<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended August 31, 2000
[ ] 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 (IRS Employer
incorporation or organization) Identification Number)
125 HALF MILE ROAD
RED BANK, NEW JERSEY 07726-8790
(Addresses of principal executive offices) Zip Code
Registrant's telephone number,
including area code: (732) 212-1280
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
As of October 10, 2000, 4,256,000 shares of Common Stock were outstanding after
giving effect to the reverse/forward split that occurred at the close of
business on May 31, 2000.
<PAGE> 2
CALTON, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)...................................
Consolidated Balance Sheets at
August 31, 2000 and November 30, 1999 ............................. 3
Consolidated Statements of Operations for the
Three Months Ended August 31, 2000 and 1999 ....................... 4
Consolidated Statements of Operations for the
Nine Months Ended August 31, 2000 and 1999 ........................ 5
Consolidated Statements of Cash Flows for the
Nine Months Ended August 31, 2000 and 1999 ........................ 6
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended August 31, 2000 .................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................................. 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................. 18
SIGNATURES ............................................................................. 18
</TABLE>
Certain information included in this report and other Company filings
(collectively, "SEC filings") under the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended (as well as information
communicated orally or in writing between the dates of such SEC filings)
contains or may contain forward looking information that is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from expected results. Among these risks, trends and uncertainties
are matters related to the indemnification provisions in connection with the
Company's sale of Calton Homes, Inc., national and local economic conditions,
and the effect of governmental regulation on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 31,589,000 $ 33,786,000
Available for sale securities 902,000 1,355,000
Current portion of holdback receivable 1,691,000 1,205,000
Receivables 878,000 337,000
Income tax receivable 205,000 0
Prepaid expenses and other assets 418,000 202,000
Net assets of discontinued operations 265,000 --
------------- -------------
Total current assets 35,948,000 36,885,000
Non-current portion of holdback receivable 1,294,000 2,842,000
Notes receivable -- 338,000
Goodwill, net 210,000 233,000
Fixed assets, net 570,000 143,000
Other assets 25,000 --
------------- -------------
Total assets $ 38,047,000 $ 40,441,000
============= =============
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilites $ 1,667,000 $ 1,350,000
Net liabilities of discontinued operations -- 437,000
------------- -------------
Total current liabilities 1,667,000 1,787,000
Minority interest 360,000 --
SHAREHOLDERS' EQUITY
Preferred Stock -- --
Common stock 287,000 283,000
Paid in capital 33,274,000 32,636,000
Retained earnings 11,861,000 14,951,000
Less cost of shares held in treasury (9,294,000) (8,698,000)
Accumulated other comprehensive loss:
Unrealized loss in available for sale securities (108,000) (518,000)
------------- -------------
Total shareholders' equity 36,020,000 38,654,000
------------- -------------
Total liabilites, minority interest and shareholders' equity $ 38,047,000 $ 40,441,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Revenues $ 1,064,000 $ 362,000
------------- -------------
Costs and expenses
Cost of revenues 413,000 43,000
Selling, general and administrative 2,722,000 527,000
------------- -------------
3,135,000 570,000
------------- -------------
Loss from operations (2,071,000) (208,000)
Interest income 535,000 505,000
Loss on disposition of securities (210,000) --
Income (loss) from continuing operations before income taxes,
------------- -------------
minority interest and discontinued operations (1,746,000) 297,000
Minority interest 192,000 --
------------- -------------
Income (loss) from continuing operations before income taxes (1,554,000) 297,000
Income tax expense (benefit) (205,000) 119,000
------------- -------------
Income (loss) from continuing operations (1,349,000) 178,000
Loss from discontinued operations, net of a benefit
for income taxes of $63,000 in 1999 -- (100,000)
------------- -------------
Net income (loss) $ (1,349,000) $ 78,000
============= =============
Earnings (loss) per share
Basic:
Income (loss) from continuing operations $ (0.32) $ 0.04
Loss from discontinued operations, net -- (0.02)
------------- -------------
Net income (loss) $ (0.32) $ 0.02
============= =============
Diluted:
Income (loss) from continuing operations $ (0.32) $ 0.04
Loss from discontinued operations, net -- (0.02)
------------- -------------
Net income (loss) $ (0.32) $ 0.02
============= =============
Weighted average number of shares outstanding
Basic 4,261,000 4,359,000
Diluted 4,261,000 4,542,000
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Revenues $ 2,273,000 $ 801,000
------------- -------------
Costs and expenses
Cost of revenues 802,000 43,000
Selling, general and administrative 5,833,000 1,190,000
------------- -------------
6,635,000 1,233,000
------------- -------------
Loss from operations (4,362,000) (432,000)
Interest income 1,593,000 1,468,000
Loss on disposition of securities (718,000) --
Income (loss) from continuing operations before income taxes,
------------- -------------
minority interest and discontinued operations (3,487,000) 1,036,000
Minority interest 192,000 --
------------- -------------
Income (loss) from continuing operations before income taxes (3,295,000) 1,036,000
Income tax expense (benefit) (205,000) 414,000
------------- -------------
Income (loss) from continuing operations (3,090,000) 622,000
Loss from discontinued operations, net of a benefit
for income taxes of $255,000 in 1999 -- (387,000)
Gain from sale of Calton Homes, Inc. net of a provision
in lieu of taxes of $3,037,000 -- 4,554,000
------------- -------------
Net income (loss) $ (3,090,000) $ 4,789,000
============= =============
Earnings (loss) per share
Basic:
Income (loss) from continuing operations $ (0.72) $ 0.13
Loss from discontinued operations, net -- (0.08)
Gain from sale of Calton Homes, Inc., net -- 0.98
------------- -------------
Net income (loss) $ (0.72) $ 1.03
============= =============
Diluted:
Income (loss) from continuing operations $ (0.72) $ 0.13
Loss from discontinued operations, net -- (0.08)
Gain from sale of Calton Homes, Inc., net -- 0.94
------------- -------------
Net income (loss) $ (0.72) $ 0.99
============= =============
Weighted average number of shares outstanding
Basic 4,299,000 4,625,000
Diluted 4,299,000 4,863,000
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,090,000) $ 4,789,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Subsidiary options issued for services 25,000 --
Loss attributable to minority interest (192,000) --
Loss on disposition of securities 718,000 --
Impairment of goodwill 119,000 --
Gain from the sale of Calton Homes, Inc. -- (4,554,000)
Loss from discontinued operations -- 387,000
Provision for income taxes -- 414,000
Depreciation and amortization 103,000 --
Change in net assets/liabilities of discontinued operations (224,000) (554,000)
Decrease (increase) in accounts receiveable (541,000) 104,000
Decrease (increase) in income taxes receivable (205,000) --
Decrease (increase) in notes receivable 104,000 --
(Increase) decrease in prepaid expenses and other assets (241,000) 859,000
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 317,000 (658,000)
------------- -------------
(3,107,000) 787,000
INVESTING ACTIVITIES
Net proceeds from sale of Calton Homes, Inc. -- 41,048,000
Sale of available for sale securities 1,346,000 --
Collection of holdback receivable 1,062,000 --
Purchase of available for sale securities (967,000) (3,396,000)
Acquisition of business, net of cash acquired (138,000) (250,000)
Purchase of property and equipment (436,000) --
------------- -------------
867,000 37,402,000
FINANCING ACTIVITIES
Stock repurchase (596,000) (8,095,000)
Capital contributed by minority owners of
Innovation Technology Partners 500,000 --
Shares repurchased upon recapitalization (10,000) --
Stock options exercised 149,000 337,000
------------- -------------
43,000 (7,758,000)
Net (decrease) increase in cash and cash equivalents (2,197,000) 30,431,000
Cash and cash equivalents at beginning of period 33,786,000 85,000
------------- -------------
Cash and cash equivalents at end of period $ 31,589,000 $ 30,516,000
============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of assets $ 0 $ 54,000
Conversion of CorVu and PrivilegeONE notes receivable
into investments 338,000 --
Fixed asets contributed by minority owners of
Innovation Technology Partners 52,000 --
Subsidiary options issued for services 25,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED AUGUST 31, 2000
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other Compre- Total
Common Paid In Retained Treasury Compre- hensive Shareholders'
Stock Capital Earnings Stock hensive Loss Earnings Equity
-------- --------- --------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
November 30, 1999 $ 283 $ 32,636 $ 14,951 $ (8,698) $ (518) $ 4,321 $ 38,654
Net Loss -- -- (3,090) -- -- (3,090) (3,090)
Issuance of Stock under
stock option plans 4 145 -- -- -- -- 149
Less: Purchase of
treasury stock -- -- -- (596) -- -- (596)
Comprehensive Loss:
Unrealized holding
loss on securities -- -- -- -- (108) (108) (108)
Reclassification adjustment
for loss realized in
net loss -- -- -- -- 518 518 518
Income tax refund -- 478 -- -- -- -- 478
Shares retired upon
recapitalization of
the Company -- (10) -- -- -- -- (10)
Subsidiary options issued
for services -- 25 -- -- -- -- 25
--------
Comprehensive loss (2,680)
Balance,
-------- --------- --------- -------- ------ -------- ---------
August 31, 2000 $ 287 $ 33,274 $ 11,861 $ (9,294) $ (108) $ 1,641 $ 36,020
======== ========= ========= ======== ====== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These interim financial statements should be read in conjunction
with the Company's annual report for the year ended November 30, 1999. Certain
reclassifications have been made to prior years' financial statements in order
to conform to the current presentation. Operating results for the three and
nine months ended August 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended November 30, 2000.
On December 31, 1998, the Company completed the sale of Calton Homes,
Inc. ("Calton Homes"), its primary operating subsidiary, to Centex Real Estate
Corporation ("Centex" or the "Purchaser"). As a result of the sale of Calton
Homes and the sale of the Florida homebuilding assets that occurred at the end
of fiscal 1997, the financial statement 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".
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 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. There were
1,521 fractional shares that resulted from the share combination that were
repurchased by the Company in June 2000 for approximately $10,000, based upon
the closing market value of the Common Stock on May 31, 2000. All Common Stock
and per share information has been adjusted to reflect the Recapitalization as
if such Recapitalization had taken place at the beginning of the periods
presented.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic and diluted per share amounts. As of
August 31, 2000, there were 4,256,000 shares of Common Stock outstanding and
options to purchase 812,000 shares of Common Stock outstanding, after giving
effect to the Recapitalization. In addition, a warrant to purchase 240,000
shares (adjusted to reflect the Recapitalization) was issued in January 2000 as
part of the acquisition of a 50.4% equity interest in PrivilegeONE Networks,
LLC ("PrivilegeONE"). The warrant becomes exercisable only if PrivilegeONE
surpasses certain specified earnings targets. Common stock equivalents from
various stock option plans and the PrivilegeONE warrant have been excluded from
the loss per share calculations for the three and nine months ended August 31,
2000 because the effect would be antidilutive.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. The Company
consolidates a subsidiary when it owns directly or indirectly more than 50% of
the outstanding voting securities. Under this method, a subsidiary's results of
operations, cash flows and balance sheets are reflected in the consolidated
financial statements of the Company. All significant intercompany accounts and
transactions have been eliminated. Participation of other shareholders in the
earnings and losses of consolidated majority owned subsidiaries are reflected
in the caption "Minority Interest" in the Company's Consolidated
8
<PAGE> 9
Financial Statements. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's shares of the earnings or
losses of majority owned subsidiaries. In certain circumstances where majority
owned subsidiaries incur losses, and the Company is unable to pass these losses
through to minority shareholders, the Company records the entire loss of the
subsidiary.
3. AVAILABLE-FOR-SALE SECURITIES
Available-for-Sale Securities at August 31, 2000 consists primarily of
common stock held in CorVu Corporation (OTCBB: CRVU) and is classified in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". These
Available-for-Sale Securities are carried at fair value based on quoted market
prices, with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. Realized gains and losses, and
declines in value judged to be other than temporary, are included in the
caption "Loss on disposition of Securities".
In January 2000, a note receivable in the amount of $234,000 issued to
the Company by CorVu was converted into 143,000 common shares of CorVu pursuant
to the terms of the note. In addition, the Company purchased an additional
375,000 shares of CorVu common stock and a five-year warrant for 225,000 shares
of CorVu for $750,000. The warrant entitles the Company to acquire certain
specified quantities of CorVu shares at exercise prices ranging from $2.00 per
share to $8.00 per share.
The Company's investment in CorVu common stock is included in
available-for-sale securities, and has been valued at $648,000, based on a
market price of $1.25 as of August 31, 2000 for CorVu common stock. The
warrants associated with the CorVu common stock are included on the balance
sheet as available-for-sale securities, and have been valued at $234,000 based
upon an independent valuation. The Company's aggregate cost basis in the stock
and the warrants of CorVu is approximately $1,000,000. The Company recorded an
unrealized loss on available for sale securities in the amount of $108,000, net
of tax as of August 31, 2000. The Company has significant exposure to market
risks associated with declines in the price of Corvu common stock.
Also included in securities available for sale are non-readily
marketable investments that are valued at $20,000.
For the quarter ended August 31, 2000 the Company reported a loss on
disposition of securities in the amount of $210,000 resulting from what
management believes is a permanent decline in non-readily marketable
securities. For the nine months ended August 31, 2000 the Company reported a
loss on disposition of securities in the amount of $718,000, resulting from
what management believes is a permanent decline in non-readily marketable
securities in the amount of $210,000 and a loss in the amount of $508,000 from
the sale of marketable securities.
4. DISCONTINUED OPERATIONS
On December 31,1998, the Company completed the sale of Calton Homes.
The shareholders of Calton, Inc. approved the sale of the stock of Calton Homes
pursuant to a stock purchase agreement (the "Stock Purchase Agreement") on
December 30, 1998.
As a result of the sale of Calton Homes and the sale of the Florida
homebuilding assets that occurred at the end of fiscal 1997, the financial
statements for the current and prior periods have been restated to reflect the
Company's homebuilding and real estate development business as discontinued
operations, including the operations of other subsidiaries located in Orlando,
Florida; Chicago, Illinois; Pennsylvania and California, where the Company had
similar operations and commercial land held for sale.
During the quarter ended August 31, 2000 the Company filed for a
federal income tax refund in the amount of $1,298,000 resulting from the
carryback of certain losses to years in which the Company incurred income
taxes. $1,093,000 of the $1,298,000 relates to issues in periods that were
prior to the sale of the homebuilding businesses and, accordingly, has been
accounted for as
9
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receivables in net assets of discontinued operations. Of this amount, $615,000
has been reserved at this time. Consequently, this amount has been recorded as
a reduction of the $1,093,000 and is reflected in the following tables
resulting in a net tax asset of $478,000.
NET ASSETS (LIABILITIES) OF DISCONTINUED OPERATIONS ARE AS FOLLOWS (AMOUNTS IN
THOUSANDS):
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
----------- -------------
(unaudited)
<S> <C> <C>
Assets
Receivables and other assets .......................... $ 0 $ 104
Commercial land ....................................... 109 109
Federal income tax recoverable ....................... 478
Liabilities
Accounts payable and accrued expenses ................. (322) (650)
------- -------
Net assets (liabilities) ................................ $ 265 $ (437)
------- -------
</TABLE>
RESULTS OF OPERATIONS FROM DISCONTINUED OPERATIONS ARE AS FOLLOWS (AMOUNTS IN
THOUSANDS):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
August 31, August 31,
2000 1999
---------- ----------
<S> <C> <C>
Revenues ................................................... $ -- $ 6,513
------- -------
Cost of revenue ....................................... -- 5,710
Selling, general and administrative ................... -- 1,445
------- -------
Total Expenses ............................................. -- 7,155
------- -------
Loss from operations ....................................... -- (642)
Benefit for income taxes ................................... -- (255)
------- -------
Net loss from discontinued operations ...................... $ -- $ (387)
------- -------
</TABLE>
5. COMMITMENTS AND CONTINGENT LIABILITIES
As part of the sale of Calton Homes on December 31, 1998, the Company
entered into a consulting agreement with the Purchaser that requires the
Purchaser to make payments of $1,300,000 per year over a three-year period to
the Company that expires on December 31, 2001.
The Stock Purchase Agreement pursuant to which the Company sold Calton
Homes requires the Company to indemnify the Purchaser for, among other things,
breaches of the agreement and certain liabilities that arise out of events
occurring prior to the closing of the sale, including the cost of warranty work
on homes delivered if such costs exceed $600,000. On December 31, 1998, as a
condition to the sale of Calton Homes, the Company entered into a holdback
escrow agreement with the Purchaser pursuant to which $5,159,000 of the closing
proceeds were deposited into escrow. Of this amount, $3,000,000 (the "General
Indemnification Funds") was deposited to provide security for the Company's
indemnity obligations and $2,159,000 (the "Specific Indemnification Funds") was
deposited to fund costs associated with certain specified litigation involving
Calton Homes. As of August 31, 2000 there was $1,573,000 in the Specific
Indemnification Funds, and $1,412,000 in the General Indemnification Funds. In
January 2000, the Purchaser asserted a $253,000 claim for
10
<PAGE> 11
indemnification related to certain alleged misrepresentations and liabilities
allegedly arising out of the events occurring prior to the sale of Calton Homes
and has instituted an arbitration proceeding pursuant to the indemnity
agreement. The Company believes that it has meritorious defenses to the
indemnity claim and intends to vigorously contest this matter, however, no
assurance can be given that the Company will not be required to make the
indemnity payment. The remaining General Indemnification Funds will be
disbursed to the Company, subject to claims for indemnification, on December
31, 2000. The Specific Indemnification Funds will be disbursed, to the extent
not otherwise utilized in the resolution of litigation, on a case by case basis
as the litigation is resolved. If all of the specified litigation is not
resolved by December 31, 2000, a portion of the General Indemnification Funds
will not be disbursed to the Company until the resolution of the litigation.
The Company may, under certain circumstances, be required to deposit additional
funds in the holdback if all of the specified litigation is not resolved by
December 31, 2000. In addition, the Company's indemnity obligations are not
limited to the amounts deposited in escrow. In the event that the Company
elects to liquidate and dissolve prior to December 31, 2003, it will be
required to organize a liquidating trust to secure its obligations to the
Purchaser. The liquidating trust will be funded with the Specific
Indemnification Funds plus $3,000,000 if created prior to December 31, 2000 and
$2,000,000 if created after December 31, 2000. If the liquidation occurs prior
to December 31, 2000, the Company may be required to deposit additional amounts
in the liquidating trust if the specified litigation is not resolved by such
date. 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.
6. ACQUISITION OF BUSINESSES
In January 2000, the Company acquired a 50.4% collective direct and
indirect (through ownership in a parent company) interest in PrivilegeONE
Networks, LLC. PrivilegeONE was formed in 1999 to develop customer loyalty
programs through the use of a co-branded credit card related to the automotive
industry.
In order to execute the PrivilegeONE business plan, PrivilegeONE
management is currently pursuing arrangements with financial institutions to
issue and process credit cards marketed by PrivilegeONE. If PrivilegeONE is
unable to secure such an arrangement, PrivilegeONE will be unable to execute
its business plan and the investment may be abandoned.
The purchase price for the Company's interest in PrivilegeONE was
comprised of $105,000 of 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 of
the acquisition date, the warrant was determined to have nominal value. The
warrant becomes exercisable only if PrivilegeONE surpasses certain specified
earnings targets. In conjunction with the acquisition of PrivilegeONE, the
Company recorded goodwill of $138,000. Due to the difficulties encountered by
PrivilegeONE in executing its business plan, the Company believes that it is
appropriate to charge to earnings the unamortized balance of the goodwill at
August 31, 2000, in the amount of $119,000 which is included in selling,
general and administrative expenses. In addition to its equity interest, the
Company has agreed to loan up to $1,500,000 to PrivilegeONE pursuant to a note,
which bears interest at the rate of 10% per annum and becomes due in January
2004. As of August 31, 2000, $1,171,000, which includes principal and interest
on the note, has been advanced to PrivilegeONE. The Company has the right to
designate a majority of the Board of Directors of PrivilegeONE until the later
of the time that the note is repaid or January 2004. The Company has entered
into agreements with the other owners of PrivilegeONE and its parent company
that obliges each of the owners to offer its equity interest in PrivilegeONE or
its parent to the other owners in the event that the owner wishes to transfer
its equity interest. The accounts of PrivilegeONE have been consolidated along
with those of the Company and the Company recognizes 100% of the losses of
PrivilegeONE.
In June 2000 the Company acquired a 51% interest in Innovation
Technology Partners, LLC ("ITP"), a newly formed entity established to provide
management and consulting services to entrepreneurial and development stage
companies. Through strategic alliances, ITP will provide
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<PAGE> 12
technology hosting and infrastructure services such as human resources
management, finance and accounting functions, and Internet/application service
provider services. For its efforts, ITP charges cash fees, accepts equity
positions in its clients, or a combination of both.
In exchange for its controlling interest, the Company contributed
$1,500,000 in cash and agreed to loan up to $3,500,000 to the new venture. The
loan, which bears interest at a rate per annum equal to prime plus one percent,
is due in June 2004. Executive management of ITP contributed $500,000 in cash
and certain assets, including existing client contracts, in exchange for their
collective 49% interest. The accounts of ITP have been consolidated along with
those of the Company with the executive management's interest shown as minority
interest. Certain owners of ITP have been issued warrants to acquire an
aggregate 11.1% interest in ITP at a value to be determined by appraisal if
certain events occur, including the completion of a public offering, a merger
or other business combination, a change of control, or if Anthony J. Caldarone
ceases to be Chairman of the Company. ITP management has been granted options
to acquire up to 150,000 shares of Common Stock of the Company if ITP surpasses
certain specified earnings targets. The terms of the options require the
options to be accounted for under variable plan accounting. As a result, the
Company could be subject to expense recognition in the event ITP achieves its
target earnings.
In addition to its management and consulting services, ITP also
intends to acquire controlling interests in certain entities that it manages
and consults with. The first initiative for this line of ITP business was the
acquisition of a 51% owned subsidiary, MindSearch, Inc. (MindSearch), a company
which has developed technology to provide consumer research to businesses on a
faster and broader basis than existing research approaches. ITP borrowed
$500,000 of its $3,500,000 credit facility with the Company to finance the
acquisition of the controlling interest in Mindsearch.
7. SEGMENT REPORTING
As of August 31, 2000 the Company operates in three business segments,
as follows.
In July 1999 the Company acquired substantially all the assets of iAW,
Inc., an Internet business solutions provider. The acquired business is operated
through a wholly owned subsidiary, eCalton.com ("eCalton"). Revenues of eCalton
are primarily recognized under the percentage of completion method of accounting
based on the ratio of costs incurred compared to estimated costs. Provisions for
estimated losses on uncompleted contracts are made in circumstances in which
such losses are probable.
In January 2000 the Company acquired a 50.4% equity interest in
PrivilegeONE. PrivilegeONE was formed in 1999 to develop customer loyalty
programs through the use of a co-branded credit card related to the automotive
industry. At this time PrivilegeONE operations consist solely of start up
activities, and its entire loss has been included in the Company's consolidated
results of operations.
The Company also provides corporate consulting services related to the
sale of the homebuilding assets in December 1998. In addition, in June 2000 the
Company acquired a 51% interest in ITP, a newly formed entity established to
provide management and consulting services to entrepreneurial and development
stage companies. Because ITP's operations are similar to that of the Company,
the results of operations for ITP are included in the results of operations for
the corporate and consulting services segment.
The Company has no foreign operations.
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Operating results, by segment, for the nine months ended August 31,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>
Corporate and
Consulting Total
eCalton PrivilegeONE Services Company
----------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 1,155 $ -- $ 1,118 $ 2,273
Total cost of revenues (a) 802 -- -- 802
Total selling, general and administrative
expenses 2,231 1,095 2,507 5,833
----------------------------------------------------------
Income (loss) from operations (1,878) (1,095) (1,389) (4,362)
Interest income -- -- 1,593 1,593
Loss on disposition of securities -- -- (718) (718)
----------------------------------------------------------
Loss from continuing operations (1,878) (1,095) (514) (3,487)
Minory interest -- -- 192 192
Income tax benefit -- -- 205 205
----------------------------------------------------------
Net income (loss) $ (1,878) $ (1,095) $ (117) $ (3,090)
==========================================================
Total assets $ 1,368 $ 60 $ 36,619 $ 38,047
</TABLE>
(a) Total cost of revenues represents production costs (consisting
primarily of allocated salaries, computer hardware, computer software and video
conferencing costs).
8. SHAREHOLDERS' EQUITY
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 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. As of August
31, 2000, there were 4,256,000 shares of Common Stock outstanding and options
to purchase 812,000 shares of Common Stock outstanding, after giving effect to
the Recapitalization. There were 1,521 fractional shares that resulted from the
share combination which were repurchased by the Company in June 2000 for
approximately $10,000 based upon the closing market value of the Common Stock
on May 31, 2000.
After giving effect to the Recapitalization, the Company's Certificate
of Incorporation 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), 200,000 of which have been designated as Class A Series
One Preferred Stock. None of the Preferred Stock is issued or outstanding.
In 1998, the Company commenced a stock repurchase program pursuant to
which it announced its intention to repurchase up to 2,000,000 shares of Common
Stock in open market repurchases and privately-negotiated transactions. As of
August 31, 2000, there were 1,491,000 shares held in Treasury in the amount of
$9,294,000.
In April 2000, the Company adopted the 2000 Equity Incentive Plan. The
aggregate number of shares of Common Stock reserved for issuance pursuant to
awards granted under the plan is 800,000 shares. In July 2000, Company's Board
of Directors approved the grant to 22 employees of options to acquire an
aggregate of 19,400 shares of Common Stock at an exercise price of $4.09 per
share. The
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<PAGE> 14
options were granted from the 2000 Equity Incentive Plan. These options have a
ten-year term and vest in five equal annual installments. In addition, the
Board approved the repricing of existing options to acquire an aggregate of
112,600 shares of common stock. The exercise prices of these options, which
ranged from $12.65 to $6.10 per share, were repriced to $4.50 per share.
During the quarter ended August 31, 2000 the Company filed for a
federal income tax refund in the amount of $1,298,000, resulting from the
carryback of certain losses to a year in which the Company incurred income
taxes. $1,093,000 of this amount relates to issues in periods that were prior
to the sale of the homebuilding businesses and, accordingly, have been included
in net assets of discontinued operations. Of the $1,093,000, $478,000 is a
result of "fresh start" accounting that was used at the time of the Company's
reorganization during 1993 and, as a result, is required to be recorded as an
increase in paid in capital.
9. INCOME TAXES
During the quarter ended August 31, 2000 the Company filed for a
federal income tax refund in the amount of $1,298,000, resulting from the
carryback of certain losses to years in which the Company incurred income
taxes. $205,000 of the refund was a result of 1999 losses and has been recorded
as a tax benefit in the current year. The remaining $1,093,000 relates to
issues in periods that were prior to the sale of the homebuilding businesses
and, accordingly, have been included in net assets of discontinued operations.
Of the $1,093,000, $478,000 is a result of "fresh start" accounting that was
used at the time of the Company's reorganization during 1993 and, as a result,
is required to be recorded as an increase in paid in capital. The difference of
$615,000 has been reserved at this time.
10. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133. SFAS No. 137
defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 will require the Company to report all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required in fiscal year
2001. Management believes that adoption of this Statement will not have a
material effect on the earnings or financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31, 2000 AND
1999
Revenues for the three months ended August 31, 2000 were $1,064,000,
compared to $362,000 for the three months ended August 31, 1999. Revenue for
the quarter ended August 31, 2000 consisted primarily of $325,000 from the
consulting agreement with the Purchaser of Calton Homes, Inc. and $600,000 in
revenues generated by eCalton through their e-business consulting services.
Revenues for the comparable quarter of 1999 were primarily comprised of
$325,000 derived from the consulting agreement.
Revenues for the nine months ended August 31, 2000 were $2,273,000
comprised primarily of $975,000 from the consulting agreement with the
purchaser of Calton Homes and $1.2 million from eCalton. Revenues for the nine
months ended August 31, 1999 were $ 801,000 which is attributable to
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<PAGE> 15
the consulting agreement. eCalton was not acquired until the third quarter of
1999, which resulted in nominal revenues for both the quarter and nine months
ended August 31, 1999.
Selling, general and administrative expenses were $2.7 million and
$5.8 million for the three and nine months ended August 31, 2000, compared to
$.5 million and $1.2 million for the three and nine months ended August 31,
1999, respectively. During 1999 the Company sold its homebuilding business and
had minimal operating expenses from eCalton and a reduced corporate office.
During fiscal 2000, the Company expanded its operations at eCalton, acquired
controlling interests in PrivilegeONE and Innovation Technology Partners, and
relocated and increased staffing at its corporate office. As a result, selling,
general and administrative expenses experienced a significant increase during
fiscal 2000 attributable primarily to payroll and payroll related expenses,
professional fees, and abandoned acquisition costs.
Interest income increased slightly for both the quarter and nine
months ended August 31, 2000 when compared to the same periods in the previous
year, due primarily to higher interest rates during the current year.
During the quarter and nine months ended August 31, 2000 the Company
recorded an income tax benefit of $205,000 related to a loss carryback to prior
years.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1998 the sale of Calton Homes generated approximately
$43.4 million of cash including the receipt of an additional $1.8 million
related to post closing adjustments. In addition, a $5.2 million holdback was
established at closing as part of the sale as a condition to indemnify the
Purchaser against existing litigation and other warranties. Of this amount
$3,000,000 (the "General Indemnification Funds") was deposited to provide
security for the Company's indemnity obligations and $2,159,000 (the "Specific
Indemnification Funds") was deposited to fund costs associated with certain
specified litigation involving Calton Homes.
At August 31, 2000 there was $1.4 million in the General
Indemnification Funds and $1.6 million in the Specific Indemnification Funds.
During the first quarter of 2000, approximately $1.0 million was collected by
the Company out of the General Indemnification Funds, and indemnity claims
totaling approximately $253,000 have been made by the Purchaser. The Purchaser
has instituted an arbitration proceeding with respect to $202,000 of these
claims in accordance with the terms of the indemnification agreement. Although
no assurance can be given that the Company will not be required to indemnify
the Purchaser, the Company believes it has meritorious defenses against these
claims. The remaining General Indemnification Funds will be disbursed to the
Company, subject to claims for indemnification, on December 31, 2000. The
Specific Indemnification Funds will be disbursed, to the extent not otherwise
utilized in the resolution of litigation, on a case-by-case basis, as the
litigation is resolved. If all of the specified litigation is not resolved by
December 31, 2000, a portion of the General Indemnification Funds will not be
disbursed to the Company until the resolution of the litigation. The Company
may, under certain circumstances, be required to deposit additional funds in
the holdback if all of the specified litigation is not resolved by December 31,
2000. Future decreases to the escrows held for indemnifications, if any, will
be recorded as an adjustment to the Income from sale of Calton Homes.
As of August 31, 2000 the Company had $31.6 million of cash and cash
equivalents. The Company's strategic plan is to acquire controlling interests
in companies within the information technology industry, including Internet and
e-commerce related businesses.
In January 2000, the Company acquired a collective direct and indirect
(through ownership in a parent company) 50.4% equity interest in PrivilegeONE
Networks, a newly formed company engaged in the development of a co-branded
loyalty credit card program. The purchase price for the Company's interest was
comprised of $105,000 of cash and a warrant to acquire 240,000 shares of Common
Stock at an exercise price of $12.50 per share. The warrant becomes exercisable
only if PrivilegeONE surpasses certain specified earning targets. In addition
to its equity interest, the Company has agreed to loan up to $1,500,000 to
PrivilegeONE pursuant to a note, which bears
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<PAGE> 16
interest at the rate of 10% per annum and becomes due in January 2004. As of
August 31, 2000, $1,171,000, which includes principal and interest was
outstanding under the note. The accounts of PrivilegeONE have been consolidated
along with those of the Company.
In June 2000, the Company acquired a 51% interest in Innovation
Technology Partners, LLC ("ITP), a newly formed entity established to provide
management and consulting services to entrepreneurial and development stage
companies. In exchange for its controlling interest, the Company contributed
$1,500,000 in cash and agreed to loan up to $3,500,000 to the new venture. The
accounts of ITP have been consolidated along with those of the Company. During
the third quarter of fiscal 2000 ITP borrowed $500,000 under this loan to
acquire a controlling interest in Mindsearch. For a more complete discussion of
Mindsearch see Note 6.
During the quarter ended August 31, 2000 the Company filed an
application for an income tax refund with the Internal Revenue Service, for
approximately $1.3 million. The application for refund is a result of tax loss
carrybacks to 1997 and 1998 when the Company incurred incomes taxes. The full
refund was received by the Company in September 2000.
The Company believes that cash on hand, interest income, proceeds from
the collection of the holdback receivable, the income tax refund received in
September 2000, and funds provided under the consulting agreement with the
Purchaser of Calton Homes, will provide sufficient capital to support the
Company's operations for the current and upcoming year.
CASH FLOWS FROM OPERATING ACTIVITIES
The proceeds from the sale of Calton Homes are primarily invested in
cash and cash equivalents which generated interest income of approximately $1.6
million for the nine months ended August 31, 2000. Additional cash flows from
operating activities include revenues derived from the consulting agreement of
$325,000 per quarter and cash collections by eCalton of approximately $725,000.
Cash utilized for operating activities for the quarter and nine months ended
August 31, 2000 includes funding the operations of eCalton, PrivilegeONE, and
Innovation Technology Partners, as well as the general and administrative costs
of Calton, Inc.
It is anticipated that the Company's operating activities combined
with the operations of eCalton, PrivilegeONE and ITP will continue to create
negative cash flow until such time that those operations execute the strategies
identified in their business plans.
CASH FLOWS FROM INVESTING ACTIVITIEs
During the nine months ended August 31, 2000 the Company received
proceeds in the amount of $1,346,000 from the disposition of securities
available for sale. In addition, $1,062,000 was collected from the Holdback
receivable during the nine months ended August 31, 2000.
In January 2000, the Company purchased an additional 375,000 shares of
CorVu Corporation Common Stock and a five-year warrant that entitles the
Company to acquire certain specified quantities of shares at specified exercise
prices ranging from $2.00 per share to $8.00. The total consideration for the
stock and the warrant was $750,000. Both the stock and the warrant are not
registered and are subject to current restrictions on trading.
In January 2000, the Company acquired a 50.4% equity interest in
PrivilegeONE. The purchase price for the Company's interest was comprised of
$105,000 of cash and a warrant. In addition to its equity interest, the Company
has agreed to loan up to $1.5 million to PrivilegeONE, of which $1,024,000 was
advanced during the nine months ended August 31, 2000.
In June 2000, the Company acquired a 51% equity interest in ITP for
$1,500,000 in cash and agreed to loan up to $3,500,000 to the new venture. The
loan, which bears interest at a rate per annum equal to prime plus one percent,
is due in June 2004. In August, ITP acquired a 51% interest in a venture called
Mindsearch. To finance this acquisition, ITP borrowed $500,000 of the
$3,500,000 commitment.
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During the nine months ended August 31, 2000 cash used by investing
activities included the purchase of available for sale securities in the amount
of $967,000 as well as purchases of property and equipment for $436,000.
CASH FLOWS FROM FINANCING ACTIVITIES
During the nine months ended August 31, 2000, option holders exercised
their options to purchase 70,600 shares (adjusted for the reverse stock split)
under the 1993 and 1996 Stock Option Plans, which generated proceeds of
$149,000. In addition, the Company repurchased shares of its own common stock
for $596,000 during the nine months ended August 31, 2000 at prices ranging
from $5.95 to $4.31, which are accounted for as treasury stock. In June, 2000,
ITP received a $500,000 capital contribution representing the contribution of
the minority owners in ITP whose accounts have been consolidated along with
those of the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133. SFAS No. 137
defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 will require the Company to report all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required in fiscal year
2001. Management believes that adoption of this Statement will not have a
material effect on the earnings or financial position of the Company.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B, which delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company does not believe that adoption of this SAB
will have a material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to equity price risks on the marketable portion
of its securities. At this time, the Company owns only one readily marketable
security, which is the investment in Corvu common stock. Corvu is in the
software development industry, which has experienced significant historical
volatility in its stock price. The Company typically does not attempt to reduce
or eliminate our market exposure on securities. Based on the closing market
price of Corvu at August 31, 2000, the fair value of our investment in Corvu
(including warrants for the purchase of Corvu common stock) was approximately
$882,000.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27. Financial Data Schedule as of August 31, 2000
B) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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)
By: /s/ Kelly S. McMakin
----------------------------------------------
Kelly S. McMakin
Senior Vice President of Accounting
(Principal Financial and Accounting Officer)
Date: October 11, 2000
18
