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, 1999
[ ] 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)
125 HALF MILE ROAD
RED BANK, NEW JERSEY 07701-6749
(Addresses of principal executive offices) Zip Code
Registrant's telephone number,
Including area code: (732) 212-1280
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, 1999, 21,800,000 shares of Common Stock were outstanding.
<PAGE>
CALTON, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at
August 31, 1999 and November 30, 1998.................. 3
Consolidated Statements of Operations for the
Three Months Ended August 31, 1999 and 1998............ 4
Consolidated Statements of Operations for the
Nine Months Ended August 31, 1999 and 1998............. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended August 31, 1999 and 1998............. 6
Consolidated Statement of Changes in Shareholders'
Equity and Comprehensive Income for the
Nine Months Ended August 31, 1999...................... 7
Notes to Consolidated Financial Statements............. 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12-14
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K....................... 14
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 the indemnification provisions in connection with the
Company's sale of Calton Homes, Inc., national and local economic conditions and
the effect of governmental regulation on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
- --------------------------------------------------------------------------------
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
------------- ------------
(unaudited)
<S> ....................................................... <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................... $ 30,516,000 $ 85,000
Receivables ......................................... 2,079,000 --
Prepaid expenses and other assets ................... 322,000 1,041,000
------------ ------------
Total current assets ........................... 32,917,000 1,126,000
Holdback receivable .................................... 4,441,000 --
Goodwill, net .......................................... 194,000 --
Stock warrant .......................................... -- 105,000
Securities available for sale .......................... 2,889,000 --
Net assets of discontinued operations .................. -- 38,851,000
------------ ------------
Total assets ........................................ $ 40,441,000 $ 40,082,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 1,203,000 $ 1,861,000
Net liabilities of discontinued operations ............. 764,000 --
------------ ------------
Total liabilities ...................................... 1,967,000 1,861,000
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock ........................................... 282,000 267,000
Paid in capital ........................................ 32,008,000 27,957,000
Retained earnings ...................................... 14,901,000 10,112,000
Less cost of shares held in treasury ................... (8,210,000) (115,000)
Accumulated other comprehensive loss:
Unrealized loss in securities available for sale .... (507,000) --
------------ ------------
Total shareholders' equity .......................... 38,474,000 38,221,000
------------ ------------
Total liabilities and shareholders' equity .......... $ 40,441,000 $ 40,082,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues ............................................ $ 867,000 $ --
------------ ------------
Costs and expenses
Cost of revenues ................................. 43,000 --
Selling, general and administrative .............. 527,000 485,000
------------ ------------
570,000 485,000
------------ ------------
Income (loss) from operations ....................... 297,000 (485,000)
Interest expense, net ............................... -- 124,000
------------ ------------
Income (loss) before income taxes ................... 297,000 (609,000)
Provision (benefit) for income taxes ................ 119,000 (257,000)
------------ ------------
Income (loss) from continuing operations ............ 178,000 (352,000)
Income (loss) from discontinued operations, net of a
provision (benefit) for income taxes of ($63,000)
in 1999 and $771,000 in 1998 ..................... (100,000) 1,052,000
------------ ------------
Net income .......................................... $ 78,000 $ 700,000
============ ============
Earnings per share
Basic:
Income (loss) from continuing operations ...... $ .01 $ (.01)
Income (loss) from discontinued operations, net (.01) .04
------------ ------------
Net income .................................... $ -- $ .03
============ ============
Diluted:
Income (loss) from continuing operations ...... $ .01 $ (.01)
Income (loss) from discontinued operations, net (.01) .04
------------ ------------
Net income .................................... $ -- $ .03
============ ============
Weighted average number of shares outstanding
Basic ............................................ 21,795,000 26,732,000
============ ============
Diluted .......................................... 22,711,000 26,732,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues ................................................................ $ 2,269,000 $ --
------------ ------------
Costs and expenses
Cost of revenues ..................................................... 43,000 --
Selling, general and administrative .................................. 1,190,000 1,450,000
------------ ------------
1,233,000 1,450,000
------------ ------------
Income (loss) from operations ........................................... 1,036,000 (1,450,000)
Interest expense, net ................................................... -- 166,000
------------ ------------
Income (loss) before income taxes ....................................... 1,036,000 (1,616,000)
Provision (benefit) for income taxes .................................... 414,000 (712,000)
------------ ------------
Income (loss) from continuing operations ................................ 622,000 (904,000)
Income from the sale of Calton Homes, Inc.,
net of a provision in lieu of taxes $3,037,000 ....................... 4,554,000 --
Income (loss) from discontinued operations, net of a
provision (benefit) for income taxes of ($255,000)
in 1999 and $1,123,000 in 1998 ....................................... (387,000) 1,473,000
------------ ------------
Net income .............................................................. $ 4,789,000 $ 569,000
============ ============
Earnings per share
Basic:
Income (loss) from continuing operations .......................... $ .03 $ (.03)
Income from the sale of Calton Homes, Inc., net ................... .20 --
Income (loss) from discontinued operations, net ................... (.02) .05
------------ ------------
Net income......................................................... $ .21 $ .02
============ ============
Diluted:
Income (loss) from continuing operations .......................... $ .03 $ (.03)
Income from the sale of Calton Homes, Inc., net ................... .19 --
Income (loss) from discontinued operations, net ................... (.02) .05
------------ ------------
Net income......................................................... $ .20 $ .02
============ ============
Weighted average number of shares outstanding
Basic ................................................................ 23,126,000 26,689,000
============ ============
Diluted .............................................................. 24,315,000 26,689,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating Activities
Net income ................................................... $ 4,789,000 $ 569,000
Adjustments to reconcile net income to net cash
used by operating activities
Income (loss) from discontinued operations ................ 387,000 (1,473,000)
Income from sale of Calton Homes, Inc. .................... (4,554,000) --
Provision (benefit) for income taxes ...................... 414,000 (712,000)
Decrease in holdback receivable ........................... 104,000 --
Change in net assets/liabilities of discontinued operations (554,000) 2,258,000
Depreciation and amortization ............................. -- 71,000
Issuance of stock under 401(k) Plan and other ............. -- 81,000
Decrease in accounts payable, accrued expenses and
other liabilities ..................................... (658,000) (529,000)
Decrease (increase) in prepaid expenses and other assets .. 859,000 (199,000)
------------ ------------
787,000 66,000
------------ ------------
Investing Activities
Net proceeds from sale of Calton Homes, Inc. .............. 41,048,000 --
Purchase of securities available for sale ................. (3,396,000) --
Acquisition of business .................................. (250,000) --
------------ ------------
37,402,000 --
------------ ------------
Financing Activities
Stock repurchase .......................................... (8,095,000) --
Stock options exercised ................................... 337,000 --
------------ ------------
(7,758,000) --
------------ ------------
Net increase in cash and cash equivalents .................... 30,431,000 66,000
Cash and cash equivalents at beginning of period ............. 85,000 17,000
------------ ------------
Cash and cash equivalents at end of period ................... $ 30,516,000 $ 83,000
============ ============
Noncash transactions:
Acquisition of assets ..................................... $ 54,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED AUGUST 31, 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumu-
lated
Total other
Share- Compre- Compre-
holders Common Paid In Retained Treasury hensive hensive
Equity Stock Capital Earnings Stock Loss Earnings
--------- -------- --------- --------- ---------- ------- =======
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
November 30, 1998.......... $ 38,221 $ 267 $ 27,957 $ 10,112 $ (115) $ -- $ --
Net income................. 4,789 -- -- 4,789 -- -- 4,789
Issuance of stock
under stock option plans... 345 8 337 -- -- -- --
Issuance of stock
under warrant exercise..... -- 7 (7) -- -- -- --
Acceleration of stock
option vesting............. 525 -- 525 -- -- -- --
Provision in lieu of
income taxes............... 3,196 -- 3,196 -- -- -- --
Less: purchase of
treasury stock............. (8,095) -- -- -- (8,095) -- --
Comprehensive Loss:
Unrealized loss in
securities available
for sale................ (507) -- -- -- -- (507) (507)
-------
Comprehensive earnings..... -- -- -- -- -- -- $ 4,282
--------- -------- --------- --------- ---------- ------- =======
Balance, August 31, 1999... $ 38,474 $ 282 $ 32,008 $ 14,901 $ (8,210) $ (507)
========= ======== ========= ========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
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, 1998. Operating results for the three
and nine months ended August 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended November 30, 1999.
On December 31, 1998, the Company completed the sale of Calton Homes,
Inc. ("Calton Homes"), its primary operating subsidiary, to Centex Real
Estate Corporation ("Centex" or the "Purchaser"). As a result of the sale of
Calton Homes and the sale of the Florida homebuilding assets that occurred
at the end of fiscal 1997, the financial statement presentation treats the
Company's homebuilding business and results as discontinued operations in
accordance with APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business."
Certain reclassifications have been made to prior years' financial
statements in order to conform with the 1999 presentation. All significant
intercompany accounts and transactions have been eliminated.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" requires the presentation of basic and diluted per share amounts,
effective for financial statements issued for periods ending after December
15, 1997. As of August 31, 1999, a total of 1,942,000 stock options have
been granted and are outstanding under the Company's stock option plans. In
addition, a warrant to purchase 1,000,000 shares of Common Stock (the
"Warrant") was also outstanding until June 1999 when the holder of the
Warrant, using the cashless exercise method provided for in the Warrant,
exercised the Warrant and was issued 681,461 shares that were purchased by
the Company (see note 6) for $750,000. As a result, the Warrant was
canceled.
2. DISCONTINUED OPERATIONS
On December 31,1998, the Company completed the sale of Calton Homes. The
shareholders of Calton, Inc. approved the sale of the stock of Calton Homes
pursuant to a stock purchase agreement (the "Stock Purchase Agreement") on
December 30, 1998. The purchase price of the sale of Calton Homes was
$48,100,000, plus certain post closing adjustments which have been resolved.
The Company recorded a pretax gain of $7,591,000 on the sale of Calton Homes
including the post closing adjustments. As part of the post closing
agreement, the Company refunded to the Purchaser $700,000 in September 1999,
paid out of the general indemnification funds that were deposited in escrow
upon closing of the sale, as a result of an indemnification claim made
pursuant to the Stock Purchase Agreement. This amount has been reflected in
the pretax gain from the sale of Calton Homes for financial reporting
purposes. Future decreases to the escrows held for indemnifications, if any,
will be recorded as an adjustment to the Income from the sale of Calton
Homes. No tax liability is expected to result from the sale. However, a
provision in lieu of taxes was recorded in the amount of $3,037,000 related
to the transaction.
As a result of the sale of Calton Homes and the sale of the Florida
homebuilding assets that occurred at the end of fiscal 1997, the financial
statements for the current and prior periods have been restated to reflect
the Company's homebuilding and real estate development business as
discontinued operations, including the operations of other subsidiaries
located in Orlando, Florida; Chicago, Illinois; Pennsylvania and California,
where the Company had similar operations and commercial land held for sale.
-8-
<PAGE>
NET ASSETS (LIABILITIES) OF DISCONTINUED OPERATIONS ARE AS FOLLOWS
(AMOUNTS IN THOUSANDS):
August 31, November 30,
1999 1998
---------- -----------
(unaudited)
Assets
Cash and cash equivalents .......... $ -- $ 11,910
Receivables and other assets ....... 174 9,385
Inventories ........................ -- 61,449
Commercial land .................... 252 252
Liabilities
Revolving credit agreement ......... -- (21,000)
Mortgages payable .................. -- (1,262)
Accounts payable and accrued expenses (1,190) (21,883)
-------- --------
Net assets/(liabilities) ........... $ (764) $ 38,851
======== ========
RESULTS OF OPERATIONS FROM DISCONTINUED OPERATIONS ARE AS FOLLOWS
(AMOUNTS IN THOUSANDS):
Nine Months Ended
August 31,
--------------------
1999 1998
-------- --------
Revenues ..................................... $ 6,513 $ 51,764
-------- --------
Cost of revenue ........................... 5,710 43,552
Selling, general and administrative ....... 1,445 5,107
-------- --------
7,155 48,659
-------- --------
Income (loss) from operations ................ (642) 3,105
Interest expense, net ........................ -- 509
-------- --------
Income (loss) before income taxes ............ (642) 2,596
Provision (benefit) for income taxes ......... (255) 1,123
-------- --------
Net income (loss) from discontinued operations $ (387) $ 1,473
======== ========
3. COMMITMENTS AND CONTINGENT LIABILITIES
(a) As part of the sale of Calton Homes on December 31, 1998, the
Company entered into a consulting agreement with the Purchaser that requires
the Purchaser to make payments of $1,300,000 per year over a three-year
period to the Company.
(b) The Stock Purchase Agreement pursuant to which the Company sold
Calton Homes on December 31, 1998 requires the Company to indemnify the
Purchaser for, among other things, breaches of the agreement and certain
liabilities that arise out of events occurring prior to the closing of the
sale, including the cost of warranty work on homes delivered if such costs
exceed $600,000. On December 31, 1998, as a condition to the sale of Calton
Homes,
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<PAGE>
the Company entered into a holdback escrow agreement with the Purchaser
pursuant to which $5,159,000 of the closing proceeds were deposited into
escrow. Of this amount $3,000,000 (the "General Indemnification Funds") was
deposited to provide security for the Company's indemnity obligations and
$2,159,000 (the "Specific Indemnification Funds") was deposited to fund
costs associated with certain specified litigation involving Calton Homes
Subject to claims for indemnification, one-half of the General
Indemnification Funds will be disbursed to the Company on December 31, 1999.
The remaining General Indemnification Funds will be disbursed to the
Company, subject to claims for indemnification, on December 31, 2000. The
Specific Indemnification Funds will be disbursed, to the extent not
otherwise utilized in the resolution of litigation, on a case by case basis
as the litigation is resolved. If all of the specified litigation is not
resolved by December 31, 2000, a portion of the General Indemnification
Funds will not be disbursed to the Company until the resolution of the
litigation. The holdback funds are earning interest for the Company at a
market rate, approximately 4.8%, however, the earnings are also subject to
the indemnity obligations. The Company may, under certain circumstances, be
required to deposit additional funds in the holdback if all of the specified
litigation is not resolved by December 31, 2000. In addition, the Company's
indemnity obligations are not limited to the amounts deposited in escrow. In
the event that the Company elects to liquidate and dissolve prior to
December 31, 2003, it will be required to organize a liquidating trust to
secure its obligations to the Purchaser. The liquidating trust will be
funded with the Specific Indemnification Funds plus $4,000,000 if created
before December 31, 1999, $3,000,000 if created between December 31, 1999
and December 31, 2000 and $2,000,000 if created after December 31, 2000. If
the liquidation occurs prior to December 31, 2000, the Company may be
required to deposit additional amounts in the liquidating trust if the
specified litigation is not resolved by such date. Any General
Indemnification Funds remaining in the holdback escrow fund will be applied
as a credit against amounts required to be deposited in the liquidating
trust.
Based upon an agreement with the Purchaser of Calton Homes, the Company
paid in September, 1999 $700,000 of the General Indemnification Funds to the
Purchaser of Calton Homes pursuant to a claim for indemnification made
pursuant to the Stock Purchase Agreement. This amount will reduce the
distribution required to be made to the Company from the General
Indemnification Funds on December 31, 1999.
(c) In July, 1999 the Company acquired iAW, Inc., an Internet business
solutions provider. The purchase price for the acquisition was $250,000. The
acquired business will be operated though a wholly owned subsidiary which
has changed its name to eCalton.com, Inc. ("eCalton"). The Company has
agreed to contribute up to $2,000,000 of debt/equity, at such time and
incremental amounts as it reasonably determines to provide the funds
necessary to implement the eCalton.com, Inc. business plan.
(d) The Company had a qualified contributory retirement plan (401(k)
Plan) which covered all eligible full-time employees with a minimum of one
year of service. The Company terminated the 401 (k) plan effective December
31, 1998.
4. ACQUISITION OF BUSINESS
In July, 1999 the Company acquired iAW, Inc., an Internet business
solution provider, that assists companies in defining an effective Internet
business strategy and implementing the components of the strategy, including
effective website design and E-Commerce applications. The purchase price for
the acquisition, which was structured as an asset purchase, was $250,000.
The Company has accounted for the transaction under the purchase method, and
has recorded Goodwill in the amount of $198,000 which will be amortized over
fifteen years. Kenneth D. Hill, who is a Calton director, is the Chief
Executive Officer of eCalton and was a principal shareholder of the acquired
company. Mr. Hill, along with two other officers of iAW, have entered into
employment agreements with the Company.
The acquired business, an early stage development company, is being
operated through a wholly owned subsidiary of Calton, which has changed its
name to eCalton.com, Inc.
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<PAGE>
5. SEGMENT REPORTING
Through the acquisition of iAW, Inc., an Internet business solutions
provider, in July, 1999, the Company has entered into a new business and
related industry. The Company does not have any foreign operations. The
accounting policies of the Company are the same for the new business segment
as those described in the summary of significant accounting policies
disclosed in the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1998, except for the revenue recognition policy of the
segment where the percentage of completion method is employed. The following
schedule discloses and illustrates eCalton in conjunction with the
consolidated Company for the nine months ended August 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
Total Segment Corporate (a) Total Company
------------- ------------- -------------
<S> <C> <C> <C>
Total revenues (a): $ 38 $ 2,231 $ 2,269
Total cost of revenue (b): $ 43 $ - $ 43
Total selling, general
administrative expenses: $ 133 $ 1,057 $ 1,190
Income (loss) from operations: $ (138) $ 1,174 $ 1,036
Provision (benefit) for income
taxes: $ (55) $ 469 $ 414
Income (loss) from continuing
operations: $ (83) $ 705 $ 622
Total assets $ 384 $ 40,057 $ 40,441
</TABLE>
----------
(a) Total revenues for the segment represent two months revenues since
acquisition on July 1, 1999.
(b) Total cost of revenues represents production costs (including
allocated salaries, computer hardware, computer software and video
conferencing costs).
6. SHAREHOLDERS' EQUITY
In 1998, the Company began a stock repurchase program pursuant to which
it is seeking to repurchase up to 10,000,000 shares of Common Stock in open
market repurchases and privately-negotiated transactions by the end of
fiscal 1999. As of August 31, 1999, the Company had purchased 6,489,000
shares (held in Treasury) for an aggregate purchase price of $8,210,000.
In April 1999, options to acquire 50,000 shares of Common Stock were
granted to the non-employee members of the Company's Board of Directors
pursuant to the Company's 1996 Equity Incentive Plan. These options have an
exercised price of $1.09, the fair market value of the Common Stock on the
date of grant, vest in one year, and have a term of ten years.
In June, 1999, the holder of a warrant (the "Warrant") to purchase
1,000,000 shares of Calton Common Stock, exercised its right under the
Warrant using the cashless exercise method. As a result, the holder was
issued 681,461
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<PAGE>
shares which the Company repurchased for $750,000. As a result, the Warrant
was canceled. The 681,461 shares are held as Treasury stock.
In July, 1999, the Company entered into employment agreements with three
officers of eCalton pursuant to which each have been granted options to
acquire 600,000 shares of Calton Common stock, or an aggregate of 1.8
million shares. The non-qualified stock options granted have terms similar
to the 1996 Equity Incentive Plan, vest in three annual equal installments
beginning July 19, 2000, are subject to certain performance criteria, and
have a term of ten years. The exercise price is $1.63 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SALE OF CALTON HOMES, INC.
On December 31, 1998, the Company completed the sale of Calton Homes,
Inc. ("Calton Homes"), its primary operating homebuilding subsidiary, to Centex
Real Estate Corporation ("Centex" or the "Purchaser"). The shareholders of
Calton, Inc. approved the sale of the stock of Calton Homes pursuant to a stock
purchase agreement (the "Stock Purchase Agreement") on December 30, 1998. The
purchase price for the stock of Calton Homes was $48.1 million, plus certain
post closing adjustments which have been resolved pursuant to an agreement with
the Purchaser. The gain is subject to a $5.2 million holdback (see Commitments
and Contingencies in the footnotes to the Company's financial statements). A
pretax gain of $7.6 million was recorded on the sale after giving affect to the
post closing adjustments and a $700,000 reduction to the gain, recorded as a
result of the resolution of an indemnification claim made by the Purchaser, and
which was paid out of the general indemnification escrow fund. Future decreases
to the escrows held for indemnifications, if any, will be recorded as an
adjustment to the Income from the sale of Calton Homes. No tax liability is
expected to result from the sale. However, a provision in lieu of taxes was
recorded for financial reporting purposes in the amount of $3.0 million related
to income from the sale. As a result, the net gain recorded was $4.6 million.
Cash proceeds upon closing were approximately $41.1 million, net of the $5.2
million holdback and other closing adjustments. Calton has entered into an
agreement to provide consulting services to Centex that requires payments to the
Company of $1.3 million per year over a three-year period commencing January 1,
1999.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31, 1999
AND 1998
Revenues for the three and nine months ended August 31, 1999 were
$867,000 and $2.3 million, respectively. Of these amounts, $325,000 and $867,000
respectively, were attributable to revenues earned pursuant to the consulting
agreement with Centex that provides for quarterly payments of $325,000. In
addition, revenues were comprised of interest income derived from funds
generated by the sale of Calton Homes, Inc. in the amounts of $505,000 and $1.4
million for the three and nine months ended August 31, 1999.
General and administrative costs were $527,000 and $1.2 million for the
three and nine months ended August 31, 1999 as compared to $485,000 and $1.5
million for the comparable periods of the prior year. The reduction during the
nine months ended August 31, 1999 is attributable to significant reductions in
Corporate fixed costs related to the sale of Calton Homes, including personnel
reductions, leasing costs, and other overhead items. However, general and
administrative costs increased during the three months ended August 31, 1999 as
a result of the operations of eCalton, and these expenses are anticipated to
continue to be higher than prior quarters.
Net income from continuing operations was $178,000 and $622,000 for the
three and nine months ended August 31, 1999 as compared to net losses of
$352,000 and $904,000 in 1998. The increase is primarily attributable to the
revenues and the reductions in fixed costs identified above. The operations of
eCalton resulted in a net loss of $83,000 due to the start up nature of this
developing business activity.
Net losses from discontinued operations were $100,000 and $387,000 for
the three and nine months ended August 31, 1999, as compared to net income of
$1.1 million and $1.5 million during the comparable periods of the prior year.
The losses for the current periods are attributable to the resolution of certain
litigation matters which exceeded management's estimates at November 30, 1998.
The Company is required to indemnify Centex with respect to certain other
litigation
-12-
<PAGE>
that remained unresolved at August 31, 1999. Although the Company
estimates it has adequately reserved for these matters, there is no assurance
that the ultimate resolution of each matter will not result in additional
charges to discontinued operations.
Pre-tax income from the sale of Calton Homes was $7.6 million, and after
recording a provision in lieu of taxes, net income was $4.6 million. The Company
finalized the post closing adjustments with the Purchaser that were previously
reflected in the second quarter results.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1998, as a part of the sale of Calton Homes, the
outstanding balance of the Company's revolving credit facility with BankBoston
in the amount of $19.5 million was repaid by the Purchaser.
The sale of Calton Homes liquidated a substantial part of the Company's
assets and liabilities and generated approximately $41.1 million of cash, which
was net of a $5.2 million holdback (see commitments and contingent liabilities)
and other closing adjustments. The Company finalized an agreement with the
Purchaser in September, 1999, and as a result collected approximately $1.8
million for the post closing adjustments. As part of the agreement, the Company
refunded to the Purchaser $700,000 in the fourth quarter of 1999, which was paid
out of the General Indemnification Funds that were deposited in escrow.
In July, 1999 the Company acquired iAW, Inc., an Internet business
solutions provider. The purchase price for the acquisition was $250,000. The
acquired business will be operated through a wholly owned subsidiary which has
changed its name to eCalton.com, Inc. The Company has agreed to contribute up to
$2,000,000 of debt/equity, at such time and in such incremental amounts as it
reasonably determines to provide the funds necessary to implement the
eCalton.com, Inc. business plan.
The Company believes that funds generated by the sale of Calton Homes,
income tax payment reductions, derived from NOL utilization and funds provided
under the three-year consulting agreement with the Purchaser of Calton Homes,
which provides for payments of $1.3 million per year, will provide sufficient
capital to support the Company's operations and fund its stock repurchase
program. Although the Company is currently analyzing potential business
opportunities consistent with its strategic plan, it has not determined the
specific application of the proceeds of the sale of Calton Homes, other than the
acquisition of eCalton. If over the period that commenced on December 30, 1999
and continues over the next 18 months thereafter, the Company has not redeployed
a substantial portion of the sale proceeds of Calton Homes, or developed a plan
to redeploy a substantial portion of the proceeds within a reasonable time
frame, the Company will be liquidated and proceeds distributed to its
shareholders.
The Company currently has no outstanding indebtedness other than
accounts payable. As a result, the Company's exposure to market rate risk
relating to interest rate risk is not material. The Company's funds are
primarily invested in highly liquid money market funds with its underlying
investments comprised of investment-grade, short-term corporate issues and
commercial paper currently yielding approximately 5.1%. The Company does not
believe that it is currently exposed to market risk relating to foreign currency
exchange risk or commodity price risk. However, a substantial part of the
Company's cash equivalents are not FDIC insured or bank guaranteed. The Company
has invested approximately $3,396,000 in marketable equity securities. As a
result, the Company has exposure to market risks associated with declines in
trading prices of these securities. As of August 31, 1999, the Company recorded
an adjustment of $507,000 related to an unrealized loss in value of the
securities.
CASH FLOWS FROM OPERATING ACTIVITIES
The proceeds from the sale of Calton Homes are primarily invested in
highly liquid funds earning interest at approximately 5.1% per annum that
amounted to $1.4 million for the nine months ended August 31, 1999. Additional
cash flows from operating activities include revenues derived from the
consulting agreement collectable at the end of each calendar quarter at $325,000
per quarter. Operating activities primarily utilize cash for general and
administrative costs.
-13-
<PAGE>
Cash flow from discontinued operations for the nine months ended August
31, 1999 primarily consisted of litigation costs as a result of the
indemnification provisions pursuant to the sale of Calton Homes. Additionally,
the Company collected $442,000 on a mortgage receivable during the third
quarter.
CASH FLOWS FROM INVESTING ACTIVITIES
On December 31, 1998, the Company received cash of $41.1 million from
the sale of Calton Homes, which was net of a $5.2 million holdback and other
closing adjustments. The Company reached an agreement with the Purchaser and as
a result collected $1.8 million in September 1999 for the post closing
adjustments. As a part of the post closing agreement, the Company refunded to
the Purchaser $700,000 in September 1999, paid out of the general
indemnification funds that were deposited in escrow.
During the second and third quarters of 1999 the Company purchased
marketable equity securities in an aggregate amount of $3.4 million.
CASH FLOWS FROM FINANCING ACTIVITIES
For the nine months ended August 31, 1999, the Company purchased
6,347,000 shares for an aggregate purchase price of $8.1 million, which is
consistent with its repurchase program to repurchase up to 10.0 million shares
of its Common Stock. In June 1999, the holder of a warrant (the "Warrant") to
purchase 1,000,000 shares of Calton Common Stock, exercised its right under the
Warrant using the cashless exercise method. As a result, the holder was issued
681,000 shares which the Company repurchased for $750,000 and is included in the
aggregate nine month numbers above. As a result, the Warrant was canceled.
Also during this period, certain optionholders exercised their options
to purchase 821,000 shares from the 1993 and 1996 Stock Option Plans generating
$337,000.
Part II - Other Information
---------------------------
Item 6. Exhibits and reports on form 8-K.
A) Exhibits
27. Financial Data Schedule as of August 31, 1999
B) Reports on Form 8-K
On July 19, 1999 the Company reported that it had acquired iAW, Inc., an
Internet business solution provider. The purchase price for the
acquisition, which was structured as an asset purchase was $250,000.
-14-
<PAGE>
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/ DAVID J. COPPOLA
-----------------------------------
David J. Coppola
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: October 15, 1999
-15-
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