SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended February 28, 2003
[ ] 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)
2013 INDIAN RIVER BLVD.
VERO BEACH, FLORIDA 32960
(Addresses of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (772) 794-1414
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 April 10, 2003, 4,644,208 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
CALTON, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets at
February 28, 2003 (Unaudited) and November 30, 2002......................... 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended February 28, 2003 and February 28, 2002.................. 4
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended February 28, 2003 and February 28, 2002.................. 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 10
Item 3. Controls and Procedures..................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 15
Item 6. Exhibits and Reports on Form 8-K............................................ 16
SIGNATURES ............................................................................ 16
- ------------------------------------------------------------------------------------------------------------------
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 continued operating losses and their effect on liquidity, the Company's ability to
raise capital, matters related to the indemnification provisions in connection with the Company's sale
of Calton Homes, Inc., national and local economic conditions, the lack of an established operating
history for the Company's current business activities, conditions and trends in the Internet and
technology industries in general, continued acceptance of the Company's co-branded customer loyalty
credit card program, the effect of governmental regulation on the Company and the risks described under
the caption "Certain Risks" in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 2002.
- ------------------------------------------------------------------------------------------------------------------
2
ITEM 1: FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2003 2002
--------------- ----------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 2,726,000 $ 3,286,000
Holdback receivable 33,000 88,000
Accounts receivable, net of allowance for doubtful accounts of
$31,000 at February 28, 2003 and November 30, 2002 223,000 281,000
Prepaid expenses and other current assets 188,000 143,000
--------------- ----------------
Total current assets 3,170,000 3,798,000
Property and equipment, net 92,000 107,000
--------------- ----------------
Total assets $ 3,262,000 $ 3,905,000
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,121,000 $ 1,118,000
Deferred taxes 487,000 487,000
--------------- ----------------
Total current liabilities 1,608,000 1,605,000
--------------- ----------------
Commitments and Contingencies - -
SHAREHOLDERS' EQUITY
Common stock, $.05 par value, 10,740,000 shares authorized;
4,644,000 shares outstanding at February 28, 2003
and November 30, 2002 232,000 232,000
Additional paid-in capital 12,138,000 12,138,000
Accumulated deficit (1,614,000) (968,000)
Less cost of shares held in treasury, 1,607,000 shares as of
February 28, 2003 and November 30, 2002 (9,102,000) (9,102,000)
--------------- ----------------
Total shareholders' equity 1,654,000 2,300,000
--------------- ----------------
Total liabilities and shareholders' equity $ 3,262,000 $ 3,905,000
=============== ================
See notes to consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
2003 2002
--------------------- ---------------------
Revenue (RESTATED)
Technical staffing services $ 234,000 $ 394,000
Homebuilding consulting fees - 108,000
Website design and implementation 127,000 127,000
Credit card loyalty program 12,000 -
--------------------- ---------------------
373,000 629,000
--------------------- ---------------------
Costs and expenses
Project personnel and expenses 244,000 412,000
Credit card loyalty program direct expenses 3,000 -
Selling, general and administrative 730,000 1,269,000
--------------------- ---------------------
977,000 1,681,000
--------------------- ---------------------
Loss from operations (604,000) (1,052,000)
Other (expense) income
Interest income 9,000 64,000
Gain on sale of subsidiary stock - 32,000
Impairment of note receivable - (750,000)
Litigation settlements (58,000) -
Other income 7,000 -
--------------------- ---------------------
Loss from continuing operations (646,000) (1,706,000)
Loss from operations of discontinued component - (442,000)
--------------------- ---------------------
Net loss $ (646,000) $ (2,148,000)
===================== =====================
Basic and diluted loss per common share:
Loss from continuing operations $ (0.14) $ (0.38)
Loss from discontinued component - (0.10)
--------------------- ---------------------
Net loss per common share $ (0.14) $ (0.48)
===================== =====================
Weighted average number of shares outstanding
Basic and diluted 4,557,000 4,445,000
See notes to consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
(UNAUDITED)
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES (RESTATED)
Net loss $ (646,000) $ (2,148,000)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 15,000 36,000
Impairment of investments - 750,000
Directors fee, non-cash - 11,000
Changes in operating assets and liabilities
Accounts receivable 58,000 224,000
Prepaid expenses and other assets (45,000) (34,000)
Accounts payable, accrued expenses and other liabilities 3,000 (178,000)
--------------- ---------------
Net cash used in operating activities (615,000) (1,339,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Assets and liabilities of discontinued component - 438,000
Sale of available for sale securities - 32,000
Purchase of property and equipment - (11,000)
Receipts from holdback escrow account 55,000 -
--------------- ---------------
Net cash (used in) provided by investing activities 55,000 459,000
CASH FLOWS FROM FINANCING ACTIVITIES
Stock repurchase - (12,000)
Receipts from stock issued in ESPP - 28,000
Issuance of treasury shares in ESPP - (28,000)
--------------- ---------------
Net cash (used in) financing activities - (12,000)
Net (decrease) in cash and cash equivalents (560,000) (892,000)
Cash and cash equivalents at beginning of period 3,286,000 4,715,000
--------------- ---------------
Cash and cash equivalents at end of period $ 2,726,000 $ 3,823,000
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ - $ -
Cash paid for income taxes $ - $ 8,000
See notes to consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated 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-QSB and Regulation S-B. 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 adjustments) considered
necessary for a fair presentation of the Company's financial position as of
February 28, 2003, and the results of operations and cash flows for the
three months ended February 28, 2003 and February 28, 2002 have been
included. These interim financial statements should be read in conjunction
with the consolidated financial statements and related notes included in
the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 17, 2003. Operating results for the three
months ended February 28, 2003 are not necessarily indicative of the
results that may be expected for the year ended November 30, 2003.
2. LIQUIDITY AND MANAGEMENT'S PLANS
The Company's consolidated financial statements are prepared on a going
concern basis, which assumes that Calton will realize its assets and
discharge its liabilities in the normal course of business. As reflected in
the financial statements, Calton has incurred losses from continuing
operations of ($646,000) and ($1,706,000) during the three months ended
February 28, 2003 and 2002, respectively. As of February 28, 2003, the
Company has working capital of $1,562,000, which is not sufficient to fund
the current operating plan during the fiscal year ending on November 30,
2003. These conditions raise substantial doubt as to the ability of Calton
to continue its normal business operations as a going concern.
Management's plans to sustain Calton operations include accelerating and
augmenting revenue opportunities, principally in the Credit Card Loyalty
Business Segment, curtailing operating expenses to the extent appropriate
and raise additional debt or equity capital from external sources. During
2002, Calton sold its non-performing interest in Innovation Growth Partners
which contributed to the Company's net loss in the amounts of $(1,020,000)
and $(442,000) during the fiscal year ended November 30, 2002, and the
quarterly period ended February 28, 2002, respectively. In addition, the
Internet development group of eCalton and PrivilegeONE consolidated office
space to best cross train and to leverage employee skill sets. While
management is actively addressing multiple sources of capital, there are
currently no commitments, and there can be no assurances that sufficient
capital can be raised under terms acceptable to management. In addition,
the Credit Card Loyalty Business Segment is in an early stage of
development. Having established technological and market feasibility,
management is currently accessing marketing channels and developing
strategic partners to support the business. Access to and maintenance of
credit card services, such as those provided in the Fleet agreement, are
essential to conduct the Credit Card Loyalty Business Segment. Fleet has
advised the Company that it wishes to terminate its agreement with the
6
Company and withdraw as the issuer of the PrivilegeONE credit card.
Although the Company does not believe that Fleet has the right to terminate
the agreement and withdraw as issuer, the Company, with the cooperation of
Fleet, is endeavoring to identify a potential successor issuer to Fleet.
The failure to enter into an agreement with a successor issuer, if the
agreement with Fleet is terminated, would have a material adverse affect on
the Company. The financial statements do not include any adjustments that
may arise as a result of this uncertainty.
3. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following as of February 28, 2003 and November 30, 2002:
2003 2002
------------------ ----------------
Accounts payable, trade $105,000 $121,000
Accrued expenses 298,000 287,000
Accrued contingency reserves 718,000 710,000
------------------ ----------------
$1,121,000 $1,118,000
================== ================
4. SEGMENT REPORTING
During the three months ended February 28, 2003, the Company operated two
identifiable business segments and for the three months ended February 28,
2002, the Company operated three identifiable business segments, as
specified below. The first business segment is comprised of eCalton
Internet Business Development (an end-to-end solutions provider for
Internet Business Development) and eCalton Technology Professionals
(technology-based consulting and staffing services specializing in network
design and management).
The second business segment is that of PrivilegeONE, which developed the
patent pending PrivilegeONE Loyalty Program, which aggregates disparate
entities under the PrivilegeONE umbrella to create customer loyalty and
retention to the individual entity through the issuance of co-branded
credit cards by a financial institution and membership cards.
The third business segment was that of Corporate and Consulting which
included Innovation Growth Partners, prior to its disposal in April 2002.
This division also recognized revenues from the purchaser of Calton Homes,
Inc. in the amount of $108,000 for the quarter ended February 28, 2002 for
consulting services. The consulting agreement expired on December 31, 2001.
No further revenues from this contract are expected.
7
Operating results, by industry segment, for the three months ended February
28, 2003 and 2002 are as follows (in thousands):
Three months ended February 28, 2003
----------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
and Staffing Business Services Company
----------------------------------------------------------------
Total revenues $ 361 $ 12 $ - $ 373
Total cost of revenues 244 3 - 247
Depreciation and amortization - - 15 15
Loss from operations (53) (202) (349) (604)
Interest income - - 9 9
Net loss (53) (202) (391) (646)
Total assets $ 262 $ 63 $ 2,937 $ 3,262
Three months ended February 28, 2002
----------------------------------------------------------------
Internet Credit Card Corporate and
Development Loyalty Consulting Total
and Staffing Business Services Company
----------------------------------------------------------------
Total revenues $ 521 $ - $ 108 $ 629
Total cost of revenues 412 - - 412
Depreciation and amortization 24 - 12 36
Loss from operations (319) (363) (370) (1,052)
Interest income - - 64 64
Net loss (319) (363) (1,466) (2,148)
Total assets $ 535 $ - $ 6,828 $ 7,363
5. COMMITMENTS AND CONTINGENT LIABILITIES
CALTON HOMES
The agreement pursuant to which the Company sold Calton Homes in December
1998 required the Company to indemnify the purchaser for, among other
things, certain liabilities that arise out of events occurring prior to the
closing, principally relating to certain warranty claims on homes built. In
connection with the sale, the Company entered into a holdback escrow
agreement with the purchaser pursuant to which approximately $5,200,000 of
the closing proceeds was deposited into escrow. Of this amount,
approximately $3,000,000 (the "General Indemnification Funds") was
deposited to provide security for the Company's
8
indemnity obligations and approximately $2,200,000 (the "Specific
Indemnification Funds") was deposited to fund costs associated with certain
specified litigation involving Calton Homes. During October 2001, the
Company entered into a settlement agreement with the seller that released
certain remaining funds in the escrow account. As of February 28, 2003,
approximately $33,000 remained in the General Indemnification Fund. The
Company's indemnification obligations are not limited to the amount in
escrow. In July 2002, the purchaser served a Demand for Arbitration on the
Company and is currently alleging damages of $1,600,000 related to alleged
construction defects in homes delivered by Calton Homes prior to its sale.
The arbitration is expected by management to be completed during 2003. The
Company intends to assert certain counterclaims against the purchaser and
seek recoveries from insurers and subcontractors. Management is in the
process of reviewing the additional claims of the purchaser and currently
believes that its reserves are adequate.
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 $2,000,000. Any General Indemnification Funds remaining in the
holdback escrow fund will be applied as a credit against amounts required
to be deposited in the liquidating trust.
CREDIT CARD PROCESSING AGREEMENT
The Company and PrivilegeONE have entered into a credit card processing
agreement (the "Agreement") with Fleet Credit Card Services, L.P. ("Fleet")
pursuant to which Fleet has agreed to issue and administer the PrivilegeONE
credit cards. Under the Agreement, Fleet is required to remit a fee for
each account established through the PrivilegeONE program plus a percentage
of the revenue realized from finance charges. PrivilegeONE is required to
pay Fleet a fee for the development of the credit card for each
participating automotive dealer. The Agreement requires the Company to
capitalize PrivilegeONE with not less than $500,000 during the original
five-year term of the agreement and maintain a contingency reserve fund
equal to three and one-half (3.5%) percent of all net revenues received by
PrivilegeONE, up to a maximum of $1,500,000. The Company has complied with
the capitalization and contingency reserve requirements outlined in the
Agreement.
The Credit Card Loyalty business segment is in an early stage of
development. Having established technological and market feasibility,
management is currently accessing marketing channels and developing
strategic partners to support the business. Access to, and maintenance of,
credit card services such as those provided in the Agreement are essential
to conduct the Credit Card Loyalty business segment. Fleet has advised the
Company that it wishes to terminate its agreement with the Company and
withdraw as the issuer of the PrivilegeONE credit card. Although the
Company does not believe that Fleet has the right to terminate the
agreement and withdraw as issuer, the Company, with the cooperation of
Fleet, is endeavoring to identify a potential successor issuer to Fleet.
The failure to enter into an agreement with a successor issuer, if the
agreement with Fleet is terminated, would have a material adverse affect on
the Company.
9
OTHER LITIGATION
On April 12, 2002, S. Raymond Tetreault and Thomas E. Van Fechtmann, each
of whom is a former officer and member of PrivilegeONE, filed an action in
the United States District Court for the State of Rhode Island against the
Company, PrivilegeONE and certain officers of the Company, alleging, among
other things, (i) breach of their employment agreements with PrivilegeONE
in connection with the termination of their employment; (ii) breach of
fiduciary duty, (iii) breach of contract as a result of the Company's
unwillingness to permit the early exercise of certain options to acquire
the Company's Common Stock prior to the record date for the dividend
declared by the Company's Board of Directors in May 2001; and (iv) common
law fraud, misrepresentation and violations of the Securities Act of 1933
in connection with the acquisition by the Company of their interest in
PrivilegeONE in May 2001, due to an alleged failure to disclose the
proposed dividend to the plaintiffs. The plaintiffs are seeking, among
other things, compensatory and punitive damages in an unspecified amount,
injunctive relief and the imposition of a constructive trust on 190,000
shares of the Company's Common Stock and its ownership interest in
PrivilegeONE. The Company's motion to have the case summarily dismissed was
denied in December 2002. On April 4, 2003, the Company asserted a
counterclaim alleging fraud, among other things, and is seeking $5,000,000
in damages.
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company and, as in the case of other pending claims,
has been reserved for accordingly.
6. DISPOSAL OF INNOVATION GROWTH PARTNERS
On April 23, 2002, the Company disposed of its 51% interest in Innovation
Growth Partners ("IGP") as part of its overall plans to curtail
expenditures and preserve cash reserves. The disposal of IGP was treated as
a discontinued operation and, accordingly, the financial results for all
periods presented were restated to reflect IGP as a discontinued operation.
The loss from the IGP operation during the quarterly period ended February
28, 2002 amounted to $442,000; it had no revenues for that period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
REVENUES: Consolidated revenues for the three months ended February 28,
2003 and 2002 were $373,000 and $629,000, respectively. Technical staffing
revenues decreased from $394,000 in 2002 to $234,000 in 2003 due to
significant reductions in staffing demands in eCalton's Houston-based
division. Homebuilding consulting fees, which amounted to $108,000 in 2002,
were derived from a single contract that expired on December 31, 2001. No
further revenues from this contract are expected.
Finally, while revenues of the Credit Card Loyalty Business Segment were
only $12,000, management of the Company has placed significant emphasis on
the development of this
10
segment and currently believes that its revenues will comprise the material
amount of consolidated revenues in future periods. However, the successful
generation of revenues from this segment is dependent upon many factors
including the acceptance of the program by a high-level of automotive
dealers and the continued maintenance of credit card processing services.
COST OF REVENUES: Cost of revenues consist of project personnel costs and
expenses associated with the technical staffing and website design and
implementation segments and credit card loyalty program direct expenses.
Project personnel and expenses decreased to $247,000 for the quarter ended
February 28, 2003 compared to $412,000 for the quarter ended February 28,
2002. The decrease is due to the lower levels of revenues generated in the
technical staffing division. Gross profits on revenues increased from 21%
in 2002 to 32% in 2003 reflecting the Company's cost cutting efficiencies
and as a result of the operations becoming more focused on more profitable
contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative costs for the quarter ended February 28, 2003 were $730,000,
compared to $1,269,000 for the quarter ended February 28, 2002. The
decrease is primarily attributable to significant downsizing of operations
at both the PrivilegeONE and the website development subsidiaries.
Specifically, both divisions have dramatically reduced occupancy costs and
have experienced a reduction in staff compared to the quarter ended
February 28, 2002.
OTHER (EXPENSE) INCOME: Interest income is principally derived from
interest on depository accounts and money market type accounts. Interest
income decreased from $64,000 during the quarter ended February 28, 2002 to
$9,000 for the quarter ended February 28, 2003. The decrease was a result
of lower average deposited balances. Currently, cash is being used in
operating activities and, accordingly, interest income is expected to
decline during 2003.
LITIGATION SETTLEMENTS: The Company recorded $58,000 in litigation
settlements for the quarter ended February 28, 2003. In December 2002, the
Company settled the last matter in which cash was withheld in the Specific
Indemnification Fund established in connection with the sale of Calton
Homes, Inc. in December 1998 and then closed the Fund. The Company
increased its litigation reserve with the remaining cash that was in the
Specific Indemnification Fund upon its closure.
IMPAIRMENT OF LONG-LIVED ASSETS: The impairment of a note receivable in the
amount of $750,000 had been incurred in the quarter ended February 28, 2002
without a similar charge in this year's quarter. Management had performed
an assessment of a note issued to the Company by Automated Information
Management, Inc. ("AIM") and, based upon a review of AIM's operating
results during the past two quarters, believed that it may not be
recoverable.
DISCONTINUED OPERATIONS: On April 23, 2002, the Company disposed of its 51%
interest in Innovation Growth Partners ("IGP") as part of its overall plans
to curtail expenditures and preserve cash reserves. The disposal of IGP was
treated as a discontinued operation and, accordingly, the financial results
for all periods presented were restated to reflect IGP as a discontinued
operation. The loss from the IGP operation during the quarterly period
ended February 28, 2002 amounted to $442,000; it had no revenues for that
period.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements are prepared on a going
concern basis, which assumes that Calton will realize its assets and
discharge its liabilities in the normal course of business. As reflected in
the financial statements, Calton has incurred losses from continuing
operations of ($646,000) and ($1,706,000) during the three months ended
February 28, 2003 and 2002, respectively and has used cash in continuing
operations of $615,000 and $1,339,000 for the quarters ended February 28,
2003 and 2002, respectively. As of February 28, 2003, the Company has
working capital of $1,562,000, which is not sufficient to fund the current
operating plan during the fiscal year ending on November 30, 2003. These
conditions raise substantial doubt as to the ability of Calton to continue
its normal business operations as a going concern.
Management's plans to sustain Calton operations include accelerating and
augmenting revenue opportunities, principally in the credit card loyalty
segment, curtailing operating expenses to the extent appropriate and
raising additional debt or equity capital from external sources. While
management is actively addressing multiple sources of capital, there are
currently no commitments, and there can be no assurances that sufficient
capital can be raised under terms acceptable to management. The financial
statements do not include any adjustments that may arise as a result of
this uncertainty.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company used cash of $615,000 in its operating activities during the
three months ended February 28, 2003 compared to $1,339,000 during the same
period of the prior year. The current year cash usages reflect the
continuing losses of the Technical Staffing, Website Design and
Implementation and Credit Card Loyalty Segments.
CASH FLOWS FROM INVESTING ACTIVITIEs
The Company has substantially curtailed its capital expenditure and
investing activities. Such curtailment is anticipated to continue until the
Company can achieve a state of profitable operations. The Company's
expenditures for property and equipment were $11,000 for the quarter ended
February 28, 2002, principally associated with the Credit Card Loyalty
Segment.
The Company received $55,000 from the Specific Indemnification Fund
established in connection with the sale of Calton Homes, Inc. in December
1998. The Company recorded $58,000 in litigation settlements for the
quarter ended February 28, 2003. In December 2002, the Company settled the
last matter in which cash was withheld in the Specific Indemnification Fund
and then closed the Fund. The Company increased its litigation reserve with
the remaining cash that was in the Specific Indemnification Fund upon its
closure.
CASH FLOWS FROM FINANCING ACTIVITIES
No cash was provided by or used in financing activities during the
quarterly period ended February 28, 2003. During the quarter ended February
28, 2002, the Company repurchased 19,000 shares of its Common Stock for
$12,000.
12
In addition, during the quarter ended February 28, 2002, the Company
received $28,000 in connection with the issuance of 55,000 shares of the
Company's Common Stock from treasury under the Company's Employee Stock
Purchase Plan. There was no similar occurrence in the quarter ended
February 28, 2003.
COMMITMENTS, GUARANTEES AND OFF BALANCE SHEET ITEMS
CALTON HOMES
The agreement pursuant to which the Company sold Calton Homes in December
1998 required the Company to indemnify the purchaser for, among other
things, certain liabilities that arise out of events occurring prior to the
closing, principally relating to certain warranty claims on homes built. In
connection with the sale, the Company entered into a holdback escrow
agreement with the purchaser pursuant to which approximately $5,200,000 of
the closing proceeds was deposited into escrow. Of this amount,
approximately $3,000,000 (the "General Indemnification Funds") was
deposited to provide security for the Company's indemnity obligations and
approximately $2,200,000 (the "Specific Indemnification Funds") was
deposited to fund costs associated with certain specified litigation
involving Calton Homes. During October 2001, the Company entered into a
settlement agreement with the seller that released certain remaining funds
in the escrow account. As of February 28, 2003, approximately $33,000
remained in the General Indemnification Fund. The Company's indemnification
obligations are not limited to the amount in escrow. In July 2002, the
purchaser served a Demand for Arbitration on the Company and is currently
alleging damages of $1,600,000 related to alleged construction defects in
homes delivered by Calton Homes prior to its sale. The arbitration is
expected by management to be completed during 2003. The Company intends to
assert certain counterclaims against the purchaser and seek recoveries from
insurers and subcontractors. Management is in the process of reviewing the
additional claims of the purchaser and currently believes that its reserves
are adequate.
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 $2,000,000. Any General Indemnification Funds remaining in the
holdback escrow fund will be applied as a credit against amounts required
to be deposited in the liquidating trust.
CREDIT CARD PROCESSING AGREEMENT
The Company and PrivilegeONE have entered into a credit card processing
agreement with Fleet Credit Card Services, L.P. ("Fleet") pursuant to which
Fleet has agreed to issue and administer the PrivilegeONE credit cards.
Under the agreement, Fleet is required to remit a fee for each account
established through the PrivilegeONE program plus a percentage of the
revenue realized from finance charges. PrivilegeONE is required to pay
Fleet a fee for the development of the credit card for each participating
automotive dealer. The agreement requires the Company to capitalize
PrivilegeONE with not less than $500,000 during the original five-year term
of the agreement and maintain a contingency reserve fund equal to three and
one-half (3.5%) percent of all net revenues received by PrivilegeONE, up to
a maximum of $1,500,000. The Company has complied with the capitalization
and contingency reserve requirements outlined in the agreement.
13
The Credit Card Loyalty business segment is in an early stage of
development. Having established technological and market feasibility,
management is currently accessing marketing channels and developing
strategic partners to support the business. Access to, and maintenance of,
credit card services such as those provided in the Agreement are essential
to conduct the Credit Card Loyalty business segment. Fleet has advised the
Company that it wishes to terminate its agreement with the Company and
withdraw as the issuer of the PrivilegeONE credit card. Although the
Company does not believe that Fleet has the right to terminate the
agreement and withdraw as issuer, the Company, with the cooperation of
Fleet, is endeavoring to identify a potential successor issuer to Fleet.
The failure to enter into an agreement with a successor issuer, if the
agreement with Fleet is terminated, would have a material adverse affect on
the Company.
OTHER LITIGATION
On April 12, 2002, S. Raymond Tetreault and Thomas E. Van Fechtmann, each
of whom is a former officer and member of PrivilegeONE, filed an action in
the United States District Court for the State of Rhode Island against the
Company, PrivilegeONE and certain officers of the Company, alleging, among
other things, (i) breach of their employment agreements with PrivilegeONE
in connection with the termination of their employment; (ii) breach of
fiduciary duty, (iii) breach of contract as a result of the Company's
unwillingness to permit the early exercise of certain options to acquire
the Company's Common Stock prior to the record date for the dividend
declared by the Company's Board of Directors in May 2001; and (iv) common
law fraud, misrepresentation and violations of the Securities Act of 1933
in connection with the acquisition by the Company of their interest in
PrivilegeONE in May 2001, due to an alleged failure to disclose the
proposed dividend to the plaintiffs. The plaintiffs are seeking, among
other things, compensatory and punitive damages in an unspecified amount,
injunctive relief and the imposition of a constructive trust on 190,000
shares of the Company's Common Stock and its ownership interest in
PrivilegeONE. The Company's motion to have the case summarily dismissed was
denied in December 2002. On April 4, 2003, the Company asserted a
counterclaim alleging fraud, among other things, and is seeking $5,000,000
in damages.
SENSITIVE ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and notes. Significant estimates include management's estimate of the
carrying value of accounts receivable and investments and the establishment
of reserves for existing and future claims. Actual results could differ
from those estimates. The Company's critical accounting policies relating
to these items are described in the Company's Annual Report on Form 10-K
for the year ended November 30, 2002. As of February 28, 2003, there have
been no material changes to any of the critical accounting policies
contained therein.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the filing date of this report, the Company
carried out an evaluation of the
14
effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including the Company's Chairman and Chief Executive Officer along with the
Company's Chief Financial Officer, who concluded that the Company's
disclosure controls and procedures are effective. There have been no
significant changes in the Company's internal controls or in other factors,
which could significantly affect internal controls subsequent to the date
the Company carried out its evaluation. Disclosure controls and procedures
are controls and other procedures that are designed to ensure that
information required to be disclosed in the Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 12, 2002, S. Raymond Tetreault and Thomas E. Van Fechtmann, each
of whom is a former officer and member of PrivilegeONE, filed an action in
the United States District Court for the State of Rhode Island against the
Company, PrivilegeONE and certain officers of the Company, alleging, among
other things, (i) breach of their employment agreements with PrivilegeONE
in connection with the termination of their employment; (ii) breach of
fiduciary duty, (iii) breach of contract as a result of the Company's
unwillingness to permit the early exercise of certain options to acquire
the Company's Common Stock prior to the record date for the dividend
declared by the Company's Board of Directors in May 2001; and (iv) common
law fraud, misrepresentation and violations of the Securities Act of 1933
in connection with the acquisition by the Company of their interest in
PrivilegeONE in May 2001, due to an alleged failure to disclose the
proposed dividend to the plaintiffs. The plaintiffs are seeking, among
other things, compensatory and punitive damages in an unspecified amount,
injunctive relief and the imposition of a constructive trust on 190,000
shares of the Company's Common Stock and its ownership interest in
PrivilegeONE. The Company's motion to have the case summarily dismissed was
denied in December 2002. On April 4, 2003, the Company asserted a
counterclaim alleging fraud, among other things, and is seeking $5,000,000
in damages.
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company and, as in the case of other pending claims,
has been reserved for accordingly.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
99.1 - Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
99.2 - Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
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/ Thomas C. Corley
-----------------------------------------------
Thomas C. Corley
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
Date: April 14, 2003
16
CERTIFICATION
I, Anthony J. Caldarone, certify that:
1. I have reviewed this quarterly report on Form 10-QSB for the quarterly
period ended February 28, 2003 of Calton, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003
/s/ Anthony J. Caldarone
------------------------------------
Anthony J. Caldarone
Chairman and Chief Executive Officer
17
CERTIFICATION
I, Thomas C. Corley, certify that:
1. I have reviewed this quarterly report on Form 10-QSB for the quarterly
period ended February 28, 2003 of Calton, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003
/s/ Thomas C. Corley
-----------------------------------
Thomas C. Corley
Senior Vice President,
Chief Financial Officer & Treasurer
18