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 August 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 October 1, 1997, 26,588,000 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
August 31, 1997 and November 30, 1996 . . . . . . . . . 3
Consolidated Statement of Operations for the
Three Months Ended August 31, 1997 and 1996 . . . . . . 4
Consolidated Statement of Operations for the
Nine Months Ended August 31, 1997 and 1996. . . . . . . 5
Consolidated Statement of Cash Flows for the
Nine Months Ended August 31, 1997 and 1996. . . . . . . 6
Consolidated Statement of Changes in
Shareholders' Equity at August 31, 1997 . . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . . 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 10-14
PART II. Other Information
Item 6. Exhibits and reports on Form 8-K. . . . . . . . . . . .15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
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, 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
August 31, November 30,
1997 1996
------------ ------------
(Unaudited)
Assets
Cash and cash equivalents . . . . . . . . . .$ 2,537,000 $ 4,292,000
Receivables . . . . . . . . . . . . . . . . . 4,243,000 9,274,000
Inventories . . . . . . . . . . . . . . . . . 67,655,000 65,525,000
Commercial land . . . . . . . . . . . . . . . 7,412,000 7,512,000
Prepaid expenses and other assets . . . . . . 4,767,000 2,154,000
------------ ------------
Total assets. . . . . . . . . . . . . . . .$ 86,614,000 $ 88,757,000
============ ============
Liabilities and Shareholders' Equity
Revolving credit agreement. . . . . . . . . .$ 36,808,000 $ 39,500,000
Mortgages payable . . . . . . . . . . . . . . 4,112,000 4,445,000
Accounts payable. . . . . . . . . . . . . . . 3,050,000 4,811,000
Accrued expenses and other liabilities. . . . 11,964,000 11,915,000
------------ ------------
Total liabilities . . . . . . . . . . . . .$ 55,934,000 $ 60,671,000
============ ============
Commitments and contingencies
Shareholders' equity
Common stock. . . . . . . . . . . . . . . . . 266,000 265,000
Paid in capital . . . . . . . . . . . . . . . 25,565,000 23,441,000
Retained earnings . . . . . . . . . . . . . . 4,849,000 4,380,000
------------ ------------
Total shareholders' equity. . . . . . . . . 30,680,000 28,086,000
------------ ------------
Total liabilities and shareholders' equity.$ 86,614,000 $ 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 August 31,
(Unaudited)
1997 1996
------------ ------------
Revenues. . . . . . . . . . . . . . . . . . . .$ 28,036,000 $ 33,355,000
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 23,813,000 28,609,000
Selling, general and administrative . . . . . 4,153,000 3,677,000
Impairment of assets. . . . . . . . . . . . . 350,000 --
------------ ------------
28,316,000 32,286,000
------------ ------------
(Loss) income from operations . . . . . . . . . (280,000) 1,069,000
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 363,000 343,000
Other (income) expense. . . . . . . . . . . . (671,000) (150,000)
------------ ------------
Income before income taxes and
extraordinary gain. . . . . . . . . . . . . . 28,000 876,000
Provision in lieu of income taxes . . . . . . . 14,000 491,000
------------ ------------
Income before extraordinary gain. . . . . . . . 14,000 385,000
Extraordinary gain from extinguishment of debt,
net of $842,000 of income taxes . . . . . . . 1,263,000 --
------------ ------------
Net income. . . . . . . . . . . . . . . . . . .$ 1,277,000 $ 385,000
============ ============
Income per share
Income before extraordinary gain. . . . . . .$ -- $ .01
Extraordinary gain, net . . . . . . . . . . . .05 --
------------ ------------
Net income per share. . . . . . . . . . . . .$ .05 $ .01
============ ============
Weighted average number of shares outstanding . 26,579,000 26,519,000
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended August 31,
(Unaudited)
1997 1996
------------ ------------
Revenues. . . . . . . . . . . . . . . . . . . .$ 75,241,000 $ 81,486,000
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 65,684,000 71,211,000
Selling, general and administrative . . . . . 10,580,000 10,619,000
Impairment of assets. . . . . . . . . . . . . 350,000 --
------------ ------------
76,614,000 81,830,000
------------ ------------
Loss from operations. . . . . . . . . . . . . . (1,373,000) (344,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 1,086,000 975,000
Other (income) expense. . . . . . . . . . . . (871,000) (260,000)
------------ ------------
Loss before income taxes and
extraordinary gain. . . . . . . . . . . . . . (1,588,000) (1,059,000)
Benefit in lieu of income taxes . . . . . . . . (794,000) (501,000)
------------ ------------
Loss before extraordinary gain. . . . . . . . . (794,000) (558,000)
Extraordinary gain from extinguishment of debt,
net of $842,000 of income taxes . . . . . . . 1,263,000 --
------------ ------------
Net income (loss) . . . . . . . . . . . . . . .$ 469,000 $ (558,000)
============ ============
Income (loss) per share
Loss before extraordinary gain. . . . . . . .$ (.03) $ (.02)
Extraordinary gain, net . . . . . . . . . . . .05 --
------------ ------------
Net income (loss) per share . . . . . . . . .$ .02 $ (.02)
============ ============
Weighted average number of shares outstanding . 26,554,000 26,480,000
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended August 31,
(Unaudited)
1997 1996
------------ ------------
Cash Flows from Operating Activities
Net income (loss) . . . . . . . . . . . . . .$ 469,000 $ (558,000)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Benefit in lieu of income taxes . . . . . (794,000) (501,000)
Extraordinary gain from
extinguishment of debt, net . . . . . . (1,263,000) --
Refund of taxes . . . . . . . . . . . . . 1,871,000 --
Impairment of assets. . . . . . . . . . . 350,000 --
Issuance of stock under 401(k) Plan . . . 25,000 39,000
Depreciation and amortization . . . . . . 940,000 989,000
Amortization of debt financing fees . . . 313,000 133,000
Decrease in receivables . . . . . . . . . 5,031,000 531,000
(Increase) decrease in inventories. . . . (1,734,000) 4,020,000
(Increase) decrease in commercial land. . (108,000) 953,000
Decrease (increase) in prepaid
expenses and other assets . . . . . . . 98,000 (74,000)
Decrease in accounts payable, accrued
expenses and other liabilities. . . . . (3,215,000) (4,159,000)
------------ ------------
1,983,000 1,373,000
------------ ------------
Cash Flows from Investing Activities
Distribution from joint venture . . . . . . . -- 553,000
Increase in property and equipment. . . . . . (39,000) (37,000)
------------ ------------
(39,000) 516,000
------------ ------------
Cash Flows from Financing Activities
Retirement of Revolving Credit Agreement. . . (39,350,000) --
Repayments under Revolving Credit Agreement . -- (6,000,000)
Proceeds under Revolving Credit Agreement . . 2,500,000 4,000,000
Proceeds under New Facility . . . . . . . . . 43,975,000 --
Repayments under New Facility . . . . . . . . (6,904,000) --
Payment of debt financing fees. . . . . . . . (3,535,000) --
Repayments of mortgages payable . . . . . . . (385,000) (717,000)
------------ ------------
(3,699,000) (2,717,000)
------------ ------------
Net decrease in cash and cash equivalents . . . (1,755,000) (828,000)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 4,292,000 5,161,000
------------ ------------
Cash and cash equivalents at end of period. . .$ 2,537,000 $ 4,333,000
============ ============
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(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 income. . . . . . . . . -- -- 469,000 469,000
Provision in lieu of
income taxes. . . . . . . -- 19,000 -- 19,000
Tax Refund. . . . . . . . . -- 1,871,000 -- 1,871,000
Issuance of stock
warrants. . . . . . . . . -- 210,000 -- 210,000
Issuance of stock
under 401(k) Plan . . . . 1,000 24,000 -- 25,000
------- ----------- ---------- -----------
Balance,
August 31, 1997 . . . . $266,000 $25,565,000 $4,849,000 $30,680,000
======== =========== ========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
- ------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These interim financial statements should be read in conjunction
with the Company's annual report for the year ended November 30, 1996.
Operating results for the three and nine month periods ended August 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended November 30, 1997.
2. Inventories
- --------------
Inventories consist of the following (amounts in thousands):
August 31, November 30,
1997 1996
------------ ------------
Land and land development costs . . . . . . . .$ 29,896 $ 22,969
Homes, lots and improvements in production. . . 30,827 33,819
Land purchase options and costs of
projects in planning. . . . . . . . . . . . 6,932 8,737
------------ ------------
$ 67,655 $ 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 nine month periods ended August 31,
1997 and August 31, 1996 is as follows (amounts in thousands):
Three Nine
Months Ended Months Ended
August 31, August 31,
1997 1996 1997 1996
------ ------ ------ ------
Interest expense incurred . . . . . . . . . . $1,387 $1,426 $4,124 $4,131
Interest capitalized. . . . . . . . . . . . . 1,005 1,079 2,989 3,084
------ ------ ------ ------
Interest expense-net . . . . . . . . . . . . 382 347 1,135 1,047
Capitalized interest amortized in
cost of revenues . . . . . . . . . . . . . . 899 1,077 2,574 2,631
------ ------ ------ ------
Interest cost reflected in pre-tax results. . $1,281 $1,424 $3,709 $3,678
====== ====== ====== ======
The Company adopted Financial Accounting Standards Board Statement No. 121
("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," on December 1, 1996, which requires impairment
losses to be recorded on communities under development when events and
-8-
circumstances indicate that they may be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than their related
carrying amounts. As of August 31, 1997, inventory with a carrying amount of
approximately $2.0 million was written down by $350,000. The writedown is based
primarily upon management's decision to withdraw from a community in its
Northeast division due to local environmental conditions and its effects on
land values and resale activity that adversely impacted the expected return on
investment from this community.
3. Commercial Land
- ------------------
During the third quarter of 1997, a contract to sell certain acreage within a
parcel of land located in Hanover Township, Pennsylvania, controlled by a
partnership in which the Company has a 75% interest, was terminated. Management
is currently evaluating the property's best use and has commissioned an
appraisal to reevaluate the fair value of the property. The Company believes
that the amount reflected in the financial statements is realizable subject to
the results of the appraisal.
4. 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 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. 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.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
AUGUST 31, 1997 AND 1996
Revenues for the three and nine month periods ended August 31, 1997 were
$28.0 million and $75.2 million, respectively, compared to revenues of
$33.4 million and $81.5 million for the three and nine month periods ended
August 31, 1996, respectively. Deliveries of 124 and 325 homes resulted in
housing revenues of $28.0 million and $72.0 million, respectively, for the
three and nine month periods ended August 31, 1997. For the comparable periods
of 1996, the Company delivered 145 and 376 homes which generated $30.2 million
and $77.4 million, respectively, of housing revenues. Revenues for the nine
month period ended August 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 sales of land and commercial land in
the three and nine month periods of $3.1 million and $4.0 million,
respectively.
Housing revenues decreased by $2.2 million and $5.4 million for the three and
nine month periods ended August 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 of approximately fourteen percent
(14%) for the three and nine month periods, respectively. The decrease in the
Company's housing revenue and number of homes for both periods resulted
primarily from decreases in homes delivered by the Company's Northeast division
of twenty-nine percent (29%) and twenty-four percent (24%) for the three and
nine month periods, respectively. The division's deliveries for the quarter and
nine month periods were impacted by the timing of deliveries from its active
adult community, Renaissance, and the decision to withdraw from an existing
community. The division continues to seek new communities that focus on its
strategy to serve the move-up and active adult home buyer. The decreases from
the Northeast division were partially offset by increased housing revenues and
home deliveries from the Florida division reflecting a twenty-five percent
(25%) and fourteen percent (14%) increase, respectively for the nine month
period over the comparable period in 1996. Included in the 1996 revenues were
twenty-eight home deliveries from the Chicago division as compared to four in
1997. The Chicago division delivered its final home in the third quarter of
1997.
Average sales prices on homes delivered in 1997 increased to $226,000 and
$221,000 for the three and nine month periods, respectively, compared to
$208,000 and $206,000 for the same periods in 1996. The increase in average
sales prices for both periods partially offsets the decline in housing revenues
attributable to volume as previously discussed. Average selling prices in the
Company continue to be favorably impacted from the deliveries from its newer
communities which reflects the Company's strategy to target the second and
third time move-up and the active adult community buyer.
The Company's gross profit margin percentage on homes increased fifteen percent
(15%), excluding the charge for impaired assets of $350,000, to approximately
15% and 13% for the three and nine month periods ended August 31, 1997,
respectively, as compared to 13% and 12% for the same periods of the prior
year. The increase for both periods is primarily attributable to the Northeast
division which, during the quarter, realized a higher volume of deliveries from
its newer communities and less deliveries from its older and close out
communities which generally carry lower margin dollars. In addition, the
Florida division realized improvement in gross margin percentage and dollars
primarily through increased deliveries, favorably impacting the Company's
overall gross profit margin and as a percent of housing revenue. Included in
the Company's gross profit margin for 1996 is the profit from the sales of land
and commercial land during the third quarter of 1996 for $762,000.
-10-
During the three months ended August 31, 1997, the Company decided to withdraw
from a community in which it acquired land on a rolling option basis in the
Northeast division due to local environmental conditions and its effects on
land values and resale activity that impacted the expected return on the
investment in the community. The decision to not purchase additional lots under
option and withdraw from this community has resulted in the fair value of this
community to fall below its carrying inventory value and, in accordance with
FAS 121, the Company recorded an impairment loss on the related inventory
value.
Selling, general and administrative expenses increased by $476,000 to
$4.2 million for the three month period ended August 31, 1997 compared to
$3.7 million for comparable period of the prior year. The increase in selling,
general and administrative expenses for the three month period reflects the
Company's increased advertising and promotion efforts including the promotion
of its active adult community, Renaissance, and increased use of brokers due to
higher levels of competition in the Florida market. For the year to date
period, selling general and administrative expenses remained at $10.6 million
despite marketing increases in the third quarter for 1997, primarily due to
management's continued efforts to reduce fixed costs. Selling, general and
administrative expenses were 14.8% and 14.7% of housing revenues for the three
and nine month periods ended August 31, 1997, respectively, compared to 12.2%
and 13.7% for the same periods in the prior year. The increase in selling,
general and administrative expenses as a percentage of housing revenues for the
nine month periods is primarily due to lower delivery levels and related
housing revenues for 1997.
In the third quarter of 1997, the Company received a tax refund related to
prior periods of $2.4 million, of which $571,000 represented accrued interest
and was recorded as Other income (expense). The Company recorded the remaining
balance of $1.9 million as an increase to Paid in capital due to the refund
relating to events occurring prior to the Company's 1993 restructuring. During
the nine month period ended August 31, 1997, the Company received $300,000 in
payments on a note previously reserved; $200,000 in the second quarter and
$100,000 in the third quarter. These amounts were recorded as Other income
(expense) and compare to $150,000 and $260,000 for the three and nine months
ended August 31, 1996, respectively.
Gross interest cost remained consistent with the prior year at $1.4 million and
$4.1 million for the three and nine month periods ended August 31, 1997,
respectively. Gross interest cost remained consistent with the prior periods
despite the Company's reduction of the average debt outstanding during the
periods, primarily from higher interest rates and commitment fees incurred on
the Company's prior revolving facility during the first six months of 1997,
coupled with the impact of obtaining a new revolving credit facility in the
third quarter of 1997 (See Liquidity and Capital Resources) which, although it
reduced the lending rate to the Company, requires the amortization of debt
issuance costs of approximately $300,000 each quarter over the three year term
of the facility. Interest capitalized in the three and nine month periods ended
August 31, 1997 was $1.0 million and $3.0 million, compared to $1.1 million and
$3.1 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 income (loss) before extraordinary gain for the three and nine
month periods ended August 31, 1997 is a provision (benefit) in lieu of income
taxes of $14,000 and ($794,000), respectively, reflecting the Company's
approximate effective tax rate based on estimates of annual results for 1997.
Realization of the year to date benefit is dependent on generating sufficient
income in the fourth quarter of 1997. Although realization is not assured,
management believes the benefit will be realized.
In June 1997, the Company entered into a new, secured revolving credit facility
(the "New Facility") with BankBoston, N.A. Proceeds from the New Facility were
used to retire the prior revolving credit facility of $42.0 million which was
discounted and paid off for $39.4 million. Based on the accounting principles
-11-
in effect at the time of the extinguishment of debt, the Company recorded an
extraordinary gain of approximately $1.3 million, after deducting $842,000 of
income taxes. Included in the gain is the write off of deferred costs and out-
of-pocket costs of approximately $550,000.
At August 31, 1997, the backlog of homes under contract increased by over ten
percent (10%) based upon 231 homes having an aggregate dollar value of
$46.4 million compared to 208 homes in backlog having a $42.0 million aggregate
dollar value as of August 31, 1996. The increase in the number of homes in
backlog is primarily attributable to the increase in the number of homes in
backlog from the Company's Northeast division which, during the third quarter,
recorded greater net sales contracts and delivered fewer homes than during the
same period in 1996. Contributing significantly to the Company's backlog is the
Northeast division's active adult community, Renaissance. As of August 31,
1997, sales from this community represented seventy percent (70%) of the
division's homes in backlog and fifty-three percent (53%) of the dollar value
of such backlog. Deliveries from Renaissance began during the third quarter of
1997. The average sales price per home in backlog decreased marginally from
$202,000 at August 31, 1996 to $201,000 at August 31, 1997, attributable to a
higher proportion and quantity of Northeast division homes in backlog. Over the
past six months, the backlog in the Northeast division has been impacted by the
average sales price per home basis from its active adult community,
Renaissance, which comprises a more significant portion of backlog. The current
average sales price of the homes at Renaissance is approximately $190,000 with
base sales prices ranging from $140,000 to $230,000.
The Company recorded net sales contracts of $27.2 million (139 homes) and
$78.1 million (391 homes) for the three and nine month periods ended August 31,
1997, respectively, compared to $23.7 million (114 homes) and $83.3 million
(418 homes) for the corresponding periods of 1996. An improved third quarter of
net sales activity resulted in a twenty-two (22%) increase in the quantity of
sales contracts and a fifteen percent (15%) increase in sales dollars. As
anticipated and previously discussed, the Northeast division's sales activity
on a quantity and dollar basis was favorably impacted by the active adult
community, Renaissance, which recorded forty three (43) new sales contracts
during the third quarter of 1997. For the nine month period ended August 31,
1997, the Company had a decrease of six percent (6%) in the quantity of sales
contracts and sales dollars compared to 1996. The Company's increased sales in
the Florida and Northeast divisions in the third quarter partially offset the
overall decreases in net sales contracts previously reported for the six months
ended May 31, 1997.
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.
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. 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
-12-
(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
percent (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. In
addition, 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. The Lender must provide notice to the Company when it decides to
exercise the Warrant. In such event, Calton has the option to 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
Warrant was valued at $210,000 and will be amortized through interest expense
over the initial three-year term of the New Facility. The unamortized value of
the Warrant ($192,000) at August 31, 1997 is reflected as a reduction to the
New Facility's amount outstanding of $37.0 million on the Balance Sheet. 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 August 31, 1997, the Company's EBITDA was
$7.3 million. Approximately $4.0 million was available to be borrowed under the
New Facility based upon a prescribed borrowing base calculation as of August
31, 1997. As of August 31, 1997, $37.0 million was outstanding under the New
Facility in addition to $1.4 million of letters of credit.
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 foreseeable future.
-13-
Cash Flows from Operating Activities
Operating activities provided $2.0 million of cash for the nine month period
ended August 31, 1997 as compared to $1.4 million for the prior year. During
the third quarter of 1997, $4.4 million of cash was generated, including a
refund of $2.4 million related to a prior period tax issue. The Company
generated cash primarily from a decrease of its receivables from the timing of
home closings between the fourth quarter of 1996 and the first quarter of 1997,
coupled with a $1.1 million payment received from a note in the second quarter.
Cash generated from receivables and the tax refund were partially used to fund
additional operating activities that included the net increase in inventory of
$1.7 million consisting of $12.4 million in land acquisitions, offset by the
sale of land under option and the timing of the construction and delivery of
homes. In addition, the timing of home closings, coupled with the pay down of
the Company's general liability insurance, resulted in a $3.2 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 acquisitions 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.
Cash Flows from Investing Activities
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
During the nine month period ended August 31, 1997 the Company reduced its
outstanding debt by approximately $3.7 million primarily due to the reduction
on the amount outstanding under the New Facility. The Company retired its
Amended Facility in the third quarter at a $2.6 million discount and replaced
this facility with a New Facility from the Bank Boston, N.A. In obtaining the
New Facility, the Company paid approximately $3.5 million in debt issuance
costs which the Company concurrently financed with proceeds from the New
Facility. The Company generated approximately $4.4 million of cash from
operations including the $2.4 million tax refund previously disclosed during
the third quarter and that was utilized to reduce the Company's New Facility to
$37.0 million at August 31, 1997.
-14-
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
A) Exhibits
*(a) Senior Secured Credit Agreement dated as of June 12, 1997
among Calton Homes, Inc., Calton Homes of Florida, Inc.
and BankBoston, N.A.
*(b) Warrant to Purchase Common Stock of Calton, Inc. issued to
BankBoston, N.A. dated June 12, 1997.
*(c) Registration Rights Agreement dated as of June 12, 1997
between Calton, Inc. and BankBoston, N.A.
* Incorporated by reference to similarly-numbered exhibits
filed with the Company's report on Form 8-K dated June 12,
1997.
27. Financial Data Schedule as of August 31, 1997.
B) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Calton, Inc.
--------------------------------
(Registrant)
By: /s/ Bradley A. Little
-----------------------------
Bradley A. Little
Senior Vice President-Finance,
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: October 15, 1997
-15-
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