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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, 2001
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 incorporation or organization) (I.R.S. Employer Identification Number)
2013 Indian River Boulevard
Vero Beach, Florida 32960
(Addresses of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 794-1414
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
-------------- ----------------------
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 21, 2002 was $1,864,654.
As of February 21, 2002 4,462,627 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PART I
ITEM 1.
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Calton, Inc. (the "Company" or "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 and homebuilder, 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, Inc. ("Calton
Homes"). Calton maintains its corporate offices at 2013 Indian River Boulevard,
Vero Beach, Florida 32960 and its telephone number is (561) 794-1414.
Calton sold its principal operating subsidiary, Calton Homes, on December 31,
1998. Since the completion of the sale, the Company's principal business
activities have been:
o providing Internet business solutions and technology based
consulting and staffing services through eCalton.com, Inc.
("eCalton"), a wholly owned subsidiary which commenced
operations following its acquisition of the business and
assets of iAW, Inc. in July 1999;
o developing a customer loyalty and co-branded credit card
program for the retail automobile industry through
PrivilegeONE Networks LLC ("PrivilegeONE"), a limited
liability company initially established as a 50.4% owned
subsidiary, which became wholly-owned by the Company in fiscal
2001;
o providing management and consulting services to
entrepreneurial and development stage companies through its
51% owned subsidiary, Innovation Growth Partners LLC ("IGP"),
which commenced operations in June 2000 and acquired a
controlling interest in MindSearch LLC ("MindSearch"), a
technology based consumer research company in 2001;
o providing consulting services to the purchaser of Calton
Homes; and
o analyzing potential business combinations and acquisition
opportunities.
2
On May 31, 2001, the Company's Board of Directors declared a special dividend of
$5.00 per share to all shareholders of record on June 20, 2001, payable on July
5, 2001. The total amount distributed pursuant to the dividend was approximately
$22,375,000. The dividend has been characterized as a liquidating dividend, as
it is considered a return of capital rather than a distribution of retained
earnings.
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.
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 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.
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 continue 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 was 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
3
individuals. Personal holding company income is comprised primarily of passive
investment income plus, under certain circumstances, personal service income.
INDEMNITY OBLIGATIONS
The agreement pursuant to which the Company sold Calton Homes 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. On the
closing date of the sale, the Company deposited approximately $5,200,000 in
escrow, $3,000,000 of which was deposited to provide security for the Company's
indemnity obligations and approximately $2,200,000 of which was deposited to
fund costs associated with certain specified litigation. As of February 15,
2002, a total of approximately $86,000 remains in escrow, pending the resolution
of three claims. The Company's indemnification obligations are not limited to
the amount in escrow and no assurance can be given that the purchaser will not
assert additional claims against the Company.
VOLATILITY OF STOCK PRICE
The Company's stock price has been volatile in the past and may continue to be
volatile in the future. Stock prices of companies engaged in start-up and
technology related businesses have generally been volatile as well. This
volatility may continue in the future. The following factors, among others, may
add to the volatility of the Company's stock price:
o actual or anticipated variations in the quarterly results of
the Company and its subsidiaries;
o changes in the market valuations of the Company's
subsidiaries, and valuations of competitors or similar
businesses;
o conditions or trends in the Internet or technology industries
in general;
o the initiation of a tender offer for all or a portion of the
Company's common stock;
o the public's perception of the prospects of early stage
ventures;
o new products or services offered by the Company, its
subsidiaries and their competitors;
o additions to, or departures of, the key personnel of the
Company or its subsidiaries;
o the current international unrest in the marketplace as a
result of the terrorist attacks in Washington and New York in
September 2001; and
o general economic conditions such as a recession, or interest
rate fluctuations.
Many of these factors are beyond the Company's control. These factors may
decrease the market price of the Company's Common Stock, regardless of the
Company's operating performance.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information required by this item is presented in Note 8 of the 2001
Financial Statements included in this report.
4
(c) DESCRIPTION OF BUSINESS
GENERAL
The Company's business activities are primarily focused on (i) providing
Internet business solutions and technology based staffing and consulting
services through eCalton, (ii) the development of a loyalty and co-branded
credit card program through PrivilegeONE, (iii) providing management and
consulting services through IGP, which has acquired a controlling interest in
MindSearch, a technology based consumer research company. In addition, the
Company focuses on analyzing potential acquisitions and other business
opportunities and, until December 31, 2001, provided consulting services to the
purchaser of Calton Homes.
eCALTON.COM
GENERAL
eCalton provides innovative Web and information technologies to professionals
that empower large and medium-sized businesses to rapidly create, deliver and
manage e-commerce solutions and Web initiatives. eCalton provides its clients
with proven, cost-effective software solutions supported by consulting personnel
to assist with implementation and ongoing project support. eCalton's service
offerings include application development, commerce portals, eBusiness
integration, wireless computing, outsourcing infrastructure, support change
management and Project Management Office ("PMO"). The division focuses primarily
on one prime vertical market - the homebuilding industry.
eCalton has expanded its operations to Houston, Texas by opening a
technology-based consulting and staffing operation specializing in network
design and management. The technology staffing division provides large and
medium-sized companies with experienced consulting professionals to assist them
in creating, delivering and managing their information technology and Internet
initiatives. Services offered by this division include supply chain management,
customer relationship management, project management, applications,
infrastructure and Internet/intranet development and design.
SALES AND MARKETING
The eCalton sales force is comprised of approximately five professionals that
market and sell its services on a nationwide basis. eCalton's 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. Additionally, eCalton has
been establishing strategic partnerships with complementary organizations, such
as advertising agencies and homebuilder technology suppliers, to facilitate
co-operative advertising and lead generation.
THE INTERNET HOME CONSTRUCTION GROUP ("iHCG")
iHCG is a specialized division of eCalton focusing on the homebuilding industry.
iHCG assists homebuilders in using the Internet to communicate effectively with
customers, suppliers, trades and employees by developing and implementing
cost-effective Web-based solutions and strategies.
COMPETITION
The market for Internet professional services is relatively saturated, intensely
competitive, rapidly evolving and subject to rapid technological change. The
market is highly competitive and characterized by numerous companies that have
introduced or developed products and services similar to those offered by
eCalton. The Company expects competition to persist. Continuous 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.
5
eCalton is responding to the industry-wide competition by primarily focusing on
the homebuilder industry as a vertical market. eCalton has created the Internet
Home Construction Group (iHCG) and through its marketing efforts, has
established iHCG as a recognizable brand in the industry. Management believes by
directing about 80% of eCalton's focus on the homebuilder industry, eCalton has
been able to provide the resources and experience necessary to become a leader
in this industry.
In addition to focusing on the homebuilder industry, eCalton plans to combat the
competitive nature of the Internet development industry by targeting local
geographic business as well as identifying other business segments that
complement eCalton's more successful projects such as the gift fruit industry.
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
PrivilegeONE was formed to develop and implement the PrivilegeONE Loyalty
Program. The patent pending Program aggregates disparate entities under the
PrivilegeONE umbrella to create customer loyalty and retention to the individual
entity through the issuance of co-branded credit card and membership cards. To
introduce the program, PrivilegeONE has focused on the initial target customer
base of automobile dealers throughout the United States. The Company believes
that if the program is proven successful in the automotive industry, it will
have applicability to many other industries that may be the focus of the next
generation of products, initially in the U.S.
Subsequent to the end of fiscal 2001 it became apparent that the implementation
strategy outlined in PrivilegeONE's business plan would be further delayed due
to technical difficulties encountered in installing the card issuer's systems at
participating dealerships and other issues. As a result, PrivilegeONE reduced
overhead to focus upon and achieve proof of concept. Upon proof of an operating
system, PrivilegeONE plans to continue to pursue its business plan while looking
at alternate sales and installation plans, third party financing or a partner
that is willing to contribute capital to the project.
AGREEMENT WITH FLEET
The Company and PrivilegeONE have entered into a credit card processing
agreement with Fleet Credit Card Services, L.P. ("Fleet") pursuant to which
Fleet has agreed to issue the PrivilegeONE credit cards. Under the agreement,
Fleet is required to pay PrivilegeONE a fee for each account established through
the PrivilegeONE program and a percentage of the revenue realized from finance
charges. PrivilegeONE is required to pay Fleet a fee for the development of the
credit card for each participating automotive dealer. The agreement requires the
Company to capitalize PrivilegeONE with not less than $500,000 during the
original five-year term of the agreement and maintain a contingency reserve fund
equal to three and one-half (3.5%) percent of all net revenues received by
PrivilegeONE, up to a maximum of $1,500,000. PrivilegeONE has not yet generated
revenues and thus the Company has not yet established the contingency reserve.
Under the terms of the agreement, the Company is required to reimburse Fleet for
the cost of Fleet's software and other costs incurred by Fleet to develop the
PrivilegeONE program, up to a maximum of $350,000. As of November 30, 2001, the
Company had reimbursed Fleet $221,000 for its software and development costs.
SALES AND MARKETING
PrivilegeONE intends to market its program directly through a national sales
force, independent sales agents and third-party cross selling efforts.
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
6
designed to promote card use. PrivilegeONE is also developing 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
marketplace.
INNOVATION GROWTH PARTNERS
GENERAL
IGP was established to develop businesses and provide management and consulting
services to entrepreneurial and development stage companies, as well as
developing and acquiring controlling interests in certain businesses to which it
provides these services. Since inception, IGP's primary focus has been on
MindSearch LLC, a company which has developed technology to provide consumer
research to businesses on a faster and broader basis than existing research
approaches. IGP currently holds a controlling interest in MindSearch. IGP has
also acquired a 5% interest in Miresco Investment Services, Inc. ("Miresco").
Miresco designs, imports and sells high quality area rugs throughout the United
States in liquidation sales held by large furniture stores.
SALES AND MARKETING
At this time, the sales and marketing efforts of IGP 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 IGP.
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 IGP, and its limited financial
resources, will likely require IGP to focus its attention on smaller clients and
projects.
CONSULTING SERVICES
The Consulting Agreement executed in conjunction with the sale of Calton Homes
required the Company to provide certain consulting services to the purchaser,
including information, advice and recommendations with respect to the
homebuilding market in New Jersey and Pennsylvania, through December 31, 2001.
The Company has agreed that it will not provide similar services to others in
New Jersey or Pennsylvania.
In consideration for the services provided by the Company under the Consulting
Agreement, the purchaser paid the Company a consulting fee of $1,300,000 per
year during the three-year term of the agreement, which expired on December 31,
2001.
EMPLOYEES
As of February 26, 2002, the Company and its majority-owned subsidiaries
employed 45 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.
7
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases approximately 650 square feet of office space
located in Red Bank, New Jersey, for approximately $1,000 per month, for a term
of one year. 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 five 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 expired on July 31, 2001, but eCalton has exercised it's
option, and renewed this lease for another one year term, expiring on July 31,
2002. 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. IGP 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.
Management believes that these arrangements currently provide adequate space for
all of the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
The agreement pursuant to which the Company sold Calton Homes 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
certain warranty claims that may arise. In connection with the sale, the Company
entered into a holdback escrow agreement with the purchaser pursuant to which
approximately $5,200,000 of the closing proceeds was deposited into escrow. Of
this amount, $3,000,000 (the "General Indemnification Funds") was deposited to
provide security for the Company's indemnity obligations and approximately
$2,200,000 (the "Specific Indemnification Funds") was deposited to fund costs
associated with certain specified litigation involving Calton Homes. As of
November 30, 2001, approximately $86,000 remained in escrow, pending the
resolution of three claims. The Company's indemnification obligations are not
limited to the amount in escrow and no assurance can be given that the purchaser
will not assert additional claims against the Company.
The Company is involved from time to time in litigation arising in the ordinary
course of business, none of which is expected to have a material adverse effect
on the Company and, as in the case of other pending claims, has been reserved
for accordingly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, 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 26, 2002 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:
8
Name Age Position
---- --- --------
Anthony J. Caldarone 64 Chairman, President and Chief Executive Officer
Thomas C. Corley 40 Acting Treasurer and Chief Financial Officer
Vice President and Chief Financial Officer - PrivilegeONE
Maria F. Caldarone 38 Vice President of Corporate Development
Executive Vice President - PrivilegeONE
Laura A. Camisa 39 Vice President of Strategic Planning
Executive Vice President - eCalton.com, Inc.
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. Corley was appointed Acting Treasurer and Chief Financial Officer of Calton
in January 2002. In January 2000, Mr. Corley was appointed Vice President and
Chief Financial Officer of PrivilegeONE. Mr. Corley has over 16 years experience
in public accounting, financial modeling and financial management having most
recently been a founding partner of McGuinness, Corley & Hodavance, CPAs from
1995 - 2000. Prior to that, he held the positions of Senior Manager of Taxation
with ESSROC Cement Corp., Senior Tax Accountant with Arthur Andersen and Staff
Accountant with Bart & Bart, CPAs.
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. In
May 2001, Ms. Caldarone was appointed Executive Vice President of PrivilegeONE.
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. In June
2001, Ms. Camisa was appointed Executive Vice President of eCalton's Internet
business development division. Prior to joining Calton, she held the position of
Director of Investor Relations and Financial Analyst at Hovnanian Enterprises,
Inc. from June 1998 through February 2000. Ms. Camisa held the position of
Financial Analyst - International Mergers and Acquisitions at Marsh & McLennan
Companies from January 1995 through May 1998. Ms. Camisa spent five years with
Kidder, Peabody & Co. as a Financial Analyst specializing in Mergers &
Acquisitions and High Yield Debt Financing as well as successfully completing
the company's Investment Banking Analyst Training Program.
9
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 2001 and 2000.
Fiscal 2001 High Low
----- -----
1st Quarter $4.25 $3.13
2nd Quarter 5.50 3.40
3rd Quarter 6.10 0.72
4th Quarter 0.85 0.42
Fiscal 2000 High Low
----- -----
1st Quarter $28.75 $7.50
2nd Quarter 33.75 5.31
3rd Quarter 6.80 4.00
4th Quarter 4.69 3.25
At February 21, 2002, there were approximately 367 shareholders of record of the
Company's common stock, based on information obtained from the Company's
transfer agent. On that date, the last sale price for the common stock as
reported by AMEX was $0.64
During fiscal 2001 the Company paid a cash dividend in the amount of
$22,375,000, or $5.00 per share. The Company did not pay any dividends during
fiscal 2000. Payment of future cash dividends will be determined from time to
time by the Company's Board of Directors, based upon its future earnings (if
any), financial condition, capital requirements and other factors. The Company
is not presently subject to any contractual or similar restriction on its
present or future ability to pay such dividends. The Company currently plans to
retain all of its earnings (if any) to support the development and expansion of
its business and has no present intention on paying any cash dividends on the
Common Stock in the foreseeable future.
10
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 included elsewhere in this report.
Fiscal Years Ended November 30,
-------------------------------------------------------------------------
(In thousands, except per share items)
2001 2000 1999 1998 1997
--------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA
Revenues $ 5,299 $ 3,534 $ 1,351 $ -- $ --
Net income (loss) from continuing operations (5,039) (5,158) 661 (1,960) (1,901)
Net income (loss) from discontinued operations(1) -- (84) (240) 6,315 1,646
Gain (loss) from sale of operating businesses -- (654) 4,418 -- 369
Extraordinary gain, net of income taxes -- -- -- 1,263
--------- ---------- ---------- ---------- ----------
Net income (loss) $ (5,039) $ (5,896) $ 4,839 $ 4,355 $ 1,377
========= ========== ========== ========== ==========
Basic earnings (loss) per share:
Net income (loss) from continuing operations $ (1.17) $ (1.21) $ 0.15 $ (0.37) $ (0.35)
Net income (loss) from discontinued operations(1) -- (.02) (.05) 1.18 .30
Gain (loss) from sale of operating businesses -- (.15) .97 -- .05
Extraordinary gain, net of income taxes -- -- -- -- .25
--------- ---------- ---------- ---------- ----------
Net income (loss) $ (1.17) $ (1.38) $ 1.07 $ 0.81 $ 0.25
========= ========== ========== ========== ==========
Diluted earnings (loss) per share:
Net income (loss) from continuing operations $ (1.17) $ (1.21) $ 0.14 (0.37) $ (0.35)
Net income (loss) from discontinued operations(1) -- (.02) (.05) 1.18 .30
Gain (loss) from sale of operating businesses -- (.15) .92 -- .05
Extraordinary gain, net of income taxes -- -- -- -- .25
--------- ---------- ---------- ---------- ----------
Net income (loss) $ (1.17) $ (1.38) $ 1.01 $ 0.81 $ 0.25
========= ========== ========== ========== ==========
SELECTED OTHER DATA:
Cash dividend per share $ 5.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
========= ========== ========== ========== ==========
At November 30,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- ---------- ---------- ----------
SELECTED BALANCE SHEET DATA
Total assets $ 9,813 $ 35,100 $ 40,441 $ 40,082 $ 35,142
Shareholders' equity 7,217 32,887 38,654 38,221 32,850
(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.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During fiscal 1999 the Company sold Calton Homes as part of the Company's
overall strategy to enhance shareholder value. Since the completion of the sale,
the Company's business activities have been primarily focused on (i) providing
Internet business solutions and technology based staffing and consulting
services through eCalton, (ii) developing a loyalty and co-branded credit card
program through PrivilegeONE, (iii) providing management and consulting services
through IGP which has acquired a controlling interest in MindSearch, (iv)
providing consulting services to the purchaser of Calton Homes pursuant to an
agreement which expired on December 31, 2001 and (v) analyzing potential
acquisition and business combination activities. The Company's consolidated
financial statements include the accounts of the Company and its majority-owned
and majority-controlled subsidiaries, including eCalton, PrivilegeONE, IGP and
MindSearch.
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2001 AND 2000
Revenues for fiscal 2001 increased to $5,299,000 compared to $3,534,000 in
fiscal 2000. The primary reason for the increase was a full year of operations
for the technical staffing division of eCalton, which commenced operations in
July 2000. Revenues for the Internet business development division of eCalton
were $1,148,000 in 2001 compared to $1,109,000 in 2000 and revenues for the
technical staffing division of eCalton were $2,760,000 compared to $936,000.
Also included in 2001 revenues was $1,300,000 in homebuilding consulting fees
and $91,000 of general consulting fees recognized by IGP compared to $1,300,000
and $189,000 in 2000, respectively. Homebuilding consulting fees were derived
from a consulting agreement that expired in December 2001. As a result, this
revenue source will not recur at historical levels during the Company's fiscal
year ending November 30, 2002.
Project personnel and expenses for eCalton were $2,420,000 in 2001 compared to
$1,514,000 in 2000. The increase is primarily attributable to a full year of
operations for the technical staffing division, which began operations in July
2000.
Selling, general and administrative expenses experienced an increase from
$8,015,000 in 2000 to $9,638,000 in 2001. The increase in 2001 is primarily from
increased personnel and business activities at PrivilegeONE, a full year of
operations for the technical staffing division of eCalton, the operations of IGP
and MindSearch, increased professional fees and a provision for uncollectible
receivables in 2001. In addition, the Company recorded a non-cash charge in the
amount of $367,000 in 2001 for stock options issued as consideration for
consulting services, which is included in selling, general and administrative
expenses.
Research and development costs related to MindSearch decreased to $34,000 in
2001 from $315,000 in 2000 as the majority of its research and development was
conducted in 2000.
The acquisitions of eCalton and PrivilegeONE resulted in recording goodwill in
fiscal 2000 in the amount of $237,000 and $138,000, respectively. However, later
in 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 based upon 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 PrivilegeONE amounted to $205,000 and $119,000, respectively.
During the second quarter of 2001 the Company acquired the remaining minority
interest in PrivilegeONE, using stock options as consideration. These options
were valued using the Black-Scholes valuation model, which resulted in a value
of $127,000 being assigned to these options. Consequently, goodwill in the
amount of $127,000 was recorded in conjunction with the grant of these options.
At that time, management believed it was appropriate to record goodwill, as
PrivilegeONE had been successful in obtaining a bank to issue the PrivilegeONE
visa card during the second quarter, which was one of the key elements necessary
to execute the PrivilegeONE business plan. However, during the fourth quarter of
2001, in accordance with SFAS 121,
12
management evaluated the carrying value of the goodwill and determined that the
goodwill would not be recoverable based on the historic operations of
PrivilegeONE and the projected future cash flows. As a result, the remaining
unamortized balance of goodwill, in the amount of $119,000, was charged to
operations and is included in the line item reported as impairment of long-lived
assets on the 2001 statement of operations and statement of cash flows.
In conjunction with the evaluation of the PrivilegeONE goodwill discussed in the
aforementioned paragraph, the Company determined that the property and equipment
on the books of PrivilegeONE have minimal value. As a result, in accordance with
SFAS 121, the Company charged the net book value of property and equipment of
PrivilegeONE to operations in the fourth quarter of 2001. This is reported on
the statement of operations and statement of cash flows as a component of
impairment of long-lived assets in the amount of $359,000.
Interest income in fiscal 2001 experienced a sharp decline compared to fiscal
2000 primarily due to a lower cash position as a result of the $22,375,000
liquidating cash dividend discussed in Note 6 to the consolidated financial
statements, as well as a decline in short term interest rates.
During the fourth quarter of 2001, MindSearch (a subsidiary in which IGP holds a
controlling interest) sold certain previously unissued equity interests for an
aggregate of $1,000,000. Of this amount, IGP purchased $250,000 of the interests
and unrelated third parties purchased $750,000 of the interests. In connection
with the sales of interests to unrelated third parties, IGP recorded a gain of
$357,000, which was the amount in excess of its carrying value in MindSearch
upon completion of the offering.
Minority interest represents the minority shareholders' interest in the net
losses of MindSearch.
The Company recorded a deferred benefit for income taxes amounting to $615,000,
which represented the reduction of deferred tax liabilities originating in
connection with certain contingent tax issues. Upon resolution of the
uncertainties, the Company reversed the deferred tax liabilities. The benefit of
certain carryback net operating losses which resulted in refundable income taxes
of $361,000 received in 2001 was recorded as a tax benefit in 2000.
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 IGP, 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 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 IGP, and through IGP, acquired a controlling interest in
MindSearch. The
13
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 PrivilegeONE 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
IGP, 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 IGP. If the cumulative
loss incurred by IGP causes the IGP associated minority interest to decline to
zero, the Company will be required to absorb all additional losses until such
time, if ever, that IGP 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents have declined significantly in 2001
principally as a result of the $22,375,000 dividend distributed to shareholders
and the other expenditures described below. As of November 30, 2001, the Company
had approximately $7,139,000 in cash and cash equivalents versus $32,190,000 on
November 30, 2000. Also, due to certain third party funding arrangements at IGP,
$1,903,000 of the 2001 balance of cash and cash equivalents (19.4% of
consolidated net assets) is restricted to the operations of IGP.
In fiscal 2001, the Company received a federal income tax refund in the amount
of $361,000 resulting from the carryback of certain losses to years in which the
Company incurred income taxes.
14
The Company believes that cash on hand will be sufficient to support the
operations of the Company and its subsidiaries for fiscal 2002. It is
anticipated that the Company's cash flow from operations, combined with the
operations of eCalton, PrivilegeONE, IGP and MindSearch will continue to utilize
cash until, if ever, those operations execute the strategies identified in their
business plans. If the Company's subsidiaries do not achieve success in
executing their business plans in the near future, the Company may be required
to curtail certain operating activities or seek additional capital to fund
operations. No assurance can be given that additional capital will be available,
if required, to sustain operations.
As of November 30, 2001, the Company had repurchased an aggregate of 1,782,000
shares of treasury stock for a total of $10,154,000, at an average price of
$5.70 per share.
CASH FLOWS FROM OPERATING ACTIVITIES
For the year ended November 30, 2001, the Company incurred a net loss of
approximately $5,039,000. The primary activities that did not use cash were the
issuance of options for consulting services which resulted in a charge of
$367,000, the establishment of a $376,000 reserve for uncollectible receivables,
an income tax refund of $361,000 and the impairment of long-lived assets of
PrivilegeONE of $478,000. Conversely, the primary operating activities, which
did not provide cash were a non-cash income tax benefit in the amount of
$615,000 and $188,000 in minority interest.
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 FLOWS FROM INVESTING ACTIVITIES
For the year ended November 30, 2001, the Company received proceeds from
investing activities from the collection of the holdback receivable in the
amount of $1,203,000. Significant items of cash used by investing activities
included the investment in Miresco in the amount of $500,000 and the purchase of
equipment and software in the amount of $572,000. In addition, the Company
advanced $750,000 to Automated Information Management, Inc. ("AIM") in exchange
for a convertible promissory note (the "AIM Note") and a warrant to acquire
1,059,666 shares of AIM Common Stock at an exercise price of $2.12 per share,
which expires in September 2004. The AIM Note is mandatorily convertible into
1,000,000 shares of AIM Common Stock no later than five days after the Company
is given notice that the Securities and Exchange Commission has declared a
proposed registration of these shares effective. If certain terms and conditions
are satisfied, the Company may be required to distribute to the Company's
shareholders some of the shares of Common Stock that would be issued upon
conversion of the AIM Note which will be considered an ordinary dividend without
a cash distribution. AIM is currently in default of its agreement to register
the shares and the Company is entitled to demand repayment of the note, which
bears interest at a rate of LIBOR plus 1%. AIM, which is based in Houston,
Texas, is primarily engaged in the design, engineering, installation and
maintenance of telecommunications infrastructure.
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.
15
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, 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 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.
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 also agreed to lend PrivilegeONE up to an additional
$1,450,000 if PrivilegeONE achieved certain milestones related to the
development of its proposed credit card program.
In May 2001, the Company acquired the remaining minority interest in
PrivilegeONE, making it a wholly-owned subsidiary. As consideration for the
remaining minority interest in PrivilegeONE, the Company granted options to
purchase 200,000 shares of the Company's Common Stock at a price of $4.02 to the
former minority owners of PrivilegeONE. The options were fully vested, became
exercisable in January 2002, and have a term of five years. The Company applied
the purchase method of accounting to record this acquisition of minority
interest. In addition to the grant of the options, the terms of the purchase
required the Company to make certain guarantees and commitments to the bank that
has agreed to issue the PrivilegeONE Visa card. The Company also agreed to fund
up to an additional $2,000,000 towards the project, and the former minority
owners of PrivilegeONE agreed to the cancellation of the previously issued
warrant to acquire 240,000 shares of the Company's Common Stock.
In June 2000, the Company acquired a 51% interest in IGP. 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 IGP
contributed $500,000 in cash and certain assets, including existing client
contracts, in exchange for their collective 49% interest. In August 2000, IGP
borrowed $500,000 of its $3,500,000 credit facility with the Company to finance
the acquisition of a 51% interest in MindSearch.
During June 2001, IGP borrowed $500,000 under the Revolving Promissory Note
issued by it to the Company in June 2000 (the "IGP Note") and used the funds to
acquire a 5% interest in Miresco.
During September 2001 the Company restructured its agreement with IGP, as
follows:
Under the terms of the IGP Note, the Company advanced an additional $250,000 to
be used specifically for funding IGP's additional investment in MindSearch. In
addition, the minority partners of IGP raised $750,000 of third party capital to
complete the funding necessary to launch the operations of MindSearch. At that
time, the outstanding principal balance of the IGP Note was $1,325,000. On
December 1, 2001, the $1,325,000 outstanding principal balance of the IGP Note
was converted to a Class A membership interest in IGP. The Class A membership
interest entitles the Company to a preferred return equal to the lesser of prime
rate plus one percent per annum, or ten percent per annum. In addition, the
Company is entitled to receive 75% of IGP's proceeds from investees until such
time as the Class A membership interest has been repaid in full.
In addition, the Company advanced $1,100,000 to IGP in exchange for a Class B
membership interest, and the minority members of IGP contributed an additional
$300,000 in exchange for a Class B membership interest. The Class B membership
interest is subordinate to the Class A membership interest.
16
The Company was released from any further obligation to advance funds under the
IGP Note.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities in 2001 includes $1,665,000 resulting from
certain optionholders exercising their options to purchase Common Stock from the
Company compared to $149,000 in 2000. The primary reason for the increase in
2001 was that the majority of the options outstanding prior to the $5.00
dividend distributed on July 5, 2001 had an exercise price of less than $5.00.
Accordingly, these option holders exercised their options in anticipation of
receiving the dividend. Additionally in fiscal 2001, $300,000 was contributed by
minority owners of IGP in exchange for a Class B membership interest as well as
the sale of an interest in MindSearch in the amount of $750,000, which totals
$1,050,000 reported on the statement of cash flows. Cash provided by financing
activities in 2000 included cash contributed by the minority owners of IGP 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 2001 include the payment of a liquidating
dividend declared by the Company's Board of Directors of $5.00 per share to all
shareholders of record on June 20, 2001 payable on July 5, 2001. The total
amount distributed pursuant to the dividend was approximately $22,375,000. This
dividend has reduced the Company's capacity for acquisitions, in terms of both
the number of acquisitions the Company will be able to make, if any, and the
size of those acquisitions.
Additional cash used by financing activities in 2001 included the repurchase of
167,000 shares of the Company's common stock in the amount of $415,000. 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.
FUTURE NON-CANCELABLE COMMITMENTS
The Company and its consolidated subsidiaries lease their facilities and certain
equipment under operating lease agreements with various expiration dates through
2005. Future non-cancelable minimum lease payments for each of the following
years ending November 30 are as follows:
2002 $175,000
2003 97,000
2004 82,000
2005 68,000
Thereafter 0
--------
Total $422,000
========
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
1.79%. 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, 2001, the Company is reporting no readily
marketable securities.
17
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 WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 10, 2001, the Registrant dismissed PricewaterhouseCoopers as its
independent auditors and engaged the firm of Aidman, Piser & Company P.A. as
their replacement. The Registrant's change of independent auditors is reported
on their Current Report on Form 8-K, which was filed with the Commission on
December 14, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to directors 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. The
information required by Item 10 with respect to executive officers is presented
in Part II - Item 4A of 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.
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.
18
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
Reference is made to the Index of Financial Statements and
Financial Statements Schedules hereinafter contained F-1
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, 2001.
19
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 26, 2002 By: /s/ Thomas C. Corley
-------------------------------------
Thomas C. Corley, Acting Chief
Financial Officer 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 26, 2002
- ------------------------------------- Officer and President
Anthony J. Caldarone (Principal Executive Officer)
/s/ Thomas C. Corley Acting Chief Financial Officer and February 26, 2002
- ------------------------------------- Treasurer (Principal Financial &
Thomas C. Corley Accounting Officer)
/s/ Anthony J. Caldarone Director February 26, 2002
- -------------------------------------
Anthony J. Caldarone
/s/ J. Ernest Brophy Director February 26, 2002
- -------------------------------------
J. Ernest Brophy
/s/ Mark N. Fessel Director February 26, 2002
- -------------------------------------
Mark N. Fessel
/s/ Kenneth D. Hill Director February 26, 2002
- -------------------------------------
Kenneth D. Hill
/s/ Robert E. Naughton Director February 26, 2002
- -------------------------------------
Robert E. Naughton
/s/ Frank Cavell Smith, Jr. Director February 26, 2002
- -------------------------------------
Frank Cavell Smith, Jr.
/s/ Gerald W. Stanley Director February 26, 2002
- -------------------------------------
Gerald W. Stanley
20
CALTON, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Aidman, Piser & Company, P.A. F-2
Report of PricewaterhouseCoopers LLP F-3
Consolidated Balance Sheets as of November 30, 2001 and 2000 F-4
Consolidated Statements of Operations for the Years Ended November 30, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended November 30, 2001, 2000 and 1999 F-6
Consolidated Statements of Shareholders' Equity for the Years Ended November 30, 2001, 2000 and F-7
1999
Notes to Consolidated Financial Statements F-8
Schedule:
II - Valuation and Qualifying Accounts F-26
- ---------------------
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 consolidated financial statements or the notes
thereto.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Calton, Inc.
We have audited the accompanying consolidated balance sheet of Calton, Inc. and
Subsidiaries ("Calton") as of November 30, 2001, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14. These financial statements and schedule are the responsibility
of Calton's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Calton,
Inc. and Subsidiaries at November 30, 2001, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Aidman, Piser & Company, P.A.
Tampa, Florida
January 22, 2002
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Calton, Inc.
In our opinion, the accompanying consolidated balance sheet as of November 30,
2000 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the two years in the period ended November 30, 2000
present fairly, in all material respects, the consolidated financial position,
results of operations and cash flows of Calton, Inc. and its subsidiaries at
November 30, 2000 and for each of the two 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 accompanying index 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.
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
January 19, 2001
F-3
CALTON, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 7,139,000 $ 32,190,000
Cash held in escrow 86,000 1,289,000
Accounts receivable, net of allowance for doubtful accounts of
$404,000 and $122,000 at November 30, 2001 and 2000, respectively 510,000 760,000
Prepaid expenses and other current assets 187,000 218,000
------------ ------------
Total current assets 7,922,000 34,457,000
Investments 1,250,000 --
Property and equipment, net 641,000 638,000
Other assets -- 5,000
------------ ------------
Total assets $ 9,813,000 $ 35,100,000
============ ============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,516,000 $ 1,384,000
Deferred taxes 487,000 741,000
------------ ------------
Total current liabilities 2,003,000 2,125,000
------------ ------------
Minority interest 293,000 88,000
Minority class B membership interest 300,000 --
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY
Preferred Stock, $.10 par value, 2,520,000 authorized; -- --
none outstanding
Common stock, $.05 par value, 10,740,000 shares authorized; 4,417,000 and
4,132,000 shares outstanding at November 30,
2001 and 2000, respectively 221,000 207,000
Additional paid-in capital 13,134,000 33,364,000
Retained earnings 4,016,000 9,055,000
Less cost of shares held in treasury, 1,782,000 and 1,615,000
shares as of November 30, 2001 and 2000, respectively (10,154,000) (9,739,000)
------------ ------------
Total shareholders' equity 7,217,000 32,887,000
------------ ------------
Total liabilities, minority interest and shareholders' equity $ 9,813,000 $ 35,100,000
============ ============
See notes to consolidated financial statements.
F-4
CALTON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Revenue
Technical staffing services $ 2,760,000 $ 936,000 $ --
Consulting services 1,300,000 1,300,000 1,194,000
Website design and implementation 1,148,000 1,109,000 157,000
Other 91,000 189,000 --
------------ ------------ ------------
5,299,000 3,534,000 1,351,000
------------ ------------ ------------
Costs and expenses
Project personnel and expenses 2,420,000 1,514,000 116,000
Selling, general and administrative 9,638,000 8,015,000 1,966,000
Research and development 34,000 315,000 --
Impairment of long lived assets 478,000 324,000 --
------------ ------------ ------------
12,570,000 10,168,000 2,082,000
------------ ------------ ------------
Loss from operations (7,271,000) (6,634,000) (731,000)
Other income (expense)
Interest income 1,072,000 2,141,000 1,845,000
Gain on sale of subsidiary stock 357,000 -- --
Loss on securities -- (1,708,000) --
------------ ------------ ------------
Income (loss) from continuing operations before income taxes,
minority interest and discontinued operations (5,842,000) (6,201,000) 1,114,000
Equity in losses of minority interest 188,000 464,000 --
Income tax (expense) benefit 615,000 579,000 (453,000)
------------ ------------ ------------
Income (loss) from continuing operations (5,039,000) (5,158,000) 661,000
Loss from discontinued operations, net of a benefit for
income taxes of $373,000 in 1999 -- (84,000) (240,000)
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) $ (5,039,000) $ (5,896,000) $ 4,839,000
============ ============ ============
Earnings (loss) per share
Basic:
Income (loss) from continuing operations $ (1.17) $ (1.21) $ 0.15
Loss from discontinued operations, net -- (0.02) (0.05)
Gain (loss) from sale of Calton Homes, Inc., net -- (0.15) 0.97
------------ ------------ ------------
Net income (loss) $ (1.17) $ (1.38) $ 1.07
============ ============ ============
Diluted:
Income (loss) from continuing operations $ (1.17) $ (1.21) $ 0.14
Loss from discontinued operations, net -- (0.02) (0.05)
Gain (loss) from sale of Calton Homes, Inc., net -- (0.15) 0.92
------------ ------------ ------------
Net income (loss) $ (1.17) $ (1.38) $ 1.01
============ ============ ============
Weighted average number of shares outstanding
Basic 4,292,000 4,276,000 4,554,000
============ ============ ============
Diluted 4,292,000 4,276,000 4,799,000
============ ============ ============
See notes to consolidated financial statements.
F-5
CALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,039,000) $ (5,896,000) $ 4,839,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Stock options issued for services 367,000 35,000 --
Minority interest (188,000) (464,000) --
Loss on securities -- 1,708,000 --
(Gain) loss from the sale of Calton Homes, Inc. -- 654,000 (4,418,000)
Gain on sale of subsidiary stock (357,000)
Income from discontinued operations -- -- 240,000
Provision for uncollectible receivables 376,000 122,000 --
Provision for income taxes (615,000) 647,000 422,000
Depreciation and amortization 218,000 226,000 17,000
Impairment of long lived assets 478,000 324,000 --
Changes in operating assets and liabilities:
Increase in accounts receivable (126,000) (545,000) (276,000)
(Increase) decrease in prepaid expenses and other current assets 36,000 (21,000) 737,000
Increase in accounts payable, accrued
expenses and other liabilities 132,000 710,000 77,000
Income tax refund 361,000 -- --
Change in net assets/liabilities of discontinued operations -- (437,000) (657,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities (4,357,000) (2,937,000) 981,000
CASH FLOWS FROM 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
Collection of holdback receivable 1,203,000 2,104,000 --
Purchases of investments (1,250,000) (967,000) (4,338,000)
Acquisition of business -- (138,000) (250,000)
Purchases of equipment and software (572,000) (622,000) (58,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (619,000) 1,743,000 40,921,000
CASH FLOWS FROM FINANCING ACTIVITIES
Purchases of treasury stock (415,000) (1,051,000) (8,583,000)
Proceeds from sale of subsidiary securities 1,050,000 500,000 --
Payment of cash dividend (22,375,000) -- --
Proceeds from stock options exercised 1,665,000 149,000 382,000
------------ ------------ ------------
Net cash used in financing activities (20,075,000) (402,000) (8,201,000)
Net (decrease) increase in cash and cash equivalents (25,051,000) (1,596,000) 33,701,000
Cash and cash equivalents at beginning of period 32,190,000 33,786,000 85,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 7,139,000 $ 32,190,000 $ 33,786,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ -- $ 2,000 $ 209,000
Cash paid for income taxes $ 19,000 $ 35,000 $ 1,640,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
Holdback receivable $ -- $ -- $ 4,047,000
Investment in subsidiary using stock options $ 127,000 $ -- $ --
Conversion of CorVu and PrivilegeONE notes receivable into
investments $ -- $ 338,000 $ --
Property and equipment contributed by minority owners of $ -- $ 52,000 $ --
Innovation Growth Partners
See notes to consolidated financial statements.
F-6
CALTON, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(amounts in thousands)
Accumulated Compre-
Common Stock Additional Other Total hensive
------------------- Paid In Retained Treasury Compre- Shareholders' Income
Shares Amount Capital Earnings Stock hensive Loss Equity (Loss)
------ ------ ----------- -------- -------- ------------ ------------- -------
Balances,
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)
Balances, -------- -------- -------- -------- -------- -------- -------- --------
November 30, 1999 4,295 215 32,704 14,951 (8,698) (518) 38,654 $ 4,321
========
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
Balances, -------- -------- -------- -------- -------- -------- -------- --------
November 30, 2000 4,132 207 33,364 9,055 (9,739) -- 32,887 ($ 5,378)
========
Net Loss -- -- -- (5,039) -- -- (5,039) ($ 5,039)
Issuance of stock under
stock option plans 451 22 1,643 -- -- -- 1,665 --
Cash dividend -- -- (22,375) -- -- -- (22,375) --
Stock options issued
pursuant to acquisition
of minority interest -- -- 127 -- -- -- 127 --
Stock options issued for
services -- -- 367 -- -- -- 367 --
Less: Purchase of
treasury stock (166) (8) 8 -- (415) -- (415) --
-------- -------- -------- -------- -------- -------- -------- --------
Balances,
November 30, 2001 4,417 $ 221 $ 13,134 $ 4,016 $(10,154) $ 0 $ 7,217 ($ 5,039)
======== ======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-7
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
1. NATURE OF BUSINESS, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESSES
Calton, Inc. ("Calton" or the "Company") was incorporated in the State of New
Jersey in 1981. The Company is engaged in (i) providing Internet business
solutions and technology based staffing and consulting services through its
wholly owned subsidiary, eCalton.com, Inc. ("eCalton"), (ii) the development of
a loyalty and co-branded credit card program through PrivilegeONE Networks, LLC,
("PrivilegeONE"), a limited liability company established as a 50.4% owned
subsidiary of the Company which became wholly owned by the Company in fiscal
2001, (iii) providing management and consulting services through Innovative
Growth Partners, LLC ("IGP"), a 51% owned limited liability company which owns a
controlling interest in MindSearch LLC ("MindSearch"), a consumer research
company, (iv) providing consulting services to the purchaser of Calton Homes
(See Note 9) and (v) analyzing potential business acquisition and combination
opportunities. As discussed in Note 9, the Company discontinued its Calton Homes
operation during its fiscal year ended November 30, 1999.
LIQUIDITY
The Company has incurred operating losses in each of its last two fiscal years.
However, with the principal operating companies in a more developed state at the
end of our current fiscal year compared with earlier periods, management
believes that cash on hand as of November 30, 2001, plus amounts to be generated
from operations, will be sufficient to support consolidated operations of the
Company for fiscal 2002. However, it is anticipated that the Company's cash flow
from operations during fiscal 2002, combined with the operations of eCalton,
PrivilegeONE, IGP and MindSearch will continue to utilize cash during 2002 as
those operations execute the strategies identified in their business plans. If
the subsidiaries do not achieve success in executing their business plans in
fiscal 2002, management may be required to curtail certain operating activities,
discontinue one or more of the subsidiaries, or seek additional capital in
fiscal 2003 to fund operations. No assurance can be given that additional
capital will be available, if required, to sustain operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 or controls 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. The Company's
consolidated results of operations are adjusted for the minority owners' share
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. In addition, the Company recognizes
gains on the direct sale by a subsidiary of its unissued equity securities, to
the extent that the proceeds
F-8
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
exceed the Company's carrying value in the respective subsidiary's equity, but
only in circumstances where management views as likely the realization of such
gain.
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 in this report 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
CALTON - Revenues of Calton, Inc. were derived from a consulting agreement with
the purchaser of Calton Homes that expired December 31, 2001. As a result, no
revenues related to consulting with Calton Homes are anticipated beyond December
31, 2001. Revenue under this agreement was recognized on a monthly basis when
earned, as Company personnel performed the contracted services. Generally, such
services were performed continuously throughout each year that the contract was
in effect.
eCALTON - The eCalton Internet business development division derives its
revenues from providing Internet design and consulting services under contracts
with principally business customers. This division recognizes revenues for
services when earned as work is performed. Certain contracts are billed on a
time and materials basis, and revenue is recognized based on the number of hours
worked by consultants at an agreed-upon rate per hour. eCalton also contracts on
a fixed-price basis, for which revenues are recognized on the percentage of
completion method of accounting, where percentage is based on the actual costs
incurred to date compared to total estimated costs on the contract. Losses on
contracts, if any, are recognized in the period when first identified and
measurable. The eCalton technical staffing division derives its revenues from
providing technical staffing services principally to business customers. This
division recognizes revenues when earned at the time the staffing services are
rendered to clients.
IGP - Revenues of IGP are derived from services provided principally to business
customers under consulting agreements. Revenues on these contracts are recorded
when earned and collectible, which occurs once IGP consulting services have been
rendered.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits and highly liquid money market
funds. Cash and cash equivalents includes $1,903,000 that is restricted solely
to the operations of IGP. 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.
INVESTMENTS
The Company classifies all short-term equity investments as available-for-sale
securities. Such investments are carried at fair value based on quoted market
prices, with unrealized gains and losses, net of tax, reported as a separate
component of comprehensive income (loss) in shareholders' equity.
F-9
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
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). The
Company classifies debt-type investments for which it has a positive intent and
ability to hold to maturity as held-to-maturity investments. Held-to-maturity
investments are recorded and measured at amortized cost.
DERIVATIVE INSTRUMENTS
In June 1998, the FASB issued Statements on Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
The Statement generally requires the recognition of all derivatives on Calton's
consolidated balance sheet at fair value. In June 1999, the FASB issued
Statement of Accounting Standards No. 137, which deferred the effective date of
SFAS 133 to all fiscal quarters of the fiscal year beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, an amendment of FASB
Statement No. 133, which is effective for fiscal years beginning after June 15,
2000. The adoption of this Statement during the Company's current fiscal year
did not have significant effect on results of operations or financial position.
PROPERTY AND EQUIPMENT
Property and equipment, which are carried at cost, are primarily comprised of
computer equipment, office furniture and leasehold improvements. Computer
equipment is being depreciated using the straight-line method over a useful life
of three to four years, office furniture is being depreciated using the
straight-line method over five years, and leasehold improvements are being
depreciated using the straight-line method 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 and other
long-lived assets for indications that the carrying value of such assets may not
be recoverable. This review consists of a comparison of the carrying value of
the assets with expected undiscounted cash flows. If the respective carrying
values exceed undiscounted cash flows, the impairment is measured using fair
value measures to the extent available, or discounted cash flows. During the
fourth quarter of the year ended November 30, 2001, the Company recognized
impairment charges amounting to $359,000 related to property and equipment and
$119,000 related to goodwill associated with the PrivilegeONE subsidiary. Such
impairments arose after the subsidiary failed to meet its revenue projections
and when it was further determined by management that the market conditions were
not supportive of the subsidiary's ongoing revenue projections. During fiscal
2000, management concluded that goodwill associated with eCalton and
PrivilegeONE having a carrying value of $324,000 had been permanently impaired
and charged the entire amount to operations.
INCOME TAXES
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.
F-10
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable and unbilled revenue, other receivables, investments,
account payable, accrued expenses and other liabilities. At November 30, 2001
and 2000, 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. Dilutive income (loss) per share 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 692,000 stock options and warrants outstanding at November 30,
2001, and 979,000 stock options and warrants outstanding at November 30, 2000,
were not included in the calculation of diluted loss per share for 2001 and
2000, as they were antidilutive. The effect of 360,000 stock options outstanding
at November 30, 1999 was not included in the diluted earnings per share
calculation as they were antidilutive.
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 related interpretations.
ADVERTISING EXPENSE
The costs of advertising are expensed as incurred. Included in selling, general
and administrative expenses are advertising costs of approximately $200,000,
$86,000 and $16,000 for the years ended November 30, 2001, 2000 and 1999,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial statements in
order to conform to the current presentation.
F-11
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
2. NOTES RECEIVABLE, PREFERRED STOCK AND OTHER INVESTMENTS
Investments consists of the following as of November 30, 2001 and 2000:
2001 2000
---------- ---------
AIM Convertible Promissory Note $ 750,000 $ --
Miresco Preferred Stock 500,000 --
CorVu Common Stock -- --
---------- ---------
$1,250,000 $ --
========== =========
In September 2001, the Company advanced $750,000 to Automated Information
Management, Inc. ("AIM") in exchange for a convertible promissory note (the "AIM
Note") and a warrant to acquire 1,059,666 shares of AIM Common Stock at an
exercise price of $2.12 per share, which expires in September 2004. The AIM Note
is mandatorily convertible into 1,000,000 shares of AIM Common Stock no later
than five days after the Company is given notice that the Securities and
Exchange Commission has declared a proposed registration of these shares
effective. If certain terms and conditions are satisfied, the Company may be
required to distribute to the Company's shareholders some of the shares of
Common Stock that would be issued upon conversion of the AIM Note which will be
considered an ordinary dividend without a cash distribution. AIM is currently in
default of its agreement to register the shares and the Company is entitled to
demand repayment of the note, which bears interest at a rate of LIBOR plus 1%.
AIM, which is based in Houston, Texas, is primarily engaged in the design,
engineering, installation and maintenance of telecommunications infrastructure.
In May 2001, IGP purchased 50,000 shares of Miresco Investment Company Series A
Preferred Stock for $500,000 which represented less than 20% of Miresco
Investment Company's ownership equity on a fully-diluted basis. The Preferred
Stock is redeemable by IGP after May 2004 at a formula price and is convertible
at anytime into shares of Miresco Common Stock at the Company's option applying
a conversion rate of $10 per share.
At November 30, 2001 and 2000 the Company holds 518,000 shares of CorVu
Corporation common stock ("CorVu" OTCBB: CRVU). 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 other than
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 fiscal 2000, and is included on the statement of
operations as loss on securities.
In addition to the CorVu loss described above, the fiscal 2000 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, 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.
F-12
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of November 30, 2001 and
2000:
2001 2000
----------- -----------
Computer equipment and furniture $ 880,000 $ 670,000
Leasehold improvements 162,000 159,000
----------- -----------
1,042,000 829,000
Less: Accumulated depreciation (401,000) (191,000)
----------- -----------
$ 641,000 $ 638,000
=========== ===========
Depreciation expense for the years ended November 30, 2001, 2000 and 1999
amounted to $210,000, $179,000 and $20,000, respectively.
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABIILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following as of November 30, 2001 and 2000:
2001 2000
---------- ----------
Accounts payable, trade $ 185,000 $ 414,000
Accrued expenses 537,000 937,000
Payable to a director 108,000 33,000
---------- ----------
830,000 1,384,000
Accrued warranty obligations arising
from the Calton Homes sale (Note 10) 686,000 1,200,000
---------- ----------
$1,516,000 $2,584,000
========== ==========
At November 30, 2000, the accrued warranty obligation arising from the Calton
Homes sale was netted against cash held in escrow.
5. MERGER AND ACQUISITION ACTIVITIES
eCALTON.COM, INC. In July 1999, the Company acquired substantially all of the
assets of iAW, Inc. an Internet business developer and solutions provider for a
cash price of $250,000. The Company conducts the activities associated with
acquired business though a wholly owned subsidiary that has changed its name to
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 fiscal 2000 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 per share.
PrivilegeONE In January 2000, the Company acquired a 50.4% collective direct and
indirect equity interest (through ownership in a parent company) in PrivilegeONE
Networks, LLC. PrivilegeONE was formed in 1999 to develop a customer loyalty
program for automobile dealers, including the development of a co-branded credit
card. 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. 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
fiscal 2000 management concluded that this goodwill had been permanently
impaired and charged the entire unamortized balance of goodwill to operations.
F-13
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
The warrant became exercisable only if PrivilegeONE surpassed 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 that bears interest at the
rate of 10% per annum and becomes due in January 2004. The Company entered into
agreements with the other owners of PrivilegeONE and its parent company that
obliged each of the owners to offer its equity interest in PrivilegeONE or its
parent to the other owners in the event that the owner wished to transfer its
equity interest.
In February 2001, the Company made an additional $50,000 equity investment in
PrivilegeONE that increased its direct and indirect ownership interest to 75.4%.
The Company also agreed to lend PrivilegeONE up to an additional $1,450,000 if
PrivilegeONE achieved certain milestones related to the development of its
proposed credit card program. The Company 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. The Company has the right to
designate a majority of the Board of Directors of PrivilegeONE until all loans
made to PrivilegeONE by the Company are repaid in full or December 31, 2004,
whichever is later. After that time, directors would be elected by the majority
vote of the owners of PrivilegeONE based upon their percentage ownership
interests.
In May 2001, the Company acquired the remaining minority interests in
PrivilegeONE. As consideration for the remaining interest in PrivilegeONE, the
Company granted 200,000 options exercisable at $4.02 per share to the minority
owners of PrivilegeONE. The options were fully vested, became exercisable six
months after the grant date and have a term of five years. The Company applied
the purchase method of accounting to record this acquisition of the remaining
minority interest and recorded goodwill in the amount of $127,000 based on a
Black-Scholes option pricing model with the following assumptions: discount rate
of 4.827%; volatility of 80%; option life of five years. The warrant to purchase
240,000 shares of the Company's common stock at a price of $12.50 and the option
granted to the owners of PrivilegeONE in February 2001 to purchase their
interests back at $10,000,000 were cancelled.
INNOVATION GROWTH PARTNERS In June 2000, the Company acquired a 51% interest in
Innovation Growth Partners ("IGP") a newly formed entity established to develop
businesses, provide management and consulting services and acquire controlling
interests in entrepreneurial and development stage companies.
In exchange for its controlling interest in IGP, the Company contributed
$1,500,000 in cash and agreed to loan up to $3,500,000 (the "IGP Note") to the
new venture. The IGP Note, which bore interest at a rate equal to prime plus one
percent per annum, was to be due in June 2004. Executive management of IGP
contributed $500,000 in cash and certain assets, including existing client
contracts, in exchange for their collective 49% interest. The accounts of IGP
have been consolidated along with those of the Company, with the executive
management's interest shown as minority interest. Certain owners of IGP have
been issued warrants to acquire an aggregate 11.1% interest in IGP 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.
The original purchase agreement provides that IGP management will be 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 IGP surpasses certain specified earnings
targets. As of November 30, 2001, such earnings levels had not been achieved.
F-14
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
In addition to its management and consulting services, IGP also acquires
controlling interests in certain entities that it manages and consults with. The
first initiative for this line of IGP business was the acquisition of a
controlling interest in MindSearch, Inc. ("MindSearch"), a company which
developed technology to provide consumer research to businesses on a faster and
broader basis than existing research approaches. In August 2000, IGP borrowed
$500,000 under the IGP Note to finance the acquisition of the controlling
interest in MindSearch. The accounts of MindSearch have been consolidated along
with those of the Company.
The pro forma effects on the Company's operations of the above acquisitions for
all periods presented were not material.
6. SHAREHOLDERS' EQUITY ACTIVITY
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), 1,000,000 shares
of which have been designated as Class A Series One Preferred Stock. None of the
Preferred Stock is issued or outstanding.
CASH DIVIDEND
On May 31, 2001, the Company's Board of Directors declared a liquidating
dividend of $5.00 per share to all shareholders of record on June 20, 2001,
payable on July 5, 2001. The total amount distributed pursuant to the dividend
was approximately $22,375,000. The dividend has been characterized as a
liquidating dividend, as it is considered a return of capital rather than a
distribution of retained earnings. Consequently, the consolidated balance sheet
and statement of shareholders' equity reflect a reduction of additional paid-in
capital, rather than a reduction of retained earnings.
STOCK REPURCHASE PROGRAM
During 1998 the Company commenced a stock repurchase program covering up to
2,000,000 shares of Common Stock in open market repurchases and privately
negotiated transactions. Treasury stock is recorded at cost as a reduction of
shareholders' equity. During the fiscal years ended November 30, 2001, 2000, and
1999, the Company purchased 167,000, 235,000 and 1,380,000 shares of common
stock for $415,000, $1,051,000 and $8,583,000, respectively.
STOCK COMPENSATION PROGRAMS AND TRANSACTIONS
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, 2001 under the
1993 Plan is $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 7.1
years at November 30, 2001
F-15
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
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 under this plan at November 30, 2001 range from $5.45 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
8.1 years at November 30, 2001.
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 under this plan at November 30, 2001
range from $0.80 to $4.12 per share. The exercise period is up to ten years,
with a weighted average remaining contractual life of 9.6 years at November 30,
2001.
At November 30, 2001 there were 100,040 options exercisable under all plans in
the aggregate with a weighted average exercise price of $6.91. Stock option
activity under each of these Plans is 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
Granted 359 -- -- 359 $ 3.31
Forfeited (45) (30) -- (75) $ 3.75
Exercised (241) (147) (63) (451) $ 3.32
---- ---- ---- ----
Options outstanding November 30, 2001 120 52 120 292 $ 5.89
==== ==== ==== ====
F-16
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
The following table summarizes information for options outstanding and
exercisable at November 30, 2001:
Options and Warrants Outstanding Exercisable
----------------------------------------------------------------------- ----------------------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
----------------- --------------- -------------- -------------- ------- --------------
$ 0.01-1.00 70,000 9.75 yrs. $ 0.83 - $ 0.83
4.01-5.00 50,200 4.50 yrs. 4.12 40 4.09
5.01-6.00 4,000 2.50 yrs. 5.45 4,000 5.45
6.01-7.00 120,000 7.25 yrs. 6.10 80,000 6.10
8.01-9.00 8,000 3.50 yrs. 8.75 8,000 8.75
13.01-14.00 40,000 8.25 yrs. 13.90 8,000 13.90
------- -------- ----------- ------- ------------
$ 0.01-14.00 292,200 7.35 yrs. $ 5.63 100,040 $ 6.91
======= ========= ============ ======= ============
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
non-plan options, which had not yet vested. During 2001 a second officer
resigned, but remained as a Board member and agreed to act as a consultant to
the Company. As a result, the Board vested the remaining 80,000 options in
return for his consulting services, which resulted in a charge of $367,000.
During 2001 the last of these officers resigned and, as a result, forfeited
80,000 of the options, which had not yet vested. As of November 30, 2001,
200,000 of the options issued in July 1999 remain outstanding.
As more fully discussed in Note 5, during May 2001, the Company granted options
to purchase 200,000 shares of Common Stock in connection with the acquisition of
the minority interest in PrivilegeONE. In addition, as also discussed in Note 5,
the Company is required to issue stock options to purchase 150,000 shares to IGP
management if certain earnings levels are achieved. Such earnings levels had not
been achieved as of November 30, 2001.
The Company accounts for employee 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 (increased) decreased by approximately ($550,000)
($269,000) and $551,000 for years ended November 30, 2001, 2000 and 1999,
respectively. On a pro forma basis, income (loss) per share would have been
(increased) decreased by ($0.13), ($.06) and $0.02 per share for 2001, 2000 and
1999, respectively. The estimated weighted average grant date fair value of the
options granted in the years ended November 30, 2001, 2000 and 1999 is $2.67,
$7.34 and $6.05, respectively, using the Black-Scholes option-pricing model,
with the following assumptions: dividend yield - none, volatility of .8,
risk-free interest rate of 4.88% in 2001, 6.54% in 2000 and 4.56% in 1999,
assumed forfeiture rate as they occur, and an expected life of 6.0, 5.8 and 3.0
years at November 30, 2001, 2000 and 1999, 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 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
F-17
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
$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 until the date they are exercised or
expire. In 2001 no compensation expense was recognized as all of the options
were exercised. 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.
Effective November 30, 2000 the Board of Directors of the Company adopted an
Employee Stock Purchase Plan (the "Plan"), which was approved by the
shareholders of the Company at the Company's 2001 Annual Meeting of
Shareholders. Initially, 175,000 shares of the Company's Common Stock were
reserved for issuance under the Plan. This initial number automatically
increases 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 are 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 is 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. The first offering period under the plan
ended on December 31, 2001.
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 Rights 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.
SALES OF SUBSIDIARY EQUITY
During the fourth quarter of 2001, MindSearch (a subsidiary in which IGP holds a
controlling interest) sold certain previously unissued equity interests for an
aggregate of $1,000,000. Of this amount, IGP purchased $250,000 of the interests
and unrelated third parties purchased $750,000 of the interests. In connection
with the sales of interests to unrelated third parties, IGP recorded a gain of
$357,000, which was the amount in excess of its carrying value in MindSearch
upon completion of the offering.
CLASS B MEMBERSHIP INTERESTS
During the fourth quarter of 2001, IGP (a 51% subsidiary of Calton) sold Class B
Membership Interests in the limited liability corporation for $1,400,000. Of
this amount, Calton purchased $1,100,000 and maintained
F-18
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
its overall 51% interest. Officers of IGP purchased the $300,000 balance of
these membership interests. Unlike the initial membership interests in IGP,
Class B Membership Interests have repayment rights and obligations. As such, the
Company has recorded these membership interests that were issued to other than
the Company outside of shareholders' equity in the 2001 balance sheet in a
manner similar to that of a mandatorily redeemable security.
7. INCOME TAXES
The income tax (expense) benefit consisted of the following for the years ended
November 30, 2001, 2000, and 1999:
2001 2000 1999
----------- ----------- -----------
Federal income taxes:
Current -- $ 605,000 $ (15,000)
Deferred $ 615,000 (84,000) 28,000
Provision in lieu of taxes -- -- (2,928,000)
State income taxes:
Current -- (26,000) (28,000)
Provision in lieu of taxes -- -- (310,000)
----------- ----------- -----------
Total federal and state income taxes 615,000 495,000 (3,253,000)
Discontinued operations -- 84,000 (373,000)
Provision in lieu of taxes-Calton Homes -- -- 3,173,000
----------- ----------- -----------
$ 615,000 $ 579,000 $ (453,000)
=========== =========== ===========
The federal net operating loss carryforward for tax purposes is approximately
$22,800,000 at November 30, 2001 and $21,200,000 at November 30, 2000. The
Company's ability to utilize its deferred tax assets including the 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 2020.
During fiscal 2001 and 2000, the Company received federal income tax refunds in
the amount of $362,000 and $1,298,000, respectively, resulting from the
carryback of certain losses to years in which the Company paid income taxes.
F-19
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
The following schedule reconciles the income tax (expense) benefit at the
federal statutory rate (34%) to the effective rate:
2001 2000 1999
----------- ----------- -----------
(Provision) benefit using statutory rate $ 1,967,000 $ 2,266,000 $(2,758,000)
Expenses for which deferred taxes cannot be
currently recognized, principally the change
in the valuation allowance (1,352,000) (1,851,000) --
Expenses for which deferred taxes can
be currently recognized -- -- 37,000
State tax benefit -- (26,000) (594,000)
State tax reserves -- -- 550,000
Expenses for which no tax benefit is available -- (15,000) (488,000)
Other -- 121,000 --
----------- ----------- -----------
615,000 495,000 (3,253,000)
Discontinued operations -- 84,000 (373,000)
Provision in lieu of taxes-Calton Homes -- -- 3,173,000
----------- ----------- -----------
$ 615,000 $ 579,000 $ (453,000)
=========== =========== ===========
Temporary differences and carryforwards that give rise to deferred tax assets
and liabilities as of November 30, 2001 and 2000 are as follows:
Deferred Tax Assets (Liabilities)
Continuing Operations Combined Operations
----------------------------------- -----------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Federal net operating losses $ 7,751,000 $ 7,214,000 $ 7,751,000 $ 7,214,000
State net operating losses 2,159,000 2,023,000 2,580,000 2,444,000
Intangible assets 1,500,000 603,000 1,500,000 603,000
Deferred state taxes 508,000 177,000 592,000 368,000
Depreciation 78,000 9,000 78,000 9,000
Litigation reserve -- -- 12,000 188,000
Stock compensation -- -- 179,000 179,000
Joint venture income -- -- 93,000 93,000
Other 419,000 85,000 441,000 333,000
------------ ------------ ------------ ------------
12,415,000 10,111,000 13,226,000 11,431,000
Less: Valuation allowances and
reserves (12,902,000) (10,852,000) (13,713,000) (12,172,000)
------------ ------------ ------------ ------------
Net deferred taxes $ (487,000) $ (741,000) $ (487,000) $ (741,000)
============ ============ ============ ============
8. INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
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, 2001 the Company operates in three business
segments, as follows.
F-20
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
INTERNET DEVELOPMENT AND STAFFING - eCALTON
eCalton provides Internet strategy consulting services and develops
comprehensive Internet-based solutions for its clients. eCalton's mission is to
help businesses and organizations optimize their competitive business advantages
through strategic use of the Internet and related technologies. The division
provides their services to small and medium size companies in various
industries, as well as one prime vertical market - the Homebuilding industry.
eCalton also operates a technology based consulting and staffing operation
specializing in network design and management. Through this technical staffing
division, eCalton assists clients in managing and improving their IT systems and
networks. This division operates in the Houston, Texas market.
CREDIT CARD LOYALTY BUSINESS - PrivilegeONE
PrivilegeONE was formed to develop and implement the PrivilegeONE Loyalty
Program. The patent pending Program aggregates disparate entities under the
PrivilegeONE umbrella to create customer loyalty and retention to the individual
entity through the issuance of co-branded credit card and membership cards. To
introduce the program, PrivilegeONE elected the initial target customer base of
automobile dealers throughout the United States.
CORPORATE AND CONSULTING - CALTON, INC. AND INNOVATION GROWTH PARTNERS
IGP was established to develop businesses and provide management and consulting
services to entrepreneurial and development stage companies, as well as
developing and acquiring controlling interests in businesses that they consult
and manage. The Company recognized revenues in the Corporate and Consulting
Services division from the purchaser in the amount of $1,300,000, $1,300,000 and
$1,194,000 for the years ended November 30, 2001, 2000 and 1999, respectively.
These amounts represented 25%, 37% and 88% of consolidated net revenues in 2001,
2000 and 1999.
F-21
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
Operating results, by segment, for the years ended November 30, 2001, 2000 and
1999 are as follows (in thousands):
Fiscal Year ended November 30, 2001
-----------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
& Staffing Business Services Company
----------- ----------- ------------- --------
Total revenues $ 3,908 $ -- $ 1,391 $ 5,299
Total cost of revenues 2,420 -- -- 2,420
Depreciation and amortization 132 5 81 218
Interest income -- -- 1,072 1,072
Loss from operations (1,399) (3,012) (1,431) (5,842)
Benefit for income taxes -- -- (615) (615)
Net loss (1,399) (3,012) (628) (5,039)
Total assets $ 562 $ 18 $ 9,233 9,813
Fiscal Year ended November 30, 2000
-----------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
& Staffing 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
Fiscal Year ended November 30, 1999
-----------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
& Staffing 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-22
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
9. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of Calton Homes. The sales
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 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 a
$5,200,000 holdback (see Note 10) 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. Further decreases to the escrows held for
indemnifications, if any, have and 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. The Company entered into an agreement to provide consulting services
to the purchaser that required payments to the Company of $1,300,000 per year
over a three-year period, which ended on December 31, 2001.
Results of operations from discontinued operations are as follows (amounts in
thousands):
Years ended
November 30,
--------------------
2000 1999
------- -------
Revenues $ -- $ 6,763
======= =======
Cost of revenues -- 5,858
Selling, general and administrative 84 1,518
------- -------
84 7,376
Loss from operations before income taxes (84) (613)
Provision (benefit) for income taxes -- (373)
------- -------
Net loss from discontinued operations $ (84) $ (240)
======= =======
10. COMMITMENTS AND CONTINGENT LIABILITIES
CONTINGENT LIABILITY ARISING FROM DISCONTINUED OPERATION
The agreement pursuant to which the Company sold Calton Homes in December 1998
required the Company to indemnify the purchaser for, among other things, certain
liabilities that arise out of events occurring prior to the closing, principally
related to certain limited warranty claims on homes built. In connection with
the sale, the Company entered into a holdback escrow agreement with the
purchaser pursuant to which approximately $5,200,000 of the closing proceeds was
deposited into escrow. Of this amount, approximately $3,000,000 (the "General
Indemnification Funds") was deposited to provide security for the Company's
indemnity obligations and approximately $2,200,000 (the "Specific
F-23
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
Indemnification Funds") was deposited to fund costs associated with certain
specified litigation involving Calton Homes. During October 2001, the Company
entered into a settlement agreement with the seller that released certain
remaining funds in the escrow account. As of November 30, 2001, approximately
$86,000 remained in escrow. In connection with the sale, the Company has
recorded a reserve of $686,000 and $1,200,000 at November 30, 2001 and 2000,
respectively (see Note 4) representing its best estimate of its future
obligations related to the remaining warranty claims.
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.
AGREEMENT WITH FLEET
The Company and PrivilegeONE have entered into a credit card processing
agreement with Fleet Credit Card Services, L.P. ("Fleet") pursuant to which
Fleet has agreed to issue the PrivilegeONE credit cards. Under the agreement,
Fleet is required to pay PrivilegeONE a fee for each account established through
the PrivilegeONE program and a percentage of the revenue realized from finance
charges. PrivilegeONE is required to pay Fleet a fee for the development of the
credit card for each participating automotive dealer. The agreement requires the
Company to capitalize PrivilegeONE with not less than $500,000 during the
original five-year term of the agreement and maintain a contingency reserve fund
equal to three and one-half (3.5%) percent of all net revenues received by
PrivilegeONE, up to a maximum of $1,500,000. PrivilegeONE has not yet generated
revenues and thus the Company has not yet established the contingency reserve.
Under the terms of the agreement, the Company is required to reimburse Fleet for
the cost of Fleet's software and other costs incurred by Fleet to develop the
PrivilegeONE program, up to a maximum of $350,000. As of November 30, 2001, the
Company had reimbursed Fleet $221,000 for its software and development costs.
LEASES
The Company and its consolidated subsidiaries lease their facilities and certain
equipment under operating lease agreements with various expiration dates through
2005. Future non-cancelable minimum lease payments for each of the following
years ending November 30, are as follows:
2002 $ 175,000
2003 97,000
2004 82,000
2005 68,000
------------
Total $ 422,000
============
Rent expense for the years ended November 30, 2001, 2000 and 1999 amounted to
$354,000, $247,000 and $45,000, respectively.
F-24
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended November 30, 2001 and 2000 are
as follows (amounts in thousands except per share items):
Three Months Ended
-------------------------------------------------------------
Feb. 28, May 31, Aug. 31, Nov. 30,
2001 2001 2001 2001
------- ------- ------- -------
Revenues $ 1,516 $ 1,438 $ 1,328 $ 1,017
======= ======= ======= =======
Net loss from continuing operations (870) (1,355) (1,463) (1,351)
------- ------- ------- -------
Net loss $ (870) $(1,355) $(1,463) $(1,351)
======= ======= ======= =======
Net loss per share
Basic $ (0.21) $ (0.32) $ (0.33) $ (0.31)
Diluted $ (0.21) $ (0.32) $ (0.33) $ (0.31)
Three Months Ended
-------------------------------------------------------------
Feb. 29, May 31, Aug. 31, Nov. 30,
2000 2000 2000 2000
------- ------- ------- -------
Revenues $ 553 $ 655 $ 1,064 $ 1,262
======= ======= ======= =======
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)
F-25
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, 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
======= ======= ==== ============ =======
Year ended November 30, 2001:
Allowance for doubtful accounts $ 122 $ 376 $-- $ 94 $ 404
======= ======= === ============ =======
Inventory valuation reserves $ 263 $ -- $-- $ 263 $ --
======= ======= === ============ =======
Valuation allowance for net deferred tax asset $10,669 $ 2,557 $-- $ -- $13,226
======= ======= === ============ =======
- -------------------------
(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-26
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, 2000, incorporated
by reference to Exhibit 3.1 to Form 10-K of Registrant for the fiscal
year ended November 30, 2000.
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 Option to Purchase Common Stock dated May 10, 2001 issued to Steven R.
Tetreault, incorporated by reference to similarly numbered exhibit
filed with Registrant's Report on Form 10-Q for the fiscal quarter
ended May 31, 2001.
4.2 Option to Purchase Common Stock dated May 10, 2001 issued to Thomas E.
Van Fechtmann, incorporated by reference to similarly numbered exhibit
filed with Registrant's Report on Form 10-Q for the fiscal quarter
ended May 31, 2001.
4.3 Option to Purchase Common Stock dated May 10, 2001 issued to Thomas
Corley, incorporated by reference to similarly numbered exhibit filed
with Registrant's Report on Form 10-Q for the fiscal quarter ended May
31, 2001.
4.4 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, incorporated by reference to
Exhibit 10.4 to Form 10-K of Registrant for the fiscal year ended
November 30, 2000.(*)
E-1
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, 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 and
Second Amendment to Executive Employment Agreement dated as of October
17, 2001(**).
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, incorporated by reference to Exhibit
10.12 to Form 10-K of Registrant for the fiscal year ended November 30,
2000.
10.13 Operating Agreement of PrivilegeONE Networks, LLC, incorporated by
reference to similarly numbered exhibit filed with Form 10-K of
Registrant for the fiscal year ended November 30, 2001.
10.14 Amendment No. 1 to Operating Agreement of PrivilegeONE Networks, LLC,
incorporated by reference to similarly numbered exhibit filed with Form
10-K of Registrant for the fiscal year ended November 30, 2001.
10.15 Promissory Note issued by PrivilegeONE Networks, Inc. dated January 27,
2000, incorporated by reference to similarly numbered exhibit filed
with Form 10-K of Registrant for the fiscal year ended November 30,
2001.
10.16 Amendment No. 1 to Promissory Note issued by PrivilegeONE Networks,
Inc., incorporated by reference to similarly numbered exhibit filed
with Form 10-K of Registrant for the fiscal year ended November 30,
2001.
10.17 Assignment and Assumption Agreement dated January 27, 2000 between
PrivilegeONE Networks, LLC and PrivilegeONE Networks, Inc.,
incorporated by reference to similarly numbered exhibit filed with Form
10-K of Registrant for the fiscal year ended November 30, 2001.
10.18 Second Promissory Note dated February 9, 2001 issued by PrivilegeONE
Networks, LLC, incorporated by reference to similarly numbered exhibit
filed with Form 10-K of Registrant for the fiscal year ended November
30, 2001.
10.19 Operating Agreement of Innovation Technology Partners, LLC,
incorporated by reference to similarly numbered exhibit filed with Form
10-K of Registrant for the fiscal year ended November 30, 2001.
10.20 Revolving Promissory Note dated June 19, 2000 issued by Innovation
Technology Partners, LLC, incorporated by reference to similarly
numbered exhibit filed with Form 10-K of Registrant for the fiscal year
ended November 30, 2001.
E-2
10.21 Consulting Agreement dated July 17, 2000 between the Registrant and
Robert E. Naughton, incorporated by reference to similarly numbered
exhibit filed with Form 10-K of Registrant for the fiscal year ended
November 30, 2001.
10.22 Amendment No. 1 to Operating Agreement of Innovation Growth Partners
LLC, incorporated by reference to exhibit filed with Registrant's
Report on Form 10-Q for fiscal quarter ended August 31, 2001.
10.23 Mandatory Redeemable, Convertible, Subordinated Note issued by
Automated Information Management, Inc.
21. Subsidiaries of the Registrant.
23.1 Consent of Aidman, Piser & Company, P.A.
23.2 Consent of PricewaterhouseCoopers LLP.
(*) 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-3