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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 1-8846
CALTON, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2433361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2013 INDIAN RIVER BOULEVARD
VERO BEACH, FLORIDA 32960
(Addresses of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (772) 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2) Yes |_| No |X|
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 May 31, 2002 was $1,429,492.
As of March 11, 2003, 4,644,208 shares of Common Stock were outstanding.
Certain portions of the Company's Proxy Statement for the annual meeting of
shareholders are incorporated by reference into Part II and Part III hereof.
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Disclosure Concerning Forward-looking Statements
- ------------------------------------------------
All statements, other than statements of historical fact, included in this Form
10-K, including in Part II, Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the statements under
"Business" are, or may be deemed to be, "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and variations of such words and
similar phrases are intended to identify such forward-looking statements. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-K. Such potential risks and
uncertainties, include without limitation, continued operating losses and their
effects on liquidity, the Company's ability to raise capital, matters related to
national and local economic conditions, the effect of governmental regulation on
the Company, commercial acceptance of the Company's co-branded customer loyalty
credit card program, the competitive environment in which the Company operates,
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 (772) 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 installation of customer loyalty and co-branded credit card
programs for the retail automobile industry in the United States
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") until the sale of the
Company's interest in IGP in April 2002;
o analyzing potential business combination 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.
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
RECENT OPERATING LOSSES AND LIMITED LIQUIDITY The Company has incurred
net losses in recent periods, including net losses from continuing
operations of $3,423,000, $4,233,000 and $4,809,000 during the fiscal
years ended November 30, 2002, 2001 and 2000, respectively. There can
be no assurance that the Company's operations will become profitable
in the future. As a result of the losses sustained, the Company's
working capital had declined to $2,193,000 at November 30, 2002, which
is not enough to fund the Company's operating plan during the fiscal
year ending November 30, 2003 without sufficient revenue generation
from the PrivilegeONE program. These conditions raise substantial
doubt as to the ability of the Company to continue its normal business
operations as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" for a description of management's plans to
sustain the Company's operations. No assurance can be given that the
plans will be successful.
RISKS ASSOCIATED WITH POTENTIAL BUSINESS COMBINATIONS The Company is
seeking to enhance shareholder value by 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
combined 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.
STRATEGIC BUSINESS FOCUS CONSIDERATIONS The Company has shifted its
core strategy to primarily managing the growth of PrivilegeONE.
PrivilegeONE has not earned significant revenue and there is no
guarantee that it will be become profitable. In addition, both Fleet
Credit Card Services ("Fleet") and PrivilegeONE have been dissatisfied
with the results of the PrivilegeONE credit card program to date and
there is no assurance that Fleet will continue as the credit card
issuer for the program or that the Company will be successful in
securing another credit card issuer if it is required or desires to do
so.
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
3
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 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 November 30, 2002, approximately $88,000 remained in
escrow pending the resolution of claims. In January 2003, one claim
was settled reducing the escrow balance to approximately $35,000. 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. As described in "Item 3
- Legal Proceedings", the purchaser of Calton Homes has served a
Demand for Arbitration on the Company and is alleging damages of
$1,600,000 related to alleged construction defects in homes delivered
by Calton Homes prior to the sale. The Company believes certain of the
claims made are without merit and that is has established adequate
reserves with respect to this matter. In addition, the Company intends
to assert certain counterclaims against the purchaser and seek
recoveries from insurers and subcontractors; however, no assurance can
be given that this matter will not have an adverse effect on the
Company's financial condition and results of operations.
POTENTIAL DELISTING On July 26, 2002, the Company received notice from
the American Stock Exchange ("AMEX") indicating that the Company is
below certain of the AMEX's continued listing standards due to the
operating losses it has sustained in three out of four of its most
recent fiscal years and a decline in shareholders' equity below
$4,000,000. The Company was afforded the opportunity to submit a plan
of compliance to the AMEX and submitted the plan on August 22, 2002.
On September 9, 2002, the AMEX notified the Company that it accepted
the Company's plan of compliance and granted the Company an extension
of time to regain compliance with the continued listing standards. The
Company will be subject to periodic reviews by the AMEX during the
18-month extension period that ends January 2004. Failure to make
progress consistent with the plan or to regain compliance with the
continued listing standards by the end of the extension period could
result in the Company being delisted from the AMEX. Delisting from the
AMEX could adversely affect the liquidity and price of the Company's
common stock, which could adversely impact the Company's ability to
raise capital through public stock offerings.
4
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 loss of PrivilegeONE's credit card issuer or failure to secure
another credit card issuer;
o the public's perception of the prospects of early stage ventures;
o the delay in executing a timely rollout of expected third party
distribution programs for PrivilegeONE in fiscal year 2003;
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 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 9 of the
2002 Financial Statements included in this report.
(C) DESCRIPTION OF BUSINESS
GENERAL The Company's business activities are primarily focused on (i)
the development of a loyalty and co-branded credit card program
through PrivilegeONE (ii) providing Internet business solutions and
technology based staffing and consulting services through eCalton and
(iii) analyzing potential combinations. eCalton will continue to
operate as it has historically but in addition will provide
technology, marketing and other support services to PrivilegeONE.
5
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. PrivilegeONE is initially
focusing on the retail automobile industry. Under the terms of this
program, customers of participating automobile dealers are offered the
opportunity to apply for the PrivilegeONE credit card. The credit card
is a Visa card imprinted with the dealership's name, which can be used
anywhere Visa cards are accepted. Through PrivilegeONE's unique credit
card acquisition system technology, qualifying customers are granted
instant credit approval. By using the PrivilegeONE card, customers
earn rebate dollars, which can be used when the customer purchases or
leases a new or used vehicle. In addition, participating dealers
provide up to a ten percent discount on parts and service when the
PrivilegeONE card is used at the dealership. To introduce the program,
PrivilegeONE has shifted its focus toward large third party
distribution channels with existing dealer relationships in the United
States and Canada. 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.
INSTALLED DEALERSHIPS The PrivilegeONE co-branded loyalty and credit
card program has been launched at 29 retail automotive dealerships in
New York, New Jersey and New Hampshire. As of February 28, 2003
approximately 1,900 cards have been issued.
AGREEMENT WITH LARGE THIRD PARTY DISTRIBUTOR In October 2002,
PrivilegeONE, as part of its shift in strategy toward third party
distribution channels, entered into its first agreement with a large
third party distributor, which is an exclusive distributor of Toyota
vehicles to 163 Toyota dealerships. Under the terms of the agreement
with this third party, the distributor has agreed to market and
promote the PrivilegeONE program at these 163 dealerships. For each
credit card account established at one of these dealerships,
PrivilegeONE will be required to pay the distributor a new account fee
and a portion of the finance charge revenue attributable to the
account. The implementation of the PrivilegeONE program through this
distribution channel has been repeatedly delayed as a result of
factors outside of the Company's control and there is no assurance
that the program will be implemented in fiscal year 2003.
AGREEMENT WITH FLEET In May 2001, the Company and PrivilegeONE entered
into a credit card processing agreement with Fleet pursuant to which
Fleet 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. The
Company has complied with the capitalization and contingency reserve
requirements outlined in the Agreement. Under the terms of the
agreement, the Company was 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,
2002, the Company had reimbursed Fleet $350,000 for its software and
development costs. Both Fleet and PrivilegeONE have been dissatisfied
with the program's results to date and there is no assurance that
Fleet will continue as the credit card issuer for the PrivilegeONE
program or that the Company will be successful in securing another
credit card issuer if it is required or desires to do so.
6
SALES AND MARKETING PrivilegeONE has shifted its strategy from an
internal sales force to large third party distribution networks, such
as the Toyota arrangement described above. PrivilegeONE, through
eCalton's technical and marketing development teams, is continuing to
develop various Internet sites and support services which link certain
large third party distributors consumer web sites to PrivilegeONE's
patent pending online credit card application system ("CCAS").
COMPETITION Although the Company believes that PrivilegeONE's
distribution channel is unique, 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.
PATENTS & TRADEMARKS PrivilegeONE has applied to the United States
Patent and Trademark Office for a patent for CCAS, its online credit
card acquisition system. No assurance can be given that the patent
will be issued. Failure to obtain patent protection for CCAS, which
the Company believes gives PrivilegeONE an advantage over potential
competitors, could result in other parties duplicating the system.
PrivilegeONE has received trademark registrations for the following:
PrivilegeONE and PrivilegeONE stylized (logo).
ECALTON.COM
GENERAL eCalton provides Internet business solutions and technology
based consulting and staffing services. In addition, eCalton is poised
to support the growth and development of PrivilegeONE.
INTERNET BUSINESS SOLUTIONS eCalton's Internet Business Solutions
division, based in Vero Beach, Florida, provides innovative web and
information technologies 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
and support change management. Through its specialized subdivision,
the Internet Home Construction Group ("iHCG"), this division focuses
primarily on one prime vertical marketing segment, 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.
TECHNOLOGY CONSULTING AND STAFFING The technology staffing division,
based in Houston, Texas, 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. The Houston office is poised to provide support services to
PrivilegeONE if and when PrivilegeONE expands into that marketplace.
7
SALES AND MARKETING As a result of the shift of its focus to providing
technology support to PrivilegeONE, eCalton reduced its direct sales
force for its Internet business solutions activities in 2002. eCalton
will continue to market its services through existing client
referrals, strategic partnerships, its website, WWW.ECALTON.COM and
co-operative advertising. In addition, eCalton has been establishing
strategic partnerships with complementary organizations such as
advertising agencies and homebuilding technology suppliers to
facilitate cooperative advertising and lead generation. eCalton will
also market its services to automotive dealerships that participate in
the PrivilegeONE co-branded credit card program. The eCalton Technical
Staffing division markets its services through, among others, existing
client referrals and the RFP process.
COMPETITION The market for Internet professional services, including
technology consulting and staffing, 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.
eCalton is responding to the industry-wide competition by primarily
focusing on the homebuilder industry as a vertical market. eCalton has
created iHCG and through its marketing efforts, has established iHCG
as a recognizable brand in the industry.
EMPLOYEES
As of March 17, 2003, the Company and its wholly owned subsidiaries
employed 19 full time personnel, and 1 part-time employee. None of the
Company's employees are subject to collective bargaining agreements.
The Company believes that its employee relations are satisfactory.
ITEM 2. 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 renewable term of six months. 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. In addition, the Company rents approximately
2,400 square feet of office space in Houston, Texas, on a
month-to-month basis, for approximately $2,700 per month.
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 in
December 1998 requires the Company to indemnify the purchaser for,
among other things, certain liabilities that arise out of events
occurring prior to the closing, including certain 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 Indemnification Funds") was deposited to fund costs
associated with certain specified litigation involving Calton Homes.
As of November 30, 2002, approximately $88,000 of the
8
Indemnification Funds remained in escrow. In January 2003, one claim
was settled reducing the escrow balance to approximately $35,000. The
Company's indemnity obligations are not limited to the amount in
escrow.
In July 2002, the purchaser served a Demand for Arbitration on the
Company and is currently alleging damages of $1,600,000 related to
alleged construction defects in homes delivered by Calton Homes prior
to its sale. The Company believes that certain of the claims are
without merit and that it has recorded adequate reserves to meet its
future obligations related to the remaining warranty claims. In
addition, the Company intends to assert certain counterclaims against
the purchaser and pursue recoveries from insurance carriers if the
Company is ultimately liable for damages in this matter.
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 Company's
agreement with the purchaser of Calton Homes requires that the
liquidating trust be funded with any Specific Indemnification Funds
remaining in escrow plus $2,000,000.
On April 12, 2002, S. Raymond Tetreault and Thomas E. Van Fechtmann,
each of whom is a former officer and member of PrivilegeONE, filed an
action in the United States District Court for the State of Rhode
Island against the Company, PrivilegeONE and certain officers of the
Company, alleging, among other things, (i) breach of their employment
agreements with PrivilegeONE in connection with the termination of
their employment; (ii) breach of fiduciary duty, (iii) breach of
contract as a result of the Company's unwillingness to permit the
early exercise of certain options to acquire the Company's Common
Stock prior to the record date for the dividend declared by the
Company's Board of Directors in May 2001; and (iv) common law fraud,
misrepresentation and violations of the Securities Act of 1933 in
connection with the acquisition by the Company of their interest in
PrivilegeONE in May 2001, due to an alleged failure to disclose the
proposed dividend to the plaintiffs. The plaintiffs are seeking, among
other things, compensatory and punitive damages in an unspecified
amount, injunctive relief and the imposition of a constructive trust
on 190,000 shares of the Company's Common Stock and its ownership
interest in PrivilegeONE. The Company's motion to have the case
summarily dismissed was denied in December 2002. At this time the
Company has not answered the complaint, asserted counterclaims nor
confirmed insurance coverage. However, it intends to vigorously defend
the claims which it believes are without merit.
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 2002, no matter was submitted to a vote
of security holders through the solicitation of proxies or otherwise.
9
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 28, 2003 are
listed below and brief summaries of their business experience and
certain other information with respect to them are set forth in the
following table and in the information which follows the table:
Name Age Position
---- --- --------
Anthony J. Caldarone 65 Chairman and Chief Executive Officer
John G. Yates 59 President and Chief Operating Officer President and
Chief Executive Officer - PrivilegeONE
Maria F. Caldarone 39 Executive Vice President of Corporate Development and Asst. Secretary
Director and Executive Vice President of Operations - PrivilegeONE
Thomas C. Corley 41 Senior Vice President, Chief Financial Officer and Treasurer
Senior Vice President and Chief Financial Officer - PrivilegeONE
Laura A. Camisa 40 Senior Vice President of Strategic Planning
Executive Vice President and Secretary - eCalton.com, Inc.
Senior Vice President of Strategic Planning - PrivilegeONE
Mr. Caldarone has served as Chairman and Chief Executive Officer of
the Company since November 1995. From November 1995 through August
2002, Mr. Caldarone also served as President of the Company. He served
as director of the Company from June 1993 through October 1995 and as
Chairman, President and Chief Executive Officer from the inception of
the Company in 1981 through June 1993.
Mr. Yates was appointed President and Chief Operating Officer of
Calton in September 2002. Mr. Yates has served as President and Chief
Executive Officer of PrivilegeONE since May 2001. From 1993 through
December 2000, Mr. Yates served as Senior Vice President and General
Manager of American Express, and in that capacity implemented and
managed the American Express Corporate Purchasing Card division. Prior
to American Express, Mr. Yates served in various management capacities
in numerous businesses during his twenty-four years with General
Electric.
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. In September 2002, Ms.
Caldarone was promoted to Executive Vice President of Calton, Inc.
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
Mr. Corley was appointed Senior Vice President of Finance, Chief
Financial Officer and Treasurer of Calton in September 2002. Mr.
Corley has served as Senior Vice President and Chief Financial Officer
of PrivilegeONE since January 2000. Mr. Corley has over 17 years
experience in public accounting, large corporate and international
tax, financial modeling and financial management having most recently
been a founding partner of McGuinness, Corley & Hodavance, CPAs from
1995 to 2000. Prior to that, he held the positions of Senior Manager
of Taxation with ESSROC Cement Corp/Italcimenti-Ciment Francais.,
Senior Tax Accountant with Arthur Andersen and Staff Accountant with
Bart & Bart, CPAs.
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
10
President of eCalton's Internet business development division. In
September 2002, Ms. Camisa was promoted to Senior Vice President of
Calton, Inc. 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.
11
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 2002 and 2001.
FISCAL 2002 High Low
------------ ------------
1st Quarter $0.75 $0.52
2nd Quarter 0.71 0.29
3rd Quarter 0.36 0.17
4th Quarter 0.27 0.13
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
At March 11, 2003, there were approximately 370 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 $.12
On July 26, 2002, the Company received notice from the AMEX indicating
that the Company is below certain of the AMEX's continued listing
standards due to the operating losses it has sustained in three out of
four of its most recent fiscal years and a decline in shareholders'
equity below $4,000,000. The Company was afforded the opportunity to
submit a plan of compliance to the AMEX and submitted the plan on
August 22, 2002. On September 9, 2002, the AMEX notified the Company
that it accepted the Company's plan of compliance and granted the
Company an extension of time to regain compliance with the continued
listing standards. The Company will be subject to periodic reviews by
the AMEX during the 18-month extension period that ends January 2004.
Failure to make progress consistent with the plan or to regain
compliance with the continued listing standards by the end of the
extension period could result in the Company being delisted from the
AMEX.
The information to be set forth in the table captioned "Equity
Compensation Plan" is incorporated herein by reference to the Company
Proxy Statement for its 2003 Annual Meeting of Shareholders.
12
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 OTHER DATA AND PER SHARE ITEMS)
SELECTED OPERATING DATA 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
Revenues $ 1,954 $ 5,208 $ 3,335 $ 1,351 $ -
============ ============ ============ ============ ============
Net income (loss) from continuing operations (3,423) (4,233) (4,809) 661 (1,960)
Net income (loss) from discontinued operations(1) (1,561) (806) (1,087) 4,178 6,315
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (4,984) $ (5,039) $ (5,896) $ 4,839 $ 4,355
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Net income (loss) from continuing operations $ (0.76) $ (0.98) $ (1.13) $ 0.15 $ (0.37)
Net income (loss) from discontinued operations(1) (0.35) (0.19) (.25) 0.92 1.18
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1.11) $ (1.17) $ (1.38) $ 1.07 $ 0.81
============ ============ ============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) from continuing operations $ (0.76) $ (0.98) $ (1.13) $ 0.14 $ (0.37)
Net income (loss) from discontinued operations(1) (0.35) (0.19) (.25) 0.87 1.18
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (1.11) $ (1.17) $ (1.38) $ 1.01 $ 0.81
============ ============ ============ ============ ============
SELECTED OTHER DATA
------------ ------------ ------------ ------------ ------------
Cash Dividend per share $ - $ 5.00 $ - $ - $ -
============ ============ ============ ============ ============
At November 30,
--------------------------------------------------------------------
SELECTED BALANCE SHEET DATA 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Total assets $ 3,905 $ 9,813 $ 35,100 $ 40,441 $ 40,082
Total debt - - - - -
Shareholders' equity $ 2,300 $ 7,217 $ 32,887 $ 38,654 $ 38,221
- --------------------------------------------------------------------------------
(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.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2002 AND 2001
REVENUES: Consolidated revenues decreased from $5,208,000 for 2001 to
$1,954,000 for 2002. Technical staffing revenues decreased from
$2,760,000 for 2001 to $1,274,000 for 2002. The primary reason for the
decrease in technical staffing revenues was the severe downturn in
economic conditions in eCalton's Houston regional area office that
caused a significant reduction in staffing demands. Consulting
services revenues decreased from $1,300,000 for 2001 to $108,000 for
2002. The consulting services revenues were derived from a single
consulting agreement associated with the sale of a business in 1998.
The agreement expired on December 31, 2001 and, accordingly, no
further revenue from this contract is currently projected. Website
design and implementation revenues decreased from $1,148,000 in 2001
to $538,000 for 2002. Economic conditions and intense competition
caused this overall reduction in demand for web site development.
Finally, during the second quarter 2002, the Company commenced the
generation of revenues from the Credit Card Loyalty business segment.
While 2002 revenues were $34,000, management has placed significant
emphasis on the development of this segment and currently believes
that its revenues will comprise the material amount of consolidated
revenues in future periods. However, the successful generation of
revenues from this segment is dependent upon many factors including
the acceptance of the program by a high level of automotive dealers
and the acquisition and maintenance of credit card processing
services.
COST OF REVENUES: Cost of revenues consists of project personnel and
expenses associated with the technical staffing services and website
design and implementation segments, and credit card loyalty program
direct expenses. Project personnel and expenses decreased from
$2,420,000 in 2001 to $1,250,000 in 2002. The decrease is
predominantly a result of the lower revenues from the two contributing
segments. Gross margins decreased from 34% in 2001 to 32% to 2002,
principally as a result of lower revenue levels.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expenses decreased from $8,238,000 in 2001 to
$4,312,000 in 2002. The largest component of this expense category,
salaries and related expenses, decreased from $4,732,000 in 2001 to
$2,472,000 in 2002, principally as a result of cost containment
efforts and activities, including reductions in personnel, in all of
the Company's business segments. Bad debts expense, which is also a
component of this expense category decreased from $376,000 in 2001 to
a net credit of $(72,000) during 2002. The decrease was a result of
management's focused effort to address outstanding balances that had
accumulated in the technical staffing and website design and
implementation segments. This process resulted in reductions of
reserves against previously balances from collections, estimate
changes and other business decisions. Management continues to curtail
costs where appropriate during 2003, with further reductions
anticipated until the credit card loyalty segment becomes operational
in mid to late 2003.
IMPAIRMENTS OF LONG-LIVED ASSETS: The Company has early adopted FAS144
in the quarter ended February 28, 2002; the pronouncement would have
otherwise been effective for the Company's fiscal year ended November
30, 2003. This pronouncement requires that the Company review the
carrying value of its long-lived assets at least annually or sooner if
facts and circumstances suggest to management that impairments may be
present. Impairment charges of $116,000 in 2002 related to the
Company's website design and implementation business segment.
Impairment charges of $478,000 in 2001 related to the Company's credit
card loyalty program segment.
INTEREST INCOME: Interest income is derived from principally interest
on depository accounts and money-market type accounts. Interest income
decreased from $1,082,000 during 2001 to $124,000 during 2002. The
decrease was a result of lower average deposited balances; such
decline followed the Company's cash
14
dividend of $22,375,000 during 2001. Currently, cash is being used in
operating activities and, accordingly, interest income is expected to
decline during 2003.
LOSSES ON INVESTMENTS/GAINS AND RECOVERIES: The 2002 loss on
investments relates to management's decision to write off the AIM Note
Receivable (see Note 3 in the Financial Statements). Subsequently, the
Company received $350,000 in partial recovery of this loss. There can
be no assurances that any further recoveries will be received on this
investment.
LITIGATION SETTLEMENTS: The Company received an aggregate of $458,000
in settlements on certain matters under litigation in 2002.
INCOME TAXES: The income tax benefit of the Company's 2002 operating
losses was fully reserved during 2002, compared to a partially
recognized benefit of $517,000 in 2001, due to the absence of
sufficient positive evidence to justify carrying deferred tax assets.
DISCONTINUED OPERATIONS: On April 23, 2002, the Company disposed of
its 51% interest in Innovation Growth Partners (IGP) by transferring
its ownership interests to IGP in exchange for $1,030,000 of IGP's
cash reserves. The transaction resulted in a loss of $541,000, which
was recorded in the quarter ended May 31, 2002. IGP was originally
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 the businesses with which it consulted. The decision to dispose of
the Company's interest in IGP resulted from the fact that it had not
generated significant revenues or profits and had required significant
cash infusion by the Company.
Results of operations from Innovation Growth Partners were as follows
during each fiscal year ended November 30:
2002 2001 2000
---------------------------------------------
Revenues of discontinued subsidiary $ - $ 91,000 $ 199,000
=============================================
Net loss from discontinued subsidiary, net of
income tax benefits of $98,000 and $48,000
during 2001 and 2000, respectively $ (1,020,000) $ (806,000) $ (517,000)
=============================================
No future losses are anticipated from the IGP disposal.
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2001 AND 2000
REVENUES: Revenues for fiscal 2001 increased to $5,208,000 compared to
$3,335,000 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 revenues was $1,300,000 in homebuilding consulting
for both fiscal 2001 and 2000. Homebuilding consulting fees were
derived from a consulting agreement that expired in December 2001.
COSTS OF REVENUES: 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.
15
SELLING GENERAL AND ADMINISTRATIVE: Selling, general and
administrative expenses experienced an increase from $7,162,000 in
2000 to $8,238,000 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 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.
IMPAIRMENTS OF LONG-LIVED ASSETS: During 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 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.
INTEREST INCOME: 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 7 to the consolidated financial statements, as well as a decline
in short term interest rates.
INCOME TAXES: The Company recorded a deferred tax benefit for income
taxes amounting to $615,000, which represents the expected tax benefit
of certain net operating loss carrybacks. 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 carrybacks
of certain losses to years in which the Company paid income taxes.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL:
The Company's consolidated financial statements are prepared on a
going concern basis, which assumes that Calton will realize its assets
and discharge its liabilities in the normal course of business. As
reflected in the financial statements, Calton has incurred losses from
continuing operations of $(3,423,000), $(4,233,000) and $(4,809,000)
and has used cash in continuing operations of $(3,497,000),
$(3,810,000) and $(2,243,000) during the fiscal years ended November
30, 2002, 2001 and 2000, respectively. As of November 30, 2002, the
Company has working capital of $2,193,000, which is not sufficient to
fund the current operating plan during the fiscal year ending on
November 30, 2003. These conditions raise substantial doubt as to the
ability of Calton to continue its normal business operations as a
going concern.
Management's plans to sustain Calton operations include accelerating
and augmenting revenue opportunities, principally in the credit card
loyalty segment, curtailing operating expenses to the extent
appropriate and raise additional debt or equity capital from external
sources. As discussed above and in Note 6 to the accompanying
financial statements, during 2002, Calton sold its non-performing
interest in Innovation Growth Partners which contributed to the
Company's net loss in the amounts of $(1,020,000), $(806,000) and
$(517,000) during the fiscal years ended November 30, 2002, 2001 and
2000, respectively. In addition, the Internet development group of
eCalton and PrivilegeONE consolidated office space to best cross train
and to leverage employee skill sets. While management is actively
addressing multiple sources of capital, there are currently no
commitments, and there can be no assurances that sufficient capital
can be raised under terms acceptable to management. The financial
statements do not include any adjustments that may arise as a result
of this uncertainty.
16
CASH FLOWS FROM OPERATING ACTIVITIES:
The Company used $3,497,000 in 2002 operating activities, compared to
$3,810,000 in 2001 operating activities. The use of cash in each
period was due to operating losses incurred in each period. Such
losses are anticipated to continue until the Company's credit card
loyalty business segment commences the generation of significant
revenues.
CASH FLOWS FROM INVESTING ACTIVITIES:
The Company generated cash of $2,020,000 from investing activities,
principally from the cash that was made available from the sale of the
Company's interest in Innovation Growth Partners as well as settlement
of certain litigation claims of the Company. Currently, there are no
formal plans to dispose of businesses. However, management is closely
monitoring the business activities of all business segments and may
chose to sell or dispose of such operations to either curtail expenses
or generate cash.
In addition, the Company currently has no commitments for capital
acquisition or equity purchases.
CASH FLOWS FROM FINANCING ACTIVITIES:
The Company generated cash of $48,000 from financing activities from
the sale of common stock to Company employees under the Company's
employee stock purchase plan. The amount received of $60,000 was
offset by purchases of treasury stock in the amount of $12,000. There
are no further plans to purchase treasury stock in the open market.
As a result of the above cash flow activities, cash decreased from
$4,715,000 at November 30, 2001 to $3,286,000 at November 30, 2002.
Total working capital deceased from $3,543,000 at November 30, 2001 to
$2,193,000 at November 30, 2001. Working capital available to the
Company as of November 30, 2002 is not currently sufficient to fund
the Company current operating plan. As a result, management is engaged
in reviewing alternative sources of capital and expense curtailment
activities. There can be no assurance that management will be
successful in its efforts to curtail expenses or raise capital in
amounts sufficient to sustain operations and achieve the Company's
plans.
COMMITMENTS, GUARANTEES AND CONTINGENCIES
LITIGATION CLAIMS:
The Company continues to have responsibility for certain warranty and
other claims in connection with the sale of Calton Homes and the
purchase of PrivilegeONE. The agreement pursuant to which the Company
sold Calton Homes in December 1998 requires 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 warranty claims on homes built. As of November 30, 2002 and
2001, $88,000 and $86,000, respectively, were maintained in an escrow
account for such contingencies. However, the Company's indemnification
obligations are not limited to the amount in escrow. As of November
30, 2002, the Company has accrued $710,000 for known and estimable
contingencies related to the sale of Calton Homes, the purchase of
PrivilegeONE and for matters that occur in the ordinary course of
business. In July 2002, the purchaser served a Demand for Arbitration
on the Company and is currently alleging damages of $1,600,000 related
to alleged construction defects in homes delivered by Calton Homes
prior to its sale. The arbitration is expected by management to be
completed during 2003. The Company intends to assert certain
counterclaims against the purchaser and seek recoveries from insurers
and subcontractors. Management is in the process of reviewing the
additional claims of the purchaser and currently believes that its
reserves are adequate for this matter.
17
In addition to the general indemnification clause, 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 Calton Homes purchaser. The liquidating trust
will be funded with the current escrowed amounts plus $2,000,000. At
this time, management does not plan to liquidate or dissolve the
Company.
CREDIT CARD PROCESSING AGREEMENT:
The Company and PrivilegeONE have entered into a credit card
processing agreement with Fleet pursuant to which Fleet has agreed to
issue and administer the PrivilegeONE credit cards. Under the
agreement, Fleet is required to remit a fee for each account
established through the PrivilegeONE program, plus 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. The
Company has complied with the capitalization and contingency reserve
requirements outlined in the Agreement.
The Credit Card Loyalty Business Segment is in an early stage of
development. Having established technological and market feasibility,
management is currently accessing marketing channels and developing
strategic partners to support the business. Access to and maintenance
of credit card services, such as those provided through the Fleet
agreement, is essential to conduct the Credit Card Loyalty Business
Segment. Failure to maintain such agreements would have a material
adverse affect on the Credit Card Loyalty Business Segment and,
possibly the Company.
OPERATING LEASE 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:
2003 $ 97,000
2004 82,000
2005 68,000
-------------------
Total $ 247,000
===================
GUARANTEES AND OFF BALANCE SHEET ARRANGEMENTS:
The Company has no guarantees outside of the consolidated organization
and no off balance sheet arrangements of any nature.
PARTICULARLY SENSITIVE ACCOUNTING ESTIMATES
RESERVE FOR BAD DEBTS: The Company provides reserves against
uncollectible accounts receivable. This process requires significant
subjective estimates that take into account the credit worthiness of
the customer, historical collection experience, and the general
economic environment. During the current year, an in-depth formal
review was performed to review all open accounts receivable, write off
balances known to be uncollectible against existing reserves, and
estimate the appropriate levels of reserves on existing balances. As a
result of this process, reserves were reduced from $404,000 as of
November 30, 2001 to $31,000 as of November 30, 2002. Such reduction
was effected by writing off $301,000 of deemed uncollectible accounts
and a general reduction in the reserve of $72,000.
18
OTHER RESERVES: The Company continues to have responsibility for
certain warranty and other claims in connection with the sale of
Calton Homes and the purchase of PrivilegeONE. This accrual requires
significant subjective estimates about existing and future claims; the
ultimate outcome may be known only as a result of litigation or
arbitration proceedings. Currently, management makes its estimates
based upon the best available evidence, which includes its historical
experience in the home building industry and the counsel of outside
lawyers engaged in litigating certain other matters. Management
applies the provisions of SFAS 5 Accounting for Contingencies in
making its estimates, where amounts that are probable and estimable
are recorded. As a result of the Company's estimation processes,
reserves for the various litigation claims of $710,000 are established
as of November 30, 2002, compared to $686,000 as of November 30, 2001.
RECENT ACCOUNTING PRINCIPLES
SFAS NO. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND
DISCLOSURE (SFAS NO. 148):
During December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148. SFAS No. 148 establishes standards for two
alternative methods of transition to the fair value method of
accounting for stock-based employee compensation under SFAS No. 123.
SFAS No. 148 also amends and augments the disclosure provisions of
SFAS No. 123 and APB No. 28, INTERIM FINANCIAL REPORTING to require
disclosure in the summary of significant accounting policies for all
companies the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings
per share in annual and interim financial statements. The transition
standards and disclosure requirements of SFAS No. 148 are effective
for fiscal years and interim periods ending after December 15, 2002.
SFAS No. 148 does not require Calton to transition from the intrinsic
approach provided in APB No. 25. In addition, Calton does not
currently plan to transition to the fair value approach in SFAS No.
123. However, Calton has adopted the additional disclosure
requirements of SFAS No. 148 in this annual report.
FASB INTERPRETATION 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS (INTERPRETATION 45):
During November 2002, the FASB issued Interpretation 45. Under
Interpretation 45 guarantees, contracts and indemnification agreements
are required to be initially recorded at fair value. Current practice
provides for the recognition of a liability only when a loss is
probable and reasonably estimable, as those terms are defined under
SFAS No. 5, ACCOUNTING FOR CONTINGENCIES. In addition, Interpretation
45 requires significant new disclosures for all guarantees even if the
likelihood of the guarantor's having to make payments under the
guarantee is remote. The disclosure requirements are effective for
financial statements of interim and annual periods ending after
December 15, 2002. The initial recognition and measurement provisions
of Interpretation 45 are applicable on a prospective basis to
guarantees, contracts or indemnification agreements issued or modified
after December 31, 2002.
Calton is currently reviewing guarantees, contracts and
indemnification agreements that may require fair value treatment under
the new standard. However, the effect on its future financial
statements is not currently determinable.
SFAS NO. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES (SFAS NO. 146):
During July 2002, the FASB issued SFAS No. 146. SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND
OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING) (EITF-94-3). SFAS No. 146 requires the recognition of a
liability for costs associated with exit or disposal activities when
the liability is actually incurred. Under
19
EITF 94-3, such costs were generally recognized in the period in which
an entity committed to an exit plan or plan of disposal. While both
standards covered costs associated with one-time termination benefits
(e.g. severance pay or stay-bonus arrangements), SFAS No. 146 provides
standards that provide for the timing of recognition of these types of
benefits. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002.
Management's plans with respect to the continuation of Calton as a
going concern are described in Note 2. While there is currently no
specific plans to exit activities as part of these plans, any such
activity would require the application of SFAS No. 146.
SFAS NO. 145 RESCISSION OF SFAS NO. 4, 44 AND 64, AMENDMENT OF SFAS
NO. 13 AND TECHNICAL CORRECTIONS (SFAS 145):
During April 2002, the FASB issued SFAS No. 145. SFAS No. 145 rescinds
SFAS No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENTS OF DEBT
(SFAS No. 4), which required all gains and losses from extinguishments
of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of
the rescission of SFAS No. 4, the classification of gain and losses
arising from debt extinguishments requires consideration of the
criteria for extraordinary accounting treatment provided in APB No.
30, Reporting the Results of Operations. In the absence of SFAS No. 4,
debt extinguishments that are not unusual in nature and infrequent in
occurrence would be treated as a component of net income or loss from
continuing operations. SFAS No. 145 is effective for financial
statements issued for fiscal years beginning after May 15, 2002. SFAS
145 is not expected to have a material impact on the Company's
financial statements.
SFAS NO. 144: ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED
ASSETS (SFAS 144):
The Company early adopted (SFAS 144) during the first quarter of its
fiscal year ended November 30, 2002. Statement 144 superseded
Financial Accounting Standard No. 121 ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS
121). While SFAS 144 retained the fundamental provisions of Statement
121 as it relates to assessing and measuring the carrying values of
long-lived assets to be held and used (e.g. property, equipment,
goodwill, and intangibles), it significantly changed the approach to
income statement recognition of discontinued operations. SFAS 144
introduced a "component" approach to determining whether a disposal
should be reported as a discontinued operation. A component is
generally defined as a group of assets that has discrete and
discernable operations (such as a subsidiary or division). Prior
accounting standards provided for discontinued operations in the event
of sale or disposal of a complete operating segment. As a result of
the adoption of SFAS 144, the Company has treated the sale of its
interest in Innovation Growth Partners as a discontinued operation for
financial reporting purposes.
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 1.41%. 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, 2002, the Company is
reporting no readily marketable securities.
20
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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
21
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 I - 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.
ITEM 14. CONTROLS AND PROCEDURES
As required by Rule 13d-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the filing date of this report, the
Company carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures.
This evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's
Chairman and Chief Executive Officer along with the Company's Chief
Financial Officer, who concluded that the Company's disclosure
controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors, which
could significantly affect internal controls subsequent to the date
the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed
in the Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designated to ensure that information required
to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's
Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) 1. and 2. Financial statements and financial statement schedules F-1
Reference is made to the Index of Financial Statements
and Financial Statements Schedules hereinafter contained
3. Exhibits E-1
Reference is made to the Index of Exhibits hereinafter contained
(b) Reports on Form 8-K
On December 5, 2002, the Company filed a Report on
Form 8-K to report a strategic shift in the business
strategy of PrivilegeONE.
On October 31, 2002, the Company filed a Report on
Form 8-K to announce the appointment of John G. Yates to
the Board of Directors.
23
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 undersigned, thereunto duly authorized.
CALTON, INC.
(Registrant)
Dated: March 15, 2003 By: /s/ Thomas C. Corley
------------------------------------------
Thomas C. Corley, Senior Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Anthony J. Caldarone Chairman and Chief Executive March 15, 2003
- ------------------------------------- Officer (Principal Executive Officer)
Anthony J. Caldarone
/s/ Thomas C. Corley Senior Vice President, Chief Financial March 15, 2003
- ------------------------------------- Officer & Treasurer (Principal Financial
Thomas C. Corley & Accounting Officer)
/s/ Anthony J. Caldarone Director March 15, 2003
- -------------------------------------
Anthony J. Caldarone
/s/ J. Ernest Brophy Director March 15, 2003
- -------------------------------------
J. Ernest Brophy
/s/ Mark N. Fessel Director March 15, 2003
- -------------------------------------
Mark N. Fessel
/s/ Kenneth D. Hill Director March 15, 2003
- -------------------------------------
Kenneth D. Hill
/s/ Robert E. Naughton Director March 15, 2003
- -------------------------------------
Robert E. Naughton
/s/ Frank Cavell Smith, Jr. Director March 15, 2003
- -------------------------------------
Frank Cavell Smith, Jr.
/s/ John G. Yates Director March 15, 2003
- -------------------------------------
John G. Yates
24
CERTIFICATION
I, Anthony J. Caldarone, certify that:
1. I have reviewed this annual report on Form 10-K for the fiscal year ended
November 30, 2002 of Calton, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 15, 2003
------------------------------------
Anthony J. Caldarone
Chairman and Chief Executive Officer
25
CERTIFICATION
I, Thomas C. Corley, certify that:
1. I have reviewed this annual report on Form 10-K for the annual period ended
November 30, 2002 of Calton, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 15, 2003
-------------------------------------
Thomas C. Corley
Senior Vice President,
Chief Financial Officer and Treasurer
26
CALTON, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of November 30, 2002 and 2001 (restated) F-3
Consolidated Statements of Operations for the Years Ended November 30, 2002, 2001 (restated) F-4
and 2000 (restated)
Consolidated Statements of Cash Flows for the Years Ended November 30, 2002, 2001 (restated) F-5
and 2000 (restated)
Consolidated Statements of Shareholders' Equity for the Years Ended November 30, 2002, 2001 F-6
(restated) and 2000 (restated)
Notes to Consolidated Financial Statements F-7
Schedule:
II - Valuation and Qualifying Accounts
-------------------------------
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 sheets of Calton, Inc. and
Subsidiaries ("Calton") as of November 30, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended November 30, 2002. Our audits 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 audits.
We conducted our audits 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 audits provide 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, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended November 30, 2002, in conformity with accounting principles
generally accepted in the United States of America. 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.
The accompanying financial statements have been prepared assuming that Calton
will continue as a going concern. As more fully described in Note 2, the Company
has incurred recurring operating losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans with respect to these conditions are also
discussed in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
As more fully discussed in Note 10, the consolidated financial statements for
2001 and 2000 have been restated to reflect Innovation Growth Partners as a
discontinued operation.
/s/ AIDMAN, PISER & COMPANY, P.A.
Tampa, Florida
March 10, 2003
F-2
CALTON, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2002 AND 2001
November 30, November 30,
2002 2001
--------------- ---------------
ASSETS (RESTATED)
Current Assets
Cash and cash equivalents $ 3,286,000 $ 4,715,000
Available for sale securities
Holdback receivable 88,000 86,000
Accounts receivable, net of allowance for doubtful accounts of
$31,000 and $404,000 at November 30, 2002 and 2001, respectively 281,000 479,000
Prepaid expenses and other current assets 143,000 173,000
--------------- ---------------
Total current assets 3,798,000 5,453,000
--------------- ---------------
Non-current portion of holdback receivable
Notes receivable
Goodwill
Investments - 750,000
Property and equipment, net 107,000 355,000
Assets of discontinued subsidiary - 3,255,000
Other assets - -
--------------- ---------------
Total assets $ 3,905,000 $ 9,813,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued expenses and other liabilities $ 1,118,000 $ 1,423,000
Deferred taxes 487,000 487,000
--------------- ---------------
Total current liabilities 1,605,000 1,910,000
--------------- ---------------
Commitments and contingencies (Note 10) - -
Liabilities of discontinued component - 686,000
--------------- ---------------
Total liabilities 1,605,000 2,596,000
--------------- ---------------
Shareholders' Equity
Common stock, $.05 par value, 10,740,000 shares authorized;
4,644,000 and 4,417,000 shares outstanding at November 30, 2002
and November 30, 2001, respectively 232,000 221,000
Additional paid-in capital 12,138,000 13,134,000
Retained earnings (deficit) (968,000) 4,016,000
Unrealized loss on available for sale securities
Less cost of shares held in treasury, 1,607,000 and 1,782,000 shares
as of November 30, 2002 and November 30, 2001, respectively (9,102,000) (10,154,000)
--------------- ---------------
Total shareholders' equity 2,300,000 7,217,000
--------------- ---------------
Total liabilities and shareholders' equity $ 3,905,000 $ 9,813,000
=============== ===============
See notes to consolidated financial statements.
F-3
CALTON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
-------------- -------------- --------------
(RESTATED) (RESTATED)
REVENUE
Technical staffing services $ 1,274,000 $ 2,760,000 $ 926,000
Consulting services 108,000 1,300,000 1,300,000
Website design and implementation 538,000 1,148,000 1,109,000
Credit card loyalty program revenue 34,000 - -
-------------- -------------- --------------
1,954,000 5,208,000 3,335,000
-------------- -------------- --------------
COSTS AND EXPENSES
Project personnel and expenses 1,238,000 2,420,000 1,514,000
Credit card loyalty program direct expenses 12,000 - -
Selling, general and administrative 4,312,000 8,238,000 7,162,000
Impairment of long lived assets 116,000 478,000 324,000
-------------- -------------- --------------
5,678,000 11,136,000 9,000,000
-------------- -------------- --------------
Loss from operations (3,724,000) (5,928,000) (5,665,000)
OTHER (EXPENSE) INCOME
Interest income 124,000 1,082,000 2,117,000
Gain on the sale of subsidiary stock - 96,000 -
Loss on investments (750,000) - (1,708,000)
Gains on recoveries on investments 350,000 - -
Litigation settlements 458,000 - -
Other income 119,000 - -
-------------- -------------- --------------
Loss from continuing operations before income taxes,
minority interest and discontinued operations (3,423,000) (4,750,000) (5,256,000)
INCOME TAX BENEFIT - 517,000 447,000
-------------- -------------- --------------
Loss from continuing operations (3,423,000) (4,233,000) (4,809,000)
-------------- -------------- --------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued subsidiary, net of income
tax benefits of $98,000 and $48,000 in 2001 and 2000 (1,020,000) (806,000) (517,000)
Loss from disposals of discontinued subsidiaries, net of income
tax benefits of $84,000 in 2000 (541,000) - (570,000)
-------------- -------------- --------------
Loss from discontinued operations (1,561,000) (806,000) (1,087,000)
-------------- -------------- --------------
NET LOSS $ (4,984,000) $ (5,039,000) $ (5,896,000)
============== ============== ==============
LOSS PER SHARE:
Basic and Diluted:
Loss from continuing operations $ (0.76) $ (0.98) $ (1.13)
Loss from discontinued operations (0.35) (0.19) (0.25)
-------------- -------------- --------------
Net loss per common share $ (1.11) $ (1.17) $ (1.38)
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 4,509,000 4,292,000 4,276,000
============== ============== ==============
Diluted 4,509,000 4,292,000 4,276,000
============== ============== ==============
See notes to consolidated financial statements.
F-4
CALTON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
--------------- ---------------- ---------------
(RESTATED) (RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,984,000) $ (5,039,000) $ (5,896,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment of investments 750,000 - 1,708,000
Losses from disposals of discontinued component 541,000 - 654,000
Impairments of long lived assets 116,000 478,000 324,000
Provision for uncollectible receivables (72,000) 282,000 121,000
Depreciation and amortization 139,000 195,000 201,000
Stock-based compensation 19,000 367,000 35,000
Deferred income taxes - (615,000) 647,000
Changes in operating assets and liabilities:
Accounts receivable 269,000 (22,000) (533,000)
Prepaid expenses and other assets 30,000 39,000 (15,000)
Accounts payable, accrued expenses and other liabilities (305,000) 144,000 501,000
Refundable income taxes - 361,000 -
--------------- ---------------- ---------------
Net cash from operating activities (3,497,000) (3,810,000) (2,253,000)
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Assets and liabilities of discontinued subsidiaries 2,028,000 (1,016,000) (1,910,000)
Purchases of property and equipment (6,000) (461,000) (544,000)
Receipts from (payments to) holdback escrow account (2,000) 1,203,000 2,104,000
Purchases of investments - (618,000) (967,000)
Acquisition of business - - (138,000)
Proceeds from the sale of investments - - 1,366,000
--------------- ---------------- ---------------
Net cash from investing activities 2,020,000 (892,000) (89,000)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (12,000) (415,000) (1,051,000)
Cash dividend - (22,375,000) -
Proceeds from the sale of treasury stock and
exercise of stock options 60,000 1,665,000 149,000
--------------- ---------------- ---------------
Net cash from financing activities 48,000 (21,125,000) (902,000)
--------------- ---------------- ---------------
Net (decrease) in cash and cash equivalents (1,429,000) (25,827,000) (3,244,000)
Cash and cash equivalents at beginning of period 4,715,000 30,542,000 33,786,000
--------------- ---------------- ---------------
Cash and cash equivalents at end of period $ 3,286,000 $ 4,715,000 $ 30,542,000
=============== ================ ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ - $ - $ 2,000
=============== ================ ===============
Cash paid for income taxes $ - $ 19,000 $ 35,000
=============== ================ ===============
Non-cash investing and financing activities:
Issuance of stock options in business acquisition $ - $ 127,000 $ -
=============== ================ ===============
See notes to consolidated financial statements.
F-5
CALTON, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
Accumulated
Common Stock Additional Retained Other Total
----------------- Paid In Earnings Treasury Compre- Shareholders' Comprehensive
Shares Amount Capital (Deficit) Stock hensive Loss Equity Income (Loss)
------ ------ ------------ --------- ---------- ------------ ------------- -------------
Balances,
Balances December 1, 1999 4,295 $ 215 $ 32,704 $14,951 $ (8,698) $(518) $ 38,654
Net Loss - - - (5,896) - - (5,896) $ (5,896)
Exercise of stock options 73 4 145 - - - 149 -
Stock options granted - - 35 - - - 35 -
Recapitalization and retirement (1) - (10) - - - (10) -
Income tax refund - - 478 - - - 478 -
Purchases of treasury stock (235) (12) 12 - (1,041) - (1,041) -
Unrealized losses on 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)
Exercise of stock options 451 22 1,643 - - - 1,665 -
Cash dividend - - (22,375) - - - (22,375) -
Stock options granted-acquisition - - 127 - - - 127 -
Stock options granted-employees - - 367 - - - 367 -
Purchases of treasury stock (166) (8) 8 - (415) - (415) -
------- ------- ---------- --------- ---------- ------- ---------- -----------
Balances November 30, 2001 4,417 $ 221 $ 13,134 $ 4,016 $ (10,154) $ - $ 7,217 $ (5,039)
===========
Net Loss - - - (4,984) - - (4,984) $ (4,984)
Stock issued to Directors 52 3 16 - - - 19 -
Purchases of treasury stock (19) (1) 1 - (12) - (12) -
Stock issued to employee stock -
ownership plan 194 9 (1,013) - 1,064 - 60 -
------- ------- ---------- --------- ---------- ------- ---------- -----------
Balances November 30, 2002 4,644 $ 232 $ 12,138 $ (968) $ (9,102) $ - $ 2,300 $ (4,984)
======= ======= ========== ========= ========== ======= ========== ===========
See notes to consolidated financial statements.
F-6
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
1. NATURE OF BUSINESS 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") and (ii)
the development of a loyalty and co-branded credit card program through
PrivilegeONE Networks, LLC, ("PrivilegeONE"),
In April 2002, Calton, Inc. disposed of its 51% ownership interest in
Innovation Growth Partners ("IGP"), a management consulting company (see
Note 6). The consolidated financial statements and related notes for all
periods prior to the disposal have been restated, where applicable, to
reflect the disposal of IGP as a discontinued operation. As also discussed
in Note 6 the Company discontinued its Calton Homes operation during its
fiscal year ended November 30, 1999, with respect to which $570,000 of loss
was recorded in 2000.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Calton, Inc.
and its majority-owned and wholly owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
REVENUE RECOGNITION
Revenues from technical staffing services are derived from service
contracts with principally commercial business customers. Technical
staffing revenues are recognized when earned, which is when the staffing
services are rendered, and considered by management to be collectible.
Revenues from website design and implementation are derived under
short-term time-and-material and, to a lesser extent, fixed price contracts
with principally commercial business customers. Website design and
implementation revenues under time-and-material contracts are recognized
upon acceptance by the customer of the website. Website design and
implementation revenues under fixed-price contracts are recognized as the
contract progresses, using the cost-to-cost method to determine percentage
of completion. There were no material incomplete fixed price website design
and implementation contracts as of November 30, 2002 and 2001. Revenues
from consulting services were derived solely from the purchaser of Calton
Homes under a contract that expired on December 31, 2001. Consulting
services revenues were recognized as the services were rendered. The
Company's services contain no material warranty or return privileges.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of demand deposits and highly liquid money market
funds. 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.
F-7
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Realized gains and losses, and declines in value
judged to be other than temporary, are included in the caption "Loss on
Investments" (see Note 3). 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.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. 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.
IMPAIRMENTS OF LONG-LIVED ASSETS
The Company performs an assessment of the carrying values of fixed assets
and other long-lived assets to be held and used when indications that the
carrying value of such assets may not be recoverable are present. 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 year
ended November 30, 2002, the Company recognized impairment charges
amounting to $116,000 related to property and equipment associated with the
Company's Internet and Staffing segment. Such impairment arose when the
segment failed to meet its revenue projections and management determined
that the market conditions were not supportive of the segment's ongoing
revenue projections.
During 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 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-8
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, investments, account payable, accrued expenses and
other liabilities. At November 30, 2002 and 2001, the fair value of these
instruments approximated their carrying value.
ADVERTISING EXPENSE
The costs of advertising are expensed as incurred. Included in selling,
general and administrative expenses are advertising costs of approximately
$61,000, $200,000 and $86,000 for the years ended November 30, 2002, 2001
and 2000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
LOSS PER SHARE COMPUTATIONS
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period.
Diluted loss per share is computed by dividing the net 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 731,000, 692,000 and 979,000 stock options and warrants
outstanding at November 30, 2002, 2001 and 2000, respectively, were not
included in the calculation of diluted loss per share for each of those
years, as they were anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic method in accordance with Accounting Principles Board No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
Accordingly, in cases where exercise prices for stock option grants equal
or exceed the trading market value of the stock at the date of grant, the
Company recognizes no compensation expense. In cases where exercise prices
are less than the fair value of the stock at the date of grant,
compensation is recognized over the period of performance or the vesting
period. The Company accounts for non-employee stock-based compensation
using the fair value approach for stock options and warrants, in accordance
with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ARRANGEMENTS.
F-9
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The following table reflects supplemental financial information related to
stock-based employee compensation, as required by SFAS 148 (See Recent
Accounting Pronouncements," below.):
Year ended November 30: 2002 2001 2000
------------------- ------------------- ------------------
Net loss, as reported $ (4,984,000) $ (5,039,000) $ (5,896,000)
=================== =================== ==================
Loss per share, as reported $ (1.11) $ (1.17) $ (1.38)
=================== =================== ==================
Stock-based employee compensation costs used in the
determination of net loss, as reported $ (0.00) $ (367,000) $ (0.00)
=================== =================== ==================
Stock-based employee compensation costs that would have been
included in the determination of net loss if the fair value
method (Statement 123) had been applied to all awards $ (4,000) $ (41,000) $ (40,000)
=================== =================== ==================
Unaudited pro forma net loss, as if the fair value method
had been applied to all awards $ (4,988,000) $ (5,080,000) $ (5,936,000)
=================== =================== ==================
Unaudited pro forma loss per share, as if the fair value
method had been applied to all awards $ (1.11) $ (1.18) $ (1.39)
=================== =================== ==================
Stock based compensation costs that would have been included in the
determination of net loss if the fair value method is had been applied is
calculated using the Black-Scholes option-pricing model, with the following
assumptions: dividend yield - none, volatility of .8, risk-free interest
rate of 2.64% in 2002, 4.88% in 2001 and 6.54% in 2000, assumed forfeiture
rate as they occur, and an expected life of 7.9, 6.0 and 5.8 years at
November 30, 2002, 2001 and 2000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND
DISCLOSURE (SFAS No. 148):
During December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148. SFAS No. 148 establishes standards for two alternative
methods of transition to the fair value method of accounting for
stock-based employee compensation under SFAS No. 123. SFAS No. 148 also
amends and augments the disclosure provisions of SFAS No. 123 and APB No.
28, INTERIM FINANCIAL REPORTING to require disclosure in the summary of
significant accounting policies for all companies the effects of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements. The transition standards and disclosure
requirements of SFAS No. 148 are effective for fiscal years and interim
periods ending after December 15, 2002.
SFAS No. 148 does not require Calton to transition from the intrinsic
approach provided in APB No. 25. In addition, Calton does not currently
plan to transition to the fair value approach in SFAS No. 123. However,
Calton has adopted the additional disclosure requirements of SFAS No. 148
in this annual report.
FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(Interpretation 45:)
F-10
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
During November 2002, the FASB issued Interpretation 45. Under
Interpretation 45 guarantees, contracts and indemnification agreements are
required to be initially recorded at fair value. Current practice provides
for the recognition of a liability only when a loss is probable and
reasonably estimable, as those terms are defined under SFAS No. 5,
ACCOUNTING FOR CONTINGENCIES. In addition, Interpretation 45 requires
significant new disclosures for all guarantees even if the likelihood of
the guarantor's having to make payments under the guarantee is remote. The
disclosure requirements are effective for financial statements of interim
and annual periods ending after December 15, 2002. The initial recognition
and measurement provisions of Interpretation 45 are applicable on a
prospective basis to guarantees, contracts or indemnification agreements
issued or modified after December 31, 2002.
Calton is currently reviewing guarantees, contracts and indemnification
agreements that may require fair value treatment under the new standard.
However, the effect on its future financial statements is not currently
determinable.
SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES (SFAS No. 146):
During July 2002, the FASB issued SFAS No. 146. SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER
COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING) (EITF-94-3). SFAS No. 146 requires the recognition of a
liability for costs associated with exit or disposal activities when the
liability is actually incurred. Under EITF 94-3, such costs were generally
recognized in the period in which an entity committed to an exit plan or
plan of disposal. While both standards covered costs associated with
one-time termination benefits (e.g. severance pay or stay-bonus
arrangements), SFAS No. 146 provides standards that provide for the timing
of recognition of these types of benefits. SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002.
Management's plans with respect to the continuation of Calton as a going
concern are described in Note 2. While there is currently no specific plans
to exit activities as part of these plans, any such activity would require
the application of SFAS No. 146.
SFAS No. 145 RESCISSION OF SFAS NO. 4, 44 AND 64, AMENDMENT OF SFAS NO. 13
AND TECHNICAL CORRECTIONS (SFAS 145):
During April 2002, the FASB issued SFAS No. 145. SFAS No. 145 rescinds SFAS
No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENTS OF DEBT (SFAS No.
4), which required all gains and losses from extinguishments of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result of the rescission of SFAS No. 4, the
classification of gain and losses arising from debt extinguishments
requires consideration of the criteria for extraordinary accounting
treatment provided in APB No. 30, Reporting the Results of Operations. In
the absence of SFAS No. 4, debt extinguishments that are not unusual in
nature and infrequent in occurrence would be treated as a component of net
income or loss from continuing operations. SFAS No. 145 is effective for
financial statements issued for fiscal years beginning after May 15, 2002.
SFAS 145 is not expected to have a material impact on the Company's
financial statements.
F-11
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
2. LIQUIDITY AND MANAGEMENT'S PLANS
The accompanying financial statements are prepared on a going concern
basis, which assumes that Calton will realize its assets and discharge its
liabilities in the normal course of business. As reflected in the
accompanying financial statements, Calton has incurred losses from
continuing operations of $(3,423,000), $(4,233,000) and $(4,809,000) and
has used cash in continuing operations of $(3,497,000), $(3,810,000) and
$(2,243,000) during the fiscal years ended November 30, 2002, 2001 and
2000, respectively. As of November 30, 2002, the Company has working
capital of $2,193,000, which is not sufficient to fund the current
operating plan during the fiscal year ending on November 30, 2003. These
conditions raise substantial doubt as to the ability of Calton to continue
its normal business operations as a going concern.
Management's plans to sustain Calton operations include accelerating and
augmenting revenue opportunities, principally in the Credit Card Loyalty
Business Segment, curtailing operating expenses to the extent appropriate
and raise additional debt or equity capital from external sources. During
2002, Calton sold its non-performing interest in Innovation Growth Partners
which contributed to the Company's net loss in the amounts of $(1,020,000),
$(806,000) and $(517,000) during the fiscal years ended November 30, 2002,
2001 and 2000, respectively. In addition, the Internet development group of
eCalton and PrivilegeONE consolidated office space to best cross train and
to leverage employee skill sets. While management is actively addressing
multiple sources of capital, there are currently no commitments, and there
can be no assurances that sufficient capital can be raised under terms
acceptable to management. In addition, the Credit Card Loyalty Business
Segment is in an early stage of development. Having established
technological and market feasibility, management is currently accessing
marketing channels and developing strategic partners to support the
business. Access to and maintenance of credit card services, such as those
provided in the Fleet agreement, is essential to conduct the Credit Card
Loyalty Business Segment. Failure to maintain such agreements would have a
material adverse affect on the Credit Card Loyalty Business Segment and,
possibly the Company. The financial statements do not include any
adjustments that may arise as a result of this uncertainty.
3. INVESTMENTS
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 1,059,660 shares of AIM Common Stock
at an exercise price of $2.12 per share. The AIM Note provided that the
note was mandatorily convertible into 1,000,000 shares of AIM Common Stock
no later than five days after the Company was given notice that the
Securities and Exchange Commission had declared a proposed registration of
these shares effective. AIM defaulted on its agreement to register the
shares. Management performed an assessment of the AIM Note during the first
fiscal quarter of 2002 and, based upon a review of AIM's operating results,
which were materially different than projections provided to management by
AIM, management believed that the note was not fully recoverable. As a
result, the investment was written off during the first fiscal quarter of
2002. Subsequent to the impairment, AIM repaid $150,000 of the principal
amount due under the note. In July 2002, the Company entered into a
Forbearance Agreement ("the Agreement") with Bodark T. Corporation
("Bodark"), the successor of AIM. Pursuant to the Agreement, the Company
agreed to forbear from exercising remedies provided that Bodark repaid the
remaining principal balance of $600,000 outstanding under the AIM Note in
equal installments on August 31, 2002, October 31, 2002 and November 30,
2002. In addition, the Company was issued 1,000,000 shares of Bodark common
stock and warrants to acquire 1,059,660 shares of Bodark common stock at an
exercise price of $2.12 per share. The warrant originally issued by AIM was
cancelled. In September 2002, Bodark remitted the August 31, 2002 payment
of $200,000. Both this payment and the $150,000 received from AIM
subsequent to the impairment was recorded as other income in the
accompanying 2002 statement of operations, and the Company will record any
subsequent payments upon the date of receipt. Bodark has not paid any of
the remaining installments. Management continues to believe the note is not
fully recoverable due to economic conditions affecting Bodark's ability to
make good on its obligation on the AIM Note.
F-12
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
3. INVESTMENTS (CONTINUED)
At November 30, 2002 and 2001 the Company also held 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 investments.
In addition to the CorVu loss described above, the fiscal 2000 loss on
investments 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 investments
resulted from the write off of non-readily marketable securities.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of November 30, 2002
and 2001:
November 30, November 30,
2002 2001
-------------- --------------
(RESTATED)
Computer equipment and furniture $ 176,000 $ 577,000
Leasehold improvements 65,000 155,000
Other 1,000 -
-------------- --------------
242,000 732,000
Less: Accumulated Depreciation (135,000) (377,000)
-------------- --------------
$ 107,000 $ 355,000
============== ==============
5. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABIILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following as of November 30, 2002 and 2001:
November 30, November 30,
2002 2001
-------------- --------------
(RESTATED)
Accounts payable, trade $ 121,000 $ 152,000
Accrued expenses 287,000 585,000
Accrued contingency reserves (Note 10) 710,000 686,000
-------------- --------------
$ 1,118,000 $ 1,423,000
============== ==============
F-13
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
6. BUSINESS ACQUISITION AND DIVESTITURE ACTIVITIES
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. 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 bore interest at the
rate of 10% per annum and was to become 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.
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 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 were consolidated along with those of the
Company, with the executive management's interest shown as minority
interest. Certain owners of IGP were issued warrants to acquire an
aggregate 11.1% interest in IGP at a value to be determined by appraisal if
certain events occurred, 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 ceased to be Chairman of the Company. The
original purchase agreement provided that IGP management would 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 surpassed certain specified
earnings targets. Such earnings levels were not achieved.
F-14
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
6. BUSINESS ACQUISITION AND DIVESTITURE ACTIVITIES (CONTINUED)
On April 23, 2002, the Company disposed of its 51% interest in IGP by
delivering its ownership interests to the IGP management in exchange for
$1,030,000 of IGP's cash reserves and warrants to acquire 25,000 shares of
Miresco Investment Services, Inc., a privately held company which designs,
imports and sells high quality area rugs throughout the United States. The
transaction resulted in a loss of $541,000, which was recorded in the
quarter ended May 31, 2002. IGP was originally 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 the businesses with which they consult.
However, from its inception, IGP did not generate significant revenues or
profits and required significant cash infusion. The consolidated financial
statements and related notes for all periods prior to the disposal have
been restated, where applicable, to reflect the disposal of IGP as a
discontinued operation as provided in SFAS No. 144 ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which was early adopted in the
first fiscal quarter of the Company's year ended November 30, 2002.
Results of operations from Innovation Growth Partners are as follows:
2002 2001 2000
--------------------------------------------
Revenues of discontinued subsidiary $ - $ 91,000 $ 199,000
============================================
Net loss from discontinued subsidiary, net of
income tax benefits of $98,000 and $48,000
during 2001 and 2000, respectively $ (1,020,000) $ (806,000) $ (517,000)
============================================
CALTON HOMES 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. In fiscal 2000, the Company recorded
an additional provision for certain costs associated with the sale in the
amount of $654,000, which reduced the previously recognized gain on sale to
$6,937,000.
The pro forma effects of the Company's acquisition activities were not
material to the financial results for the periods presented.
7. 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.
F-15
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
7. SHAREHOLDERS' EQUITY ACTIVITY (CONTINUED)
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, 2002,
2001, and 2000, the Company purchased 19,000, 167,000 and 235,000 shares of
common stock for $12,000, $415,000 and $1,051,000, respectively.
STOCK COMPENSATION PROGRAMS AND TRANSACTIONS
As of November 30, 2002 there were 271,000 options exercisable under all
plans in the aggregate with a weighted average exercise price of $5.53.
Stock option activity is summarized as follows (shares in thousands):
2002 2001 2000
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-----------------------------------------------------------------------------------
Outstanding
Beginning of year 292 $ 5.89 459 $ 6.04 372 $ 3.44
Granted at market price 467 0.45 359 3.31 167 10.29
Exercised -- -- (451) 3.32 (72) 2.00
Expired or cancelled (28) l0.79 (75) 3.75 (8) 10.85
-----------------------------------------------------------------------------------
Outstanding -
End of year 731 $ 3.24 292 $ 5.89 459 $ 6.04
===================================================================================
Exercisable as of
November 30 271 $ 5.53 100 $ 6.91 346 $ 4.79
===================================================================================
The weighted average exercise price of the options granted during fiscal
years ended 2002, 2001 and 2000 is $0.45, $3.31 and $10.29, respectively.
The range of exercise prices for exercisable options and the weighted
average remaining lives are reflected in the following table.
F-16
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
7. SHAREHOLDERS' EQUITY ACTIVITY (CONTINUED)
STOCK COMPENSATION PROGRAMS AND TRANSACTIONS (CONTINUED)
Options and Warrants Outstanding Exercisable
--------------------------------------------------------------------------- --------------------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
----------------- -------------- ------------------ ------------------ ------------ ------------------
$ 0.01 - 1.00 509,000 8.95 yrs. $ 0.50 10,000 $ 0.83
1.01 - 5.00 50,200 3.50 yrs. 4.12 106,840 3.59
5.01 - 6.00 4,000 1.50 yrs. 5.45 10,000 5.45
6.01 - 7.00 120,000 6.25 yrs. 6.10 120,000 6.10
7.01 - 9.00 8,000 2.50 yrs 8.75 8,000 8.75
13.01 - 14.00 40,000 7.25 yrs. 13.90 16,000 13.90
-------------- ------------------ ------------------ ------------ ------------------
$ 0.01 - 14.00 731,200 7.93 yrs. $ 3.24 270,840 $ 5.53
============== ================== ================== ============ ==================
During 2002, the Company sold 194,000 shares of treasury stock to employees
participating in the Employee Stock Purchase plan for $60,000. Treasury
stock was relieved using the weighted average purchase price of all shares
in treasury, and the difference was recorded as a reduction of paid-in
capital.
During 2001, an officer resigned, but remained as a Board member and agreed
to act as a consultant to the Company. As a result, the Board vested 80,000
previously granted options in return for his consulting services, which
resulted in a charge of $367,000.
As more fully discussed in Note 6, 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. The options were fair
valued at $127,000 using the Black-Scholes pricing model.
As of November 30, 2002, there were 4,000 shares of common stock reserved
for possible future issuances under the Company's stock option plans.
PREFERRED STOCK RIGHTS AGREEMENTS
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
F-17
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
7. SHAREHOLDERS' EQUITY ACTIVITY (CONTINUED)
PREFERRED STOCK RIGHTS AGREEMENTS (CONTINUED)
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.
8. INCOME TAXES
The income tax (expense) benefit consisted of the following for the years
ended November 30, 2002, 2001, and 2000:
2002 2001 2000
-------------------------------------------
Federal income taxes:
Current $ - $ (98,000) $ 557,000
Deferred - 615,000 (84,000)
Provision in lieu of taxes - - -
State income taxes:
Current - - (26,000)
Provision in lieu of taxes - - -
-------------------------------------------
Total federal and state income taxes - 517,000 447,000
Discontinued operations - 98,000 132,000
-------------------------------------------
$ - $ 615,000 $ 579,000
===========================================
The federal net operating loss carryforward for tax purposes is
approximately $24,732,000 at November 30, 2002. 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 $1,000,000 per year under Section 382 of the
Internal Revenue Code as a result of the change in control of the Company
in November 1995. These federal carryforwards will expire between 2007 and
2022.
F-18
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
8. INCOME TAXES (CONTINUED)
The following schedule reconciles the income tax (expense) benefit at the
federal statutory rate (35%) to the effective rate:
2002 2001 2000
----------------------------------------------
(Provision) benefit using statutory rate $ 1,743,000 $ 1,967,000 $ 2,266,000
Change in valuation allowance (1,743,000) (1,352,000) (1,851,000)
Other - - 164,000
----------------------------------------------
$ - $ 615,000 $ 579,000
==============================================
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities as of November 30, 2002 and 2001 are as follows:
Deferred Tax Assets (Liabilities)
------------------------------------
2002 2001
------------------------------------
Net operating losses $ 10,751,000 $ 9,910,000
Asset impairment charges 321,000 281,000
Accrued obligations arising from Calton Homes sale 261,000 252,000
Capital loss carryforwards 189,000 -
Investment impairment charges 140,000 -
Bad debt and other allowances 11,000 234,000
Other 47,000 76,000
------------------------------------
Deferred tax assets 11,720,000 10,753,000
Deferred tax liabilities (487,000) (487,000)
Less: Valuation allowances (11,720,000) (10,753,000)
------------------------------------
Net deferred taxes $ (487,000) $ (487,000)
====================================
F-19
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
9. 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. During the operating periods presented in the
accompanying financial statements, the Company operated in three business
segments, as follows.
INTERNET DEVELOPMENT AND STAFFING
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.
CORPORATE AND CONSULTING
Revenues from consulting services were derived solely from the purchaser of
Calton Homes under a contract that expired on December 31, 2001. The
Company recognized revenues in the Corporate and Consulting Services
division from the purchaser in the amount of $108,000, $1,300,000 and
$1,300,000 for the years ended November 30, 2002, 2001 and 2000,
respectively. No further revenues from this contract are expected.
CREDIT CARD LOYALTY BUSINESS
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.
F-20
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
Operating results, by segment, for the years ended November 30, 2002, 2001
and 2000 are as follows (in thousands):
Fiscal year ended November 30, 2002
------------------------------------------------------------------
eCalton P1 Corp/IGP
Internet Credit Card Corporate and
Development Loyalty Consulting Total
and Staffing Business Services Company
------------------------------------------------------------------
Segment revenues $ 1,812 $ 34 $ 108 $ 1,954
Cost of revenues 1,238 12 - 1,250
Depreciation and amortization 86 - 53 139
Interest income - - 124 124
Loss from operations (881) (1,346) (1,196) (3,423)
Net loss (881) (1,346) (2,757) (4,984)
Total assets $ 321 $ 22 $ 3,562 $ 3,905
Fiscal year ended November 30, 2001 - Restated
------------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
and Staffing Business Services Company
------------------------------------------------------------------
Segment revenues $ 3,908 $ - $ 1,300 $ 5,208
Cost of revenues 2,420 - - 2,420
Depreciation and amortization 132 5 58 195
Interest income - - 1,082 1,082
Loss from operations (1,399) (3,012) (339) (4,750)
Income tax benefit - - (517) (517)
Net loss (1,399) (3,012) (628) (5,039)
Total assets $ 562 $ 18 $ 9,233 $ 9,813
Fiscal year ended November 30, 2000 - Restated
------------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
and Staffing Business Services Company
------------------------------------------------------------------
Segment revenues $ 2,035 $ - $ 1,300 $ 3,335
Cost of revenues 1,514 - - 1,514
Depreciation and amortization 109 26 66 201
Interest income - - 2,117 2,117
Loss from operations (2,910) (1,709) (637) (5,256)
Income tax benefit - - (447) (447)
Net loss (2,911) (1,859) (1,126) (5,896)
Total assets $ 1,172 $ 39 $ 33,889 $ 35,100
F-21
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
10. COMMITMENTS AND CONTINGENT LIABILITIES
CALTON HOMES
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 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 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, 2002 and 2001, $88,000 and
$86,000, respectively, remained in the escrow account. In January 2003, one
claim was settled reducing the escrow balance to approximately $35,000. The
Company's indemnification obligations are not limited to the amount in
escrow. In July 2002, the purchaser served a Demand for Arbitration on the
Company and is currently alleging damages of $1,600,000 related to alleged
construction defects in homes delivered by Calton Homes prior to its sale.
The arbitration is expected by management to be completed during 2003. The
Company intends to assert certain counterclaims against the purchaser and
seek recoveries from insurers and subcontractors. Management is in the
process of reviewing the additional claims of the purchaser and currently
believes that its reserves are adequate for this matter.
The Company provided a basic limited warranty, including parts and labor,
for all Calton Homes products. The Company estimated the costs that might
be incurred under its basic limited warranty and recorded a liability in
the amount of such costs at the time product revenue was recognized.
Factors that affect the Company's warranty liability include the number of
sold units, historical and anticipated rates of warranty claims, and
average cost per claim. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary. The
Company's warranty liability is included in Accounts Payable, Accrued
Expenses and other Liabilities in the accompanying balance sheet. See Note
5.
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 Calton Homes 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.
OTHER LITIGATION
On April 12, 2002, S. Raymond Tetreault and Thomas E. Van Fechtmann, each
of whom is a former officer and member of PrivilegeONE, filed an action in
the United States District Court for the State of Rhode Island against the
Company, PrivilegeONE and certain officers of the Company, alleging, among
other things, (i) breach of their employment agreements with PrivilegeONE
in connection with the termination of their employment; (ii) breach of
fiduciary duty, (iii) breach of contract as a result of the Company's
unwillingness to permit the early exercise of certain options to acquire
the Company's Common Stock prior to the record date for the dividend
declared by the Company's Board of Directors in May 2001; and (iv) common
law fraud, misrepresentation and violations of the Securities Act of 1933
in connection with the acquisition by the Company of their interest
in PrivilegeONE in May 2001, due to an alleged failure to disclose the
proposed dividend to the plaintiffs. The plaintiffs are seeking, among
other things, compensatory and punitive damages in an unspecified amount,
injunctive relief and the imposition of a constructive trust on 190,000
shares of the Company's Common Stock and its ownership interest
F-22
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
in PrivilegeONE. The Company's motion to have the case summarily
dismissed was denied in December 2002. At this time the Company has not
answered the complaint, asserted counterclaims nor confirmed insurance
coverage. However, it intends to vigorously defend the claims which it
believes are without merit.
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.
CREDIT CARD PROCESSING AGREEMENT
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 and administer the PrivilegeONE credit
cards. Under the agreement, Fleet is required to remit a fee for each
account established through the PrivilegeONE program, plus 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. The Company has
complied with the capitalization and contingency reserve requirements
outlined in the Agreement.
The Credit Card Loyalty Business Segment is in an early stage of
development. Having established technological and market feasibility,
management is currently accessing marketing channels and developing
strategic partners to support the business. Access to and maintenance
of credit card services, such as those provided in the Fleet agreement,
is essential to conduct the Credit Card Loyalty Business Segment.
Failure to maintain such agreements would have a material adverse
affect on the Credit Card Loyalty Business Segment and, possibly the
Company.
OPERATING LEASE 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:
2003 $ 97,000
2004 82,000
2005 68,000
-------------------
Total $ 247,000
===================
Rent expense for the years ended November 30, 2002, 2001 and 2000
amounted to $193,000, $268,000 and $206,000, respectively.
LITIGATION SETTLEMENTS
During the fiscal year ended November 30, 2002, the Company received
$458,000 in final and complete settlement of principally two litigation
matters, which closed the matters in their entirety.
F-23
CALTON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMER 30, 2002, 2001 AND 2000
11. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended November 30, 2002 and 2001
are as follows (amounts in thousands except per share items):
Three Months Ended
----------------------------------------------------------------------
Feb. 28, May 31, Aug. 31, Nov. 30,
2002 2002 2002 2002
--------------- ---------------- ---------------- ----------------
RESTATED
Revenue $ 629 $ 499 $ 441 $ 385
=============== ================ ================ ================
Gross profit $ 217 $ 159 $ 159 $ 169
=============== ================ ================ ================
Loss from continuing operations $ (1,706) $ (760) $ (759) $ (198)
=============== ================ ================ ================
Net loss $ (2,148) $ (1,857) $ (759) $ (220)
=============== ================ ================ ================
Basic and diluted loss per share:
Loss from continuing operations $ (0.38) $ (0.17) $ (0.17) $ (0.04)
Net loss $ (0.48) $ (0.42) $ (0.17) $ (0.04)
Three Months Ended
---------------------------------------------------------------------
Feb. 28, May 31, Aug. 31, Nov. 30,
2001 2001 2001 2001
--------------- ---------------- ---------------- ----------------
RESTATED
Revenue $ 1,486 $ 1,435 $ 1,268 $ 1,019
=============== ================ ================ ================
Gross Profit $ 880 $ 700 $ 654 $ 554
=============== ================ ================ ================
Loss from continuing operations $ (493) $ (981) $ (1,192) $ (1,567)
=============== ================ ================ ================
Net loss $ (870) $ (1,335) $ (1,463) $ (1,371)
=============== ================ ================ ================
Basic and diluted loss per share:
Loss from continuing operations $ (0.12) $ (0.24) $ (0.27) $ (0.35)
Net loss $ (0.21) $ (0.33) $ (0.33) $ (0.30)
As more fully discussed in Note 6, the Company has accounted for the
disposal of IGP during the second quarter of fiscal year ended November 30,
2002 as a discontinued operation. The quarterly financial information in
the table above for the quarter ended February 28, 2002 and 2001 differs
from the Company's quarterly filing for that period since it has been
restated to reflect Innovation Growth Partners as a discontinued operation.
The Company's investment in AIM (see Note 3) in the amount of $750,000 was
written off during the first quarter of 2002. Subsequent recoveries of
$150,000 and $200,000 were received and recorded in the second and third
quarters, respectively, of 2002. The Company received and recorded
litigation settlements (see Note 10) of $147,000 and $310,000 in the second
and third quarters, respectively, of 2002. The Company performs its annual
impairment review during the fourth quarter of each year, or sooner if
circumstances indicate. As a result of these reviews charges of $116,000
and $478,000 were recorded during the fourth quarters of fiscal 2002 and
2001, respectively.
F-24
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 $ 84 $ - $ - $ 10,753
============ ============ ============ ============ ============
Year ended November 30, 2002:
Allowance for doubtful accounts $ 404 $ - $ - $ 373 $ 31
============ ============ ============ ============ ============
Valuation allowance for net deferred tax asset $ 10,753 $ 967 $ - $ - $ 11,720
============ ============ ============ ============ ============
(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-25
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.
2.3 Assignment of Interest in Innovative Growth Partners, LLC and Agreement
as to Other Matters dated as of April 18, 2002 among Calton, Inc.,
Innovation Growth Partners, LLC and, Richard Dole, Frederick Huttner and
James West, incorporated by reference to Exhibit 2 to Form 8-K of
Registrant dated May 8, 2002.
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.
4.1 Option to Purchase Common Stock dated May 10, 2002 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, 2002 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, 2002 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. (*)
E-1
10.4 Incentive Compensation Plan of Registrant.
10.7 Executive Employment Agreement dated as of November 21, 1995 between
Registrant and Anthony J. Caldarone, incorporated by reference to Exhibit
10.7 to Form 10-K of Registrant for the fiscal year ended November 30,
1995, 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, 2002,
incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for
fiscal year ended November 30, 2001 and Third Amendment to Executive
Employment Agreement dated as of October 30, 2002(**).
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.
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.
10.21 Consulting Agreement dated July 17, 2001 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.
10.23 Mandatory Redeemable, Convertible, Subordinated Note issued by Automated
Information Management, Inc., incorporated by reference to Form 10-K of
Registrant for fiscal year ended November 30, 2001.
10.24 Co-Brand Credit Card Program Agreement dated as of May 8, 2001 between
Fleet Credit Card Services, L.P. and PrivilegeONE Networks, LLC.
Information has been omitted from this exhibit and is subject to a
request for confidential treatment.
10.25 Amendment No. 1 to Co-Bran Credit Card Agreement dated as of August 15,
2002 between Fleet Credit Card Services, L.P. and PrivilegeONE Networks,
LLC. Information has been omitted from this exhibit and is subject to a
request for confidential treatment.
10.26 Services Agreement dated as of October ___, 2002 between PrivilegeONE
Networks, LLC and World Omni Financial Corp. Information has been omitted
from this exhibit and is subject to a request for confidential treatment.
21. Subsidiaries of the Registrant.
23. Consent of Aidman, Piser & Company, P.A.
(*) Constitutes a compensatory plan required to be filed by an exhibit
pursuant to Item 14(c) of Form 10-K.
(**) Constitutes a management contract required to be filed pursuant to
Item 14(c) of Form 10-K.
E-2