SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended May 31, 1996
[ ] 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)
500 Craig Road
Manalapan, New Jersey 07726-8790
(Addresses of principal Zip Code
executive offices)
Registrant's telephone number,
including area code: (908) 780-1800
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 whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
As of July 1, 1996, 26,519,000 shares of Common Stock were outstanding.
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CALTON, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at
May 31, 1996 and November 30, 1995. . . . . . . . . . . . . 3
Consolidated Statement of Operations for the
Three Months Ended May 31, 1996 and 1995. . . . . . . . . . 4
Consolidated Statement of Operations for the
Six Months Ended May 31, 1996 and 1995. . . . . . . . . . . 5
Consolidated Statement of Cash Flows for the
Six Months Ended May 31, 1996 and 1995. . . . . . . . . . . 6
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended May 31, 1996. . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . . . .8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . .11-14
PART II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Securityholders . . . . 15
Item 6. Exhibits and reports on Form 8-K . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Certain information included in this report and other Company filings
(collectively, "SEC filings") under the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended (as well as information
communicated orally or in writing between the dates of such SEC filings)
contains or may contain forward looking information that is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from expected results. Among these risks, trends and uncertainties
are matters related to national and local economic conditions, the effect of
governmental regulation on the Company, the competitive environment in which
the Company operates, changes in interest rates, home prices, availability and
cost of land for future growth, the timing of land acquisition and project
development, availability of working capital and the availability and cost of
labor and materials. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, November 30,
1996 1995
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents. . . . . . . . . . . $ 4,764,000 $ 5,161,000
Receivables. . . . . . . . . . . . . . . . . . 5,783,000 8,964,000
Inventories. . . . . . . . . . . . . . . . . . 67,808,000 64,246,000
Commercial land and buildings. . . . . . . . . 9,481,000 9,439,000
Prepaid expenses and other assets. . . . . . . 2,287,000 3,606,000
----------- -----------
Total assets . . . . . . . . . . . . . . . . $90,123,000 $91,416,000
=========== ===========
Liabilities and Shareholders' Equity
Revolving credit agreement . . . . . . . . . . $45,000,000 $45,000,000
Mortgages payable. . . . . . . . . . . . . . . 3,259,000 1,227,000
Accounts payable . . . . . . . . . . . . . . . 3,209,000 3,270,000
Accrued expenses and other liabilities . . . . 13,542,000 14,906,000
----------- -----------
Total liabilities. . . . . . . . . . . . . . 65,010,000 64,403,000
----------- -----------
Commitments and contingencies
Shareholders' equity
Common stock . . . . . . . . . . . . . . . . . 265,000 264,000
Paid in capital. . . . . . . . . . . . . . . . 21,864,000 22,822,000
Retained earnings. . . . . . . . . . . . . . . 2,984,000 3,927,000
----------- -----------
Total shareholders' equity . . . . . . . . . 25,113,000 27,013,000
----------- -----------
Total liabilities and shareholders' equity . $90,123,000 $91,416,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended May 31,
(Unaudited)
1996 1995
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $28,675,000 $38,836,000
Costs and expenses
Cost of revenues . . . . . . . . . . . . . . . 25,220,000 34,433,000
Selling, general and administrative. . . . . . 3,848,000 4,450,000
----------- -----------
29,068,000 38,883,000
----------- -----------
Loss from operations. . . . . . . . . . . . . . (393,000) (47,000)
Interest expense, net . . . . . . . . . . . . . 276,000 573,000
----------- -----------
Loss before income taxes. . . . . . . . . . . . (669,000) (620,000)
Benefit for income taxes. . . . . . . . . . . . (375,000) (304,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . $ (294,000) $ (316,000)
=========== ===========
Loss per share. . . . . . . . . . . . . . . . . $ (.01) $ (.01)
=========== ===========
Weighted average number of
shares outstanding . . . . . . . . . . . . . . 26,512,000 26,222,000
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended May 31,
(Unaudited)
1996 1995
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $48,131,000 $77,051,000
Costs and expenses
Cost of revenues . . . . . . . . . . . . . . . 42,602,000 68,237,000
Selling, general and administrative. . . . . . 6,942,000 9,238,000
----------- -----------
49,544,000 77,475,000
----------- -----------
Loss from operations. . . . . . . . . . . . . . (1,413,000) (424,000)
Interest expense, net . . . . . . . . . . . . . 522,000 931,000
----------- -----------
Loss before income taxes. . . . . . . . . . . . (1,935,000) (1,355,000)
Benefit for income taxes. . . . . . . . . . . . (992,000) (664,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . $ (943,000) $ (691,000)
=========== ===========
Loss per share. . . . . . . . . . . . . . . . . $ (.04) $ (.03)
=========== ===========
Weighted average number of
shares outstanding . . . . . . . . . . . . . . 26,463,000 26,499,000
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended May 31,
(Unaudited)
1996 1995
----------- -----------
Cash Flows from Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . $(943,000) $(691,000)
Adjustments to reconcile net loss
to net cash used by operating activities
Benefit for income taxes . . . . . . . . . . (992,000) (664,000)
Issuance of stock under 401(k) Plan. . . . . 35,000 133,000
Depreciation and amortization. . . . . . . . 599,000 716,000
Decrease in receivables. . . . . . . . . . . 3,031,000 2,789,000
Decrease (increase) in inventories . . . . . 79,000 (1,697,000)
Decrease in prepaid expenses
and other assets. . . . . . . . . . . . . . 493,000 56,000
Decrease in accounts payable, accrued
expenses and other liabilities. . . . . . . (3,136,000) (5,243,000)
----------- -----------
(834,000) (4,601,000)
----------- -----------
Cash Flows from Investing Activities
Distribution from joint venture. . . . . . . . 553,000 --
Increase in property and equipment . . . . . . (26,000) (217,000)
----------- -----------
527,000 (217,000)
----------- -----------
Cash Flows from Financing Activities
Proceeds under Revolving Credit Agreement. . . 2,000,000 4,500,000
Repayments under Revolving Credit Agreement. . (2,000,000) --
Repayments of mortgages payable. . . . . . . . (90,000) (932,000)
----------- -----------
(90,000) 3,568,000
----------- -----------
Net decrease in cash and cash equivalents . . . (397,000) (1,250,000)
Cash and cash equivalents at
beginning of period. . . . . . . . . . . . . . 5,161,000 5,759,000
----------- -----------
Cash and cash equivalents at end of period. . . $4,764,000 $4,509,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended May 31, 1996
(Unaudited)
Common Paid In Retained
Stock Capital Earnings Total
--------- ----------- ---------- -----------
Balance,
November 30, 1995. . . . $264,000 $22,822,000 $3,927,000 $27,013,000
Net loss. . . . . . . . . -- -- (943,000) (943,000)
Benefit for income
taxes. . . . . . . . . . -- (992,000) -- (992,000)
Issuance of stock
under 401(k) Plan. . . . 1,000 34,000 -- 35,000
--------- ----------- ---------- -----------
Balance,
May 31, 1996 . . . . . $265,000 $21,864,000 $2,984,000 $25,113,000
========= =========== ========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These interim financial statements should be read in conjunction
with the Company's annual report for the year ended November 30, 1995.
Operating results for the three and six month periods ended May 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1996.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1995. If the Company adopted this statement currently, it would
not have a material effect on the Company's financial position, results of
operations or cash flows.
2. Inventories
-----------
Inventories consisted of the following (amounts in thousands):
May 31, November 30,
1996 1995
----------- -----------
Land and land development costs . . . . . . . . $ 22,189 $ 20,496
Homes, lots and improvements in production. . . 39,689 39,251
Land purchase options and costs of
projects in planning . . . . . . . . . . . . . 5,930 4,499
----------- -----------
$ 67,808 $ 64,246
=========== ===========
Homes, lots and improvements in production represents all costs of homes under
construction, including model homes, land and land development costs, and the
related carrying costs of these lots.
Interest capitalized in inventories is charged to interest expense as part of
cost of revenues when the related inventories are closed. Interest incurred,
capitalized and expensed for the three and six month periods ended May 31, 1996
and May 31, 1995 is as follows (amounts in thousands):
-8-
Three Months Six Months
Ended Ended
May 31, May 31,
1996 1995 1996 1995
------ ------ ------ ------
Interest expense incurred . . . . . . . . . . $1,357 $1,984 $2,705 $3,761
Interest capitalized. . . . . . . . . . . . . 960 1,372 2,005 2,679
------ ------ ------ ------
Interest expense-net. . . . . . . . . . . . 397 612 700 1,082
Capitalized interest amortized
in cost of revenues. . . . . . . . . . . . . 970 953 1,554 1,953
------ ------ ------ ------
Interest cost reflected in pre-tax loss . . . $1,367 $1,565 $2,254 $3,035
====== ====== ====== ======
3. Shareholders' Equity
--------------------
In January 1996, the Compensation Committee of the Company's Board of Directors
approved the grant to certain employees of the Company of options to acquire
220,000 shares of Common Stock under the Company's Amended and Restated 1993
Non-Qualified Stock Option Plan. Each of such options has an exercise price of
$.3125 per share, the fair market value of the Common Stock on the date of
grant, and a term of ten years. In addition, the Company's Board of Directors
approved the grant to Anthony J. Caldarone, Chairman, President and Chief
Executive Officer of the Company, of incentive stock options to acquire 500,000
shares of Common Stock under the Company's 1996 Equity Incentive Plan at an
exercise price of $.34375 per share, (110% of the fair market value of the
Common Stock on the date of grant). The options granted to Mr. Caldarone have a
term of five years.
On April 24, 1996, the Company's Compensation Committee approved the grant to
various employees of the Company options to acquire 663,000 shares of Common
Stock under the Company's Equity Incentive Plan. The options are awarded to
eligible employees based upon a number of criteria including years of
employment and base compensation. Each of such options has an exercise price of
$.53125 per share, the fair market value of the Common Stock on the date of the
grant, vests in equal annual installments over a period of five years and has a
term of ten years. In addition, 30,000 stock options were granted, at an
exercise price of $.53125 per share, to the outside directors of the Company
pursuant to the formula award provision of the Plan.
4. Unusual Items
-------------
During the second quarter of fiscal 1995, as a result of the consolidation of
the New Jersey-North and New Jersey-South divisions and economic and market
conditions including a decreased sales pace, the Company decided not to incur
further preacquisition costs on nine properties controlled under option. These
actions resulted in a pre-tax charge of approximately $1,050,000 that is
reflected in Cost of Revenues. Also included in Cost of Revenues is $1,100,000
pre-tax credit realized from the reversal of a reserve previously provided on a
community substantially completed in the second quarter of 1995. This reserve
related to a $1,100,000 payable that the Company, in finalizing the accounting
for this community in the second quarter of 1995, determined, based upon
further review and advice of counsel, had been discharged by reason of the
creditor's failure to take certain actions in connection with the Company's
bankruptcy reorganization.
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5. Commercial Land and Buildings
-----------------------------
In April 1995, a subsidiary of the Company sold an office building for $880,000
in cash that reduced Commercial Land and Buildings by $800,000 and resulted in
a pre-tax gain of approximately $80,000. The net proceeds of $800,000 were used
to reduce mortgages payable.
6. Subsequent Events
-----------------
In June 1996, the Federal Deposit Insurance Corporation (the "FDIC"), in its
capacity as Liquidating Agent/Receiver of Eliot Savings Bank, instituted an
action in the United States District Court, District of Massachusetts, seeking
recovery of amounts owed under a $5.7 million promissory note (the "Note")
issued to Eliot Savings Bank by the Residences at the Surf joint venture (the
"Joint Venture"), an entity in which a Talcon, L.P. subsidiary had an interest.
This action relates to a loan on property owned by the Joint Venture. The loan
was placed on the property before Talcon was formed. Accordingly, in connection
with the creation of Talcon, the interest in the Joint Venture was transferred
upstream to Calton, Inc. and then transferred downstream into Talcon, L.P. and
eventually into the Talcon, L.P. subsidiary. In its suit, the FDIC alleges,
among other things, that Calton, by virtue of the assignment of the interest in
the Joint Venture to Calton in 1987, has liability as a general partner in the
Joint Venture and is seeking to collect approximately $8.7 million in principal
and interest from Calton and other parties. While no discovery has occurred to
date, based upon a preliminary analysis of this matter, Calton believes that
the FDIC's position is contrary to applicable law and that Calton does not have
any obligations under the Note by virtue of the assignment of the interest in
the Joint Venture to Calton or otherwise. The Company will vigorously contest
this matter but there can be no assurances that the case will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 1996 AND 1995
Revenues for the three and six month periods ended May 31, 1996 were $28.7
million and $48.1 million, respectively, compared to revenues of $38.8 million
and $77.1 million for the three and six month periods ended May 31, 1995,
respectively. Deliveries of 139 and 231 homes resulted in housing revenues of
$27.8 million and $47.2 million, respectively, for the three and six months
ended May 31, 1996. For the comparable periods of 1995, the Company delivered
149 and 328 homes which generated $37.4 million and $75.2 million of housing
revenues. Housing revenues decreased by $9.6 million for the quarter ended May
31, 1996 primarily due to a twenty-one percent (21%) decrease in the average
price per home realized in the Company's deliveries during this period. The
Company's average sales price per home delivered decreased from $251,000 for
the three months ended May 31, 1995 to $200,000 for the three months ended May
31, 1996. The primary reason for the decrease in average sales price is
attributable to the mix of homes delivered reflecting a greater proportion of
deliveries in the Florida division, where average selling prices are lower than
in the Northeast, and a corresponding decrease in Northeast division
deliveries. Florida deliveries, which increased seventy-two percent (72%) in
quantity of homes delivered and one hundred sixteen percent (116%) in housing
revenues over the corresponding period in 1995, benefited from the opening of
two new communities during the first quarter of 1996. Northeast deliveries were
impacted by a decrease in the number of new communities open for sales in 1995
compared to 1994, leading to a lower backlog entering 1996. Northeast
deliveries decreased by thirty-four percent (34%), contributing to a forty-six
percent (46%) decrease in housing revenue compared to the comparable period of
the prior year. At May 31, 1996, the Northeast division currently has eight
communities available for sales compared to twelve at May 31, 1995. Deliveries
for the quarter benefited from Northeast deliveries originally scheduled for
delivery in the first quarter of 1996 that had been delayed by the severe
winter weather conditions. Housing revenues decreased by $28.0 million for the
six month period ended May 31, 1996 primarily due to the thirty percent (30%)
decrease in the number of homes delivered coupled with a reduction of the
average sales price on homes delivered during the period to $204,000 from
$229,000 realized during the same period in 1995. The decrease in the number of
homes delivered by the Company is primarily attributable to a forty-seven
percent (47%) and fifty-two percent (52%) decrease in homes delivered and
housing revenues, respectively, by the Company's Northeast division which, in
1996, was adversely impacted by fewer communities open for sales and deliveries
than in 1995 that contributed to a lower level of backlog entering 1996
compared to 1995 and the resulting level of deliveries during the first six
months of 1996.
The Company's gross profit margin on homes delivered was approximately 12%
during the three and six month periods ended May 31, 1996 as compared to 11%
during the three and six month periods ended May 31, 1995. The improvement in
gross profit margin is attributable to a higher proportion of deliveries in the
Florida division where the gross profit margin has increased. The improved
margins on Florida homes is attributable to the shift to a higher average price
per home. The average price per home delivered in Florida for the six months
ended May 31, 1996 was $143,000 compared to $112,000 for the prior year.
During the second quarter of fiscal 1995, as a result of the consolidation of
the New Jersey-North and New Jersey-South divisions and economic and market
conditions including a decreased sales pace, the Company decided not to incur
further preacquisition costs on nine properties controlled under option. These
actions resulted in a pre-tax charge of approximately $1,050,000 that is
reflected in Cost of Revenues. Also included in Cost of Revenues is $1,100,000
pre-tax credit realized from the reversal of a reserve previously provided on a
community substantially completed in the second quarter of 1995. This reserve
related to a $1,100,000 payable that the Company, in finalizing the accounting
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for this community in the second quarter of 1995, determined, based upon
further review and advice of counsel, had been discharged by reason of the
creditor's failure to take certain actions in connection with the Company's
bankruptcy reorganization.
Selling, general and administrative expenses decreased by $600,000 to $3.8
million in the three months ended May 31, 1996 compared to $4.4 million in the
same period of 1995. The decrease is primarily due to a reduction of
advertising costs, employee levels and other operating expenses attributable to
the winddown of the Chicago division and management's continued efforts to
reduce fixed operating costs. Selling, general and administrative expenses
decreased from $9.2 million to $6.9 million for the six months ended May 31,
1995 and 1996, respectively. The decrease is due to the effect on selling costs
from the lower levels of home deliveries, reductions in employee levels and
lower advertising costs due to the winddown of the Chicago operations during
1996 and the consolidation of the Northeast division in March 1995 that
resulted in fewer communities open for sales and deliveries in 1996. Selling,
general and administrative expenses were 13.4% and 14.4% of revenue for the
three and six month periods ended May 31, 1996, respectively, compared to 11.4%
and 12.0% for the same periods in the prior year. The increase in selling,
general and administrative expenses as a percentage of revenues is primarily
due to the lower delivery levels and revenues for the three and six month
periods ended May 31, 1996.
Gross interest cost was approximately $1.4 million and $2.7 million for the
three and six month periods ended May 31, 1996, compared to $2.0 million and
$3.8 million, respectively, in the corresponding periods of the prior year. The
decrease in gross interest cost resulted from lower debt levels in the
Company's revolving credit agreement. Interest capitalized in the three and six
month periods ended May 31, 1996 were $960,000 and $2.0 million compared to
$1.4 million and $2.7 million, respectively, in the corresponding periods of
the prior year, primarily as a result of decreased inventory levels subject to
interest capitalization. The capitalized amounts will reduce future gross
profit levels assuming no relative increases in selling prices.
As a result of the above factors, the Company reported a net loss of $294,000
($.01 per share) and $943,000 ($.04 per share) for the three and six month
periods ended May 31, 1996, compared to a net loss of $316,000 ($.01 per share)
and $691,000 ($.03 per share) for the corresponding periods of the prior year.
Included in the net loss for the quarter ended May 31, 1996 is a benefit for
income taxes of $375,000 reflecting the Company's adjusted effective tax rate
benefit of 56% for the quarter based on estimates of annual results for 1996
that includes land sales forecasted to close in the last half of the year.
At May 31, 1996, the backlog totalled 239 homes having an aggregate dollar
value of $48.4 million, reflecting decreases in the number of homes in backlog
and in backlog value of 28% and 36%, respectively, over the levels at May 31,
1995 of 333 homes having an aggregate dollar value of $75.9 million. Prior year
results benefited from a greater number of communities open for sales in the
Northeast and higher backlog levels entering the first six months of 1995. Also
impacting sales in the Northeast was a record level of snowfall this past
winter and a sluggish economy. The average price per home in backlog at May 31,
1996 decreased to $203,000 compared to $228,000 at May 31, 1995 primarily due
to the increased impact of the Florida division on the May 31, 1996 backlog
levels, representing approximately forty percent (40%) and fifty-seven percent
(57%) of total dollars and homes, respectively, compared to eleven percent
(11%) and nineteen percent (19%), respectively, at May 31, 1995. The higher
proportion of Florida homes in backlog at May 31, 1996 is attributable to the
opening of four new communities during the first six months of 1996 and fewer
communities open for sales and deliveries in the Northeast division. As a
result of the increase in net sales activity in Florida, the Company realized
an increase in net sales contracts of twenty-five percent (25%) and a thirteen
percent (13%) increase in net sales dollars to 304 homes and $59.6 million,
respectively, for the six-month period ended May 31, 1996 from 242 homes and
$52.6 million for the comparable period of the prior year. The backlog in both
years includes contracts containing financing and other contingencies customary
in the industry including, in certain instances, contracts that are contingent
on the purchasers selling their existing homes. Due to changes in product
offerings, the uncertainty of future market conditions and the general economic
-12-
environment, the sales backlog, the number and mix of homes delivered, average
selling prices and gross profit achieved in the current and prior periods may
not be indicative of those to be realized in succeeding periods.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company amended its Revolving Credit Facility (the
"Facility") to meet anticipated operating results through the remainder of the
term of the Facility. The February 1996 amendment to the Facility changed
various restrictions and financial covenants with which the Company is required
to comply, including covenants relating to cash basis interest coverage, EBITDA
and tangible net worth and limits the amount which can be expended on land
acquisition and land development. Purchase money financing from other sources
is limited to $5.0 million under the Facility. Although these limitations will
restrict the Company's ability to expand its business, the Company believes it
should be able to comply with the amended financial covenants; however, based
upon market conditions in the Northeast, certain covenant levels may not be
met. Certain subsidiaries of the Company are guarantors of the obligations
under the Facility. The Lenders have a security interest in substantially all
of the assets of the Company and its subsidiaries, subject only to certain
permitted liens approved by the Lenders.
The amended Facility permits borrowings of up to $55.0 million until November
1, 1996, when the commitment will be reduced to $50.0 million, subject to
borrowing base and other limitations. The amended Facility increased the
interest rate charged to the Company to the lender's prime rate (8.25% at May
31, 1996) plus two percent (2%). The Company believes that funds generated by
its operating activities, income tax payment reductions derived from NOL
utilization and borrowing availability under the Facility will provide
sufficient capital to support the Company's operations and near term plans
through the term of the Facility; however, the Company will have to seek an
extension of the Facility or arrange replacement financing prior to the
expiration of the Facility on February 28, 1997. As of May 31, 1996,
approximately $2.0 million was available to be borrowed under the Facility. The
unused Facility commitment of $8.5 million is available as of May 31, 1996 to
the Company for investment in inventory that results in the corresponding
growth of its borrowing base.
CASH FLOWS FROM OPERATING ACTIVITIES
Inventories amounted to $67.8 million at May 31, 1996 compared to $64.2 million
at November 30, 1995. The increase in inventory of $3.6 million since November
30, 1995 is attributable to: the acquisition of $5.6 million of new land in the
Northeast and Florida divisions of which $2.1 million was financed by a
purchase money mortgage; and inventory accruals of $1.8 million. These
increases were offset by home deliveries. The current land acquisitions
correspond to the opening of five new communities during the six-month period,
four in Florida and one in the Northeast. The Company will continue to focus on
the acquisition of new land at advantageous prices and terms. Funds generated
by the Company's operations will be utilized for the acquisitions as needed,
and to the extent available. Also, options will be utilized to the extent
possible to minimize risks, conserve cash and maximize the Company's land
pipeline. The Facility requires approval of the lenders for all land
acquisitions.
The decrease in receivables of $3.2 million from $9.0 million at November 30,
1995 to $5.8 million at May 31, 1996 is attributable to the timing of home
closings.
A $1.4 million decrease in accrued expenses and other liabilities from November
30, 1995 to May 31, 1996 is primarily attributable to the reduction of home
deliveries as compared to the fourth quarter of 1995 and the payment of
severance to the Company's former President.
-13-
CASH FLOWS FROM INVESTING ACTIVITIES
The Company received a $553,000 distribution from a joint venture which is
substantially complete.
CASH FLOWS FROM FINANCING ACTIVITIES
The aggregate principal amount of loans outstanding under the Facility was
$45.0 million at May 31, 1996 and November 30, 1995. In addition, mortgages
payable increased by $2.1 million to partially fund the acquisition of one new
community in the Northeast. The additional borrowings under the Facility for
1996 and 1995 were utilized to purchase land.
-14-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1996, the Federal Deposit Insurance Corporation (the "FDIC"), in its
capacity as Liquidating Agent/Receiver of Eliot Savings Bank, instituted an
action in the United States District Court, District of Massachusetts, seeking
recovery of amounts owed under a $5.7 million promissory note (the "Note")
issued to Eliot Savings Bank by the Residences at the Surf joint venture (the
"Joint Venture"), an entity in which a Talcon, L.P. subsidiary had an interest.
This action relates to a loan on property owned by the Joint Venture. The loan
was placed on the property before Talcon was formed. Accordingly, in connection
with the creation of Talcon, the interest in the Joint Venture was transferred
upstream to Calton, Inc. and then transferred downstream into Talcon, L.P. and
eventually into the Talcon, L.P. subsidiary. In its suit, the FDIC alleges,
among other things, that Calton, by virtue of the assignment of the interest in
the Joint Venture to Calton in 1987, has liability as a general partner in the
Joint Venture and is seeking to collect approximately $8.7 million in principal
and interest from Calton and other parties. While no discovery has occurred to
date, based upon a preliminary analysis of this matter, Calton believes that
the FDIC's position is contrary to applicable law and that Calton does not have
any obligations under the Note by virtue of the assignment of the interest in
the Joint Venture to Calton or otherwise. The Company will vigorously contest
this matter but there can be no assurances that the case will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Securityholders.
The Company held its 1996 Annual Meeting of Shareholders (the "Meeting") on
April 23, 1996. At the Meeting, shareholders of the Company, in addition to
electing directors, were asked to approve the adoption of the 1996 Equity
Incentive Plan. The proposal was approved by the shareholders. Results of the
shareholders' voting were:
For: 12,009,331 shares;
Against: 2,319,734 shares;
Abstain: 201,738 shares;
Broker Non-Votes: 9,487,855 shares.
Item 6. Exhibits and reports on Form 8-K.
A) Exhibits
27. Financial Data Schedule as of May 31, 1996.
B) Reports on Form 8-K
None.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Calton, Inc.
-----------------------------
(Registrant)
By: /s/ Bradley A. Little
-----------------------------
Bradley A. Little
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
-16-
Date: July 12, 1996
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