to liquidate and dissolve prior to
December 31, 2003, it will be required to organize a liquidating trust
to secure its obligations to the purchaser. The liquidating trust will
be funded with the Specific Indemnification Funds plus $2,000,000. Any
General Indemnification Funds remaining in the holdback escrow fund
will be applied as a credit against amounts required to be deposited in
the liquidating trust.
LEASES
The Company and its consolidated subsidiaries lease their facilities
and equipment under operating lease agreements with various expiration
dates through 2005. Future minimum lease payments as of November 30,
2000 under the leases are as follows:
2001 $246,000
2002 167,000
2003 97,000
2004 82,000
2005 68,000
Thereafter: --
--------
Total: $660,000
========
Rental expense for the Company and its subsidiaries for the years ended
November 30, 2000, 1999, and 1998 was $247,000, $45,000, and $392,000,
respectively.
8. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of Calton Homes.
The purchase price for the stock of Calton Homes was $48,100,000 plus
certain post-closing adjustments. In fiscal 1999, the Company recorded
a pretax gain of $7,591,000 on the sale. Cash proceeds from the sale
were approximately $43,440,000, net of the $4,040,000 remaining
holdback and $1,800,000 million cash received from closing adjustments.
No tax liability resulted from the sale since the transaction resulted
in a capital loss for tax purposes. However, a provision in lieu of
taxes was recorded for financial reporting purposes in fiscal 1999 in
the amount of $3,173,000 related to the sale transaction. The gain was
subject to the $5,200,000 holdback (see Note 7) of which $700,000 was
refunded to the purchaser, out of the General Indemnification Funds and
included as part of the gain and $592,000 was received by the Company
pursuant to the terms of the indemnification agreement. Future
decreases to the escrows held for indemnifications, if any, will be
recorded as an adjustment to the gain from the sale of Calton Homes. In
fiscal 2000, the Company recorded a provision of approximately $650,000
against the previously recognized gain on sale of $7,591,000. Calton
has entered into an agreement to provide consulting services to Centex
that requires payments to the Company of $1,300,000 per year over a
three-year period.
F-19
40
Results of operations from discontinued operations are as follows
(amounts in thousands):
Years ended November 30,
-------------------------
1999 1998
-------- --------
Revenues $ 6,763 $105,292
======== ========
Cost of revenues 5,858 85,897
Selling, general and administrative 1,518 10,172
-------- --------
7,376 96,069
-------- --------
Income (loss) from operations (613) 9,223
Interest expense, net -- 545
-------- --------
Income (loss) before income taxes (613) 8,678
Provision (benefit) for income taxes (373) 2,363
-------- --------
Net income (loss) from discontinued operations $ (240) $ 6,315
======== ========
Net assets of discontinued operations are as follows (amounts in
thousands):
Nov. 30,
1999
--------------
Assets
Receivables and other assets $ 104
Commercial land 109
Liabilities
Accounts payable and accrued expenses (650)
-------------
Net liabilities $ (437)
=============
9. SEGMENT REPORTING
The Company accounts for reportable segments using the "management
approach". The management approach focuses on disclosing financial
information that the Company's management uses to make decisions about
the Company's operating matters. As of November 30, 2000 the Company
operates in three business segments, as follows.
In July 1999, the Company acquired substantially all of the assets of
iAW, Inc., an Internet business solutions provider. The acquired
business is operated through a wholly owned subsidiary, eCalton.
Revenues of eCalton are derived from designing Web pages and providing
internet strategy consulting services. In addition, eCalton also earns
revenues from employee staffing.
In January 2000, the Company acquired a 50.4% equity interest in
PrivilegeONE. PrivilegeONE was formed in 1999 to develop customer
loyalty programs through the use of a co-branded credit card related to
the automotive industry. At this time PrivilegeONE operations consist
solely of start up activities, and its entire loss has been included in
the Company's consolidated results of operations.
F-20
41
The Company also provides corporate consulting services related to the
sale of the homebuilding assets in December 1998. In addition, in June
2000 the Company acquired a 51% interest in ITP, a newly formed entity
established to provide management and consulting services to
entrepreneurial and development stage companies, as well as acquiring
controlling interest in certain entities that ITP consults with.
Because ITP's operations are similar to that of the Company's corporate
consulting for Centex, the results of operations for ITP are included
in the results of operations for the corporate and consulting services
segment.
The Company recognized revenues in the Corporate and Consulting
Services division from Centex Corporation in the amount of $1,300,000
and $1,194,000 for the years ended November 30, 2000 and 1999,
respectively. These amounts represented 37% and 88% of consolidated net
revenues in 2000 and 1999.
The Company has no foreign operations.
Operating results, by segment, for the years ended November 30, 2000
and 1999 are as follows (in thousands):
Year ended November 30, 2000
--------------------------------------------------------------------
Internet Credit Card Corporate and
Business Loyalty Consulting Total
Solutions Business Services Company
--------------------------------------------------------------------
Total revenues $ 2,045 $ -- $ 1,489 $ 3,534
Total cost of revenues 1,514 -- -- 1,514
Depreciation and amortization 109 26 91 226
Interest income -- -- 2,144 2,144
Loss from operations (2,910) (1,709) (1,582) (6,201)
Benefit for income taxes -- -- (579) (579)
Net loss (2,911) (1,859) (1,126) (5,896)
Total assets $ 1,172 $ 39 $ 33,889 $ 35,100
Year ended November 30, 1999
--------------------------------------------------------------------
Internet Credit Card Corporate and
Business Loyalty Consulting Total
Solutions Business Services Company
--------------------------------------------------------------------
Total revenues $ 157 $ -- $ 1,194 $ 1,351
Total cost of revenues 116 -- -- 116
Depreciation and amortization 14 -- 3 17
Interest income -- -- 1,845 1,845
Income (loss) from operations (427) -- 1,541 1,114
Provision (benefit) for income taxes (171) -- 624 453
Net income (loss) (256) -- 5,095 4,839
Total assets $ 464 $ -- $ 39,977 $ 40,441
F-21
42
10. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended November 30, 2000 and
1999 are as follows (amounts in thousands, except per share amounts):
Three Months Ended
--------------------------------------------------------------
Feb. 29, May 31, Aug. 31, Nov. 30,
2000 2000 2000 2000
-------------- -------------- ------------- ---------------
Net loss from continuing operations $(1,063) $(678) $(1,349) $(2,068)
Net loss from discontinued operations -- -- -- (84)
Net loss from the sale of Calton Homes -- -- -- (654)
------- ----- ------- -------
Net loss $(1,063) $(678) $(1,349) $(2,806)
======= ===== ======= =======
Net loss per share
Basic $ (0.25) $(0.16) $ (0.32) $ (0.65)
Diluted $ (0.25) $(0.16) $ (0.32) $ (0.65)
Three Months Ended
--------------------------------------------------------------
Feb. 28, May 31, Aug. 31, Nov. 30,
1999 1999 1999 1999
-------------- -------------- ------------- ---------------
Net income from continuing operations $ 159 $ 285 $ 178 $ 39
Net income (loss) from discontinued
operations 92 (379) (100) 147
Net income (loss) from the sale of Calton Homes 3,886 668 -- (136)
------- ----- ------- -------
Net income $ 4,137 $ 574 $ 78 $ 50
======= ===== ======= =======
Net income per share (a)
Basic $ 0.80 $0.15 $ -- $ --
Diluted $ 0.75 $0.10 $ -- $ --
(a) Net income per share does not agree to the per share amounts
presented on the face of the income statement as a result of the
impact of the stock repurchase program.
F-22
43
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-70628, 33-75184, 333-28135, and
333-42424) of Calton, Inc. of our report dated January 19, 2001
relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Tampa, Florida
February 22, 2001
F-23
44
SCHEDULE II
CALTON, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Year Expenses Accounts Deductions of Year
- ---------------------------------------------- ----------- ----------- ---------- ------------ ----------
Year ended November 30, 1998:
Inventory valuation reserves $ 981 $ -- $ -- $ 726 $ 255
============ ============ ============ ============ =======
Valuation allowance for net deferred
tax asset $ 16,090 $ -- $ -- $ 2,549 $13,541
============ ============ ============ ============ =======
Year ended November 30, 1999:
Inventory valuation reserves $ 255 $ -- $ -- $ 100 $ 155
============ ============ ============ ============ =======
Valuation allowance for net deferred
tax asset $ 13,541 $ -- $ -- $ 4,736(a) $ 8,805
============ ============ ============ ============ =======
Year ended November 30, 2000:
Allowance for doubtful accounts $ -- $ 122 $ -- $ -- $ 122
============ ============ ============ ============ =======
Inventory valuation reserves $ 155 $ 108 $ -- $ -- $ 263
============ ============ ============ ============ =======
Valuation allowance for net deferred
tax asset $ 8,805 $ 1,864 $ -- $ -- $10,669
============ ============ ============ ============ =======
- ----------------
(a) The majority of the change in valuation allowance is due to the sale of
Calton Homes, Inc. and did not have an income statement impact.
F-24
45
CALTON, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
2.1 Amended and Restated Stock Purchase Agreement effective September 2, 1998
among Calton, Inc., Calton Homes, Inc. and Centex Real Estate Corp.,
incorporated by reference to Exhibit 2 to Form 8-K of Registrant dated December
31, 1998.
2.2 Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated as of
December 28, 1998 among Calton, Inc., Calton Homes, Inc. and Braewood
Development Corp. (assignee of Centex Real Estate Corp.), incorporated by
reference to Exhibit 2.1 to Form 8-K of Registrant dated December 31, 1998.
3.1 Amended and Restated Certificate of Incorporation of the Registrant filed
with the Secretary of State, State of New Jersey on May 28, 1993, incorporated
by reference to Exhibit 3.2 to Amendment No. 1 to Form S-1 Registration
Statement under the Securities Act of 1933, Registration No. 33-60022,
Certificate of Amendment to Amended and Restated Certificate of Incorporation of
Registrant filed with the Secretary of State, State of New Jersey on April 27,
1994, incorporated by reference to Exhibit 3(b) to Form S-1 Registration
Statement under the Securities Act of 1933, Registration No. 33-76312, and
Certificate of Amendment to Amended and Restated Certificate of Incorporation of
Registrant filed with the Secretary of State, State of New Jersey on May 29,
1997, incorporated by reference to Exhibit 3.1 to Form 10-K of Registrant for
the fiscal year ended November 30, 1997, Certificate of Amendment to Amended and
Restated Certificate of Incorporation of Registrant filed with the Secretary of
State, State of New Jersey on February 2, 1999, incorporated by reference to
Exhibit 3.1 to Form 10-K of Registrant for the fiscal year ended November 30,
1998, and Certificate of Amendment to Amended and Restated Certificate of
Incorporation filed with the Secretary of State, State of New Jersey on May 30,
2001.
3.2 By Laws of Registrant, as amended, incorporated by reference to Exhibit 3.2
to Form 10-K of Registrant for the fiscal year ended November 30, 1998.
4.1 Warrant to Purchase Common Stock of Calton, Inc. dated January 2000 issued
to Taytrowe Van Fechtmann World Companies, Inc., incorporated by reference to
Exhibit 4.2 to Form 10-K of Registrant for the fiscal year ended November 30,
1999.
4.2 Rights Agreement dated February 1, 1999 by and between the Registrant and
First City Transfer Company as Rights Agent, including forms of Rights
Certificate and Election to Purchase included as Exhibit B thereto, incorporated
by reference to Exhibit 1 to Form 8-A Registration Statement of Registrant filed
with the Securities and Exchange Commission on February 2, 1999.
(*) 10.1 1996 Equity Incentive Plan, incorporated by reference to Exhibit 10.1
to Form 10-K of Registrant for the fiscal year ended November 30, 1996.
(*) 10.3 Registrant's Amended and Restated 1993 Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.3 to Form 10-K of Registrant for the
fiscal year ended November 30, 1995.
(*) 10.4 Incentive Compensation Plan of Registrant.
(**) 10.7 Executive Employment Agreement dated as of November 21, 1995 between
Registrant and Anthony J. Caldarone, incorporated by reference to Exhibit 10.7
to Form 10-K of Registrant for the fiscal year ended November 30, 1995 and
Amendment to Executive Employment Agreement dated as of April 14, 1999,
incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for the
fiscal year ended November 30, 1999.
E-1
46
10.8 Consulting Agreement between Registrant and Braewood Development Corp.
dated December 31, 1998, incorporated by reference to Exhibit 10.9 to Form 10-K
of Registrant for the fiscal year ended November 30, 1998.
(*) 10.9 2000 Equity Incentive Plan incorporated by reference to Exhibit 10.10
to Form 10-K of Registrant for the fiscal year ended November 30, 1999.
(*) 10.10 Option Agreement dated July 19, 1999 between the Company and Kenneth
D. Hill, incorporated by reference to Exhibit 10.11 to Form 10-K of Registrant
for the fiscal year ended November 30, 1999. Agreements identical in term and
content between the Registrant and each of Matthew R. Smith and Robert K. Hill
have been executed. These documents have not been filed.
(**) 10.11 Employment Agreement dated as of July 19, 1999 between eCalton.com,
Inc. and Kenneth D. Hill, incorporated by reference to Exhibit 10.2 to Form 10-K
of Registrant for the fiscal year ended November 30, 1999.
10.12 Employee Stock Purchase Plan.
10.13 Operating Agreement of PrivilegeOne Networks, LLC
10.14 Amendment No. 1 to Operating Agreement of PrivilegeOne Networks, LLC
10.15 Promissory Note issued by PrivilegeOne Networks, Inc. dated January 27,
2000
10.16 Amendment No. 1 to Promissory Note issued by PrivilegeOne Networks, Inc.
10.17 Assignment and Assumption Agreement dated January 27, 2000 between
PrivilegeOne Networks, LLC and PrivilegeOne Networks, Inc.
10.18 Second Promissory Note dated February 9, 2001 issued by PrivilegeOne
Networks, LLC
10.19 Operating Agreement of Innovation Technology Partners, LLC
10.20 Revolving Promissory Note dated June 19, 2000 issued by Innovation
Technology Partners, LLC
10.21 Consulting Agreement dated July 17, 2000 between the Registrant and Robert
E. Naughton
21. Subsidiaries of the Registrant.
(*) Constitutes a compensatory plan required to be filed by an exhibit
pursuant to Item 14(c) of Form 10-K.
(**) Constitutes a management contract required to be filed pursuant to Item
14(c) of Form 10-K.
E-2