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, 1998
[ ] 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
As of September 30, 1998, 26,755,000 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
August 31, 1998 and November 30, 1997 . . . . . . . . . . .3
Consolidated Statement of Operations for the
Three Months Ended August 31, 1998 and 1997 . . . . . . . .4
Consolidated Statement of Operations for the
Nine Months Ended August 31, 1998 and 1997. . . . . . . . .5
Consolidated Statement of Cash Flows for the
Nine Months Ended August 31, 1998 and 1997. . . . . . . . .6
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended August 31, 1998. . . . . .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 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, uncertainty pertaining to the Year 2000
issue, 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 acquisitions and project development, adverse weather
conditions 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, Nov. 30,
1998 1997
---------- -----------
(Unaudited)
Assets
Cash and cash equivalents . . . . . . . . . . $ 2,496,000 $ 7,142,000
Receivables . . . . . . . . . . . . . . . . . 5,485,000 5,430,000
Inventories . . . . . . . . . . . . . . . . . 71,899,000 43,972,000
Commercial land . . . . . . . . . . . . . . . 252,000 7,120,000
Prepaid expenses and other assets . . . . . . 3,747,000 3,923,000
---------- -----------
Total assets. . . . . . . . . . . . . . . . $83,879,000 $67,587,000
=========== ===========
Liabilities and Shareholders' Equity
Revolving credit agreement. . . . . . . . . . $24,878,000 $17,325,000
Mortgages payable . . . . . . . . . . . . . . 2,649,000 3,234,000
Accounts payable. . . . . . . . . . . . . . . 8,688,000 3,630,000
Cash overdraft. . . . . . . . . . . . . . . . -- 2,981,000
Accrued expenses and other liabilities. . . . 13,753,000 7,567,000
---------- -----------
Total liabilities . . . . . . . . . . . . . 49,968,000 34,737,000
---------- -----------
Commitments and contingencies
Shareholders' equity
Common stock. . . . . . . . . . . . . . . . . 267,000 266,000
Paid in capital . . . . . . . . . . . . . . . 27,318,000 26,827,000
Retained earnings . . . . . . . . . . . . . . 6,326,000 5,757,000
---------- -----------
Total shareholders' equity. . . . . . . . . 33,911,000 32,850,000
---------- -----------
Total liabilities and shareholders' equity. $83,879,000 $67,587,000
=========== ===========
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)
1998 1997
----------- -----------
Revenues . . . . . . . . . . . . . . . . . . . $21,021,000 $28,036,000
----------- -----------
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 17,111,000 23,813,000
Selling, general and administrative . . . . . 2,560,000 4,153,000
Impairment of assets. . . . . . . . . . . . . -- 350,000
----------- -----------
19,671,000 28,316,000
----------- -----------
Income (loss) from operations. . . . . . . . . 1,350,000 (280,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 136,000 363,000
Other income. . . . . . . . . . . . . . . . . -- (671,000)
----------- -----------
Income before income taxes and
extraordinary gain. . . . . . . . . . . . . . 1,214,000 28,000
Provision in lieu of income taxes. . . . . . . 514,000 14,000
----------- -----------
Income before extraordinary gain . . . . . . . 700,000 14,000
Extraordinary gain from extinguishment of debt,
net of $842,000 of income taxes . . . . . . . -- 1,263,000
----------- -----------
Net income . . . . . . . . . . . . . . . . . . $ 700,000 $ 1,277,000
=========== ===========
Basic and diluted income per share
Income before extraordinary gain. . . . . . . $ .03 $ --
Extraordinary gain, net . . . . . . . . . . . -- .05
----------- -----------
Net income per share. . . . . . . . . . . . . $ .03 $ .05
=========== ===========
Basic weighted average shares outstanding . . 26,732,000 26,579,000
Diluted weighted average shares outstanding . 27,970,000 27,314,000
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)
1998 1997
----------- -----------
Revenues . . . . . . . . . . . . . . . . . . . $51,764,000 $75,241,000
----------- -----------
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 43,552,000 65,684,000
Selling, general and administrative . . . . . 6,557,000 10,580,000
Impairment of assets. . . . . . . . . . . . . -- 350,000
----------- -----------
50,109,000 76,614,000
----------- -----------
Income (loss) from operations. . . . . . . . . 1,655,000 (1,373,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 675,000 1,086,000
Other income. . . . . . . . . . . . . . . . . -- (871,000)
----------- -----------
Income (loss) before income taxes and
extraordinary gain. . . . . . . . . . . . . . 980,000 (1,588,000)
Provision (benefit) in lieu of income taxes. . 411,000 (794,000)
----------- -----------
Income (loss) before extraordinary gain. . . . 569,000 (794,000)
Extraordinary gain from extinguishment of debt,
net of $842,000 of income taxes . . . . . . . -- 1,263,000
----------- -----------
Net income . . . . . . . . . . . . . . . . . . $ 569,000 $ 469,000
=========== ===========
Basic and diluted income per share
Income (loss) before extraordinary gain . . $ .02 $ (.03)
Extraordinary gain, net . . . . . . . . . . . -- .05
----------- -----------
Net income per share. . . . . . . . . . . . . $ .02 $ .02
=========== ===========
Basic weighted average shares outstanding . . 26,689,000 26,554,000
Diluted weighted average shares outstanding . 27,780,000 26,661,000
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)
1998 1997
----------- -----------
Cash Flows from Operating Activities
Net income. . . . . . . . . . . . . . . . . . $ 569,000 $ 469,000
Adjustments to reconcile net income to
net cash used by operating activities
Amortization of deferred financing fees . 856,000 313,000
Depreciation and amortization . . . . . . 553,000 940,000
Provision (benefit) in lieu of
income taxes. . . . . . . . . . . . . . 411,000 (794,000)
Issuance of stock under 401(k) Plan
and other . . . . . . . . . . . . . . . 81,000 25,000
Extraordinary gain from extinguishment
of debt, net. . . . . . . . . . . . . . -- (1,263,000)
Refund of taxes, net. . . . . . . . . . . -- 1,871,000
Impairment of assets. . . . . . . . . . . -- 350,000
Decrease in receivables . . . . . . . . . 387,000 5,031,000
Increase in inventories . . . . . . . . . (21,641,000) (1,734,000)
Decrease (increase) in commercial land. . 4,664,000 (108,000)
(Increase) decrease in prepaid expenses
and other assets. . . . . . . . . . . . (566,000) 98,000
Increase (decrease) in accounts payable,
accrued expenses and other liabilities. 6,248,000 (3,215,000)
----------- -----------
(8,438,000) 1,983,000
----------- -----------
Cash Flows from Investing Activities
Increase in property and equipment. . . . . . (17,000) (39,000)
----------- -----------
Cash Flows from Financing Activities
Proceeds under new facility . . . . . . . . . 21,700,000 43,975,000
Repayments under new facility . . . . . . . . (14,200,000) (6,904,000)
Repayment of cash overdraft . . . . . . . . . (2,981,000) --
Repayments of mortgages payable . . . . . . . (585,000) (385,000)
Payment of debt financing fees. . . . . . . . (125,000) (3,535,000)
Retirement of revolving credit agreement. . . -- (39,350,000)
Proceeds under revolving credit agreement . . -- 2,500,000
----------- -----------
3,809,000 (3,699,000)
----------- -----------
Net decrease in cash and cash equivalents. . . (4,646,000) (1,755,000)
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 7,142,000 4,292,000
----------- -----------
Cash and cash equivalents at end of period . . $ 2,496,000 $ 2,537,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended August 31, 1998
(Unaudited)
Common Paid In Retained
Stock Capital Earnings Total
-------- ----------- ---------- -----------
Balance,
November 30, 1997. . . . $266,000 $26,827,000 $5,757,000 $32,850,000
Net income. . . . . . . . -- -- 569,000 569,000
Provision in lieu of
income taxes . . . . . . -- 411,000 -- 411,000
Issuance of stock
under 401(k) Plan. . . . 1,000 64,000 -- 65,000
Shares issued under
stock option plan. . . . -- 16,000 -- 16,000
-------- ----------- ---------- -----------
Balance,
August 31, 1998. . . . . $267,000 $27,318,000 $6,326,000 $33,911,000
======== =========== ========== ===========
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, 1997.
Operating results for the three and nine month periods ended August 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended November 30, 1998. Certain reclassifications have been made to prior year
financial statements in order to conform with the 1998 presentation.
2. Subsequent Events
- ---------------------
On September 2, 1998 and September 21, 1998, the Company announced a series
of planned transactions with the intent to change the Company's overall
business strategy and enhance shareholder value. The proposed transactions
include:
- - The sale of Calton Homes, Inc. ("Calton Homes"), the Company's wholly
owned homebuilding subsidiary, to Centex Real Estate Corporation
("Centex"), the homebuilding subsidiary of Centex Corporation (NYSE:CTX).
- - The estimated purchase price for the stock of Calton Homes, which is
subject to adjustment, will be approximately $50 million in cash. In
addition, Centex has agreed to repay certain indebtedness of Calton Homes
(currently estimated to be approximately $23.4 million) at closing.
- - Upon closing of the sale of Calton Homes to Centex, the Company intends to
initiate a significant stock repurchase program, where the Company will
seek to repurchase up to 10 million shares of Common Stock in open market
repurchases and privately-negotiated transactions during the next twelve
months.
- - Shifting the Company's business focus to provide various services to
participants in the homebuilding industry, including consulting services,
equity and debt financing and financial advisory services and seeking to
invest in, acquire or combine with one or more operating businesses
within or outside the homebuilding industry. As a part of the agreement
with Centex, there will be certain non-compete provisions applicable to
the Company within the New Jersey and Pennsylvania marketplaces.
- The Company will enter into a consulting agreement with Centex upon the
consummation of the sale of Calton Homes that will provide for payments
of $1.5 million per year for four years (subject to potential adjustments
in the fourth year).
The timing and number of shares purchased pursuant to the stock repurchase
program will depend upon a number of factors, including market price. If within
18 months from the date of the closing of the sale transaction, the Company has
not redeployed a substantial portion of the sale proceeds, or developed a plan
to redeploy a substantial portion of the sale proceeds within a reasonable time
frame, the Company will be liquidated and dissolved.
The sale of Calton Homes will represent the sale of substantially all of the
Company's business, thereby requiring shareholder approval by a majority of the
shares of the Company that vote on the sale transaction. Accordingly, on
September 21, 1998, the Company filed a preliminary proxy statement with the
Securities and Exchange Commission ("SEC") that provides the details of the
above planned transactions. The Company anticipates that, among other things,
upon the timely clearance by the SEC of the proxy statement, the definitive
proxy statement and proxy card will be distributed in early November 1998 in
anticipation of the special meeting of shareholders that is expected to take
place in early December. No assurance can be given that the SEC review process
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will conform to the anticipated time frame described above. Furthermore, no
assurance can be given that the above transactions will be completed. If
approved, the sale would be accounted for as a discontinued operation under the
provisions of Accounting Principle Board Opinion 30.
The Company's Common Stock is currently listed for trading on the American
Stock Exchange ("AMEX"). Based upon preliminary discussions with AMEX, the
Company does not believe that the sale of Calton Homes will result in the
delisting of the Common Stock; however, under AMEX's suspension and delisting
policies, AMEX will normally consider suspending dealings in, or removing from
listing securities of a company, if the company has sold or otherwise disposed
of its principal operating assets, has ceased to be an operating company or has
discontinued a substantial portion of its operations or business for any
reason. AMEX has indicated that the Common Stock may become subject to
delisting if the Company is not engaged in active business operations within a
reasonable period of time after the closing of the sale of Calton Homes. If the
Common Stock is delisted, it would trade on the OTC Bulletin Board or in the
"pink sheets" maintained by the National Quotation Bureau, Inc., which are
considered to be less efficient markets.
3. Inventories
- ---------------
Inventories consist of the following (amounts in thousands):
August 31, Nov. 30,
1998 1997
---------- -----------
Land and land development costs . . . . . . . $ 27,595 $ 21,936
Homes, lots and improvements in production. . 39,761 17,468
Land purchase options and costs of
projects in planning . . . . . . . . . . . 4,543 4,568
---------- -----------
$ 71,899 $ 43,972
========== ===========
Homes, lots and improvements in production represent 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 homes are delivered or land sales are closed.
Interest incurred, capitalized and expensed for the three and nine month
periods ended August 31, 1998 and 1997 is as follows (amounts in thousands):
Three Nine
Months Ended Months Ended
August 31, August 31,
1998 1997 1998 1997
------ ------ ------ ------
Interest expense incurred. . . . . . . . . . $ 913 $1,387 $2,752 $4,124
Interest capitalized . . . . . . . . . . . . 717 1,005 1,951 2,989
------ ------ ------ ------
Interest expense-net . . . . . . . . . . . . 196 382 801 1,135
Capitalized interest amortized in
Cost of revenues. . . . . . . . . . . . . . 685 899 1,532 2,574
------ ------ ------ ------
Interest cost reflected in pretax
income (loss) . . . . . . . . . . . . . . . $ 881 $1,281 $2,333 $3,709
====== ====== ====== ======
4. Commercial Land
- -------------------
For the nine month period ended August 31, 1998, the Company closed on the
sale of four parcels of commercial land for combined revenues of $5,800,000,
pretax profit of $200,000 and net cash proceeds of $4,940,000. The largest
remaining parcel of land closed in the third quarter of 1998, thereby
substantially completing the Company's strategy to sell its remaining
Commercial Land.
In the second quarter of 1998, the Company received approval for the rezoning
of 60 acres of land located in New Jersey from commercial to residential
development. The Company intends to develop 128 active adult homes at this site
and, therefore, reclassified approximately $1,800,000 from Commercial land to
Inventories.
The balance of $252,000 as of August 31, 1998 represents two parcels located
in Pennsylvania and Florida that are available for sale.
-9-
5. Commitments and Contingent Liabilities
- ------------------------------------------
(a) In July 1994, an action was filed against Calton Homes, the Township of
Plainsboro, New Jersey and its planning board, certain real estate brokers and
certain unnamed officers of Calton Homes 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. A report submitted to the court by the plaintiffs' expert indicates
that the values of only 18 of the plaintiffs' homes were affected by the
development of the public works site and the court granted Summary Judgment
dismissing the consumer fraud claims of the other Plaintiffs. Notwithstanding
the submission of the expert's report, the Company does not believe that the
values of any of the plaintiffs' homes have been impaired. 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.
(b) 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.
6. Shareholders' Equity
- ------------------------
In January 1998, the Company's Compensation Committee approved the grant to
various employees of the Company options to acquire 343,000 shares of Common
Stock under the Company's 1996 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
$.50 per share, the fair market value of the Common Stock on the date of the
grant, vests in equal installments over a period of five years and has a term
of ten years.
Effective December 1, 1997, the Company has adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings per Share," which requires the
disclosure of basic and diluted income per share. For the three months ended
August 31, 1998 and 1997, the basic and diluted income per share before
extraordinary gain was $.03 for both calculations in 1998 compared to $.00 for
both basic and diluted income per share in 1997. For the nine months ended
August 31, 1998 and 1997, the basic and diluted income (loss) per share before
extraordinary gain was $.02 for both calculations in 1998 and $(.03) for both
calculations in 1997. The basic and diluted income per share for the
extraordinary gain in 1997 was $.05 resulting in total basic and diluted income
per share of $.05 and $.02 for the three and nine month periods ended
August 31, 1997, respectively. No such extraordinary gain was recorded in 1998.
The basic and diluted income (loss) per share for the three and nine month
periods ended August 31, 1998 and 1997 is calculated based upon the weighted
average shares outstanding for calculating basic income per share and the
addition of common stock equivalents for calculating diluted income per share
as follows (shares in thousands):
Three Nine
Months Ended Months Ended
August 31, August 31,
1998 1997 1998 1997
------ ------ ------ ------
Basic weighted average common stock
outstanding . . . . . . . . . . . . . . . . 26,732 26,579 26,689 26,554
Common stock equivalents . . . . . . . . . . 1,238 735 1,091 107
------ ------ ------ ------
Diluted weighted average common stock
outstanding . . . . . . . . . . . . . . . . 27,970 27,314 27,780 26,661
====== ====== ====== ======
In April 1998, non-employee members of the Board of Directors were granted
options to acquire 30,000 shares of Common Stock under the Company's 1996
Equity Incentive Plan. The options have an exercise price of $.625, the fair
market value of the Common Stock on the date of the grant, have a term of ten
years and become exercisable after one year from the date of grant.
A total of 2,831,000 stock options have been granted and are outstanding
under the 1993 Non-Qualified Stock Option Plan and the 1996 Equity Incentive
Plan. In addition, a warrant to purchase 1,000,000 shares of Common Stock was
issued to BankBoston, N.A. as a component of refinancing the Company's credit
facility in June 1997.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PENDING SALE OF CALTON HOMES, INC.
- ----------------------------------
On September 2, 1998, the Company announced it had signed a definitive
agreement to sell Calton Homes, Inc., its wholly owned homebuilding subsidiary,
to Centex Real Estate Corporation ("Centex"). The purchase price for the stock
of Calton Homes, which is subject to adjustment, is estimated to be
approximately $50.0 million in cash. In addition, Centex has agreed to pay
certain existing indebtedness of Calton Homes at closing and will satisfy the
remaining outstanding obligations of Calton Homes, which indebtedness and
obligations are estimated to total $34.0 million. The pre-tax gain on the sale
is estimated to be between $10.0 and $12.0 million.
The proposed sale is subject to certain conditions, including the approval of
Calton's shareholders, and is expected to close by year end. The sale
transaction is part of the Company's overall strategy designed to enhance
shareholder value. If the sale transaction is consummated, the Company intends
to use the net proceeds to initiate a significant stock repurchase program of
up to 10 million shares of Common Stock in open market repurchases and
privately-negotiated transactions during the next twelve months. The remaining
sales proceeds will be reinvested within a reasonable time frame in conjunction
with the Company's refocused strategy. The Company will enter into a consulting
agreement with Centex upon the consummation of the sale transaction that will
provide for payments of $1.5 million per year for four years (subject to
potential adjustments in the fourth year). The Company anticipates ongoing
general and administrative expenses of approximately $100,000 per month
following the closing of the transaction (see Note 2).
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
AUGUST 31, 1998 AND 1997
- ---------------------------------------------------------
Revenues
- --------
Revenues for the three and nine month periods ended August 31, 1998 were
$21.0 million and $51.8 million, respectively, compared to $28.0 million and
$75.2 million for the comparable periods ended August 31, 1997. Deliveries of
72 and 165 homes resulted in housing revenues of $19.8 million and
$43.4 million, respectively, for the three and nine month periods ended
August 31, 1998. For the comparable periods of 1997, the Company delivered 124
and 325 homes that generated housing revenues of $28.0 million and
$72.0 million, respectively. Revenues for the three and nine month periods
ended August 31, 1998 include the sale of four parcels of commercial land and
land under option for $1.2 million and $8.4 million, respectively, that
resulted in an aggregate of $100,000 in pretax profit for the nine month
period. The sales of commercial land parcels in the third quarter of 1998
substantially complete the Company's strategy to sell off its remaining
commercial land. 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.
Housing revenues decreased by $8.2 million and $28.6 million for the three
and nine month periods ended August 31, 1998, respectively, when compared to
the same periods in 1997. The decrease in housing revenues for both periods is
primarily attributable to the sale of the Company's Orlando, Florida
homebuilding assets (the "Florida division") at the end of 1997. The Florida
division delivered 74 homes and 172 homes for the three and nine month periods
ended August 31, 1997, respectively, contributing housing revenues of
$11.9 million and $27.3 million during those periods. During the third quarter
of 1998, the Company's Northeast division, as anticipated, began deliveries
from its three conventional communities that opened for sales during the last
twelve months. The delivery of the backlog from these communities contributed
to an increase in housing revenue of $3.7 million for the three months ended
August 31, 1998 compared to the same period of 1997. Housing revenue for the
nine months ended August 31, 1998 was $43.4 million compared to $43.9 million
for the same period in the prior year. Compared to the third quarter of 1997,
the Northeast division increased the quantity of home deliveries by 23 homes
for a total of 72 home deliveries for the quarter, representing a forty-seven
percent (47%) increase. This increase is primarily attributable to the 1998
deliveries from the division's active adult community, Renaissance, from which
approximately sixty percent (60%) of the division's homes had been delivered
through the nine month period. While home deliveries increased during the third
quarter of fiscal 1998, the average revenue per home during this period of
$275,000 decreased from $325,000 in the prior year. The average revenue per
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home for the nine months ended August 31, 1998 and 1997 was $263,000 and
$294,000, respectively. The average revenue per home for Renaissance for the
nine months ended August 31, 1998 was approximately $201,000. The Company
anticipates delivery levels from its conventional communities to increase in
the fourth quarter of 1998, resulting in a change in the mix of homes delivered
and an increase in the average revenue per home.
Gross profit
- ------------
The Company continued to realize gross profit margins similar to the second
quarter of 1998, with a nineteen percent (19%) housing gross profit margin for
the third quarter of 1998 and an eighteen percent (18%) housing gross profit
margin for the nine month period ended August 31, 1998. Excluding the charge
for impaired assets of $350,000 in the third quarter of 1997 and the impact of
the Florida division, the housing gross profit margin realized for the three
and nine month periods ended August 31, 1997 was sixteen percent (16%) and
thirteen percent (13%), respectively. The improvements in the housing gross
profit margin during 1998 and 1997 are a result of deliveries from newer
communities, primarily Renaissance, which delivered sixty percent (60%) of the
division's homes through the first nine months of 1998. The Company has also
benefited from improved economic conditions in the New Jersey markets by
increasing the base selling prices on its homes and generating more revenues
from the sale of optional items while reducing sales incentives. This trend is
anticipated to continue into the fourth quarter of fiscal year 1998.
In the third quarter of 1997, the Company decided to withdraw from a
community in the Northeast division, in which it acquired land on a rolling
option basis, due to local environmental conditions and its effects on land
values and resale activity, that impacted the expected return on investment in
the community. The division recorded a $350,000 impairment loss on the
community.
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expenses were $2.6 million (12.2% of
revenues) and $6.6 million (12.7% of revenues) for the three and nine month
periods ended August 31, 1998, respectively, compared to $4.2 million (14.8% of
revenues) and $10.6 million (14.1% of revenues) for the same periods in 1997.
The Florida division incurred approximately $1.5 million and $3.7 million of
selling, general and administrative expenses for the three and nine month
periods ended August 31, 1997, respectively. Excluding the effect of the
Florida division, the Company's selling, general and administrative costs
decreased by $120,000 and $320,000 for the three and nine month periods ended
August 31, 1998, respectively, compared to the same periods in 1997. The
decrease is primarily attributable to lower broker commissions as a result of
deliveries from Renaissance that have had significantly less broker
participation than conventional communities. In addition, the Company has
continued to benefit from management's efforts to reduce fixed costs. The
Company anticipates selling, general and administrative costs in the fourth
quarter of 1998 to increase with revenue due to the incurrence of higher broker
participation anticipated from the delivery of the division's conventional
communities from the sales backlog.
Following the anticipated sale of Calton Homes, the Company anticipates
ongoing general and administrative expenses of approximately $100,000 per
month.
Other income (expense)
- ----------------------
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
that was recorded as Other income. The Company recorded the remaining balance
of $1.9 million as an increase in Paid in capital since the refund related 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.
Interest
- --------
Gross interest cost was approximately $900,000 and $2.8 million for the three
and nine month periods ended August 31, 1998, respectively, compared to
$1.4 million and $4.1 million in the corresponding periods of the prior year.
The decrease in gross interest cost resulted from lower debt levels sustained
since the end of fiscal 1997 as a result of the sale of the Company's Orlando,
Florida homebuilding assets and the corresponding reduction of the Company's
revolving credit facility (the "Facility") to $17.5 million at November 30,
-12-
1997. As of August 31, 1998, borrowings under the Facility were $25.0 million
compared to $37.0 million at August 31, 1997. The Company's weighted average
debt outstanding under its Facility for the three and nine month periods ended
August 31, 1998 amounted to $26.4 million and $23.5 million, respectively,
compared to $40.2 million and $40.8 million for the same periods ended
August 31, 1997. Partially offsetting the decrease in the weighted average debt
is the Company's higher effective interest rate of 14.3% for the nine month
period ended August 31, 1998 compared to 12.5% for the same period in 1997.
During the third quarter of 1998, the Company's lenders extended the
termination date of the Facility (see Liquidity and Capital Resources) by one
year to June 2001 and adjusted other operating and nonoperating covenants for a
commitment fee of $125,000. This transaction resulted in the extension of the
amortization of the remaining original issuance costs over the remaining life
of the Facility. As a result, the amortization expense, which includes the
amortization of the commitment fee paid in connection with the extension of the
Facility, was reduced to approximately $200,000 per quarter from $300,000,
thereby favorably impacting the effective interest rate of the Company for the
fourth quarter of fiscal 1998 and beyond. If the contemplated transaction
occurs with Centex, the Facility will be paid off by Centex.
Interest capitalized in the three and nine month periods ended August 31,
1998 was $717,000 and $2.0 million compared to $1.0 million and $3.0 million,
respectively, in the corresponding periods of the prior year. The decrease in
interest capitalization is primarily attributable to lower inventory levels
subject to interest capitalization primarily due to the sale of the Orlando,
Florida homebuilding assets.
Taxes
- -----
Included in the net income for the three and nine month periods ended
August 31, 1998 is a provision in lieu of income taxes of $514,000 and
$411,000, respectively, as compared to a provision of $14,000 and a benefit of
$794,000 for the three and nine month periods ended August 31, 1997,
respectively, excluding the provision in lieu of income taxes for the
extraordinary gain. The tax provision recorded by the Company is calculated
using the Company's effective rate which is based upon estimates of annual
results for 1998. The tax provision for the nine month period ended August 31,
1998 is recorded as an adjustment to Paid in capital due to no income taxes
currently due.
Extraordinary Gain
- ------------------
In June 1997, the Company entered into a new, secured revolving credit
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
in effect at the time of the extinguishment of debt, the Company recorded an
extraordinary gain of approximately $1.3 million, after deducting a $842,000
provision in lieu of income taxes. Included in the gain is the writeoff of
deferred costs and out-of-pocket costs of approximately $550,000.
Sales Activity and Backlog
- --------------------------
The Company recorded net sales contracts of $31.5 million (102 homes) and
$107.1 million (347 homes) for the three and nine month periods ended
August 31, 1998, respectively, compared to $15.3 million (63 homes) and
$45.0 million (182 homes) for the corresponding periods in 1997 for the
Northeast division. The Northeast division's net sales activity continued to
outpace the prior year for both three and nine month periods. The Northeast
division recorded increases for the three months ended August 31, 1998 in net
sales contracts of sixty-two percent (62%) and net sales dollars of one hundred
and six percent (106%) compared to the three months ended August 31, 1997. For
the nine months ended August 31, 1998, the division increased the number of net
sales contracts and net sales contract dollars by ninety-one percent (91%) and
one hundred and thirty-eight percent (138%), respectively, in comparison to the
nine months ended August 31, 1997.
The increase in net sales activity experienced by the Northeast division for
the three and nine month periods ended August 31, 1998 has been influenced by
the strong economic conditions in the division's markets and, generally, the
State of New Jersey, that has experienced low unemployment resulting from
positive job growth, high consumer confidence and mortgage rates that have in
recent days approached 30-year record lows. The Northeast division has also
benefited in 1998 from having nine active communities open for sales for the
entire fiscal year to date period. Eight active communities were open for sales
at August 31, 1997, including five conventional and three active adult
communities (which, collectively, comprise Renaissance); however, the division
-13-
had three conventional community wind downs during this period. In addition,
Renaissance did not commence net sales activity until the second quarter of
1997 and did not have completed model homes to support sales promotion
activities until the third quarter of 1997.
At August 31, 1998, the Company's Northeast division reached near record
levels of backlog dollars in its New Jersey market previously attained as of
August 31, 1994. These near record levels were achieved through the positive
net sales activity outpacing delivery levels for the three and nine month
periods ended August 31, 1998. At August 31, 1998, excluding the impact of the
Florida division, the backlog of homes under sales contract increased one
hundred and fifty-four percent (154%) in quantity and two-hundred and
thirty-seven percent (237%) in sales backlog dollars to 292 homes having an
aggregate dollar value of $94.8 million compared to 115 homes having an
aggregate dollar value of $28.1 million as of August 31, 1997. The average
sales prices of homes in backlog as of August 31, 1998 increased to $324,000
from $245,000 in the prior year (excluding the impact of the Florida division).
The increase is attributable to the higher proportion of conventional homes in
backlog as of August 31, 1998 compared to the August 31, 1997 backlog of homes
which had a higher proportion of Renaissance homes with an average base sales
price of $186,000. The Company anticipates that, consistent with net sales and
operating results to date, Renaissance will continue to be a significant
contributor to the Company's net sales and operating results for 1998. The
Company expects increased delivery levels in the fourth quarter from its three
newer conventional communities which began deliveries in the third quarter of
1998. The Company estimates that approximately one half of the Company's
backlog will be delivered during 1999.
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.
Year 2000 Conversion
- --------------------
The Company has completed an initial assessment of its Year 2000 status and
developed a plan to address the Company's exposure to the "Year 2000" issue.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer systems that
have time-sensitive software may recognize the date "00" as the year 1900
rather than 2000. This could result in a major system failure or
miscalculations. Pursuant to its plan, the Company is in the process of
upgrading all of its personal computers and testing the software programs
within its mainframe system. The Company estimates that the cost of compliance
of the Year 2000 conversion on all of its systems will be approximately
$125,000. Major suppliers will be contacted in order to assess their status as
to Year 2000 compliance. The Company's Year 2000 plan is expected to be
completed on or before May 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the past several years, the Company has financed operations primarily
from internally generated funds from home deliveries, land sales and sales of
commercial land and buildings. The Company utilizes the Facility that it
entered into in June 1997 to finance its operations as needed. During 1998, the
Company completed the refinancing of the Company's debt with the inclusion of
two additional substantial lenders, extended the expiration of the Facility to
the year 2001 and also improved its operating flexibility for a commitment fee
of $125,000. This transaction will extend the amortization of the remaining
original issuance costs over the remaining life of the Facility. As a result,
the amortization expense, which includes the amortization of the commitment fee
paid in connection with the extension of the Facility, was reduced to $200,000
per quarter from $300,000, thereby favorably impacting the effective interest
rate of the Company for the fourth quarter of 1998 and beyond. If the sale of
Calton Homes to Centex is completed, borrowings under the Facility will be paid
off at the date of closing by Centex.
For the last twelve months and the nine month period ended August 31, 1998,
the Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") was $9.2 million and $3.9 million, respectively. As of August 31,
1998, the Company's unused commitment under the Facility was approximately
$19.0 million, of which $13.3 million was available for borrowing, based upon a
prescribed borrowing base calculation. As of August 31, 1998, $25.0 million was
-14-
outstanding under the Facility in addition to $1.0 million of letters of credit
as compared to $37.0 million under the Company's prior revolving credit
agreement at August 31, 1997. The Company's average debt outstanding under its
Facility during the three and nine month periods ended August 31, 1998 was
$26.4 million and $23.5 million, respectively, compared to $40.2 million and
$40.8 million for the same periods ended August 31, 1997. The Company
anticipates the average debt outstanding in fiscal 1998 to continue to be less
than the comparable periods in 1997 due to the sale of the Florida assets and
as part of its strategy to finance a greater proportion of its inventories with
its equity, thereby, maintaining an improved financial statement debt-to-equity
ratio over the prior years.
The Company believes that funds generated by its operating activities, income
tax payment reductions derived from NOL utilization, financing land
acquisitions through rolling options and seller mortgages when available, and
borrowing availability under the Facility will provide sufficient capital to
support the Company's operations pending the completion of the sale of Calton
Homes to Centex.
Cash Flows from Operating Activities
- ------------------------------------
Operating activities resulted in the use of $8.4 million of cash during the
nine month period ended August 31, 1998 compared to $2.0 million of cash
generated in the comparable period of the prior year. The utilization of cash
by operations is primarily attributable to the increase in inventories of
approximately $27.9 million from the beginning of fiscal 1998. The increase in
inventories is primarily due to the acquisition of new land and options of
$11.1 million, coupled with land improvement costs of $15.5 million and
corresponding direct construction increases incurred to meet the anticipated
delivery of homes in backlog. Offsetting the net increase in inventories is the
delivery of homes for the nine month period ended August 31, 1998. The sale of
three parcels of commercial land and land under option generated approximately
$5.7 million of cash proceeds during the nine month period ended August 31,
1998.
The funding of the cash overdraft of $3.0 million, classified as a financing
activity, took place in the first quarter of 1998. The impact of the cash
overdraft on the change in accounts payable, accrued expenses and other
liabilities contributed to the $6.2 million increase to cash provided by
operations. The build-up of inventories in the third quarter of 1998 resulted
in a corresponding increase in trade accounts payable.
Cash paid for income taxes during the nine months ended August 31, 1998 and
1997 was $285,000 and $30,000, respectively.
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.
Cash Flows from Financing Activities
- ------------------------------------
The Company used approximately $7.5 million of cash primarily from the
Facility to finance the net acquisitions of new land and other related
operating activities during the nine month period ended August 31, 1998. 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
of the amount outstanding under the Facility. The Company retired its prior
credit facility in the third quarter of 1997 at a $2.6 million discount and
replaced it with the Facility from BankBoston, N.A. In obtaining the Facility,
the Company paid approximately $3.5 million in debt issuance costs which the
Company concurrently financed with proceeds from the Facility.
-15-
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and reports on Form 8-K.
A) Exhibits
27. Financial Data Schedule as of August 31, 1998.
B) Reports on Form 8-K.
On September 23, 1998, the Company filed a report on Form 8-K to
report that it signed a definitive agreement to sell Calton Homes,
its wholly owned homebuilding subsidiary, to Centex Real Estate
Corporation, the homebuilding subsidiary of Centex Corporation.
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 13, 1998
-16-
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