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 May 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.
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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 June 30, 2000, 4,275,000 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>
CALTON, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
May 31, 2000 and November 30, 1999........................ 3
Consolidated Statements of Operations for the
Three Months Ended May 31, 2000 and 1999.................. 4
Consolidated Statements of Operations for the
Six Months Ended May 31, 2000 and 1999.................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended May 31, 2000 and 1999.................... 6
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended May 31, 2000.............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............13
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securityholders........15
Item 5. Other Information.........................................15
Item 6. Exhibits and Reports on Form 8-K..........................16
SIGNATURES................................................................ 16
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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>
May 31, November 30,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents ............................... $ 33,765,000 $ 33,786,000
Securities available for sale ........................... -- 1,339,000
Holdback receivable - current ........................... 708,000 1,205,000
Receivables ............................................. 508,000 337,000
Prepaid expenses and other assets ....................... 309,000 202,000
------------ ------------
Total current assets ................................. 35,290,000 36,869,000
Holdback receivable ..................................... 2,339,000 2,842,000
Securities available for sale ........................... 1,739,000 16,000
Notes receivable ........................................ -- 338,000
Goodwill, net ........................................... 347,000 233,000
Fixed assets, net ....................................... 347,000 143,000
------------ ------------
Total assets .......................................... $ 40,062,000 $ 40,441,000
------------ ------------
Liabilities and Shareholders' Equity
Accounts payable, accrued expenses and other liabilities. $ 2,059,000 $ 1,350,000
Net liabilities of discontinued operations .............. 450,000 437,000
------------ ------------
Total liabilities ..................................... 2,509,000 1,787,000
------------ ------------
Shareholders' equity
Common stock ........................................... 287,000 283,000
Paid in capital ......................................... 32,781,000 32,636,000
Retained earnings ....................................... 13,210,000 14,951,000
Less cost of shares held in treasury .................... (9,123,000) (8,698,000)
Accumulated other comprehensive gain (loss):
Unrealized gain (loss) in securities available for sale 398,000 (518,000)
------------ ------------
Total shareholders' equity ............................ 37,553,000 38,654,000
------------ ------------
Total liabilities and shareholders' equity ............ $ 40,062,000 $ 40,441,000
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended May 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues .................................................... $ 1,193,000 $ 828,000
----------- -----------
Costs and expenses
Cost of revenues ......................................... 253,000 --
Selling, general and administrative ...................... 1,618,000 353,000
----------- -----------
1,871,000 353,000
----------- -----------
Income (loss) from continuing operations before income taxes,
and discontinued operations ............................. (678,000) 475,000
Provision for income taxes .................................. -- 190,000
----------- -----------
Income (loss) from continuing operations .................... (678,000) 285,000
Loss from discontinued operations, net of a benefit
for incomes taxes of $254,000 in 1999 ................... -- (379,000)
Income from sale of Calton Homes, Inc., net of a provision
in lieu of taxes of $446,000 ....................... -- 668,000
----------- -----------
Net income (loss) ........................................... $ (678,000) $ 574,000
=========== ===========
Earnings (loss) per share
Basic:
Income (loss) from continuing operations .............. $ (.16) $ .07
Loss from discontinued operations, net ................ -- (.09)
Income from sale of Calton Homes, Inc., net ........... -- .15
----------- -----------
Net income (loss) ..................................... $ (.16) $ .13
=========== ===========
Diluted:
Income (loss) from continuing operations .............. $ (.16) $ .06
Loss from discontinued operations, net ................ -- (.08)
Income from sale of Calton Homes, Inc., net .......... -- .14
----------- -----------
Net income (loss) ..................................... $ (.16) $ .12
=========== ===========
Weighted average number of shares outstanding
Basic .................................................... 4,328,000 4,346,000
=========== ===========
Diluted .................................................. 4,328,000 4,619,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CALTON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended May 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues .................................................... $ 2,267,000 $ 1,402,000
----------- -----------
Costs and expenses
Cost of revenues ......................................... 389,000 --
Selling, general and administrative ...................... 3,111,000 663,000
----------- -----------
3,500,000 663,000
----------- -----------
Income (loss) from operations ............................... (1,233,000) 739,000
Loss on securities sold ..................................... (508,000) --
----------- -----------
Income (loss) from continuing operations before income taxes,
and discontinued operations .............................. (1,741,000) 739,000
Provision for income taxes .................................. -- 295,000
----------- -----------
Income (loss) from continuing operations .................... (1,741,000) 444,000
Loss from discontinued operations, net of a benefit
for incomes taxes of $192,000 in 1999 .................... -- (287,000)
Income from sale of Calton Homes, Inc., net of a provision
in lieu of taxes of $3,037,000 ...................... -- 4,554,000
----------- -----------
Net income (loss) ........................................... $(1,741,000) $ 4,711,000
=========== ===========
Earnings (loss) per share
Basic:
Income (loss) from continuing operations .............. $ (.40) $ .09
Loss from discontinued operations, net ................ -- (.06)
Income from sale of Calton Homes, Inc., net ........... -- .96
----------- -----------
Net income (loss) ..................................... $ (.40) $ .99
=========== ===========
Diluted:
Income (loss) from continuing operations .............. $ (.40) $ .09
Loss from discontinued operations, net ................ -- (.06)
Income from sale of Calton Homes, Inc., net ........... -- .90
----------- -----------
Net income (loss) ..................................... $ (.40) $ .93
=========== ===========
Weighted average number of shares outstanding
Basic .................................................... 4,317,000 4,758,000
=========== ===========
Diluted .................................................. 4,317,000 5,043,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CALTON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended May 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities
Net income (loss) ................................................ $ (1,741,000) $ 4,711,000
Adjustments to reconcile net income (loss) to net cash provided
by (used by) operating activities
Income from the sale of Calton Homes, Inc. .................... -- (4,554,000)
Loss from discontinued operations ............................. -- 287,000
Loss on sale of securities .................................... 508,000 --
Provision for income taxes .................................... -- 295,000
Depreciation and amortization ................................. 59,000 --
Change in net assets/liabilities of discontinued operations ... -- (500,000)
Increase in receivables ....................................... (170,000) --
(Increase) decrease in prepaid expenses and other assets ...... (107,000) 630,000
Increase (decrease) in accounts payable, accrued
expenses and other liabilities ............................. 76,000 (568,000)
------------ ------------
(1,375,000) 301,000
------------ ------------
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 ............................. 1,000,000 104,000
Purchase of securities available for sale ..................... (825,000) (3,098,000)
Acquisition of business, net of cash acquired ................. (20,000) --
Purchase of property and equipment ............................ (241,000) --
------------ ------------
1,263,000 38,054,000
------------ ------------
Financing Activities
Stock repurchase .............................................. (58,000) (7,345,000)
Stock options exercised ....................................... 149,000 330,000
------------ ------------
91,000 (7,015,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents ............. (21,000) 31,340,000
Cash and cash equivalents at beginning of period ................. 33,786,000 85,000
------------ ------------
Cash and cash equivalents at end of period ....................... $ 33,765,000 $ 31,425,000
------------ ------------
Noncash Investing Activities:
Conversion of notes receivable into investments ............... $ 338,000 $ --
============ ============
Stock repurchase payable ...................................... $ 367,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended May 31, 2000
(Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Total Other
Shareholders' Common Paid In Retained Treasury Comprehensive Comprehensive
Equity Stock Capital Earnings Stock 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)........................... (1,741) -- -- (1,741) -- -- (1,741)
Issuance of stock under
stock option plans................ 149 4 145 -- -- -- --
Less: Purchase of Treasury stock..... (425) -- -- -- (425) -- --
Comprehensive loss:
Unrealized holding gains in
securities, net of tax......... 398 -- -- -- -- 398 398
Reclassification adjustment
for loss realized in net income... 518 -- -- -- -- 518 518
------
Comprehensive loss................... -- -- -- -- -- -- (825)
------- ---- ------- ------- ------- ----- ------
Balance, May 31, 2000............... $37,553 $287 $32,781 $13,210 $(9,123) $ 398 $3,496
======= ==== ======= ======= ======= ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<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 six months
ended May 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, effective for
financial statements issued for periods ending after December 15, 1997. As of
May 31, 2000, there were 21,470,000 shares of Common Stock and options to
purchase 3,963,000 shares of Common Stock outstanding. After giving effect to
the Recapitalization, there were 4,294,000 shares of Common Stock and options to
acquire 793,000 shares of Common Stock outstanding. In addition, a warrant to
purchase 240,000 shares (as 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 warrant used in calculating
the diluted earnings per share have been excluded from the loss per share
calculations for the six months ended May 31, 2000 because the effect would be
antidilutive.
2. Securities Available For Sale
During the first quarter of 2000 the Company recognized a $508,000 loss on
securities sold.
8
<PAGE>
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 $1,664,000, based on a market
price of $1.875 for CorVu as of May 31, 2000, 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
$398,000, net of tax as of May 31, 2000.
The aggregate 478,000 warrants (including 253,000 warrants acquired in
November 1999) and 518,000 shares of CorVu Common Stock are currently
unregistered securities and are expected to be registered during fiscal 2000.
The Company has significant exposure to market risks associated with declines in
trading prices of these securities.
Also included in securities available for sale are non-readily marketable
investments which are maintained at cost in the amount of $85,000.
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):
May 31, 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)
===== =====
9
<PAGE>
Results of operations from discontinued operations are as follows (amounts
in thousands):
Six Months Ended
------------------------
May 31, May 31,
2000 1999
------- -------
Revenues ........................................ $ -- $ 6,513
------- -------
Cost of revenue .............................. -- 5,710
Selling, general and administrative .......... -- 1,282
------- -------
-- 6,992
------- -------
Loss from operations ............................ -- (479)
Benefit for income taxes ........................ -- (192)
------- -------
Net loss from discontinued operations ........... $ -- $ (287)
======= =======
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) 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 May 31, 2000 there was $1,551,000 in the Specific
Indemnification Funds, and $1,496,000 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 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.
10
<PAGE>
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 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. 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. As of May 31,
2000, $776,000 was 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 owners agreements with the other owners of PrivilegeONE and its parent
company which obliges each of the owners to offer its equity interest in
PrivilegeONE or its parent to the other owners in the event that the owner
wishes to transfer its equity interest. The 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 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
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. 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 six months ended May 31, 2000
(dollars in thousands):
<TABLE>
<CAPTION>
Corporate and
Consulting Total
eCalton PrivilegeONE Services Company
------- ------------ ------------- -------
<S> <C> <C> <C> <C>
Total revenues ..................................... $ 555 $ -- $ 1,712 $ 2,267
Total cost of revenues (a) ......................... 389 -- -- 389
Total selling, general and administrative expenses.. 1,160 734 1,217 3,111
Income (loss) from operations ...................... (994) (734) 495 (1,233)
Loss on sale of securities ......................... -- -- (508) (508)
Loss from continuing operations .................... (994) (734) (13) (1,741)
Total assets ....................................... $ 818 $ 60 $39,184 $40,062
</TABLE>
----------
(a) Total cost of revenues represents production costs (including allocated
salaries, computer hardware, computer software and video conferencing
costs).
11
<PAGE>
7. 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 May 31, 2000 there were
21,470,000 shares of Common Stock outstanding and 3,963,000 options to purchase
Common Stock outstanding. After giving effect to the Recapitalization, there
were 4,294,000 shares of Common Stock and 793,000 options outstanding. 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.
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.
The Company commenced a significant 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
May 31, 2000, there were 1,454,000 shares held in Treasury in the amount of
$9,123,000.
In April 2000, the shareholders of the Company approved the adoption of the
2000 Equity Incentive Plan (the "2000 Plan"). The aggregate number of shares of
Common Stock reserved for issuance pursuant to awards granted under the plan is
800,000 shares. Following the adoption of the 2000 Plan, the Company's Board of
Directors approved the grant to nine employees of options to acquire an
aggregate of 20,400 shares of Common Stock at an exercise price of $8.75 per
share. These options have a ten-year term and vest in five equal annual
installments.
8. Subsequent Event
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 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. ITP management may also be granted options to acquire
up to 150,000 shares of Common Stock of the Company if ITP successfully executes
its business plan.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2000 AND 1999
Revenues for the three and six months ended May 31, 2000 were $1.2 million
and $2.3 million, respectively as compared to $.8 million and $1.4 million for
the three and six months ended May 31, 1999, 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 $.3 million of revenues
earned by eCalton. The revenues for the comparable quarter of the prior year
were comprised of $.3 million derived from the consulting agreement and $.5
million of interest income.
Revenues for the six months ended May 31, 2000 were comprised of: $.6
million from the consulting agreement with the purchaser of Calton Homes, $1.1
million of interest income and $.6 million from eCalton as compared to $.5
million from the consulting agreement and $.9 million of interest income for the
six months ended May 31, 1999. eCalton was not acquired until the third quarter
of 1999.
Selling, general and administrative costs were $1.6 million and $3.1
million for the three and six months ended May 31, 2000 as compared to $.4
million and $.7 million for the three and six months ended May 31, 1999,
respectively. These significant increases are attributable to the operations of
eCalton and PrivilegeONE aggregating $1.0 million and $1.8 million for the three
and six months ended May 31, 2000. eCalton's selling, general and administrative
expenses have increased during the second quarter to $.7 million from $.5 during
the first quarter as a result of additional hiring of personnel. General and
administrative costs have also increased at Calton, Inc. to $1.3 million for the
six months ended May 31, 2000 as compared to $.7 million for the six months
ended May 31, 1999 primarily due to personnel additions and increased
professional costs, attributable to increasing acquisition related activities
and resources. Also included in selling, general and administrative costs is $.3
million related to proposed transactions that were abandoned.
The Company recorded a $508,000 loss on the sale of securities available
for sale during the six months ended May 31, 2000.
For the three and six months ended May 31, 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 May 31, 2000 there was $1.5 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 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
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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 May 31, 2000 the Company had $33.8 million of highly liquid money
market funds. The Company's strategic plan is to acquire controlling interests
in companies within the information technology industry, including Internet and
e-commerce. Also, the Company filed a registration statement with the Securities
and Exchange Commission relating to a proposed spin-off to its shareholders of a
15% interest in Calton Acquisition Corp., a wholly owned subsidiary which was
formed to pursue a merger or other business combination with an operating
business. Calton has made a $250,000 equity contribution and a $750,000 loan to
Calton Acquisition Corp., which has no other assets and which has not conducted
any business.
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 interest at the rate of 10% per
annum and becomes due in January 2004. Through May 31, 2000 the Company had
funded $776,000 of the $1.5 million.
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 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 May 31, 2000 the Company had repurchased an
aggregate of 1.5 million shares for $9.1 million, an average price of $6.27 per
share, pursuant to its stock repurchase program.
Cash Flows from Operating Activities
The proceeds from the sale of Calton Homes are primarily invested in highly
liquid funds earning interest at approximately 6.2% per annum that generated
approximately $1.0 million for the six months ended May 31, 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 six months
ended May 31, 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
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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, however it is anticipated that the securities will be
registered during fiscal 2000.
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 $672,000 was funded during the six months ended May 31, 2000 and advances
of $104,000 to PrivilegeONE were outstanding at the beginning of the year.
Cash Flows from Financing Activities
During the six months ended May 31, 2000, certain optionholders exercised
their options to purchase 70,600 shares as adjusted for the reverse stock split
under the 1993 and 1996 Stock Option Plans generating $149,000. In addition, the
Company repurchased 74,000 shares (as adjusted for the reverse stock split) for
$425,000 during the first six months of fiscal 2000.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders
The Company held its 2000 Annual Meeting of shareholders (the
"Meeting") on April 17, 2000. At the Meeting, shareholders were asked to
reelect Frank Cavell Smith, Jr. as director until the 2004 annual meeting
and to adopt the Calton, Inc. 2000 Equity Incentive Plan. The results of
the voting were as follows:
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstain Non-Votes
---------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Election of Frank Cavell Smith, Jr. 20,477,248 -- 162,863 -- --
Adoption of the 2000 Equity Incentive Plan 9,141,267 406,853 -- 30,322 11,061,669
</TABLE>
Shareholder votes do not reflect the reverse split that occurred at
the close of business on May 31, 2000. The terms of office of each of
Anthony J. Caldarone, J. Ernest Brophy, Mark N. Fessel, Kenneth D. Hill,
and Robert Naughton, continued after the Meeting.
Item 5. Other Information
(i) Effective at the close of business on May 31, 2000, the Company
effected a one-for-twenty-five share combination or "reverse split" of
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 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 stock options and the
warrant outstanding have been proportionately adjusted.
(ii) In June, 2000 the Company filed a registration statement with the
Securities and Exchange Commission relating to a proposed spin-off to its
shareholders of a 15% interest in Calton Acquisition Corp., a wholly-owned
subsidiary which was recently formed to pursue a merger or other business
combination with an operating business. Calton has made a $250,000 equity
contribution and a $750,000 loan to Calton Acquisition Corp., which has no
other assets and which has not conducted any business.
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<PAGE>
(iii) 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 Company's agreement with ITP and the other owners
of ITP obliges each of the owners to offer its interest in ITP to the other
owners in the event the owner wishes to transfer its equity interest. In
addition, if the holders of a majority of the outstanding interests in ITP
decide to sell their interests, they must, at the request of the minority
owners, condition their sale of the interests on the buyer's purchase of
the interests owned by the minority owners. Certain of the other 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 an initial public offering by ITP, a merger or other
business combination involving ITP, a change of control of ITP, or if
Anthony J. Caldarone ceases to be Chairman of the Company.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27. Financial Data Schedule as of May 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/ David J. Coppola
--------------------------------------------
David J. Coppola
Vice-President and Treasurer
(Principal Financial and Accounting Officer)
Date: July 14, 2000
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