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, 1997
[ ] 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 executive offices) Zip Code
Registrant's telephone number,
including area code: (732) 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 June 30, 1997, 26,561,000 shares of Common Stock were outstanding.
CALTON, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at
May 31, 1997 and November 30, 1996. . . . . . . . . . . 3
Consolidated Statement of Operations for the
Three Months Ended May 31, 1997 and 1996. . . . . . . . 4
Consolidated Statement of Operations for the
Six Months Ended May 31, 1997 and 1996. . . . . . . . . 5
Consolidated Statement of Cash Flows for the
Six Months Ended May 31, 1997 and 1996. . . . . . . . . 6
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended May 31, 1997. . . . . . 7
Notes to Consolidated Financial Statements. . . . . .8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 11-15
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securityholders. . .15
Item 6. Exhibits and reports on Form 8-K. . . . . . . . . . . .16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Certain information included in this report and other Company filings
(collectively, "SEC filings") under the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended (as well as information
communicated orally or in writing between the dates of such SEC filings)
contains or may contain forward looking information that is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from expected results. Among these risks, trends and uncertainties
are 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,
1997 1996
(Unaudited)
----------- -----------
Assets
Cash and cash equivalents . . . . . . . . . . $3,971,000 $4,292,000
Receivables . . . . . . . . . . . . . . . . . 5,783,000 9,274,000
Inventories . . . . . . . . . . . . . . . . . 69,175,000 65,525,000
Commercial land and buildings . . . . . . . . 7,359,000 7,512,000
Prepaid expenses and other assets . . . . . . 2,141,000 2,154,000
----------- -----------
Total assets. . . . . . . . . . . . . . . . $88,429,000 $88,757,000
----------- -----------
Liabilities and Shareholders' Equity
Revolving credit agreement. . . . . . . . . . $42,000,000 $39,500,000
Mortgages payable . . . . . . . . . . . . . . 4,125,000 4,445,000
Accounts payable. . . . . . . . . . . . . . . 2,936,000 4,811,000
Accrued expenses and other liabilities. . . . 12,877,000 11,915,000
----------- -----------
Total liabilities . . . . . . . . . . . . . 61,938,000 60,671,000
----------- -----------
Commitments and contingencies
Shareholders' equity
Common stock. . . . . . . . . . . . . . . . . 265,000 265,000
Paid in capital . . . . . . . . . . . . . . . 22,654,000 23,441,000
Retained earnings . . . . . . . . . . . . . . 3,572,000 4,380,000
----------- -----------
Total shareholders' equity. . . . . . . . . 26,491,000 28,086,000
----------- -----------
Total liabilities and shareholders' equity. $88,429,000 $88,757,000
=========== ===========
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)
1997 1996
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $24,596,000 $28,675,000
----------- -----------
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 21,616,000 25,220,000
Selling, general and administrative . . . . . 3,397,000 3,848,000
----------- -----------
25,013,000 29,068,000
----------- -----------
Loss from operations. . . . . . . . . . . . . . (417,000) (393,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 443,000 276,000
Other (income) expense. . . . . . . . . . . . (200,000) --
----------- -----------
Loss before income taxes. . . . . . . . . . . . (660,000) (669,000)
Benefit in lieu of income taxes . . . . . . . . (330,000) (375,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . $(330,000) $(294,000)
=========== ===========
Net loss per share. . . . . . . . . . . . . . . $ (.01) $ (.01)
=========== ===========
Weighted average number of shares outstanding . 26,551,000 26,512,000
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)
1997 1996
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $47,205,000 $48,131,000
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 41,871,000 42,602,000
Selling, general and administrative . . . . . 6,427,000 6,942,000
----------- -----------
48,298,000 49,544,000
----------- -----------
Loss from operations. . . . . . . . . . . . . . (1,093,000) (1,413,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 723,000 522,000
Other (income) expense. . . . . . . . . . . . (200,000) --
----------- -----------
Loss before income taxes. . . . . . . . . . . . (1,616,000) (1,935,000)
Benefit in lieu of income taxes . . . . . . . . (808,000) (992,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . $(808,000) $(943,000)
=========== ===========
Net loss per share. . . . . . . . . . . . . . . $ (.03) $ (.04)
=========== ===========
Weighted average number of shares outstanding . 26,542,000 26,463,000
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)
1997 1996
----------- -----------
Cash Flows from Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . $(808,000) $(943,000)
Adjustments to reconcile net loss to
net cash used by operating activities
Benefit in lieu of income taxes. . . . . . . (808,000) (992,000)
Issuance of stock under 401(k) Plan. . . . . 21,000 35,000
Depreciation and amortization. . . . . . . . 597,000 599,000
Decrease in receivables. . . . . . . . . . . 3,491,000 3,031,000
Increase in inventories. . . . . . . . . . . (1,187,000) (92,000)
(Increase) decrease in commercial land
and buildings . . . . . . . . . . . . . . . (55,000) 171,000
(Increase) decrease in prepaid expenses
and other assets. . . . . . . . . . . . . . (158,000) 493,000
Decrease in accounts payable, accrued
expenses and other liabilities. . . . . . . (3,518,000) (3,136,000)
----------- -----------
(2,425,000) (834,000)
=========== ===========
Cash Flows from Investing Activities
Distribution from joint venture. . . . . . . . -- 553,000
Increase in property and equipment . . . . . . (24,000) (26,000)
----------- -----------
(24,000) 527,000
----------- -----------
Cash Flows from Financing Activities
Proceeds under Revolving Credit Agreement. . . 2,500,000 2,000,000
Repayments under Revolving Credit Agreement. . -- (2,000,000)
Repayments of mortgages payable. . . . . . . . (372,000) (90,000)
----------- -----------
2,128,000 (90,000)
----------- -----------
Net decrease in cash and cash equivalents . . . (321,000) (397,000)
Cash and cash equivalents at
beginning of period. . . . . . . . . . . . . . 4,292,000 5,161,000
----------- -----------
Cash and cash equivalents at end of period. . . $3,971,000 $4,764,000
=========== ===========
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, 1997
(Unaudited)
Common Paid In Retained
Stock Capital Earnings Total
--------- ----------- ---------- -----------
Balance,
November 30, 1996. . . . . $265,000 $23,441,000 $4,380,000 $28,086,000
Net loss. . . . . . . . . . -- -- (808,000) (808,000)
Benefit in lieu of
income taxes. . . . . . . . -- (808,000) -- (808,000)
Issuance of stock
under 401(k) Plan. . . . . -- 21,000 -- 21,000
--------- ----------- ---------- -----------
Balance,
May 31, 1997 . . . . . . . $265,000 $22,654,000 $3,572,000 $26,491,000
========= =========== ========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These interim financial statements should be read in conjunction
with the Company's annual report for the year ended November 30, 1996.
Operating results for the three and six month periods ended May 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1997.
2. Inventories
-----------
Inventories consist of the following (amounts in thousands):
May 31, November 30,
1997 1996
----------- ------------
Land and land development costs . . . . . . . . . $26,022 $22,969
Homes, lots and improvements in production. . . . 36,767 33,819
Land purchase options and costs of
projects in planning . . . . . . . . . . . . . . 6,386 8,737
----------- ------------
$69,175 $65,525
----------- ------------
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, 1997
and May 31, 1996 is as follows (amounts in thousands):
Three Six
Months Ended Months Ended
May 31, May 31,
1997 1996 1997 1996
------ ------ ------ ------
Interest expense incurred . . . . . . . . $1,488 $1,357 $2,737 $2,705
Interest capitalized. . . . . . . . . . . 1,019 960 1,984 2,005
------ ------ ------ ------
Interest expense-net . . . . . . . . . . 469 397 753 700
Capitalized interest amortized
in cost of revenues. . . . . . . . . . . 952 970 1,675 1,554
------ ------ ------ ------
Interest cost reflected in pre-tax loss . $1,421 $1,367 $2,428 $2,254
====== ====== ====== ======
3. Commitments and Contingent Liabilities
--------------------------------------
(a) In July 1994, an action was filed against Calton Homes, Inc., the
Township of Plainsboro, New Jersey and its planning board, certain real estate
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brokers and certain unnamed officers of Calton Homes, Inc., by approximately 60
purchasers in the Company's Princeton Manor development seeking compensatory
and punitive damages arising out of an alleged failure to disclose that a
portion of the property adjacent to the community could be developed by
Plainsboro Township as a public works site. The Company is vigorously
contesting this matter and, although there can be no assurances, does not
believe that the case will have any material effect on the financial position,
results of operations or cash flows of the Company. In addition, the Company
believes that it is contractually entitled to indemnification from Plainsboro
Township in the event that any liability should arise.
(b) 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 $5,700,000 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. ("Talcon") 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, and eventually into the Talcon 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 $8,700,000
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 is vigorously
contesting this matter and, although there can be no assurances, does not
believe that the case will have any material effect on the financial position,
results of operations or cash flows of the Company.
(c) The Company is involved from, time to time, in other litigation in the
ordinary course of business. Management presently believes that the resolution
of any such matter should not have a material, adverse effect on the financial
condition, results of operations or cash flows of the Company.
4. Subsequent Events
-----------------
In June 1997, the Company retired its existing revolving credit facility (the
"Amended Facility"). The principal balance outstanding of $42,000,000 was
discounted and paid off for $39,400,000. A net extraordinary gain of
approximately $1,300,000, after deducting $840,000 of income taxes, will be
recorded in the third quarter of 1997. Included in the gain is the write off of
deferred costs and out-of-pocket costs of approximately $500,000.
The Company refunded and replaced the Amended Facility with a new, secured
revolving credit facility (the "New Facility") from BankBoston, N.A. (the
"Lender"). The New Facility provides borrowing availability of $45,000,000,
subject to "borrowing base" limitations, during its initial three year term,
expiring in June 2000. The Lender's commitment includes an agreement to issue
up to $5,000,000 of letters of credit which will be applied against borrowing
availability. Additionally, at the request of the Company, the New Facility
provides the lender with an option at the end of each year to extend the
facility for an additional year, thereby resulting in an ongoing three-year
term. As a component of the consideration to enter the New Facility, the
Company issued a warrant (the "Warrant") to purchase 1,000,000 shares of Calton
Common Stock at a price of $.50 per share. The Warrant, which is exercisable
only in whole, becomes exercisable in January 1999 and expires in June 2004. If
the Lender provides notice that it wishes to exercise the Warrant, Calton may,
at its option, repurchase the Warrant at a price based upon the difference
between the then current market price of Calton's Common Stock and the exercise
price of the Warrant. The Lender is entitled to certain rights to have the
-9-
shares issuable upon exercise of the Warrant registered for public sale. The
Warrant contains provisions providing for an adjustment in the exercise price
and number of shares issuable upon the exercise of the Warrant upon the
occurrence of certain events, including sales of Calton Common Stock (other
than pursuant to employee stock options) at prices below the exercise price of
the Warrant or the then current market price of Calton's Common Stock. In
addition, certain terms of the Warrant are subject to adjustment if the Company
issues convertible securities, options or other warrants having terms more
favorable to the holder than the Warrant.
-10-
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, 1997 AND 1996
- ------------------------------------------------------------------------------
Revenues for the three and six month periods ended May 31, 1997 were $24.6
million and $47.2 million, respectively, compared to revenues of $28.7 million
and $48.1 million for the three and six month periods ended May 31, 1996,
respectively. Deliveries of 113 and 201 homes resulted in housing revenues of
$24.6 million and $43.9 million, respectively, for the three and six month
periods ended May 31, 1997. For the comparable periods of 1996, the Company
delivered 139 and 231 homes which generated $27.8 million and $47.2 million,
respectively, of housing revenues. Revenues for the six month period ended
May 31, 1997 include the sale of a parcel of land previously under option for
$3.3 million that resulted in no significant gain or loss. Prior year results
include the bulk sale of lots for approximately $850,000 in the second quarter
of 1996, where no significant gain or loss was recognized.
Housing revenues decreased by $3.2 million and $3.3 million for the three and
six month periods ended May 31, 1997, respectively, when compared to the same
periods in 1996. Revenues during both periods were adversely impacted by a
decrease in the volume of homes delivered reflecting a nineteen percent (19%)
and thirteen percent (13%) decrease for the three and six month periods,
respectively. The decrease in the Company's housing revenue is attributable to
an approximately twenty percent (20%) reduction in home deliveries in the
Northeast division in 1997 as a result of fewer communities available for
deliveries entering 1997 as compared to 1996 and the level of backlog entering
fiscal 1997 compared to the prior year. As of May 31, 1997, the Northeast
division had six active communities available for sales and deliveries as
compared to eight in the prior year. The division will continue to seek new
communities and focus on the move-up and active adult homebuyer. The decreases
from the Northeast division were partially offset by a twenty-three percent
(23%) increase in deliveries and a thirty-four percent (34%) increase in
revenues in the Florida division. Included in the 1996 revenues were deliveries
from the Chicago division as it substantially delivered its remaining homes.
Average sales prices on the homes delivered in 1997 increased to $218,000 and
$219,000 for the three and six month periods, respectively, compared to
$200,000 and $204,000 in 1996 to partially offset the decline in housing
revenue due to volume. Average selling prices increased for the three and six
month periods ended May 31, 1997 primarily due to the mix of homes delivered by
the Company's Northeast division and, to a lesser extent, its Florida division,
reflecting deliveries from each divisions' newer communities. The impact of
these communities on average sales prices reflects the Company's current
strategy to target the second and third time move-up buyer.
The Company's gross profit margin on homes delivered remained at 12% for the
three and six month periods ended May 31, 1997 as compared to the same periods
of the prior year. The Company's Northeast division realized higher margins on
newer communities, however, deliveries on two close-out communities offset the
overall improvement during the first six months of 1997. The Florida division
realized improvement in gross margin primarily through increased deliveries.
Selling, general and administrative expenses decreased by $450,000 to $3.4
million and by $500,000 to $6.4 million for the three and six month periods
ended May 31, 1997 respectively, compared to $3.8 million and $6.9 million for
the same periods in 1996. The decrease is primarily due to a reduction of
selling and advertising costs as a result of fewer communities open for sales
in the Northeast, management's continued efforts to reduce fixed costs and, to
a lesser extent, the wind down of the Chicago division in 1996. Selling,
general and administrative expenses were 13.8% and 14.6% of revenues for the
three and six month periods ended May 31, 1997, respectively, compared to 13.9%
and 14.7% for the same periods in the prior year.
-11-
In the second quarter of 1997, the Company received a $200,000 payment on a
note previously reserved and recorded this amount as Other income (expense).
Gross interest cost was approximately $1.5 million and $2.7 million for the
three and six month periods ended May 31, 1997, compared to $1.4 million and
$2.7 million, respectively, in the corresponding periods of the prior year.
Gross interest cost remained consistent with the prior periods despite the
Company's reduction of the average debt outstanding by $5.4 million during the
six month period ending May 31, 1997, primarily as a result of higher interest
rates and commitment fees incurred on the Company's revolving credit facility
during the six months ended May 31, 1997. Interest capitalized in the three and
six month periods ended May 31, 1997 was $1.0 million and $2.0 million,
compared to $960,000 and $2.0 million, respectively, in the corresponding
periods of the prior year. Capitalized interest remained consistent with the
prior periods primarily as a result of comparable inventory levels subject to
interest capitalization. The capitalized amounts will reduce future gross
profit levels assuming no relative increases in selling prices.
Included in the net loss for the three and six month periods ended May 31, 1997
is a benefit for income taxes of $330,000 and $808,000, respectively,
reflecting the Company's approximate effective tax rate based on estimates of
annual results for 1997. Realization of the benefit is dependent on generating
sufficient income through the remainder of 1997. Although realization is not
assured, management believes the benefit will be realized.
At May 31, 1997, the backlog of homes under contract totaled 216 homes having
an aggregate dollar value of $47.2 million compared to 239 homes in backlog
having a $48.4 million aggregate dollar value as of May 31, 1996. The decrease
in the number of homes in backlog is primarily attributable to a reduction in
the number of homes in backlog from the Company's Florida division and fewer
communities open for sales. Compared to the prior year, the Florida division
backlog was impacted by increased deliveries in the first quarter of 1997
coupled with a twenty six percent (26%) decrease in net sales contracts for the
second quarter of 1997. The Florida division sales for the second quarter were
impacted by the effect of the close out of three communities during the quarter
and the timing of new communities. The average sales price per home in backlog
increased from $203,000 at May 31, 1996 to $218,000 at May 31, 1997 reflecting
approximately a seven percent (7%) increase in average sales price per home,
attributable to a greater proportion and quantity of Northeast division homes
in backlog coupled with an eleven percent (11%) increase in average sales
prices in the Florida division backlog. Impacting the average sales price per
home in the Northeast division backlog during the second quarter were
forty-three (43) net sales contracts with a combined backlog value of
approximately $7.5 million entered into by the division's new active adult
community, Renaissance. As of May 31, 1997, sales in this community represented
forty-three percent (43%) of the division's homes in backlog and twenty-six
percent (26%) of the dollar value of such backlog. The Company expects
Renaissance to continue to positively impact the quantity and dollar value of
homes in backlog. The average sales prices of these homes is approximately
$175,000 with base sales prices ranging from $140,000 to $230,000. Deliveries
from Renaissance are anticipated to begin in the third quarter of 1997. The
increased average sales price per home in the Florida division backlog reflects
the year to date net sales activities from some of the newer communities opened
during last year that target the second and third time move-up buyer.
The Company recorded net sales contracts of $31.6 million (158 homes) and $50.9
million (252 homes) for the three and six month periods ended May 31, 1997,
respectively, compared to $35.8 million (181 homes) and $59.6 million (304
homes) for the corresponding periods in 1996. The decrease in sales dollars of
twelve percent (12%) and fifteen percent (15%) for the three and six month
periods ended May 31, 1997, respectively, can be primarily attributable to the
decreased average sales price on net sales contracts for the Northeast division
entered into during these periods as compared to the prior year, coupled with a
decrease in sales volume for the six month period attributable to fewer
communities available for sales as discussed previously. Impacting the average
sales price for the three and six month periods ended May 31, 1997 are the
Renaissance net sales where sales prices are less than the communities that
target the move-up buyer. In addition, the Company's Florida division had
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decreased sales activity during these periods as previously discussed resulting
in decreased sales dollars and primarily contributing to the Company's decrease
in net sales of homes of thirteen percent (13%) and fifteen percent (15%) for
the three and six month periods ended May 31, 1997, respectively.
The backlog in both years includes contracts containing financing and other
contingencies customary in the industry, including contracts that are
contingent on purchasers selling their existing homes. The sales backlog, 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 due to changes in product offerings, the uncertainty of future market
conditions and the general economic environment.
Effective December 1, 1996, the Company adopted the Financial Accounting
Standards Board Statement 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
Company's adoption of this statement on December 1, 1996 did not have a
material effect on the Company's financial position, results of operations and
cash flows to date.
In February 1997, the Financial Accounting Standards Board issued Statement
Financial Accounting Standards No. 128, "Earnings per Share." The provisions of
this statement are effective for financial statements issued for periods ending
after December 15, 1997. Although early adoption is not permitted, when the
Company adopts this statement in fiscal year 1998, the basic earnings per share
calculation should approximate the current primary earnings per share
calculation; however, the diluted earnings per share calculation, when adopted,
may be lower than the basic.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In June 1997, the Company retired the Amended Facility. The principal balance
outstanding of $42.0 million was discounted and paid off for $39.4 million. A
net extraordinary gain of approximately $1.3 million, after deducting $840,000
of income taxes, will be recorded in the third quarter of 1997. Included in the
gain is the write off of deferred costs and out-of-pocket costs of
approximately $500,000.
The Company refunded and replaced the Amended Facility with a new, secured
revolving credit facility (the "New Facility") from BankBoston, N.A. (the
"Lender"). The New Facility provides borrowing availability of $45.0 million
(subject to "borrowing base" limitations) during its initial three year term,
expiring in June 2000. The Lender's commitment includes an agreement to issue
up to $5.0 million of letters of credit which will be applied against borrowing
availability. At the request of the Company, the New Facility provides the
lender with an option at the end of each year to extend the facility for an
additional year, thereby resulting in an ongoing three-year term.
The New Facility contains more favorable terms than the facility it replaces,
including the interest rate charged to the Company of prime plus one percent
(1%) or a Eurodollar rate option (based upon LIBOR) plus three and one half (
3.5%), no commitment reductions, more financial and operating flexibility, in
addition to the longer term. The New Facility permits up to $10 million of
non-recourse purchase money financing from other sources. It is anticipated
that the Company's effective interest rate on the New Facility will be
comparable to the former Amended Facility due to the amortization of debt
issuance costs of approximately $3.5 million over the initial three-year term
of the New Facility.
The New Facility contains certain financial and operating covenants including,
among others, covenants that require the Company to maintain a specified level
of tangible net worth and certain debt service and interest coverage ratios.
The Company will be required to obtain the consent of the Lender for purchases
of land having a single takedown price in excess of $3.0 million except
purchases pursuant to existing contracts and option arrangements. In addition,
-13-
the New Facility limits the amount of land inventory which may be held by the
Company and the Company's ability to incur certain additional indebtedness,
make certain investments, acquire certain assets, dispose of assets and enter
into merger and acquisition transactions without Lender approval.
Calton's primary operating subsidiaries, Calton Homes, Inc. and Calton Homes of
Florida, Inc. (collectively, the "Borrowers"), are the primary obligors under
the New Facility. Calton and certain of its subsidiaries have guaranteed the
obligations of the Borrowers under the New Facility. Borrowings under the New
Facility are secured by a lien upon substantially all of the assets of the
Borrowers and a pledge of the Borrowers' outstanding stock and the stock of
certain of their subsidiaries.
As a component of the consideration to enter into the New Facility, Calton
issued the Lender a warrant (the "Warrant") to purchase 1,000,000 shares of
Calton Common Stock at a price of $.50 per share. The Warrant, which is
exercisable only in whole, becomes exercisable in January 1999 and expires in
June 2004. If the Lender provides notice that it wishes to exercise the
Warrant, Calton may, at its option, repurchase the Warrant at a price based
upon the difference between the then current market price of Calton's Common
Stock and the exercise price of the Warrant. The Lender is entitled to certain
rights to have the shares issuable upon exercise of the Warrant registered for
public sale. The Warrant contains provisions providing for an adjustment in the
exercise price and number of shares issuable upon the exercise of the Warrant
upon the occurrence of certain events, including sales of Calton Common Stock
(other than pursuant to employee stock options) at prices below the exercise
price of the Warrant or the then current market price of Calton's Common Stock.
In addition, certain terms of the Warrant are subject to adjustment if the
Company issues convertible securities, options or other warrants having terms
more favorable to the holder than the Warrant.
For the twelve month period ended May 31, 1997, the Company's EBITDA was $8.0
million. On a pro-forma basis, approximately $1.6 million was available to be
borrowed under the New Facility based upon a prescribed borrowing base
calculation as of May 31, 1997. As of June 12, 1997, $39.5 million was
outstanding under the New Facility and an additional $1.4 million of letters of
credit were outstanding.
The Company believes that funds generated by its operating activities, income
tax payment reductions derived from NOL utilization and borrowing availability
under the New Facility will provide sufficient capital to support the Company's
operations for the forseeable future.
Cash Flows from Operating Activities
- ------------------------------------
Operating activities resulted in the use of $2.4 million of cash for the six
month period ended May 31, 1997 as compared to $834,000 in the prior year. The
use of cash by operations for the six month period ended May 31, 1997 can be
attributable to a $1.2 million net increase in inventory consisting of $7.8
million in land acquisitions, offset to a certain extent by the sale of a
parcel of land under option and the timing of the construction and delivery of
homes between the fourth quarter of 1996 and the first six months of 1997. The
timing of such activities coupled with the receipt of $1.1 million of payments
under a note in the second quarter resulted in the decrease in receivables of
$3.5 million. The timing of home closings coupled with the paydown of the
Company's general liability insurance resulted in the $3.5 million reduction in
accounts payable, accrued expenses and other liabilities.
The Company will continue to seek opportunities to obtain control of land for
future communities at advantageous prices and terms. Funds generated by the
Company's operations will be utilized for the acquisition of such properties.
In addition, borrowings from the New Facility will be utilized for acquisitions
as needed, and to the extent available. Also, options will continue to be
utilized to the extent possible to minimize risks, conserve cash and maximize
the Company's land pipeline.
-14-
Cash Flows from Investing Activities
- ------------------------------------
In the second quarter of 1997, the Company received a $200,000 payment on a
note previously reserved and recorded this amount as Other income (expense). In
the second quarter of 1996, the Company received a $553,000 distribution from a
joint venture in which it previously participated.
Cash Flows from Financing Activities
- ------------------------------------
The Company utilized approximately $2.1 million of cash primarily from its
revolving line of credit to finance the acquisitions of new land and home
building activities in the first six months of 1997.
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Securityholders.
The Company held its 1997 Annual Meeting of Shareholders (the "Meeting") on May
29, 1997. At the Meeting, shareholders of the Company, in addition to electing
directors, were asked to approve the proposal to amend the Company's Amended
and Restated Certificate of Incorporation to provide for the classification of
the Company's Board of Directors. The proposal was approved by the
shareholders. Results of the shareholders' voting were:
For: 9,729,234 shares;
Against: 3,787,034 shares;
Abstain: 23,893 shares;
Broker Non-Votes: 9,050,522 shares.
Four nominees were elected as directors of the Company at the Meeting. J.
Ernest Brophy was elected to serve until the 1998 annual meeting, Mark N.
Fessel was elected to serve until the 1999 annual meeting, Frank Cavell Smith,
Jr. was elected to serve until the 2000 annual meeting and Anthony J. Caldarone
was elected to serve until the 2001 annual meeting. Each nominee received at
least eighty-eight percent (88%) of the votes cast in favor of his election.
The results of the voting were as follows:
Votes Cast for Votes
Director the Director Withheld
----------------------- -------------- ---------
J. Ernest Brophy 19,953,447 2,637,236
Mark N. Fessel 19,932,247 2,658,436
Frank Cavell Smith, Jr. 19,953,497 2,637,186
Anthony J. Caldarone 19,953,330 2,637,353
There were no abstentions or broker non-votes in connection with the
shareholder vote for the election of directors which occurred at the Meeting.
-15-
Item 6. Exhibits and reports on Form 8-K.
A) Exhibits
27. Financial Data Schedule as of May 31, 1997.
B) Reports on Form 8-K.
On July 1, 1997, the Company filed a report on Form 8-K to report
that it obtained a new $45 million secured revolving credit facility
from BankBoston, N.A. that replaced the Company's prior revolving
credit facility on June 12, 1997.
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)
Date: July 15, 1997
-16-
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