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 February 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 1-8846
CALTON, INC.
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(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 March 31, 2000, 21,660,000 shares of Common Stock were outstanding.
<PAGE>
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
February 29, 2000 and November 30, 1999........................ 3
Consolidated Statements of Operations for the
Three Months Ended February 29, 2000 and February 28, 1999..... 4
Consolidated Statements of Cash Flows for the
Three Months Ended February 29, 2000 and February 28, 1999..... 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended February 29, 2000............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 11
PART II. Other Information
Item 1. Legal Proceedings................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURES........................................................................... 14
</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>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents ................................. $ 34,998,000 $ 33,786,000
Securities available for sale ............................. -- 1,339,000
Holdback receivable - current.............................. 708,000 1,205,000
Receivables ............................................... 424,000 337,000
Prepaid expenses and other assets.......................... 318,000 202,000
------------ ------------
Total current assets ................................... 36,448,000 36,869,000
Holdback receivable........................................ 2,299,000 2,842,000
Securities available for sale ............................. 1,754,000 16,000
Notes receivable .......................................... -- 338,000
Goodwill, net ............................................. 360,000 233,000
Fixed assets, net ......................................... 241,000 143,000
------------ ------------
Total assets............................................. $ 41,102,000 $ 40,441,000
------------ ------------
Liabilities and Shareholders' Equity
Accounts payable, accrued expenses and other liabilities $ 2,053,000 $ 1,350,000
Net liabilities of discontinued operations................. 450,000 437,000
------------ ------------
Total liabilities........................................ 2,503,000 1,787,000
------------ ------------
Shareholders' equity
Common stock............................................... 285,000 283,000
Paid in capital............................................ 32,695,000 32,636,000
Retained earnings.......................................... 13,888,000 14,951,000
Less cost of shares held in treasury....................... (8,698,000) (8,698,000)
Accumulated other comprehensive gain (loss):
Unrealized gain (loss) in securities available for sale.. 429,000 (518,000)
------------ ------------
Total shareholders' equity .............................. 38,599,000 38,654,000
------------ ------------
Total liabilities and shareholders' equity............... $ 41,102,000 $ 40,441,000
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended February 29, 2000 and February 28, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues .................................................... $ 1,074,000 $ 574,000
------------ ------------
Costs and expenses
Cost of revenues.................................... 136,000 --
Selling, general and administrative................. 1,493,000 310,000
------------ ------------
1,629,000 310,000
------------ ------------
Income (loss) from operations................................ (555,000) 264,000
(Loss) on the sale of securities available for sale ......... (508,000) --
------------ ------------
Income (loss) from continuing operations before income taxes,
and discontinued operations........................ (1,063,000) 264,000
Provision for income taxes................................... -- 105,000
------------ ------------
Income (loss) from continuing operations..................... (1,063,000) 159,000
Income from discontinued operations, net of a provision
for incomes taxes of $62,000 in 1999 ................ -- 92,000
Income from sale of Calton Homes, Inc., net of a provision
in lieu of taxes of $2,591,000 ...................... -- 3,886,000
------------ ------------
Net income (loss)............................................ $ (1,063,000) $ 4,137,000
------------ ------------
Earnings (loss) per share
Basic:
Income (loss) from continuing operations............. $ (.05) $ .01
Income (loss) from discontinued operations, net...... -- --
Income from sale of Calton Homes, Inc., net.......... -- .15
------------ ------------
Net income (loss) ................................... $ (.05) $ .16
------------ ------------
Diluted:
Income (loss) from continuing operations ............ $ (.05) $ .01
Income (loss) from discontinued operations, net ..... -- --
Income from sale of Calton Homes, Inc., net.......... -- .14
------------ ------------
Net income (loss).................................... $ (.05) $ .15
------------ ------------
Weighted average number of shares outstanding
Basic ............................................... 21,534,000 25,855,000
------------ ------------
Diluted ............................................. 21,534,000 27,599,000
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended February 29, 2000 and February 28, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Operating Activities
Net income (loss) ................................................ $ (1,063,000) $ 4,137,000
Adjustments to reconcile net income (loss) to net cash provided
by (used by) operating activities
Income from the sale of Calton Homes, Inc. .................... -- (3,886,000)
(Loss) from discontinued operations ........................... -- (92,000)
Provision for income taxes .................................... -- 105,000
Loss on sale of securities .................................... 508,000 --
Depreciation and amortization ................................. 24,000 --
Change in net assets/liabilities of discontinued
operations .................................................. 13,000 320,000
(Increase) in receivables ..................................... (87,000) --
Decrease (increase) in prepaid expenses
and other assets ........................................... (117,000) 260,000
Increase (decrease) in accounts payable, accrued
expenses and other liabilities .............................. 404,000 (432,000)
------------ ------------
(318,000) 412,000
------------ ------------
Investing Activities
Net proceeds from sale of Calton Homes, Inc. .................. -- 41,048,000
Sale of securities available for sale ......................... 1,349,000 --
Collection of holdback receivable ............................. 1,040,000 --
Purchase of securities available for sale ..................... (790,000) --
Acquisition of business, net of cash acquired ................. (20,000) --
Purchase of property and equipment ............................ (110,000) --
------------ ------------
1,469,000 41,048,000
------------ ------------
Financing Activities
Stock repurchase .............................................. -- (1,263,000)
Stock options exercised ....................................... 61,000 179,000
------------ ------------
61,000 (1,084,000)
------------ ------------
Net increase in cash and cash equivalents ........................ 1,212,000 40,376,000
Cash and cash equivalents at beginning of period ................. 33,786,000 85,000
------------ ------------
Cash and cash equivalents at end of period ....................... $ 34,998,000 $ 40,461,000
============ ============
Noncash Investing Activities:
Conversion of notes receivable into investments ............... $ 338,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended February 29, 2000
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Total Other Compre-
Shareholders' Common Paid In Retained Treasury Compre- hensive
Equity Stock Capital Earnings Stock hensive Loss Earnings
------------- -------- -------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
November 30, 1999 ......... $ 38,654 $ 283 $ 32,636 $ 14,951 $ (8,698) $ (518) $ 4,321
--------
Net (loss) ................ (1,063) -- -- (1,063) -- -- (1,063)
Issuance of stock under
stock option plans ... 61 2 59 -- -- -- --
Comprehensive earnings:
Unrealized holding
gains in securities,
net of tax ........... 429 -- -- -- -- 429 429
Reclassification
adjustment for loss
realized in net income 518 -- -- -- -- 518 518
--------
Comprehensive
earnings ............. -- -- -- -- -- -- (116)
-------- -------- -------- -------- -------- -------- --------
Balance,
February 29, 2000 ......... $ 38,599 $ 285 $ 32,695 $ 13,888 $ (8,698) $ 429 $ 4,205
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
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 with the current presentation. All significant
intercompany accounts and transactions have been eliminated. Operating
results for the three months ended February 29, 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."
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic and diluted per share amounts,
effective for financial statements issued for periods ending after December
15, 1997. As of February 29, 2000, a total of 4,067,000 stock options have
been granted and are outstanding under the Company's stock option plans. In
addition, a warrant to purchase 1,200,000 shares of Common Stock was also
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 warrant used in calculating the diluted earnings per share have
been excluded from the loss per share calculations for the quarter ended
February 29, 2000 because the effect would be antidilutive.
2. Securities Available For Sale
During the quarter ended February 29, 2000 the Company recognized a
$508,000 loss on securities sold.
In January 2000, a note receivable in the amount of $234,000 issued to
the Company by CorVu Corporation ("CorVu") was converted into 143,000
common shares pursuant to the terms of the note. In addition, the Company
purchased an additional 375,000 shares of common stock and a five year
warrant for 225,000 shares of CorVu for $750,000. The warrant entitles the
Company to acquire certain specified quantities of shares at specified
exercise prices ranging from $2.00 per share to $8.00 per share.
The Company's aggregate investment in CorVu Corporation classified as
Securities available for sale has been valued at $1,714,000 in accordance
with Statement of Financial Accounting Standards No. 115. The Company's
aggregate cost basis in the stock and the warrants of CorVu is
approximately $1,000,000. The Company recorded an unrealized gain on
Securities available for sale in the amount of $429,000, net of tax.
7
<PAGE>
The aggregate 478,000 warrants (including 253,000 warrants held from
November 1999) and 518,000 shares of CorVu common stock are unregistered
securities and are not currently freely tradable. The Company has
significant exposure to market risks associated with declines in trading
prices of these securities.
3. 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.
Net assets (liabilities) of discontinued operations are as follows (amounts in
thousands):
February 29, November 30,
2000 1999
------------ ------------
(unaudited)
Assets
Receivables and other assets ............... $ -- $ 104
Commercial land ............................ 109 109
Liabilities
Accounts payable and accrued expenses ...... (559) (650)
----- -----
Net assets/(liabilities) ........................ $(450) $(437)
===== =====
Results of operations from discontinued operations are as follows (amounts in
thousands):
Three Months Ended
---------------------------
February 29, February 28,
2000 1999
------------ ------------
Revenues ......................................... $ -- $6,513
---- ------
Cost of revenue ............................. -- 5,710
Selling, general and administrative ......... -- 649
---- ------
-- 6,359
Income from operations ........................... -- 154
Provision for income taxes ....................... -- 62
---- ------
Net income from discontinued operations .......... $ -- $ 92
==== ======
8
<PAGE>
4. Commitments and Contingent Liabilities
(a) 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.
(b) If by June 30, 2000, the Company has not redeployed a substantial
portion of the proceeds of the Sale Transaction, or developed a plan to
redeploy a substantial portion of such proceeds within a reasonable time
frame, the Company, subject to shareholder approval, will be liquidated and
dissolved. Management currently expects to deploy or have a plan to deploy
a substantial portion of the proceeds by June 30, 2000.
(c) The Stock Purchase Agreement pursuant to which the Company sold
Calton Homes on December 31, 1998 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 February 29, 2000 there was $1,531,000 in the
Specific Indemnification Funds, and $1,477,000 in the General
Indemnification Funds. In January 2000, the Purchaser asserted a $253,000
claim for 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 on 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.
5. Acquisition of Business
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
9
<PAGE>
PrivilegeONE. If PrivilegeONE is unable to secure such an arrangement,
PrivilegeONE will be unable to execute its business plan and the investment
will 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 1,200,000
shares of the Company's Common Stock at an exercise price of $2.50 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. Goodwill in the amount of
$138,000 was recorded and will be amortized over five years. 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. 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 shareholder agreements with the other shareholders of
PrivilegeONE and its parent company which obliges each of the shareholders
to offer its shares in PrivilegeONE or its parent to the other shareholders
in the event that the shareholder wishes to transfer its shares. The
shareholder agreements also grant the Company the preemptive right to
acquire a proportionate share of any additional securities issued by
PrivilegeONE or its parent and provide that certain corporate actions may
not be taken without the Company's approval.
6. Segment Reporting
Through the acquisition of substantially all the assets of iAW, Inc.,
an Internet business solutions provider, in July 1999, the Company entered
into a new business and related industry. 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. The Company does not have any foreign operations. In
addition, the Company acquired a 50.4% equity interest in PrivilegeONE and
consolidated its operations that are primarily start up activities. The
following schedule illustrates eCalton and PrivilegeONE relative to the
consolidated Company for the three months ended February 29, 2000 (dollars
in thousands):
<TABLE>
<CAPTION>
Corporate
and
Consulting Total
eCalton PrivilegeONE Services Company
-------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Total revenues .......................... $ 228 $ -- $ 846 $ 1,074
Total cost of revenues (a) .............. 136 -- -- 136
Total selling, general and administrative
expenses .......................... 467 351 675 1,493
Income (loss) from operations ........... (375) (351) 171 (555)
(Loss) on sale of securities ............ -- -- (508) (508)
Income (loss) from continuing
operations ........................ (375) (351) (337) (1,063)
Total assets ............................ $ 555 $ 44 $ 40,503 $ 41,102
</TABLE>
(a) Total cost of revenues represents production costs (including allocated
salaries, computer hardware, computer software and video conferencing
costs).
10
<PAGE>
7. Shareholders' Equity
The Company's Certificate of Incorporation provides for 53,700,000
authorized shares of Common Stock (par value $.01 per share), 2,600,000
shares of Redeemable Convertible Preferred Stock (par value $.10 per share)
and 10,000,000 shares of Class A Preferred Stock (par value $.10 per
share), one million shares of which have been designated as Class A Series
One Preferred Stock. None of the Preferred Stock is issued or outstanding.
The Company commenced a significant stock repurchase program pursuant
to which it announced its intention to repurchase up to 10,000,000 shares
of Common Stock in open market repurchases and privately-negotiated
transactions during fiscal 1999 and 1998. As of February 29, 2000, there
were 6,900,000 shares held in Treasury in the amount of $8,698,000. The
Company has suspended the acquisition of additional shares since the market
value of the Company's Common Stock has been in excess of book value.
In January 2000, the Board approved the grant of options to acquire
215,000 shares under the 1993 Non-Qualified Stock Option Plan (the "1993
Plan"). The exercise price of options granted is $2.53 per share. As of
February 29, 2000 there are 1,073,000 options outstanding under the 1993
Plan. The options granted under the 1993 Plan vest in equal installments
over a three-year period and have a maximum term of ten years.
In January 2000, the Company's Board of Directors approved a grant to
the Company's Chairman and President of options to acquire 200,000 shares
of Common Stock under the 1996 Equity Incentive Plan ("1996 Plan"). These
options have an exercise price of $2.78 per share, a term of five years and
vest in five equal annual installments. In addition, the Board approved the
grant to other employees of options to acquire 136,000 shares of Common
Stock under the 1996 Plan. The exercise price of these options, which have
a ten year term and vest in five equal annual installments is $2.53 per
share. As of February 29, 2000 there are 1,194,000 options outstanding
under the 1996 Plan.
In January 2000, the Company's Board of Directors adopted the 2000
Equity Incentive Plan subject to shareholder approval. If approved, the
aggregate number of shares of common stock reserved for issuance pursuant
to awards granted under the plan is 4,000,000 shares.
In July 1999, the Company entered into employment agreements with
three officers of eCalton pursuant to which each have been granted options
to acquire 600,000 shares of Calton Common Stock, or an aggregate of 1.8
million shares. The non-qualified stock options granted have terms similar
to the 1996 Equity Incentive Plan, vest in three equal annual installments
beginning July 19, 2000, and have a term of ten years. The exercise price
is $1.63 per share
In January 2000, the Company issued a warrant to acquire 1,200,000
shares of the Company's Common Stock at an exercise price of $2.50 per
share to Taytrowe Van Fecthmann World Companies, Inc., the parent company
of PrivilegeONE, in connection with the acquisition of the Company's
interest in PrivilegeONE. The warrant, which has a term of five years, is
not exercisable unless PrivilegeONE surpasses certain specified earnings
targets.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 29, 2000 AND
FEBRUARY 28, 1999
Revenues for the three months ended February 29, 2000 and February 28,
1999 were $1.1 million and $.6 million, respectively. The current quarter
revenues include: $325,000 from the consulting agreement with the Purchaser
of Calton Homes, Inc., interest income of $.5 million and $228,000 of
revenues earned by eCalton. The revenues for the comparable quarter of the
prior year were comprised of $217,000 derived from the consulting agreement
and $357,000 of interest income.
11
<PAGE>
Selling, general and administrative costs for the three months ended
February 29, 2000 were $1.4 million as compared to $.3 million for the
three months ended February 28, 1999. These expenses increased
significantly due to the operations of eCalton and PrivilegeONE in the
amounts of $.5 million and $.3 million, respectively. General and
administrative costs have also increased at Calton, Inc. due to personnel
additions primarily attributable to increasing acquisition related
activities and resources, and the opening of the Vero Beach office.
Selling, general and administrative costs are anticipated to increase
further at eCalton as a result of additional hiring of personnel.
PrivilegeONE's general and administrative costs are expected to increase
later this year once a credit card processing relationship is established
and operations are ramped up. Included in selling, general and
administrative costs is $232,000 of costs incurred related to proposed
transactions that were abandoned during the quarter ended February 29,
2000.
The Company recorded a $508,000 loss on the sale of securities
available for sale during the quarter ended February 29, 2000.
For the three months ended February 29, 2000, no tax benefit was
recorded on the loss from continuing operations due to the uncertainty of
realization.
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 February 29, 2000 there was $1.5 million in the General
Indemnification Funds and $1.5 million in the Specific Indemnification
Funds. During the first quarter of 2000, approximately $1.0 million was
collected out of the General Indemnification Funds, and indemnity claims
totaling approximately $253,000 have been made by the Purchaser, and 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 February 29, 2000 the Company had $35.0 million of highly liquid
money market funds.
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 1,200,000 shares of Common Stock at an exercise price of $2.50 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 interest at the rate of 10% per annum and becomes due in
January 2004. Through February 29, 2000
12
<PAGE>
the Company had funded $430,000 of the $1.5 million.
The Company believes that current cash on hand, proceeds from the
collection of the holdback receivable, income tax payment reductions derived
from NOL utilization, and funds provided under the consulting agreement with
the Purchaser of Calton Homes which provides for payments of $1.3 million
per year, until December 31, 2002, will provide sufficient capital to
support the Company's operations. As of February 29, 2000 the Company had
repurchased an aggregate of 6.9 million shares for $8.7 million, an average
price of $1.26 per share. Management has suspended the acquisition of
additional shares subsequent to year end since the market value of the
Company's common stock has been trading in excess of book value. Although
the Company is currently analyzing potential business opportunities
consistent with its strategic plan, it has not determined the specific
application for the remaining proceeds of the sale of Calton Homes. If by
June 30, 2000, the Company has not redeployed a substantial portion of the
sale proceeds of Calton Homes, or developed a plan to redeploy a substantial
portion of the proceeds within a reasonable timeframe, the Company, subject
to shareholder approval, will be liquidated and proceeds distributed to its
shareholders. Management currently expects to deploy or have a plan to
deploy a substantial portion of the proceeds by June 30, 2000.
Cash Flows from Operating Activities
The proceeds from the sale of Calton Homes are primarily invested in
highly liquid funds earning interest at approximately 5.5% per annum that
generated $.5 million for the three months ended February 29, 2000.
Additional cash flows from operating activities include revenues derived
from the consulting agreement of $325,000 per quarter. Cash utilized for
operating activities for the quarter include general and administrative
costs, funding eCalton's operations as it continues to develop its business
plan, and funding PrivilegeONE's start-up operations.
It is anticipated that the Company's operating activities combined with
the operations of eCalton and PrivilegeONE 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
The Company sold the securities available for sale during the three
months ended February 29, 2000 and received proceeds of $1.3 million. In
addition, approximately $1.0 million was collected from the Holdback
receivable during the quarter.
In January 2000, the Company purchased an additional 375,000 shares of
CorVu Corporation common stock and a five-year warrant which 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 warrants 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 pursuant to a
note, of which $326,000 was funded during the three months ended February
29, 2000 and advances of $104,000 to PrivilegeONE were outstanding at the
beginning of the year.
Cash Flows from Financing Activities
During the three months ended February 29, 2000, certain optionholders
exercised their options to purchase 145,000 shares under the 1993 and 1996
Stock Option Plans generating $61,000.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2000, Centex Real Estate Corporation ("CREC") instituted
an arbitration proceeding with the American Arbitration Association in
Dallas, Texas in which it is seeking indemnity from the Company in the
amount of $202,000 pursuant to the Stock Purchase Agreement executed
in connection with the sale of Calton Homes and the related Holdback
Escrow Agreement. CREC claims that subsequent to the sale of Calton
Homes, Calton Homes was required to pay a $202,000 invoice issued by a
contractor who performed work prior to the sale of Calton Homes, and
that the Company should be required to indemnify it for this payment.
The Company believes that it has meritorious defenses to the indemnity
claim and intends to vigorously contest this matter; however, no
assurance an be given that the Company will not be required to make
the indemnity payment.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27. Financial Data Schedule as of February 29, 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/ David J. Coppola
----------------------
David J. Coppola
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: April 14, 2000
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