-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IzEJNHFweUYQxlLUrpKsX5uENWQs+Jp/gfiNF/a3QtFNfbLhkzj0BkZY/hx+bJzA kQmGc6kPWya9SFEKKJsKig== 0000950144-01-003117.txt : 20010228 0000950144-01-003117.hdr.sgml : 20010228 ACCESSION NUMBER: 0000950144-01-003117 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALTON INC CENTRAL INDEX KEY: 0000717216 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 222433361 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08846 FILM NUMBER: 1554278 BUSINESS ADDRESS: STREET 1: 125 HALF MILE ROAD CITY: RED BANK STATE: NJ ZIP: 07701-6749 BUSINESS PHONE: 9087801800 MAIL ADDRESS: STREET 1: 500 CRAIG RD CITY: MANALAPAN STATE: NJ ZIP: 07726-8790 10-K 1 g67239e10-k.txt CALTON,INC. - FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The fiscal year ended November 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file no. 1-8846 CALTON, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-2433361 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2013 INDIAN RIVER BOULEVARD 32960 VERO BEACH, FLORIDA (Zip Code) (Addresses of principal executive offices) Registrant's telephone number, including area code: (732) 212-1280 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- ---------------------- Common Stock American Stock Exchange $.05 par value per share Rights American Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value (based upon the last sales price reported by the American Stock Exchange) of voting shares held by non-affiliates of the registrant as of February 20, 2001 was $10,789,152. As of February 20, 2001 4,132,356 shares of Common Stock were outstanding. The Company's Proxy Statement for the annual meeting of shareholders is incorporated by reference into Part III hereof. 2 - ------------------------------------------------------------------------------- DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in this Form 10-K, including in Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the statements under "Business" are, or may be deemed to be, "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar phrases are intended to identify such forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K. Such potential risks and uncertainties, include without limitation, matters related to national and local economic conditions, the effect of governmental regulation on the Company, the competitive environment in which the Company operates, potential adverse affects of acquisitions, the ability of the Company to identify suitable acquisition candidates, changes in interest rates, and other risk factors detailed herein and in other of the Company's Securities and Exchange Commission filings. The forward-looking statements are made of the date of this Form 10-K and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements. - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS GENERAL Calton, Inc. (the "Company" or "Calton") sold its principal operating subsidiary, Calton Homes, Inc. ("Calton Homes"), on December 31, 1998. See "Sale of Calton Homes." Since the completion of the sale, the Company has been engaged in providing consulting services to the purchaser of Calton Homes and analyzing potential business and acquisition opportunities. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider in its early stages of development. In January 2000, the Company acquired a controlling interest in PrivilegeONE Networks, LLC ("PrivilegeONE"), a newly-formed company engaged in the development of a co-branded loyalty credit card program. In June 2000, the Company acquired a controlling interest in Innovation Technology Partners ("ITP"), a newly-formed entity established to provide management and consulting services to entrepreneurial and development stage companies. In August 2000, through its interest in ITP, the Company acquired a controlling interest in MindSearch, Inc. ("MindSearch") a company which is developing technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. Effective at the close of business on May 31, 2000, the Company effected a one-for-twenty-five share combination or "reverse split" of the Company's Common Stock. Contemporaneous with, but after giving effect to the share combination, the Company effected a five-for-one forward split of the Common Stock. As a result of this Recapitalization (the "Recapitalization"), each twenty-five shares of Common Stock outstanding was combined into one share of Common Stock and the resulting share was split into five shares. All Common Stock, stock option, warrant and per share information has been adjusted to give effect to the Recapitalization. Calton was incorporated in 1981 for the purpose of acquiring all of the issued and outstanding capital stock of Kaufman and Broad of New Jersey, Inc., a New Jersey corporation, from Kaufman and Broad, Inc., a Maryland corporation. After the acquisition, the name Kaufman and Broad of New Jersey, Inc. was changed to Calton Homes. Calton maintains its corporate offices at 2013 Indian River Boulevard, Vero Beach, Florida 32960 and its telephone number is (732) 212-1280. As used herein, the term "Company" refers to Calton, Inc. and its subsidiaries, unless the context indicates otherwise. 2 3 SALE OF CALTON HOMES On December 31, 1998 (the "Closing Date"), Calton completed the sale of Calton Homes, its wholly-owned homebuilding subsidiary, to Centex Real Estate Corporation ("Centex" or the "purchaser"), the homebuilding subsidiary of Centex Corporation (NYSE:CTX), one of the nation's largest homebuilders (the "Sale Transaction"). The purchase price for the stock of Calton Homes, which was paid in cash at closing, was $48.1 million, subject to a $5.2 million holdback, and certain post closing adjustments. The Company recorded a pre-tax gain of approximately $6.9 million and a net gain of approximately $3.7 million after recording a non-cash provision in lieu of taxes of $3.2 million as a result of the Sale Transaction in the first quarter of fiscal 1999, and adjusted for a provision of approximately $650,000 recorded during fiscal 2000. Calton has entered into an agreement to provide consulting services to purchaser which entitles the Company to payments of $1.3 million per year over the three year period ending December 31, 2001. STRATEGIC PLAN At the time of the Sale Transaction, the Company announced that the Sale Transaction was part of a strategic plan designed to enhance shareholder value. Pursuant to its strategic plan, the Company commenced a stock repurchase program and announced its intention to (i) shift the Company's primary business focus from homebuilding to providing various services to participants both within and outside the homebuilding industry, including consulting services, equity and debt financing and financial advisory services and (ii) seek to invest in, acquire or combine with one or more operating businesses within or outside the homebuilding industry. In April 2000, the Company announced that its strategic plan would focus on acquiring controlling interests in information technology companies. Pursuant to its stock repurchase program, the Company has, since October 31, 1998, acquired approximately 1,615,000 shares of Common Stock at an average price of $6.03 per share. The timing and number of additional shares purchased pursuant to the stock repurchase program will depend on a variety of factors, including the market price of the Common Stock. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., in January 2000, acquired a 50.4% interest in PrivilegeONE, in June 2000 acquired a 51% interest in ITP, and in August 2000 ITP acquired a 51% interest in MindSearch. The Company continues to analyze potential acquisitions and other business opportunities. Pending further implementation of the Company's strategic plan, the Company's cash will be temporarily invested as management of the Company deems prudent, which may include, demand deposits, money market accounts, or United States government securities; provided, however, that the Company will attempt to invest the net proceeds and conduct its activities in a manner which will not result in the Company being deemed to be an investment company under the Investment Company Act of 1940, as amended, or a personal holding company for federal income tax purposes. See "Certain Risks." CERTAIN RISKS RISKS ASSOCIATED WITH POTENTIAL BUSINESS COMBINATIONS The Company is seeking to enhance shareholder value by investing in, acquiring or combining with one or more operating businesses. Management of the Company will endeavor to evaluate the risks inherent in any particular target business; however, there can be no assurance that the Company will properly ascertain all such risks. In many cases, shareholder approval will not be required to effect such a business combination. The fair market value of the target business will be determined by the Board of Directors of the Company. Therefore, the Board of Directors has significant discretion in determining whether a target business is suitable for a proposed business combination. The success of the Company will depend on the Company's ability to attract and retain qualified personnel as well as the abilities of key management of 3 4 the acquired companies. As a result, no assurance can be given that the Company will be successful in implementing its strategic plan or that the Company will be able to generate profits from such activities. CONTINUED LISTING ON AMEX The Company's Common Stock is currently listed for trading on the American Stock Exchange ("AMEX"). Under AMEX's suspension and delisting policies, AMEX will normally consider suspending dealings in, or removing from listing, securities of a company if the company has sold or otherwise disposed of its principal operating assets, has ceased to be an operating company or has discontinued a substantial portion of its operations or business for any reason. AMEX has indicated that the Common Stock may become subject to delisting if the Company is not engaged in active business operations within a reasonable period of time after the closing of the Sale Transaction. Although the Company is engaged in active businesses as a result of its consulting agreement with purchaser and its acquisitions of iAW, PrivilegeONE, ITP and MindSearch, no assurance can be given that AMEX will not commence proceedings to delist the Common Stock. If the Common Stock is delisted, it would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc., which are generally considered to be less efficient markets. INVESTMENT COMPANY ACT CONSIDERATIONS The Investment Company Act of 1940, as amended ("1940 Act"), requires the registration of, and imposes various substantive restrictions on, certain companies that engage primarily, or propose to engage primarily, in the business of investing, reinvesting, or trading in securities, or companies that fail certain statistical tests regarding the composition of assets and sources of income and are not primarily engaged in a business other than investing, holding, owning or trading securities. The Company intends to conduct its activities in a manner which will not subject the Company to regulation under the 1940 Act; however, there can be no assurance that the Company will not be deemed to be an investment company under the 1940 Act. If the Company were required to register as an investment company under the 1940 Act, it would become subject to substantial regulation with respect to its capital structure, management, operations, transactions with affiliates, the nature of its investments and other matters. In addition, the 1940 Act imposes certain requirements on companies deemed to be within its regulatory scope, including compliance with burdensome registry, recordkeeping, voting, proxy, disclosure and other rules and regulations. In the event of the characterization of the Company as an investment company, the failure of the Company to satisfy regulatory requirements, whether on a timely basis or at all, could have a material adverse effect on the Company. CERTAIN TAX MATTERS Section 541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects a corporation which is a "personal holding company," as defined in the IRC, to a 39.6% penalty tax on undistributed personal holding company income in addition to the corporation's normal income tax. The Company could become subject to the penalty tax if (i) 60% or more of its adjusted ordinary gross income is personal holding company income and (ii) 50% or more of its outstanding Common Stock is owned, directly or indirectly, by five or fewer individuals. Personal holding company income is comprised primarily of passive investment income plus, under certain circumstances, personal service income. INDEMNITY OBLIGATIONS On the closing date of the Sale Transaction, the Company deposited approximately $5,200,000 in escrow, $3,000,000 of which provides security for the Company's indemnity obligations and approximately $2,200,000 of which was deposited to fund costs associated with certain specified litigation. The purchaser has asserted indemnity claims of approximately $2,300,000 against of the Company and an arbitration proceeding is scheduled for March 2001 to resolve these claims. See the section of this report captioned "Legal Proceedings" for a more detailed description of this matter. 4 5 (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The information required by this item is presented in Note 9 of the 2000 Financial Statements located on page F-20 of this report. (c) DESCRIPTION OF BUSINESS GENERAL With the sale of Calton Homes, the Company discontinued its homebuilding operations. Since the completion of the Sale Transaction, the Company has been engaged in providing consulting services to the purchaser of Calton Homes and analyzing potential acquisitions and other business opportunities. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider. In January 2000, the Company acquired a 50.4% interest in PrivilegeONE, a newly formed company which is developing a co-branded credit card program for the automobile dealer industry. In February 2001, the Company acquired an additional 25% of PrivilegeONE. In June 2000, the Company acquired a 51% interest in ITP, a newly-formed entity established to provide management and consulting services to entrepreneurial and development stage companies. In August 2000, through its interest in ITP, the Company acquired a controlling interest in MindSearch, a company which is developing technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. ECALTON.COM GENERAL In July 1999, the Company acquired substantially all of the assets of iAW, Inc. an Internet business developer. The Company conducts the acquired business though a wholly-owned subsidiary that has changed its name to eCalton.com, Inc. ("eCalton"). eCalton provides Internet strategy consulting and comprehensive Internet-based solutions. By combining business and Internet knowledge with creativity, eCalton provides its customers with the resources and tools to optimize, monitor, and measure the effectiveness of their e-business. eCalton provides Internet-based solutions to small and medium size companies in various industries, as well as to two prime vertical markets - the Florida Agricultural industry and the Homebuilding and Construction industries. In July 2000, eCalton entered into a second line of business, a technology based consulting and staffing service specializing in network design and management. Through its technical staffing business, eCalton assists clients in managing and improving their IT systems and networks. This division employs approximately 20 employees and consultants, and operates in the Houston, Texas market. SALES AND MARKETING The eCalton sales force is comprised of professionals that market and sell its services on a nationwide basis. eCalton's national marketing office is headquartered in Vero Beach, Florida. It markets eCalton's services through print advertising, face to face interviews with client executives, trade show attendance and through its website, www.eCalton.com. THE FLORIDA AGRICULTURAL INDUSTRY The Florida Farm Foundation has engaged eCalton to develop an Internet Hub, AGMARKETING.ORG, to provide farmers, ranchers, and allied organizations access to the Internet in a cost-effective, user-friendly way. The Web site will enable the user to buy and sell products and services, to connect with vendors and suppliers, and access technical information. In addition, eCalton is offering sponsorships and advertising opportunities to the agriculture business community through this Internet site. 5 6 THE HOMEBUILDING AND CONSTRUCTION GROUP eCalton has designed a Web site package for Homebuilders and Developers offering a customized "look and feel" that reflects their company, logo, corporate colors and image, using predefined templates. The site is intended to help homebuilders reduce operating costs, improve customer service levels, and improve communications with clients, vendors, employees, and investors. These sites will be designed so that employees with only basic Web browser/user skills can add, edit and update content through the use of eCalton's EasyRemoteAdmin Tools(TM). COMPETITION The market for Internet professional services is relatively saturated, intensely competitive, rapidly evolving and subject to rapid technological change. The market is already highly competitive and characterized by an increasing number of entrants that have introduced or developed products and services similar to those offered by eCalton. The Company expects competition not only to persist, but also to increase. Increased competition may result in price reductions, reduced margins and loss of market share. eCalton's competitors and potential competitors have longer operating histories, larger installed customer bases, greater name recognition, longer relationships with their clients, and significantly greater financial, technical, marketing and public relations resources than eCalton. As a result, eCalton's competitors may be better positioned to react in the ever-changing market place. eCalton expects competition to persist and intensify in the future. Competition in the technical staffing industry is intense, with little barrier to entry. The industry is highly evolved with competitors who have much greater access to capital and significantly greater name recognition. In addition, competitors may be better positioned to offer a superior benefits package than can be offered by the Company, and provide a much larger client base allowing for better continuity of work flow for the employee or consultant. PRIVILEGEONE GENERAL In January 2000, the Company acquired a 50.4% collective direct and indirect interest (through ownership in a parent company) in PrivilegeONE Networks, LLC. PrivilegeONE was formed in 1999 to develop a customer loyalty program through the use of a co-branded credit card related to the automotive industry. The purchase price for the Company's interest in PrivilegeONE was comprised of $105,000 in cash and a five-year warrant to acquire 240,000 shares of the Company's Common Stock at an exercise price of $12.50 per share. The warrant becomes exercisable only if PrivilegeONE surpasses certain specified earnings targets. In addition to its equity interest, the Company agreed to loan up to $1,500,000 to PrivilegeONE pursuant to a note which bears interest at the rate of 10% per annum and becomes due in January 2004. As of November 30, 2000, $1,486,000 has been advanced to PrivilegeONE. The Company has entered into 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. In February 2001, the Company made an additional $50,000 equity investment in PrivilegeOne which increased its direct and indirect ownership interest to 75.4%. The Company has also agreed to lend PrivilegeOne up to an additional $1,450,000 if PrivilegeOne achieves certain milestones related to the development of its proposed credit card program. The Company has granted the other owners of PrivilegeOne an option to purchase the interest in PrivilegeOne acquired by the Company in February 2001 at a price of $10,000,000. This option, which expires in February 2004, may only be exercised if all of the loans made by the Company to PrivilegeOne are repaid in full. The Company has the right to designate a majority of the Board of Directors of PrivilegeOne 6 7 until all loans made to PrivilegeOne by the Company are repaid in full or December 31, 2004, whichever is later. After that time, directors will be elected by the majority vote of the owners of PrivilegeOne based upon their percentage ownership interests. In order to execute the PrivilegeONE business plan, PrivilegeONE management is currently negotiating an arrangement with a financial institution to issue and process credit cards marketed by PrivilegeONE. If such an arrangement is not secured, PrivilegeONE will be unable to execute its business plan. SALES AND MARKETING PrivilegeONE intends to market its program directly through a national sales force. PrivilegeONE is seeking to develop customer acquisition and loyalty strategies centered on the acceptance and use of its cards, including reward programs from automobile dealers designed to promote card use. PrivilegeONE also intends to develop an Internet site through which it will seek to develop strong relationships with, and provide services to, customers of the automobile dealership. COMPETITION The credit card industry is characterized by intense competition. PrivilegeONE will compete with numerous co-branded credit card programs, including reward-based programs. Most of these programs are sponsored by entities with greater resources and name recognition than PrivilegeONE. As a result, PrivilegeONE's competitors may be better positioned to react in a changing market place. INNOVATION TECHNOLOGY PARTNERS GENERAL In June 2000, the Company acquired a 51% interest in ITP, a newly-formed entity established to develop businesses and provide management and consulting services to entrepreneurial and development stage companies. In the original business plan, ITP was to focus on providing 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. ITP will continue to perform services as described in the original business plan, but due to changes in the technology and internet related environment, ITP will place increased emphasis on developing and acquiring controlling interests in businesses which have a possibility of providing the Company with a greater return on its investment. In exchange for its controlling interest in ITP, 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 equal to prime plus one percent per annum, 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. Certain owners of ITP have been issued warrants to acquire an aggregate 11.1% interest in ITP at a value to be determined by appraisal if certain events occur, including the completion of a public offering, a merger or other business combination, a change of control of the Company, or if Anthony J. Caldarone ceases to be Chairman of the Company. ITP management has been granted options to acquire up to 150,000 shares of Common Stock of the Company at an exercise price of $5.56 per share if ITP surpasses certain specified earnings targets. As a result, the Company could be subject to expense recognition in the event it becomes probable that ITP will achieve its target earnings. In addition to its management and consulting services, ITP also intends to acquire controlling interests in certain entities that it manages and consults with. The first initiative for this line of ITP business was the acquisition of a 51%-owned subsidiary, MindSearch, Inc. ("MindSearch"), a company which has developed technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. ITP borrowed $500,000 under its $3,500,000 credit facility with the Company to finance the acquisition of the controlling interest in MindSearch. 7 8 SALES AND MARKETING At this time, the sales and marketing efforts of ITP are focused primarily on the operations of MindSearch and general business consulting services. MindSearch marketing efforts revolve around customer survey and data gathering. The general consulting services are marketed primarily by referrals and personal business contacts of the executive management of ITP. COMPETITION Competition in the financial and business consulting industry is intense, with businesses such as national accounting firms and investment banking firms better positioned and better capitalized to attract and retain significant clients. The limited number of professionals employed by ITP, and its limited financial resources, will likely require ITP to focus its attention on smaller clients and projects. CONSULTING SERVICES The Consulting Agreement executed in conjunction with the Sale Transaction requires the Company to provide certain consulting services to purchaser, including information, advice and recommendations with respect to the homebuilding market in New Jersey and Pennsylvania. The Company has agreed that it will not provide similar services to others in New Jersey or Pennsylvania during the term of the Consulting Agreement and for a four-year period after the expiration of the three-year term of the Consulting Agreement. The Consulting Agreement requires Anthony J. Caldarone, the Company's Chairman, President and Chief Executive Officer to participate in the performance of the consulting services to purchaser and for so long as he remains employed by, or associated with, the Company. In consideration for the services provided by the Company under the Consulting Agreement, purchaser is required to pay the Company a consulting fee of $1,300,000 per year, payable in equal quarterly installments during the three-year term of the agreement, which expires on December 30, 2001. EMPLOYEES As of February 20, 2001, the Company and its subsidiaries employed 61 full time personnel, and 1 part-time employee. None of the Company's employees are subject to collective bargaining agreements. The Company believes that its employee relations are satisfactory. ITEM 2. COMPANY FACILITIES The Company currently leases approximately 1,000 square feet of office space located in Red Bank, New Jersey, for approximately $3,100 per month. The term of this lease is on a month-to-month basis. The Company also leases approximately 3,800 square feet of office space in Vero Beach, Florida at a monthly rate of approximately $6,800 for a term of 5 years ending August 31, 2005. The Company's subsidiary, eCalton, currently leases approximately 12,000 square feet of office space in Vero Beach, Florida, for approximately $10,700 per month. This lease expires on July 31, 2001, but eCalton has an option to renew this lease for three one-year terms. eCalton also rents approximately 2,400 square feet of office space in Houston, Texas for approximately $2,700 per month. The term of the lease is on a month-to-month basis. PrivilegeONE currently leases 2,000 square feet of office space in Rhode Island at a cost of $900 per month on a month-to-month basis. ITP currently leases 3,500 square feet of office space in Houston, Texas at a cost of approximately $6,200 per month through January 31, 2003. 8 9 Management believes that these arrangements currently provide adequate space for all of the Company's business operations. ITEM 3. LEGAL PROCEEDINGS 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 approximately $5,200,000 of the closing proceeds were deposited into escrow. Of this amount, $3,000,000 (the "General Indemnification Funds") were deposited to provide security for the Company's indemnity obligations and approximately $2,200,000 (the "Specific Indemnification Funds") were deposited to fund costs associated with certain specified litigation involving Calton Homes. During 1999, the Company refunded $700,000 to the purchaser, out of the General Indemnification Funds as a part of a settlement agreement and related post-closing adjustments. The Amended and Restated Stock Purchase Agreement ("Agreement"), pursuant to which the Company sold Calton Homes on December 31, 1998 requires the Company to indemnify the purchaser for, among other things, certain liabilities that arise out of events occurring prior to the closing of the sale, including the cost of warranty work on homes delivered if such costs exceed $600,000. In January 2000, the purchaser asserted a $253,000 claim for indemnification related to certain alleged liabilities arising out of the events occurring prior to the sale of Calton Homes. The purchaser has agreed to reduce the claim to $205,000. On December 28, 2000, rather than permit the release of the remaining General Indemnification Funds, which were to be disbursed to the Company at year-end, the purchaser asserted that it had sustained losses of $770,000 as a result of matters allegedly arising from events prior to the sale of Calton Homes, including the cost of warranty work in excess of the $600,000 reserve established upon the closing of the transaction. In addition, the purchaser requested the escrow agent to set aside $1,139,000 for damages which it believes it will sustain in the future, including the cost of anticipated warranty work and other matters. An arbitration proceeding to resolve these issues is currently scheduled for March 2001. The Company believes that many of the claims made by the purchaser are without merit and intends to vigorously contest these claims in the arbitration. In certain instances, the purchaser has not provided sufficient documentation to enable the Company to assess the merits of the claim. With regard to claims for warranty work performed, the Company believes that the purchaser has failed to comply with the provisions of its agreement with the Company related to the performance of the work and did not demonstrate reasonably prudent business judgment in administering warranty claims. At this time it is not possible to accurately predict what the Company's liability will be related to the claims asserted by the purchaser. However, at this time the potential additional claims asserted by the purchaser against the General Indemnification Fund total approximately $2,300,000. As of November 30, 2000, the balance in the General Indemnification Fund amounted to only $1,434,000. No amounts will be released from the General Indemnification Funds until the indemnity claims are resolved. The Company's indemnity obligations are not limited to the amounts deposited in escrow. The Specific Indemnification Funds are to be disbursed, to the extent not otherwise utilized in the resolution of litigation, on a case-by-case basis, as the litigation is resolved. As of November 30, 2000, there were $1,055,000 of Specific Indemnification Funds remaining in escrow. With the exception of two matters, each of the matters for which the Specific Indemnification Funds were deposited have been resolved, subject, in certain cases, to the finalization of settlement agreements. Under the terms of its agreement with the purchaser, the Company is required to deposit additional Specific Indemnification Funds for any matters that remain unresolved at December 31, 2000. As a result, the Company may be required to deposit an additional $189,000 in escrow until the resolution of the remaining two matters. The Company has filed a counter claim against the purchaser alleging that purchaser has breached the Agreement and holdback escrow agreement. The Company contends that purchaser did not comply with its express obligations under the contract and its 9 10 obligations of "good faith and fair dealing" implied in all New Jersey contracts. Among other things, the Company alleges that purchaser failed to handle third party indemnification claims in good faith and in a reasonable manner using prudent business standards, and failed to provide the Company with requested information on certain claims to allow the Company to make an intelligent assessment of the claim. At this time, there can be no assurance that the Company will prevail in this counter claim. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2000, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of February 22, 2001 are listed below and brief summaries of their business experience and certain other information with respect to them are set forth in the following table and in the information which follows the table:
NAME AGE POSITION ---- --- -------- Anthony J. Caldarone 63 Chairman, President and Chief Executive Officer Kelly S. McMakin 39 Senior Vice President of Accounting Christopher J. Burk 37 Vice President of Acquisitions Maria F. Caldarone 37 Vice President of Corporate Development Laura A. Camisa 38 Vice President of Strategic Planning
Mr. Caldarone was reappointed as Chairman, President and Chief Executive Officer of Calton in November 1995, having previously served in such capacities from the inception of the Company in 1981 through May 1993. From June 1993 through October 1995, Mr. Caldarone served as a Director of the Company. Mr. McMakin was appointed Senior Vice President of the Company in January 2000. From 1993 through January 2000, Mr. McMakin served as Controller and Treasurer of Florafax International, Inc., a publicly traded floral wire service and credit card processor headquartered in Vero Beach, Florida. Mr. McMakin is a Certified Public Accountant. Mr. Burk was hired as Vice President of Acquisitions by the Company in March 2000. From 1990 until March 2000, he was the principal at a privately held investment management firm which invested in both large and small emerging growth companies. In addition, Mr. Burk has served as Chairman of a closely held telecommunications firm he founded in 1993. Ms. Caldarone served as the Director of Business Development from January 1999 until she was appointed as a Vice President of the Company in February 2000. From 1995 through January 1999, Ms. Caldarone was a non-practicing attorney. Prior to 1995, Ms. Caldarone was employed by Trafalgar Homes from December 1993 to November 1994, where she served as Director of Land Acquisition. Ms. Caldarone is a licensed attorney in the state of Florida. Ms. Caldarone is the daughter of Mr. Caldarone. Ms. Camisa was hired as a Financial Analyst by the Company in February 2000. In April 2000, she was appointed Vice President of Strategic Planning. She held the position of Director of Investor Relations and Financial Analyst at Hovnanian Enterprises, Inc. from June 1998 through February 2000. Following her completion of the Analyst Training Program at Kidder, Peabody & Co., Ms. Camisa 10 11 also held the position of Financial Analyst - International Mergers and Acquisitions at Marsh & McLennan Companies from January 1995 through May 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Calton, Inc. common stock is traded on the American Stock Exchange ("AMEX") under the symbol CN. The following reflects the high and low sales prices of the common stock during fiscal 2000 and 1999. FISCAL 2000 High Low ------------ ------------- 1st Quarter $28.75 $ 7.50 2nd Quarter 33.75 5.31 3rd Quarter 6.88 4.00 4th Quarter 4.69 3.25 FISCAL 1999 High Low ------------ ------------- 1st Quarter $ 1.50 $ 1.00 2nd Quarter 1.38 1.00 3rd Quarter 1.56 1.31 4th Quarter 1.88 1.19 At February 20, 2001, there were approximately 3,000 record and "street name" shareholders of the Company's common stock, based on information obtained from the Company's transfer agent and number of requests from brokers and dealers for the Company's proxies and annual reports. On that date, the last sale price for the common stock as reported by AMEX was $3.86. The Company did not pay any dividends on its Common Stock during fiscal 2000 or 1999. 11 12 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth historical selected financial information of the Company as of the dates and for the periods indicated. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto include elsewhere in this report. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended November 30, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- -------- SELECTED OPERATING DATA Revenues $ 3,534 $ 1,351 $ -- $ -- $ 1,292 Net income (loss) from continuing operations (5,158) 661 (1,960) (1,901) (1,736) Net income (loss) from discontinued operations(1) (84) (240) 6,315 1,646 2,189 Gain (loss) from sale of operating businesses (654) 4,418 -- 369 -- Extraordinary gain, net of income taxes -- -- -- 1,263 -- Net income (loss) $ (5,896) $ 4,839 $ 4,355 $ 1,377 $ 453 Basic earnings (loss) per share: Net income (loss) from continuing operations $ (1.21) $ 0.15 $ (0.37) $ (0.35) $ (0.30) Net income (loss) from discontinued operations(1) (.02) (.05) 1.18 .30 .40 Gain (loss) from sale of operating businesses (.15) .97 -- .05 -- Extraordinary gain, net of income taxes -- -- -- .25 -- ---------- ---------- ---------- ---------- -------- Net income (loss) $ (1.38) $ 1.07 $ 0.81 $ 0.25 $ 0.10 ========== ========== ========== ========== ======== Diluted earnings (loss) per share: Net income (loss) from continuing operations $ (1.21) $ 0.14 $ (0.37) $ (0.35) $ (0.30) Net income (loss) from discontinued operations(1) (.02) (.05) 1.18 .30 .40 Gain (loss) from sale of operating businesses (.15) .92 -- .05 -- Extraordinary gain, net of income taxes -- -- -- .25 -- ---------- ---------- ---------- ---------- -------- Net income (loss) $ (1.38) $ 1.01 $ 0.81 $ 0.25 $ 0.10 ========== ========== ========== ========== ======== At November 30, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- -------- SELECTED BALANCE SHEET DATA Total assets $ 35,100 $ 40,441 $ 40,082 $ 35,142 $ 70,895 Total debt (2) -- -- -- -- 39,500 Shareholders' equity 32,887 38,654 38,221 32,850 28,086
(1) As a result of the sale of Calton Homes, Inc. that occurred on December 31, 1998, the financial statements presentation treats the Company's homebuilding business and results as discontinued operations in accordance with APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." The Company recognized a gain of $4,418,000 that is net of a provision in lieu of taxes of $3,173,000 on the sale. (2) Debt is included as part of discontinued operations subsequent to June 1997 since Calton Homes, Inc. became the primary obligor and borrower of a revolving credit agreement entered into at that time. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - SALE OF CALTON HOMES On December 31, 1998, the Company completed the sale of Calton Homes, Inc., its primary operating homebuilding subsidiary to Centex Real Estate Corporation. The purchase price for the stock of Calton Homes was approximately $48,100,000, which resulted in a pretax gain of approximately $6,900,000, inclusive of a provision of approximately $650,000 recorded in fiscal 2000, and was subject to a $5,200,000 holdback. The Company has entered into an agreement to provide consulting services to Centex that requires payments to the Company of $1,300,000 per year over a three-year period, ending December 30, 2001. The sale of Calton Homes was completed as part of the Company's overall strategy to enhance shareholder value. Since the completion of the sale, the Company has been engaged in providing consulting services to the purchaser of Calton Homes and analyzing potential business and acquisition opportunities. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider. In January 2000, the Company acquired a 50.4% interest in PrivilegeONE, a newly formed company which is developing a co-branded credit card program for the automobile dealer industry. In February 2001, the Company acquired an additional 25% of PrivilegeOne. In June 2000, the Company acquired a 51% interest in ITP, a newly-formed entity established to provide management and consulting services to entrepreneurial and development stage companies. In August 2000, through its interest in ITP, the Company acquired a 51% interest in MindSearch, a company which is developing technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. The Company's consolidated financial statements included the accounts of the Company and its majority-owned subsidiaries, including eCalton, PrivilegeOne, ITP and MindSearch. The Company continues to actively analyze other opportunities to deploy the funds generated by the sale of Calton Homes. The following discussions included in the Results of Operations are based on the continuing operations of Calton, Inc. The financial statements present the Company's homebuilding business as discontinued operations in accordance with APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business." RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2000 AND 1999 Revenues for fiscal 2000 increased to $3,534,000 compared to revenues of $1,351,000 for fiscal 1999. The primary reasons for the increase were a full year of operations for eCalton in 2000, compared to four months of operations in 1999, as well as the addition of the technical staffing division at eCalton, which commenced operations in July 2000. Revenues for the Web development division at eCalton were $1,109,000 compared to $157,000 in 1999, and revenues for the staffing operation at eCalton were $936,000 in 2000, with no similar revenues in 1999. Also included in 2000 revenues was $189,000 from ITP, which was acquired in June 2000. Project personnel expenses for eCalton were $1,514,000 in 2000 compared to $116,000 in 1999. The increase is attributable to a full year of operations for the eCalton Web division in 2000, compared to four months of operations in 1999, as well as the addition of the technical staffing division which began operations in July 2000. Selling, general and administrative expenses experienced an increase from $1,966,000 in 1999 to $8,015,000 in 2000. During 1999 the Company sold its homebuilding business and had minimal operating expenses, and a greatly reduced corporate office. In addition, eCalton was a much smaller operating unit and was not 13 14 acquired until late in 1999. During fiscal 2000, the Company expanded its operations at eCalton, including commencing operations of a technical staffing division. In addition, the Company acquired controlling interests in PrivilegeONE and ITP, and through ITP, acquired a controlling interest in MindSearch. The Company also relocated and increased staffing at its corporate office. As a result, selling, general and administrative expenses experienced a significant increase during fiscal 2000 attributable primarily to payroll and payroll related expenses, professional fees, and abandoned acquisition costs. Research and development costs associated with MindSearch's efforts to develop technology to provide consumer research amounted to $315,000 in 2000, with no similar costs in 1999. The acquisitions of eCalton and PrivilegeONE resulted in goodwill in the amount of $237,000 and $138,000, respectively. However, during 2000 management concluded that the goodwill for both eCalton and PrivilegeONE had been permanently impaired, and charged the entire unamortized balance to operations. This conclusion was reached because of sustained losses since inception for both entities, and the lack of certainty at November 30, 2000 as to whether these businesses would ever become profitable. The amount charged to operations for eCalton and PrivilegONE amounted to $205,000 and $119,000, respectively. Interest income increased from $1,845,000 in 1999 to $2,144,000 in 2000, primarily due to higher interest rates in effect during 2000. The Company recognized a loss on securities in the amount of $1,708,000 for fiscal 2000. During fiscal 2000 and the prior year, the Company acquired 518,000 shares of CorVu Corporation (OTCBB: CRVU) common stock. The Company had previously valued and reported these securities based on the closing price of CorVu common stock, as reported on the "Over-the-Counter" Bulletin Board. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company has assessed the carrying value of these shares and concluded that the decline in the value of these securities is not temporary. This conclusion was based on, among other things, CorVu's financial condition and sustained losses from operations, the low per share value at which CorVu common stock is trading, the Company's inability to liquidate its shares in CorVu, and other factors that management considered relevant under the circumstances. The loss associated with this other than temporary impairment amounted to $990,000 for the current year. In addition, the current year loss on securities includes a capital loss on the sale of common stock of two publicly traded New York Stock Exchange companies in the amount of $508,000, and a charge for non-readily marketable securities in the amount of $210,000. The credit to income for minority interest represents 49% of the net loss of ITP, which had a capital contribution of $552,000 from minority shareholders upon its formation in 2000. The Company may record only up to a cumulative $552,000 of minority interest credit against losses of ITP. If the cumulative loss incurred by ITP causes the ITP associated minority interest to decline to zero, the Company will be required to absorb all additional losses until such time, if ever, that ITP begins to generate a profit. The current year income tax benefit consists of a $579,000 benefit related to a loss carryback to prior years and a current state tax expense of $26,000. The 1999 income tax expense from continuing operations of $453,000 is a result of income from continuing operations in 1999 of $1,114,000. RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1999 AND 1998 Income from continuing operations before taxes was $1,114,000 for the year ended November 30, 1999 compared to a loss of $2,085,000 for the year ended November 30, 1998. Revenues of $1,351,000 during fiscal 1999 were primarily derived from the consulting agreement with the purchaser of Calton Homes, and also included revenues of $157,000 from eCalton. There were no comparable revenues for fiscal 1998. 14 15 Selling, general and administrative expenses included in continuing operations were approximately $2,000,000 during both fiscal 1999 and 1998. General and administrative expenses decreased approximately $500,000 at the corporate level. The decrease is attributable to a significant reduction in corporate fixed costs related to the sale of Calton Homes, including personnel reductions, leasing costs and other overhead items. However, the reductions were offset with the expenditures of eCalton as part of the strategy to ramp up its operations during 1999 and 2000. As a result of the circumstances described above, the Company recognized income from continuing operations, net of taxes of $661,000 for fiscal 1999 compared to a loss of $1,960,000 for fiscal 1998. Included in the 1999 results is a pretax loss of $427,000 from eCalton, $256,000 net of taxes. Loss from discontinued operations for 1999 was $240,000, net of a $373,000 tax benefit for the year ended November 30, 1999. The loss includes approximately $1,000,000 related to legal costs and the resolution of certain litigation matters in excess of amounts previously reserved by management related to the Company's former homebuilding business. As a condition to the sale of Calton Homes, the Company is required to indemnify the purchaser for certain specified litigation pending against Calton Homes. There is no assurance that the ultimate resolution of the pending litigation will not result in additional charges. Partially offsetting the loss is pre-tax income of $429,000 from one month of operations of Calton Homes and a commercial land sale. In addition, included in the tax provision for discontinued operations is a tax benefit related to the reduction of a state tax reserve in the amount of $550,000 due to the resolution of certain state tax issues. Income from discontinued operations for the year ended November 30, 1998 was $6,315,000, net of a tax provision of $2,363,000. The results primarily include the operations of Calton Homes. Taxes for the year ended November 30, 1999 reflect a provision for income taxes of $3,253,000 resulting in an effective rate of thirty-nine and one- half percent (39.5%). The increase in the effective tax rate from thirty-four percent (34%) for the year ended November 30, 1998 was primarily due to the future tax benefits recognized in 1998 which were significantly higher than those recognized in 1999, coupled with a significantly larger amount of 1999 expenses for which the Company will not receive any tax benefit. In 1998 a provision for income taxes of approximately $2,200,000 was recorded. The net operating loss carryforwards and certain other deferred tax assets are subject to utilization limitations as a result of the changes in the control of the Company that occurred in 1993 and 1995. The Company's ability to use the net operating loss ("NOL") to offset future income is $1,100,000 per year for 14 years. This amount has been reduced from 1998 by $500,000 per year as a result of the sale of Calton Homes (see Note 4). The effective rate from continuing operations for the years ended November 30, 1999 and 1998 is based upon a provision of $453,000 and a benefit of $125,000, respectively. The effective rate for 1998 is influenced by the tax expense associated with intercompany charges from continuing operations to discontinued operations. As of November 30, 1999 the Company was reporting a $518,000 unrealized loss on marketable equity securities in comprehensive income. LIQUIDITY AND CAPITAL RESOURCES On December 31, 1998 the sale of Calton Homes liquidated a substantial part of the Company and resulted in the payoff, by the purchaser, of the Company's revolving credit facility with BankBoston which had an outstanding balance of $19,500,000. The sale generated approximately $43,400,000 of cash including the receipt of an additional $1,800,000 related to the post closing adjustments that were finalized in September 1999. In addition, a $5,200,000 holdback was established at closing as part of the sale as a condition to indemnify the purchaser against existing litigation and other warranties. 15 16 As part of a post-closing settlement agreement, $700,000 was refunded to the purchaser in the fourth quarter of 1999, which was paid out of the General Indemnification Funds. The Company collected $592,000 out of the Specific Indemnification Fund during 1999 as a result of certain litigation settlements, and legal fee reimbursements. As of November 30, 2000 there was $1,055,000 in the Specific Indemnification Fund and $1,434,000 in the General Indemnification Fund. Receipt of the remaining holdback money will be determined in an arbitration proceeding to resolve pending issues with the purchaser in March 2001. If the Company does not prevail in arbitration the Company may receive no further disbursements from the General Indemnity Escrow Account. The Company's indemnity obligations are not limited to the amounts deposited in escrow. As of November 30, 2000 the Company had approximately $32,190,000 of cash and cash equivalents compared to $33,786,000 at November 30, 1999. The majority of this cash was invested in money market funds, which were earning approximately 6.3% at November 30, 2000 compared to 5.0% at November 30, 1999. The Company believes that cash on hand, interest income, and funds provided under the remaining year of the consulting agreement with the purchaser of Calton Homes, which provides for another payment of $1,300,000, will provide sufficient capital to support the Company's operations for the upcoming year. As of November 30, 2000 the Company had repurchased an aggregate of 1,615,000 shares of treasury stock for a total of $9,739,000, at an average price of $6.03 per share. Management continues to buy back shares of the Company's common stock, as the stock continues to trade at a price that is below both cash and book value per share. If the Company's stock experiences an increase in its trading price, management may suspend purchasing shares of the Company. CASH FLOWS FROM OPERATING ACTIVITIES For the year ended November 30, 2000 the Company incurred a net loss of approximately $5,900,000. However, cash used by operating activities amounted to only $2,937,000. There were a number of operating activities that did not use cash, such as a loss on securities in the amount of $1,708,000, a loss on the sale of Calton Homes of $654,000, tax related items of $647,000, increases in accounts payable and accrued expenses of $710,000, as well as other less significant items. Conversely, other operating activities that did not provide cash were minority interest of $464,000 and an increase in receivables of $545,000. Cash flow from operating activities generated approximately $1,000,000 during 1999, which includes $1,700,000 of interest earned on money market funds, and approximately $1,000,000 from the consulting agreement with the purchaser of Calton Homes. Partially offsetting the increases was cash utilized for general and administrative costs and the funding of eCalton's operations as it proceeded in the initial stages of business. Cash flow from discontinued operations during fiscal 1999 primarily consisted of the payment of legal settlements and litigation costs related to the indemnification obligations arising from the sale of Calton Homes in the amount of $1,500,000. Offsetting the uses of cash were the collection of a mortgage payable in the amount of $442,000 and the sale of a commercial land parcel of $240,000, among other items. 16 17 CASH FLOWS FROM INVESTING ACTIVITIES For the year ended November 30, 2000 the Company received proceeds from investing activities from the sale of marketable securities in the amount of $1,366,000 and from the collection of the holdback receivable in the amount of $2,104,000. Significant items of cash used by investing activities included the purchase of securities in the amount of $967,000 and the purchase of property and equipment in the amount of $622,000. In addition to items disclosed on the face of the consolidated statements of cash flows, the Company also made certain acquisitions, which are described in the following paragraphs. The acquisitions discussed below have been consolidated in the Company's financial statements and, consequently, they are not reflected in the statement of cash flows. In January 2000, the Company acquired a collective direct and indirect (through ownership in a parent company) 50.4% equity interest in PrivilegeONE Networks, Inc., 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. 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 November 30, 2000 the outstanding principal balance on this loan was $1,486,000. In February 2001, the Company made an additional $50,000 equity investment in PrivilegeOne which increased its direct and indirect ownership interest to 75.4%. The Company has also agreed to lend PrivilegeOne up to an additional $1,450,000 if PrivilegeOne achieves certain milestones related to the development of its proposed credit card program. In June 2000, the Company acquired a 51% interest in ITP. 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. Executive management of ITP contributed $500,000 in cash and certain assets, including existing client contracts, in exchange for their collective 49% interest. In addition to its management and consulting services, ITP also intends to acquire controlling interests in certain entities that it manages and consults with. The first initiative for this line of ITP business was the acquisition of a 51%-owned subsidiary, MindSearch. In August 2000, ITP borrowed $500,000 of its $3,500,000 credit facility with the Company to finance the acquisition of a controlling interest in MindSearch. The Company generated approximately $43,400,000 of cash in fiscal 1999 from the sale of Calton Homes including the receipt of an additional $1,800,000 as part of the post-closing settlement. As a part of the post-closing agreement, the Company refunded to the purchaser $700,000 in September 1999, paid out of the General Indemnification Funds that were deposited in escrow and classified as Holdback receivable. In addition, the Company collected $592,000 of the holdback established to secure the Company's indemnity obligations to the purchaser. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider. The purchase price for the acquisition was $250,000. In addition to the purchase price, at the time of acquisition the Company contributed $750,000 of capital to fund operations. The Company purchased marketable equity securities for an aggregate amount of $4,000,000 in fiscal 1999, of which approximately $1,400,000 was outstanding as of November 30, 1999. In November 1999, the Company loaned $250,000 to CorVu Corporation in exchange for a convertible note with a warrant attached. The note has been subsequently converted to 143,000 common shares of CorVu Corporation under the terms of the loan when the borrower became a publicly held company through a reverse merger. As consideration for making the loan, the Company obtained a warrant 17 18 that permits the purchase of 253,000 shares at a per share price of $.01 per share. The fair value of the warrant was $16,000 based upon the allocation of the relative fair values of the convertible note and warrant at the time of issuance. CASH FLOWS FROM FINANCING ACTIVITIES Cash provided by financing activities in 2000 include cash contributed by the minority owners of ITP in the amount of $500,000 and proceeds from the exercise of stock options in the amount of $149,000. Cash used by financing activities in 2000 include the repurchase of 235,000 shares of the Company's common stock in the amount of $1,051,000. These repurchases were consistent with the Company's repurchase program to repurchase up to two million shares of its Common Stock. For the year ended November 30, 1999 the Company repurchased approximately 1,400,000 shares of its Common Stock on the open market and in privately negotiated transactions for an aggregate price of $8,600,000, an average of $6.14 per share. In June 1999, the holder of a warrant (the "Warrant") to purchase 200,000 shares of Calton Common Stock exercised its right under the Warrant using the cashless exercise method. As a result, the holder was issued 136,000 shares which the Company repurchased for $750,000 that is included in the aggregate numbers above. As a result, the Warrant was cancelled. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company currently has no outstanding indebtedness other than accounts payable. As a result, the Company's exposure to market rate risk relating to interest rates is not material. The Company's funds are primarily invested in highly liquid money market funds with its underlying investments comprised of investment-grade, short-term corporate issues currently yielding approximately 6.3%. The Company does not believe that it is currently exposed to market risk relating to foreign currency exchange risk or commodity price risk. However, a substantial part of the Company's cash equivalents are not FDIC insured or bank guaranteed. As of November 30, 2000 the Company is reporting no marketable securities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are set forth herein commencing on page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. 18 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a) 1. and 2. Financial statements and financial statement schedules F-1 Reference is made to the Index of Financial Statements and Financial Statements Schedules hereinafter contained 3. Exhibits E-1 Reference is made to the Index of Exhibits hereinafter contained (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended November 30, 2000.
19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the underwriter, thereunto duly authorized. CALTON, INC. ------------------------------ (Registrant) Dated: February 22, 2001 By: /s/ KELLY S. MCMAKIN ------------------------------ Kelly S. McMakin, Senior Vice President and Treasurer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the underwriter, thereunto duly authorized.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Anthony J. Caldarone Chairman, Chief Executive February 22, 2001 - ------------------------------------- Officer and President Anthony J. Caldarone (Principal Executive Officer) /s/ Kelly S. McMakin Senior Vice President of Accounting February 22, 2001 - ------------------------------------- (Principal Financial & Kelly S. McMakin Accounting Officer) /s/ Anthony J. Caldarone Director February 22, 2001 - ------------------------------------- Anthony J. Caldarone /s/ J. Ernest Brophy Director February 22, 2001 - ------------------------------------- J. Ernest Brophy /s/ Mark N. Fessel Director February 22, 2001 - ------------------------------------- Mark N. Fessel /s/ Kenneth D. Hill Director February 22, 2001 - ------------------------------------- Kenneth D. Hill /s/ Robert E. Naughton Director February 22, 2001 - ------------------------------------- Robert E. Naughton /s/ Frank Cavell Smith, Jr. Director February 22, 2001 - ------------------------------------- Frank Cavell Smith, Jr. /s/ Gerald W. Stanley Director February 22, 2001 - ------------------------------------- Gerald W. Stanley
20 21 CALTON, INC. AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- Report of Independent Certified Public Accountants ................................................. F-2 Consolidated Balance Sheets as of November 30, 2000 and 1999 ....................................... F-3 Consolidated Statements of Operations for the Years Ended November 30, 2000, 1999 and 1998 ......... F-4 Consolidated Statements of Cash Flows for the Years Ended November 30, 2000, 1999 and 1998 ......... F-5 Consolidated Statements of Shareholders' Equity for the Years Ended November 30, 2000, 1999 and 1998 F-6 Notes to Consolidated Financial Statements ......................................................... F-7 Consent of Independent Certified Public Accountants ................................................ F-23 Schedules: II - Valuation and Qualifying Accounts ................................................... F-24
Schedules other than the schedule listed above have been omitted because of the absence of the condition under which they are required or because the required information is presented in the financial statements or the notes thereto. F-1 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Calton, Inc. In our opinion, the consolidated financial statements listed in the index appearing under item 14(a)(1) on page F-1 present fairly, in all material respects, the financial position of Calton, Inc. and its subsidiaries at November 30, 2000 and November 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(a)(2) on page F-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Tampa, Florida January 19, 2001 F-2 23 CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999
2000 1999 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 32,190,000 $ 33,786,000 Available for sale securities -- 1,355,000 Current portion of holdback receivable 1,289,000 1,205,000 Accounts receivable, net of allowance for doubtful accounts of $122,000 and $0 at November 30, 2000 and 1999, respectively 760,000 337,000 Prepaid expenses and other assets 218,000 202,000 ------------ ------------ Total current assets 34,457,000 36,885,000 Non-current portion of holdback receivable -- 2,842,000 Notes receivable -- 338,000 Goodwill, net -- 233,000 Property and equipment, net 638,000 143,000 Other assets 5,000 -- ------------ ------------ Total assets $ 35,100,000 $ 40,441,000 ============ ============ LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities $ 1,384,000 $ 778,000 Deferred taxes 741,000 572,000 Net liabilities of discontinued operations -- 437,000 ------------ ------------ Total current liabilities 2,125,000 1,787,000 ------------ ------------ Commitments and contingencies (Note 7) Minority interest 88,000 -- ------------ ------------ SHAREHOLDERS' EQUITY Preferred Stock -- -- Common stock, $.05 par value, 10,740,000 shares authorized; 4,132,000 and 4,295,000 shares outstanding at November 30, 2000 and 1999, respectively 207,000 215,000 Additional paid in capital 33,364,000 32,704,000 Retained earnings 9,055,000 14,951,000 Less cost of shares held in treasury, 1,615,000 and 1,380,000 shares as of November 30, 2000 and 1999, respectively (9,739,000) (8,698,000) Accumulated other comprehensive loss: Unrealized loss in available for sale securities -- (518,000) ------------ ------------ Total shareholders' equity 32,887,000 38,654,000 ------------ ------------ Total liabilities, minority interest and shareholders' equity $ 35,100,000 $ 40,441,000 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 24 CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED NOVEMBER 30, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Revenue Homebuilding consulting fees $ 1,300,000 $ 1,194,000 $ -- Web design and implementation 1,109,000 157,000 -- Technical staffing 936,000 -- -- Other 189,000 -- -- ------------ ------------ ------------ 3,534,000 1,351,000 -- ------------ ------------ ------------ Costs and expenses Project personnel and expenses 1,514,000 116,000 -- Selling, general and administrative 8,015,000 1,966,000 2,029,000 Research and development 315,000 -- -- Impairment of goodwill 324,000 -- -- ------------ ------------ ------------ 10,168,000 2,082,000 2,029,000 ------------ ------------ ------------ Loss from operations (6,634,000) (731,000) (2,029,000) Other expense (income) Interest income (2,144,000) (1,845,000) -- Interest expense 3,000 -- 56,000 Loss on securities 1,708,000 -- -- ------------ ------------ ------------ Income (loss) from continuing operations before income taxes, minority interest and discontinued operations (6,201,000) 1,114,000 (2,085,000) Minority interest (464,000) -- -- Income tax expense (benefit) (579,000) 453,000 (125,000) ------------ ------------ ------------ Income (loss) from continuing operations (5,158,000) 661,000 (1,960,000) Income (loss) from discontinued operations, net of a provision (benefit) for income taxes of ($373,000) in 1999 and $2,363,000 in 1998 (84,000) (240,000) 6,315,000 Gain (loss) from sale of Calton Homes, Inc. net of a provision in lieu of taxes of $0 in 2000 and $3,173,000 in 1999 (654,000) 4,418,000 -- ------------ ------------ ------------ Net income (loss) $ (5,896,000) $ 4,839,000 $ 4,355,000 ============ ============ ============ Earnings (loss) per share Basic: Income (loss) from continuing operations $ (1.21) $ 0.15 $ (0.37) Income (loss) from discontinued operations, net (0.02) (0.05) 1.18 Gain (loss) from sale of Calton Homes, Inc., net (0.15) 0.97 -- ------------ ------------ ------------ Net income (loss) $ (1.38) $ 1.07 $ 0.81 ============ ============ ============ Diluted: Income (loss) from continuing operations $ (1.21) $ 0.14 $ (0.37) Income (loss) from discontinued operations, net (0.02) (0.05) 1.18 Gain (loss) from sale of Calton Homes, Inc., net (0.15) 0.92 -- ------------ ------------ ------------ Net income (loss) $ (1.38) $ 1.01 $ 0.81 ============ ============ ============ Weighted average number of shares outstanding Basic 4,276,000 4,554,000 5,337,000 ------------ ------------ ------------ Diluted 4,276,000 4,799,000 5,337,000 ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-4 25 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30, ----------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ (5,896,000) $ 4,839,000 $ 4,355,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of effects of business acquisitions Subsidiary options issued for services 35,000 -- -- Minority interest (464,000) -- -- Loss on securities 1,708,000 -- -- Impairment of goodwill 324,000 -- -- (Gain) loss from the sale of Calton Homes, Inc. 654,000 (4,418,000) -- Income (loss) from discontinued operations -- 240,000 (6,315,000) Provision for uncollectible receivables 122,000 -- -- Provision for income taxes 647,000 422,000 -- Depreciation and amortization 226,000 17,000 164,000 Change in net assets/liabilities of discontinued operations (437,000) (657,000) 3,232,000 Increase in accounts receivable (545,000) (276,000) -- (Increase) decrease in prepaid expenses and other assets (21,000) 737,000 (895,000) Increase (decrease) in accounts payable, accrued expenses and other liabilities 710,000 77,000 (431,000) Issuance of stock under 401(k) Plan and other -- -- 91,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities (2,937,000) 981,000 201,000 INVESTING ACTIVITIES Net proceeds from sale of Calton Homes, Inc. -- 43,440,000 -- Sale of available for sale securities 1,366,000 2,127,000 -- Decrease in holdback receivable 2,104,000 -- -- Purchase of available for sale securities (967,000) (4,000,000) -- Acquisition of business, net of cash acquired (138,000) (250,000) -- Increase in notes receivable -- (338,000) -- Purchase of property and equipment (622,000) (58,000) (18,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 1,743,000 40,921,000 (18,000) FINANCING ACTIVITIES Stock repurchase (1,051,000) (8,583,000) (115,000) Capital contributed by minority owners of Innovation Technology Partners 500,000 -- -- Stock options exercised 149,000 382,000 -- ------------ ------------ ------------ Net cash used in financing activities (402,000) (8,201,000) (115,000) Net (decrease) increase in cash and cash equivalents (1,596,000) 33,701,000 68,000 Cash and cash equivalents at beginning of period 33,786,000 85,000 17,000 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 32,190,000 $ 33,786,000 $ 85,000 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 2,000 $ 209,000 $ 3,970,000 Cash paid for income taxes $ 35,000 $ 1,640,000 $ 680,000 NON-CASH INVESTING AND FINANCING ACTIVITIES Holdback receivable $ -- $ 4,047,000 $ -- Acquisition of assets $ -- $ 54,000 $ -- Conversion of CorVu and PrivilegeONE notes receivable into investments $ 338,000 $ -- $ -- Property and equipment contributed by minority owners of Innovation Technology Partners $ 52,000 $ -- $ --
The accompanying notes are an integral part of these financial statements. F-5 26 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
Accumulated Common Stock Additional Other Total -------------------- Paid-in Retained Treasury Comprehensive Shareholders' Comprehensive Shares Amount Capital Earnings Stock Loss Equity Income(Loss) -------- -------- -------- -------- ---------- ---------- ------------ ----------- Balance, November 30, 1997 5,323 $ 266 $ 26,827 $ 5,757 $ -- $ -- $ 32,850 $ -- Net Income -- -- -- 4,355 -- -- 4,355 -- Issuance of Stock under 401 (k) Plan 32 1 70 -- -- -- 71 -- Issuance of Stock under stock option plans -- -- 20 -- -- -- 20 -- Income tax refund -- -- 1,040 -- -- -- 1,040 -- Less: Purchase of treasury stock (28) -- -- -- (115) -- (115) -- -------- -------- -------- -------- -------- -------- -------- -------- Balance November 30, 1998 5,327 267 27,957 10,112 (115) -- 38,221 -- Net Income -- -- -- 4,839 -- 4,839 4,839 Issuance of Stock under stock option plans 176 9 373 -- -- -- 382 -- Issuance of Stock under warrant exercise 143 7 (7) -- -- -- -- -- Modification of stock option terms -- -- 525 -- -- -- 525 -- Income tax refund -- -- 3,788 -- -- -- 3,788 -- Less: Purchase of treasury stock (1,351) -- -- -- (8,583) -- (8,583) -- Adjustment to reflect par value -- (68) 68 -- -- -- -- -- Comprehensive Loss: unrealized loss in available for sale securities -- -- -- -- -- (518) (518) (518) -------- Comprehensive income 4,321 -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 1999 4,295 215 32,704 14,951 (8,698) (518) 38,654 Net Loss (5,896) (5,896) (5,896) Issuance of Stock under stock option plans 73 4 145 -- -- -- 149 -- Issuance of Stock and options by consolidated subsidiary -- -- 35 -- -- -- 35 -- Shares retired upon recapitalization of the Company (1) -- (10) -- -- -- (10) -- Income tax refund -- -- 478 -- -- -- 478 -- Less: Purchase of treasury stock (235) -- -- -- (1,041) -- (1,041) -- Adjustment to reflect par value -- (12) 12 -- -- -- -- -- Change in unrealized loss in available for sale securities -- -- -- -- -- 518 518 518 -------- Comprehensive Loss $ (5,378) ======== -------- -------- -------- -------- -------- -------- -------- Balance, November 30, 2000 4,132 $ 207 $ 33,364 $ 9,055 $ (9,739) $ -- $ 32,887 ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-6 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESSES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Calton, Inc. and all of its wholly owned and majority owned subsidiaries (the "Company"). The Company consolidates a subsidiary when it owns directly or indirectly more than 50% of the outstanding voting securities. Under this method, a subsidiary's results of operations, cash flows and balance sheets are reflected in the consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated. Participation of other security holders in the earnings and losses of consolidated majority owned subsidiaries are reflected in the caption "Minority Interest" in the Company's consolidated financial statements. Minority interest adjusts the Company's consolidated results of operations to reflect only the Company's shares of the earnings or losses of majority owned subsidiaries. In certain circumstances where majority owned subsidiaries incur losses, and the Company is unable to pass these losses through to minority security holders, the Company records the entire loss of the subsidiary. DESCRIPTION OF BUSINESSES On December 31, 1998, the Company completed the sale of the primary homebuilding subsidiary, Calton Homes, Inc. ("Calton Homes") to Centex Real Estate Corporation ("Centex" or the "purchaser"). As a result of the sale of Calton Homes, the financial statements treat the Company's former 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." In July 1999 the Company acquired substantially all of the assets of iAW, Inc, and subsequently changed the name to eCalton.com, Inc. ("eCalton"). eCalton is engaged in designing Web pages and providing Internet strategy consulting and comprehensive Internet-based solutions. In addition, eCalton is in the business of providing technical staffing to assist and augment their clients' information technology departments. In January 2000, the Company acquired a collective direct and indirect (through ownership in a parent company) equity interest in PrivilegeONE Networks, LLC ("PrivilegeONE"), a newly formed limited liability corporation engaged in the development of a co-branded loyalty credit card program. PrivilegeONE has developed a co-branded credit card with the name of individual automobile dealers, along with that of PrivilegeONE, and will provide dealership-sponsored incentives for consumers to use the card both at the dealerships, and at other businesses that accept the cards. 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 addition to its management and consulting services, ITP also intends to acquire controlling interests in certain entities that it manages and consults with. In August 2000, through its interest in ITP, the Company acquired a controlling interest in MindSearch, a company which is developing technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. Through December 30, 2001, the Company is to provide corporate consulting services related to the sale of the homebuilding assets under a consulting agreement with the purchaser. The eCalton Web strategy division develops Web sites for customers throughout the United States, while the eCalton staffing operation places staff mainly in the Houston, Texas market. To date, ITP has consulted on projects mainly in the south Texas area. PrivilegeONE has yet to generate any revenues, but expects to operate in most regions of the United States once operational. F-7 28 RECAPITALIZATION Effective at the close of business on May 31, 2000, the Company effected a one-for-twenty-five share combination or "reverse split" of the Company's Common Stock. Contemporaneous with, but after giving effect to the share combination, the Company effected a five-for-one forward split of the Common Stock. As a result of this recapitalization (the "Recapitalization"), each twenty-five shares of Common Stock outstanding was combined into one share of Common Stock and the resulting share was split into five shares. All Common Stock, stock option, warrant and per share information has been adjusted to reflect the Recapitalization as if such Recapitalization had taken place at the beginning of the periods presented. In connection with this Recapitalization, the Company changed the par value of its common stock from $.01 to $.05 per share. REVENUE RECOGNITION Revenues of Calton, Inc. are comprised of the consulting agreement payments from the purchaser of Calton Homes. Revenue is recognized once the consulting report has been delivered and the amounts due under the contract become payable to the Company. eCalton recognizes revenues for services as work is performed on a project-by-project basis adjusted for any anticipated losses in the period in which any such losses are identified. For projects charged on a time and materials basis, revenue is recognized based on the number of hours worked by consultants at an agreed-upon rate per hour. eCalton also undertakes projects on a fixed-fee or capped-fee basis for which revenues are recognized on the percentage of completion method of accounting based on the evaluation of actual costs incurred to date compared to total estimated costs. Revenues of ITP are recorded once ITP consulting services have been rendered. CASH AND CASH EQUIVALENTS Cash equivalents consist of demand deposits, United States Government Treasury Bills, and highly liquid money market funds with original maturities of three months or less. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the FDIC insurance limits. The Company has not experienced any loss to date on these investments. AVAILABLE-FOR-SALE SECURITIES The Company classifies all of its short-term investments as available-for-sale securities. Such investments are carried at fair value based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of comprehensive income (loss) in shareholders' equity. Realized gains and losses, and declines in value judged to be other than temporary, are included in the caption "Loss on Securities" (see Note 2). PROPERTY AND EQUIPMENT Property and equipment are primarily comprised of computer equipment, office furniture and leasehold improvements. Computer equipment is being depreciated over a useful life of three to four years, office furniture is being depreciated over five years, and leasehold improvements are being depreciated over the terms of the respective leases, which range from one to five years. Maintenance and repairs are expensed as incurred, while renewals and betterments are capitalized. The Company periodically performs an assessment of fixed assets to determine if the assets have been impaired. Impairments are recognized in operating results to the extent that carrying value exceeds fair value. F-8 29 INTANGIBLE ASSETS Goodwill consists of the excess of purchase price over the fair value of assets and liabilities acquired in acquisitions accounted for under the purchase method of accounting. Goodwill is amortized on a straight-line basis over five to ten years. The Company periodically analyzes the carrying value of its goodwill and other intangible assets to assess the recoverability from future operations. Impairments are recognized in operating results to the extent that carrying value exceeds fair value. During 2000 the Company concluded that the goodwill associated with the acquisitions of both eCalton and PrivilegeONE had been impaired, and charged these amounts to operations. This conclusion was reached because of sustained losses since inception for both entities, and the lack of certainty at November 30, 2000 as to whether these businesses would ever become profitable. INCOME TAXES The Company records income taxes using the liability method based on enacted tax laws and statutory tax rates applicable to the period in which differences are expected to affect taxable income. Under this method, the Company records deferred taxes based on temporary taxable and deductible differences between the tax bases of the Company's assets and liabilities and their financial reporting bases. A valuation allowance is established when it is more likely than not that some or all of the deferred tax assets will not be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts receivable and unbilled revenue, other receivables, accounts payable, accrued expenses and other liabilities. At November 30, 2000 and 1999, the fair value of these instruments approximated their carrying value. USE OF 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 accompanying notes. Actual results could differ from those estimates. PER SHARE COMPUTATIONS Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Income (loss) per share assuming dilution is computed by dividing the net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period. The effect of 979,000 stock options and warrants were not included in the calculation of earnings per share for 2000, as they would be antidilutive. There were 360,000 stock options that were not included in the calculation of diluted earnings per share in 1999 as these options were antidilutive. In addition, a warrant to purchase 200,000 shares of common stock was outstanding until June 1999 (see Note 5). The effect of stock options and the warrant were not included in the calculation of diluted earnings per share in 1998 as these options and warrants were antidilutive due to the loss from continuing operations during this period. STOCK-BASED COMPENSATION The Company measures compensation expense related to the grant of stock options and stock-based awards to employees in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations. Stock-based compensation arrangements involving non-employees are accounted for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and F-9 30 related interpretations. The Company provides the disclosure requirements of SFAS 123 for employee arrangements. ADVERTISING EXPENSE The costs of advertising are expensed as incurred. Included in selling, general and administrative expenses are advertising costs of approximately $86,000 and $16,000 for the years ended November 30, 2000 and 1999, respectively. RECENT ACCOUNTING PRONOUNCEMENTS On December 3, 1999, the staff of the SEC published Staff Accounting Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company's policy of revenue recognition is consistent with this bulletin. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Hedging Activities", which amended Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement 138 must be adopted concurrently with the adoption of Statement 133. The Company expects to adopt these new Statements effective December 1, 2000. These Statements will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of these Statements will have a significant effect on its results of operations or financial position. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statements in order to conform to the 2000 presentation. 2. AVAILABLE-FOR-SALE SECURITIES In November 1999, the Company made a $250,000 unsecured bridge loan to CorVu Corporation ("CorVu") pursuant to a note which provided that all principal and accrued interest would become due upon the earlier of (i) 120 days or (ii) the closing of a reverse merger transaction with Minnesota American, Inc. Upon the occurrence of the reverse merger in January 2000, the bridge loan was converted to 143,000 common shares in the surviving corporation. As consideration for making the bridge loan, the Company was issued a five year warrant to purchase 253,000 shares of common stock in CorVu at a per share price of $.01 per share. Also in January 2000, 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 quantities of CorVu common stock at prices ranging from $2.00 per share to $8.00 per share. At November 30, 2000, the Company is reporting no Available-for-Sale Securities, although the Company holds 518,000 shares of CorVu Corporation (OTCBB: CRVU) as of the balance sheet date. The Company had previously valued and reported these securities based on the closing price of CorVu common stock, as reported on the "Over-the-Counter" Bulletin Board. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" the Company has assessed the carrying value of these shares and concluded that the decline in value was not temporary. This conclusion was based on, among other things, CorVu's financial condition and sustained losses from operations, the low per share value at which CorVu common stock is trading, the Company's inability to liquidate its shares in CorVu, and other factors that management considered relevant under the circumstances. The loss associated with this other-than-temporary impairment amounted to $990,000 for the current year, and is included on the income statement as loss on securities. In addition, the current year loss on securities includes a capital loss on the sale of common stock of two publicly traded New F-10 31 York Stock Exchange companies in the amount of $508,000, for which the Company received proceeds in the amount of approximately $1,350,000. The remaining $210,000 of loss on securities resulted from the write off of non-readily marketable securities. 3. ACQUISITIONS AND INVESTMENTS In July 1999 the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider for a cash price of $250,000. The acquired business is operated through a wholly-owned subsidiary named eCalton.com, Inc. As a result of the acquisition, the Company recorded goodwill in the amount of $237,000, which was originally to be amortized over ten years. However, during the current year management concluded that this goodwill had been permanently impaired, and charged the entire unamortized balance of goodwill to operations. In conjunction with the acquisition, the Company entered into employment contracts with the three principal officers of eCalton, and granted each officer options to acquire 120,000 shares of the Company's common stock at a price of $8.15. During the fourth quarter of 2000 one of these officers resigned, and 80,000 of these options were cancelled. In January 2000, the Company acquired a collective direct and indirect (through ownership in a parent company) 50.4% equity interest in PrivilegeONE Networks, LLC, a newly formed limited liability corporation 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 five-year warrant to acquire 240,000 shares of common stock at an exercise price of $12.50 per share. As of the acquisition date, the warrant was determined to have nominal value. As a result of the acquisition, the Company recorded goodwill in the amount of $138,000, which was originally to be amortized over five years. However, during the current year management concluded that this goodwill had been permanently impaired, and charged the entire unamortized balance of goodwill to operations. The warrant becomes exercisable only if PrivilegeONE surpasses certain specified earnings 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. As of November 30, 2000 the outstanding principal balance on this loan was $1,486,000. The Company has the right to designate a majority of the Board of Directors of PrivilegeONE until the later of the time that the note is repaid or January 2004. The Company has entered into agreements with the other owners of PrivilegeONE and its parent company, 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. In June 2000, the Company acquired a 51% interest in ITP, a newly-formed entity established to provide management and consulting services to entrepreneurial and development stage companies. 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 equal to prime plus one percent per annum, is due in June 2004. Executive management of ITP contributed $500,000 in cash and certain assets, including exiting client contracts, in exchange for their collective 49% interest. The accounts of ITP have been consolidated along with those of the Company with the executive management's interest shown as minority interest. Certain owners of ITP have been issued warrants to acquire an aggregate 11.1% interest in ITP at a value to be determined by appraisal if certain events occur, including the completion of a public offering, a merger or other business combination, a change of control, or if Anthony J. Caldarone ceases to be Chairman of the Company. ITP management has been granted options to acquire up to 150,000 shares of common stock of the Company at an exercise price of $5.56 per share if ITP surpasses certain specified earnings targets. As a result, the Company could be subject to expense recognition in the event it becomes probable that ITP will achieve its target earnings. F-11 32 In addition to its management and consulting services, ITP also intends to acquire controlling interests in certain entities that it manages and consults with. The first initiative for this line of ITP business was the acquisition of a 51%-owned subsidiary, MindSearch, Inc., a company which has developed technology to provide consumer research to businesses on a faster and broader basis than existing research approaches. In August 2000, ITP borrowed $500,000 under its $3,500,000 credit facility with the Company to finance the acquisition of a controlling interest in MindSearch. The accounts of MindSearch have been consolidated along with those of the Company. During 2000 the Company also acquired certain interests in businesses accounted for using the cost method in amounts totaling less than $250,000 in the aggregate. 4. INCOME TAXES The components of the provision/(benefit) for income taxes are as follows: (amounts in thousands)
Years Ended November 30, ----------------------------- 2000 1999 1998 ------- ------- ------- Federal Current $ (605) $ 15 $ 1,785 Deferred 84 (28) (603) Provision in lieu of income taxes -- 2,928 527 State Current 26 28 16 Provision in lieu of income taxes -- 310 513 ------- ------- ------- (495) 3,253 2,238 Less: Discontinued operations (provision) benefit (84) 373 (2,363) Provision in lieu of taxes on the sale of Calton Homes -- (3,173) -- ------- ------- ------- Continuing operations $ (579) $ 453 $ (125) ======= ======= =======
F-12 33 The following schedule reconciles the federal provision (benefit) for income taxes computed at the statutory rate to the actual provision for income taxes: (amounts in thousands)
Years Ended November 30, ----------------------------- 2000 1999 1998 ------- ------- ------- Computed provision (benefit) for income taxes at 34% $(2,266) $ 2,758 $ 2,242 Expenses for which deferred tax benefit cannot be currently recognized 1,851 -- -- Expenses for which deferred tax benefit is currently recognized -- (37) (399) State and local tax benefit 26 594 529 State tax reserves -- (550) -- Expenses for which no tax benefit is available 15 488 -- Other (121) -- (134) ------- ------- ------- Total provision (benefit) for income taxes (495) 3,253 2,238 Less: Discontinued operation (provision) benefit (84) 373 (2,363) Provision in lieu of taxes on the sale of Calton Homes -- (3,173) -- ------- ------- ------- Continuing operations $ (579) $ 453 $ (125) ======= ======= =======
During fiscal 2000, the Company received a federal income tax refund in the amount of $1,298,000 resulting from the carryback of certain losses to years in which the Company incurred income taxes. In 1999, the resolution of certain state tax issues resulted in a $550,000 reduction to the 1999 provision for income taxes. F-13 34 Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities at November 30, 2000, and 1999 are as follows: (amounts in thousands)
Deferred Tax Assets (Liabilities) ------------------------------------------- Continuing Operations Combined* --------------------- ------------------- 2000 1999 2000 1999 -------- --------- -------- ------- Income from joint ventures $ -- $ -- $ 93 $ 33 Federal net operating losses 7,214 5,594 7,214 5,594 State net operating losses 2,023 2,248 2,444 2,662 Depreciation 9 (6) 9 (6) Deferred state taxes 177 5 368 131 Litigation reserve -- -- 188 187 Stock compensation -- -- 179 179 Intangibles, net 603 -- 603 -- Other 85 23 333 109 -------- -------- -------- ------- 10,111 7,864 11,431 8,889 Valuation allowances (10,111) (7,864) (11,431) (8,805) -------- -------- -------- ------- Total deferred taxes $ -- $ -- $ -- $ 84 ======== ======== ======== =======
* Includes both continuing and discontinued operations Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. For federal and state tax purposes, a valuation allowance was provided on a significant portion of the net deferred tax assets due to uncertainty of realization. The federal net operating loss carryforward for tax purposes is approximately $21,200,000 at November 30, 2000 and $16,400,000 at November 30, 1999. The Company's ability to use its deferred tax assets, including federal net operating loss carryforwards, created prior to November 21, 1995 to offset future income is limited to approximately $1,127,000 per year under Section 382 of the Internal Revenue Code as a result of the change in control of the Company in November 1995. The limitation has been reduced by approximately $500,000 per year as a result of the terms of the sale of Calton Homes. These federal carryforwards will expire between 2007 and 2019. F-14 35 5. SHAREHOLDERS' EQUITY The Company's Certificate of Incorporation, as amended, provides for 10,740,000 authorized shares of Common Stock (par value $.05 per share), 520,000 shares of Redeemable Convertible Preferred Stock (par value $.10 per share) and 2,000,000 shares of Class A Preferred Stock (par value $.10 per share), one million shares of which have been designated as Class A Series One Preferred Stock. None of the Preferred Stock is issued or outstanding. During 1998 the Company commenced a stock repurchase program with the intention to repurchase up to 2,000,000 shares of Common Stock in open market repurchases and privately negotiated transactions. As of November 30, 2000, there were 1,615,000 shares held in Treasury totaling $9,739,000. In May 1993, the Company adopted the Calton, Inc. 1993 Non-Qualified Stock Option Plan (the "1993 Plan") under which a total of 299,000 shares of Common Stock were reserved for issuance. Under the terms of the 1993 Plan, options may be granted at an exercise price designated by the Board of Directors. The options granted under the 1993 Plan vest in equal installments over a three-year period. The exercise price of outstanding options at November 30, 2000 under the 1993 Plan range from $1.55 to $6.10 per share. Options granted under the 1993 Plan have a maximum term of ten years, with a weighted average remaining contractual life of 7.5 years at November 30, 2000. In April 1996, the Company's shareholders approved the Company's 1996 Equity Incentive Plan (the "1996 Plan") under which a total of 400,000 shares of Common Stock were reserved for issuance. Under the terms of the 1996 Plan, options may be granted at an exercise price equal to the fair market value of the Common Stock on the date of grant (110% of such fair market value in the case of an incentive stock option granted to a 10% shareholder). The exercise prices of outstanding options at November 30, 2000 range from $1.70 to $13.90 per share with vesting ranging from one to five years. The exercise period is up to ten years, with a weighted average remaining contractual life of 6.1 years at November 30, 2000. In April 2000, the Company's shareholders approved the Company's 2000 Equity Incentive Plan (the "2000 Plan") under which a total of 800,000 shares of Common Stock were reserved for issuance. Under the terms of the 2000 Plan, options may be granted at an exercise price equal to the fair market value of the Common Stock on the date of grant (110% of such fair market value in the case of an incentive stock option granted to a 10% shareholder). Generally, the options granted under the 2000 Plan vest in equal installments over a five-year period. The exercise prices of outstanding options at November 30, 2000 range from $3.65 to $4.50 per share. The exercise period is up to ten years, with a weighted average remaining contractual life of 9.6 years at November 30, 2000. At November 30, 2000 there were 346,000 options exercisable under all plans in the aggregate, with a weighted average exercise price of $4.79. In connection with the sale of Calton Homes, Inc. the Company made certain adjustments to the terms of options to acquire the Company's Common Stock previously granted and outstanding as of December 31, 1998 under the 1993 Plan and the 1996 Plan. Effective January 1, 1999, all options that were previously granted and outstanding became exercisable, regardless of whether the right to exercise the option had previously vested. Employees of Calton Homes, Inc. had until December 31, 2000 to exercise any options, and options of employees of Calton, Inc. will expire in accordance with their original terms. The effect of the amendments to the stock option plans of approximately $525,000 is considered to be severance costs and was therefore recorded as an expense and included in the gain on the sale transaction in the first quarter of 1999. F-15 36 Stock option activity under each of these Plans are summarized as follows (shares in thousands):
2000 1996 1993 Weighted Average Plan Plan Plan Total Exercise Price ---- ---- ---- ----- -------------- Options outstanding November 30, 1998 -- 276 135 411 $ 1.99 Granted -- 17 120 137 $ 6.05 Exercised -- (104) (72) (176) $ 2.07 ---- ---- --- ---- Options outstanding November 30, 1999 -- 189 183 372 $ 3.44 Granted 49 75 43 167 $ 10.29 Forfeited (2) (6) -- (8) $ 10.85 Exercised -- (29) (43) (72) $ 2.00 ---- ---- --- ---- Options outstanding November 30, 2000 47 229 183 459 $ 6.04 ==== ==== === ====
In July 1999, the Company entered into employment agreements with three officers of eCalton pursuant to which each have been granted options to acquire 120,000 shares of the Company's Common Stock, or an aggregate of 360,000 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 $8.15 per share. During 2000 one of these officers resigned and, as a result, forfeited 80,000 of the options which had not yet vested. The Company accounts for stock option plans under APB 25. Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methods prescribed under FAS 123, the Company's net income (loss) would have been reduced by (increased by) approximately ($269,000), $551,000 and $141,000 for years ended November 30, 2000, 1999 and 1998, respectively. On a pro forma basis, earnings (loss) per share would have been reduced by (increased by) ($.06), $.02 and $.00 per share for 2000, 1999 and 1998, respectively. The estimated weighted average fair value of the options granted in the years ended November 30, 2000, 1999 and 1998 is $7.34, $6.05 and $1.55, respectively, using the Black-Scholes option-pricing model, with the following assumptions: dividend yield - none, volatility of .8, .8 and .7, risk-free interest rate of 6.54%, 4.56% and 5.49%, assumed forfeiture rate as they occur, and an expected life of 5.8 years, 3 years and 4.7 years at November 30, 2000, 1999 and 1998, respectively. Compensation expense recognized in providing pro forma disclosures may not be representative of the effects on net income or loss for future years. In June 1999, the holder of a warrant (the "Warrant") to purchase 200,000 shares of Calton Common Stock exercised the Warrant using the cashless exercise method. As a result, the holder was issued 136,000 shares which the Company repurchased for $750,000 and the Warrant was canceled. The 136,000 shares are held as treasury stock. In July 2000 the Company's Board of Directors repriced 92,000 options held by current employees of the Company. The options were repriced to $4.50 per share, and had exercise prices ranging from $6.10 to $12.65 prior to the repricing. The effect of repricing options can trigger compensation expense to the extent that the fair value of the Company's common stock exceeds the new price of the options through until the date they are exercised or expire. In 2000 no compensation expense was recognized as a result of the repricing, as the price of the Company's stock did not close above $4.50 at the end of any reporting period. F-16 37 Effective November 30, 2000 the Board of Directors of the Company adopted an Employee Stock Purchase Plan (the "Plan"), subject to shareholder approval at the Company's 2001 Annual Meeting of Shareholders. The stock subject to options under the Plan will initially be 175,000 shares of the Company's common stock. This initial number shall be automatically increased on January 1 of each year by the lesser of (i) 2% of the total number of shares of common stock outstanding on December 31 of the prior year or (ii) 75,000 shares. Offering periods will be determined by the Compensation Committee, with a maximum offering period not to exceed twenty-four months. Under the terms of the Plan, the option price per share will be the lesser of (i) 85% of the average market price of the common stock on the first business day of the offering period, or (ii) 85% of the average market price of the common stock on the last business day of the payment period. In February 1999, the Company's Board of Directors adopted a shareholder rights plan (the "Rights Plan") and declared a dividend of one preferred stock purchase right (a "Right") for each outstanding share of Common Stock. Under the Rights Plan, each Right represents the right to purchase from the Company one one-hundredth (1/100th) of a share of Class A Preferred Stock Series One (the "Preferred Stock") at a price of $5.50 per one one-hundredth (1/100th) of a share. Each one one-hundredth (1/100th) of a share of Preferred Stock has economic and voting terms equivalent to those of one share of the Company's Common Stock. The Rights will not become exercisable unless and until, among other things, a person or group acquires or commences a tender offer for 15% or more of the Company's outstanding Common Stock. In the event that a person or group, without Board approval acquires 15% or more of the outstanding Common Stock, each Right would entitle its holder (other than the person or group) to purchase shares of Preferred Stock having a value equal to twice the exercise price. Also, if the Company is involved in a merger or sells more than 50% of its assets or earning power, each Right will entitle its holder (other than the acquiring person or group) to purchase shares of common stock of the acquiring company having a market value equal to twice the exercise price. If any person or group acquires at least 15%, but less than 50%, of the Company's Common Stock, the Board may, at its option, exchange one share of Common Stock for each Right (other than Rights held by such person or group). The Right Plan may cause substantial dilution to a person or group that, without prior Board approval, acquires 15% or more of the Company's Common Stock, unless the Rights are first redeemed by the Board. The Rights expire on February 1, 2009 and may be redeemed by the Company at a price of $.01 per Right. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: (in thousands) As of November 30, ------------------- 2000 1999 ----- ----- Computer, furniture and other equipment $ 670 $ 155 Leasehold improvements 159 -- ----- ----- 829 155 Less: Accumulated depreciation (191) (12) ----- ----- $ 638 $ 143 ===== ===== Total depreciation expense for the years ended November 30, 2000, 1999 and 1998 was $179,000, $20,000 and $164,000, respectively. F-17 38 7. COMMITMENTS AND CONTINGENT LIABILITIES DISCONTINUED OPERATIONS 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. 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 approximately $5,200,000 of the closing proceeds were deposited into escrow. Of this amount, approximately $3,000,000 (the "General Indemnification Funds") were deposited to provide security for the Company's indemnity obligations and approximately $2,200,000 (the "Specific Indemnification Funds") were deposited to fund costs associated with certain specified litigation involving Calton Homes. During 1999, the Company refunded $700,000 to the purchaser, out of the General Indemnification Funds as a part of a settlement agreement and related post closing adjustments. The Amended and Restated Stock Purchase Agreement ("Agreement"), pursuant to which the Company sold Calton Homes on December 31, 1998, requires the Company to indemnify the purchaser for, among other things, certain liabilities that arise out of events occurring prior to the closing of the sale, including the cost of warranty work on homes delivered if such costs exceed $600,000. In January 2000, the purchaser asserted a $253,000 claim for indemnification related to certain alleged liabilities arising out of the events occurring prior to the sale of Calton Homes. The purchaser has agreed to reduce claim to $205,000. On December 28, 2000, rather than permit the release of the remaining General Indemnification Funds, which were to be disbursed to the Company at year-end, the purchaser asserted that it had sustained losses of $770,000 as a result of matters allegedly arising from events prior to the sale of Calton Homes, including the cost of warranty work in excess of the $600,000 reserve established upon the closing of the transaction. In addition, the purchaser requested the escrow agent to set aside $1,139,000 for damages which it believes it will sustain in the future, including the cost of anticipated warranty work and other matters. An arbitration proceeding to resolve these issues is currently scheduled for March 2001. The Company believes that many of the claims made by the purchaser are without merit and intends to vigorously contest these claims in the arbitration. In certain instances, the purchaser has not provided sufficient documentation to enable the Company to assess the merits of the claim. With regard to claims for warranty work performed, the Company believes that the purchaser has failed to comply with the provisions of its agreement with the Company related to the performance of the work and did not demonstrate reasonably prudent business judgment in administering warranty claims. At this time it is not possible to accurately predict what the Company's liability will be related to the claims asserted by the purchaser. However, at this time the potential additional claims asserted by the purchaser against the General Indemnification Fund total approximately $2,300,000. As of November 30, 2000, the balance in the General Indemnification Fund amounted to only $1,434,000. No amounts will be released from the General Indemnification Funds until the indemnity claims are resolved. The Company's indemnity obligations are not limited to the amounts deposited in escrow. The Specific Indemnification Funds are to be disbursed, to the extent not otherwise utilized in the resolution of litigation, on a case-by-case basis, as the litigation is resolved. As of November 30, 2000, there were $1,055,000 of Specific Indemnification Funds remaining in escrow. With the exception of two matters, each of the matters for which the Specific Indemnification Funds were deposited have been resolved, subject, in certain cases, to the finalization of settlement agreements. Under the terms of its agreement with the purchaser, the Company is required to deposit additional Specific Indemnification Funds for any matters that remain unresolved at December 31, 2000. As a result, the Company may be required to deposit an additional $189,000 in escrow until the resolution of the remaining two matters. F-18 39 The Company has filed a counter claim against the purchaser alleging that purchaser has breached the purchase agreement and holdback escrow agreement. The Company contends that purchaser did not comply with its express obligations under the contract and its obligations of "good faith and fair dealing" implied in all New Jersey contracts. Among other things, the Company alleges that purchaser failed to handle third party indemnification claims in good faith and in a reasonable manner using prudent business standards, and failed to provide the Company with requested information on certain claims to allow the Company to make an intelligent assessment of the claim. At this time, there can be no assurance that the Company will prevail in this counter claim. 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 $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. LEASES The Company and its consolidated subsidiaries lease their facilities and equipment under operating lease agreements with various expiration dates through 2005. Future minimum lease payments as of November 30, 2000 under the leases are as follows: 2001 $246,000 2002 167,000 2003 97,000 2004 82,000 2005 68,000 Thereafter: -- -------- Total: $660,000 ======== Rental expense for the Company and its subsidiaries for the years ended November 30, 2000, 1999, and 1998 was $247,000, $45,000, and $392,000, respectively. 8. DISCONTINUED OPERATIONS On December 31, 1998, the Company completed the sale of Calton Homes. The purchase price for the stock of Calton Homes was $48,100,000 plus certain post-closing adjustments. In fiscal 1999, the Company recorded a pretax gain of $7,591,000 on the sale. Cash proceeds from the sale were approximately $43,440,000, net of the $4,040,000 remaining holdback and $1,800,000 million cash received from closing adjustments. No tax liability resulted from the sale since the transaction resulted in a capital loss for tax purposes. However, a provision in lieu of taxes was recorded for financial reporting purposes in fiscal 1999 in the amount of $3,173,000 related to the sale transaction. The gain was subject to the $5,200,000 holdback (see Note 7) of which $700,000 was refunded to the purchaser, out of the General Indemnification Funds and included as part of the gain and $592,000 was received by the Company pursuant to the terms of the indemnification agreement. Future decreases to the escrows held for indemnifications, if any, will be recorded as an adjustment to the gain from the sale of Calton Homes. In fiscal 2000, the Company recorded a provision of approximately $650,000 against the previously recognized gain on sale of $7,591,000. Calton has entered into an agreement to provide consulting services to Centex that requires payments to the Company of $1,300,000 per year over a three-year period. F-19 40 Results of operations from discontinued operations are as follows (amounts in thousands):
Years ended November 30, ------------------------- 1999 1998 -------- -------- Revenues $ 6,763 $105,292 ======== ======== Cost of revenues 5,858 85,897 Selling, general and administrative 1,518 10,172 -------- -------- 7,376 96,069 -------- -------- Income (loss) from operations (613) 9,223 Interest expense, net -- 545 -------- -------- Income (loss) before income taxes (613) 8,678 Provision (benefit) for income taxes (373) 2,363 -------- -------- Net income (loss) from discontinued operations $ (240) $ 6,315 ======== ========
Net assets of discontinued operations are as follows (amounts in thousands): Nov. 30, 1999 -------------- Assets Receivables and other assets $ 104 Commercial land 109 Liabilities Accounts payable and accrued expenses (650) ------------- Net liabilities $ (437) ============= 9. SEGMENT REPORTING The Company accounts for reportable segments using the "management approach". The management approach focuses on disclosing financial information that the Company's management uses to make decisions about the Company's operating matters. As of November 30, 2000 the Company operates in three business segments, as follows. In July 1999, the Company acquired substantially all of the assets of iAW, Inc., an Internet business solutions provider. The acquired business is operated through a wholly owned subsidiary, eCalton. Revenues of eCalton are derived from designing Web pages and providing internet strategy consulting services. In addition, eCalton also earns revenues from employee staffing. In January 2000, the Company acquired a 50.4% equity interest in PrivilegeONE. PrivilegeONE was formed in 1999 to develop customer loyalty programs through the use of a co-branded credit card related to the automotive industry. At this time PrivilegeONE operations consist solely of start up activities, and its entire loss has been included in the Company's consolidated results of operations. F-20 41 The Company also provides corporate consulting services related to the sale of the homebuilding assets in December 1998. In addition, in June 2000 the Company acquired a 51% interest in ITP, a newly formed entity established to provide management and consulting services to entrepreneurial and development stage companies, as well as acquiring controlling interest in certain entities that ITP consults with. Because ITP's operations are similar to that of the Company's corporate consulting for Centex, the results of operations for ITP are included in the results of operations for the corporate and consulting services segment. The Company recognized revenues in the Corporate and Consulting Services division from Centex Corporation in the amount of $1,300,000 and $1,194,000 for the years ended November 30, 2000 and 1999, respectively. These amounts represented 37% and 88% of consolidated net revenues in 2000 and 1999. The Company has no foreign operations. Operating results, by segment, for the years ended November 30, 2000 and 1999 are as follows (in thousands):
Year ended November 30, 2000 -------------------------------------------------------------------- Internet Credit Card Corporate and Business Loyalty Consulting Total Solutions Business Services Company -------------------------------------------------------------------- Total revenues $ 2,045 $ -- $ 1,489 $ 3,534 Total cost of revenues 1,514 -- -- 1,514 Depreciation and amortization 109 26 91 226 Interest income -- -- 2,144 2,144 Loss from operations (2,910) (1,709) (1,582) (6,201) Benefit for income taxes -- -- (579) (579) Net loss (2,911) (1,859) (1,126) (5,896) Total assets $ 1,172 $ 39 $ 33,889 $ 35,100
Year ended November 30, 1999 -------------------------------------------------------------------- Internet Credit Card Corporate and Business Loyalty Consulting Total Solutions Business Services Company -------------------------------------------------------------------- Total revenues $ 157 $ -- $ 1,194 $ 1,351 Total cost of revenues 116 -- -- 116 Depreciation and amortization 14 -- 3 17 Interest income -- -- 1,845 1,845 Income (loss) from operations (427) -- 1,541 1,114 Provision (benefit) for income taxes (171) -- 624 453 Net income (loss) (256) -- 5,095 4,839 Total assets $ 464 $ -- $ 39,977 $ 40,441
F-21 42 10. QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial results for the years ended November 30, 2000 and 1999 are as follows (amounts in thousands, except per share amounts):
Three Months Ended -------------------------------------------------------------- Feb. 29, May 31, Aug. 31, Nov. 30, 2000 2000 2000 2000 -------------- -------------- ------------- --------------- Net loss from continuing operations $(1,063) $(678) $(1,349) $(2,068) Net loss from discontinued operations -- -- -- (84) Net loss from the sale of Calton Homes -- -- -- (654) ------- ----- ------- ------- Net loss $(1,063) $(678) $(1,349) $(2,806) ======= ===== ======= ======= Net loss per share Basic $ (0.25) $(0.16) $ (0.32) $ (0.65) Diluted $ (0.25) $(0.16) $ (0.32) $ (0.65)
Three Months Ended -------------------------------------------------------------- Feb. 28, May 31, Aug. 31, Nov. 30, 1999 1999 1999 1999 -------------- -------------- ------------- --------------- Net income from continuing operations $ 159 $ 285 $ 178 $ 39 Net income (loss) from discontinued operations 92 (379) (100) 147 Net income (loss) from the sale of Calton Homes 3,886 668 -- (136) ------- ----- ------- ------- Net income $ 4,137 $ 574 $ 78 $ 50 ======= ===== ======= ======= Net income per share (a) Basic $ 0.80 $0.15 $ -- $ -- Diluted $ 0.75 $0.10 $ -- $ --
(a) Net income per share does not agree to the per share amounts presented on the face of the income statement as a result of the impact of the stock repurchase program. F-22 43 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-70628, 33-75184, 333-28135, and 333-42424) of Calton, Inc. of our report dated January 19, 2001 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Tampa, Florida February 22, 2001 F-23 44 SCHEDULE II CALTON, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
Additions ------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Year Expenses Accounts Deductions of Year - ---------------------------------------------- ----------- ----------- ---------- ------------ ---------- Year ended November 30, 1998: Inventory valuation reserves $ 981 $ -- $ -- $ 726 $ 255 ============ ============ ============ ============ ======= Valuation allowance for net deferred tax asset $ 16,090 $ -- $ -- $ 2,549 $13,541 ============ ============ ============ ============ ======= Year ended November 30, 1999: Inventory valuation reserves $ 255 $ -- $ -- $ 100 $ 155 ============ ============ ============ ============ ======= Valuation allowance for net deferred tax asset $ 13,541 $ -- $ -- $ 4,736(a) $ 8,805 ============ ============ ============ ============ ======= Year ended November 30, 2000: Allowance for doubtful accounts $ -- $ 122 $ -- $ -- $ 122 ============ ============ ============ ============ ======= Inventory valuation reserves $ 155 $ 108 $ -- $ -- $ 263 ============ ============ ============ ============ ======= Valuation allowance for net deferred tax asset $ 8,805 $ 1,864 $ -- $ -- $10,669 ============ ============ ============ ============ =======
- ---------------- (a) The majority of the change in valuation allowance is due to the sale of Calton Homes, Inc. and did not have an income statement impact. F-24 45 CALTON, INC. AND SUBSIDIARIES INDEX TO EXHIBITS 2.1 Amended and Restated Stock Purchase Agreement effective September 2, 1998 among Calton, Inc., Calton Homes, Inc. and Centex Real Estate Corp., incorporated by reference to Exhibit 2 to Form 8-K of Registrant dated December 31, 1998. 2.2 Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated as of December 28, 1998 among Calton, Inc., Calton Homes, Inc. and Braewood Development Corp. (assignee of Centex Real Estate Corp.), incorporated by reference to Exhibit 2.1 to Form 8-K of Registrant dated December 31, 1998. 3.1 Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State, State of New Jersey on May 28, 1993, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-60022, Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on April 27, 1994, incorporated by reference to Exhibit 3(b) to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-76312, and Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on May 29, 1997, incorporated by reference to Exhibit 3.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1997, Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on February 2, 1999, incorporated by reference to Exhibit 3.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1998, and Certificate of Amendment to Amended and Restated Certificate of Incorporation filed with the Secretary of State, State of New Jersey on May 30, 2001. 3.2 By Laws of Registrant, as amended, incorporated by reference to Exhibit 3.2 to Form 10-K of Registrant for the fiscal year ended November 30, 1998. 4.1 Warrant to Purchase Common Stock of Calton, Inc. dated January 2000 issued to Taytrowe Van Fechtmann World Companies, Inc., incorporated by reference to Exhibit 4.2 to Form 10-K of Registrant for the fiscal year ended November 30, 1999. 4.2 Rights Agreement dated February 1, 1999 by and between the Registrant and First City Transfer Company as Rights Agent, including forms of Rights Certificate and Election to Purchase included as Exhibit B thereto, incorporated by reference to Exhibit 1 to Form 8-A Registration Statement of Registrant filed with the Securities and Exchange Commission on February 2, 1999. (*) 10.1 1996 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1996. (*) 10.3 Registrant's Amended and Restated 1993 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.3 to Form 10-K of Registrant for the fiscal year ended November 30, 1995. (*) 10.4 Incentive Compensation Plan of Registrant. (**) 10.7 Executive Employment Agreement dated as of November 21, 1995 between Registrant and Anthony J. Caldarone, incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for the fiscal year ended November 30, 1995 and Amendment to Executive Employment Agreement dated as of April 14, 1999, incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for the fiscal year ended November 30, 1999. E-1 46 10.8 Consulting Agreement between Registrant and Braewood Development Corp. dated December 31, 1998, incorporated by reference to Exhibit 10.9 to Form 10-K of Registrant for the fiscal year ended November 30, 1998. (*) 10.9 2000 Equity Incentive Plan incorporated by reference to Exhibit 10.10 to Form 10-K of Registrant for the fiscal year ended November 30, 1999. (*) 10.10 Option Agreement dated July 19, 1999 between the Company and Kenneth D. Hill, incorporated by reference to Exhibit 10.11 to Form 10-K of Registrant for the fiscal year ended November 30, 1999. Agreements identical in term and content between the Registrant and each of Matthew R. Smith and Robert K. Hill have been executed. These documents have not been filed. (**) 10.11 Employment Agreement dated as of July 19, 1999 between eCalton.com, Inc. and Kenneth D. Hill, incorporated by reference to Exhibit 10.2 to Form 10-K of Registrant for the fiscal year ended November 30, 1999. 10.12 Employee Stock Purchase Plan. 10.13 Operating Agreement of PrivilegeOne Networks, LLC 10.14 Amendment No. 1 to Operating Agreement of PrivilegeOne Networks, LLC 10.15 Promissory Note issued by PrivilegeOne Networks, Inc. dated January 27, 2000 10.16 Amendment No. 1 to Promissory Note issued by PrivilegeOne Networks, Inc. 10.17 Assignment and Assumption Agreement dated January 27, 2000 between PrivilegeOne Networks, LLC and PrivilegeOne Networks, Inc. 10.18 Second Promissory Note dated February 9, 2001 issued by PrivilegeOne Networks, LLC 10.19 Operating Agreement of Innovation Technology Partners, LLC 10.20 Revolving Promissory Note dated June 19, 2000 issued by Innovation Technology Partners, LLC 10.21 Consulting Agreement dated July 17, 2000 between the Registrant and Robert E. Naughton 21. Subsidiaries of the Registrant. (*) Constitutes a compensatory plan required to be filed by an exhibit pursuant to Item 14(c) of Form 10-K. (**) Constitutes a management contract required to be filed pursuant to Item 14(c) of Form 10-K. E-2 EX-10.4 2 g67239ex10-4.txt CALTON,INC.-COMPENSATION PLAN 1 EXHIBIT 10.4 CALTON, INC. INCENTIVE COMPENSATION PLAN 1. PURPOSE Pursuant to Calton's ("Calton" or the "Company") philosophy of providing compensation to its employees which is competitive with the compensation offered by similar companies operating in the same regions, the Company has established the Calton, Inc. Incentive Compensation Plan (the "Plan") to promote the interests of Calton and its shareholders by enhancing the Company's ability to attract, retain and motivate highly qualified individuals to serve the Company and any of its 80% or greater owned subsidiaries by providing such individuals the opportunity to earn meaningful additional compensation based on the operating results of the Company. This Plan is consistent with the Plan that has been in effect and renewed since 1995. 2. EFFECTIVE DATE AND TERM OF THE PLAN The Plan shall be effective as of December 1, 2000, subject to the approval of the Company's Board of Directors (the "Board"), and it shall terminate on November 30, 2002 (the "Term"). The Board, in its sole discretion, may renew, for up to two (2) fiscal years upon each such renewal, the Term of the Plan and the provisions hereunder. 3. PARTICIPATION All officers of the Company and any of its 80% or greater owned subsidiaries are eligible for participation in the Plan. In addition, up to 10% of the Incentive Pool (as defined below) may be used for bonuses to other full time employees of the Company and any of its 80% or greater owned subsidiaries who are not otherwise eligible for commissions or bonuses. The employees that are eligible to participate in the Plan (the "Eligible Employees") shall be determined each fiscal year by the Compensation Committee of the Board (the "Committee") based on the recommendations of the President and Chief Executive Officer of the Company. The determination of Eligible Employees entitled to participate in the Plan shall be made by the Committee no later than the end of the first quarter of any fiscal year; provided, however, that an Eligible Employee hired after the end of the first quarter of any fiscal year may be considered by the Committee for participation in the Plan. Participation in the Plan during any one fiscal year does not imply or guarantee participation in any other fiscal year during the Term of the Plan. 4. INCENTIVE COMPENSATION The available pool of incentive compensation (the "Incentive Pool") under this Plan during any particular fiscal year shall be equal to ten percent (10%) of the Company's pre-tax income as reported in the Company's Form 10-K for a particular fiscal year, subject to certain non-operating adjustments (the "Adjustments") that may be made to the Incentive Pool at the discretion of the Committee to remove the effect of events or transactions not in the ordinary course of the Company's operations. 5. DISTRIBUTION OF INCENTIVE COMPENSATION The President and Chief Executive Officer of the Company shall recommend the dollar amount of an award from the Incentive Pool (the "Incentive Award') to be granted to each Eligible Employee participating in the Plan; provided, however, that the Eligible Employee participating in the Plan may not receive an Incentive Award during any particular fiscal year that exceeds the lesser of twenty percent (20%) of the Incentive Pool or one hundred percent (100%) of the Eligible Employee's base salary compensation for the same fiscal year; provided, 2 however, that the Committee reserves the right to make special, supplemental grants that exceed one hundred percent (100%) of an Eligible Employee's base salary for the same fiscal year. The Committee shall then review and approve, with the power to alter, modify or disapprove in whole or in part, the proposed Incentive Award for each Eligible Employee participating in the Plan no later than February 15 of the succeeding fiscal year, or the fifteenth day of the last month of the first quarter of the succeeding fiscal year if the end of such preceding fiscal year is other than November 30. An Eligible Employee selected for participation in the Plan who was hired by the Company or one of its 80% or greater owned subsidiaries subsequent to the commencement of the relevant fiscal year shall only be entitled to a pro-rata portion of any Incentive Award. An Eligible Employee participating in the Plan shall not be entitled to receive any Incentive Award until the grant of any such Incentive Award has been approved by the Committee. Any Incentive Award shall be distributed and paid to an Eligible Employee in accordance with the Company's ordinary payroll policies and procedures during the last pay period of February of each fiscal year, or during the last pay period of the last month of the first quarter of the fiscal year if the end of such preceding fiscal year is other than November 30. All approved and paid Incentive Awards shall be subject to all tax withholding and reporting requirements. 6. TERMINATION Upon the termination of employment of an Eligible Employee selected to participate in the Plan for a particular fiscal year for any reason, the Committee shall not grant, and the Eligible Employee shall not be entitled to, an Incentive Award for the fiscal year in which termination occurred, unless otherwise determined by the Board of Directors. 7. AMENDMENT OR DISCONTINUANCE At any time during the Term of the Plan, the Committee may alter, amend, suspend or discontinue the Plan. 8. OTHER AGREEMENTS In the event that any term or condition of the Plan varies from, or is in any way dissimilar to or in contrast with, any term, condition or provision of any other agreement between the Company and an Eligible Employee, such as an employment agreement, the relevant terms, conditions and/or provisions of such other agreement will control. 9. SUCCESSORS The provisions of the Plan shall be binding upon all successors of any Eligible Employee granted an Incentive Award under the Plan, including, without limitation, the estate of any such Eligible Employee and the executors, administrators or trustees of such estate, and any receiver, trustee in bankruptcy or representative of the creditors of any such Eligible Employee. Any obligations with respect to Incentive Awards granted pursuant to the Plan shall be expressly assumed by any successor in interest to the Company. -2- 3 10. GOVERNING LAW AND JURISDICTION OF NEW JERSEY COURTS The Plan and any agreement entered into in connection therewith shall be construed and its provision enforced and administered in accordance with the laws of the State of New Jersey. -3- EX-10.12 3 g67239ex10-12.txt CALTON,INC-STOCK PURCHASE PLAN 1 EXHIBIT 10.12 CALTON, INC. EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1 - PURPOSE. This Employee Stock Purchase Plan (the "Plan") is intended to encourage stock ownership by all eligible employees of Calton, Inc. (the "Company"), a New Jersey corporation, and its participating subsidiaries (as defined in Article 17) so that they may share in the growth of the Company by acquiring or increasing their proprietary interest in the Company. This Plan is designed to encourage eligible employees to remain in the employ of the Company and its participating subsidiaries. This Plan is intended to constitute an "employee stock purchase plan" within the meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE 2 - ADMINISTRATION OF THE PLAN. This Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company. The interpretation and construction by the Committee of any provisions of this Plan or of any option granted under it, shall be final, unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out this Plan as it may deem best, provided that any such rules and regulations shall be applied on a uniform basis to all employees under the Plan. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any option granted under it. In the event the Board of Directors dissolves the Committee or terminates the authority of the Committee to administer this Plan, the Board of Directors shall have all power and authority to administer this Plan. In such event, the word "Committee" wherever used herein shall be deemed to mean the Board of Directors. ARTICLE 3 - ELIGIBLE EMPLOYEES. All employees of the Company or any of its participating subsidiaries whose customary employment is more than twenty (20) hours per week and for more than five (5) months in any calendar year shall be eligible to receive options under this Plan to purchase common stock of the Company, and all eligible employees shall have the same rights and privileges hereunder. Persons who are eligible employees on the first business day of any Offering Period (as defined in Article 5) shall receive their options as of such day. Persons who become eligible employees after any date on which options are granted under this Plan shall be granted options on the first day of the next succeeding Offering Period on which options are granted to eligible employees under this Plan. Directors 2 who are not employees of the Company shall not be eligible to receive options under the Plan. In no event, however, may an employee be granted an option if such employee, immediately after the option was granted, would be treated as owning stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any parent corporation or subsidiary corporation, as the terms "parent corporation" and "subsidiary corporation" are defined in Section 424(e) and (f) of the Code. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. ARTICLE 4 - STOCK SUBJECT TO THE PLAN. The stock subject to the options under this Plan shall be shares of the Company's authorized but unissued Common Stock, par value $.05 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company, including shares purchased in the open market. The aggregate number of shares which may be issued pursuant to this Plan is One Hundred Seventy-Five Thousand (175,000) shares, which number shall automatically increase on January 1 of each year, beginning January 1, 2002, by such number of shares as is equal to the lesser of (i) 2% of the total number of shares of Common Stock outstanding on December 31 of the prior year and (ii) Seventy-Five Thousand (75,000) shares. The number of shares which may be issued under this Plan shall at all times be subject to adjustment as provided in Article 12. If any option granted under this Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available under this Plan. ARTICLE 5 - EFFECTIVENESS; PAYMENT PERIOD AND STOCK OPTIONS. Subject to the terms and conditions of this Plan, the Committee shall make offerings to eligible employees to purchase Common Stock under this Plan from time to time on the date or dates designated by the Committee. The Committee shall specify the terms and conditions for each such offering including the date of the offering, the fixed terms of any offering and the terms of any interim payment periods (each a "Payment Period") within the fixed term of any offering. The fixed term of any offering (each an "Offering Period") shall be a maximum of twenty-four months during which term payroll deductions shall be made from the annual compensation of eligible employees participating in an offering. On the first business day of each Offering Period, the Company will grant to each eligible employee who is then a participant in this Plan an option to purchase on the last day of each Payment Period within such Offering Period, at the Option Price hereinafter provided for, a number of shares which has on the first day of the Offering Period an aggregate Option Price equal to 15% of the Employee's annual compensation, on condition that such employee remains eligible to participate in this Plan throughout the remainder of such Payment Period. The participant shall be entitled to exercise the option so granted only to the extent of the participant's accumulated payroll deductions on the last day of such Payment Period. The option price per share for each Payment Period shall be the lesser of (i) 85% of the average market price of the Common Stock on the first business day of the Offering Period to which such Payment Period relates, or (ii) 85% of the average market price of the Common Stock on the last -2- 3 business day of such Payment Period (the "Option Price"). The Option Price shall be subject to adjustment as provided in Article 12. For purposes of this Plan, the term "average market price" on any date means (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq Stock Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the average the closing bid and asked prices last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq Stock Market; or (iv) if the Common Stock is not publicly traded, the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. For purposes of determining the "last reported" sale price or the "last quoted" price for the foregoing provision, the last reported or quoted prices shall mean, as the case may be, at 4:00 p.m., New York time, on that day. For purposes of this Plan, the term "business day" means a day on which there is trading on the Nasdaq Stock Market or the aforementioned national securities exchange, whichever is applicable pursuant to the preceding paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or legal holiday in the State of New Jersey. No employee shall be granted an option which permits the employee's right to purchase stock under this Plan, and under all other Section 423(b) employee stock purchase plans of the company and any parent or subsidiary corporations, to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined on the date or dates that options on such stock were granted) for each calendar year in which such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the Code. If the participant's accumulated payroll deductions on the last day of the Payment Period would otherwise enable the participant to purchase Common Stock in excess of the Section 423(b)(8) limitation described in this paragraph, the excess of the amount of the accumulated payroll deductions over the aggregate purchase price of the shares actually purchased shall be promptly refunded to the participant by the Company, without interest. ARTICLE 6 - EXERCISE OF OPTION. Each eligible employee who continues to be a participant in this Plan on the last day of a Payment Period shall be deemed to have exercised his or her option on such date and shall be deemed to have purchased from the Company such number of full shares of Common Stock reserved for the purpose of this Plan as the participant's accumulated payroll deductions on such date will pay for at the Option Price, subject to the Section 423(b)(8) limitation described in Article 5. If the individual is not a participant on the last day of a Payment Period, then he or she shall not be entitled to exercise his or her option and the amount of his or her payroll deduction not previously used to purchase Common Stock shall be refundable. The Committee may determine with respect to participating employees whether any fractional share which would be issuable under this Article 6 shall be rounded down to the next lower whole share or -3- 4 credited as a fractional share. Unused payroll deductions remaining in a participant's account at the end of a Payment Period by reason of the inability to purchase a fractional share shall be carried forward to the next Payment Period. ARTICLE 7 - AUTHORIZATION FOR ENTERING THE PLAN. An employee may elect to enter this Plan by filling out, signing and delivering to the Company an authorization: A. Stating the percentage to be deducted regularly from the employee's pay; B. Authorizing the purchase of stock for the employee in each Payment Period in accordance with the terms of this Plan; and C. Specifying the exact name or names in which stock purchased from the employee is to be issued as provided under Article 11 hereof. Such authorization must be received by the Company at least ten (10) business days before the first day of the next succeeding Offering Period and shall take effect only if the employee is an eligible employee on the first business day of such Offering Period. Unless a participant files a new authorization or withdraws from this Plan, the deductions and purchases under the authorization the participant has on file under this Plan will continue from one Offering Period to succeeding (but not overlapping) Offering Periods as long as this Plan remains in effect. Eligible employees may not participate in more than one Offering Period at a time. The Company will accumulate and hold for each participant's account the amounts deducted from his or her pay. No interest will be paid on these amounts. ARTICLE 8 - MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS. An employee may authorize payroll deductions in an amount (expressed as a whole percentage) of not less than one percent (1%) but not more than fifteen percent (15%) of the employee's total compensation including base pay or salary and any overtime, bonuses and commissions. ARTICLE 9 - CHANGE IN PAYROLL DEDUCTIONS. Deductions may not be increased or decreased during an Offering Period. However, a participant may withdraw in full from an Offering Period. ARTICLE 10 - WITHDRAWAL FROM THE PLAN. A participant may withdraw from the Plan (in whole but not in part) at any time prior to the last day of a Payment Period by delivering a withdrawal notice to the Company, in which event the Company will promptly refund the entire balance of the employee's deductions not previously used to purchase stock under such Payment Period. -4- 5 To re-enter this Plan, an employee who has previously withdrawn must file a new authorization at least ten (10) business days before the first day of the next Offering Period in which he or she wishes to participate. The employee's re-entry into this Plan becomes effective at the beginning of such Offering Period, provided that he or she is an eligible employee on the first business day of the Offering Period. ARTICLE 11 - ISSUANCE OF STOCK. After the end of each Offering Period, the Company will deposit the number of shares of Common Stock which each participant has purchased into an account (a "Brokerage Account") established in the participant's name with the Company's transfer agent or at a stock brokerage or other financial services firm which the Company shall designate. The participant may request that the account be established in the name of the participant or in the name of the participant and the name of another person of legal age as joint tenants with rights of survivorship. Subject to Article 16 hereof, a participant may sell or otherwise dispose of shares in the Brokerage Account at any time; however, each participant shall hold shares in the Brokerage Account until (a) two years after the beginning of the Offering Period in which the participant purchased the shares or (b) one year after the applicable Payment Date, whichever comes later. After these time periods elapse, the participant may transfer the applicable shares to another stock brokerage or other financial services firm, or the participant may request that the Company issue a stock certificate in the participant's name. ARTICLE 12 - ADJUSTMENTS. In the event of a stock split, stock dividend, recapitalization, reorganization, exchange of shares or other similar event or change in the Company's capitalization, the class and aggregate number of shares set forth in Article 4 hereof which are subject to options which have been or may be granted under this Plan, the Option Price and the limitations set forth in the second paragraph of Article 5 shall also be appropriately adjusted to reflect such events . Notwithstanding the foregoing, any such adjustment shall be made only after the Committee, based on advice of counsel for the Company, determines whether such adjustments would constitute a "modification" (as that term is defined in Section 424 of the Code). If the Committee determines that such adjustments would constitute a modification, it may refrain from making such adjustments. If the Company is to be consolidated with or acquired by another entity in a merger, a sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board") shall, with respect to options then outstanding under this Plan, either (i) make appropriate provision for the continuation of such options by arranging for the substitution on an equitable basis for the shares then subject to such options either (a) the consideration payable with respect to the outstanding shares of the Common Stock in connection with the Acquisition, (b) shares of stock of the successor corporation, or a parent or subsidiary of such corporation, or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such options immediately preceding the Acquisition; (ii) terminate each participant's options in exchange for a cash payment equal to the excess of (a) the fair market value on the date of the Acquisition of the -5- 6 number of shares of Common Stock that the participant's accumulated payroll deductions as of the date of the Acquisition could purchase, at an option price determined with reference only to the first business day of the applicable Payment Period and subject to the Code Section 423(b)(8) and fractional-share limitations on the amount of stock a participant would be entitled to purchase, over (b) the result of multiplying such number of shares by such option price; or (iii) provide for the assumption of the purchase rights by such acquiring party, subject to the same terms and conditions set forth herein, except that any purchase price shall be adjusted to reflect any exchange ratio. The Committee or Successor Board shall determine the adjustments to be made under this Article 12, and its determination shall be conclusive. ARTICLE 13 - NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. An employee's rights under this Plan are the employee's alone and may not be transferred or assigned to, or availed of by, any other person other than by will or the laws of descent and distribution. Any option granted under this Plan to an employee may be exercised, during the employee's lifetime, only by the employee. ARTICLE 14 - TERMINATION OF EMPLOYEE'S RIGHTS. Whenever a participant ceases to be an eligible employee because of retirement, voluntary or involuntary termination, resignation, layoff, discharge, death or for any other reason, his or her rights under this Plan shall immediately terminate, and the Company shall promptly refund, without interest, the entire balance of his or her payroll deduction account under this Plan. Notwithstanding the foregoing, eligible employment shall be treated as continuing intact while a participant is on military leave, sick leave or other bona fide leave of absence, for up to 90 days, or, if longer than 90 days, for so long as the participant's right to re-employment is guaranteed by statute or by contract. If a participant's payroll deductions are interrupted by any legal process, a withdrawal notice will be considered as having been received from the participant on the day the interruption occurs. ARTICLE 15 - TERMINATION AND AMENDMENTS TO PLAN. Unless terminated sooner as provided below, this Plan shall terminate on November 30, 2009. This Plan may be terminated at any time by the Company's Board of Directors but such termination shall not affect options then outstanding under this Plan. It will terminate in any case when all or substantially all of the unissued shares of stock reserved for the purposes of this Plan have been purchased. If at any time shares of stock reserved for the purpose of this Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to the amount of payroll deductions accumulated on behalf of each participant that would otherwise be used to purchase stock, and this Plan shall terminate. Upon such termination or any other termination of this Plan, all payroll deductions not used to purchase stock will be refunded, without interest. -6- 7 The Committee or the Board of Directors may from time to time adopt amendments to this Plan provided that, without the approval of the shareholders of the Company, no amendment may (i) increase the number of shares that may be issued under this Plan (except as provided in Article 4); (ii) change the class of employees eligible to receive options under this Plan, if such action would be treated as the adoption of a new plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under the Securities Exchange act of 1934 to become inapplicable to this Plan. ARTICLE 16 - LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN. This Plan is intended to provide shares of Common stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his or her own affairs. An employee may, therefore, sell stock purchased under this Plan at any time the employee chooses, subject to compliance with any applicable Federal or state securities laws and subject to any restrictions imposed under Article 21 to ensure that tax withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK. ARTICLE 17 - PARTICIPATING SUBSIDIARIES. The term "participating subsidiary" shall mean any present or future subsidiary of the Company, as that term is defined in Section 424(f) of the Code, which is designated from time to time by the Board of Directors to participate in this Plan. The Board of Directors shall have the power to make such designation before or after this Plan is approved by the shareholders. ARTICLE 18 - OPTIONEES NOT SHAREHOLDERS. Neither the granting of an option to an employee nor the deductions from his or her pay shall constitute such employee a shareholder of the shares covered by an option until such shares have been actually purchased by the employee. ARTICLE 19 - APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to options granted under this Plan will be used for general corporate purposes. ARTICLE 20 - NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By electing to participate in this Plan, each participant agrees to notify the Company in writing immediately after the participant transfers Common Stock acquired under this Plan, if such transfer occurs within two years after the first business day of the Payment Period in which such Common Stock was acquired. Each participant further agrees to provide any information about such a transfer as may be requested by the Company or any subsidiary corporation in order to assist it in complying with the tax laws. Such dispositions generally are treated as "disqualifying dispositions" under Sections 421 and 424 of the Code, which have certain tax consequences to participants and to the Company and its participating subsidiaries. -7- 8 ARTICLE 21 - WITHHOLDING OF ADDITIONAL INCOME TAXES. By electing to participate in this Plan, each participant acknowledges that the Company and its participating subsidiaries are required to withhold taxes with respect to the amounts deducted from the participant's compensation and accumulated for the benefit of the participant under this Plan, and each participant agrees that the Company and its participating subsidiaries may deduct additional amounts from the participant's compensation, when amounts are added to the participant's account, used to purchase Common Stock or refunded, in order to satisfy such withholding obligations. Each participant further acknowledges that when Common Stock is purchased under this Plan the Company and its participating subsidiaries may be required to withhold taxes with respect to all or a portion of the difference between the fair market value of the Common Stock purchased and its purchase price, and each participant agrees that such taxes may be withheld from compensation otherwise payable to such participant. It is intended that tax withholding will be accomplished in such a manner that the full amount of payroll deductions elected by the participant under Article 7 will be used to purchase Common Stock. However, if amounts sufficient to satisfy applicable tax withholding obligations have not been withheld from compensation otherwise payable to any participant, then, notwithstanding any other provision of this Plan, the Company may withhold such taxes from the participant's accumulated payroll deductions and apply the net amount to the purchase of Common Stock, unless the participant pays to the Company, prior to the exercise date, an amount sufficient to satisfy such withholding obligations. Each participant further acknowledges that the Company and its participating subsidiaries may be required to withhold taxes in connection with the disposition of stock acquired under this Plan and agrees that the Company or any participating subsidiary may take whatever action it considers appropriate to satisfy such withholding requirements, including deducting from compensation otherwise payable to such participant an amount sufficient to satisfy such withholding requirements or conditioning any disposition of Common Stock by the participant upon the payment to the Company or such subsidiary of an amount sufficient to satisfy such withholding requirements. ARTICLE 22 - GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver shares of Common stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to this Plan. For example, the Company may be required to identify shares of Common Stock issued under this Plan on its stock ownership records and send tax information statements to employees and former employees who transfer title to such shares. ARTICLE 23 - GOVERNING LAW. The validity and construction of this Plan shall be governed by the laws of the State of New Jersey, without giving effect to the principles of conflicts of law thereof. -8- EX-10.13 4 g67239ex10-13.txt CALTON,INC.-OPERATING AGREEMENT PRIVILEGEONE 1 EXHIBIT 10.13 PRIVILEGEONE NETWORKS, L.L.C. OPERATING AGREEMENT THIS OPERATING AGREEMENT (this "Agreement") is entered into as of the 2nd day of February, 2000, by and among the parties identified on the signature pages hereto. EXPLANATORY STATEMENT WHEREAS, PrivilegeOne Networks, L.L.C. (the "Company") was formed under the laws of the State of Delaware on February 2, 2000; WHEREAS, PrivilegeONE Networks, Inc., a Delaware corporation (the "Corporation"), has transferred and assigned to the Company all of its business and assets and the Company has assumed all of the liabilities of the Corporation; WHEREAS, the Corporation has assigned to the entities identified on Exhibit A hereto the right to receive the membership Interests indicated by the Percentages on such exhibit (which interests have been assigned in accordance with the respective ownership interests such entities had in the Corporation); and WHEREAS, the parties hereto wish to confirm the admission, which for all purposes shall be deemed effective as of February 2, 2000, of the parties identified on Schedule A as members of the Company. NOW, THEREFORE, for good and valuable consideration, the parties, intending legally to be bound, agree as follows: SECTION I DEFINED TERMS The following capitalized terms shall have the meanings specified in this Section I. Other terms are defined in the text of this Agreement and, throughout this Agreement, those terms shall have the meanings respectively ascribed to them. "Act" means the Delaware Limited Liability Company Act, 6 Del. Codess.18-101 ET SEQ. as amended from time to time. "Adjusted Capital Account Deficit" means, with respect to any Interest Holder, the deficit balance, if any, in the Interest Holder's Capital Account as of the end of the applicable taxable year, after giving effect to the following adjustments: 2 (i) the deficit shall be decreased by the amounts which the Interest Holder is obligated to restore under Section 4.4.2, or is deemed obligated to restore under Regulation Section 1.704-2(g)(2) and (i)(5); and (ii) the deficit shall be increased by the terms described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). "Adjusted Capital Contribution" means, as of any day, an Interest Holder's total Capital Contributions less all amounts actually distributed to the Interest Holder under Sections 4.1, 4.2 and 7.2. hereof. The amount of any such distribution shall be decreased by the amount of Company liabilities assumed by the Interest Holder or secured by any Company property distributed to the Interest Holder. If any Interest is transferred in accordance with the terms of this Agreement, the transferee succeeds to the Adjusted Capital Contributions of the transferor to the extent the Adjusted Capital Contributions relate to the Interest transferred. "Affiliate" means, with respect to any Person (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 5% or more of the voting interests of such Person, (ii) each Person that controls, is controlled by or is under common control with each Person or any Affiliate of such Person, (iii) each of such Person's officers, directors, joint venturers, members and partners, or (iv) such Person's spouse, children, siblings and parents. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting interests, by contract or otherwise. "Agreement" means this Operating Agreement," as amended from time to time. "Board of Directors" means the board of directors of the Company as established pursuant to Section 5.1 of this Agreement. "Capital Account" means the account to be maintained by the Company for each Interest Holder in accordance with the following provisions: (i) an Interest Holder's Capital Account is credited with the Interest Holder's Capital Contributions, the amount of any Company liabilities assumed by the Interest Holder (or which are secured by Company property distributed to the Interest Holder), the Interest Holder's allocable share of Profits and any item of income or gain specifically allocated to the Interest Holder under the provisions of Section IV; and (ii) an Interest Holder's Capital Account is debited with the amount of money and the fair market value of any Company property distributed to the Interest Holder, the amount of any liabilities of the Interest Holder assumed by the Company (or which are secured by property contributed by the Interest Holder to the Company), the Interest Holder's allocable share of Losses and any item of expense or loss specially allocated to the Interest Holder under the provisions of Section IV. -2- 3 If any interest is transferred under this Agreement, the transferee succeeds to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred interest. It is intended that the Capital Accounts of all Interest Holders be maintained in compliance with the provisions of Regulation Section 1.704-1(b), and all provisions of this Agreement relating to the maintenance of Capital Accounts are to be interpreted and applied in a manner consistent with that Regulation. "Capital Contribution" means the total amount of cash and the fair market value of any other assets contributed (or deemed contributed under Regulation Section 1.704-1(b)(2)(iv)(d)) to the Company by an Interest Holder, net of liabilities assumed or to which the assets are subject. "Capital Proceeds" means the gross receipts received by the Company from a Capital Transaction. "Capital Transaction" means any transaction not in the ordinary course of business which results in the Company's receipt of cash or other consideration other than Capital Contributions, including, without limitation, proceeds of sales or exchanges or other dispositions of property not in the ordinary course of business, financings, refinancings, condemnations, and insurance proceeds for the destruction of assets used in the trade or business of the Company. "Cash Flow" means all cash funds derived from operations of the Company (including interest received on reserves), less cash funds to pay current operating expenses and to pay or establish reasonable reserves for future expenses, debt payments, capital improvements, contingencies, and replacements as determined by the Board of Directors. Cash Flow does not include Capital Proceeds but is increased by the reduction of any reserve previously established. Cash Flow is not reduced by noncash charges, including without limitation, depreciation and amortization. "Code" means the Internal Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law. "Company" means, the limited liability company formed in accordance with this Agreement. "GAAP" means generally accepted accounting principles. "Interest" means an Interest Holder's share of the Profits and Losses of, and the right to receive distributions from, the Company. "Interest Holder" means any Person who holds an Interest, whether as a Member or an unadmitted assignee of a Member. "Interest Holder Minimum Gain" means an amount, with respect to each Interest Holder Nonrecourse Liability, equal to the Minimum Gain that would result if such Interest Holder Nonrecourse Liability were treated as a -3- 4 Nonrecourse Liability, determined in accordance with the provisions of Regulation Section 1.704-2(i)(3). "Interest Holder Nonrecourse Deduction" means for any fiscal year, the net increase during the year in Interest Holder Minimum Gain attributable to the Interest Holder Nonrecourse Liability reduced, but not below zero, by proceeds of the liability (i) distributed during the year to the Interest Holder bearing the economic risk of loss for the liability and (ii) that are both attributable to the liability and allocable to an increase in the Interest Holder Minimum Gain. "Interest Holder Nonrecourse Liability" means any Company liability to the extent the liability is nonrecourse (under Code Section 1001), and an Interest Holder or person or entity related to an Interest Holder (under Regulation Section 1.752-4(b)) bears the economic risk of loss, determined in accordance with Regulation Section 1.704-2(b)(4). "Member" means each Person signing this Agreement and any Person who subsequently is admitted as a Member of the Company and agrees to be bound by the terms of this Agreement. "Membership Rights" means all of the rights of a Member in the Company, including a Member's (i) Interest, (ii) right to inspect the Company's books and records; and (iii) right to participate in the management of and vote on matters relating to the Company, to the extent such rights exist. "Minimum Gain" has the meaning set forth in Regulation Section 1.704-2(b)(2) and 1.704-2(d). Minimum Gain shall be computed separately for each Interest Holder in a manner consistent with the Regulations under Code Section 704(b). "Negative Capital Account" means a Capital Account with a balance of less than zero. "Net Capital Proceeds" means the net cash proceeds received by the Company from a Capital Transaction, less any portion thereof used to establish reserves for Company expenses, obligations, and contingencies as determined by the Board of Directors. Net Capital Proceeds shall include all principal and interest payments on any debt obligation received by the Company in any Capital Transaction. "Nonrecourse Deductions" has the meaning set forth in Regulation Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a taxable year of the Company equals the net increase, if any, in the amount of Minimum Gain during that taxable year, reduced, but not below zero, by the aggregate distributions made during such year of the proceeds of a Nonrecourse Liability that are allocable to an increase in Minimum Gain, determined in accordance with Regulation Section 1.704-2(c). "Nonrecourse Liability" means any liability of the Company with respect to which no Interest Holder or person or entity related to an Interest Holder has personal liability determined in accordance with Code Section 752 and the Regulations promulgated thereunder. -4- 5 "Percentage" means, as to a Member, the percentage set forth after the Member's name on Exhibit A, as amended from time to time, and as to an Interest Holder who is not a Member, the Percentage of the Member whose Interest has been acquired by such Interest Holder, to the extent the Interest Holder has succeeded to that Member's Interest. "Person" means and includes any individual, corporation. partnership, association, limited liability company, trust, estate or other entity. "Positive Capital Account" means a Capital Account with a balance greater than zero. "Profits" and "Losses" means, for each taxable year of the Company (or other period for which Profits or Losses must be computed) the Company's taxable income or loss determined in accordance with Code Section 703(a), with the following adjustments: (i) all items of income, gain, loss, deduction, or credit required to be stated separately under Code Section 703(a)(1) are included in computing taxable income or loss; and (ii) any tax-exempt income of the Company, not otherwise taken into account in computing Profits or Losses, is included in computing taxable income or loss, and (iii) any expenditures of the Company described in Code Section 705(a)(2)(B) (or treated as such under Regulation Section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profits or Losses, are subtracted from taxable income or loss; and (iv) gain or loss resulting from any taxable disposition of Company property is computed by reference to the adjusted book value of the property disposed of determined in accordance with Regulation Section 1.704-1(b)(2)(iv)(d) through (h), notwithstanding the fact that the adjusted book value differs from the adjusted basis of the property for federal income tax purposes; and (v) in lieu of the depreciation, amortization or cost recovery deductions allowable in computing taxable income or loss, there is taken into account the depreciation computed based upon the adjusted book value of the asset; and (vi) notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Section 4.4 hereof are not taken into account in computing Profits or Losses. "Promissory Note" means the promissory note dated January 27, 2000 issued to Calton, Inc. by the Corporation in the original principal amount of $1,500,000, the obligations under which have been assumed by the Company, or any extension thereof as may be agreed by the parties to the Promissory Note and this Agreement. "Regulations" means the income tax regulations, including any temporary regulations, from time to time promulgated under the Code. "Representative" means each then current Board of Directors representative. -5- 6 "Secretary of State" means the Office of the Delaware Secretary of State. "Statutory Event" means, with respect to any Member, the occurrence of any event specified in Section 18-304 of the Act. "Transfer" means, when used as a noun, any voluntary sale, assignment, attachment, or other relinquishment and, when used as a verb, means, voluntarily to sell, assign, or otherwise relinquish. A pledge, hypothecation, or grant of a security interest, lien or other encumbrance or the voluntary act of doing any of the foregoing does not constitute a Transfer. SECTION II FORMATION AND NAME; OFFICE; PURPOSE; TERM 2.1. ORGANIZATION. The Company has been organized as a limited liability company pursuant to the Act and the provisions of this Agreement. The Certificate of Formation, in the form attached as Exhibit B, has been executed and filed for record with the Secretary of State. 2.2. NAME OF THE COMPANY. The name of the Company shall be "PrivilegeOne Networks, L.L.C.". The Company may do business under that name and under any other name or names the Board of Directors selects. If the Company does business under a name other than that set forth in its certificate of formation, then the Company shall file a certificate or registration of alternate name as required by the Act. 2.3. PURPOSE. The Company is organized to develop customer loyalty programs through the use of co-branded credit cards and for such other lawful purposes for which limited liability companies may be formed under the Act, and to do any and all things necessary, convenient, or incidental to that purpose. 2.4. TERM. The Company commenced its existence upon the filing of the Certificate of Formation with the Secretary of State and shall continue its existence in perpetuity unless its existence is terminated earlier pursuant to Section VII of this Agreement. 2.5. REGISTERED OFFICE. The registered office of the Company in the State of Delaware shall be located at 1209 Orange Street, Wilmington, Delaware 19801, or at any other place within the State of Delaware which the Board of Directors selects, or at such other location as the registered agent shall determine in compliance with the Act. 2.6. REGISTERED AGENT. The name and address of the Company's registered agent in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19081. 2.7. MEMBERS. The name, present mailing address, taxpayer identification number, and Percentage of each Member is set forth on Exhibit A. -6- 7 SECTION III MEMBERS; CAPITAL; CAPITAL ACCOUNTS 3.1. INITIAL CAPITAL CONTRIBUTIONS. The Members hereby acknowledge that the Corporation made a contribution of its business and assets, which had an agreed value of $92,377.46 as of February 2, 2000, to the Company and that the Members have succeeded to the Percentages and the Capital Contributions set forth opposite their names and addresses on Exhibit A hereto. 3.2. ADDITIONAL CAPITAL CONTRIBUTION. No Member shall be required to contribute any additional capital to the Company, and no Member shall have any personal liability for any obligation of the Company. 3.3. NO INTEREST ON CAPITAL CONTRIBUTIONS. Interest Holders shall not be paid interest on their Capital Contributions. 3.4. RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise provided in this Agreement, no Interest Holder shall have the right to receive the return of any Capital Contribution or any Capital Account balance. 3.5. FORM OF DISTRIBUTION. If an Interest Holder is entitled to receive a return of a Capital Contribution or any other distribution, the Company, at the discretion of the Board of Directors, may distribute cash, notes, property or a combination thereof to the Interest Holder. 3.6. CAPITAL ACCOUNTS. A separate Capital Account shall be maintained for each Interest Holder, in accordance with Code Section 704(b) and Regulation Section 1.704-1(b). 3.7. CERTAIN ADJUSTMENTS. Capital Accounts will be adjusted to reflect the fair market value of the existing Interest Holders' Capital Accounts upon (i) the admission of a new Interest Holder, (ii) the making of any additional Capital Contributions by an Interest Holder, (iii) the distribution to an Interest Holder by the Company of Property other than money unless all Interest Holders receive an individual interest in the distributed property in accordance with their interest in the Company or (iv) the termination of the Company for federal income tax purposes. 3.8. LOAN TO COMPANY. The parties hereto acknowledge and agree that Calton, Inc. agreed to make advances to the Corporation under the Promissory Note pursuant to, and subject to the terms set forth in, Section 5.2 of the Stock Acquisition Agreement dated as of January 27, 2000 among Taytrowe Van Fechtmann World Companies, Inc., the Corporation, Steven R. Tetreault, Thomas E. Van Fechtmann, Thomas C. Corley and Calton, Inc. (the "Stock Acquisition Agreement"). The parties hereto agree that the Company shall inure to the rights of and hereby assumes the repayment obligations of the Corporation under Section 5.2 of the Stock Acquisition Agreement and that any advances under the Promissory Note shall hereinafter be made to the Company. -7- 8 SECTION IV PROFIT, LOSS, AND DISTRIBUTIONS 4.1. DISTRIBUTION OF CASH FLOW. 4.1.1. Except as provided for in paragraph 4.1.2, there shall be no distribution of Cash Flow until after the Promissory Note has been paid in full. 4.1.2. If and to the extent that the Company is earning income which will result in a Member being subject to income tax for income not distributed by the Company but deemed to have been received by a Member for federal or state tax purposes, a minimum distribution shall be made to the Member in such amount and at such time as shall be sufficient to enable the Member to meet the income tax liability arising or incurred as a result of participation in the Company. Such minimum tax distributions shall be made on a timely basis, in no event later than seventy-five (75) days after the end of the Company's taxable year and, for quarterly, estimated tax payments of Members, at least five (5) business days prior to each such estimated tax due date. For purposes of this paragraph, each Member shall be responsible for communicating to the Tax Matters Partner no later than sixty (60) days after the termination of each quarter, the amount of the increase in such Member's tax liability resulting from the imputation of income from the Company to the Member for the relevant period. The Company agrees to provide to each Member information pertaining to the Company necessary for the Member to compute such potential tax liability. 4.1.3. After the Promissory Note has been paid in full, the Company shall distribute to its Members, within 120 days after the end of each fiscal year, an amount equal to sixty-five percent (65%) of its net income earned during the prior year, after taxes, as determined in accordance with GAAP. 4.1.4. Subject to the provisions of Section 4.1.2 and 4.1.3, Cash Flow shall be distributed to the Interest Holders, at such times and in such amounts as the Board of Directors shall determine and consistent with this Agreement, as follows: (i) until their remaining Adjusted Capital Contributions have been paid in full, in proportion to their Adjusted Capital Contributions, and (ii) from and after payment in full of all remaining Adjusted Capital Contributions, in proportion to their respective Percentages. 4.2. DISTRIBUTION OF CAPITAL PROCEEDS. Net Capital Proceeds shall be distributed and applied by the Company in the following order and priority: 4.2.1. to the payment of debts and liabilities of the Company then due and outstanding (including all debts due to any Interest Holder); then 4.2.2. the balance shall be distributed as follows: 4.2.2.1. to the Interest Holders in proportion to their Adjusted Capital Contributions, until their remaining Adjusted Capital Contributions have been paid in full; 4.2.2.2. the balance, to the Interest Holders in accordance with their respective Percentages. -8- 9 4.3. ALLOCATION OF PROFITS AND LOSSES. 4.3.1. PROFITS. After giving effect to the special allocations set forth in Section 4.4., Profits shall be allocated to the Interest Holders as follows: 4.3.1.1. first, profits from Capital Transactions will be allocated to those Interest Holders with Negative Capital Accounts in proportion to the ratio of their Negative Capital Account balances to the total of the Negative Capital Account balances until no Interest Holder has a Negative Capital Account Balance; 4.3.1.2. second, profits from Capital Transactions to those Interest Holders whose Adjusted Capital Contributions are in excess of their Capital Accounts in accordance with the ratio of these excesses until all excesses have been eliminated to cause each Interest Holder's Capital Account balance to be in proportion to the Interest Holder's then respective Percentage; 4.3.1.3. third, all other profits among the Interest Holders in proportion to their then respective Percentages. 4.3.2. LOSSES. After giving effect to the special allocations set forth in Section 4.4, Losses shall be allocated to the Interest Holders as follows: 4.3.2.1. first, to each Interest Holder with a Positive Capital Account balance in proportion to each such Interest Holder's Positive Capital Account balance until no Interest Holder has a Positive Capital Account balance; 4.3.2.2. second, among the Interest Holders in proportion to their respective Percentages. 4.3.3. RULES OF CONSTRUCTION. If there is insufficient profit or loss to allocate to the Interest Holders pursuant to any subsection of 4.3.1 or 4.3.2 to cause each Interest Holder's Capital Account balance to equal the entire Capital Account balance described in such subsection with respect to such Interest Holder, the Profit or Loss available to be allocated among the Interest Holders pursuant to said subsection shall be allocated in proportion to the amounts thereof that would have been allocated to each Interest Holder pursuant to such subsection if there had been sufficient amounts thereof to fully satisfy the requirements of such subsection with respect to every Interest Holder. 4.4. REGULATORY ALLOCATIONS. 4.4.1. MINIMUM GAIN CHARGEBACK. Except as set forth in Regulation Section 1.704-2(f), if, during any taxable year, there is a net decrease in Minimum Gain, each Interest Holder, prior to any other allocation under this Section 4.4., shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Interest Holder's share of the net decrease of Minimum Gain, computed in accordance with Regulation Section 1.704-2(g). Allocations of gross income and gain under this Section 4.4.1 shall be made first from gain recognized from the disposition of Company assets subject to Nonrecourse Liabilities, to the extent of the Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and -9- 10 gain for the taxable year. It is the intent of the parties that any allocation under this Section 4.4.1 shall constitute a "minimum gain chargeback" under Regulation Section 1.704-2(f). 4.4.2. INTEREST HOLDER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Regulation Section 1.704-2(i)(4), if, during any taxable year, there is a net decrease in Interest Holder Minimum Gain attributable to an Interest Holder Nonrecourse Liability during any taxable year, each Interest Holder who has a share of the Interest Holder Minimum Gain attributable to such Interest Holder Nonrecourse Liability shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Interest Holder's share of the net decrease in the Interest Holder Minimum Gain. This allocation shall be made after the allocation under Section 4.4.1, and prior to any other allocation under this Section 4.4. Allocations of gross income and gain under this Section 4.4.2 shall be made first from gain recognized from the disposition of the Company assets subject to Interest Holder Nonrecourse Liabilities to the extent of Interest Holder Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 4.4.2 shall constitute a "minimum gain chargeback" under Regulation Section 1.704-2(i). 4.4.3. QUALIFIED INCOME OFFSET. If any Interest Holder unexpectedly receives any adjustments, allocations, or distributions described in Regulation Section 1.704-1 (b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5), or Section 1.704-1(b)(2)(ii)(d)(6), items of gross income and gain shall be specially allocated to each such Interest Holder in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Interest Holder as quickly as possible. An allocation under this Section 4.4.3 shall be made only if and to the extent that such Interest Holder would have an Adjusted Capital Account Deficit after all other allocations provided for under this Section 4.4 have been tentatively made as if this Section 4.4.3 were not in the Agreement. 4.4.4. NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for a taxable year or other period shall be specifically allocated among the Interest Holders in accordance with their respective Percentages. 4.4.5. INTEREST HOLDER NONRECOURSE DEDUCTIONS. Any Interest Holder Nonrecourse Deduction for any taxable year or other period shall be specially allocated to the Interest Holder who bears the risk of loss with respect to the Interest Holder Nonrecourse Liability to which the Interest Holder Nonrecourse Deduction is attributable, as determined in accordance with Regulation Section 1.704-2(b). 4.4.6. CODE SECTION 754 ADJUSTMENT. To the extent an adjustment to the tax basis of any Company asset under Code Section 734(b) or Code Section 743(b) is required, under Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment -10- 11 decreases basis), and the gain or loss shall be specially allocated to the Interest Holders in a manner consistent with the manner in which their Capital Accounts are required to be adjusted under that Section of the Regulations. 4.4.7. CONTRIBUTED PROPERTY AND BOOK-UPS. In accordance with Code Section 704(c) and the Regulations thereunder, as well as Regulation Section 1.704-1(b)(2)(iv)(d)(3), income, gain, loss, and deduction with respect to any property contributed (or deemed contributed) to the Company shall, solely for tax purposes, be allocated among the Interest Holders so as to take account of any variation between the adjusted basis of the property to the Company for federal income tax purposes and its fair market value at the date of contribution (or deemed contribution). If the adjusted book value of any Company asset is adjusted as provided herein, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take account of any variation between the adjusted basis of the asset for federal income tax purposes and its adjusted book value in the manner required under Code Section 704(c) and the Regulations thereunder. Allocations under this Section 4.4.7 are solely for the purpose of federal, state, and local taxes, and shall not be taken into account in determining any Interest Holder's Capital Account and allocable share of Profits and Losses. 4.4.8. WITHHOLDING. All amounts required to be withheld under Code Section 1446 or any other provision of federal, state or local law shall be treated as amounts actually distributed to the affected Interest Holders for all purposes under this Agreement. 4.5. LIQUIDATION AND DISSOLUTION. 4.5.1. If the Company is liquidated, the assets of the Company shall be distributed in accordance with Section 7.2. 4.5.2. No Interest Holder shall be obligated to restore a Negative Capital Account. 4.6. GENERAL. 4.6.1. Except as otherwise provided in this Agreement, the timing and amount of all distributions shall be determined by the Board of Directors. 4.6.2. If any assets of the Company are distributed in kind to the Interest Holders, those assets shall be valued at their fair market value, and any Interest Holder entitled to any interest in those assets shall receive that interest as a tenant-in-common with all other Interest Holders so entitled. Unless the Board of Directors otherwise agrees, the fair market value of the assets shall be determined by an independent appraiser who shall be selected by the Board of Directors. The Profit or Loss for each unsold asset shall be determined as if the asset had been sold at its fair market value, and the Profit or Loss shall be allocated as provided in Section 4.3 and shall be properly credited or charged to the Capital Accounts of the Interest Holders prior to the distribution of the assets. 4.6.3. All Profits and Losses shall be allocated and all distributions shall be made to the Persons shown on the records of the Company to have been Interest Holders as of the last day of the taxable year for which the allocation or distribution is to be made. Notwithstanding the foregoing, unless the Company's taxable year is otherwise separated into two or more short -11- 12 years, if there is a Transfer during the taxable year, the Profits and Losses shall be allocated between the original Interest Holder and the successor on the basis of the number of days each was an Interest Holder during the taxable year. 4.6.4. The Board of Directors is hereby authorized, upon the advice of the Company's tax counsel, to amend this Section IV to comply with the Code and the Regulations promulgated under Code Section 704(b); provided, however, that no amendment shall materially affect distributions to an Interest Holder without the Interest Holder's prior written consent. SECTION V MANAGEMENT; RIGHTS, POWERS, AND DUTIES 5.1. MANAGEMENT. 5.1.1. BOARD OF DIRECTORS. Subject to the Act or this Agreement, the powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed by, the Board of Directors who shall be responsible for the management and operations of the Company and shall have all powers necessary to manage and control the Company, to conduct its business, and to implement any decision of the Members adopted pursuant to this Agreement. The initial Board of Directors shall consist of three (3) Representatives. The number of Representatives constituting the Board of Directors may be increased or decreased from time to time by unanimous approval of the Members. Representatives shall be elected by the Members as provided in Section 5.1.2. and each Representative so elected shall hold office until his or her successor is duly elected and qualified or until his or her earlier death, resignation, or removal. Any Representative may resign at any time upon notice to the Company or may be removed with or without cause, as provided in Section 5.1.2. Any vacancy occurring in the Board of Directors shall be filled as provided in Section 5.1.2. A Representative need not be an employee of a Member or a resident of the State of Delaware. 5.1.2. ELECTION AND REMOVAL OF REPRESENTATIVES. Representatives shall be elected by Members by a plurality vote (based upon Percentages voted by Members) at the annual meeting of Members to be held each year pursuant to Section 5.2.1; provided, however, that (i) until the later of the payment in full of the Promissory Note and December 31, 2004 (the "Control Termination Date"), Calton, Inc. shall have the right to nominate for election a majority of the Representatives, and (ii) after the Control Termination Date, Calton, Inc. shall have the right to nominate a number of Representatives in proportion to its Percentage.All of the Members hereby agree to vote in favor of the election of the Calton, Inc. nominees as Representatives. Calton, Inc. agrees that the other Members of the Company (the "Non-Calton Members") shall collectively have the right to nominate the remaining Representatives in each election of Representatives and agrees that it shall vote in favor of the election of such nominees. Representatives who are nominees of Calton, Inc. may be removed only by Calton, Inc. Representatives who are nominees of the -12- 13 Non-Calton Members may be removed only by a vote of the Non-Calton Members holding a majority of the Percentages held by the Non-Calton Members. Any vacancy in the Board of Directors shall be filled by the Member(s) who nominated the Representative whose absence has caused the vacancy. 5.1.3. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware (but within the contiguous United States) and at such times as the Board of Directors may from time to time determine, and if so determined, notices thereof need not be given. Any Representative shall have the right to appoint any person to act on his or her behalf and in his or her place at any regular meetings of the Board of Directors which he or she is unable to attend. 5.1.4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time, whenever called by the Board of Directors or requested by at least two Representatives, at such place or places within or without the State of Delaware (but within the contiguous United States) as may be stated in the notice of the meeting. Notice of the time and place of a special meeting must be given by the Board of Directors at least 10 days before the special meeting. The attendance of a Representative at any meeting shall constitutes a waiver of notice of such meeting, except where a Representative attends a meeting for the sole purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Any Representative shall have the right to appoint any person to act on his or her behalf and in his or her place at any special meetings of the Board of Directors which he or she is unable to attend. 5.1.5. MEETINGS BY TELEPHONE CONFERENCE. Unless otherwise restricted by this Agreement or the Act, Representatives may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 5.1.5. shall constitute presence in person at such meeting. 5.1.6. QUORUM; VOTE REQUIRED FOR ACTION. Except as may be otherwise specifically provided by law or this Agreement, at all meetings of the Board of Directors the presence of two thirds of the Representatives constituting the entire Board of Directors shall constitute a quorum for the transaction of business; provided, however, in order for a quorum to exist, at least one Representative that has been nominated for election by Calton, Inc. and one Representative nominated for election by the Non-Calton Members shall be present. The vote of at least a majority of the Representatives who are present at any meeting of the Board of Directors at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the Representatives present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 5.1.7. SECRETARY OF MEETINGS. The Board of Directors may appoint any person to act as secretary of a Board of Directors meeting. 5.1.8. ACTIONS OF THE BOARD BY CONSENT IN LIEU OF MEETING. Unless otherwise restricted by this Agreement or the Act, any action required or permitted to be taken at any meeting of the Board of Directors may be taken -13- 14 without a meeting if all of the Representatives consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. 5.1.9. NO REPRESENTATIVE COMPENSATION. Representatives who are also employees of the Company or of any Member shall not receive compensation for their services hereunder. 5.1.10. POWERS OF MEMBERS. Without limiting the generality of Section 5.1.1., the unanimous approval of the Members shall be required before any of the following acts involving the Company may be taken: (a) any determination to call for any additional Capital Contribution, or any authorization, issuance or creation of, or increase of any Membership Rights or other interests in the Company; (b) admitting any additional Member; (c) transferring all or substantially all of the assets of the Company; (d) any merger, consolidation or other business combination with respect to the Company or the liquidation or dissolution of the Company or the adoption of any plan with respect to any such liquidation or dissolution; (e) the Company making an assignment for the benefit of creditors, filing a voluntary petition in bankruptcy, filing a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, or seeking, consenting to or acquiescing in the appointment by a court of a trustee, receiver or liquidator of the Company or all or any substantial part of its assets; (f) submitting any application for the entry of a decree of judicial dissolution of the Company under the Act; (g) exercising any purchase option pursuant to Section 6.1.4.3.; (h) indemnifying any employee, agent or any other Person, except as specifically provided herein; (i) entering into, amending, modifying or terminating a contract with a term in excess of one year or involving aggregate consideration (including assumed actual and contingent liabilities) or receipts, or delivery or receipt of goods or services having a value, in excess of U.S. $25,000 over the term of such agreement, except as such acts are in the ordinary course of the Company's business; (j) entering into, amending, modifying or terminating any contract to acquire or transfer any asset, the fair market value or aggregate consideration (including assumed actual -14- 15 and contingent liabilities) of which exceeds U.S. $25,000, except as such acts are in the ordinary course of the Company's business; (k) filing any claim or lawsuit against any person or entity where the amount claimed is greater than U.S. $10,000, or (ii) settling any claim or lawsuit where the fair market value of the settlement amount is greater than U.S. $10,000; (l) borrowing any principal amount in excess of U.S. $10,000, incurring any contingent liability whatsoever in excess of U.S. $10,000, lending or guarantying any third party indebtedness, it being understood that such limitation shall not be a limitation on the amount or type of trade payables that may be incurred in the ordinary course of business consistent in all respects with past practices by the Company; (m) executing or otherwise entering into, or amending, modifying or terminating, any employment contract, or the hiring or firing of any highly compensated person (defined herein as a person whose annual base salary is U.S. $80,000 or more) with or without cause; (n) approving of the Company's annual operating budget, and any material deviations therefrom, including setting or amending the compensation level of any officer or other similarly compensated person to the extent that any such compensation level is not in accordance with the Executive Incentive Pay Schedule developed by the Company and annexed hereto as Exhibit D; (o) incurring any lien on any assets of the Company, other than purchase money liens on items the purchase of which is not otherwise subject to approval hereunder; (p) executing or otherwise entering into, or amending, modifying or terminating any contract with an officer, employee or Representative of the Company or a Member, an Affiliate of a Member or a person related by blood or marriage to an officer, employee or Representative of the Company or a Member involving aggregate consideration (including assumed actual and contingent liabilities) or fair market value or actual or contingent liability in excess of U.S. $10,000; (q) approving of Member loans to or from the Company; (r) amendment of this Agreement; (s) the appointment or removal of any officer; (t) amending the Company's certificate of formation; (u) the adoption or modification of financial accounting methods or principles (except those required by changes in accounting industry standards or approved as consistent -15- 16 with GAAP as applied by such accounting firm), or any decision not to audit the financial statements of the Company; or (v) any material change in the business of the Company. Notwithstanding anything to the contrary set forth above, this Section 5.1.2. shall terminate with respect to paragraphs b, h, i, j , k, m and s after such time as all amounts outstanding under the Promissory Note are repaid in full and such Promissory Note is terminated. In addition, nothing contained herein shall be deemed to require the approval of Calton, Inc. as a Member to repay and/or terminate the Promissory Note. -16- 17 5.1.11. OFFICERS. 5.1.11.1. The Board of Directors may, from time to time, employ or retain Persons as may be necessary or appropriate for the conduct of the Company's business (subject to the supervision and control of the Board of Directors), including employees, agents an other Persons who may be designated as officers of the Company. Any number of offices may be held by the same person. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable. Officers need not be residents of the State of Delaware or Members. Any officers so designated shall have such authority and perform such duties as the Board of Directors may, from time to time, delegate to them by written resolution of the Board of Directors. The Board of Directors may assign titles to particular officers. Each officer shall hold office until he or she shall resign or shall have been removed in the manner hereinafter provided. The salaries or other compensation, if any, of the officers of the Company shall be fixed from time to time by the Board of Directors. 5.1.11.2. Any officer may resign as such at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the Board of Directors. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Any officer may be removed as such, either with or without cause at any time by the Board of Directors. Designation of an officer shall not of itself create any contractual rights or employment rights. 5.1.11.3. The officers, in the performance of their duties as such, shall owe to the Company duties of loyalty and due care of the type owed by the officers of a corporation to such corporation and its shareholders under the laws of the State of Delaware. 5.1.11.4. The Board of Directors hereby appoints Steven R. Tetreault as President of the Company and Thomas Corley as Senior Financial Officer of the Company. All other offices shall remain vacant until filled by the Board of Directors. The President shall be chief executive officer of the Company. Subject only to the authority of the Board of Directors, the President shall have general charge and supervision over, and responsibility for, the business and affairs of the Company. Unless otherwise directed by the Board of Directors, all other officers shall be subject to the authority and supervision of the President. The President may enter into and execute in the name of the Company contracts or other instruments in the regular course of business or contracts or other instruments not in the regular course of business which are authorized, either generally or specifically, by the Board of Directors. The President shall have the power and duties of management usually vested in the office of president of a business corporation. The Senior Financial Officer shall have the duties and responsibilities customarily assigned to a treasurer of a corporation. 5.1.12. INSURANCE. The Company shall maintain such general property and liability insurance as is determined by theBoard of Directors, consistent with industry practice. -17- 18 5.2. MEETINGS OF AND VOTING BY MEMBERS. 5.2.1. An annual meeting of Members shall be held each year on a date selected by the Board of Directors to elect the Representatives. Annual meetings of Members shall be held at the Company's principal place of business or at any other place designated by the Board of Directors. 5.2.2. A special meeting of the Members may be called at any time by the Board of Directors or by those Members holding at least twenty-five percent (25%) of the Percentages then held by Members. Special meetings of Members shall be held at the Company's principal place of business or at any other place designated by the Board of Directors. 5.2.3. Not less than ten (10) nor more than sixty (60) days before each meeting, the Board of Directors shall give written notice of the meeting to each Member entitled to vote at the meeting. The notice shall state the time, place, and purpose of the meeting. Notwithstanding the foregoing provisions, each Member who is entitled to notice waives notice if before or after the meeting the Member signs a waiver of the Notice which is filed with the records of Members meetings, or is present at the meeting in person or by proxy. Unless this Agreement provides otherwise, at a meeting of Members, the presence in person or by proxy of Members holding not less than fifty-one percent (51%) of the Percentages then held by Members constitutes a quorum. A Member may vote either in person or by written proxy signed by the Member or by his duly authorized attorney in fact. 5.2.4. Except as otherwise provided in this Agreement, wherever this Agreement requires the approval of the Members, the affirmative vote of members holding fifty-one percent (51%) or more of the Percentages then held by Members shall be required to approve the matter. 5.2.5. In lieu of holding a meeting, the Members may vote or otherwise take action by a written instrument indicating the consent of Members holding at least fifty-one percent (51%) of the Percentages then held by Members. 5.3. PERSONAL SERVICES. 5.3.1. No Member shall be required to perform services for the Company solely by virtue of being a Member. Unless approved by the Board of Directors or as otherwise set forth in a written agreement between the Company and the Member, no Member shall perform services for the Company or be entitled to compensation for services performed for the Company. 5.4. DUTIES OF PARTIES. 5.4.1. The Board of Directors shall devote such time to the business and affairs of the Company as is necessary to carry out the duties of the Board of Directors set forth in this Agreement. 5.4.2. Each Member understands and acknowledges that the conduct of the Company's business may involve business dealings and undertakings with Members and their Affiliates. In any of those cases, those dealings and undertakings shall be at arm's length and on commercially reasonable terms. -18- 19 5.5. LIABILITY AND INDEMNIFICATION. 5.5.1. Each Person who at any time shall be, or shall have been, a Representative or officer of the Company, or any Person who, while a Member, Representative, officer, employee or agent of the Company, is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity, shall be indemnified by the Company as and to the fullest extent permitted by the provisions of Delaware law or any successor statutory provisions, as from time to time amended. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which one to be indemnified may be entitled as a matter of law or under this Agreement, any other agreement, or by determination of the Board of Directors, both as to any action in an official capacity and as to action in another capacity while holding such office. Any repeal of this Section 5.5.1 shall be prospective only, and shall not adversely affect any right of indemnification existing at the time of such repeal or modification or thereafter arising as a result of acts or omissions prior to the time of such repeal or modification. Notwithstanding the foregoing or any provision herein to the contrary, no indemnification shall be provided, and the indemnification rights contained in the provisions of this Section 5.5 shall not apply, with respect to any conduct or action by any Person that constitutes insubordination, misconduct, dereliction of duty, a violation of law or Company policies, breach of fiduciary duty, or acts against the Company's interests. 5.5.2. Without limiting the provisions of Section 5.5.1, subject to Section 5.5.4, the Company shall indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a Representative, officer, employee or agent of the Company, or is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of an action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 5.5.3. Without limiting the provisions of Section 5.5.1, subject to Section 5.5.4, the Company shall indemnify any Person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a Representative or an officer of the Company, or is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity, against expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best -19- 20 interests of the Company; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. 5.5.4. Any indemnification under this Section 5.5 (unless ordered by a court) shall be made by the Company as permitted by Delaware law or as authorized in the specific case upon a determination that indemnification is proper in the circumstances because it is permitted under Delaware law or the applicable standards of conduct set forth in Section 5.5.2 or Section 5.5.3, as the case may be, have been met. 5.5.5. INSURANCE. The Company may purchase and maintain insurance on behalf of any individual who is or was a Member, Representative, officer, employee or agent of the Company, or is or was serving at the request of the Company as a Member, Representative, officer, employee or agent of the Company against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Company would have the power or the obligation to indemnify him or her against such liability under the provisions of this Section 5.5. 5.6. PREEMPTIVE RIGHT. The Company hereby grants to Calton, Inc. the preemptive right to acquire additional Interests in the Company in the amount necessary to maintain its Percentage in the Company if and whenever the Company proposes to sell additional Interests in the Company. In the event the Company proposes to sell additional Interests, it shall give Calton, Inc. written notice of its intention, describing the general terms upon which the Company proposes to sell the additional Interests, including the names of the proposed additional Interest Holders. Calton, Inc. shall have fifteen (15) days from the date of receipt of any such notice to agree to contribute (subject to receipt of any final prospectus in compliance with the Securities Act) the amount of capital necessary to maintain its Percentage; provided, that Calton may condition any such agreement upon approval by its board of directors at its next meeting, though in no event more than thirty (30) days after the date of such agreement. In the event Calton, Inc. fails to exercise the preemptive right set forth herein, the Company may sell the additional Interests as described in the notice. In the event the Company has not completed the sale of the additional Interests prior to one hundred twenty (120) days after the delivery of the notice to Calton, Inc. in respect of such sale, the Company shall not thereafter sell any additional Interests without first offering such Interests to Calton, Inc. in the manner provided above. The preemptive right set forth herein is not assignable except that it may be assigned by Calton, Inc. to a majority-owned Affiliate of Calton, Inc. Calton, Inc. may exercise this preemptive right with respect to all or any portion of the Interests Offered. -20- 21 SECTION VI TRANSFERS OF INTERESTS AND WITHDRAWALS OF MEMBERS 6.1. TRANSFERS. 6.1.1. No Person may Transfer all or any portion of or any interest or rights in the Person's Membership Rights or Interest unless the following conditions ("Conditions of Transfer") are satisfied: 6.1.1.1. the Transfer will not require registration of Interests or Membership Rights under any federal or state securities laws; 6.1.1.2. the transferee delivers to the Company a written instrument agreeing to be bound by the terms of Section VI of this Agreement; 6.1.1.3. the Transfer will not result in the termination of the Company pursuant to Code Section 708; 6.1.1.4. the Transfer will not result in the Company being subject to the Investment Company Act of 1940, as amended; 6.1.1.5. the transferor or the transferee delivers the following information to the Company: (i) the transferee's taxpayer identification number; and (ii) the transferee's initial tax basis in the Transferred Interest; and 6.1.1.6. The transferor complies with the provisions set forth in Section 6.1.4., except that any Transfer from Calton, Inc. to any of its majority owned Affiliates need not comply with the provisions set forth in Section 6.1.4. 6.1.2. If the Conditions of Transfer are satisfied, then a Member or Interest Holder may Transfer all or any portion of that Person's Interest. The Transfer of an Interest pursuant to this Section 6.1 shall not result, however, in the Transfer of any of the transferor's other Membership Rights, if any, and the transferee of the Interest shall have no right to: (i) become a Member; or (ii) exercise any Membership Rights other than those specifically pertaining to the ownership of an Interest. 6.1.3. Each Member hereby acknowledges the reasonableness of the prohibition contained in this Section 6.1 in view of the purposes of the Company and the relationship of the Members. The Transfer of any Membership Rights or Interests in violation of the prohibition contained in this Section 6.1 shall be invalid, null and void, and of no force or effect. Any Person to whom Membership Rights are attempted to be transferred in violation of this Section shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, receive distributions from the Company or have any other rights in or with respect to the Membership Rights. 6.1.4. RIGHTS OF FIRST AND SECOND OFFER. 6.1.4.1. If an Interest Holder (a "Transferor") desires to Transfer all or any portion of, or any interest or rights in, the Transferor's Interest (the "Transferor Interest"), the Transferor shall provide -21- 22 each other Interest Holder (each a "Remaining Interest Holder and, collectively, the "Remaining Interest Holders) and the Company with written notice of such desire (the "Transfer Notice"). The Transfer Notice shall describe the Transferor Interest, identify the proposed transferee and state the proposed purchase price. Such Transfer Notice shall also contain the Transferor's warranty that the Transferor is acting in good faith and that the information contained in the Transfer Notice is correct to the best of the Transferor's knowledge. Upon receipt of the Transfer Notice, the Remaining Interest Holders shall have the option to purchase (at the price set forth in the Transfer Notice) all or any portion of the Transferor Interest. Each Remaining Interest Holder desiring to purchase all or any portion of the Transferor Interest shall provide the Transferor with written notice of such desire (which notice shall set forth the portion of the Transferor Interest which such Remaining Interest Holder desires to purchase and if such Remaining Interest Holder is a Member, the Percentage then held by such Remaining Interest Holder) within ten (10) days of receipt of the Transfer Notice. Upon expiration of such ten day period, the Transferor shall determine (pursuant to Section 6.1.4.2. below) the portion of the Transferor Interest which may be purchased by the Remaining Interest Holders electing to purchase all or a portion of the Transferor Interest (collectively the "Remaining Purchasing Interest Holders" and, individually, a "Remaining Purchasing Interest Holder") and deliver to each Remaining Purchasing Interest Holder written notice setting forth the portion of the Transferor Interest which each such Interest Holder may purchase, the purchase price and a closing date for such purchase. 6.1.4.2. The portion of the Transferor Interest which a Remaining Purchasing Interest Holder shall be entitled to purchase shall be determined by multiplying the percentage represented by the Transferor Interest by a fraction, the numerator of which shall be equal to the Percentage held by the Remaining Purchasing Interest Holder as a Member and the denominator of which shall be equal to the Percentage held by all of the Remaining Purchasing Interest Holders who are Members. 6.1.4.3. If the Remaining Purchasing Interest Holders purchase less than all of the Transferor Interest, the Transferor shall promptly provide the Company with written notice of that portion of the Transferor Interest remaining available for purchase. The Company shall then have the option of purchasing such remaining portion of the Transferor Interest at the price set forth in the Transfer Notice. To exercise its option, the Company must provide written notice of the portion of the Transferor Interest the Company desires to purchase to the Transferor within ten (10) days of receipt of the notice from the Transferor regarding the availability of a portion of the Transferor Interest for purchase. 6.1.4.4. Any closing pursuant to this Section 6.1.4. shall take place within thirty (30) days of delivery of the Transferor Notice. The closing on any purchase pursuant to Section 6.1.4.3 shall take place either contemporaneously with or as soon after the completion of any closing pursuant to Section 6.1.4.1 as is practicable, which date shall in no event be later than forty-five (45) days after the delivery of the Transferor Notice. 6.1.4.5. In the event that all of the Transferor Interest is not purchased either by Remaining Interest Holders or the Company, then the Transferor may make a bona fide Transfer of the remaining portion of -22- 23 such Transferor Interest, subject to the terms, conditions, and restrictions of this Agreement, to the prospective purchaser named in the Transferor Notice, such Transfer to be made only in strict accordance with the terms therein stated and only for a period of ninety (90) days following the completion of any closing pursuant to Sections 6.1.4.1 or 6.1.4.3 (the "Free Transfer Period"). The prospective purchaser who acquires any portion of the Transferor Interest pursuant to this Section 6.1.4.5 shall hold such portion subject to all the terms, conditions, and restrictions of this Agreement. However, if the Transferor shall fail to make such Transfer within the ninety (90) day period provided for hereinabove, all such Interests not Transferred shall again become subject to the terms and conditions of this Agreement. 6.1.4.6. Any Transfer of any portion of the Transferor Interest made after the last day of the Free Transfer Period or without strict compliance with the terms, provisions and conditions of Section 6.1.4 and the other terms, provisions, and conditions of this Agreement, shall be null, void, and of no force or effect. 6.1.5. TAG-ALONG RIGHTS. In the event that (i) Interest Holders holding a majority of the Percentages then held by Members (hereinafter the "Majority Interest Holders") elect to Transfer all of the Interests that they hold to a third party purchaser, and (ii) neither the Company nor any of the Interest Holders holding the remaining minority of the Percentages then held by Members (each a "Minority Interest Holder" and collectively, the "Minority Interest Holders") exercise their rights to acquire such Interests pursuant to Section 6.1.4 of this Agreement, then, if any of the Minority Interest Holders shall so direct in writing to the Majority Interest Holders, the Majority Interest Holders shall, as a condition of the Transfer of their Interests to the prospective purchaser, require that the prospective purchaser purchase from the Minority Interest Holders providing such notice all of the Interests in the Company then held by such Minority Interest Holders, on the same terms and conditions as are applicable to the prospective purchase of the Interests from the Majority Interest Holders. Written notice of the Interest Holder's rights under this Section 6.1.5 shall be provided to the Majority Interest Holders within ten (10) days of the expiration of the options granted to the Remaining Interest Holders pursuant to Section 6.1.4. 6.2. VOLUNTARY WITHDRAWAL. No Member shall have the right or power to effect a voluntarily withdrawal from the Company. 6.3. EFFECT OF STATUTORY EVENT. THE OCCURRENCE OF A STATUTORY EVENT SHALL NOT, UNLESS OTHERWISE MANDATED BY APPLICABLE LAW, CAUSE A MEMBER TO CEASE TO BE A MEMBER. SECTION VII DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY 7.1. EVENTS OF DISSOLUTION. The Company shall be dissolved upon the happening of any of the following events: 7.1.1. upon the unanimous written agreement of all of the Members; -23- 24 7.1.2. upon the entry of a decree of judicial dissolution under the Act; 7.1.3. the determination of the Board of Directors to dissolve the Company. 7.2. PROCEDURE FOR WINDING UP. If the Company is dissolved, the Board of Directors shall wind up its affairs. On winding up of the Company, the assets of the Company shall be distributed as follows: first, to creditors, including Members who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the Company, other than liabilities for which reasonable provision has been made and liabilities of the type referred to in the next two paragraphs; second, those amounts deemed necessary by the Board of Directors for any contingent liabilities or obligations of the Company will be set aside as a reserve for contingent liabilities to be distributed at such time and in such manner hereunder as the Board of Directors will determine in its sole discretion; third, to Interest Holders and former Members who have received a Withdrawal Notice pursuant to Section 6.4.2, for unpaid distributions to which they become entitled prior to dissolution or withdrawal, as applicable; fourth, to Interest Holders and Members who have received a Withdrawal Notice pursuant to 6.4.2 but not yet received the Withdrawal Purchase Price; and fifth to Interest Holders in proportion to their remaining Capital Account balances after taking into account all contributions, distributions and allocations for all periods. 7.3. FILING OF A CERTIFICATE OF CANCELLATION. If the Company is dissolved, the appropriate officers of the Company shall promptly file a certificate of cancellation with the Secretary of State and take such other actions as may be necessary to terminate the Company. SECTION VIII BOOKS, RECORDS, ACCOUNTING, AND TAX ELECTIONS 8.1. BANK ACCOUNTS. All funds of the Company shall be deposited in a bank account or accounts opened in the Company's name. The President, subject to the review and approval of the Board of Directors, shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts, and the Persons who will have authority with respect to the accounts and the funds therein. 8.2. BOOKS AND RECORDS. 8.2.1. The Senior Financial Officer of the Company shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company's business. The records shall include, but not be limited to: (i) complete and accurate information regarding the state of the business and financial condition of the Company; (ii) a copy of the certificate of formation and operating agreement, all amendments to the certificate of formation and -24- 25 operating agreement, and all executed copies of any written powers of attorney pursuant to which the operating agreement, any certificate, and all amendments thereto have been executed; (iii) a current list of the names and last known business, residence, or mailing addresses of all Members and the dates they became Members; (iv) the Company's federal, state, and local tax returns; (v) any Certificate of Agreed Value; and (vi) true and full information regarding the amount of cash, and a description and statement of the agreed value of any other property or services, contributed by each Member and which each Member has agreed to contribute in the future. 8.2.2. The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours. 8.2.3. Any request for information shall be in writing, and shall state the purpose therefor. Each Member shall reimburse the Company for all costs and expenses incurred by the Company in connection with the Member's inspection and copying of the Company's books and records. 8.3. ANNUAL ACCOUNTING PERIOD. The annual accounting period of the Company shall be its taxable year. The Company's taxable year shall be selected by Calton, Inc., subject to the requirements and limitations of the Code. The Company's independent certified public accountants shall be selected by Calton, Inc. 8.4. REPORTS. 8.4.1. ANNUAL REPORTS. The Senior Financial Officer of the Company shall cause to be delivered to each Member, within twenty (20) days after the end of each fiscal year, an annual report containing a balance sheet as of the end of the Company's fiscal year and statements of income, Member's equity and cash flows for the year then ended, each of which shall be audited by independent certified public accountants, as selected pursuant to Section 8.3 hereof. 8.4.2. QUARTERLY REPORTS. Within fifteen (15) days after the end of each quarter of each fiscal year, the Senior Financial Officer of the Company shall cause to be delivered to each Member a quarterly report containing a balance sheet as of the end of such quarter and a statement of income for such quarter, each of which may be unaudited but which shall be certified by the Senior Financial Officer of the Company as fairly presenting the financial position of the Company at the end of such quarter and results of operations of the Company for such quarter and as having been prepared in accordance with the accounting methods followed by the Company for federal income tax purposes and otherwise in accordance with GAAP applied on a basis substantially consistent with that of the Company's audited financial statements (subject to normal year end adjustments). 8.4.3. MONTHLY REPORTS. Within twenty (20) days after the end of each month of each fiscal year, the Senior Financial Officer of the Company shall cause to be delivered to each Member a monthly report containing a balance sheet as of the end of such month and a statement of income for such month, each -25- 26 of which may be unaudited but which shall be certified by the Senior Financial Officer of the Company as fairly presenting the financial position of the Company at the end of such month and results of operations of the Company for such month and as having been prepared in accordance with the accounting methods followed by the Company for federal income tax purposes and otherwise in accordance with GAAP applied on a basis substantially consistent with that of the Company's audited financial statements (subject to normal year end adjustments). 8.4.4. TAX INFORMATION. Within one-hundred-twenty (120) days of the end of each fiscal year, the Senior Financial Officer of the Company will cause to be delivered to each Member all information necessary for the preparation of such Member's federal income tax returns, including a statement showing such Member's share of income, gains, losses, deductions and credits for such year for federal income tax purposes and the amount of any distributions made to or for the account of such Member pursuant to this Agreement. 8.5. TAX MATTERS PARTNER. Taytrowe Van Fechtmann World Companies, Inc. shall be the tax matters partner for the Company ("Tax Matters Partner"). The Tax Matters Partner shall have all powers and responsibilities provided in Code Section 6221, ET SEQ. The Tax Matters Partner shall keep all Members informed of all notices from government authorities which may come to the attention of the Tax Matters Partner. The Company shall pay and be responsible for all reasonable third-party costs and expenses incurred by the Tax Matters Partner in performing those duties. A Member shall be responsible for any costs incurred by the Member with respect to any tax audit or tax-related administrative or judicial proceeding against any Member, even though it relates to the Company. The Tax Matters Partner shall not compromise any dispute with the Internal Revenue Service without the approval of the Members. 8.6. TAX ELECTIONS. The Tax Matters Partner shall have the authority to make all Company elections permitted under the Code that the Board of Directors deems necessary or advisable, including, without limitation, elections of methods of depreciation and elections under Code Section 754. The decision to make or not make an election shall be reserved to the Board of Directors. SECTION IX GENERAL PROVISIONS 9.1. ASSURANCES. Each Member shall execute all such certificates and other documents and shall do all such filing, recording, publishing and other acts as the Board of Directors deems appropriate to comply with the requirements of law for the formation and operation of the Company and to comply with any laws, rules, and regulations relating to the acquisition, operation, or holding of the property of the Company. 9.2. NOTIFICATIONS. Any notice, demand, consent, election, offer, approval, request, or other communication (collectively a "Notice") required or permitted under this Agreement must be in writing and either delivered personally or sent by overnight courier service of national reputation, or by certified or registered mail, postage prepaid, return receipt requested. Any Notice to be given hereunder by the Company shall be given by the Board of -26- 27 Directors. A Notice addressed to an Interest Holder, a Member, or a Representative must be addressed to the Interest Holder, Member, or Representative at such person or entity's last known address on the records of the Company. A Notice to the Company must be addressed to the Company's principal office. A Notice delivered personally will be deemed given only when acknowledged in writing by the person to whom it is delivered. A Notice that is sent by overnight courier service of national reputation will be deemed given the day after it is accepted by such service in good order for delivery the next day. A Notice that is sent by mail will be deemed given three (3) business days after it is mailed. Any party may designate, by Notice to all of the others, a substitute address or addressees for Notices; and, thereafter, Notices to such party are to be directed to such substitute address or addressees. 9.3. SPECIFIC PERFORMANCE. The parties recognize that irreparable injury will result from a breach of any provision of this Agreement and that money damages will be inadequate to remedy fully the injury. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of this Agreement, any party who may be injured (in addition to any other remedies which may be available to that party) shall be entitled to one or more preliminary or permanent orders (i) restraining and enjoining any act which would constitute a breach or (ii) compelling the performance of any obligation which, if not performed, would constitute a breach. 9.4. START-UP RIGHT OF FIRST REFUSAL. In the event that the Company or any Member other than Calton, Inc. (a "Non-Calton Party") decides to form any type of entity for any purpose (hereinafter a "Start-Up") and the capital contribution to such Start Up will not be provided exclusively by the Company, the Company and/or any Non-Calton Party, as the case may be, shall offer Calton, Inc. in writing the opportunity to invest its capital in such Start-Up. The Company and the Non-Calton Party agree that they shall provide Calton, Inc. with copies of such business plans, copyrights, patents, trademarks, licenses, agreements and other documents as Calton, Inc. shall require to properly evaluate an investment in any Start-Up. The Company and the Non-Calton Party further agree that they shall not solicit or accept any other potential investors in such Start-Up unless and until Calton, Inc. shall have notified them in writing that it either (a) decided not to invest in the Start-Up or (b) decided to invest in the Start-Up but would be unable to provide all of the capital desired. The right of first refusal granted under this Section 9.4 to Calton, Inc. shall expire with respect to an offered opportunity if Calton, Inc. does not provide written Notice of its intent to accept the opportunity within thirty (30) days of the receipt by Calton, Inc. of the written offer. 9.5. COMPLETE AGREEMENT. This Agreement, including the exhibits and attachments hereto, constitutes the complete and exclusive statement of the agreement among the Members, and supersedes all prior written and oral statements, including any prior representation, statement, condition, or warranty. Except as expressly provided otherwise herein, this Agreement may not be amended without the written consent of all of the Members. -27- 28 9.6. APPLICABLE LAW. All questions concerning the construction, validity, and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal law, excluding the law of conflicts, of the State of Delaware. 9.7. HEADINGS. The headings herein are inserted as a matter of convenience only, and do not define or limit the scope of this Agreement or the intent of the provisions hereof. 9.8. BINDING PROVISIONS. This Agreement is binding upon, and inures to the benefit of, the parties hereto and their respective, successors and permitted assigns. 9.9. SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be considered severable; and if, for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or otherwise affect those portions of this Agreement which are valid. 9.10. ESTOPPEL CERTIFICATE. Each Member shall, within ten (10) days after receipt of a written request by any Member, deliver to the requesting Member a certificate stating, to the Member's knowledge, that: (a) this Agreement is in full force and effect; (b) this Agreement has not been modified except by any instrument or instruments identified in the certificate; and (c) there is no default hereunder by the requesting Member, or if there is a default, the nature and extent thereof. If such certificate is not received within the aforesaid ten (10) day period, the Board of Directors shall cause the execution and delivery of the certificate on behalf of the requested Member, without qualification, pursuant to the power of attorney granted in Section 5.6. 9.11. COUNTERPARTS. This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which, when taken together, shall constitute one and the same document. The signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. -28- 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. TAYTROWE VAN FECHTMANN WORLD COMPANIES, INC. By: ---------------------------------- Name: Steven R. Tetreault Title: President CALTON, INC. By: ---------------------------------- Name: Anthony J. Caldarone Title: President 3DTHINK, INC. By: ---------------------------------- Name: Title: -29- 30 EXHIBIT A PRIVILEGEONE NETWORKS, L.L.C. OPERATING AGREEMENT LIST OF MEMBERS, CAPITAL, AND PERCENTAGES
Name and Address Capital Contribution Percentage ---------------- -------------------- ---------- Taytrowe Van Fechtmann World Companies, Inc. $34,179.66 37% 20 Fry Pond Road West Greenwich, RI 02817 (Taxpayer I.D. No.: 05-0504889) Calton, Inc. $35,103.43 38% 125 Half Mile Road Suite 206 Red Bank, NJ 07701-6749 (Taxpayer I.D. No.: 22-243361) 3D THINK, INC. $23,094.37 25% 20 Fry Pond Road West Greenwich, RI 02817 (Taxpayer I.D. No.: 05-0511869)
31 EXHIBIT B CERTIFICATE OF FORMATION OF PRIVILEGEONE NETWORKS, L.L.C. [Omitted] 32 EXHIBIT C EXECUTIVE INCENTIVE PAY SCHEDULE [Omitted] EX-10.14 5 g67239ex10-14.txt CALTON,INC.-A#1 OPERATING AGREEMENT PRIVILEGEONE 1 EXHIBIT 10.14 AMENDMENT NO. 1 TO OPERATING AGREEMENT OF PRIVILEGEONE NETWORKS, L.L.C. This Amendment No. 1 to Operating Agreement of PrivilegeOne Networks, L.L.C. dated as of February 9 , 2001 among Calton, Inc., a New Jersey corporation, Taytrowe Van Fechtmann World Companies, LLC, a Delaware limited liability company ("TVF") and 3D Think, Inc., a Delaware corporation ("3D"). WHEREAS, the parties hereto have entered into or succeeded to the interest of a member under that certain Operating Agreement of PrivilegeOne Networks, L.L.C. dated as of February 2, 2000; WHEREAS, PrivilegeOne Networks, L.L.C. (the "Company") requires additional capital to pursue its business plan and conduct its operations; WHEREAS, in connection with the contribution of additional capital by Calton, Inc. it is necessary to amend certain provisions of the Operating Agreement and to increase Calton, Inc.'s percentage interest in the Company; NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and premises contained herein, hereby agree as follows: 1. DEFINED TERMS. Capitalized terms not otherwise defined herein shall have the meanings ascribed in the Operating Agreement. 2. CAPITAL CONTRIBUTION. Contemporaneous with the execution of this Amendment No. 1 to Operating Agreement, Calton shall make an additional equity contribution to the Company of $50,000. 3. ADDITIONAL LOAN. Contemporaneously with the execution of this Amendment No. 1 to Operating Agreement, the Company shall execute and deliver to Calton, Inc. the Second Promissory Note. 4. CLAWBACK OPTION. Contemporaneously with the execution of this Amendment No. 1 to Operating Agreement, Calton, Inc. shall execute and deliver to each of TVF and 3D the Clawback Option. 2 5. AMENDMENT OF PROMISSORY NOTE. The parties hereby agree that contemporaneously with the execution of this Agreement, the Company and the parties hereto shall amend the Promissory Note pursuant to an Amendment No. 1 to Promissory Note in the form annexed hereto as Annex III. 6. AMENDMENTS TO OPERATING AGREEMENT. (a) The following definitions are hereby added to Section 1.1 of the Operating Agreement: "Claw Back Option" means the option granted to TVF and 3D pursuant to the Claw Back Option Agreement annexed hereto as Annex I. "Second Promissory Note" means the promissory note of even date herewith issued to Calton, Inc. by the Company in the form annexed hereto as Annex II. (b) Section 3.1 of the Operating Agreement is hereby amended to read in its entirety as follows: "3.1 CAPITAL CONTRIBUTIONS. The Members hereby acknowledge that the Corporation made a contribution of its business and assets, which had an agreed value of $92,337.46 as of February 2, 2000, to the Company. In addition, Calton, Inc. made a $50,000 equity contribution to the Company as of February 6 , 2001. The Capital Contributions to which each Member has succeeded and/or made and the Percentages applicable to each Member are set forth on Exhibit A hereto." (c) Section 5.1.2 is hereby amended to read in its entirety as follows: "5.1.2 ELECTION AND REMOVAL OF REPRESENTATIVES. Representatives shall be elected by Members by a plurality vote (based upon Percentages voted by Members) at the annual meeting of Members to be held each year pursuant to Section 5.2.1; provided, however, that notwithstanding any change in the Percentages which may occur after the date hereof (i) until the later of (x) the payment in full of the Promissory Note and the Second Promissory Note and (z) December 31, 2004 (the "Control Termination Date"), Calton, Inc. shall have the right to nominate for election a majority of the Representatives, (ii) after the Control Termination Date, Calton, Inc. shall have the right to nominate a number of Representatives in proportion to its Percentage and (iii) all of the Members hereby agree to vote in favor of the election of the Calton, Inc. nominees as Representatives. Calton, Inc. agrees that the other Members of the Company (the "Non-Calton Members") shall collectively have the right to nominate the remaining Representatives in each election of Representatives and agrees that it shall vote in favor of the election of such nominees. Representatives who are nominees of Calton, Inc. may only be removed by Calton, Inc. Representatives who are nominees of the Non-Calton Members may be removed only a vote of the Non-Calton Members holding a majority of the Percentages held by the Non-Calton Members. Any vacancy in the Board of Directors may be filled by the Member(s) who nominated the Representative whose absence has caused the vacancy." -2- 3 (d) Section 5.1.10 is hereby amended to read in its entirety as follows: "5.1.10 POWERS OF MEMBERS. Without limiting the generality of Section 5.1.1 until such time as (i) the Promissory Note and the Second Promissory Note have been repaid in full and (ii) the Clawback Option has been exercised in full, the unanimous approval of the Members shall be required before any of the following acts involving the Company: (a) any determination to call for any additional Capital Contribution, or any authorization, issuance or creation of, or increase of any Membership Rights or other interests in the Company; (b) transferring all or substantially all of the assets of the Company; (c) any merger, consolidation or other business combination with respect to the Company or the liquidation or dissolution of the Company or the adoption of any plan with respect to any such liquidation or dissolution; (d) the Company making an assignment for the benefit of creditors, filing a voluntary petition in bankruptcy, filing a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, or seeking, consenting to or acquiescing in the appointment by a court of a trustee, receiver or liquidator of the Company or all or any substantial part of its assets; (e) submitting any application for the entry of a decree of judicial dissolution of the Company under the Act; (f) amendment of this Agreement; After such time as the Promissory Note and the Second Promissory Note is paid in full and the Clawback Option is exercised, the unanimous approval of the Members shall be required before any of the acts specified in paragraphs (a) through (f) above and any of the following acts involving the Company may be taken: (1) exercising any purchase option pursuant to Section 6.1.4.3.; (2) borrowing any principal amount in excess of U.S. $10,000, incurring any contingent liability whatsoever in excess of U.S. $10,000, lending or guarantying any third party indebtedness, it being understood that such limitation shall not be a limitation on the amount or type of trade payables that may be incurred in the ordinary course of business consistent in all respects with past practices by the Company; (3) approving of the Company's annual operating budget, and any material deviations therefrom, including setting or amending the compensation level of any -3- 4 officer or other similarly compensated person to the extent that any such compensation level is not in accordance with the Executive Incentive Pay Schedule developed by the Company and annexed hereto as Exhibit C; (4) incurring any lien on any assets of the Company, other than purchase money liens on items the purchase of which is not otherwise subject to approval hereunder; (5) executing or otherwise entering into, or amending, modifying or the terminating any contract with an officer, employee or Representative of the Company or a Member, an Affiliate of a Member or a person related by blood or marriage to an officer, employee or Representative of the Company or a Member involving aggregate consideration (including assumed actual and contingent liabilities) or fair market value or actual or contingent liability in excess of U.S. $10,000; (6) approving of Member loans to or from the Company; (7) amending the Company's certificate of formation; (8) the adoption or modification of financial accounting methods or principles (except those required by changes in accounting industry standards or approved as consistent with GAAP as applied by such accounting firm), or any decision not to audit the financial statements of the Company; or (9) any material change in the business of the Company." Neither the execution of this Amendment nor anything contained herein shall constitute a waiver by any individual or Member of rights they may have pursuant to contracts with the Company that pre-date and exist as of the date of this Amendment. (e) Section 6.1.1.4 is hereby amended to read in its entirety as follows: "6.1.1.4 the Transfer will not result in the Company or Calton, Inc. being subject to the Investment Company Act of 1940, as amended." (f) Exhibit A to the Operating Agreement is hereby amended to read in its entirety as set forth in Annex III hereto. Nothing contained herein shall be deemed to require the approval of Calton, Inc. as a Member to repay and/or terminate the Promissory Note or the Second Promissory Note. 7. WEB DEVELOPMENT WORK. Website development and hosting work will be offered by the Company to eCalton.com, Inc. as the preferred vendor based upon competitive bids for all work having a cost in excess of $5,000. -4- 5 8. INFORMATION SYSTEMS. Each of the Members hereby acknowledges and agrees that notwithstanding anything to the contrary set forth above, until such time as the Promissory Note and the Second Promissory Note are paid in full and the Clawback Option is exercised, the Company shall make no expenditures for items related to computers, software, computer systems or information technology which have a cost in excess of $1,500 without the prior written approval of Calton, Inc. 9. CALTON, INC. APPROVAL RIGHTS. Each of the Members hereby acknowledges and agrees that notwithstanding anything to the contrary set forth above, until such time as the Promissory Note and Second Promissory Note are paid in full and the Clawback Option is exercised, the Company shall make no expenditure or contractual commitment in an amount in excess of $2,500 without the prior written approval of Calton, Inc. 10. COUNTERPARTS. This Amendment No. 1 to Operating Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which, when taken together, shall constitute one and the same document. The signature of any party to any counterpart shall be deemed a signature to and may be appended to, any other counterpart. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to Operating Agreement as of the date first above written. Calton, Inc. By: ---------------------------------- Name: Title: Taytrowe Van Fechtmann World Companies, LLC By: ---------------------------------- Name: Title: 3d Think, Inc. By: ---------------------------------- Name: Title: -5- 6 ANNEX III EXHIBIT A PRIVILEGEONE NETWORKS, L.L.C. OPERATING AGREEMENT LIST OF MEMBERS, CAPITAL AND PERCENTAGES Name and Address Capital Contribution Percentage - ---------------- -------------------- ---------- Taytrowe Van Fechtmann World Companies, LLC $34,179.66 18.35% 20 Fry Pond Road West Greenwich, RI 02817 (Taxpayer I.D. No.:***) Calton, Inc. $85,103.00 69.25% 125 Half Mile Road, Suite 206 Red Bank, NJ 07701-6749 (Taxpayer I.D. No.: 22-243361) 3D THINK, INC. $23,094.37 12.40% 20 Fry Pond Road West Greenwich, RI 02817 (Taxpayer I.D. No.:05-0511869) EX-10.15 6 g67239ex10-15.txt CALTON,INC.-PROMISSORY NOTE PRIVILEGEONE 1 EXHIBIT 10.15 PROMISSORY NOTE PRIVILEGEONE NETWORKS, INC. $1,500,000.00 January 27, 2000 FOR VALUE RECEIVED, PrivilegeOne Networks, Inc., a corporation formed under the laws of the State of Delaware (the "Borrower") whose mailing address is 20 Fry Pond Road, West Greenwich, Rhode Island 02817 promises to pay to the order of Calton, Inc. (the "Lender"), at the office of the Lender at 125 Half Mile Road, Suite 206, Red Bank, New Jersey 07701, or at such other place as the Lender may from time to time designate to the Borrower in writing, the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) or so much thereof as may be advanced to Borrower hereunder together with interest on so much thereof as is or may be from time to time outstanding and unpaid, at the rate hereinafter set forth and for any other Indebtedness owing to the Lender by the Borrower in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of debts, dues, public and private. All capitalized terms used in this Promissory Note shall have the meaning ascribed to them herein. This Promissory Note shall bear interest at a rate of ten percent (10%) per annum. Interest shall be payable quarterly on the fifteenth (15th) day of each calendar quarter commencing with the quarter that begins on January 1, 2001. Principal and all unpaid interest shall be due and payable on the fourth anniversary of the date of this Promissory Note. The Borrower may make prepayments of principal, interest, or principal and interest without penalty. Upon the occurrence of an Event of Default, the Borrower agrees that the Lender shall have all the rights and remedies set forth in this Promissory Note, including, without limitation, the rights of acceleration set forth herein. The Borrower may cancel this Promissory Note and terminate the provisions hereof and the related Agreement of Guaranty of even date herewith at any time by (1) paying all sums then payable hereunder and (2) notifying the Lender that this Promissory Note is terminated. ARTICLE 1: EVENTS OF DEFAULT; RIGHTS AND REMEDIES 1.1 EVENTS OF DEFAULT. The occurrence of any of the following events (each, an "Event of Default") shall terminate any obligation on the part of the Lender to disburse Loan Proceeds and, at the option of the Lender, shall make this Promissory Note and the entire Indebtedness immediately due and payable (provided, however, that in the case of an Event of Default under Subsection (e) all amounts owing under this Promissory Note shall automatically and immediately become due and payable without any action by or on behalf of the Lender), and the Lender may exercise any and all rights and remedies for the collection of any amounts outstanding hereunder and take whatever action it deems necessary to -1- 2 secure itself all without notice of default, presentment, or demand for payment, protest, or notice of nonpayment or dishonor, or other notices or demands of any kind or character: (a) Failure of the Borrower to pay within ten (10) days of the date when due, whether by acceleration or otherwise, any of the Indebtedness in accordance with this Promissory Note. (b) Any representation or warranty set forth in the Stock Acquisition Agreement, this Promissory Note or any Advance Request (as defined in Section 3.1.4 herein), or in connection with any transaction contemplated by any such document, shall prove in any material respect to have been false or misleading when made by the Borrower. (c) Any default by the Borrower in the performance or compliance with the covenants, promises, conditions or provisions of this Promissory Note. (d) The failure to pay when due, or failure to perform or observe any other obligation or condition with respect to any of the following obligations to any Person, beyond any period of grace under the instrument creating such obligation: (i) any indebtedness for borrowed money or for the deferred purchase price of property in excess of $25,000.00, (ii) any obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP, or (iii) any contingent liabilities, such as guaranties, for the obligations of others relating to indebtedness for borrowed money or for the deferred purchase price of property or services or relating to obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP. (e) The Borrower applies for or consents to the appointment of a trustee or receiver for any part of its respective properties; any bankruptcy, reorganization, debt arrangement, dissolution, or liquidation proceeding is commenced or consented to by the Borrower, or any application for appointment of a receiver or a trustee, or any proceeding for bankruptcy, reorganization, debt management, or liquidation is filed for or commenced against the Borrower, and is not withdrawn or dismissed within sixty (60) days thereafter; PROVIDED, however, that within said sixty (60) day period the Lender shall have no obligation to disburse the Loan Proceeds. (f) Failure of the Borrower to comply with any other provision of this Promissory Note or the Stock Purchase Agreement not constituting an Event of Default under any of the preceding provisions of this Section 1.1, and such failure continues for thirty (30) days after notice to the Borrower from the Lender. (g) Any lien for labor, services, materials, or otherwise is filed against any property of the Borrower or any interest of the Borrower or the Lender therein and is not removed within thirty (30) days thereafter; PROVIDED, HOWEVER, the Borrower will not be deemed to be in default under this subparagraph if and so long as the Borrower: (i) contests in good faith the validity or amount of any asserted lien and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any -2- 3 property of the Borrower or any interest of the Borrower or the Lender therein; and (ii) provides the Lender with such security as the Lender may require to protect the Lender against all loss, damage, and expense, including attorneys' fees, which it might incur if the asserted lien is determined to be valid. (h) Without having first obtained the written consent of the Lender, the Borrower transfers, sells, conveys, assigns, or further encumbers all or any portion of the Borrower's interest in any property, except as in the ordinary course of Borrower's business. (i) Upon the commencement of any legal or governmental actions, proceedings or investigations to which the Borrower is a party or to which any property of the Borrower is subject and which could result in any material adverse change in the business, operations, properties or financial condition or performance of the Borrower, unless: (i) dismissed with thirty (30) days of commencement, or (ii) if and so long as Borrower contests in good faith the validity or amount of any asserted lien and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any property of the Borrower or any interest of the Borrower or the Lender therein; and provides the Lender with such security as the Lender may require to protect the Lender against all loss, damage, and expense, including attorney's fees, which Lender might incur if the asserted lien is determined to be valid. 1.2 NO ADVANCES. The Lender shall have no obligation to disburse the Loan Proceeds if an Event of Default shall occur and be continuing. 1.3 BORROWER'S BOARD OF DIRECTORS. The Lender shall have the right to appoint a majority of the members of the Borrower's board of directors due to the occurrence of an Event of Default under Subsection (a) of Section 1.1 of this Article 1 if such default continues for thirty (30) days after notice of such default is given to Borrower. 1.4 RIGHTS AND REMEDIES. In addition to the remedies set forth in Sections 1.1 through 1.3 of this Promissory Note, upon the occurrence of an Event of Default, and until cured (provided such cure is effected prior to the Lender giving the Borrower written notice of the election by the Lender to accelerate all amounts owing under this Promissory Note on account of such Event of Default), the Lender shall be entitled to exercise all the rights and remedies provided by any applicable law, including, without limitation, the Uniform Commercial Code as enacted in the State of New Jersey. Each and every right or remedy granted to the Lender pursuant to this Promissory Note, or allowed the Lender by law or equity, shall be cumulative. Failure or delay on the part of the Lender to exercise any such right or remedy shall not operate as a waiver thereof. Any single or partial exercise by the Lender of any such right or remedy shall not preclude any future exercise thereof or the exercise of any other right or remedy. ARTICLE 2: AFFIRMATIVE COVENANTS From and after the date of this Promissory Note and until the Indebtedness is indefeasibly paid, in full, in cash, and the Lender has no obligation to make any Advances hereunder, the Borrower agrees that it will observe and comply with the following covenants for the benefit of the Lender. 2.1 USE OF LOAN PROCEEDS. The Loan Proceeds made available to Borrower pursuant to this Promissory Note shall be utilized by Borrower solely to meet its working capital requirements to support the development of its DealerCard -3- 4 product and Borrower shall furnish Lender with such detailed documentation and information regarding Borrower's working capital requirements as Lender may request while this Promissory Note is outstanding. 2.2 FUTURE DEBT. Borrower will not issue, incur, create, assume, guarantee or otherwise become liable for any other indebtedness for borrowed money unless such other indebtedness is subordinated in right of payment to this Indebtedness under this Promissory Note. ARTICLE 3: CONDITIONS TO ADVANCES 3.1 CONDITIONS TO LOAN. The Lender's obligation to make the Loan and to disburse any of the Loan Proceeds is subject to the reasonable satisfaction of the Lender, of each of the following conditions precedent: 3.1.1 LOAN DOCUMENTS; OTHER DOCUMENTS. The Lender shall have received; duly executed originals of this Promissory Note, the Agreement of Guaranty and such other instruments and documents contemplated herein and therein, as appropriate. 3.1.2 EVIDENCE OF CORPORATE ACTION. The Lender shall have received, in form and substance satisfactory to the Lender, documents, including a resolution signed by all members of the Board of Directors of the Borrower evidencing all action taken by the Borrower to authorize the execution, delivery and performance of this Promissory Note, and naming those persons with authority to act and execute this Promissory Note on behalf of the Borrower. 3.1.3 FURTHER ASSURANCES. The Borrower shall have provided and/or executed and delivered to the Lender, in form and substance reasonably satisfactory to the Lender, such further documents and instruments as the Lender may in the Lender's discretion reasonably request. 3.1.4 ADVANCE REQUEST. Should Borrower at any time wish to request the disbursement of additional monies from Lender or to request an increase in the amount of any Scheduled Disbursement under the Stock Acquistion Agreement, the Borrower shall deliver to the Lender, no later than ten (10) Business Days preceding the requested disbursement date, a request (an "Advance Request"), in form and substance satisfactory to the Lender, stating the dollar amount of the requested Advance, the specific purpose for which the Advance is being requested and such details respecting the intended utilization of the Advance as Lender may require. 3.1.5 DEFAULT. No Event of Default shall have occurred and be continuing, nor shall an Event of Default result from the making of the Advance. ARTICLE 4. NOTICES All notices, requests, and demands required or permitted under the terms of this Promissory Note shall be in writing and (a) shall be addressed as set forth below or at such other address as either party shall designate in writing, (b) shall be deemed to have been given or made: (I) if delivered personally, immediately upon delivery, (ii) if by telex, telegram or facsimile -4- 5 transmission, immediately upon sending and upon confirmation of receipt, (iii) if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending, and (iv) if by United States Mail, certified mail, return receipt requested, five (5) days after mailing. 4.1 IF TO THE BORROWER: c/o Taytrowe Van Fechtmann World Companies, Inc. 20 Fry Pond Road West Greenwich, Rhode Island 02817 Fax No.: (401) 397-8332 Attention: Steven R. Tetreault, President With a copy to: Thomas R. Noel, Esq. COUNSELOR AT LAW, P.C. 50 South Main Street Providence, RI 02903 Fax No. (401) 621-5688 4.2 IF TO THE LENDER TO: Calton, Inc. 125 Half Mile Road Suite 206 Red Bank, New Jersey 07701-6749 Fax No.: (732) 212-1290 Attention: Anthony J. Caldarone, President With a copy to: Philip D. Forlenza, Esq. Giordano, Halleran & Ciesla, P.C. P.O. Box 190 Middletown, New Jersey 07748 Fax No.: (732) 224-6599 THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF NEW JERSEY AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT, WITHOUT GIVING EFFECT TO ANY OTHERWISE APPLICABLE RULES CONCERNING CONFLICTS OF LAWS. BORROWER IRREVOCABLY AGREES THAT ANY LITIGATION WITH RESPECT TO THIS PROMISSORY NOTE OR ENFORCEMENT OF ANY JUDGMENT OBTAINED AGAINST BORROWER FOR BREACH OF THIS PROMISSORY NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW JERSEY AND IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (COLLECTIVELY, THE "SPECIFIED COURTS") (IF APPLICABLE SUBJECT MATTER JURISDICTIONAL REQUIREMENTS ARE PRESENT), AS LENDER MAY ELECT; AND, BY EXECUTION -5- 6 AND DELIVERY OF THIS PROMISSORY NOTE, BORROWER IRREVOCABLY SUBMITS TO SUCH JURISDICTION. BORROWER AGREES THAT IT SHALL MAINTAIN A DULY APPOINTED AGENT FOR SERVICE OF SUMMONS AND OTHER LEGAL PROCESS AS LONG AS BORROWER REMAINS OBLIGATED UNDER THIS PROMISSORY NOTE AND SHALL KEEP LENDER ADVISED IN WRITING OF THE IDENTITY AND LOCATION OF SUCH AGENT. THE RECEIPT BY SUCH AGENT AND/OR BY BORROWER OF SUCH SUMMONS OR OTHER LEGAL PROCESS IN ANY SUCH L ITIGATION SHALL BE DEEMED PERSONAL SERVICE AND ACCEPTANCE BY BORROWER FOR ALL PURPOSES OF SUCH LITIGATION. BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. The Borrower, the Guarantor, and any sureties, or endorsers hereof hereby jointly and severally waive presentment for payment, demand, protest, diligence in collection, and notice of dishonor and nonpayment of this Promissory Note, and all defenses on the ground of delay, suretyship, release of any party liable for payment hereof, or of any extension of time for the payment hereof (including any right to notice of any of the foregoing) which may be hereafter given by the holder or holders of this Promissory Note from time to time (the "Holder") to them or either of them or to anyone who has assumed the payment of this Promissory Note, and it is specifically agreed that the obligations of said Borrower, Guarantor, sureties or endorsers shall not be in any way affected or altered to the prejudice of the Holder hereof by reason of the assumption of payment of the same by any other person or entity. At the option of the Holder, the unpaid balance of this Promissory Note and all other obligations of the Borrower to the Holder, direct or indirect, absolute or contingent, now existing or hereafter arising, may become immediately due and payable without notice or demand upon the occurrence of an Event of Default under this Promissory Note, and the Borrower agrees that upon such occurrence the Holder shall have and be entitled to assert all the other rights and remedies set forth in this Promissory Note, including, without limitation, the rights and remedies set forth herein. In addition, the Holder shall have the right to recover all costs of collection and enforcement of this Promissory Note as provided herein. This Promissory Note shall replace and supersede the Grid Note dated November 19, 1999 issued by Borrower to Lender and the entire principal amount outstanding under such Grid Note shall be deemed as advanced by Lender to Borrower under this Promissory Note; however, interest on such advances shall continue to accrue from the date such amounts were advanced to the Borrower under the Grid Note. Upon the execution and delivery of this Promissory Note, the Grid Note shall terminate and become void. DEFINITIONS: 1. BUSINESS DAY: any day (a) other than a Saturday or Sunday and other than a day which is a Federal legal holiday or a legal holiday for banks in the state of New Jersey. 2. GUARANTOR: Taytrowe Van Fechtmann World Companies, Inc., a Delaware corporation with offices located at 20 Fry Pont Road, West Greenwich, Rhode Island 02817. -6- 7 3. INDEBTEDNESS: all amounts due and owing under this Promissory Note. 4. LOAN PROCEEDS: monies advanced to Borrower pursuant to this Promissory Note. 5. PERSON: any individual, corporation, association, partnership, trust, organization, government, governmental agency, or other entity. 6. STOCK ACQUISITION AGREEMENT: the Stock Acquisition Agreement by and among Taytrowe Van Fechtmann World Companies, Inc., PrivilegeOne Networks, Inc. and Calton, Inc. dated as of January 27, 2000. IN WITNESS WHEREOF, the Borrower has executed this Promissory Note on this 27 day of January, 2000. ATTEST: PRIVILEGEONE NETWORKS, INC., a Delaware corporation - --------------------------- --------------------------- Name: Name: Title: Title: -7- EX-10.16 7 g67239ex10-16.txt CALTON,INC.-A#1 PROMISSORY NOTE PRIVILEGEONE 1 EXHIBIT 10.16 AMENDMENT NO. 1 TO PROMISSORY NOTE DATED JANUARY 27, 2000 This Amendment to Promissory Note dated January 27, 2000 (the "Note") issued by PrivilegeOne Networks, Inc., a Delaware corporation, to Calton, Inc., a New Jersey corporation, the obligations under which have been assumed by PrivilegeOne Networks, LLC, a Delaware limited liability company. 1. AMENDMENT. The first sentence of the second paragraph of the Note is hereby amended to read in its entirety as follows: "This Promissory Note shall bear interest at a rate of ten percent (10%) per annum. Interest shall be payable quarterly on the fifteenth (15th) day of each calendar quarter commencing with the quarter that begins on October 1, 2001." 2. WAIVER. Lender hereby waives its rights with respect to defaults due to the failure to make payments due under the Note which occurred prior to the execution of this Amendment No. 1. IN WITNESS WHEREOF, the parties have executed this Amendment this 9th day of February, 2001. PrivilegeOne Networks, Inc. By: --------------------------- PrivilegeOne Networks, LLC By: --------------------------- Calton, Inc. By: --------------------------- EX-10.17 8 g67239ex10-17.txt CALTON,INC.-ASSUMPTION AGREEMENT PRIVILEGEONE 1 EXHIBIT 10.17 ASSIGNMENT AND ASSUMPTION AGREEMENT This ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") is delivered and executed as of February 2, 2000 by and between PrivilegeOne Networks, Inc., a Delaware corporation ("Assignor"), and PrivilegeOne Networks, L.L.C., a Delaware limited liability company ("Assignee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Assignor has (i) entered into certain Employment and Non-Competition Agreements with each of Steven R. Tetreault, Thomas E. Van Fechtmann and Thomas C. Corley, each dated as of January 27, 2000 (each an "Employment Agreement" and, collectively, the "Employment Agreements") and (ii) executed a certain Promissory Note in the original principal amount of $1,500,000.00 dated as of January 27, 2000 (the "Promissory Note"); WHEREAS, (i) Section 16 of each Employment Agreement permits the Assignor to assign its rights and obligations under such Employment Agreement to a business entity that succeeds to all or substantially all of the Assignor's business provided such succeeding business entity assumes the Assignor's obligations under such Employment Agreement and (ii) the Promissory Note permits a third party to assume the payment thereof; WHEREAS, Assignee will succeed to all or substantially all of Assignor's business and will assume (i) all of Assignor's obligations under the Employment Agreements and (ii) the payment of the Promissory Note; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Effective as of the date of this Agreement, Assignor hereby assigns, transfers and conveys to Assignee (i) all of Assignor's rights and obligations under the Employment Agreements (ii) all rights and obligations under the Promissory Note and (iii) the rights and obligations under the agreements and contracts identified on Schedule A hereto (the "Other Agreements"). Effective as of the date of this Agreement, Assignee hereby assumes (i) all of the Assignor's rights and obligations under the Employment Agreements, (ii) all rights and obligations under the Promissory Note and (iii) all rights and obligations under the Other Agreements. 2. Assignor and Assignee each hereby further undertake to use all reasonable efforts to take, or cause to be taken, any further action necessary 2 or desirable to carry out the purposes of this Agreement and to execute, deliver or file, or cause to be executed, delivered or filed, all necessary or desirable documentation. 3. All of the rights and remedies of Assignor and Assignee, respectively, under this Agreement shall inure to the benefit of their respective successors and assigns forever. 4. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to any conflicts of laws principles. 5. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one original instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on their behalf as of the date first above written. PRIVILEGEONE NETWORKS, INC. By: -------------------------------------- Name: Stephen R. Tetreault Title: President PRIVILEGEONE NETWORKS, L.L.C. By: Taytrowe Van Fechtmann World Companies, Inc., Member By: --------------------------------- Name: Steven R. Tetreault Title: President By: Calton, Inc., Member By: --------------------------------- Name: Anthony J. Caldarone Title: President By: 3DThink, Inc., Member By: --------------------------------- Name: Title: -2- 3 Each of the undersigned hereby consents to the assignment, as of the date of this Agreement, of his Employment Agreement with PrivilegeOne Networks, Inc. to PrivilegeOne Networks, L.L.C. and the assumption, as of the date of this Agreement, by PrivilegeOne Networks, L.L.C. of all obligations of PrivilegeOne Networks, Inc. thereunder. - -------------------------------- Steven R. Tetreault - -------------------------------- Thomas E. Van Fechtmann - -------------------------------- Thomas C. Corley Calton, Inc. hereby acknowledges that, as of the date of this Agreement, PrivilegeOne Networks, L.L.C. has assumed all of the obligations of PrivilegeOne Networks, Inc. under the Promissory Note; however such description does not terminate the liability of PrivilegeOne Networks, Inc. under such promissory note. CALTON, INC. - -------------------------------- Name: Anthony J. Caldarone Title: President -3- EX-10.18 9 g67239ex10-18.txt CALTON,INC.-PROMISSORY NOTE NO.2 PRIVILEGEONE 1 EXHIBIT 10.18 ANNEX II SECOND PROMISSORY NOTE PRIVILEGEONE NETWORKS, LLC $1,450,000.00 February 9, 2001 FOR VALUE RECEIVED, PrivilegeOne Networks, LLC, a limited liability company formed under the laws of the State of Delaware (the "Borrower") whose mailing address is 20 Fry Pond Road, West Greenwich, Rhode Island 02817 promises to pay to the order of Calton, Inc. (the "Lender"), at the office of the Lender at 125 Half Mile Road, Suite 206, Red Bank, New Jersey 07701, or at such other place as the Lender may from time to time designate to the Borrower in writing, the principal amount of One Million Four Hundred Fifty Thousand Dollars ($1,450,000) or so much thereof as may be advanced to Borrower hereunder together with interest on so much thereof as is or may be from time to time outstanding and unpaid, at the rate hereinafter set forth and for any other Indebtedness owing to the Lender by the Borrower in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of debts, dues, public and private. All capitalized terms used in this Promissory Note shall have the meaning ascribed to them herein. This Promissory Note shall bear interest at a rate of ten percent (10%) per annum. Interest shall be payable quarterly, in arrears, on the fifteenth (15th) day following the end of each calendar quarter commencing with the quarter that begins on July 1, 2001. The first interest payment will therefore be due on October 15, 2001. Principal and all unpaid interest shall be due and payable on January 27, 2004. The Borrower may make prepayments of principal, interest, or principal and interest without penalty. Upon the occurrence of an Event of Default, the Borrower agrees that the Lender shall have all the rights and remedies set forth in this Promissory Note, including, without limitation, the rights of acceleration set forth herein. If an Event of Default shall occur, interest shall accrue from the date of the Event of Default and during the continuance of the Event of Default at a rate equal to the lower of fourteen percent (14%) per annum or the highest rate permitted by law. The Borrower may cancel this Promissory Note and terminate the provisions hereof and the related Agreements of Guaranty of even date herewith at any time by (1) paying all sums then payable hereunder and (2) notifying the Lender that this Promissory Note is terminated. 2 ARTICLE 1: EVENTS OF DEFAULT; RIGHTS AND REMEDIES 1.1 EVENTS OF DEFAULT. The occurrence of any of the following events (each, an "Event of Default") shall terminate any obligation on the part of the Lender to disburse Loan Proceeds and, at the option of the Lender, shall make this Promissory Note and the entire Indebtedness immediately due and payable (provided, however, that in the case of an Event of Default under Subsection (e) all amounts owing under this Promissory Note shall automatically and immediately become due and payable without any action by or on behalf of the Lender), and the Lender may exercise any and all rights and remedies for the collection of any amounts outstanding hereunder and take whatever action it deems necessary to secure itself all without notice of default, presentment, or demand for payment, protest, or notice of nonpayment or dishonor, or other notices or demands of any kind or character: (a) Failure of the Borrower to pay within ten (10) days of the date when due, whether by acceleration or otherwise, any of the Indebtedness in accordance with this Promissory Note. (b) Any representation or warranty of PrivilegeOne Networks, Inc. set forth in the Stock Acquisition Agreement or any representation of Borrower set forth in this Promissory Note or any Advance Request (as defined in Section 3.1.4 herein), or in connection with any transaction contemplated by any such document, shall prove in any material respect to have been false or misleading when made. (c) Any default by the Borrower in the performance or compliance with the covenants, promises, conditions or provisions of this Promissory Note or the Initial Promissory Note. (d) The failure to pay when due, or failure to perform or observe any other obligation or condition with respect to any of the following obligations to any Person, beyond any period of grace under the instrument creating such obligation: (i) any indebtedness for borrowed money or for the deferred purchase price of property in excess of $25,000.00, (ii) any obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP, or (iii) any contingent liabilities, such as guaranties, for the obligations of others relating to indebtedness for borrowed money or for the deferred purchase price of property or services or relating to obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP. (e) The Borrower applies for or consents to the appointment of a trustee or receiver for any part of its respective properties; any bankruptcy, reorganization, debt arrangement, dissolution, or liquidation proceeding is commenced or consented to by the Borrower, or any application for appointment of a receiver or a trustee, or any proceeding for bankruptcy, reorganization, debt management, or liquidation is filed for or commenced against the Borrower, and is not withdrawn or dismissed within sixty (60) days thereafter; provided, however, that within said sixty (60) day period the Lender shall have no obligation to disburse the Loan Proceeds. (f) Failure of the Borrower to comply with any other provision of this Promissory Note or the Operating Agreement not constituting an Event of Default under any of the preceding provisions of this Section 1.1, and such failure continues for thirty (30) days after notice to the Borrower from the Lender. -2- 3 (g) Any lien for labor, services, materials, or otherwise is filed against any property of the Borrower or any interest of the Borrower or the Lender therein and is not removed within thirty (30) days thereafter; PROVIDED, HOWEVER, the Borrower will not be deemed to be in default under this subparagraph if and so long as the Borrower: (i) contests in good faith the validity or amount of any asserted lien and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any property of the Borrower or any interest of the Borrower or the Lender therein; and (ii) provides the Lender with such security as the Lender may require to protect the Lender against all loss, damage, and expense, including attorneys' fees, which it might incur if the asserted lien is determined to be valid. (h) Without having first obtained the written consent of the Lender, the Borrower transfers, sells, conveys, assigns, or further encumbers all or any portion of the Borrower's interest in any property, except as in the ordinary course of Borrower's business. (i) Upon the commencement of any legal or governmental actions, proceedings or investigations to which the Borrower is a party or to which any property of the Borrower is subject and which could result in any material adverse change in the business, operations, properties or financial condition or performance of the Borrower, unless: (i) dismissed with thirty (30) days of commencement, or (ii) if and so long as Borrower contests in good faith the validity or amount of any asserted lien and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any property of the Borrower or any interest of the Borrower or the Lender therein; and provides the Lender with such security as the Lender may require to protect the Lender against all loss, damage, and expense, including attorney's fees, which Lender might incur if the asserted lien is determined to be valid. (j) A breach of any of the covenants set forth in the Guaranty of even date herewith issued to Lender by Steven R. Tetreault, Cindy H. Tetreault, Thomas E. Van Fechtmann, Stacey Van Fechtmann or Thomas Corley. 1.2 NO ADVANCES. The Lender shall have no obligation to disburse the Loan Proceeds if an Event of Default shall occur and be continuing. 1.3 BORROWER'S BOARD OF DIRECTORS. The Lender shall have the right to appoint a majority of the members of the Borrower's board of directors due to the occurrence of an Event of Default under Subsection (a) of Section 1.1 of this Article 1 if such default continues for thirty (30) days after notice of such default is given to Borrower. 1.4 RIGHTS AND REMEDIES. In addition to the remedies set forth in Sections 1.1 through 1.3 of this Promissory Note, upon the occurrence of an Event of Default, and until cured (provided such cure is effected prior to the Lender giving the Borrower written notice of the election by the Lender to accelerate all amounts owing under this Promissory Note on account of such Event of Default), the Lender shall be entitled to exercise all the rights and remedies provided by any applicable law, including, without limitation, the -3- 4 Uniform Commercial Code as enacted in the State of New Jersey. Each and every right or remedy granted to the Lender pursuant to this Promissory Note, or allowed the Lender by law or equity, shall be cumulative. Failure or delay on the part of the Lender to exercise any such right or remedy shall not operate as a waiver thereof. Any single or partial exercise by the Lender of any such right or remedy shall not preclude any future exercise thereof or the exercise of any other right or remedy. ARTICLE 2: AFFIRMATIVE COVENANTS From and after the date of this Promissory Note and until the Indebtedness is indefeasibly paid, in full, in cash, and the Lender has no obligation to make any Advances hereunder, the Borrower agrees that it will observe and comply with the following covenants for the benefit of the Lender. 2.1 USE OF LOAN PROCEEDS. The Loan Proceeds made available to Borrower pursuant to this Promissory Note shall be utilized by Borrower solely to meet its working capital requirements to support the development of its PrivilegeOne Credit Card Program product and Borrower shall furnish Lender with such detailed documentation and information regarding Borrower's working capital requirements as Lender may request while this Promissory Note is outstanding. Notwithstanding anything to the contrary set forth herein, $100,000 advanced upon the achievement of the Agreement Milestone (as defined below), $150,000 advanced upon the achievement of the Solicitation Milestone (as defined below) and $100,000 advanced upon the achievement of the Implementation Milestone (as defined below) shall be used for reimbursement of expenses to the issuer or proposed issuer of the PrivilegeOne Credit Card. 2.2 FUTURE DEBT. Borrower will not issue, incur, create, assume, guarantee or otherwise become liable for any other indebtedness for borrowed money unless such other indebtedness is subordinated in right of payment to this Indebtedness under this Promissory Note. ARTICLE 3: CONDITIONS TO ADVANCES 3.1 PROPOSED ADVANCES. The Lender agrees that subject to the terms and conditions of this Note, it shall make advances to Borrower in accordance with the following schedule and upon occurrence of the following events; provided, that such events occur or have occurred by the date indicated and provided further, that the Lender shall have no obligation to make advances upon the occurrence of an event described below by the prescribed date if any of the events listed above such event in the table set forth below have not previously occurred:
Event Date Advance Amount ----- ---- -------------- Execution of this Note 2-06-01 $200,000 Execution of definitive Co-Brand Credit Card Program Agreement with 2-15-01 $350,000 Fleet Credit Card Services, L.P. (the "Fleet Agreement") upon terms and reasonably satisfactory to Lender (the "Agreement Milestone") Enrollment of at least 20 automobile dealers in Borrower Credit Card 2-28-01 Dollar for Dollar program with contract revenues of not less than $180,000 and per dealer deposit nonrefundable deposits of not less than $90,000 up to $90,000
-4- 5
Event Date Advance Amount ----- ---- -------------- Enrollment of at least 20 automobile dealers in Borrower Credit Card 3-15-01 $360,000 Program with non-refundable deposits of not less than 50% of dealer commitment out of no more than 40 solicitation calls to dealers identified on a list approved by Lender (the "Solicitation Milestone) Implementation Date (as defined in Fleet Agreement) occurs (the 4-01-01 $450,000 "Implementation Milestone")
Subject to Section 3.2 below, advances will be made within ten (10) days of the applicable event upon written request from Borrower. 3.2 CONDITIONS TO LOAN. The Lender's obligation to make the Loan and to disburse any of the Loan Proceeds is subject to the reasonable satisfaction of the Lender, of each of the following conditions precedent: 3.1.1 LOAN DOCUMENTS; OTHER DOCUMENTS. The Lender shall have received duly executed originals of this Promissory Note, guaranties in form reasonably satisfactory to Lender from the Guarantors and such other instruments and documents contemplated herein and therein, as appropriate, including written evidence reasonably satisfactory to it that the applicable event described in Section 3.1 has occurred by the date indicated. 3.1.2 FURTHER ASSURANCES. The Borrower shall have provided and/or executed and delivered to the Lender, in form and substance reasonably satisfactory to the Lender, such further documents and instruments as the Lender may in the Lender's discretion reasonably request. 3.1.3 NO ADVERSE CHANGE. There shall have been no material adverse change in the financial condition, results of operations, business or prospects of Borrower. 3.1.4 ADVANCE REQUEST. Should Borrower at any time wish to request the disbursement of additional monies from Lender or to request an increase in the amount of any disbursement under the terms of this Promissory Note, the Borrower shall deliver to the Lender, no later than ten (10) Business Days preceding the requested disbursement date, a request (an "Advance Request"), in form and substance satisfactory to the Lender, stating the dollar amount of the requested Advance, the specific purpose for which the Advance is being requested and such details respecting the intended utilization of the Advance as Lender may require. 3.1.5 DEFAULT. No Event of Default shall have occurred and be continuing, nor shall an Event of Default result from the making of the Advance. -5- 6 ARTICLE 4. NOTICES All notices, requests, and demands required or permitted under the terms of this Promissory Note shall be in writing and (a) shall be addressed as set forth below or at such other address as either party shall designate in writing, (b) shall be deemed to have been given or made: (i) if delivered personally, immediately upon delivery, (ii) if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt, (iii) if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending, and (iv) if by United States Mail, certified mail, return receipt requested, five (5) days after mailing. 4.1 IF TO THE BORROWER: c/o Taytrowe Van Fechtmann World Companies, LLC 20 Fry Pond Road West Greenwich, Rhode Island 02817 Fax No.: (401) 397-8332 Attention: Steven R. Tetreault, President With a copy to: Thomas R. Noel, Esq. COUNSELOR AT LAW, P.C. 50 South Main Street Providence, RI 02903 Fax No. (401) 621-5688 IF TO THE LENDER TO: Calton, Inc. 125 Half Mile Road Suite 206 Red Bank, New Jersey 07701-6749 Fax No.: (732) 212-1290 Attention: Anthony J. Caldarone, President With a copy to: Philip D. Forlenza, Esq. Giordano, Halleran & Ciesla, P.C. P.O. Box 190 Middletown, New Jersey 07748 Fax No.: (732) 224-6599 THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF NEW JERSEY AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT, WITHOUT GIVING EFFECT TO ANY OTHERWISE APPLICABLE RULES CONCERNING CONFLICTS OF LAWS. -6- 7 BORROWER IRREVOCABLY AGREES THAT ANY LITIGATION WITH RESPECT TO THIS PROMISSORY NOTE OR ENFORCEMENT OF ANY JUDGMENT OBTAINED AGAINST BORROWER FOR BREACH OF THIS PROMISSORY NOTE MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW JERSEY AND IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (COLLECTIVELY, THE "SPECIFIED COURTS") (IF APPLICABLE SUBJECT MATTER JURISDICTIONAL REQUIREMENTS ARE PRESENT), AS LENDER MAY ELECT; AND, BY EXECUTION AND DELIVERY OF THIS PROMISSORY NOTE, BORROWER IRREVOCABLY SUBMITS TO SUCH JURISDICTION. BORROWER AGREES THAT IT SHALL MAINTAIN A DULY APPOINTED AGENT FOR SERVICE OF SUMMONS AND OTHER LEGAL PROCESS AS LONG AS BORROWER REMAINS OBLIGATED UNDER THIS PROMISSORY NOTE AND SHALL KEEP LENDER ADVISED IN WRITING OF THE IDENTITY AND LOCATION OF SUCH AGENT. THE RECEIPT BY SUCH AGENT AND/OR BY BORROWER OF SUCH SUMMONS OR OTHER LEGAL PROCESS IN ANY SUCH L ITIGATION SHALL BE DEEMED PERSONAL SERVICE AND ACCEPTANCE BY BORROWER FOR ALL PURPOSES OF SUCH LITIGATION. BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. The Borrower, the Guarantors, and any sureties, or endorsers hereof hereby jointly and severally waive presentment for payment, demand, protest, diligence in collection, and notice of dishonor and nonpayment of this Promissory Note, and all defenses on the ground of delay, suretyship, release of any party liable for payment hereof, or of any extension of time for the payment hereof (including any right to notice of any of the foregoing) which may be hereafter given by the holder or holders of this Promissory Note from time to time (the "Holder") to them or either of them or to anyone who has assumed the payment of this Promissory Note, and it is specifically agreed that the obligations of said Borrower, Guarantors, sureties or endorsers shall not be in any way affected or altered to the prejudice of the Holder hereof by reason of the assumption of payment of the same by any other person or entity. At the option of the Holder, the unpaid balance of this Promissory Note and all other obligations of the Borrower to the Holder, direct or indirect, absolute or contingent, now existing or hereafter arising, may become immediately due and payable without notice or demand upon the occurrence of an Event of Default under this Promissory Note, and the Borrower agrees that upon such occurrence the Holder shall have and be entitled to assert all the other rights and remedies set forth in this Promissory Note, including, without limitation, the rights and remedies set forth herein. In addition, the Holder shall have the right to recover all costs of collection and enforcement of this Promissory Note as provided herein. DEFINITIONS: 1. BUSINESS DAY: any day (a) other than a Saturday or Sunday and other than a day which is a Federal legal holiday or a legal holiday for banks in the state of New Jersey. 2. GUARANTORS: Taytrowe Van Fechtmann World Companies, Inc., a Delaware corporation with offices located at 20 Fry Pont Road, West Greenwich, Rhode Island 02817, 3D Think, Inc., a Delaware corporation with offices located at 20 -7- 8 Fry Pont Road, West Greenwich, Rhode Island 02817 and each of (i) Steven R. Tetreault and his spouse, (ii) Thomas Van Fechtmann and his spouse and (iii) Thomas Corley. 3. INDEBTEDNESS: all amounts due and owing under this Promissory Note. 4. INITIAL PROMISSORY NOTE: the Promissory Note dated January 27, 2000 issued by PrivilegeOne Networks, Inc. to Calton, Inc., the obligations under which have been assumed by Borrower. 5. LOAN PROCEEDS: monies advanced to Borrower pursuant to this Promissory Note. 6. OPERATING AGREEMENT. The Operating Agreement of PrivilegeOne Networks, LLC dated as of February 2, 2000 among Calton, Inc., Taytrowe Van Fechtmann World Companies, Inc. and 3D Think, Inc., as such agreement may be amended from time to time. 7. PERSON: any individual, corporation, association, partnership, trust, organization, government, governmental agency, or other entity. 8. STOCK ACQUISITION AGREEMENT: the Stock Acquisition Agreement by and among Taytrowe Van Fechtmann World Companies, Inc., PrivilegeOne Networks, Inc. and Calton, Inc. dated as of January 27, 2000. IN WITNESS WHEREOF, the Borrower has executed this Promissory Note on this 9th day of February, 2001. ATTEST: PRIVILEGEONE NETWORKS, LLC., a Delaware limited liability company - --------------------- --------------------------- Name: Name : Title: Title: -8- EX-10.19 10 g67239ex10-19.txt CALTON,INC.-OPERATING AGREEMENT INNOVATION TECH 1 Exhibit 10.19 INNOVATION TECHNOLOGY PARTNERS, L.L.C. OPERATING AGREEMENT THIS OPERATING AGREEMENT (this "Agreement") is entered into as of the 19th day of June, 2000, by and among the parties identified on the signature pages hereto. EXPLANATORY STATEMENT WHEREAS, Innovation Technology Partners, L.L.C. was formed under the laws of the State of Delaware on June 8, 2000; WHEREAS, the parties hereto caused the formation of the Company and wish to confirm the admission, which for all purposes shall be deemed effective as of June 19, 2000, of the parties identified on Schedule A as members of the Company. NOW, THEREFORE, for good and valuable consideration, the parties, intending legally to be bound, agree as follows: SECTION I DEFINED TERMS The following capitalized terms shall have the meanings specified in this Section I. Other terms are defined in the text of this Agreement and, throughout this Agreement, those terms shall have the meanings respectively ascribed to them. "Act" means the Delaware Limited Liability Company Act, 6 Del. Code ss. 18-101 ET SEQ. as amended from to time. "Adjusted Capital Account Deficit" means, with respect to any Unit Holder, the deficit balance, if any, in the Unit Holder's Capital Account as of the end of the applicable taxable year, after giving effect to the following adjustments: (i) the deficit shall be decreased by the amounts which the Unit Holder is obligated to restore under Section 4.4.2, or is deemed obligated to restore under Regulation Section 1.704-2(g)(2) and (i)(5); and (ii) the deficit shall be increased by the terms described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). 2 "Adjusted Capital Contribution" means, as of any day, a Unit Holder's total Capital Contributions less all amounts actually distributed to the Unit Holder under Sections 4.1, 4.2 and 7.2. hereof. The amount of any such distribution shall be decreased by the amount of Company liabilities assumed by the Unit Holder or secured by any Company property distributed to the Unit Holder. If any Interest is transferred in accordance with the terms of this Agreement, the transferee succeeds to the Adjusted Capital Contributions of the transferor to the extent the Adjusted Capital Contributions relate to the Interest transferred. "Affiliate" means, with respect to any Person (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 50% or more of the voting interests of such Person, (ii) each Person that controls, is controlled by or is under common control with each Person or any Affiliate of such Person, (iii) each of such Person's officers, directors, managers, joint venturers, members and partners, or (iv) such Person's spouse, children, siblings and parents. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting interests, by contract or otherwise. "Agreement" means this Operating Agreement, as amended from time to time. "Board of Managers" means the Board of Managers of the Company as established pursuant to Section 5.1 of this Agreement. "Capital Account" means the account to be maintained by the Company for each Unit Holder in accordance with the following provisions: (i) a Unit Holder's Capital Account is credited with the Unit Holder's Capital Contributions, the amount of any Company liabilities assumed by the Unit Holder (or which are secured by Company property distributed to the Unit Holder), the Unit Holder's allocable share of Profits and any item of income or gain specifically allocated to the Unit Holder under the provisions of Section IV; and (ii) a Unit Holder's Capital Account is debited with the amount of money and the fair market value of any Company property distributed to the Unit Holder, the amount of any liabilities of the Unit Holder assumed by the Company (or which are secured by property contributed by the Unit Holder to the Company), the Unit Holder's allocable share of Losses and any item of expense or loss specially allocated to the Unit Holder under the provisions of Section IV. If any interest is transferred under this Agreement, the transferee succeeds to the Capital Account of the transferor to the extent the Capital Account is attributable to the transferred interest. It is intended that the Capital Accounts of all Unit Holders be maintained in compliance with the provisions of Regulation Section 1.704-1(b), and all provisions of this Agreement relating to the maintenance of Capital Accounts are to be interpreted and applied in a manner consistent with that Regulation. 2 3 "Capital Contribution" means the total amount of cash and the fair market value of any other assets contributed (or deemed contributed under Regulation Section 1.704-1(b)(2)(iv)(d)) to the Company by a Unit Holder, net of liabilities assumed or to which the assets are subject. "Capital Proceeds" means the gross receipts received by the Company from a Capital Transaction. "Capital Transaction" means any transaction not in the ordinary course of business which results in the Company's receipt of cash or other consideration other than Capital Contributions, including, without limitation, proceeds of sales or exchanges or other dispositions of property not in the ordinary course of business, financings, refinancings, condemnations, and insurance proceeds for the destruction of assets used in the trade or business of the Company; provided, however, that the sale or other transfer of a security of or an interest in an entity that was acquired in the ordinary course of the Company's business shall not be considered a Capital Transaction. "Cash Flow" means all cash funds derived from operations of the Company (including interest received on reserves), less cash funds to pay current operating expenses and to pay or establish reasonable reserves for future expenses, debt payments, capital improvements, contingencies, and replacements as determined by the Board of Managers. Cash Flow does not include Capital Proceeds but is increased by the reduction of any reserve previously established. Cash Flow is not reduced by noncash charges, including without limitation, depreciation and amortization. "Code" means the Internal Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law. "Company" means, the limited liability company formed in accordance with this Agreement. "Huttner Members" means WHTP, L.L.C. and Richard Dole. "Interest" means a Member's share of the Profits and Losses of, and the right to receive distributions from, the Company. "Involuntary Withdrawal" means, with respect to any Member, the occurrence of any of the following events: (i) the Member makes an assignment for the benefit of creditors; (ii) the Member files a voluntary petition in bankruptcy; (iii) the Member is adjudged bankrupt or insolvent or there is entered against the Member an order for relief in any bankruptcy or insolvency proceeding; 3 4 (iv) the Member files a petition seeking for the Member any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law or regulation; (v) the Member files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Member in any proceeding described in Subsections (i) through (iv); (vi) the Member seeks, consents to, or acquiesces in the appointment of a trustee for, receiver for, or liquidation of the Member or of all or any substantial portion of the Member's properties; (vii) any proceeding instituted against the Member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation, continues for one hundred twenty (120) days after the commencement thereof or the appointment of a trustee, receiver, or liquidator for the Member or all or any substantial part of the Member's properties without the Member's agreement or acquiescence, which appointment is not vacated or stayed for ninety (90) days or, if the appointment is stayed for ninety (90) days, after the expiration of the stay during which period the appointment is not vacated; (viii) if the Member is an individual, the Member's death (unless the resulting transferee is a Permitted Transferee) or adjudication by a court of competent jurisdiction that the Member is incompetent to manage the Member's person or property; (ix) if the Member is acting as a Member by virtue of being a trustee of a trust, the termination of the trust; (x) if the Member is a partnership or limited liability company, the dissolution and commencement of winding up of the partnership or limited liability company; (xi) if the Member is a corporation, the dissolution of the corporation or the revocation of its certificate of incorporation; or (xii) if the Member is an estate, the distribution by the fiduciary of the estate's entire interest in the limited liability company. "Member" means each Person signing this Agreement and any Person who subsequently is admitted as a Member of the Company and agrees to be bound by the terms of this Agreement. "Membership Rights" means all of the rights of a Member in the Company, including a Member's (i) Interest, (ii) right to inspect the Company's books and records; and (iii) right to participate in the management of and vote on matters relating to the Company, to the extent such rights exist. 4 5 "Minimum Gain" has the meaning set forth in Regulation Section 1.704-2(b)(2) and 1.704-2(d). Minimum Gain shall be computed separately for each Unit Holder in a manner consistent with the Regulations under Code Section 704(b). "Negative Capital Account" means a Capital Account with a balance of less than zero. "Net Capital Proceeds" means the net cash proceeds received by the Company from a Capital Transaction, less any portion thereof used to establish reserves for Company expenses, obligations, and contingencies as determined by the Board of Managers. Net Capital Proceeds shall include all principal and interest payments on any debt obligation received by the Company in any Capital Transaction. "Nonrecourse Deductions" has the meaning set forth in Regulation Section 1.704-2(b)(1). The amount of Nonrecourse Deductions for a taxable year of the Company equals the net increase, if any, in the amount of Minimum Gain during that taxable year, reduced, but not below zero, by the aggregate distributions made during such year of the proceeds of a Nonrecourse Liability that are allocable to an increase in Minimum Gain, determined in accordance with Regulation Section 1.704-2(c). "Nonrecourse Liability" means any liability of the Company with respect to which no Unit Holder or person or entity related to an Unit Holder has personal liability determined in accordance with Code Section 752 and the Regulations promulgated thereunder. "Percentage" means, the fraction, expressed as a percentage, the numerator of which is the total number of Units held by the Unit Holder and the denominator of which is the total number of Units issued and outstanding. "Permitted Transferee" shall mean a spouse, child, grandchild or sibling of a Unit Holder or a trust formed for estate planning purposes by a Unit Holder. "Person" means and includes any individual, corporation, partnership, association, limited liability company, trust, estate or other entity. "Positive Capital Account" means a Capital Account with a balance greater than zero. "Profits" and "Losses" means, for each taxable year of the Company (or other period for which Profits or Losses must be computed) the Company's taxable income or loss determined in accordance with Code Section 703(a), with the following adjustments: (i) all items of income, gain, loss, deduction, or credit required to be stated separately under Code Section 703(a)(1) are included in computing taxable income or loss; and (ii) any tax-exempt income of the Company, not otherwise taken into account in computing Profits or Losses, is included in computing taxable income or loss, and 5 6 (iii) any expenditures of the Company described in Code Section 705(a)(2)(B) (or treated as such under Regulation Section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profits or Losses, are subtracted from taxable income or loss; and (iv) gain or loss resulting from any taxable disposition of Company property is computed by reference to the adjusted book value of the property disposed of determined in accordance with Regulation Section 1.704-1(b)(2)(iv)(d) through (h), notwithstanding the fact that the adjusted book value differs from the adjusted basis of the property for federal income tax purposes; and (v) in lieu of the depreciation, amortization or cost recovery deductions allowable in computing taxable income or loss, there is taken into account the depreciation computed based upon the adjusted book value of the asset; and (vi) notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Section 4.4 hereof are not taken into account in computing Profits or Losses. "Promissory Note" means the Promissory Note issued by the Company to Calton, Inc., a copy of which is attached to this Agreement as Exhibit C. "Registration Rights Agreement" means the Registration Rights Agreement annexed hereto as Exhibit D. "Regulations" means the income tax regulations, including any temporary regulations, from time to time promulgated under the Code. "Representative" means each then current Board of Managers representative. "Secretary of State" means the Office of the Delaware Secretary of State. "Transfer" means, when used as a noun, any sale, assignment, attachment, pledge, hypothecation, grant of a security interest in or other relinquishment and, when used as a verb, means, to sell, assign, pledge, hypothecate, encumber or otherwise relinquish. "Unit" shall mean a unit of Interest which shall entitle the holder thereof to a share of the Profits and Losses and a right to receive distributions from the Company. "Unit Holder" means any Person who holds a Unit, whether as a Member or an unadmitted assignee of a Member. "Unit Holder Minimum Gain" means an amount, with respect to each Unit Holder Nonrecourse Liability, equal to the Minimum Gain that would result if such Unit Holder Nonrecourse Liability were treated as a Nonrecourse Liability, determined in accordance with the provisions of Regulation Section 1.704-2(i)(3). 6 7 "Unit Holder Nonrecourse Deduction" means for any fiscal year, the net increase during the year in Unit Holder Minimum Gain attributable to the Unit Holder Nonrecourse Liability reduced, but not below zero, by proceeds of the liability (i) distributed during the year to the Unit Holder bearing the economic risk of loss for the liability and (ii) that are both attributable to the liability and allocable to an increase in the Unit Holder Minimum Gain. "Unit Holder Nonrecourse Liability" means any Company liability to the extent the liability is nonrecourse (under Code Section 1001), and an Unit Holder or person or entity related to an Unit Holder (under Regulation Section 1.752-4(b)) bears the economic risk of loss, determined in accordance with Regulation Section 1.704-2(b)(4). "Warrant" means the Warrants to acquire additional Interests to be issued to certain employees of the Company in the form annexed hereto as Exhibit E. SECTION II FORMATION AND NAME; OFFICE; PURPOSE; TERM 2.1. ORGANIZATION. The Company has been organized as a limited liability company pursuant to the Act and the provisions of this Agreement. The Certificate of Formation, in the form attached as Exhibit B, has been executed and filed for record with the Secretary of State. 2.2. NAME OF THE COMPANY. The name of the Company shall be "Innovation Technology Partners, L.L.C.". The Company may do business under that name and under any other name or names the Board of Directors selects. If the Company does business under a name other than that set forth in its certificate of formation, then the Company shall file a certificate or registration of alternate name as required by the Act. 2.3. PURPOSE. The Company is organized primarily to provide management and consulting services to businesses, and secondarily, in connection with the provision of such services, to acquire interests in such businesses and to hold, manage and dispose of such interests, and for such other lawful purposes for which limited liability companies may be formed under the Act, and to do any and all things necessary, convenient, or incidental to that purpose; provided, however, that the Company shall take no action the direct result of which, if it had 100 or more security holders, would cause it to be an investment company under the Investment Company Act of 1940 and the rules promulgated thereunder by the Securities and Exchange Commission (without taking into account any exclusion provided by Rule 3a2 of such rules). 2.4. TERM. The Company commenced its existence upon the filing of the Certificate of Formation with the Secretary of State and shall continue its existence in perpetuity unless its existence is terminated earlier pursuant to Section VII of this Agreement. 2.5. REGISTERED OFFICE. The registered office of the Company in the State of Delaware shall be located at 1209 Orange Street, Wilmington, Delaware 19801, or at any other place 7 8 within the State of Delaware which the Board of Managers selects, or at such other location as the registered agent shall determine in compliance with the Act. 2.6. REGISTERED AGENT. The name and address of the Company's registered agent in the State of Delaware shall be The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19081. 2.7. MEMBERS. The name, present mailing address, taxpayer identification number, and Percentage of each Member is set forth on Exhibit A. SECTION III MEMBERS; CAPITAL; CAPITAL ACCOUNTS 3.1. INITIAL CAPITAL CONTRIBUTIONS. Upon the execution and delivery of this Agreement (i) Calton, Inc. shall make a cash contribution of $1,500,000, (ii) Richard Dole shall make a cash contribution of $167,000 and property (including furniture, equipment, software and assignment of contracts) having the Agreed Value as identified on Exhibit A hereto and (iii) WHTP, L.L.C. shall make a contribution of $333,000 in cash and property (including furniture, equipment, software and assignments of contracts) having the Agreed Value as identified on Exhibit A hereto. Exhibit A hereto also identifies the initial Percentage of each Member. Richard Dole and WHTP, L.L.C. represent that all assets contributed to the Company by them will be free and clear of all liens, charges and encumbrances upon such contribution. 3.2. ADDITIONAL CAPITAL CONTRIBUTION. No Member shall be required to contribute any additional capital to the Company, and no Member shall have any personal liability for any obligation of the Company, including, but not limited to, any obligations to restore negative Capital Accounts. 3.3. NO INTEREST ON CAPITAL CONTRIBUTIONS. Unit Holders shall not be paid interest on their Capital Contributions. 3.4. RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise provided in this Agreement, no Unit Holder shall have the right to receive the return of any Capital Contribution or any Capital Account balance. 3.5. FORM OF DISTRIBUTION. If an Unit Holder is entitled to receive a return of a Capital Contribution or any other distribution, the Company, at the discretion of the Board of Directors, may distribute cash, notes, property or a combination thereof to the Unit Holder. 3.6. CAPITAL ACCOUNTS. A separate Capital Account shall be maintained for each Unit Holder, in accordance with Code Section 704(b) and Regulation Section 1.704-1(b). 3.7. CERTAIN ADJUSTMENTS. Capital Accounts will be adjusted to reflect the fair market value of the existing Unit Holders' Capital Accounts upon (i) the issuance of additional Units or interests in the Company, (ii) the making of any additional Capital Contributions by an Unit Holder, (iii) the distribution to an Unit Holder by the Company of Property other than money 8 9 unless all Unit Holders receive an individual interest in the distributed property in accordance with their interest in the Company or (iv) the termination of the Company for federal income tax purposes. SECTION IV PROFIT, LOSS, AND DISTRIBUTIONS 4.1. DISTRIBUTION OF CASH FLOW. Cash Flow shall be distributed to the Unit Holders, at such times and in such amounts as the Board of Managers shall determine in proportion to their respective Percentages. Without limiting the generality of the preceding sentence, if and to the extent that the Company is earning income which will result in a Unit Holder that is a Member being subject to income tax for income not distributed by the Company but deemed to have been received by the Unit Holder for federal or state tax purposes, a minimum distribution shall be made to the Unit Holders in such amount and at such time (but in no event later than seventy-five (75) days after the end of the Company's taxable year) as shall be sufficient to enable each Unit Holder to meet the income tax liability arising or incurred as a result of participation in the Company. Any such distribution shall be made to the Unit Holders in proportion to their respective Percentages. 4.2. DISTRIBUTION OF CAPITAL PROCEEDS. Net Capital Proceeds shall be distributed and applied by the Company in the following order and priority: 4.2.1. to the payment of debts and liabilities of the Company then due and outstanding (including all debts due to any Unit Holder); then 4.2.2. the balance shall be distributed as follows: 4.2.2.1. to the Unit Holders in proportion to their Adjusted Capital Contributions, until their remaining Adjusted Capital Contributions have been paid in full; 4.2.2.2. the balance, to the Unit Holders in accordance with their respective Percentages. 4.3. ALLOCATION OF PROFITS AND LOSSES. 4.3.1. PROFITS. After giving effect to the special allocations set forth in Section 4.4., Profits shall be allocated to the Unit Holders as follows: 4.3.1.1. first, profits from Capital Transactions will be allocated to those Unit Holders with Negative Capital Accounts in proportion to the ratio of their Negative Capital Account balances until no Unit Holder has a Negative Capital Account Balance; 4.3.1.2. second, profits from Capital Transactions to those Unit Holders whose Adjusted Capital Contributions are in excess of their Capital Accounts in accordance with the ratio of these excesses until all excesses have been eliminated to cause each Unit Holder's Capital Account balance to be in proportion to the Unit Holder's then respective Percentage; 9 10 4.3.1.3. third, all other profits among the Unit Holders in proportion to their then respective Percentages. 4.3.2. LOSSES. After giving effect to the special allocations set forth in Section 4.4, Losses shall be allocated to the Unit Holders as follows: 4.3.2.1. first, to each Unit Holder with a Positive Capital Account balance in proportion to each such Unit Holder's Positive Capital Account balance until no Unit Holder has a Positive Capital Account balance; 4.3.2.2. second, among the Unit Holders in proportion to their respective Percentages. 4.3.3. RULES OF CONSTRUCTION. If there is insufficient profit or loss to allocate to the Unit Holders pursuant to any subsection of 4.3.1 or 4.3.2 to cause every Unit Holder's Capital Account balance to equal the entire Capital Account balance described in such subsection with respect to such Unit Holder, the Profit or Loss available to be allocated among the Unit Holders pursuant to said subsection shall be allocated in proportion to the amounts thereof that would have been allocated to each Unit Holder pursuant to such subsection if there had been sufficient amounts thereof to fully satisfy the requirements of such subsection with respect to every Unit Holder. 4.4. REGULATORY ALLOCATIONS. 4.4.1. MINIMUM GAIN CHARGEBACK. Except as set forth in Regulation Section 1.704-2(f), if, during any taxable year, there is a net decrease in Minimum Gain, each Unit Holder, prior to any other allocation under this Section 4.4., shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Unit Holder's share of the net decrease of Minimum Gain, computed in accordance with Regulation Section 1.704-2(g). Allocations of gross income and gain under this Section 4.4.1 shall be made first from gain recognized from the disposition of Company assets subject to Nonrecourse Liabilities, to the extent of the Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 4.4.1 shall constitute a "minimum gain chargeback" under Regulation Section 1.704-2(f). 4.4.2. UNIT HOLDER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Regulation Section 1.704-2(i)(4), if, during any taxable year, there is a net decrease in Unit Holder Minimum Gain attributable to an Unit Holder Nonrecourse Liability during any taxable year, each Unit Holder who has a share of the Unit Holder Minimum Gain attributable to such Unit Holder Nonrecourse Liability shall be specially allocated items of gross income and gain for such taxable year (and, if necessary, subsequent taxable years) in an amount equal to that Unit Holder's share of the net decrease in the Unit Holder Minimum Gain. This allocation shall be made after the allocation under Section 4.4.1, and prior to any other allocation under this Section 4.4. Allocations of gross income and gain under this Section 4.4.2 shall be made first from gain recognized from the disposition of the Company assets subject to Unit Holder Nonrecourse 10 11 Liabilities to the extent of Unit Holder Minimum Gain attributable to those assets, and thereafter, from a pro-rata portion of the Company's other items of income and gain for the taxable year. It is the intent of the parties that any allocation under this Section 4.4.2 shall constitute a "minimum gain chargeback" under Regulation Section 1.704-2(i). 4.4.3. QUALIFIED INCOME OFFSET. If any Unit Holder unexpectedly receives any adjustments, allocations, or distributions described in Regulation Section 1.704-1 (b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5), or Section 1.704-1(b)(2)(ii)(d)(6), items of gross income and gain shall be specially allocated to each such Unit Holder in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Unit Holder as quickly as possible. An allocation under this Section 4.4.3 shall be made only if and to the extent that such Unit Holder would have an Adjusted Capital Account Deficit after all other allocations provided for under this Section 4.4 have been tentatively made as if this Section 4.4.3 were not in the Agreement. 4.4.4. NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for a taxable year or other period shall be specifically allocated among the Unit Holders in accordance with their respective Percentages. 4.4.5. UNIT HOLDER NONRECOURSE DEDUCTIONS. Any Unit Holder Nonrecourse Deduction for any taxable year or other period shall be specially allocated to the Unit Holder who bears the risk of loss with respect to the Unit Holder Nonrecourse Liability to which the Unit Holder Nonrecourse Deduction is attributable, as determined in accordance with Regulation Section 1.704-2(b). 4.4.6. CODE SECTION 754 ADJUSTMENT. To the extent an adjustment to the tax basis of any Company asset under Code Section 734(b) or Code Section 743(b) is required, under Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases basis), and the gain or loss shall be specially allocated to the Unit Holders in a manner consistent with the manner in which their Capital Accounts are required to be adjusted under that Section of the Regulations. 4.4.7. CONTRIBUTED PROPERTY AND BOOK-UPS. In accordance with Code Section 704(c) and the Regulations thereunder, as well as Regulation Section 1.704-1(b)(2)(iv)(d)(3), income, gain, loss, and deduction with respect to any property contributed (or deemed contributed) to the Company shall, solely for tax purposes, be allocated among the Unit Holders so as to take account of any variation between the adjusted basis of the property to the Company for federal income tax purposes and its fair market value at the date of contribution (or deemed contribution). If the adjusted book value of any Company asset is adjusted as provided herein, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take account of any variation between the adjusted basis of the asset for federal income tax purposes and its adjusted book value in the manner required under Code Section 704(c) and the Regulations thereunder. Allocations under this Section 4.4.7 are solely for the purpose of 11 12 federal, state, and local taxes, and shall not be taken into account in determining any Unit Holder's Capital Account and allocable share of Profits and Losses. 4.4.8. WITHHOLDING. All amounts required to be withheld under Code Section 1446 or any other provision of federal, state or local law shall be treated as amounts actually distributed to the affected Unit Holders for all purposes under this Agreement. 4.5. LIQUIDATION AND DISSOLUTION. 4.5.1. If the Company is liquidated, the assets of the Company shall be distributed in accordance with Section 7.2. 4.5.2. No Unit Holder shall be obligated to restore a Negative Capital Account. 4.6. GENERAL. 4.6.1. Except as otherwise provided in this Agreement, the timing and amount of all distributions shall be determined by the Board of Managers. 4.6.2. If any assets of the Company are distributed in kind to the Unit Holders, those assets shall be valued at their fair market value, and any Unit Holder entitled to any interest in those assets shall receive that interest as a tenant-in-common with all other Unit Holders so entitled. Unless the Board of Managers otherwise agrees, the fair market value of the assets shall be determined by an independent appraiser who shall be selected by the Board of Managers. The Profit or Loss for each unsold asset shall be determined as if the asset had been sold at its fair market value, and the Profit or Loss shall be allocated as provided in Section 4.3 and shall be properly credited or charged to the Capital Accounts of the Unit Holders prior to the distribution of the assets. 4.6.3. All Profits and Losses shall be allocated and all distributions shall be made to the Persons shown on the records of the Company to have been Unit Holders as of the last day of the taxable year for which the allocation or distribution is to be made. Notwithstanding the foregoing, unless the Company's taxable year is otherwise separated into two or more short years, if there is a Transfer or an Involuntary Withdrawal during the taxable year, the Profits and Losses shall be allocated between the original Unit Holder and the successor on the basis of the number of days each was an Unit Holder during the taxable year. 4.6.4. The Board of Managers is hereby authorized, upon the advice of the Company's tax counsel, to amend this Section IV to comply with the Code and the Regulations promulgated under Code Section 704(b); provided, however, that no amendment shall materially affect distributions to an Unit Holder without the Unit Holder's prior written consent. 12 13 SECTION V MANAGEMENT; RIGHTS, POWERS, AND DUTIES 5.1. MANAGEMENT. 5.1.1. BOARD OF MANAGERS. Subject to the Act or this Agreement, the powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed by, the Board of Managers who shall be responsible for the management and operations of the Company and shall have all powers necessary to manage and control the Company, to conduct its business, and to implement any decision of the Members adopted pursuant to this Agreement. The initial Board of Managers shall consist of seven (7) Representatives, two (2) of whom shall be appointed by the Huttner Members (the "Initial Huttner Designees") and two (2) of whom shall be appointed by Calton, Inc. (the "Initial Calton Designeess"). After the designation of the Initial Huttner Designees and the Initial Calton Designees, the remaining Representatives shall be appointed as follows: (a) Calton, Inc. shall designate two (2) additional Representatives (the "Second Calton Designees"); provided, however, that neither of the Second Calton Designees shall become a Representative unless the choice of the designee is approved by the Initial Huttner Representatives (which approval shall not be unreasonably withheld); (b) The Huttner Members shall designate one additional Representative (the "Second Huttner Designee"); provided, however, that the Second Huttner Designee shall not become a Representative unless the choice of the designee is approved by the Initial Calton Designees (which approval shall not be unreasonably withheld). The number of Representatives constituting the Board of Managers may be increased or decreased from time to time by unanimous approval of the Members. Representatives shall be elected by the Members as provided in this Section 5.1.1. and Section 5.2.1, and each Representative so elected shall hold office until his successor is duly elected and qualified or until his or her earlier death resignation, or removal. Any Representative may resign at any time upon notice to the Company or may be removed with or without cause, by the Member(s) having appointed such Representative in accordance with this Section V. A Representative need not be an employee of a Member or a resident of the State of Delaware. Subject to the powers of removal and replacement set forth above in this Section 5.1, the Huttner Members hereby appoint Richard Dole and Frederick A. Huttner as their initial Representatives and Calton Inc. hereby appoints Anthony J. Caldarone and Robert E. Naughton as its initial Representatives. Calton, Inc. shall designate the Second Calton Designees, and the Huttner Members shall designate the Second Huttner Designees, by July 15, 2000, and the appointment of such additional Representatives shall occur simultaneously after the requisite approvals are obtained pursuant to this Section 5.1.1. 5.1.2. ELECTION OF REPRESENTATIVES. After such time Calton, Inc. holds less than 51% of the Percentages then held by Members, the Representatives shall be elected by the Members pursuant to Section 5.2.1. 13 14 5.1.3. VACANCIES. Any vacancy occurring in the Board of Directors for any cause shall be filled by the Member(s) that appointed the Representative whose absence has created the vacancy; provided, however, that (a) for so long as Calton, Inc. owns 51% of the outstanding Units, the selection of any individual to replace a Second Calton Designee or a Second Huttner Designee (or any individual who is replacing a successor to a Second Calton Designee or a Second Huttner Designee) must be approved by the Huttner Members, in the case of a designation by Calton, Inc., and Calton, Inc. in the case of a designation by the Huttner Members (which approval shall not, in either case, by unreasonably withheld) and (b) any vacancy caused by the absence of a Representative who has been elected by a vote of Members pursuant to Section 5.2 shall be filled by a vote of the Members pursuant to Section 5.2.1 5.1.4. REGULAR MEETINGS. Regular meetings of the Board of Managers may be held at such places within or without the State of Delaware (but within the contiguous United States) and at such times as the Board of Managers may from time to time determine, and if so determined, notices thereof need not be given. 5.1.5. SPECIAL MEETINGS. Special meetings of the Board of Managers may be held at any time, whenever called by the Board of Managers or requested by at least two Representatives, at such place or places within or without the State of Delaware (but within the contiguous United States) as may be stated in the notice of the meeting. Notice of the time and place of a special meeting must be given by the Board of Managers at least 10 days before the special meeting. The attendance of a Representative at any meeting shall constitutes a waiver of notice of such meeting, except where a Representative attends a meeting for the sole purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Managers need be specified in the notice or waiver of notice of such meeting. 5.1.6. MEETINGS BY TELEPHONE CONFERENCE. Unless otherwise restricted by this Agreement or the Act, Representatives may participate in a meeting of the Board of Managers by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 5.1.5. shall constitute presence in person at such meeting. 5.1.7. QUORUM; VOTE REQUIRED FOR ACTION. Except as may be otherwise specifically provided by law or this Agreement, at all meetings of the Board of Managers the presence of a majority of the Representatives constituting the entire Board of Managers shall constitute a quorum for the transaction of business; provided, however, that for so long as Calton, Inc. owns 51% or more of the outstanding Units, no quorum shall exist unless at least two Representatives appointed by Calton, Inc. are present and two Representatives appointed by the Huttner Members are present. The vote of a majority of the Representatives who are present at any meeting of the Board of Managers at which there is a quorum shall be the act of the Board of Managers. If a quorum shall not be present at any meeting of the Board of Managers, the Representatives present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 14 15 5.1.8. SECRETARY OF MEETINGS. The Board of Directors may appoint any person to act as secretary of a Board of Managers meeting. 5.1.9. ACTIONS OF THE BOARD BY CONSENT IN LIEU OF MEETING. Unless otherwise restricted by this Agreement or the Act, any action required or permitted to be taken at any meeting of the Board of Managers may be taken without a meeting if all of the Representatives consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Managers. 5.1.10. NO REPRESENTATIVE COMPENSATION. The Representatives shall not receive compensation for their services hereunder unless approved by the Board of Managers. 5.1.11. OFFICERS. 5.1.11.1. The Board of Managers may, from time to time, employ or retain Persons as may be necessary or appropriate for the conduct of the Company's business (subject to the supervision and control of the Board of Managers who may be designated as officers of the Company. Any number of offices may be held by the same person. In its discretion, the Board of Managers may choose not to fill any office for any period as it may deem advisable. Officers need not be residents of the State of Delaware or Members. Any officers so designated shall have such authority and perform such duties as the Board of Managers may, from time to time, delegate to them by written resolution of the Board of Managers. The Board of Managers may assign titles to particular officers. Each officer shall hold office until he or she shall resign or shall have been removed in the manner hereinafter provided. The salaries or other compensation, if any, of the officers of the Company shall be fixed from time to time by the Board of Managers. 5.1.11.2. Any officer may resign as such at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the Board of Managers. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Any officer may be removed as such, either with or without cause at any time by the Board of Managers. Designation of an officer shall not of itself create any contractual rights or employment rights. 5.1.11.3. The officers, in the performance of their duties as such, shall owe to the Company duties of loyalty and due care of the type owed by the officers of a corporation to such corporation and its shareholders under the laws of the State of Delaware. 5.1.11.4. The Board of Managers hereby appoints the following officers: (a) Managing Members - James H. West, Frederick A. Huttner and Richard Dole. Subject only to the authority of the Board of Managers, the Managing Members shall have general charge and supervision over, and responsibility for, the business and affairs of the Company. Unless otherwise directed by the Board of Managers, all other officers shall be subject to the authority and supervision of the Managing Members. The Managing Members may enter into and execute in the name of the Company contracts or other instruments in the regular course of 15 16 business or contracts or other instruments not in the regular course of business which are authorized, either generally or specifically, by the Board of Managers. The Managing Members shall have the power and duties of management usually vested in the office of president of a business corporation. (b) Managing Directors. The Managing Directors shall have such powers and perform such duties as may be prescribed by the Board or the Managing Members. The Managing Directors may also be designated as Executive Managing Directors or Senior Managing Directors, as the Board of Managers may from time to time prescribe. (c) Treasurer - James H. West. The Treasurer shall have charge of the funds of the Company. The Treasurer shall keep full and accurate accounts of all receipts and disbursements of the Company in books belonging to the Company and shall deposit all monies and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board of Managers. The Treasurer shall disburse the funds of the Company as may be ordered by the Board of Managers, and shall render to the Board of Managers, whenever they may require it, an account of all his transactions as Treasurer and an account of the business and financial position of the Company. (d) Secretary - Edward Powell. The Secretary shall, at the request of the Board of Managers, attend all meetings of the Board and all meetings of the committees thereof and record all the proceedings of the meetings in a book or books to be kept for that purpose or shall ensure that his or her designee attends each such meeting to act in such capacity. Under the supervision of the Board of Managers, the Secretary shall give, or cause to be given, all notices required to be given by this Agreement or by law. The Secretary shall also have such other powers and perform such other duties as the Board of Managers or the President may, from time to time, prescribe. (e) Assistant Secretary - Richard Dole. The Assistant Secretary shall perform such duties as the Board of Managers shall require of such Assistant Secretary. The Assistant Secretary shall, during the absence or incapacity of the Secretary, assume and perform all functions and duties which the Secretary might lawfully do if present and not under any incapacity. 5.1.12. INSURANCE. The Company shall maintain such general property and liability insurance as is determined by the Board of Managers, consistent with industry practice. 5.2. MEETINGS OF AND VOTING BY MEMBERS. 5.2.1. After such time as Calton, Inc. no longer owns 51% of the outstanding Units, an annual meeting of Members shall be held each year on a date selected by the Board of Managers to elect the Representatives. Representatives shall be elected by Members by a plurality vote (based upon Units voted by Members); provided, however, that (i) for so long as 16 17 Calton, Inc. owns less than 51% but more than 30% of the outstanding Units, it shall have the right to nominate two individuals as Representatives, (ii) for so long as Calton, Inc. owns 20% or more of the outstanding Units but less than 30% of the outstanding Units, it shall have the right to nominate one individual as a Representative; and (iii) all of the Members hereby agree to vote the Units owned by them in favor of such nominees as Representatives. Annual meetings of Members shall be held at the Company's principal place of business or at any other place designated by the Board of Managers. 5.2.2. A special meeting of the Members may be called at any time by any Managing Member, the Board of Managers or by those Members holding at least twenty-five percent (25%) of the outstanding Units then held by Members. Special meetings of Members shall be held at the Company's principal place of business or at any other place designated by the Board of Managers. 5.2.3. Not less than ten (10) nor more than sixty (60) days before each annual or special meeting, the Board of Managers shall give written notice of the meeting to each Member entitled to vote at the meeting. The notice shall state the time, place, and purpose of the meeting. Notwithstanding the foregoing provisions, each Member who is entitled to notice waives notice if before or after the meeting the Member signs a waiver of the Notice which is filed with the records of Members meetings, or is present at the meeting in person or by proxy. Unless this Agreement provides otherwise, at a meeting of Members, the presence in person or by proxy of Members holding not less than fifty-one percent (51%) of the outstanding Units then held by Members constitutes a quorum. A Member may vote either in person or by written proxy signed by the Member or by his duly authorized attorney in fact. 5.2.4. Except as otherwise provided in this Agreement, wherever this Agreement or the Act requires the approval of the Members, the affirmative vote of members holding fifty-one percent (51%) or more of the outstanding Units then held by Members shall be required to approve the matter. 5.2.5. In lieu of holding a meeting, the Members may vote or otherwise take action by a written instrument indicating the consent of Members holding at least fifty-one percent (51%) of the outstanding Units then held by Members. 5.3. PERSONAL SERVICES. 5.3.1. No Member shall be required to perform services for the Company solely by virtue of being a Member. Unless approved by the Board of Managers or as otherwise set forth in an agreement between the Company and the Member, no Member shall perform services for the Company or be entitled to compensation for services performed for the Company. 5.4. DUTIES OF PARTIES. 5.4.1. The Board of Managers shall devote such time to the business and affairs of the Company as is necessary to carry out the duties of the Board of Managers set forth in this Agreement. 17 18 5.4.2. Each Member understands and acknowledges that the conduct of the Company's business may involve business dealings and undertakings with Members and their Affiliates. In any of those cases, those dealings and undertakings shall be at arm's length and on commercially reasonable terms. 5.5. LIABILITY AND INDEMNIFICATION. 5.5.1. Each Person who at any time shall be, or shall have been, a Representative or officer of the Company, or any Person who, while a Member, Representative, officer, employee or agent of the Company, is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity, shall be indemnified by the Company as and to the fullest extent permitted by the provisions of Delaware law or any successor statutory provisions, as from time to time amended. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which one to be indemnified may be entitled as a matter of law or under this Agreement, any other agreement, by determination of the Board of Managers, both as to any action in an official capacity and as to action in another capacity while holding such office. Any repeal of this Section 5.5.1 shall be prospective only, and shall not adversely affect any right of indemnification existing at the time of such repeal or modification or thereafter arising as a result of acts or omissions prior to the time of such repeal or modification or thereafter arising as a result of acts or omissions prior to the time of such repeal or modification. Notwithstanding the foregoing or any provision herein to the contrary, no indemnification shall be provided, and the indemnification rights contained in the provisions of this Section 5.5 shall not apply, with respect to any conduct or action by any person that constitutes insubordination, misconduct, dereliction or duty, a violation or law or Company policies, breach or fiduciary duty, or acts against the Company's interests. 5.5.2. Without limiting the provisions or Section 5.5.1, subject to Section 5.5.4, the Company shall indemnify any Person who was or is a party or is threatened to made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a Representative, officer, employee or agent of the Company, or is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of an action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 5.5.3. Without limiting the provisions of Section 5.5.1, subject to Section 5.5.4, the Company shall indemnify any Person who was or is a party, or is threatened to be made a party 18 19 to any threatened, pending or complete action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a Representative or an officer of the Company, or is or was serving at the request of the Company as a member, manager, director, officer, partner, employee or agent of another entity against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. 5.5.4. Any indemnification under this Section 5.5 (unless ordered by a court) shall be made by the Company as permitted by Delaware law or as authorized in the specific case upon a determination that indemnification is proper in the circumstances because it is permitted under Delaware law or the applicable standards of conduct set forth in Section 5.5.2 or Section 5.5.3, as the case may be, have been met. 5.6. INVESTMENT OPPORTUNITIES AND CONFLICTS OF INTEREST. Each Huttner Member shall, and shall cause each of its Affiliates to, bring all investment or business opportunities to the Company of which any of the foregoing become aware and which they believe are within the scope and investment objectives of the Company or are otherwise competitive with the business of the Company; provided, however, that no such opportunity need be brought to the Company if it (a) would cause Calton, Inc. or the Company to be an investment company under the Investment Company Act of 1940 or (b) involves an aggregate of $50,000 or less. 5.7. RIGHT OF FIRST PURCHASE. If the Board of Managers determines to raise additional capital through the sale of additional Units or interests in the Company, it shall first offer each of Calton, Inc. and the Huttner Members the opportunity to provide all of such financing on the terms set forth in the offer (the "Financing Offer") on a pro rata basis based on the number of Units then held. Any such Financing Offer may be accepted all or in part by Calton, Inc. and the Huttner Members. If any such Member does not accept in full a Financing Offer, then the other Members receiving the Financing Offer shall have the right to acquire the unsubscribed Units or interests; provided, however, if any of the Members who do not accept the Financing Offer are Huttner Members, the other Huttner Members shall have the right to acquire the unsubscribed Units interests (on a pro rata basis on the number of Units then held by each Huttner Member wishing to acquire the unsubscribed interests) before that right is granted to Calton, Inc. Any such right of oversubscription must be exercised within fifteen (15) days of the receipt of notice of the right to oversubscribe. If Calton, Inc. and the Huttner Members do not elect to purchase any of the Units or interests pursuant to a Financing Offer, the Company shall have 120 days thereafter to sell the Units or interests at a price and upon general terms and conditions materially no more favorable to the purchasers thereof then were specified in the Financing Offer. If the Company has not sold such interests within such 120 day period, the Company shall not thereafter issue or sell any interests without first offering such Units or interests to Calton, Inc. 19 20 and the Huttner Members in the manner provided above. The right of first purchase granted pursuant to this Section 5.7 shall not apply to the issuance of Units pursuant to the Warrant or pursuant to the Unit option plan contemplated by Section 5.12. 5.8. TAG ALONG RIGHTS. In the event that (i) Unit Holders holding a majority of the outstanding Units (hereinafter the "Majority Unit Holders") elect to sell Units that they hold representing a Controlling Interest (as hereinafter defined) in the Company to a third party purchaser, and (ii) the holder(s) of the remaining minority of the outstanding Units (each a "Minority Unit Holder" and, collectively, the "Minority Unit Holders") and the Company do not exercise their rights to acquire such Units pursuant to Section VI of this Agreement, then, if any of the Minority Unit Holders shall so direct in writing to the Majority Unit Holders, the Majority Unit Holders shall, as a condition of the transfer of the Controlling Interest to the prospective purchaser, require that the prospective purchaser purchase from the Minority Unit Holders all of the Units then owned by such Minority Unit Holders, on the same terms and conditions as are applicable to the prospective purchase of the Controlling Interest from the Majority Unit Holders. Written notice of the exercise of a Minority Unit Holder's rights under this Section 5.8 shall be provided to the Majority Unit Holders within ten (10) days of the expiration of the purchase right granted to the Remaining Unit Holders pursuant to Section VI. For purposes of this Section 5.8, a "Controlling Interest" is defined as not less than fifty percent (50%) of the Company's outstanding Units. 5.9. LOAN TO COMPANY. Upon the execution and delivery of this Agreement by each of the Members, Calton, Inc. and the Company shall execute and deliver the Promissory Note. 5.10. REGISTRATION RIGHTS. Upon the execution and delivery of this Agreement by each of the Members, the Company shall execute and deliver to Calton, Inc. the Registration Rights Agreement. 5.11. WARRANTS. Upon the execution and delivery of this Agreement by each of the Members, the Company shall execute and deliver to each of Richard Dole, James West and Frederick Huttner the Warrants in the denominations identified on Exhibit E hereto. 5.12. EMPLOYEE PLANS. The Board of Managers may establish and carry out pension, profit sharing, bonus, purchase, option, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions (including, without limitation, health insurance, medical and dental reimbursement, life insurance, accident insurance and disability insurance) for the Company, and any Member, Representative, employee or agent of the Company, including plans, trusts and provisions which may provide for the ownership, acquisition, holding, or disposition of Units, interests in the Company or other securities, and may indemnify and maintain insurance on behalf of any fiduciary of such plans, trusts or provisions. The parties hereto acknowledge and agree that the Board of Managers shall formulate and adopt an option plan pursuant to which employees of and consultants (which may include employees of Calton, Inc.) to the Company shall be granted options to acquire a number of Units which shall represent ten percent (10%) of the number of Units outstanding after giving effect to the exercise of such options and the 20 21 Warrants. Annexed hereto as Exhibit G is a schedule setting forth the proposed ownership of the Company after giving effect to the exercise of the options described above and the Warrants. 5.13. EMPLOYMENT AGREEMENTS. Upon the execution and delivery of this Agreement, the Company will enter into the employment agreements with each of James West, Frederick Huttner and Richard Dole in the forms annexed hereto as Exhibits F-1 through F-3. SECTION VI TRANSFERS OF INTERESTS AND WITHDRAWALS OF MEMBERS 6.1. TRANSFERS. 6.1.1. No Person may Transfer all or any portion of or any interest or rights in the Person's Membership Rights, Interest or Units unless the following conditions ("Conditions of Transfer") are satisfied: 6.1.1.1. the Transfer will not require registration of Interests, Units or Membership Rights under any federal or state securities laws; 6.1.1.2. the transferee delivers to the Company a written instrument agreeing to be bound by the terms of Section VI of this Agreement; 6.1.1.3. the Transfer will not result in the termination of the Company pursuant to Code Section 708; 6.1.1.4. the Transfer will not result in the Company being subject to the Investment Company Act of 1940, as amended; 6.1.1.5. the transferor or the transferee delivers the following information to the Company: (i) the transferee's taxpayer identification number; and (ii) the transferee's initial tax basis in the Transferred Interest; and 6.1.1.6. The transferor complies with the provisions set forth in Section 6.1.4., except that any Transfer from Calton, Inc. to any of its Affiliates or by a Huttner Member to a Permitted Transferee need not comply with the provisions set forth in Section 6.1.4. 6.1.2. If the Conditions of Transfer are satisfied, then a Member or Unit Holder may Transfer all or any portion of that Person's Units. The Transfer of Units pursuant to this Section 6.1 shall not result, however, in the Transfer of any of the transferor's other Membership Rights, if any, and the transferee of the Units shall have no right to: (i) become a Member; or (ii) exercise any Membership Rights other than those specifically pertaining to the ownership of an Interest. 6.1.3. Each Member hereby acknowledges the reasonableness of the prohibition contained in this Section 6.1 in view of the purposes of the Company and the relationship of the Members. The Transfer of any Membership Rights, Interests or Units in violation of the 21 22 prohibition contained in this Section 6.1 shall be invalid, null and void, and of no force or effect. Any Person to whom Membership Rights are attempted to be transferred in violation of this Section shall not be entitled to vote on matters coming before the Members, participate in the management of the Company, receive distributions from the Company or have any other rights in or with respect to the Membership Rights. 6.1.4. RIGHTS OF FIRST AND SECOND OFFER. 6.1.4.1. If a Unit Holder (a "Transferor') desires to Transfer all or any portion of, or any interest or rights in, the Transferor's Units (the "Transferor Units"), the Transferor shall provide each other Unit Holder (each a "Remaining Unit Holder and, collectively, the "Remaining Unit Holders) and the Company with written notice of such desire (the "Transfer Notice"). The Transfer Notice shall describe the Transferor Units, identify the proposed transferee and state the proposed purchase price. Such Transfer Notice shall also contain the Transferor's warranty that the Transferor is acting in good faith and that the information contained in the Transfer Notice is correct to the best of the Transferor's knowledge. Upon receipt of the Transfer Notice, the Remaining Unit Holders shall have the option to purchase (at the price set forth in the Transfer Notice) all or any portion of the Transferor Units. Each Remaining Unit Holder desiring to purchase all or any portion of the Transferor Units shall provide the Transferor with written notice of such desire (which notice shall set forth the portion of the Transferor Units which such Remaining Unit Holder desires to purchase and the Percentage then held by such Remaining Unit Holder) within ten (10) days of receipt of the Transfer Notice. Upon expiration of such ten day period, the Transferor shall determine (pursuant to Section 6.1.4.2. below) the number of the Transferor Units which may be purchased by the Remaining Unit Holders electing to purchase all or a portion of the Transferor Units (collectively the "Remaining Purchasing Unit Holders" and, individually, a "Remaining Purchasing Unit Holder") and deliver to each Remaining Purchasing Unit Holder written notice setting forth the number of the Transferor Units which each such Unit Holder may purchase, the purchase price and a closing date for such purchase. 6.1.4.2. The number of the Transferor Units which a Remaining Purchasing Unit Holder shall be entitled to purchase shall be determined by multiplying the number of Percentage represented, either directly or indirectly, by the Transferor Units by a fraction, the numerator of which shall be equal to the number of Units held by the Remaining Purchasing Unit Holder and the denominator of which shall be equal to the number of Units held by all of the Remaining Purchasing Unit Holders. The number of Units that each Remaining Unit Holder is entitled to purchase under this Section 6.1.4.2 shall be referred to as its "Pro Rata Fraction." 6.1.4.3. Notwithstanding anything to the contrary set forth above, if the Transferor is a Huttner Member, then the other Huttner Members shall have the right to exercise the purchase rights provided above by following the procedures set forth in Section 6.1.4.1 through Section 6.1.4.2 as if the other Huttner Members were the only Remaining Unit Holders. If such other Huttner Members do not elect to purchase all of the Transferor Units pursuant to such procedures, the other Remaining Unit Holders shall have the rights to purchase specified in Section 6.1.4.1 through 6.1.4.2. 22 23 6.1.4.4. If the Remaining Purchasing Unit Holders purchase less than all of the Transferor Units, the Transferor shall promptly provide the Company with written notice of that portion of the Transferor Units remaining available for purchase. The Company shall then have the option of purchasing such remaining portion of the Transferor Units at the price set forth in the Transfer Notice. To exercise its option, the Company must provide written notice of the portion of the Transferor Units the Company desires to purchase to the Transferor within ten (10) days of receipt of the notice from the Transferor regarding the availability of a portion of the Transferor Units for purchase. 6.1.4.5. Any closing pursuant to this Section 6.1.4. shall take place within thirty (30) days of delivery of the Transferor Notice. The closing on any purchase pursuant to Section 6.1.4.3 shall take place either contemporaneously with or as soon after the completion of any closing pursuant to Section 6.1.4.1 as is practicable, which date shall in no event be later than forty-five (45) days after the delivery of the Transferor Notice. 6.1.4.6. In the event that all of the Transferor Units are not purchased either by Remaining Unit Holders or the Company, then the Transferor shall have no obligation to sell any portion of the Transferor Units to the remaining Unit Holders or the Company and may make a bona fide Transfer of the Transferor Units (or any remaining portion thereof if the Transferor elects to sell a portion of the Transferor Units to a Remaining Unit Holder or the Company), subject to the terms, conditions, and restrictions of this Agreement, to the prospective purchaser named in the Transferor Notice, such Transfer to be made only in strict accordance with the terms therein stated and only for a period of ninety (90) days following the completion of any closing pursuant to this Section 6.1.4 (the "Free Transfer Period"). The prospective purchaser who acquires any portion of the Transferor Units pursuant to this Section 6.1.4.5 shall hold such Transferor subject to all the terms, conditions, and restrictions of this Agreement. 6.1.4.7. Any Transfer of any portion of the Transferor Units made after the last day of the Free Transfer Period or without strict compliance with the terms, provisions and conditions of Section 6.1.4 and the other terms, provisions, and conditions of this Agreement, shall be null, void, and of no force or effect. 6.2. VOLUNTARY WITHDRAWAL. No Member shall have the right or power to effect a voluntary withdrawal from the Company. 6.3. EFFECT OF INVOLUNTARY WITHDRAWAL. Immediately upon the occurrence of an event of Involuntary Withdrawal, the successor of the withdrawn Member shall thereupon become an Unit Holder but shall not become a Member. 6.4. OPTIONAL BUY-OUT IN EVENT OF INVOLUNTARY WITHDRAWAL. 6.4.1. In the event of an Involuntary Withdrawal, the withdrawn Member or the successor in interest to such Member (the "Withdrawn Member") shall be deemed to offer for sale to the Company (the "Withdrawal Offer") all of the Membership Interest and Units of the withdrawn Member (the "Withdrawal Interest"). 23 24 6.4.2. The Withdrawal Offer shall be and remain irrevocable for a period (the "Withdrawal Offer Period") ending at 5:00 P.M. local time at the Company's principal office on the sixtieth (60th) day following the date the Members elect to continue the Company. At any time during the Withdrawal Offer Period, the Company may accept the Withdrawal Offer by notifying the Withdrawn Member of its acceptance (the "Withdrawal Notice"). 6.4.3. If the Company accepts the Withdrawal Offer, the Withdrawal Notice shall fix a closing date (the "Withdrawal Closing Date") for the purchase which shall be not earlier than ten (10) or later than ninety (90) Days after the expiration of the Withdrawal Period. 6.4.4. If the Company accepts the Withdrawal Offer, the Company shall purchase the Withdrawal Interest for the price equal to the amount the Withdrawn Member would receive if the Company were liquidated and the amount equal to the Appraised Value were available for distribution to the Members (the "Withdrawal Purchase Price"). The Withdrawal Purchase Price shall be paid in cash on the Withdrawal Closing Date. 6.4.5. If the Company fails to accept the Withdrawal Offer, then the Withdrawn Member, upon the expiration of the Withdrawal Offer Period, shall thereafter be treated as the unadmitted assignee of a Member. 6.5. APPRAISED VALUE. 6.5.1. The term "Appraised Value" means the appraised value of the equity in the Company's assets as hereinafter provided. Within fifteen (15) days after demand by either one to the other, the Company and the withdrawing Member shall each appoint an appraiser to determine the value of the equity in the Company's Assets. If the two appraisers agree upon the equity value in the Company's assets, they shall jointly render a single written report stating that value. If the two appraisers cannot agree upon the equity value of the Company's assets, they shall each render a separate written report and shall appoint a third appraiser, who shall appraise the Company's assets and determine the value of the equity therein, and shall render a written report of his opinion thereon. Each party shall pay the fees and other costs of the appraiser appointed by that party, and the fees and other costs of the third appraiser shall be shared equally by both parties. 6.5.2. The equity value contained in the aforesaid joint written report or written report of the third appraiser, as the case may be, shall be the Appraised Value, provided, however, that if the value of the equity stated in the appraisal report of the third appraiser is more than the higher of the first two appraisals, the higher of the first two appraisals shall govern and provided, further, that if the value of the equity stated in the appraisal report of the third appraiser is less than the lower of the first two appraisals, the lower of the first two appraisals shall govern. 24 25 SECTION VII DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY 7.1. EVENTS OF DISSOLUTION. The Company shall be dissolved upon the happening of any of the following events: 7.1.1. upon the unanimous written agreement of all of the Members; 7.1.2. the entry of a decree of judicial dissolution under the Act; 7.1.3. the unanimous consent of the Board of Managers to dissolve the Company. 7.2. PROCEDURE FOR WINDING UP. If the Company is dissolved, the Board of Managers shall wind up its affairs. On winding up of the Company, the assets of the Company shall be distributed as follows: first, to creditors, including Members who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the Company, other than liabilities for which reasonable provision has been made and liabilities of the type referred to in the next two paragraphs; second, those amounts deemed necessary by the Board of Managers for any contingent liabilities or obligations of the Company will be set aside as a reserve for contingent liabilities to be distributed at such time and in such manner hereunder as the Board of Managers will determine it its sole discretion; third, to Unit Holders and former Members who have received a Withdrawal Notice pursuant to Section 6.4.2, for unpaid distributions to which they became entitled prior to dissolution or withdrawal, as applicable; fourth, to Interest Holders and Members, who have received Withdrawal Notice pursuant to Section 6.4.2 but not yet received the Withdrawal Purchase Price; and fifth to Unit Holders in proportion to their remaining Capital Account balances after taking into account all contributions, distributions and allocations for all periods. 7.3. FILING OF A CERTIFICATE OF CANCELLATION. If the Company is dissolved, one or more Members, as permitted by the Act shall promptly file a certificate of cancellation with the Secretary of State and take such other actions as may be necessary to terminate the Company. SECTION VIII BOOKS, RECORDS, ACCOUNTING, AND TAX ELECTIONS 8.1. BANK ACCOUNTS. All funds of the Company shall be deposited in a bank account or accounts opened in the Company's name. The Board of Managers shall determine the institution or institutions at which the accounts will be opened and maintained, the types of accounts, and the Persons who will have authority with respect to the accounts and the funds therein. 25 26 8.2. BOOKS AND RECORDS. 8.2.1. The Secretary shall keep or cause to be kept complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company's business. The records shall include, but not be limited to: (i) complete and accurate information regarding the state of the business and financial condition of the Company; (ii) a copy of the certificate of formation and operating agreement, all amendments to the certificate of formation and operating agreement, and all executed copies of any written powers of attorney pursuant to which the operating agreement, any certificate, and all amendments thereto have been executed; (iii) a current list of the names and last known business, residence, or mailing addresses of all Members and the dates they became Members; (iv) the Company's federal, state, and local tax returns; (v) any Certificate of Agreed Value; and (vi) true and full information regarding the amount of cash, and a description and statement of the agreed value of any other property or services, contributed by each Member and which each Member has agreed to contribute in the future. 8.2.2. The books and records shall be maintained in accordance with sound accounting practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours. 8.2.3. Any request for information shall be in writing, and shall state the purpose therefor. Each Member shall reimburse the Company for all costs and expenses incurred by the Company in connection with the Member's inspection and copying of the Company's books and records. 8.3. ANNUAL ACCOUNTING PERIOD; AUDITORS. The annual accounting period of the Company shall be its taxable year. The Company's taxable year shall be the twelve month period ending November 30 or such other twelve month period as Calton, Inc. may designate, subject to the requirements and limitations of the Code. The Company's independent auditors shall be selected by the Board of Managers. 8.4. REPORTS. 8.4.1. ANNUAL REPORTS. The Company shall cause to be delivered to each Partner, within 30 days after the end of each fiscal year, an annual report containing a balance sheet as of the end of the Company's fiscal year and statements of income, Member's equity and cash flows for the year then ended, each of which shall be audited by independent certified public accountants, as selected pursuant to Section 8.3 hereof. 8.4.2. QUARTERLY REPORTS. Within 20 days after the end of each quarter of each fiscal year, the Company shall cause to be delivered to each Member a quarterly report containing a balance sheet as of the end of such quarter and a statement of income for such quarter, each of which may be unaudited but which shall be certified by an officer of the Company as fairly presenting the financial position of the Company at the end of such quarter and results of operations of the Company for such quarter and as having been prepared in accordance with the accounting methods followed by the Company for federal income tax purposes and otherwise in 26 27 accordance with GAAP applied on a basis substantially consistent with that of the Company's audited financial statements (subject to normal year end adjustments). 8.4.3. MONTHLY REPORTS. Within 20 days after the end of each month of each fiscal year, the Company shall cause to be delivered to each Member a monthly report containing a balance sheet as of the end of such month and a statement of income for such month, each of which may be unaudited but which shall be certified by an officer of the Company as fairly presenting the financial position of the Company at the end of such month and results of operations of the Company for such month and as having been prepared in accordance with the accounting methods followed by the Company for federal income tax purposes and otherwise in accordance with GAAP applied on a basis substantially consistent with that of the Company's audited financial statements (subject to normal year end adjustments). 8.4.4. TAX INFORMATION. Within 120 days of the end of each fiscal year, the Company will cause to be delivered to each Member all information necessary for the preparation of such Member's Federal income tax returns, including a statement showing such Member's share of income, gains, losses, deductions and credits for such year for Federal income tax purposes and the amount of any distributions made to or for the account of such Member pursuant to this Agreement. 8.5. TAX MATTERS PARTNER. Richard Dole shall be the tax matters partner for the Company ("Tax Matters Partner"). The Tax Matters Partner shall have all powers and responsibilities provided in Code Section 6221, ET SEQ. The Tax Matters Partner shall keep all Members informed of all notices from government authorities which may come to the attention of the Tax Matters Partner. The Company shall pay and be responsible for all reasonable third-party costs and expenses incurred by the Tax Matters Partner in performing those duties. A Member shall be responsible for any costs incurred by the Member with respect to any tax audit or tax-related administrative or judicial proceeding against any Member, even though it relates to the Company. The Tax Matters Partner shall not compromise any dispute with the Internal Revenue Service without the approval of the Members. 8.6. TAX ELECTIONS. The Tax Matters Partner shall have the authority to make all Company elections permitted under the Code that the Tax Matters Partner deems necessary or advisable, including, without limitation, elections of methods of depreciation and elections under Code Section 754. The decision to make or not make an election shall be reserved to the Managing Member. SECTION IX GENERAL PROVISIONS 9.1. ASSURANCES. Each Member shall execute all such certificates and other documents and shall do all such filing, recording, publishing and other acts as the Board of Managers deems appropriate to comply with the requirements of law for the formation and operation of the Company and to comply with any laws, rules, and regulations relating to the acquisition, operation, or holding of the property of the Company. 27 28 9.2. NOTIFICATIONS. Any notice, demand, consent, election, offer, approval, request, or other communication (collectively a "notice") required or permitted under this Agreement must be in writing and either delivered personally or sent by overnight courier service of national reputation, or by certified or registered mail, postage prepaid, return receipt requested. A notice must be addressed to a Unit Holder at the Unit Holder's last known address on the records of the Company. A notice to the Company must be addressed to the Company's principal office. A notice delivered personally will be deemed given only when acknowledged in writing by the person to whom it is delivered. A notice that is sent by overnight courier service of national reputation will be deemed given the day after it is accepted by such service in good order for delivery the next day. A notice that is sent by mail will be deemed given three (3) business days after it is mailed. Any party may designate, by notice to all of the others, a substitute address or addressees for notices; and, thereafter, notices to such party are to be directed to such substitute address or addressees. 9.3. SPECIFIC PERFORMANCE. The parties recognize that irreparable injury will result from a breach of any provision of this Agreement and that money damages will be inadequate to remedy fully the injury. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of this Agreement, any party who may be injured (in addition to any other remedies which may be available to that party) shall be entitled to one or more preliminary or permanent orders (i) restraining and enjoining any act which would constitute a breach or (ii) compelling the performance of any obligation which, if not performed, would constitute a breach. 9.4. COMPLETE AGREEMENT. This Agreement, including the exhibits and attachments hereto, constitutes the complete and exclusive statement of the agreement among the Members, and supersedes all prior written and oral statements, including any prior representation, statement, condition, or warranty. Except as expressly provided otherwise herein, this Agreement may not be amended without the written consent of all of the Members holding not less than 80% of the outstanding Units held by Members. 9.5. APPLICABLE LAW. All questions concerning the construction, validity, and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal law, excluding the law of conflicts, of the State of Delaware. 9.6. HEADINGS. The headings herein are inserted as a matter of convenience only, and do not define or limit the scope of this Agreement or the intent of the provisions hereof. 9.7. BINDING PROVISIONS. This Agreement is binding upon, and inures to the benefit of, the parties hereto and their respective, successors and permitted assigns. 9.8. SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be considered severable; and if, for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or otherwise affect those portions of this Agreement which are valid. 28 29 9.9. ESTOPPEL CERTIFICATE. Each Member shall, within ten (10) days after receipt of a written request by any Member, deliver to the requesting Member a certificate stating, to the Member's knowledge, that: (a) this Agreement is in full force and effect; (b) this Agreement has not been modified except by any instrument or instruments identified in the certificate; and (c) there is no default hereunder by the requesting Member, or if there is a default, the nature and extent thereof. If such certificate is not received within the aforesaid ten (10) day period, the Managing Member shall cause the execution and delivery of the certificate on behalf of the requested Member, without qualification, pursuant to the power of attorney granted in Section 5.6. 9.10. COUNTERPARTS. This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which, when taken together, shall constitute one and the same document. The signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. CALTON, INC. By: ----------------------------------------- Name: Anthony J. Caldarone Title: President WHTP, L.L.C. By: ----------------------------------------- Name: Title: ----------------------------------------- Richard Dole 29 30 EXHIBIT A INNOVATION TECHNOLOGY PARTNERS, L.L.C. OPERATING AGREEMENT LIST OF MEMBERS, CAPITAL, AND PERCENTAGES
Name and Address Capital Contribution Units Percentage - ---------------- -------------------- ----- ---------- Calton, Inc. $1,500,000 510 51% 125 Half Mile Road, Suite 206 Red Bank, NJ 07701-6749 (Taxpayer I.D. No.: 22-2433361) Richard Dole 167,000* 151.08 15.108 29 Tiel Way Houston, Texas 77019 Social Security No. ###-##-#### WHTP, L.L.C 333,000** 338.92 33.892 5847 San Felipe, Suite 4545 Houston, Texas 77057 Taxpayer I.D. to be supplied
* Also contributing assets identified on Schedule 1 hereto having an Agreed Value of $20,405. ** Also contributing assets identified on Schedule 1 hereto having an Agreed Value of $40809. 31 EXHIBIT B CERTIFICATE OF FORMATION OF INNOVATION TECHNOLOGY PARTNERS, L.L.C. [See Attached] 32 EXHIBIT C PROMISSORY NOTE [See Attached] 33 EXHIBIT D REGISTRATION RIGHTS AGREEMENT 34 EXHIBIT E WARRANT 35 EXHIBIT F EMPLOYMENT AGREEMENTS 36 EXHIBIT G OWNERSHIP AFTER EXERCISE OF OPTIONS AND WARRANTS EX-10.20 11 g67239ex10-20.txt CALTON,INC.-REVOLVING PROMISSORY INNOVATION TECH 1 EXHIBIT 10.20 REVOLVING PROMISSORY NOTE INNOVATION TECHNOLOGY PARTNERS, L.LC. $3,500,000.00 June 19, 2000 FOR VALUE RECEIVED, Innovation Technology Partners, L.L.C., a limited liability company formed under the laws of the State of Delaware (the "Borrower") whose mailing address is 5487 San Felipe, Suite 4545, Houston, Texas 77057 promises to pay to the order of Calton, Inc. (the "Lender"), at the office of the Lender at 125 Half Mile Road, Suite 206, Red Bank, New Jersey 07701-6749, or at such other place as the Lender may from time to time designate to the Borrower in writing, the lesser of (i) the principal amount of Three Million Five Hundred Thousand Dollars ($3,500,000) or (ii) the aggregate principal amount of Advances made by the Lender to the Borrower pursuant to the terms, conditions and provisions of this Revolving Promissory Note (this "Note"). The Borrower hereby further promises to pay the order of the Lender principal and interest on the unpaid principal amount hereof from time to time outstanding and unpaid, at the interest rate hereinafter set forth, and in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of all debts and dues, both public and private, on the dates hereinafter set forth. All capitalized terms used in this Note shall have the meaning ascribed to them herein. This Note shall bear interest at a per annum rate equal to the Prime Rate plus one (1) percentage point. The interest rate shall be adjusted monthly based upon the Prime Rate published on the last business day of each month during the term of this Note. Interest shall be payable quarterly on the first day of each calendar quarter with respect to interest accrued prior to such date, with the first such interest payment being due October 1, 2000. Principal and all unpaid interest shall be due and payable on the fourth anniversary of the date of this Note; provided, however, that in the event that a Prepayment Event shall occur, the Borrower, at Lender's election, shall prepay, on the date that the Prepayment Event shall occur, the amount then outstanding under this Note in an amount equal to the lesser of (i) the Net Proceeds related to such Prepayment Event or (ii) the principal and interest then outstanding under this Note. -1- 2 This Note is a revolving note which shall entitle the Borrower to borrow, repay and reborrow amounts upon the terms and conditions of this Note. In no event shall Lender have any obligation to advance more than $3,500,000 pursuant to this Note or to advance any amounts after June 16, 2004. The Borrower hereby authorizes the Lender to endorse on the grid attached as Schedule 1 to this Note, an appropriate notation evidencing the date and amount of each Advance made pursuant to this Note and the date and amount of each payment or prepayment of principal thereof. Each such notation, in the absence of manifest error, shall constitute prima facie evidence of and be conclusive as to the outstanding principal amount of all Advances; PROVIDED, HOWEVER, that the failure to make such endorsement shall not limit or otherwise affect the obligations of the Borrower to the Lender under this Note. The Borrower may make prepayments of principal, interest, or principal and interest at any time without penalty. Upon the occurrence of an Event of Default, the Borrower agrees that the Lender shall have all the rights and remedies set forth in this Note, including, without limitation, the rights of acceleration set forth herein. The Borrower may cancel this Note and terminate the provisions hereof at any time by (1) paying all sums then payable hereunder and (2) notifying the Lender that this Note is terminated. ARTICLE 1: EVENTS OF DEFAULT; RIGHTS AND REMEDIES 1.1 EVENTS OF DEFAULT. The occurrence of any of the following events (each, an "Event of Default") shall terminate any obligation on the part of the Lender to disburse Loan Proceeds and, upon written notice from the Lender to the Borrower, make this Note and the entire Indebtedness immediately due and payable (PROVIDED, HOWEVER, that in the case of an Event of Default under Subsection (c) all amounts owing under this Note shall automatically and immediately become due and payable without any action by or on behalf of the Lender): (a) Failure of the Borrower to pay within ten (10) days of the date when due, whether by acceleration or otherwise, any of the Indebtedness in accordance with this Note. (b) The failure of Borrower to pay when due, or failure of Borrower to perform or observe any other obligation or condition with respect to any of the following obligations to any Person, beyond any period of grace under the instrument creating such obligation if such failure would have a material adverse effect on the financial condition of Borrower: (i) any indebtedness for borrowed money or for the deferred purchase price of property in an amount in excess of $100,000, (ii) any obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP in an amount in excess of $100,000, or (iii) any contingent liabilities, such as guaranties, for the obligations of others relating to indebtedness for borrowed money or for the deferred purchase price of property or relating to obligations under leases which have or should have been characterized as capitalized leases, as determined in accordance with GAAP in an amount in excess of $100,000. Notwithstanding the foregoing, the Borrower will not be deemed to be in default under this subparagraph if and so long as the Borrower contests in good faith the validity or amount of any asserted claims and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any property of the Borrower or any interest of the Borrower or the Lender therein. (c) The Borrower applies for or consents to the appointment of a trustee or receiver for any part of its respective properties; any bankruptcy, reorganization, debt arrangement, dissolution, or liquidation proceeding is commenced or consented to by the Borrower, or any application for appointment of a receiver or a trustee, or any proceeding for bankruptcy, reorganization, debt management, or liquidation is filed for or commenced against the Borrower, and is not withdrawn or dismissed within sixty (60) days thereafter. -2- 3 (d) Any lien for labor, services, materials, or otherwise relating to an obligation of $100,000 or more is filed against any property of the Borrower or any interest of the Borrower or the Lender therein and is not removed within thirty (30) days thereafter; PROVIDED, HOWEVER, the Borrower will not be deemed to be in default under this subparagraph if and so long as the Borrower contests in good faith the validity or amount of any asserted lien and diligently prosecutes or defends an action appropriate to obtain a binding determination of the disputed matter and such contest shall have the effect of preventing the sale or forfeiture of any property of the Borrower or any interest of the Borrower or the Lender therein. (e) Failure of Buyer to comply with the provisions of Article 2 of this Note. (f) Any money judgment, writ or warrant of attachment or similar process involving in an individual case or in the aggregate at any time an amount in excess of $50,000 (not adequately covered by insurance) shall be entered or filed against Borrower or its assets and shall remain undischarged, unvacated or unstayed for a period of 60 days. (g) Failure of the Borrower to comply with any other provision of this Note not constituting an Event of Default under any of the preceding provisions of this Section 1.1, and such failure continues for thirty (30) days after notice to the Borrower from the Lender. (h) The employment of any of Richard Dole, James West or Frederick Huttner (each "an Employee") is terminated for any reason unless Lender approves the individual replacing such Employee (it being acknowledged and agreed that such approval shall not be unreasonably withheld and that the Borrower shall have 90 days to identify an acceptable replacement). 1.2 NO ADVANCES. The Lender shall have no obligation to make an Advance if an Event of Default shall occur and be continuing. 1.3 RIGHTS AND REMEDIES. In addition to the remedies set forth above, upon the occurrence of an Event of Default, and until cured (provided such cure is effected prior to the Lender giving the Borrower written notice of the election by the Lender to accelerate all amounts owing under this Note on account of such Event of Default), the Lender shall be entitled to exercise all the rights and remedies provided by any applicable law, including, without limitation, the Uniform Commercial Code as enacted in the State of New Jersey. Each and every right or remedy granted to the Lender pursuant to this Note, or allowed the Lender by law or equity, shall be cumulative. Failure or delay on the part of the Lender to exercise any such right or remedy shall not operate as a waiver thereof. Any single or partial exercise by the Lender of any such right or remedy shall not preclude any future exercise thereof or the exercise of any other right or remedy. ARTICLE 2: COVENANTS OF THE BORROWER From and after the date of this Note and until the Indebtedness is indefeasibly paid, in full, in cash, and this Note terminated, the Borrower agrees that it will observe and comply with the following covenants for the benefit of the Lender. -3- 4 2.1 USE OF LOAN PROCEEDS. The Loan Proceeds shall be utilized by Borrower for general working capital requirements and investments, as presented in the Business Plan. Borrower shall furnish Lender with such detailed documentation and information regarding Borrower's working capital requirements and investments as Lender may request while this Note is outstanding. 2.2 FUTURE DEBT. Borrower will not issue, incur, create, assume, guarantee or otherwise become liable for any other indebtedness for borrowed money unless such other indebtedness is for equipment, capital leasing items or similar items used in the ordinary course of business of the Borrower and such indebtedness is secured only by the equipment or items which are acquired with the proceeds of the borrowed money. 2.3 REPURCHASE OF INTEREST. Borrower will not repurchase any interests in, or units representing interests in, Borrower from any member or unit holder (except Lender), or make a return of capital to any member or unit holder (except Lender), without the Lender's written consentwhile this Note is outstanding. 2.4 EXTRAORDINARY TRANSACTIONS. Borrower will not be a party to any merger, consolidation, dissolution, redomestication or reorganization, or sell or otherwise dispose of all or substantially all of its assets while this Note is outstanding unless Borrower obtains the prior written consent of Lender. ARTICLE 3: CONDITIONS TO ADVANCES 3.1 CONDITIONS TO LOAN. Lender's obligation to make an Advance and to disburse any of the Loan Proceeds is subject to each of the following conditions precedent: 3.1.1 LOAN DOCUMENTS; OTHER DOCUMENTS. The Lender shall have received a duly executed original of this Note, and such other instruments and documents contemplated herein, as appropriate. 3.1.2 EVIDENCE OF ENTITY ACTION. The Lender shall have received, if it so requests, in form and substance reasonably satisfactory to the Lender, documents, including a resolution of its Board of Managers certified by an officer of the Borrower evidencing all action taken by the Borrower to authorize the execution, delivery and performance of this Note, and to make a request for an Advance under this Note. 3.1.3 FURTHER ASSURANCES. The Borrower shall have provided and/or executed and delivered to the Lender, in form and substance reasonably satisfactory to the Lender, such further documents and instruments as the Lender may in the Lender's discretion reasonably request. 3.1.4 ADVANCE REQUEST. Should Borrower at any time wish to request the disbursement of any Loan Proceeds from Lender, the Borrower shall deliver to the Lender, no later than three (3) Business Days preceding the requested disbursement date, a written request (an "Advance Request"), in form and substance reasonably satisfactory to the Lender, stating the dollar amount of the requested Advance, the specific purpose for which the Advance is being -4- 5 requested and such details respecting the intended utilization of the Advance as Lender may require. Provided that all other conditions of this Article 3 are fulfilled, Lender shall make an Advance as requested. In the event that Lender determines not to make an Advance as requested, Lender shall deliver to Borrower within 48 hours of receiving such request a written notice stating the reason(s) for Lender's determination prior to the requested disbursement date for the Advance Lender determined not to make. 3.1.5 DEFAULT. No Event of Default shall have occurred and be continuing, nor shall an Event of Default result from the making of the Advance. 3.1.6 MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the business, financial condition or operating results of the Borrower. 3.1.7 CHANGE OF CONTROL. Lender shall not own less than a 36% equity interest in Borrower. ARTICLE 4: NOTICES All notices, requests, and demands required or permitted under the terms of this Note shall be in writing and shall be (a) addressed as set forth below, or to such other address as a party may have specified by notice given to the other party pursuant to this provision, and (b) deemed to have been given or made: (i) if delivered personally, immediately upon delivery; (ii) if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; (iii) if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and (iv) if by United States Mail, certified mail, return receipt requested, five (5) days after mailing. IF TO THE BORROWER: Innovation Technology Partners, L.L.C. 5847 San Felipe, Suite 4545 Houston, Texas 77057 Fax No.: (713) 914-9655 Attention: Managing Member WITH A COPY TO: Drew R. Fuller, Jr., Esq. Cauthorn Hale Hornberger Fuller Sheehan Becker & Beiter Incorporated 700 North Mary's Street, Suite 600 San Antonio, Texas 78205 Fax No. (210) 271-1730 IF TO THE LENDER TO: Calton, Inc. 125 Half Mile Road Suite 206 Red Bank, New Jersey 07701-6749 Fax No.: (732) 212-1290 Attention: Anthony J. Caldarone, President -5- 6 WITH A COPY TO: Philip D. Forlenza, Esq. Giordano, Halleran & Ciesla, P.C. 125 Half Mile Road P.O. Box 190 Middletown, New Jersey 07748 Fax No.: (732) 224-6599 ARTICLE 5: DEFINITIONS As used herein, the following terms have the following meanings: 5.1 "ADVANCE" means a disbursement of Loan Proceeds from Lender to Borrower. 5.2 "BUSINESS DAY" means any day other than a Saturday or Sunday and other than a day which is a Federal legal holiday or a legal holiday for banks in the State of New Jersey. 5.3 "BUSINESS PLAN" means the Business Plan of the Company dated May 25, 2000. 5.4 "INDEBTEDNESS" means all amounts due and owing under this Note. 5.5 "LOAN PROCEEDS" means the proceeds of a revolving credit loan which Lender hereby agrees to make available to the Borrower from time to time subject to the terms, conditions and provisions of this Note in an amount which shall not exceed in the aggregate at any time outstanding $3,500,000. 5.6 "NET PROCEEDS" means all cash proceeds, less reasonable transaction costs and, in the case of a sale of assets, after repayment of any indebtedness secured by a lien on the assets sold that is required to be repaid upon sale. 5.7 "PERSON" means any individual, corporation, association, partnership, trust, organization, government, governmental agency, or other entity. 5.8 "PREPAYMENT EVENT" means (i) the incurrence by the Company or any subsidiary of any indebtedness for borrowed money, except as permitted by Section 2.2, (ii) the sale by the Company of any interest in the Company or any subsidiary entity of the Company for cash or (iii) the sale by the Company or any subsidiary entity of any asset, other than in the ordinary course of business. 5.9 "PRIME RATE" means the prime rate as published in the "Money Rates" column of the Wall Street Journal. ARTICLE 6: MISCELLANEOUS 6.1 GOVERNING LAW. This Note shall be governed by and construed in accordance with the applicable Laws of the State of New Jersey and the United States of America from time to time in effect, without giving effect to any otherwise applicable rules concerning conflicts of laws. -6- 7 6.2 LITIGATION; JURISDICTION. Borrower irrevocably agrees that any litigation with respect to this Note or enforcement of any judgment obtained against Borrower for breach of this Note may be brought in the courts of the State of New Jersey and in the United States District Court for the District of New Jersey (collectively, the "specified courts") (if applicable subject matter jurisdictional requirements are present), as Lender may elect; and, by execution and delivery of this Note, Borrower irrevocably submits to such jurisdiction. Borrower agrees that it shall maintain a duly appointed agent for service of summons and other legal process as long as Borrower remains obligated under this Note and shall keep Lender advised in writing of the identity and location of such agent. The receipt by such agent and/or by Borrower of such summons or other legal process in any such litigation shall be deemed personal service and acceptance by Borrower for all purposes of such litigation. Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. 6.3 CERTAIN WAIVERS. The Borrower and any sureties or endorsers hereof hereby jointly and severally waive presentment for payment, demand, protest, diligence in collection, and notice of dishonor and nonpayment of this Note, and all defenses on the ground of delay, suretyship, release of any party liable for payment hereof, or of any extension of time for the payment hereof (including any right to notice of any of the foregoing) which may be hereafter given by the holder of this Note from time to time to them or to anyone who has assumed the payment of this Note, and it is specifically agreed that the obligations of said Borrower, sureties or endorsers shall not be in any way affected or altered to the prejudice of the holder hereof by reason of the assumption of payment of the same by any other Person. 6.4 COSTS OF COLLECTION. Borrower agrees to pay all reasonable costs of collection, including reasonable attorneys' fees paid or incurred by Lender in enforcing this Note on default or the rights and remedies herein provided. 6.5 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto; PROVIDED, HOWEVER, that the Borrower may not assign its rights and obligations hereunder. Any assignment in contravention of this Section 6.5 shall be void. 6.6 SEVERABILITY. In the event that one or more provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Note, but this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 6.7 HEADINGS. The headings contained herein are for the purpose of convenience of reference only and are not intended to be considered in construing this Note. 6.8 AMENDMENTS. Modifications and amendments of this Note may be made solely in writing by the prior written consent of both the Borrower and the holder of this Note. 6.9 NON-NEGOTIABLE. This Note is not negotiable by Lender without Borrower's prior written consent; provided however, that Lender may assign and transfer this Note to a direct or indirect majority-owned subsidiary without Borrower's consent. -7- 8 IN WITNESS WHEREOF, the Borrower and Lender have executed this Revolving Promissory Note this 16th day of June, 2000. ATTEST: Innovation Technology Partners, L.L.C. By: - ----------------------- --------------------------------------- Name: Name: Title: Title: ATTEST: Calton, Inc. By: - ----------------------- --------------------------------------- Name: Name: Title: Title: -8- 9 SCHEDULE 1 TO REVOLVING NOTE
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-9- EX-10.21 12 g67239ex10-21.txt CALTON,INC-CONSULTING AGREEMENT ECALTON.COM 1 EXHIBIT 10.21 CONSULTING AGREEMENT THIS AGREEMENT made as of this 17th day of July, 2000, by and between eCalton.com, Inc., a corporation organized and existing under and by virtue of the laws of the State of Delaware (the "Company") and Robert E. Naughton (the "Consultant"). WHEREAS, the Company desires to retain Consultant to provide specified consulting services and Consultant desires to be retained to provide such services under the terms and conditions set forth in this Agreement: W I T N E S S E T H: Section 1. APPOINTMENT. The Company hereby retains Consultant to provide advice and consultation with respect to (a) the development of an information technology consulting business (the "Business"), (b) the establishment of an office in Houston, Texas (the "Houston Office") to provide information technology consulting services, (c) the identification and solicitation of potential employees of the Company to staff the Houston Office and (d) such other matters related to the foregoing as the Company may reasonably request. Section 2. COMPENSATION. (a) In consideration of all services to be performed by Consultant hereunder, the Company shall pay Consultant at the rate of Ten Thousand Eight Hundred Twenty-Nine Dollars ($10,829) per month on the last business day of each month this Agreement is in effect beginning on the last business day of the month immediately succeeding the date of the signing of this Agreement (the "Payment"). For the month of July 2000 or in the event that this Agreement terminates for any reason and the Consultant is entitled to be paid for services rendered for a period of less than one month, then the Company shall be obligated to pay a pro-rata portion of the $10,829 monthly fee based upon the number of days of service rendered. (b) In the event that during the term of this Agreement the Houston Office (i) generates gross revenues of not less than $135,000 per month, (ii) achieves a gross profit margin of 36% or more after taking into account a $26,000 general administrative expense to be charged to the Business by the Company, the Consultant shall be entitled to fifty percent (50%) of the net income attributable to the Business of the Houston Office for such month but in no event shall such additional compensation exceed $16,500 for any one month or $82,500 in the aggregate. To the extent that the net income attributable to the Business of the Houston Office for any month during the term of this Agreement (including amounts carried over pursuant to this sentence) exceeds $33,000, such excess shall be carried over and be deemed net income in the next succeeding month. The additional compensation payable under this Section 2(b) shall be payable on the last day of the month following the month in which the requirements set 2 forth in this Section 2(b) are met. Except as indicated above, the determination of gross profit and net income shall be made in accordance with generally accepted accounting principles. (c) It is understood and agreed by and between the parties hereto that the compensation set forth in this Agreement constitutes the entire compensation due from the Company to Consultant for the services performed by Consultant hereunder and Consultant does not now have nor will he in the future have any right to any further compensation whether by way of contingencies or otherwise arising out of the rendering to the Company of the services set forth in this Agreement unless approved by the Company's Board of Directors; (d) Any compensation paid to Consultant hereunder shall be payable without deduction for federal or state income taxes or for social security payments. Section 3. TERM AND TERMINATION. (a) This Agreement shall be effective as of July 17, 2000 and shall remain in full force and effect until November 30, 2000 unless sooner terminated as provided herein; (b) Either party shall have the right to terminate this Agreement at any time upon written notice in the event the other party shall commit a breach of any of the terms of this Agreement; (c) Either party shall have the right to terminate this Agreement at any time upon fourteen (14) days written notice to the other party. Section 4. ASSIGNMENT. This Agreement may not be assigned by Consultant nor may Consultant's duties hereunder be delegated, the services to be rendered hereunder being of a personal nature. Section 5. INDEPENDENT CONTRACTOR. Nothing contained in this Agreement shall be construed as appointing Consultant as an agent or employee of the Company, it being expressly agreed and understood that in rendering the services hereunder, Consultant shall at all times act as an independent contractor. The Company shall carry no Workers' Compensation insurance to cover Consultant. The Company shall not pay any contribution to Social Security, unemployment insurance, federal or state withholding taxes, nor provide any other contributions or benefits which might be expected in an employer-employee relationship. Consultant agrees to report and pay any contributions for taxes, unemployment insurance, Social Security and any and all other benefits for himself. Section 6. CONFIDENTIALITY. (a) Consultant hereby agrees that during the term of this Agreement and for a period of three (3) years following the termination of this Agreement, he will not disclose, cause to be disclosed, or otherwise allow any Confidential Information (as hereinafter defined) to come into the possession of any person or entity, without the written consent of the Company, whether such information is on or in the Company's documents, records, forms, memos, computer disks or tape, or otherwise, and whether the Confidential Information is in written, -2- 3 verbal or electronic form. Consultant's obligation to keep confidential all Confidential Information does not apply to any portions of the Confidential Information which, without breach of any obligation to the Company hereunder, is required to be disclosed by court order. If Consultant believes that any Confidential Information may have to be disclosed as a result of a court order, the Consultant will contact the Company as soon as possible prior to such disclosure, and any failure to so contact the Company shall be a breach of Consultant's obligations hereunder. (b) "Confidential Information" means (i) all notes, analyses, compilations, studies, or other documents which are prepared by Consultant or given to Consultant in performance of his duties under this Agreement, and (ii) any written or oral information, data and/or materials pertaining to the Company's strategic focus, products, processes, customers, supplies, operations and services including information relating to research and development, inventions, manufacturing and purchasing. (c) The obligation of confidence assumed by Consultant hereunder shall not apply to information: (i) which at the time of disclosure is in the public domain; or (ii) which after disclosure thereafter lawfully becomes a part of the public domain other than through disclosure by Consultant or through Consultant; or (iii) which is lawfully disclosed to Consultant by a third party not under an obligation of confidence to the Company with respect to said information. Section 7. DUTY OF LOYALTY. Consultant shall disclose promptly to the, any and all technology consulting opportunities and acquisition opportunities brought to the attention of or conceived or created by Consultant during the term of this Agreement and related to the business or activities of the Company. Section 8. NON-COMPETITION. Except pursuant to the advance written consent of the Company, the Consultant covenants and agrees with the Company that during the term of this Agreement and for a period of sixty days after the termination of this Agreement neither the Consultant nor any Controlled Affiliate (as hereinafter defined) shall, whether on his or its own behalf or on behalf of any other person, firm, partnership, corporation or other business venture (hereinafter, a "person"), own, manage, control, participate in, consult with, be employed by, render services for or otherwise assist in any manner any person that is engaged in, any Competitive Business Activity (as hereinafter defined). Further, except pursuant to the advance-written consent of the Company and without limiting the quality of the other provisions of the Agreement, Consultant agrees that neither he nor any Controlled Affiliate shall, whether on his or its own behalf or on behalf of any other person, commercially exploit or otherwise use for any purpose any of the information, written or oral, acquired -3- 4 by him in the course of rendering services to the Company and that neither he nor any Controlled Affiliate shall provide such information to or otherwise compete with any such person in the commercial exploitation or other use of such information. (a) Nothing in this Agreement shall prohibit the Consultant or any Controlled Affiliate from being an owner of not more than 5% of the equity or debt securities of any public company, so long as the Consultant has no active participation (other than exercising voting or consensual rights with respect to such interest of up to 5%) in the business of such public company. (b) As used herein, "Controlled Affiliate" of Consultant means any member of the Consultant's immediate family and any other person or entity which, directly or indirectly, is at any time, controlled by the Consultant. For purposes of this definition, "control" of a person or entity means the power, direct or indirect, to cause the direction of the management and policies of such person, whether by contract or otherwise. (c) As used herein: "Competitive Business Activity," with respect to any person, means information technology consulting services and the contract placement of consultants to provide such services. SECTION 9. BINDING EFFECT. This Agreement shall inure to the benefit of the Company and its successors and assigns and be binding upon Consultant and/or Consultant's heirs, executors, administrators or other legal representatives; SECTION 10. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties and hereby supercedes any and all other arrangements, agreements and understandings between the parties, whether oral or written concerning the subject matter hereof. SECTION 11. GOVERNING LAW. The validity of this Agreement and the interpretation and performance of all of its terms shall be governed by the substantive laws of the State of New Jersey. SECTION 12. BUSINESS EXPENSES. Consultant shall be reimbursed for all reasonable business expenses incurred by Consultant during the term of the Agreement on behalf of the Company in the performance of services for the Company. Consultant is required to submit itemized requests for reimbursement of such expenditures supported by sufficient documentation of the expenditures and explanation of their purpose. SECTION 13. WAIVER. Failure of either party hereto to insist upon strict compliance with any of the terms, covenants and conditions hereof shall not be deemed a waiver or relinquishment of any similar right or power hereunder at any subsequent time or of any other provision hereof. SECTION 14. SURVIVAL OF PROVISIONS. In the event that any provision, term or condition of this Agreement is invalid or unenforceable as written but may be rendered valid and enforceable by limitation thereof, then such provision shall be construed as valid and enforceable to the maximum extent permitted by applicable law. The provisions of Sections 6, 7 and 8 of this Agreement shall survive the termination of this Agreement or the termination of services being provided by the Consultant of the Company. -4- 5 SECTION 15. NOTICE. Any notice required or permitted to be given hereunder shall be given either by personal delivery or by registered mail, by air if to a different country, return receipt requested, to the appropriate party at the following address or to such other address as the parties may hereafter communicate to each other in writing; it being understood that such notice shall be deemed given as of the date so delivered or mailed: To: Company eCalton.com, Inc. 333 17th Street, Suite D Vero Beach, FL 32960 Copy to: Calton, Inc. 2013 Indian River Boulevard Vero Beach, FL 32960 To Consultant: Robert E. Naughton 409 Edgewood Drive Montgomery, TX 77356 IN WITNESS WHEREOF, the parties have hereunto set their hands as of this day and year first above written. eCalton.com, Inc. By: ----------------------------- Kenneth D. Hill, President ----------------------------- Robert E. Naughton Consultant -5- EX-21 13 g67239ex21.txt CALTON,INC.-SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 CALTON, INC. SUBSIDIARIES STATE OF COMPANY INCORPORATION ------- ------------- eCalton.com, Inc. (f/k/a Calton Homes of Florida, Inc.) Florida Calton Homes of Chicago, Inc. Illinois Calton Homes of Pennsylvania, Inc. Pennsylvania Calton Homes of Pennsylvania at Pennway, Inc. Pennsylvania Calton Homes of California, Inc. California Calton Lindenwood Corporation California Calton Manzanita Corporation California Calton Tamarack Corporation California Calton California Equity Corporation California Calton Capital, Inc. New Jersey Calton General, Inc. New Jersey Calton Homes Finance, Inc. New Jersey Calton Homes Finance II, Inc. New Jersey Haddon Group of Virginia, Inc. New Jersey PrivilegeOne LLC Delaware Innovation Technology Partners Delaware MindSearch Delaware -----END PRIVACY-ENHANCED MESSAGE-----