SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 1998
or
|_| 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
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Common Stock American Stock Exchange
$.01 par value per share
Rights American Stock Exchange
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|.
The aggregate market value (based upon the last sales price reported by the
American Stock Exchange) of voting shares held by non-affiliates of the
registrant as of February 16, 1999 was $37,513,000.
As of February 16, 1999, 27,282,000 shares of Common Stock were outstanding.
Certain items in Parts I and II incorporate information by reference to the 1998
Annual Report to Shareholders and Part III is incorporated by reference to the
Proxy Statement for the annual meeting of shareholders to be held on April 14,
1999. Except for portions which are expressly incorporated by reference herein,
the Annual Report is not deemed filed a part hereof.
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Disclosure Concerning Forward-Looking Statements
All statements, other than statements of historical fact, included in this Form
10-K, including without limitation the statements incorporated by reference in
Part II, Item 7: "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the statements under "Business," are, or may be
deemed to be, "Forward-Looking Statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar phrases are intended to
identify such forward-looking statements. Such forward-looking statements
involve assumptions, known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements contained in this Form
10-K. Such potential risks and uncertainties, include without limitation,
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, and other risk factors detailed
herein and in other of the Company's Securities and Exchange Commission filings.
The forward-looking statements are made as of the date of this Form 10-K and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Calton, Inc. (the "Company" or "Calton"), through its subsidiary,
Calton Homes, Inc. ("Calton Homes"), was previously engaged in the
design, construction and sale of single family detached homes in New
Jersey. The Company delivered 325 homes in fiscal 1998 with an
average sales price of $286,000.
On November 30, 1997, the Company sold its Orlando, Florida
homebuilding assets for $16.7 million in cash. On December 31, 1998,
the Company sold Calton Homes for $48.1 million in cash, subject to
a $5.2 million holdback and certain post closing adjustments. See
"Sale of Calton Homes." This sale was part of an overall strategy
designed to enhance shareholder value. See "Strategic Plan."
Calton was incorporated in 1981 for the purpose of acquiring all of
the issued and outstanding capital stock of Kaufman and Broad of New
Jersey, Inc., a New Jersey corporation, from Kaufman and Broad,
Inc., a Maryland corporation. After the acquisition, the name of
Kaufman and Broad of New Jersey, Inc. was changed to Calton Homes.
Calton maintains its executive offices at 500 Craig Road, Manalapan,
New Jersey 07726 and its telephone number is (732) 780-1800. As used
herein, the term "Company" refers to Calton, Inc. and its
subsidiaries, unless the context indicates otherwise.
SALE OF CALTON HOMES
On December 31, 1998 (the "Closing Date"), Calton completed the sale
of Calton Homes, its wholly owned homebuilding subsidiary, to Centex
Real Estate Corporation ("Braewood"), the homebuilding subsidiary of
Centex Corporation (NYSE:CTX), one of the nation's largest
homebuilders (the "Sale Transaction"). The purchase price for the
stock of Calton Homes, which was paid in cash at closing, was $48.1
million, subject to a $5.2 million holdback, and is subject to
certain post closing adjustments. Calton has entered into an
agreement to provide consulting services to Braewood which will
entitle the Company to payments of $1.3 million per year over a
three year period.
The Company estimates that it will record a pre-tax gain of
approximately $8.8 million and a net gain of approximately $4.6
million after recording a non-cash provision in lieu of taxes of
$4.2 million as a result of the Sale Transaction in the first
quarter of fiscal 1999.
Upon completion of the Sale Transaction, substantially all of the
employees of Calton and Calton Homes continued their employment with
Calton Homes. The current officers of Calton are Anthony J.
Caldarone, Chairman, President and Chief Executive Officer, David
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J. Coppola, Vice President and Treasurer, and Mary Magee, Secretary.
Each of the Company's directors continues to serve on the Board of
Directors.
STRATEGIC PLAN
General. The Sale Transaction was effected pursuant to a strategic
plan designed to enhance shareholder value. Pursuant to this plan,
the Company has (i) initiated a significant stock repurchase
program, (ii) intends to shift the Company's business focus to
providing various services to participants in the homebuilding
industry and (iii) is seeking to invest in, acquire or combine with
one or more operating businesses within or outside of the
homebuilding industry.
The Company anticipates ongoing general and administrative expenses
of approximately $100,000 per month during the initial months of
fiscal 1999. Pending the implementation of the Company's strategic
plan, the Company's cash will be invested as management of the
Company deems prudent, which may include, but will not be limited
to, mutual funds, money market accounts, stocks, bonds or United
States government or municipal securities; provided, however, that
the Company will attempt to invest the net proceeds and conduct its
activities in a manner which will not result in the Company being
deemed to be an investment company under the Investment Company Act
of 1940, as amended, or a personal holding company for federal
income tax purposes. See "Certain Risks."
If within 18 months from the Closing Date, the Company has not
redeployed a substantial portion of the proceeds of the Sale
Transaction, or developed a plan to redeploy a substantial portion
of such proceeds within a reasonable time frame, the Company will be
liquidated and dissolved.
Stock Repurchase Program. The Company plans to use a portion of the
proceeds of the Sale Transaction to fund a stock repurchase program
(the "Stock Repurchase Program") pursuant to which it will seek to
acquire up to 10,000,000 shares of its Common Stock over a 12 month
period. The Company expects to purchase shares from time to time in
privately negotiated transactions or in open market purchases. The
timing and number of shares purchased will depend on a variety of
factors, including market price. The Stock Repurchase Program will
reduce the Company's cash and shareholders equity while increasing
book value per share to the extent that the average price paid per
share is less than the book value per share. The Company is
endeavoring to conduct the Stock Repurchase Program in a manner that
will not adversely affect the liquidity of the Common Stock. The
Company anticipates that there will still be a sufficient number of
shares outstanding and publicly traded following the completion of
the Stock Repurchase Program to ensure a continued trading market in
its Common Stock. Since October 31, 1998, the Company has acquired
approximately 1,230,000 shares of Common Stock at an average price
of $1.09 per share.
Consulting, Investment and Advisory Services. The Board of Directors
intends to shift the Company's primary business focus to providing
various services to participants in the homebuilding industry,
including consulting services (including the consulting services
being provided to Braewood pursuant to a consulting agreement
entered into in connection with the Sale Transaction (the
"Consulting Agreement")), equity and debt financing and financial
advisory services. The Company's management believes that emerging
growth of small to middle market companies will provide an
opportunity which may enable the Company to realize returns on its
equity which exceed those which can currently be achieved through
direct participation in the homebuilding industry in New Jersey and
Pennsylvania. Management believes that these objectives can be
achieved by:
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o Providing consulting services to Braewood and other
participants in the homebuilding industry as permitted by the
Consulting Agreement and the Company's non-competition
agreement with Braewood (the "Non-Competition Agreement");
o Investing in both equity and debt securities, generally of
homebuilders and real estate companies operating in diverse
geographic areas;
o Underwriting project financing for emerging growth
homebuilders with participation from institutional investors
to provide for additional leverage;
o Providing advisory services and investment capital in
connection with workouts, restructurings, recapitalizations
and mergers and acquisitions;
o Acquiring and selling companies; and
o Administering Calton's existing real estate subsidiaries and
utilizing, to the extent possible, the Company's net loss
carryforwards.
The Consulting Agreement requires the Company to provide certain
consulting services to Braewood, including information, advice and
recommendations with respect to the homebuilding market in New
Jersey and Pennsylvania. In addition, the Company has agreed to use
its best efforts to identify corporate acquisition candidates and
other business opportunities for Braewood and Calton Homes in New
Jersey and Pennsylvania, and upon Braewood's request, to assist
Braewood and Calton Homes in (i) obtaining development entitlements
for land, (ii) marketing and promotional activities, (iii) procuring
goods and services from third parties and (iv) locating, screening,
interviewing and recommending compensation levels for prospective
employees. The Company has agreed that it will not provide similar
services to others in New Jersey or Pennsylvania during the term of
the Consulting Agreement and for a four year period after the
expiration of the three year term of the Consulting Agreement.
The Consulting Agreement requires Anthony J. Caldarone, the
Company's Chairman, President and Chief Executive Officer to
participate in the performance of the consulting services to
Braewood and for so long as he remains employed by or associated
with the Company.
In consideration for the services to be provided by the Company
under the Consulting Agreement, Braewood will be required to pay the
Company a consulting fee of $1.3 million per year, payable in equal
quarterly installments during the three year term of the agreement.
Other than the Consulting Agreement, the Company has not entered
into any arrangements to provide consulting, investment or advisory
services to any third parties.
The Non-Competition Agreement will limit the scope of the activities
that can be conducted by the Company in New Jersey and Pennsylvania.
Pursuant to the Non-Competition Agreement, the Company has agreed
that until the fourth anniversary of the date on which the
Consulting Agreement expires, it will not participate in the
provision of homebuilding services, directly or indirectly, in
Pennsylvania or New Jersey, either through any form of ownership
(except the ownership of up to 5% of a publicly held corporation) or
as a principal, agent, employee, employer, advisor, consultant,
lender, partner or any other capacity whatsoever. The Company will,
however, be permitted to provide second or wraparound mortgage
financing to certain small homebuilding companies on a project by
project basis. Any such financing may include participating
mortgages; provided however, that the Company shall be prohibited
from obtaining as a result of such financings or any foreclosures,
deeds in lieu of foreclosure or other enforcement proceeding an
interest in the equity, capital or profits of any homebuilding
company in excess of ten percent (10%), and from directly or
indirectly participating in the management of control of any such
company. The Company may, in order to preserve its investment if a
borrower defaults, acquire a
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project or projects owned by such defaulting borrower, but following
its acquisition, the Company (i) may not expand any such project
beyond the investment therein at acquisition (except as necessary to
prevent further loss or to fulfill contracts to build and deliver
homes), (ii) must provide Braewood a right of first refusal if the
Company is presented with an offer to buy and (iii) must fully
dispose of any such project within 12 months.
Acquisitions and Business Combinations. The Company is seeking to
enhance shareholder value by investing in, acquiring or combining
with one or more operating businesses within or outside of the
homebuilding industry. Such activities could include the acquisition
of an entire company or companies, or divisions thereof, either
through a merger or a purchase of assets, as well as an investment
in the securities of a company or companies, or alternatively, a
combination with another business in which the Company would not be
the surviving corporation. The Company has not entered into any
substantive negotiations concerning such acquisitions or
investments. There can be no assurance that the Company will be
successful in such efforts, and the redeployment of the Company's
assets into new investment and businesses entails risk to its
shareholders. In addition, the scope of the Company's activities
will be limited by the Non-Competition Agreement, which prohibits
the Company from engaging in the operating activity which has
historically represented the Company's primary business in its
primary market.
CERTAIN RISKS
Lack of Operating History in New Business. As part of its strategic
plan, the Company intends to provide various services to
participants in the homebuilding industry, including investment,
advisory and consulting services. In addition, the Company has
entered into a Consulting Agreement with Braewood; however, the
Company has not previously engaged in providing such services to
third parties. In addition, the Company has not entered into any
agreement to provide such services to any other third party.
Further, the Company will be subject to the Non-Competition
Agreement with Braewood which will limit the scope of the activities
which can be conducted by the Company in New Jersey and
Pennsylvania. Moreover, the success of the Company will depend on
the Company's ability to attract and retain qualified personnel. As
a result, no assurance can be given that the Company will be
successful in implementing its strategic plan or that the Company
will be able to generate profits from any such activities.
Risks Associated with Potential Business Combinations. In addition
to engaging in the activities described above under the caption
"Lack of Operating History in New Business," the Company is seeking
to enhance shareholder value by investing in, acquiring or combining
with one or more operating businesses either within or outside of
the homebuilding industry. As the Company has not yet identified a
prospective business (a "Target Business") with which it is likely
to effectuate a merger, exchange of capital stock, stock or asset
acquisition or other similar type of transaction (a "Business
Combination"), shareholders have no basis on which to evaluate the
possible merits or risks of a Target Business. Management of the
Company will endeavor to evaluate the risks inherent in any
particular Target Business; however, there can be no assurance that
the Company will properly ascertain all such risks. In many cases,
shareholder approval will not be required to effect such a Business
Combination. The fair market value of the Target Business will be
determined by the Board of Directors of the Company. Therefore, the
Board of Directors has significant discretion in determining whether
a Target Business is suitable for a proposed Business Combination.
Furthermore, the structure of a Business Combination with a Target
Business, which may take the form of a merger, exchange of capital
stock or stock or asset acquisition, cannot be determined
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because, at the present time, no agreements, arrangements or
understandings exist with respect to any such proposed Business
Combination.
Continued Listing on AMEX The Company's Common Stock is currently
listed for trading on the American Stock Exchange ("AMEX"). 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 Transaction. 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
generally considered to be less efficient markets.
Investment Company Act Considerations. The Investment Company Act of
1940, as amended ("1940 Act"), requires the registration of, and
imposes various substantive restrictions on, certain companies that
engage primarily, or propose to engage primarily, in the business of
investing, reinvesting, or trading in securities, or that fail
certain statistical tests regarding the composition of assets and
source of income, and are not primarily engaged in a business other
than investing, holding, owning or trading securities. The Company
intends to conduct its activities in a manner which will not subject
the Company to regulation under the 1940 Act; however, there can be
no assurance that the Company will not be deemed to be an investment
company under the 1940 Act. If the Company were required to register
as an investment company under the 1940 Act, it would become subject
to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliates, the nature of
its investments and other matters. In addition, the 1940 Act imposes
certain requirements on companies deemed to be within its regulatory
scope, including compliance with burdensome registry, recordkeeping,
voting, proxy, disclosure and other rules and regulations. In the
event of the characterization of the Company as an investment
company, the failure of the Company to satisfy regulatory
requirements, whether on a timely basis or at all, could have a
material adverse effect on the Company.
Certain Tax Matters. Section 541 of the Internal Revenue Code of
1986, as amended (the "IRC"), subjects a corporation which is a
"personal holding company," as defined in the IRC, to a 39.6%
penalty tax on undistributed personal holding company income in
addition to the corporation's normal income tax. The Company could
become subject to the penalty tax if (i) 60% or more of its adjusted
ordinary gross income is personal holding company income and (ii)
50% or more of its outstanding Common Stock is owned, directly or
indirectly, by five or fewer individuals. Personal holding company
income is comprised primarily of passive investment income plus,
under certain circumstances, personal service income.
Indemnity Obligations. The stock purchase agreement pursuant to
which the Company sold Calton Homes 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. The Company has deposited an
aggregate of approximately $5.2 million in escrow, $3 million of
which provide security for the Company's indemnity obligations and
approximately $2.2 million of which were deposited to fund costs
associated with certain specified litigation involving Calton Homes.
Under certain circumstances, the Company may be required to deposit
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additional funds into escrow. In addition, the Company's indemnity
obligations are not limited to the amount deposited in escrow. No
assurance can be given that the purchaser of Calton Homes will not
make claims for indemnity or that a significant portion of the
escrowed funds will not be utilized to resolve litigation. See
"Legal Proceedings."
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Substantially all revenues and equity in earnings, operating profits
and assets of the Company and its subsidiaries in fiscal 1998 were
attributable to one line of business, the development and sale of
residential housing and the acquisition and sale of real property.
(C) DESCRIPTION OF BUSINESS
GENERAL
During fiscal 1998, the Company designed, constructed and sold
single family detached homes in New Jersey. The Company marketed
primarily to second and third time move-up homebuyers with its
conventional housing product line and active adult homebuyers. In
fiscal 1998, the Company delivered 325 homes with an average sales
price of approximately $286,000. In addition, the Company sold land
and options to acquire land to other builders from time to time
after adding value by obtaining entitlements. The Company completed
the sale of its homebuilding operations on December 31, 1998. See
"Sale of Calton Homes."
GEOGRAPHIC MARKETS
In fiscal 1998, the Company's homebuilding operations were located
in New Jersey. Generally, the Company conducted its homebuilding
operations in markets that demonstrated a strong growth profile. In
1997, the Company decided to exit from the Florida market by selling
its Orlando, Florida homebuilding assets based on the Company's
determination that the Company's resources would be better invested
in the New Jersey market. The Company selected locations for its
residential housing communities that had ready access to major
arterial highways and which experienced increased housing demand.
During 1998, the Company conducted homebuilding activities in
Burlington, Hunterdon, Mercer, Middlesex, Monmouth and Ocean
counties in New Jersey.
PRODUCTS
The Company offered a variety of single-family detached homestyles
tailored to meet the specific needs of the particular geographic and
demographic markets served, including the second and third time
move-up homebuyer, the active adult homebuyer and, to a lesser
extent, the first time and first time move-up homebuyer. From time
to time, the Company also offered townhomes. Homestyles, prices and
sizes were tailored to each community based upon the Company's
assessment of specific market conditions and the restrictions
imposed by local jurisdictions. In certain projects, recreational
amenities such as tennis courts and playground areas were
constructed by the Company.
During 1998, base prices in the Company's conventional housing
communities that offered various styles of two-story colonial homes
ranged from $229,000 to $611,000 for homes ranging in size from
approximately 2,700 square feet to 4,500 square feet. The Company
offered nine different single-family primarily one story detached
home types in its active adult community, Renaissance, ranging from
$140,000 to $235,000. These homes ranged in size from approximately
1,500 square feet to 2,200 square feet.
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LAND ACQUISITION, PLANNING AND DEVELOPMENT
Substantially all of the land acquired by the Company was purchased
only after necessary entitlements were obtained so that the Company
had certain rights to begin development or construction as market
conditions dictated. The term "entitlements" refers to developmental
approvals, tentative maps or recorded plats, depending on the
jurisdiction within which the land was located. Entitlements
generally give a developer the right to obtain building permits upon
compliance with certain conditions that are usually within the
developer's control. Although entitlements were ordinarily obtained
prior to the Company's purchase of the land, the Company was still
required to obtain a variety of other governmental approvals and
permits during the development process.
The Company's general policy was to control land for future
development or sale through the use of purchase options or
contingent purchase contracts whenever practicable and where market
conditions permitted. The Company generally endeavored to acquire
property for development on an installment method, with closings on
a portion of a project on a periodic basis. From time to time, the
Company acquired property through the use of purchase money
mortgages. In certain cases, when available, the Company acquired
finished lots on a rolling option basis. These policies enabled the
Company to limit its financial commitments, including cash
expenditures and interest and other carrying costs, and avoid large
land inventories exceeding the Company's near term development
needs. At the same time, the Company retained any appreciation in
the value of the parcel prior to exercising the option or closing
the contingent purchase contract. During the option or contingency
period, the Company performed feasibility studies, technical,
engineering and environmental surveys and obtained the entitlements.
In making land acquisitions, the Company considered such factors as:
(i) current market conditions; (ii) internal and external
demographic and marketing studies; (iii) environmental conditions;
(iv) proximity to developed and recreational areas; (v) availability
of mass transportation and major arterial highways and ready access
to metropolitan areas and other employment centers; (vi) industrial
and commercial growth patterns; (vii) financial review as to the
feasibility of the proposed community, including projected profit
margins, returns on capital employed and payback periods; (viii) the
ability to secure governmental approvals and entitlements; (ix)
customer preferences; (x) access to materials and subcontractors;
and (xi) management's judgement as to the real estate market,
economic trends and the Company's experience in a particular market.
The Company's development activities included land planning and
securing entitlements. These activities were performed by the
Company's employees, together with independent engineers, architects
and other consultants.
CONSTRUCTION
The Company employed production managers responsible for
coordinating all functions pertaining to the construction process.
All construction work for the Company was performed by
subcontractors on a fixed price basis, with the Company acting as
general contractor. In order to maintain control over costs, quality
and work schedules, the Company employed an on-site superintendent
who was responsible for supervising subcontractor work at each
community.
The Company's housing was constructed according to standardized
design plans that were then customized to each individual contract
preference. Generally, the Company sought to develop communities
having a number of lots to absorb deliveries over a minimum one year
period in order to reduce the per home cost of the housing products
which it sold.
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Advantages achieved by volume building included lower costs paid to
subcontractors and reduced material costs per home.
Generally, the Company's policy was to commence construction of a
detached home beyond the foundation after a sales contract for that
home had been signed. The Company, however, ordinarily attempted to
maintain a predetermined inventory of homes in process in order to
match the construction times of homes with the mortgage application
process and to accommodate customers who required immediate
occupancy, such as relocation homebuyers.
MATERIALS AND SUBCONTRACTORS
The Company attempted to maintain efficient operations by utilizing
standardized material available from a variety of sources. Prices
for materials fluctuated due to various factors, including demand
levels or supply shortages.
The Company entered into contracts with numerous subcontractors
representing all building trades in connection with the construction
of its homes, and established long-term relationships with a number
of subcontractors. These subcontractors bid competitively for each
phase of the work at each project and were selected based on
quality, price and reliability. Subcontractor bids were solicited
after an internal job cost budget estimate was prepared based on
estimated material quantities. These internal estimates served as
the formal baseline budget against which the cost of each trade was
measured. The Company was responsible for contracting all trades in
each of its communities. The Company monitored subcontractor
performance and expenditures for each community to assess
profitability. Additionally, the Company was generally able to
obtain reduced prices from many of its subcontractors due to the
volume of work it provided to its subcontractors. Agreements with
subcontractors and suppliers generally spanned three to twelve
months, and provided a fixed price for labor and materials.
SALES AND MARKETING
The Company typically constructed, furnished and landscaped a model
home for each community and maintained an on-site sales office
staffed with its own sales personnel. At Renaissance, six different
home types were presented in the model park in addition to a decor
center. The Company made use of newspaper, billboard and direct mail
advertising, special promotional events and illustrated brochures in
a comprehensive marketing program. The Company established a web
site on the Internet (http://www.caltonhomes.com) to provide
customers with additional information on the Company's communities
and homes. In marketing its products, the Company emphasized
quality, features and value and provided a 15-year limited warranty
on its homes. In addition, the Company offered a customization
program, "Your Home Your Way(R)," in order to make the products the
Company built more attractive to homebuyers by tailoring them to
individual customer needs.
Sales of the Company's homes were made pursuant to standard sales
contracts that were customary in the markets served by the Company.
Such contracts required a customer deposit (generally up to 10% of
the base selling price and $5,000 for the active adult community,
Renaissance) at time of contract signing and provided the customer
with a mortgage contingency, if necessary. The contingency period
typically was sixty (60) days following execution of the contract.
In certain instances, contracts were contingent on the sale of a
purchaser's existing home. In such cases, the Company retained the
right to sell the lot to a
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different homebuyer during the period in which the "house-to-sell"
condition was not satisfied. The cancellation rate for new contracts
signed was approximately 15% in fiscal 1998.
CUSTOMER FINANCING
The Company sold its homes to customers who generally financed their
purchase through conventional and government insured mortgages. The
Company provided its customers with information on a wide selection
of conventional mortgage products and various mortgage lenders to
assist the homebuyer through the mortgage process. Mortgages
arranged by mortgage providers in recent years were mortgage loans
underwritten and made directly by a lending institution to the
customer. The Company is not liable for repayment of any mortgage
loans.
COMMERCIAL LAND
The Company has continued to focus on selling its commercial land.
During fiscal 1998, the Company closed on the sale of two parcels of
commercial land, including its largest remaining parcel located in
eastern Pennsylvania, for an aggregate of $4.9 million in proceeds
that resulted in an aggregate gain of approximately $200,000. The
Company's remaining two commercial properties consist of land
located in Florida and Pennsylvania, one of which is under contract
for sale. These properties have a book value of $252,000.
COMPETITION
The homebuilding industry is highly competitive. Homebuilders
compete for desirable properties, financing, raw materials and
skilled labor among other things. The Company competed in each of
the geographic areas in which it operated with numerous real estate
developers, ranging from small local to larger regional and national
builders and developers, some of which had greater sales and
financial resources than the Company. Resale homes provided
additional competition. The Company competed primarily on the basis
of quality, features, value, reputation, price, location, design and
amenities.
REGULATION AND ENVIRONMENTAL MATTERS
The Company was subject to various local, state and federal
statutes, ordinances, rules and regulations concerning zoning,
building design, construction and similar matters, including local
regulation which imposes restrictive zoning and density requirements
in order to limit the number of homes that can eventually be built
within the boundaries of a particular locality. In addition, the
Company was subject to registration and filing requirements in
connection with the construction, advertisement and sale of its
communities in certain states and localities in which it operated
even if any or all necessary government approvals were obtained.
Certain governmental authorities imposed fees as a means of
defraying the cost of providing certain governmental services to
developing areas, or required developers to donate land to the
municipality or make certain off-site land improvements.
The Company was also subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning
protection of health and the environment ("environmental laws"). The
particular environmental laws applicable to any given community
varied greatly according to the community site, the site's
environmental conditions and the present and former uses of the
site. These environmental laws sometimes resulted in delays, caused
the Company to incur substantial compliance and other costs, and
prohibited or severely restricted development in certain
environmentally sensitive regions or areas. For example, in July
1987, New Jersey adopted the Fresh Water Wetlands Protection Act
which restricts
-9-
<PAGE>
building in or near certain protected geographic areas designated as
fresh water wetlands. The preservation of wetlands located within a
project sometimes lessened the number of units that could be built
in a particular project.
In July 1985, New Jersey adopted the Fair Housing Act which
established an administrative agency to adopt criteria by which
municipalities will determine and provide for their fair share of
low and moderate income housing ("Mt. Laurel" housing). This agency
promulgated regulations with respect to such criteria effective
August 1986.
The Company was sometimes required to set aside Mt. Laurel housing
in certain municipalities in which it owned or had the right to
acquire land. In order to comply with such requirements, the Company
was required to (i) sell some homes at prices which would result in
no gain or loss and an operating margin less than would have
resulted otherwise, or (ii) contribute to public funding of
affordable housing, which contribution increaseed the costs of homes
to be developed in a community. The Company attempted to recover
some of these potential losses or reduced margins through increased
density, certain cost saving construction and land development
measures and reduced land prices for the sellers of property.
The foregoing does not purport to be a full description of all of
the legislation and regulations impacting the business of the
Company. The Company may be subject to numerous other governmental
rules and regulations in each jurisdiction in which it does
business.
EMPLOYEES
As of February 16, 1999, the Company employed 3 full-time personnel.
The Company also employed 2 part-time employees. The Company
believes its employee relations are satisfactory.
ITEM 2. COMPANY FACILITIES
In connection with the Sale Transaction, the Company sublet its
interest as a tenant in its corporate offices to Calton Homes.
Calton Homes has resublet to the Company approximately 1,620 square
feet until May 31, 1999 for approximately $2,600 per month.
Management believes that this arrangement currently provides
adequate space for the Company's operations. The Company will seek
to lease office space upon the expiration of its current sublease.
ITEM 3. LEGAL PROCEEDINGS
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, the Company entered into a
holdback escrow agreement with the purchaser pursuant to which
approximately $5.2 million of the closing proceeds were deposited
into escrow. Of this amount, $3 million (the "General
Indemnification Funds") were deposited to provide security for the
Company's indemnity obligations and approximately $2.2 million (the
"Specific Indemnification Funds") were 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
-10-
<PAGE>
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 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 million if created before
December 31, 1999, $3 million if created between December 31, 1999
and December 31, 2000 and $2 million 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.
Calton's by-laws contain provisions which provide indemnification
rights to officers, directors and employees under certain
circumstances with respect to liabilities and damages incurred in
connection with any proceedings brought against such persons by
reason of their being officers, directors or employees of Calton.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matter was submitted to a vote
of security holders through the solicitation of proxies or
otherwise. On December 30, 1998, the Company held a special meeting
of shareholders (the "Special Meeting") at which the Company's
shareholders were asked to approve the sale by the Company of Calton
Homes. Of the votes cast in person or by proxy at the Special
Meeting, 14,313,274 shares voted in favor of the Sale Transaction,
382,281 shares voted against the Sale Transaction and 25,942 shares
abstained from voting.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 16, 1999 are
listed below and brief summaries of their business experience and
certain other information with respect to them is set forth in the
following table and in the information which follows the table.
Name Age Position
- ---- --- --------
Anthony J. Caldarone 61 Chairman, President and Chief Executive Officer
David J. Coppola 39 Vice President and Treasurer
Mr. Caldarone was reappointed as Chairman, President and Chief
Executive Officer of Calton in November 1995, having previously
served in such capacities from the inception of the Company in 1981
through May 1993. From June 1993 through October 1995, Mr.
-11-
<PAGE>
Caldarone served as a Director of the Company.
Mr. Coppola was appointed Treasurer of the Company in January 1999.
He served as the Company's Controller from 1992 until 1999 and was
appointed as a Vice President of the Company in 1993. Mr. Coppola is
a Certified Public Accountant.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information pertaining to the market for the Registrant's Common
Stock, high and low sales prices of the Common Stock in 1998 and
1997 and the number of holders of Common Stock is presented on page
24 of the 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
The Company has not paid dividends on its capital stock in the past.
ITEM 6. SELECTED FINANCIAL DATA
The financial highlights data is presented on page one of the 1998
Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is presented on pages 4
through 10 of the 1998 Annual Report to Shareholders, which
information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is presented under the caption
"Financial Instrument Market Risk" on page 10 of the 1998 Annual
Report to Shareholders, which information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, including the Report of
Independent Accountants thereon and the unaudited Quarterly
Financial Results, are presented on pages 11 through 24 of the 1998
Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-13-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors is incorporated herein by
reference to "Election of Directors" and "Compliance with Section
16(a) of the Exchange Act" contained in the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held on
April 14, 1999. Certain information relating to executive officers
of the Company is set forth in Item 4A of Part I of this Form 10-K
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is incorporated
herein by reference to "Executive Compensation" contained in the
Registrant's definitive proxy statement for the annual meeting of
shareholders to be held on April 14, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of certain beneficial
owners and management is incorporated herein by reference to
"Principal Shareholders" and "Security Ownership of Management" from
the Registrant's definitive proxy statement for the annual meeting
of shareholders to be held on April 14, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
-14-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) 1. and 2. Financial statements and financial
statement schedules
Reference is made to the Index of
Financial Statements and Financial
Statement Schedules hereinafter
contained F-1
3. Exhibits
Reference is made to the Index of
Exhibits hereinafter contained F-5
(b) Reports on Form 8-K
In January 1999, the Company
filed a report on Form 8-K,
dated December 31, 1998,
announcing that it had completed
the sale of Calton Homes.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: February 26, 1999 By:
-----------------------
David J. Coppola
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
- -------------------------
Anthony J. Caldarone Chairman, Chief Executive February 26, 1999
Officer and President
(Principal Executive Officer)
- -------------------------
David J. Coppola Vice President February 26, 1999
(Principal Financial &
Accounting Officer)
- -------------------------
J. Ernest Brophy Director February 26, 1999
- -------------------------
Mark N. Fessel Director February 26, 1999
- -------------------------
Frank Cavell Smith, Jr. Director February 26, 1999
-16-
<PAGE>
CALTON, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
Consolidated Balance Sheet as of November 30, 1998 and 1997 *
Consolidated Statements of Operations for the Years Ended
November 30, 1998, 1997 and 1996 *
Consolidated Statements of Cash Flows for the Years
Ended November 30, 1998, 1997 and 1996 *
Consolidated Statements of Shareholders' Equity for
the Years Ended November 30, 1998, 1997 and 1996 *
Notes to Consolidated Financial Statements *
Report of Independent Accountants *,F-2
Consent of Independent Accountants F-3
Schedules **
II-Valuation and Qualifying Accounts F-4
- ----------
* The financial statements and notes thereto together with the Report
of Independent Accountants on pages 11 through 24 of the 1998 Annual
Report to Shareholders are incorporated herein by reference.
** Schedules other than the schedule listed above have been omitted
because of the absence of the conditions under which they are
required or because the required information is presented in the
financial statements or the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Calton, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 13, 1999 appearing in the November 30, 1998 Annual Report
to Shareholders of Calton, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 13, 1999
F-2
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Calton, Inc. and Subsidiaries on Form S-8 (Nos. 33-70628, 33-75184
and 333-28135) of our report, dated January 13, 1999 appearing in the Annual
Report to Shareholders which is incorporated in this Annual Report on Form 10-K.
We also consent to true incorporation by reference of our report on the
Financial Statement Schedule, which appears on page F-4 of this Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 25, 1999
F-3
<PAGE>
SCHEDULE II
CALTON, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Balance
Beginning Costs and Charge to At End
Description of Year Expenses Other Accounts Deductions of Year
- ------------------------------------------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended November 30, 1996:
Net realizable value reserves for inventory $ 1,993 $ -- $ -- $ 880(A) $ 1,113
========== ========== ============== ========== ==========
Valuation allowance for net deferred tax
asset $ 18,647 $ -- $ 981 $ -- $ 19,628
========== ========== ============== ========== ==========
Year ended November 30, 1997:
Net realizable value reserves for inventory $ 1,113 $ 750 $ -- $ 882(A) $ 981
========== ========== ============== ========== ==========
Valuation allowance for net deferred tax
asset $ 19,628 $ -- $ -- $ 3,538(B) $ 16,090
========== ========== ============== ========== ==========
Year ended November 30, 1998:
Net realizable value reserves for inventory $ 981 $ -- $ -- $ 726 $ 255
========== ========== ============== ========== ==========
Valuation allowance for net deferred tax
asset $ 16,090 $ -- $ -- $ 2,549 $ 13,541
========== ========== ============== ========== ==========
</TABLE>
(A) Represents the utilization of reserves recorded when affected homes are
delivered and land is sold.
(B) Represents the change in the valuation allowance due to the changes in the
deferred tax assets and the impact of the IRS Code Section 382 limitation
on those assets.
F-4
<PAGE>
INDEX TO EXHIBITS
2.1 Agreement for Sale and Purchase of Assets dated as of November 26,
1997 between Beazer Homes Corp., Beazer Homes USA, Inc., Calton
Homes of Florida, Inc. and Calton Homes, Inc., incorporated by
reference to Exhibit 2 to Form 8-K of Registrant dated December 1,
1997.
2.2 Amended and Restated Stock Purchase Agreement effective September 2,
1998 among Calton, Inc., Calton Homes, Inc. and Centex Real Estate
Corp., incorporated by reference to Exhibit 2 to Form 8-K of
Registrant dated December 31, 1998.
2.3 Amendment No. 1 to Amended and Restated Stock Purchase Agreement
dated as of December 28, 1998 among Calton, Inc., Calton Homes, Inc.
and Braewood Development Corp. (assignee of Centex Real Estate
Corp.), incorporated by reference to Exhibit 2.1 to Form 8-K of
Registrant dated December 31, 1998.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
filed with the Secretary of State, State of New Jersey on May 28,
1993, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to
Form S-1 Registration Statement under the Securities Act of 1933,
Registration No. 33-60022, Certificate of Amendment to Amended and
Restated Certificate of Incorporation of Registrant filed with the
Secretary of State, State of New Jersey on April 27, 1994,
incorporated by reference to Exhibit 3(b) to Form S-1 Registration
Statement under the Securities Act of 1933, Registration No.
33-76312, and Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Registrant filed with the Secretary
of State, State of New Jersey on May 29, 1997, incorporated by
reference to Exhibit 3.1 to Form 10-K of Registrant for the fiscal
year ended November 30, 1997, and Certificate of Amendment to
Amended and Restated Certificate of Incorporation of Registrant
filed with the Secretary of State, State of New Jersey on February
2, 1999.
3.2 By Laws of Registrant, as amended.
4.1 Warrant to Purchase Common Stock of Calton, Inc. dated June 12, 1997
issued to BankBoston, N.A., incorporated by reference to Exhibit
10.2 to Form 8-K of Registrant dated June 12, 1997.
4.2 Rights Agreement dated February 1, 1999 by and between the
Registrant and First City Transfer Company as Rights Agent,
including forms of Rights Certificate and Election to Purchase
included as Exhibit B thereto, incorporated by reference to Exhibit
1 to Form 8-A Registration Statement of Registrant filed with the
Securities and Exchange Commission on February 2, 1999.
(*) 10.1 1996 Equity Incentive Plan, incorporated by reference to Exhibit
10.1 to Form 10-K of Registrant for the fiscal year ended November
30, 1996.
(*) 10.3 Registrant's Amended and Restated 1993 Non-Qualified Stock Option
Plan, incorporated by reference to Exhibit 10.3 to Form 10-K of
Registrant for the fiscal year ended November 30, 1995.
(*) 10.4 Incentive Compensation Plan of Registrant, incorporated by reference
to Exhibit 10.4 to Form 10-K of Registrant for the fiscal year ended
November 30, 1996.
(*) 10.6 Severance Policy for Senior Executives of Registrant, incorporated
by reference to Exhibit 10.6 of Form 10-K of Registrant for the
fiscal year ended November 30, 1994.
F-5
<PAGE>
(**) 10.7 Executive Employment Agreement dated as of November 21, 1995 between
Registrant and Anthony J. Caldarone, incorporated by reference to
Exhibit 10.7 to Form 10-K of Registrant for the fiscal year ended
November 30, 1995.
10.8 Senior Secured Credit Agreement dated as of June 12, 1997, among
Calton Homes, Inc., Calton Homes of Florida, Inc. and BankBoston,
N.A., incorporated by reference to Exhibit 10.1 to Form 8-K of
Registrant dated June 12, 1997.
10.9 Consulting Agreement between Registrant and Braewood Development
Corp. dated December 31, 1998.
13. Certain pages of Registrant's 1998 Annual Report to Shareholders
which, except for those portions expressly incorporated herein by
reference, are not deemed filed as part hereof.
21. Subsidiaries of the Registrant.
27. Financial Data Schedule.
- ----------
(*) Constitutes a compensatory plan required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(**) Constitutes a management contract required to be filed pursuant to Item
14(c) of Form 10-K.
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CALTON, INC.
To The Secretary of State
State of New Jersey
Pursuant to the provisions of Section 14A:9-2(2) and Section 14A:7-2(4) of
the New Jersey Business Corporation Act, the undersigned Corporation executes
this Certificate of Amendment to its Amended and Restated Certificate of
Incorporation:
The name of the Corporation is "Calton, Inc." (the "Corporation").
The following amendment to the Amended and Restated Certificate of
Incorporation (the "Amendment") was approved by the Board of Directors of the
Corporation at a meeting held on the 1st day of February, 1999 pursuant to the
resolution set forth in the Certificate of Designations of the Class A Preferred
Stock, Series One of Calton, Inc. that is annexed to this Certificate of
Amendment as Exhibit A:
Article IV, Section C of the Amended and Restated Certificate of
Incorporation is hereby amended to include the provisions set forth in the
Certificate of Designations of the Class A Preferred Stock, Series One of
Calton, Inc. that is annexed to this Certificate of Amendment as Exhibit A.
The Amendment described above was adopted by the Corporation's Board of
Directors pursuant to Section 14A:7-2(2) of the New Jersey Business Corporation
Act.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment as of the 2nd day of February, 1999.
CALTON, INC.
By:
---------------------------------------
Anthony J. Caldarone, President
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
CLASS A PREFERRED STOCK, SERIES ONE
OF
CALTON, INC.
I, Anthony J. Caldarone, Chairman of the Board and Chief Executive Officer of
Calton, Inc. (the "Corporation"), a corporation organized and existing under the
New Jersey Business Corporation Act (the "NJBCA"), in accordance with the
provisions of the NJBCA, DO HEREBY CERTIFY that: pursuant to the authority
conferred upon the Board of Directors by the Amended and Restated Certificate of
Incorporation of the Corporation, as amended, and pursuant to the NJBCA the
Board of Directors on February 1, 1999 adopted the following resolution which
creates a series of 1,000,000 shares of Preferred Stock designated as Class A
Preferred Stock, Series One.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its Amended
and Restated Certificate of Incorporation, a series of Preferred Stock of the
Corporation be, and hereby is, created and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
or other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall
be designated as "Class A Preferred Stock, Series One" (the "Series One
Preferred Stock") and the number of shares constituting such series shall be
1,000,000.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set forth,
the holders of shares of Series One Preferred Stock shall be entitled to
receive, when, as and if declared by
<PAGE>
the Board of Directors out of funds legally available for the purpose, (i) cash
dividends in an amount per share (rounded to the nearest cent) equal to 100
times the aggregate per share amount of all cash dividends declared or paid on
the Common Stock, $0.01 par value per share, of the Corporation (the "Common
Stock") and (ii) a preferential cash dividend (the "Preferential Dividends"), if
any, on the first day of February, May, August and November of each year (each a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series One Preferred Stock, in an amount (except in the case of the first
Quarterly Dividend Payment Date if the date of the first issuance of Series One
Preferred Stock is a date other than a Quarterly Dividend Payment Date, in which
case such payment shall be a prorated amount of such amount) equal to $50.00 per
share of Series One Preferred Stock less the per share amount of all cash
dividends declared on the Series One Preferred Stock pursuant to clause (i) of
this sentence since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series One Preferred Stock. In
the event the Corporation shall, at any time after the issuance of any share or
fraction of a share of Series One Preferred Stock, make any distribution on the
shares of Common Stock of the Corporation, whether by way of a dividend or a
reclassification of stock, a recapitalization, reorganization or partial
liquidation of the Corporation or otherwise, which is payable in cash or any
debt security, debt instrument, real or personal property or any other property
(other than cash dividends subject to the immediately preceding sentence, a
distribution of shares of Common Stock or other capital stock of the Corporation
or a distribution of rights or warrants to acquire any such share, including any
debt security convertible into or exchangeable for any such share, at a price
less
-2-
<PAGE>
than the Fair Market Value (as hereinafter defined) of such share), then, and in
each such event the Corporation shall simultaneously pay on each then
outstanding share of Series One Preferred Stock of the Corporation a
distribution, in like kind, of 100 times such distribution paid on a share of
Common Stock (subject to the provisions for adjustment hereinafter set forth).
The dividends and distributions on the Series One Preferred Stock to which
holders thereof are entitled pursuant to clause (i) of the first sentence of
this paragraph and pursuant to the second sentence of this paragraph are
hereinafter referred to as "Participating Dividends" and the multiple of such
cash and non-cash dividends on the Common Stock applicable to the determination
of the Participating Dividends, which shall be 100 initially but shall be
adjusted from time to time as hereinafter provided, is hereinafter referred to
as the "Dividend Multiple." In the event the Corporation shall at any time after
February 1, 1999 (the "Effective Date") declare or pay any dividend or make any
distribution on Common Stock payable in shares of Common Stock, or effect a
subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, or issue any of its capital stock in a reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing or surviving
corporation), then in each such case the Dividend Multiple thereafter applicable
to the determination of the amount of Participating Dividends which holders of
shares of Series One Preferred Stock shall be entitled to receive shall be the
Dividend Multiple applicable immediately prior to such event multiplied by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
-3-
<PAGE>
(B) The Corporation shall declare each Participating Dividend at the
same time it declares any cash or non-cash dividend or distribution on the
Common Stock in respect of which a Participating Dividend is required to be
paid. No cash or non-cash dividend or distribution on the Common Stock in
respect of which a Participating Dividend is required to be paid shall be paid
or set aside for payment on the Common Stock unless a Participating Dividend in
respect of such dividend or distribution on the Common Stock shall be
simultaneously paid, or set aside for payment, on the Series One Preferred
Stock.
(C) Preferential Dividends shall begin to accrue on outstanding
shares of Series One Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issuance of any shares of Series One Preferred Stock.
Accrued but unpaid Preferential Dividends shall cumulate but shall not bear
interest. Preferential Dividends paid on the shares of Series One Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
Section 3. Voting Rights. The holders of shares of Series One
Preferred Stock shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set forth,
each share of Series One Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the Corporation.
The number of votes which a holder of Series One Preferred Stock is entitled to
cast, as the same may be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Vote Multiple." In the event the Corporation
shall at any time after the Effective Date declare or pay any dividend on Common
Stock payable in shares of Common Stock, or effect a subdivision or split or a
-4-
<PAGE>
combination, consolidation or reverse split of the outstanding shares of Common
Stock into a greater or lesser number of shares of Common Stock, or issue any of
its capital stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Corporation is the continuing or surviving corporation), then in each such case
the Vote Multiple thereafter applicable to the determination of the number of
votes per share to which holders of shares of Series One Preferred Stock shall
be entitled after such event shall be the Vote Multiple immediately prior to
such event multiplied by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in the Amended and Restated
Certificate of Incorporation or By-Laws, the holders of shares of Series One
Preferred Stock and the holders of shares of Common Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation.
(C) In the event that the Preferential Dividends accrued on the
Series One Preferred Stock for four or more quarterly dividend periods, whether
consecutive or not, shall not have been declared and paid or set apart for
payment, the holders of record of Preferred Stock of the Corporation of all
series (including the Series One Preferred Stock), other than any series in
respect of which such right is expressly withheld by the Amended and Restated
Certificate of Incorporation or the authorizing resolutions included in the
Certificate of Designations therefor, shall have the right, at the next meeting
of stockholders called for the election of directors, to elect two members to
the Board of Directors, which directors shall be in addition to the number
required by the By-Laws prior to such event, to serve until the next
-5-
<PAGE>
Annual Meeting and until their successors are elected and qualified or their
earlier resignation, removal or incapacity or until such earlier time as all
accrued and unpaid Preferential Dividends upon the outstanding shares of Series
One Preferred Stock shall have been paid (or irrevocably set aside for payment)
in full. The holders of shares of Series One Preferred Stock shall continue to
have the right to elect directors as provided by the immediately preceding
sentence until all accrued and unpaid Preferential Dividends upon the
outstanding shares of Series One Preferred Stock shall have been paid (or set
aside for payment) in full. Such directors may be removed and replaced by such
stockholders, and vacancies in such directorships may be filled only by such
stockholders (or by the remaining director elected by such stockholders, if
there be one) in the manner permitted by law; provided, however, that any such
action by stockholders shall be taken at a meeting of stockholders and shall not
be taken by written consent thereto.
(D) Except as otherwise required by the Certificate of incorporation
or By-Laws or set forth herein, holders of Series One Preferred Stock shall have
no special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for the taking of any corporate action.
Section 4. Certain Restrictions.
(A) Whenever Preferential Dividends or Participating Dividends are
in arrears or the Corporation shall be in default of payment thereof, thereafter
and until all accrued and unpaid Preferential Dividends and Participating
Dividends, whether or not declared, on shares of Series One Preferred Stock
outstanding shall have been paid or set aside for payment in full, and in
addition to any and all other rights which any holder of shares of Series One
Preferred Stock may have in such circumstances, the Corporation shall not
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<PAGE>
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration, any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series One Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity as to dividends with the Series
One Preferred Stock, unless dividends are paid ratably on the Series One
Preferred Stock and all such parity stock on which dividends are payable
or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled if the full dividends accrued thereon
were to be paid;
(iii) except as permitted by subparagraph (iv) of this paragraph
4(A), redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series One Preferred Stock, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (both as to dividends and upon liquidation,
dissolution or winding up) to the Series One Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series One Preferred Stock, or any shares of stock ranking on a parity
with the Series One Preferred Stock (either as to dividends or upon
liquidation, dissolution or winding up), except in accordance with a
purchase offer made to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall
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<PAGE>
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any Subsidiary (as hereinafter
defined) of the Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such shares at
such time and in such manner. A "Subsidiary" of the Corporation shall mean any
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient to elect a majority of the Board of
Directors or other persons performing similar functions are Beneficially Owned,
directly or indirectly, by the Corporation or by any corporation or other entity
that is otherwise controlled by the Corporation.
(C) The Corporation shall not issue any shares of Series One
Preferred Stock except upon exercise of Rights issued pursuant to that certain
Rights Agreement dated as of February 1, 1999 between the Corporation and First
City Transfer Company, a copy of which is on file with the Secretary of the
Corporation at its principal executive office and shall be made available to
stockholders of record without charge upon written request therefor addressed to
said Secretary. Notwithstanding the foregoing sentence, nothing contained in the
provisions hereof shall prohibit or restrict the Corporation from issuing for
any purpose any series of Preferred Stock with rights and privileges similar to,
different from, or greater than, those of the Series One Preferred Stock.
Section 5. Reacquired Shares. Any shares of Series One Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares upon their retirement and
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<PAGE>
cancellation shall become authorized but unissued shares of Preferred Stock,
without designation as to series, and such shares may be reissued as part of a
new series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series One Preferred Stock unless the holders of shares of
Series One Preferred Stock shall have received, subject to adjustment as
hereinafter provided, (A) $100 ($1.00 per one one-hundredth of a share) plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment, or (B) if greater than the amount
specified in clause (i)(A) of this sentence, an amount equal to 100 times the
aggregate amount to be distributed per share to holders of Common Stock, as the
same may be adjusted as hereinafter provided, and (ii) to the holders of stock
ranking on a parity upon liquidation, dissolution or winding up with the Series
One Preferred Stock, unless simultaneously therewith distributions are made
ratably on the Series One Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of shares of
Series One Preferred Stock are entitled under clause (i)(A) of this sentence and
to which the holders of such parity shares are entitled, in each case upon such
liquidation, dissolution or winding up. The amount to which holders of Series
One Preferred Stock may be entitled upon liquidation, dissolution or winding up
of the Corporation pursuant to clause (i)(B) of the foregoing sentence is
hereinafter referred to as the "Participating Liquidation Amount" and the
multiple of the amount to be distributed to holders of shares of Common Stock
upon the liquidation, dissolution or winding up of the Corporation applicable
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<PAGE>
pursuant to said clause to the determination of the Participating Liquidation
Amount, as said multiple may be adjusted from time to time as hereinafter
provided, is hereinafter referred to as the "Liquidation Multiple." In this
event the Corporation shall at any time after the Effective Date declare or pay
any dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or split or a combination, consolidation or reverse split of the
outstanding shares of Common Stock into a greater or lesser number of shares of
Common Stock, or issue any of its capital stock in a reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing or surviving
corporation, then in each such case the Liquidation Multiple thereafter
applicable to the determination of the Participating Liquidation Amount to which
holders of Series One Preferred Stock shall be entitled after such event shall
be the Liquidation Multiple applicable immediately prior to such event
multiplied by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 7. Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Common Stock of the
Corporation receive after the Effective Date, in respect of their shares of
Common Stock any share of capital stock of the Corporation (other than any share
of Common Stock of the Corporation), whether by way of reclassification,
recapitalization, reorganization, dividend or other distribution or otherwise (a
"Transaction"), then, and in each such event the dividend rights, voting rights
and rights upon the liquidation, dissolution or winding up of the Corporation of
the shares of Series One Preferred Stock shall be adjusted so that after such
event the holders
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<PAGE>
of Series One Preferred Stock shall be entitled, in respect of each share of
Series One Preferred Stock held, in addition to such rights in respect thereof
to which such holder was entitled immediately prior to such adjustment, to (i)
such additional dividends as equal the Dividend Multiple in effect immediately
prior to such Transaction multiplied by the additional dividends which the
holder of a share of Common Stock shall be entitled to receive by virtue of the
receipt in the Transaction of such capital stock, (ii) such additional voting
rights as equal the Vote Multiple in effect immediately prior to such
Transaction multiplied by the additional voting rights which the holder of a
share of Common Stock shall be entitled to receive by virtue of the receipt in
the Transaction of such capital stock and (iii) such additional distributions
upon liquidation, dissolution or winding up of the Corporation as equal the
Liquidation Multiple in effect immediately prior to such Transaction multiplied
by the additional amount which the holder of a share of Common Stock shall be
entitled to receive upon liquidation, dissolution or winding up of the
Corporation by virtue of the receipt in the Transaction of such capital stock,
as the case may be, all as provided by the terms of such capital stock.
(B) In the event that holders of shares of Common Stock of the
Corporation receive after the Effective Date, in respect of their shares of
Common Stock any right or warrant to purchase Common Stock (including as such a
right, for all purposes of this paragraph, any security convertible into or
exchangeable for Common Stock) at a purchase price per share less than the Fair
Market Value (as hereinafter defined) of a share of Common Stock on the date of
issuance of such right or warrant, then and in each such event the dividend
rights, voting rights and rights upon the liquidation, dissolution or winding up
of the Corporation of the shares of Series One Preferred Stock shall each be
adjusted so that after
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<PAGE>
such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple
shall each be the product of the Dividend Multiple, the Vote Multiple and the
Liquidation Multiple, as the case may be, in effect immediately prior to such
event multiplied by a fraction the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock which could be
acquired upon exercise in full of all such rights or warrants and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately before such issuance of rights or warrants plus the number of shares
of Common Stock which could be purchased, at the Fair Market Value of the Common
Stock at the time of such issuance, by the maximum aggregate consideration
payable upon exercise in full of all such rights or warrants.
(C) In the event that holders of shares of Common Stock of the
Corporation receive after the Effective Date in respect of their shares of
Common Stock any right or warrant to purchase capital stock of the Corporation
(other than shares of Common Stock), including as such a right, for all purposes
of this paragraph, any security convertible into or exchangeable for capital
stock of the Corporation, (other than Common Stock), at a purchase price per
share less than the Fair Market Value of such shares of capital stock on the
date of issuance of such right or warrant, then and in each such event the
dividend rights, voting rights and rights upon liquidation, dissolution or
winding up of the Corporation of the shares of Series One Preferred Stock shall
each be adjusted so that after such event each holder of a share of Series One
Preferred Stock shall be entitled, in respect of each share of Series One
Preferred Stock held, in addition to such rights in respect thereof to which
such holder was entitled immediately prior to such event, to receive (i) such
additional dividends as equal the Dividend Multiple in effect immediately prior
to such event multiplied, first, by the additional
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<PAGE>
dividends to which the holder of a share of Common Stock shall be entitled upon
exercise of such right or warrant by virtue of the capital stock which could be
acquired upon such exercise and multiplied again by the Discount Fraction (as
hereinafter defined) and (ii) such additional voting rights as equal the Vote
Multiple in effect immediately prior to such event multiplied, first, by the
additional voting rights to which the holder of a share of Common Stock shall be
entitled upon exercise of such right or warrant by virtue of the capital stock
which could be acquired upon such exercise and multiplied again by the Discount
Fraction and (iii) such additional distribution upon liquidation, dissolution or
winding up of the Corporation as equal the Liquidation Multiple in effect
immediately prior to such event multiplied, first, by the additional amount
which the holder of a share of Common Stock shall be entitled to receive upon
liquidation, dissolution or winding up of the Corporation upon exercise of such
right or warrant by virtue of the capital stock which could be acquired upon
such exercise and multiplied again by the Discount Fraction. For purposes of
this paragraph, the "Discount Fraction" shall be a fraction the numerator of
which shall be the difference between the Fair Market Value of a share of the
capital stock subject to a right or warrant distributed to holders of shares of
Common Stock of the Corporation as contemplated by this paragraph immediately
after the distribution thereof and the purchase price per share for such share
of capital stock pursuant to such right or warrant and the denominator of which
shall be the Fair Market Value of a share of such capital stock immediately
after the distribution of such right or warrant.
(D) For purposes of this Certificate of Designations, the "Fair
Market Value" of a share of capital stock of the Corporation (including a share
of Common Stock) on any date shall be deemed to be the average of the daily
closing price per share thereof over the 30 consecutive Trading Days (as such
term is hereinafter defined) immediately prior to such
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<PAGE>
date; provided, however, that, in the event that such Fair Market Value of any
such share of capital stock is determined during a period which includes any
date that is within 30 Trading Days after (i) the ex-dividend date for a
dividend or distribution on stock payable in shares of such stock or securities
convertible into shares of such stock, or (ii) the effective date of any
subdivision, split, combination, consolidation, reverse stock split or
reclassification of such stock, then, and in each such case, the Fair Market
Value shall be appropriately adjusted by the Board of Directors of the
Corporation to take into account ex-dividend or post-effective date trading. The
closing price for any day shall be the last sale price, regular way, or, in
case, no such sale takes place on such day, the average of the closing bid and
asked prices, regular way (in either case, as reported in the applicable
transaction reporting system with respect to securities listed or admitted to
trading on the American Stock Exchange), or, if the shares are not listed or
admitted to trading on the American Stock Exchange, as reported in the
applicable transaction reporting system with respect to securities listed on the
principal national securities exchange on which the shares are listed or
admitted to trading or, if the shares are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") or such other system then in use, or if on any such
date the shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the shares selected by the Board of Directors of the Corporation.
The term "Trading Day" shall mean a day in which the principal national
securities exchange on which the shares are listed or admitted to trading is
open for the transaction of business or, if the shares are not listed or
admitted to trading on any
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<PAGE>
national securities exchange, on which the American Stock Exchange or such other
national securities exchange as may be selected by the Board of Directors of the
Corporation is open. If the shares are not publicly held or not so listed or
traded on any day within the period of 30 Trading Days applicable to the
determination of Fair Market Value thereof as aforesaid, "Fair Market Value"
shall mean the fair market value thereof per share as determined in good faith
by the Board of Directors of the Corporation. In either case referred to in the
foregoing sentence, the determination of Fair Market Value shall be described in
a statement filed with the Secretary of the Corporation.
Section 8. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
outstanding share of Series One Preferred Stock shall at the same time be
similarly exchanged for or changed into the aggregate amount of stock,
securities, cash and/or other property (payable in like kind), as the case may
be, for which or into which each share of Common Stock is changed or exchanged
multiplied by the highest of the Vote Multiple, the Dividend Multiple or the
Liquidation Multiple in effect immediately prior to such event.
Section 9. Effective Time of Adjustments.
(A) Adjustments to the Series One Preferred Stock required by the
provisions hereof shall be effective as of the time at which the event requiring
such adjustments occurs.
(B) The Corporation shall give prompt written notice to each holder
of a share of Series One Preferred Stock of the effect of any adjustment to the
voting rights, dividend rights or rights upon liquidation, dissolution or
winding up of the Corporation of such
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<PAGE>
shares required by the provisions hereof. Notwithstanding the foregoing
sentence, the failure of the Corporation to give such notice shall not affect
the validity of or the force or effect of or the requirement for such
adjustment.
Section 10. No Redemption. The shares of Series One Preferred Stock
shall not be redeemable at the option of the Corporation or any holder thereof.
Notwithstanding the foregoing sentence of this Section, the Corporation may
acquire shares of Series One Preferred Stock in any other manner permitted by
law, the provisions hereof and the Certificate of Incorporation of the
Corporation.
Section 11. Ranking. Unless otherwise provided in the Amended and
Restated Certificate of Incorporation of the Corporation or a Certificate of
Designations relating to a series of preferred stock of the Corporation
established after the issuance of any share of Series One Preferred Stock or any
right, warrant, or option providing for the issuance thereof, the Series One
Preferred Stock shall rank, as to the payment of dividends and the distribution
of assets on liquidation, dissolution or winding up, (i) junior to all other
series of the Corporation's Preferred Stock and (iv) senior to the Common Stock.
Section 12. Amendment. The provisions hereof and the Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
adversely affect the rights, privileges or powers of the Series One Preferred
Stock without, in addition to any other vote of stockholders required by law,
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series One Preferred Stock, voting together as a single class.
Section 13. Fractional Shares. Series One Preferred Stock may be
issued in fractions of a share (in one one-hundredths (1/100th) of a share and
integral multiples thereof)
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<PAGE>
that shall entitle the holder thereof, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and have the benefit of all other rights of holders of shares of
Series One Preferred Stock.
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<PAGE>
IN WITNESS WHEREOF, I have executed and subscribed this Certificate
to Designations and do affirm the foregoing as true under the penalties of
perjury this 2nd day of February, 1999.
----------------------------------
Name: Anthony Caldarone
Title: Chairman of the Board
and Chief Executive Officer
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EXHIBIT 3.2
CALTON, INC.
BY-LAWS
ARTICLE I
OFFICES
Section 1. The registered office shall be at 500 Craig Road, in the
Township of Freehold, County of Monmouth, State of New Jersey. The registered
agent of the Corporation at such office is Robert E. Linkin.
Section 2. The Corporation may also have offices at such other places,
both within and without the State of New Jersey, as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. All meetings of the shareholders for the election of directors
and for any other purpose may be held at such time and place, within or without
the State of New Jersey, as shall be stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
Section 2. Annual meetings of shareholders shall be held on a regular
business day of the month of March or April at the offices of the Corporation or
at such other date, time and place of which shall be established by the Board of
Directors, at which they shall elect by a plurality vote a Board of Directors
and transact such other business as may properly be brought before the meeting.
Section 3. Notice of the annual meeting shall be given by mailing, no more
than sixty (60) days nor less than ten (10) days prior thereto, a written notice
stating the time and place thereof, directed to each shareholder of record
entitled to vote at the meeting at his address as the same appears upon the
records of the Corporation.
Section 4. The officer or agent having charge of the stock transfer books
for shares of the Corporation shall make and certify a complete list of the
shareholders entitled to vote at a shareholders' meeting or any adjournment
thereof. Such list shall be arranged alphabetically within each class, series,
or group of shareholders maintained by the
<PAGE>
Corporation, showing the address of, and the number of shares held by, each
shareholder. Such list shall be produced at the time and place of the meeting;
be subject to the inspection of any shareholder during the whole time of the
meeting; and be prima facie evidence as to who are the shareholders entitled to
examine such list or to vote at any such meetings.
Section 5. Special meetings of the shareholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the Chairman of the Board or the president, and
shall be called by the president or secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of shareholders
owning a majority in amount of the entire capital stock of the Corporation
issued and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting.
Section 6. Written or telegraphic notice of a special meeting of
shareholders, stating the time, place and object thereof, shall be given to each
shareholder entitled to vote thereat, not more than sixty (60) nor less than ten
(10) days before the date fixed for the meeting.
Section 7. Business transacted at any special meeting of shareholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the shareholders for the transaction of
business, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the shareholders, the shareholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjourned meeting is for more than thirty (30) days, or, if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder of record
entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present, in person or
represented by proxy, shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation a different vote is required, in which case
such express provision shall govern and control the decision of such question.
<PAGE>
Section 10. Each shareholder shall, at every meeting of the shareholders,
be entitled to that number of votes in person or by proxy as provided in the
certificate of incorporation for each share of capital stock having voting power
held by such shareholder.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent without a meeting may authorize another person or persons to act
for him by proxy. Every proxy shall be executed in writing by the shareholder or
his agent, except that a proxy may be given by a shareholder or his agent by
telegram or cable or by any means of electronic communication which results in a
writing. No proxy shall be valid for more than 11 months, unless a longer time
is expressly provided therein. Unless it is irrevocable as provided below in
this Article II, Section 10, a proxy shall be revocable at will. The grant of a
later proxy revokes any earlier proxy unless the earlier proxy is irrevocable. A
proxy shall not be revoked by the death or incapacity of a shareholder but such
proxy shall continue in force until revoked by the personal representative or
guardian of the shareholder. The presence at any meeting of any shareholder who
has given a proxy does not revoke the proxy unless the shareholder files written
notice of the revocation with the secretary of the meeting prior to the voting
of the proxy or votes the shares subsequent to the proxy by written ballot.
A proxy which states that it is irrevocable is irrevocable if coupled with
an interest either in the stock itself or in the Corporation and, in particular
and without limitation, if it is held by any of the following or a nominee of
any of the following: (a) a pledgee; (b) a person who has purchased or agreed to
purchase the shares; (c) a creditor of the Corporation who has extended credit
or has agreed to continue to extend credit to the Corporation if the proxy is
given in consideration of the extension or continuation; (d) a person who has
agreed to perform services as an employee of the Corporation if the proxy is
given in consideration of the agreement; or (e) a person designated pursuant to
the terms of an agreement as to voting between two or more shareholders. An
irrevocable proxy becomes revocable when the interest which supports the proxy
has terminated. Unless noted conspicuously on the share certificate, an
otherwise irrevocable proxy may be revoked by a person who becomes the holder of
the shares without actual knowledge of the restriction.
A person named in a proxy as the attorney or agent of a shareholder may,
if the proxy so provides, substitute another person to act in his place,
including any other person named as an attorney or agent in the same proxy. The
substitution shall not be effective until an instrument effecting it is filed
with the secretary of the Corporation.
Section 11. Whenever the vote of shareholder at a meeting thereof is
required or permitted to be taken in connection with any corporate action by any
provision of the statutes or of the Certificate of Incorporation, the meeting
and the vote of shareholders may be dispensed with if all the shareholders who
would have been entitled to vote upon the
<PAGE>
action if such meeting were held shall consent in writing to such corporate
action being taken, and in the case of any action to be taken pursuant to
Chapter 10 of Title 14A of the Revised Statutes of the State of New Jersey, the
Corporation provides to all other shareholders the advanced notification
required by N.J.S.A. 14A:5-6(2)(b).
Subject to the provisions of N.J.S.A. 14A:5-6(2), whenever the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the statutes or of the
Certificate of Incorporation, other than the election of directors, the meeting
and vote of shareholders may be dispensed with and the action may be taken
without a meeting upon the written consent of shareholders who would have been
entitled to cast the minimum number of votes which would be necessary to
authorize such action at a meeting at which all shareholders entitled to vote
thereon were present and voting.
Section 12. At each meeting of shareholders, the Chairman of the Company's
Board of Directors or in his or her absence the President of the Company or in
his or her absence any Vice President of the Company or in his or her absence a
chairman chosen by the vote of a majority in interest of the shareholders
present in person or represented by proxy and entitled to vote thereat, shall
act as chairman. The Secretary or in his or her absence an Assistant Secretary
or in the absence of the Secretary and all Assistant Secretaries a person whom
the chairman of the meeting shall appoint shall act as secretary of the meeting
and keep a record of the proceedings thereof. The Board of Directors of the
Corporation shall be entitled to make such rules or regulations for the conduct
of meetings of shareholders as it shall deem necessary, appropriate or
convenient. Subject to such rules and regulations, the chairman shall have the
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to shareholders of record of the
Corporation and their duly authorized and constituted proxies, and such other
persons as the chairman shall permit, restrictions on entry at the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulation of the opening and closing
of the polls for balloting on matters which are to be voted on by ballot. The
chairman shall have absolute authority over matters of procedure and there shall
be no appeal from the ruling of the chairman. The chairman may rule that a
resolution, nomination or motion not be submitted to the shareholders for a vote
unless seconded by a shareholder or a proxy for a shareholder. The chairman may
require that any person who is neither a bona fide shareholder nor a proxy for a
bona fide shareholder leave the meeting, and upon the refusal of a shareholder
to comply with a procedural ruling of the chairman which the chairman deems
necessary for the proper conduct of the meeting, may require that such
shareholder leave the meeting. The chairman may, on his own motion,
<PAGE>
summarily adjourn any meeting for any period he deems necessary if he rules that
orderly procedures cannot be maintained at the meeting. Unless, and to the
extent, determined by the Board of Directors or the chairman of the meeting,
meetings of shareholders shall not be required to be held in accordance with
rules of parliamentary procedure.
Section 13. To be properly brought before an annual meeting of
shareholders, business must be either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) otherwise properly brought before the meeting by or at the direction of the
Board or (c) otherwise properly brought before the meeting by a shareholder. In
addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing, either by personal delivery or by United
States mail, postage prepaid, to the Secretary of the Corporation not later than
90 days prior to the meeting anniversary date of the immediately preceding
annual meeting. A shareholder's notice to the Secretary shall set forth as to
each matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting, (ii) the name and record address of the shareholder proposing such
business, (iii) the class and number of shares of the Corporation which are
beneficially owned by the shareholder and (iv) any material interest of the
shareholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 13 of Article II and any other applicable requirements,
provided, however, that nothing in this Section 13 of Article II shall be deemed
to preclude discussion by any shareholder of any business properly brought
before the annual meeting.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 13 of Article II and
any other applicable requirements and if he should so determine, which
determination shall be conclusive, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole Board
shall be the number, not less than three nor more than fifteen, fixed from time
to time by a majority vote of the whole Board of Directors; provided, no
decrease in the number of directors shall shorten the term of any incumbent
director. Each director shall serve for the
<PAGE>
term of the class for which elected or until such time as a successor shall have
been duly elected and shall have qualified. Directors need not be shareholders.
Section 2. Nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of directors generally. However,
any shareholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation not later than (i) with
respect to an election to be held at an annual meeting of shareholders, 90 days
prior to the anniversary date of the immediately preceding annual meeting; and
(ii) with respect to an election to be held at a special meeting of shareholders
for the election of directors, the close of business on the tenth day following
the date on which notice of such meeting is first given to shareholders. Each
such notice shall set forth: (a) the name and address of the shareholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (d) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (e)
the signed consent of each nominee to serve as a director of the Corporation if
so elected. The Corporation may require any proposed nominee or shareholder
proposing a nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such proposed
nominee to serve as a director of the Corporation or to properly complete any
proxy or information statements used for the solicitation of proxies in
connection with the meeting at which directors are to be elected. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
Section 3. Whenever any vacancy shall occur in the Board of Directors by
death, resignation or otherwise, it shall be filled by a majority vote of the
directors then in office, though less than a quorum, but any such director so
elected shall hold office only until the next succeeding annual meeting of
shareholders. At such annual meeting, such director or a successor to such
director shall be elected and qualified in the class to which such director is
assigned to hold office for the term or remainder of the term of such class. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
<PAGE>
Section 4. The business of the Corporation shall be managed by its Board
of Directors, which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the shareholders.
Section 5. The removal of one or more directors for cause or without cause
shall be governed by N.J.S.A. 14A:6-6 or any successor provisions thereto.
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. The Board of Directors of the Corporation may hold meetings,
both regular or special, either within or without the State of New Jersey.
Section 7. The first meeting of each newly elected Board of Directors
shall be held at such time and place as shall be fixed by the vote of the
shareholders at the annual meeting, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
shareholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the shareholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors, or upon the conclusion of the
shareholders' meeting at which time they were elected, without further notice.
At such meeting the Board of Directors shall elect from their own number a
chairman of the Board and president for the ensuing year and until their
successors are elected and qualify in their stead, elect other officers of the
Corporation, and shall transact such other business as may come before the
meeting.
Section 8. Regular meetings of the Board of Directors may be held without
notice at such time and to such place as shall from time to time be determined
by the Board.
Section 9. Special meetings of the Board may be called by the chairman of
the Board or president or secretary on three (3) days notice to each director,
either personally or by mail or by telegram. Special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of any two directors.
Section 10. At all meetings of the Board, a majority of the directors in
office shall constitute a quorum for the transaction of business, and the act of
a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of
<PAGE>
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 11. Unless otherwise restricted by the Certificate of
Incorporation or by these By-Laws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if a written consent thereto is signed by all members of
the Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
COMPENSATION OF DIRECTORS
Section 12. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors, and directors who are not
full-time employees of the Corporation may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as a director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
COMMITTEES OF DIRECTORS
Section 13. The Board of Directors may, by resolution passed by a majority
of the whole Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of two
or more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that in the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors.
Section 14. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
ARTICLE IV
NOTICES
<PAGE>
Section 1. Notices to directors and shareholders shall be in writing and
delivered personally or mailed to the directors or shareholders at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given if given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by the Board of
Directors and shall be a Chairman of the Board, a president, one or more
vice-presidents, a secretary, a treasurer and such assistant secretaries and
assistant treasurers as the Board of Directors shall from time to time
determine. The Board of Directors may also designate one or more vice-presidents
to be executive vice-presidents and/or senior vice-presidents. Two or more
offices may be held by the same person except that where the offices of
president and secretary are held by the same person, such person shall not hold
any other office.
Section 2. The Board of Directors may appoint each other officers and
agents as it shall deem necessary, who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 3. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors, except that the Board of Directors may
delegate such duty to an officer or officers of the Corporation.
Section 4. The officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors, without the necessity of specifying any cause therefor
and without any prior notice of such action to the officer so removed.
THE CHAIRMAN OF THE BOARD
Section 5. The chairman of the board shall preside at all meetings of the
shareholders and the Board of Directors. He shall, in the absence or the
disability of the president, perform the duties and exercise the powers of the
president, and shall perform such other duties as may be delegated to him by the
Board of Directors.
<PAGE>
THE PRESIDENT
Section 6. The President shall be the chief executive officer of the
Corporation, shall have general and active management of the business of the
Corporation, and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 7. The President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to the officers of the Corporation or to some other officer
or agent of the Corporation.
THE VICE-PRESIDENT
Section 8. The vice-president, or if there shall be more than one, the
vice-presidents, shall, in the absence or disability of the president and the
Chairman of the Board and the executive vice-president and/or senior
vice-president, if any, perform the duties and exercise the powers of the
president and shall perform such other duties and have such other powers as the
Board of Directors or the president may from time to time prescribe. The Board
of Directors may determine the order in which the vice-presidents shall so act
in place of the president, and may designate a vice-president to perform all of
the duties of the president in the case of the absence or disability of the
president. The exercise of any power or the performance of any duty of the
president by the vice-president so designated shall be conclusive evidence of
the disability of the president and the Chairman of the Board and the executive
vice-president and/or senior vice-president.
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The Secretary or an assistant secretary shall attend all
meetings of the Board of Directors and all meetings of the shareholders and
record all the proceedings of the meetings of the Corporation and of the Board
of Directors in a book to be kept for that purpose. He shall give, or cause to
be given, notice of all meetings of the shareholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or president, under whose supervision he shall be. He
shall have custody of the corporate seal of the Corporation and be, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and, when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries, in the order determined by the Board of Directors, shall,
in the absence or
<PAGE>
disability of the secretary, perform the duties and exercise the powers of the
secretary, and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURER
Section 11.The treasurer shall have the custody of the corporate funds and
securities, and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation, and shall deposit all
monies and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
Section 12. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
Corporation.
Section 13. If required by the Board of Directors, he shall give the
Corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in the case of his death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belong to the Corporation.
Section 14. The assistant treasurer, or if there shall be more than one,
the assistant treasurers, in the order determined by the Board of Directors,
shall, in the absence or disability of the treasurer, perform the duties and
exercise the powers of the treasurer as the Board of Directors may from time to
time prescribe.
ARTICLE VI
INDEMNIFICATION
Section 1. The Corporation shall indemnify a corporate agent against his
expenses and liabilities actually and reasonably incurred in connection with the
defense of any proceeding involving the corporate agent by reason of his being
or having been such a corporate agent, other than a proceeding by or in the
right of the Corporation, if (a) such corporate agent acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation and (b) with respect to any criminal proceeding, such corporate
agent had no reasonable cause to believe his conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that
<PAGE>
such corporate agent did not meet the applicable standards of conduct set forth
in paragraphs (a) and (b) herein.
Section 2. The Corporation shall indemnify a corporate agent against his
liabilities and expenses, actually or reasonably incurred by him in connection
with the defense, in any proceeding, by or in the right of the Corporation to
procure a judgment in its favor which involves the corporate agent by reason of
his being or having been such corporate agent, if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation. However, in such proceeding no indemnification shall be
provided in respect of any claim, issue or matter as to which such corporate
agent shall have been adjudged liable to the Corporation unless and only to the
extent that the New Jersey Superior Court or the court in which such proceeding
was brought shall determine upon application that despite the adjudication of
liability, but in view of all circumstances of the case, such corporate agent is
fairly and reasonably entitled to indemnity for such expenses or liabilities as
the New Jersey Superior Court or such other court shall deem proper.
Section 3. The Corporation shall indemnify a corporate agent against
expenses (including attorneys fees) to the extent that such corporate agent has
been successful on the merits or otherwise in any proceeding referred to in
Sections 1 and 2 of this Article or in defense of any claim, issue or matter
therein.
Section 4. Any indemnification under Section 1 of this Article and, unless
ordered by a court, under Section 2 of this Article, may be made by the
Corporation only as authorized in a specific case upon a determination that
indemnification is proper in the circumstances because the corporate agent met
the applicable standard of conduct set forth in Sections 1 or 2 of this Article.
Such determination shall be made (a) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to or otherwise
involved in the proceeding or (b) if such a quorum is not obtainable, or, event
if obtainable and such quorum of the Board of Directors by a majority vote of
the disinterested directors so directs, by independent legal counsel in a
written opinion, such counsel to be designated by the Board of Directors or (c)
by the shareholders.
Section 5. Expenses incurred by a corporate agent in connection with a
proceeding may be paid by the Corporation in advance of the final disposition of
the proceeding, as authorized by the Board of Directors, upon receipt of an
undertaking by or on behalf of the corporate agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified as
provided in this Article.
Section 6. The indemnification and advancement of expenses provided by or
granted pursuant to the other sections of this Article shall not exclude any
other rights to which a corporate agent may be entitled under the certificate of
incorporation, a bylaw, agreement, vote of shareholders, or otherwise; provided
that no indemnification shall be
<PAGE>
made to or on behalf of a corporate agent if a judgment or other final
adjudication adverse to the corporate agent establishes that his acts or
omissions (a) were in breach of his duty of loyalty to the Corporation or its
Shareholders, (b) were not in good faith or involved a knowing violation of law
or (c) resulted in receipt by the corporate agent of an improper personal
benefit.
Section 7. The Corporation shall have the power to purchase and maintain
insurance on behalf of any corporate agent against any expenses incurred in any
proceeding and any liabilities asserted against him by reason of his being or
having been a corporate agent, whether or not the Corporation would have the
power to indemnify him against such expenses and liabilities under the
provisions of this section. The Corporation may purchase such insurance from, or
such insurance may be reinsured in whole or in part by, an insurer owned by or
otherwise affiliated with the Corporation, whether or not such insurer does
business with other insureds.
ARTICLE VII
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the Corporation shall be entitled to
have a certificate signed by, or in the name of, the Corporation by the Chairman
of the Board or president or executive vice-president, a senior vice-president
or a vice-president and by the treasurer or an assistant treasurer or the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Where a certificate is countersigned (a) by a transfer agent
other than the Corporation or its employee or (b) by a registrar other than the
Corporation or its employee, any other signature on the certificate, including
the signatures of the officers of the Corporation, may be facsimiles. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
LOST CERTIFICATES
Section 3. Any person claiming a certificate or certificates of stock of
the Corporation to be lost, stolen or destroyed shall provide notice of that
fact to the secretary or an assistant secretary of the Corporation. Any two (2)
officers of the Corporation, other than an assistant secretary or an assistant
treasurer, may direct a new certificate or certificates to be issued in place of
and of the same tenor and for the same number of shares as the certificate or
certificates theretofore issued by the Corporation and alleged to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person
<PAGE>
claiming the certificate or certificates of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates,
such officers may, in their discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond or indemnity in form and amount and with one or more sureties
satisfactory to such officers as indemnity against any claim that may be made
against the Corporation with respect to the certificate or certificates alleged
to have been lost, stolen or destroyed. The Board of Directors may at any time
authorize the issuance of a new certificate or certificates to replace a
certificate or certificates alleged to be lost, stolen or destroyed upon such
other lawful terms and conditions as the Board of Directors shall prescribe.
TRANSFER OF STOCK
Section 4. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence or succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 5. In order that the Corporation may determine the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of such meeting, not more than sixty (60) days prior to any other
action. A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments, a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of New
Jersey.
ARTICLE VIII
<PAGE>
LOANS AND GUARANTEES
Section 1. The Corporation may make loans to, may guarantee the
indebtedness of, and may otherwise provide financial assistance to any director,
officer or employee of the Corporation, provided that the Board determines, in
its judgment, that the action may reasonably be expected to benefit the
Corporation. Loans, guarantees, and other financial assistance made pursuant to
this Section shall contain all terms and conditions that the Board of Directors
deems appropriate at the time the loans, guarantees, or assistance are made.
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends upon the capital stock of the Corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends, such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meeting contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the shareholders when called for by vote of the
shareholders, a full and clear statement of the business and condition of the
Corporation.
CHECKS
Section 4. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
Section 5. The officers of the Corporation and such other persons as may
be designated by the Board of Directors, shall severally have full power and
authority to receive and give receipt for all monies due and payable to this
Corporation from any source
<PAGE>
whatever, and to endorse for deposit warrants and checks in its name, and on its
behalf, and to give full discharge for the same.
FISCAL YEAR
Section 6.The fiscal year of the Corporation shall begin on the first day
of December of each year.
SEAL
Section 7.The corporate seal shall have inscribed thereon the following:
"CALTON, INC., 1981, Corporate Seal, New Jersey". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE X
DEFINITIONS
All terms used in these By-laws shall have the meaning defined in the New
Jersey Business Corporation Act, which are incorporated herein by reference,
unless otherwise defined in these By-laws.
ARTICLE XI
AMENDMENTS
Section 1.These By-Laws may be altered, amended or repealed, or new
by-laws may be adopted by the Board of Directors, at any regular meeting of the
Board of Directors or at any special meeting of the Board of Directors. These
By-Laws may also be altered, amended or repealed, or new by-laws may be adopted,
by the shareholders, at any regular meeting or at any special meeting if notice
of such alternation, amendment, repeal or adoption of new by-laws be contained
in the notice of such special meeting.
EXHIBIT 10.9
CONSULTING AGREEMENT
CONSULTING AGREEMENT ("AGREEMENT") dated as of December 31, 1998, between
Calton, Inc., a New Jersey corporation ("CONSULTANT"), and Braewood Development
Corp., a Nevada corporation ("Braewood") and a wholly-owned subsidiary of Centex
Real Estate Corporation, a Nevada corporation ("Braewood").
RECITALS
A. Braewood has purchased from Consultant all the issued and outstanding
capital stock of Calton Homes, Inc., a New Jersey corporation (the
"COMPANY"), pursuant to a Stock Purchase Agreement dated as of September
2, 1998 (the "STOCK PURCHASE AGREEMENT"). The Company designs, constructs
and sells single-family detached homes in Central New Jersey.
B. Consultant and its officers, including Anthony J. Caldarone, have valuable
experience and knowledge regarding the Company's business and the New
Jersey homebuilding market. In order to take advantage of such experience
and knowledge, and pursuant to Section 4.24 of the Stock Purchase
Agreement, Braewood desires to engage Consultant to furnish to Braewood
and the Company certain consulting services hereinafter described, and
Consultant desires to accept such engagement, on the terms and conditions
set forth in this Agreement.
NOW THEREFORE, in consideration of the agreements set forth herein, and for
other good and valuable consideration, the receipt and sufficiently of which are
hereby acknowledged, the parties hereby agree as follows:
1. Duties of Consultant. Braewood hereby engages Consultant, and Consultant
hereby accepts such engagement, to provide information, advice and
recommendations (the "INFORMATION") to the officers, managers and other
employees of Braewood and the Company with respect to the homebuilding market in
the State of New Jersey and the Commonwealth of Pennsylvania and such submarkets
within the State of New Jersey and the Commonwealth of New Jersey as Braewood
may specify from time to time (collectively, the "MARKETS"). The Information
shall be provided by Consultant to Braewood in the form of written reports at
least once each calendar quarter and shall include statistical data and analysis
regarding sales trends of particular home designs and floor plans; customer
tastes and preferences; home prices; building permit and job growth; land and
lot availability and acquisition opportunities; the financial performance of
competitors (to the extent available); and such other information relating to
the homebuilding industry as Braewood may reasonably request, in each case in
the Markets. Consultant shall use its best efforts to identify corporate
acquisition candidates and other business opportunities (including without
limitation opportunities relating to retirement housing) for Braewood and the
Company in the Markets. Upon Braewood's request, Consultant shall assist
Braewood and the Company in obtaining development entitlements for land (such as
zoning, subdivision, etc.), in marketing and promotional activities, in
procuring goods and services from third parties and in locating, screening,
interviewing and recommending compensation levels for prospective employees, in
each case in the Markets. Consultant shall make its designated officers and
other appropriate personnel reasonably available on a regular basis to consult
with Braewood and the Company regarding the foregoing matters.
<PAGE>
Consultant shall provide to Braewood and the Company such other consulting
services relating to the homebuilding industry in the Markets as Braewood may
from time to time reasonably request.
2. Exclusivity of Services. Without limiting in any way the provisions of
the Non-Competition Agreements between Braewood, on the one hand, and Consultant
and Anthony J. Caldarone, on the other, in each case dated December 31, 1998
(the "Non-Competition Agreements"), Consultant agrees that neither it nor any of
its officers, directors, employees or other affiliates (including Anthony J.
Caldarone and Joyce P. Caldarone) shall provide consulting services of the type
contemplated by this Agreement to any other person or entity in the Markets,
directly or indirectly, either through any form of ownership (other than
ownership of securities of a publicly held corporation of which it owns, or has
real or contingent rights to own, less than one percent of any class of
outstanding securities), or as a principal, agent, employee, employer, advisor,
consultant, partner or in any other capacity whatsoever, either for its own
benefit or for the benefit of any other person, firm, corporation or
governmental, private or other entity of whatever kind. The duration of the
covenants contained in this Section 2 shall be (a) with respect to Consultant,
the term of this Agreement and a period of four years thereafter, (b) with
respect to Anthony J. Caldarone, the term of this Agreement and a period of four
years after the earlier to occur of the termination of this Agreement or the
termination of his employment with Consultant and its affiliates, and (c) with
respect to Joyce P. Caldarone, a period of four years from the date hereof.
Nothing herein shall replace or limit in any respect the obligations of
Consultant or Anthony J. Caldarone under their respective Non-Competition
Agreements.
3. Conduct of Activities by Consultant. Consultant will carry out its
duties hereunder through its officers and employees designated by it from time
to time; provided, however, that Anthony J. Caldarone shall actively participate
in the performance by Consultant of its duties for so long as he remains
employed by or associated with Consultant. Consultant covenants and agrees that
it will make available and assign such personnel, and ensure that they devote
such time and effort, as shall be necessary to perform Consultant's duties
hereunder in a thorough and professional manner and otherwise to cause the
purposes of this Agreement to be accomplished. The Information provided by
Consultant shall be used by Braewood and the Company for such purposes, if any,
as the Board of Directors or management of Braewood or the Company may determine
in their sole discretion.
4. Compensation of Consultant. For Consultant's services hereunder and for
expenses to be incurred in connection with such services, Braewood shall
compensate Consultant at the rate of $1.5 million per year, payable in equal
quarterly installments, commencing three months after the Effective Date (as
defined in the Stock Purchase Agreement); provided, however, that in no event
shall such payment be due prior to 30 days following the date of this Agreement;
and provided, further, however, that if, at any time during the fourth year of
the term of this Agreement, Anthony J. Caldarone is not employed by or otherwise
associated with Consultant, the total compensation payable by Braewood to
Consultant for such fourth year shall equal the pro rata amount payable to
Consultant for the period up to and including the termination of Mr. Caldarone's
employment or association with Consultant. Notwithstanding anything to the
contrary in the preceding sentence, in no event shall the total compensation
payable to Consultant for the fourth year of the term of this Agreement be less
than $750,000. Consultant acknowledges that the compensation described in this
paragraph is fair and adequate for the services to be provided by it under this
Agreement, and
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<PAGE>
Consultant shall not receive any separate or additional compensation for any
such services. Braewood shall reimburse Calton, in accordance with Braewood's
expense reimbursement policy, for reasonable out-of-pocket expenses incurred by
Calton in connection with the performance of its obligations under this
Agreement and approved in advance by Braewood, upon submission to Braewood of
original receipts therefor or such other evidence as Braewood deems
satisfactory; provided, however, that Calton shall not be entitled to
reimbursement for any expenses in any year until its reasonable expenses, for
which it has received Braewood's prior approval and submitted receipts or other
evidence satisfactory to Calton, have exceeded $60,000 in such year, it being
understood and agreed that the first $60,000 of expenses reasonably incurred by
Calton in each year in connection with this Agreement shall be the sole
responsibility of Calton.
5. Term and Termination. This Agreement shall continue in effect for a
period of four years from the date hereof, unless earlier terminated in
accordance herewith. This Agreement may be terminated by mutual agreement of the
parties, or by either party immediately upon notice to the other party following
a Default by such other party. For purposes of this Agreement, a "Default" shall
be deemed to occur under the following circumstances:
(a) any violation by Consultant of any provision of its Non-Competition
Agreement shall constitute a Default by Consultant under this
Agreement;
(b) any violation by Anthony J. Caldarone of any provision of his
Non-Competition Agreement, if Mr. Caldarone is employed by or
otherwise associated with Consultant or any affiliate of Consultant
at the time of such violation, shall constitute a Default by
Consultant under this Agreement;
(c) any material breach of Section 2, 7 or 8 of this Agreement by
Consultant, or by any of its affiliates or agents as contemplated by
such sections, shall constitute a Default by Consultant;
(d) a material breach or failure by either party to perform its
obligations under any provision of this Agreement other than Section
2, 7 or 8, which breach or failure is not cured within 30 days of
receipt of written notice of Default, shall constitute a Default by
such party; or
(e) if either party becomes insolvent, is adjudged a bankrupt, makes a
general assignment for the benefit of creditors or takes the benefit
of any legislation for the liquidation or winding up of
corporations, then such party shall be deemed to have committed a
Default.
For purposes of this Section 5, a "material" breach or failure by a party is (i)
an intentional breach or failure, (ii) a breach or failure that causes or
results in, or in the judgment of the other party is reasonably anticipated to
cause or result in, costs, expenses or liabilities to such other party of
$50,000 or more, or (iii) a breach or failure that causes or results in a
significant and ongoing interruption of the other party's operations. Upon any
termination of this Agreement for any reason, neither party shall have any
further obligations to the other party; provided, however, that (x) the
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<PAGE>
provisions of Sections 2, 7, 8 and 9 hereof shall survive termination of this
Agreement, (y) Braewood shall continue to be obligated to make the payments
required by Section 4 of this Agreement, without right of offset, payable in the
manner and at the times specified therein (it being understood and agreed that
Braewood's sole remedies for a Default by Consultant shall be those set forth in
Sections 9 and 10 hereof), and (z) nothing herein shall relieve either party of
responsibility for its own Default, as provided in Sections 9 and 10 hereof.
6. Independent Contractor Status. The services of Consultant hereunder as a
consultant to Braewood and the Company will be those of an independent
contractor, and neither Consultant nor any officer, agent or employee of
Consultant will be regarded as an agent or employee of Braewood or the Company
for any purpose. Consultant shall have the right to determine the means and
methods of performing its consulting duties hereunder. Neither Consultant nor
any officer, agent or employee of Consultant shall hold itself, himself or
herself out as an agent or employee of Braewood or the Company or have any
authority to incur any financial obligations or make other commitments on behalf
of Braewood or the Company.
7. Confidentiality. Consultant shall treat as confidential all information
(including, without limitation, all know-how, trade secrets, business plans,
projections and decisions, computer programs and related manuals, pricing
information, supplier names and contact persons, customer lists, financing
sources and contracts, teaching and training materials, and sales strategies)
obtained from, or on behalf of, Braewood or the Company (the "CONFIDENTIAL
INFORMATION") and shall not disclose any of such information to persons not
directly involved with Braewood or the Company or use such information for its
personal gain without the prior written consent of Braewood, which may be
withheld in Braewood's sole discretion; provided, however, that the term
"Confidential Information" does not include any information which (i) at the
time of disclosure is generally available to the public (other than as a result
of a disclosure directly or indirectly by Consultant or any affiliate or agent
of Consultant), (ii) was disclosed to Consultant on a nonconfidential basis by a
source other than Braewood or its affiliates or agents, provided that such
source was not bound by any duty of confidentiality, or (iii) information
developed by Consultant after the termination of this Agreement independent of,
and without any knowledge of, any disclosure made to it or information provided
or made available to it by or on behalf of Braewood or its affiliates or agents.
Consultant shall not impair any of Braewood's or the Company's intellectual
property rights, including copyrights and rights to trademarks, or make any
unauthorized use of such intellectual property rights or the Confidential
Information. All employees or agents of Consultant who have access to the
Confidential Information shall be bound by this Section 7 and shall be
admonished by Consultant that they are obligated to preserve the confidentiality
of the Confidential Information and may not make unauthorized use of the
Confidential Information or of Braewood's or the Company's intellectual property
rights. All Confidential Information shall remain the sole and exclusive
property of Braewood or the Company and shall not be used, copied or reproduced.
8. Non-Solicitation of Employees. During the term of this Agreement and for
a period of two years following the termination of this Agreement, Consultant
will not, directly or indirectly, solicit or otherwise induce any of the
employees of Braewood or the Company to leave the employment of Braewood or the
Company.
-4-
<PAGE>
9. Enforcement. Consultant acknowledges that (a) the restrictions contained
in Sections 2, 7 and 8 hereof are reasonable and necessary to protect the
legitimate interests of Braewood and its affiliates, (b) Braewood would not have
entered into this Agreement in the absence of such restrictions, and (c) any
violation of any provision of such Sections will result in irreparable injury to
Braewood. Consultant also acknowledges that Braewood shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as an equitable accounting of all earnings, profits and
other benefits arising from any such violation, which rights shall be cumulative
and in addition to any other rights or remedies to which Braewood may be
entitled.
10. Remedies. In the event of any Default by Braewood, Consultant's sole
remedy shall be (a) if such Default occurs during the first three years of the
term hereof, the right to receive the balance of the payments Consultant was
entitled to receive under Section 4 hereof for such three-year period or (b) if
such Default occurs during the fourth year of the term hereof, the right to
receive the balance of the payments Consultant was entitled to receive under
Section 4 hereof for such fourth year. In the event of any Default by
Consultant, Braewood shall, in addition to its rights and remedies specified in
Section 9 hereof, be entitled to pursue any and all rights and remedies
available to it at law or in equity, including without limitation the right to
recover its actual damages suffered or incurred as a result of such Default;
provided, however, that in no event shall Braewood be entitled to (x) set off
any claim for damages against payments required to be made by it pursuant to
Section 4 of this Agreement, or (y) recover any amount in excess of the maximum
amount of compensation payable to Consultant under the terms of this Agreement
during the entire term hereof. In any proceeding by either party to enforce its
rights under this Agreement, the prevailing party shall be entitled to recover
its reasonable expenses (including attorneys' fees) from the nonprevailing
party. Neither party shall be entitled to recover consequential or speculative
damages from the other.
11. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns. No party may
assign this Agreement without the prior written consent of the parties hereto;
provided, however, that Consultant may assign its rights and obligations
hereunder to a Liquidating Trust formed pursuant to Section 2.01(a) of the Stock
Purchase Agreement without the consent of any other party.
12. Entire Agreement. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and supersedes all
prior written or oral agreements and understandings, and all contemporaneous
oral agreements and understandings, with respect to the subject matter hereof.
13. Notices. Any notice or other communication required, permitted or
contemplated by this Agreement ("Notice") must be in writing and delivered to
the other party by certified mail, return receipt requested or delivered by
facsimile mail with the original counterpart thereof being sent on the same
business day or on the business day immediately following the date of facsimile
transmission. Such Notice shall be deemed received three business days after a
certified letter containing such Notice, properly addressed with the postage
prepaid is deposited in the United States mail or on the same day if transmitted
by facsimile mail. Notice shall go to the parties at the addresses shown
opposite their respective signatures at the end of this Agreement.
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<PAGE>
14. Amendments; Waivers. Any provision of this agreement may be amended or
waived, if and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by all parties hereto or in the case of a waiver, by
the party against whom the waiver is to be effective. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
15. Partial Invalidity of this Agreement. In the event that any provision
of this Agreement is invalid or unenforceable as written but may be rendered
valid and enforceable by limitation thereof, then such provision shall be
construed as valid and enforceable to the maximum extent permitted by applicable
law.
16. Governing Law. This Agreement shall be construed in accordance with
and governed by the internal substantive law of New Jersey, without regard to
the conflict of law rules thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
BRAEWOOD DEVELOPMENT CORP. Address for Notice:
By: ________________________________ 2728 North Harwood, Suite 800
Name: ______________________________ Dallas, Texas 75201
Title: _____________________________ Phone: (214) 981-6100 Fax: (214) 981-6000
CALTON, INC. Address for Notice:
By: ________________________________ 500 Craig Road
Name: ______________________________ Manalapan, New Jersey 07726-8790
Title: _____________________________ Phone: (732) 780-1800 Fax: (732) 780-7257
Guaranty of CREC:
CREC hereby fully, unconditionally and irrevocably, subject to all
conditions and defenses to which the obligations guaranteed are subject,
guarantees the due prompt and complete payment by Braewood of the payments
required to be made by Braewood to the Consultant pursuant to the Consulting
Agreement set forth above. This guaranty is an absolute, unconditional and
continuing guaranty of payment and is not a guaranty of collection.
CENTEX ESTATE CORPORATION Address for Notice:
By: 2728 North Harwood, Suite 800
------------------------ Dallas, Texas 75201
Name: William D. Albers
----------------------
Title: Executive Vice President
and Chief Financial Officer Phone: (214) 981-6100 Fax: (214) 981-6000
------------------------------
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EXHIBIT 13
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended November 30,
-----------------------------------------------------------------
SELECTED OPERATING DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues ........................................ $ -- $ -- $ 1,292 $ 9,090 $ 2,444
Gross profit .................................... -- -- 583 1,092 739
Net loss from continuing operations(1) .......... (1,960) (1,901) (1,736) (1,660) (2,439)
Net income (loss) from discontinued operations .. 6,315 2,015 2,189 (1,478) 6,632
Extraordinary gain, net of income taxes ......... -- 1,263 -- -- --
Net income (loss) ............................... 4,355 1,377 453 (3,138) 4,193
Per share data, basic and diluted
Net loss from continuing operations ............. (.07) (.07) (.06) (.06) (.09)
Net income (loss) from discontinued operations .. .23 .07 .08 (.06) .25
Extraordinary gain, net of income taxes ......... -- .05 -- -- --
Net income (loss) ............................... .16 .05 .02 (.12) .16
<CAPTION>
At November 30,
-----------------------------------------------------------------
SELECTED BALANCE SHEET DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Total assets .................................... $40,082 $35,142 $70,895 $77,183 $103,890
Total debt(2) ................................... -- -- 39,500 45,000 66,911
Shareholders' equity ............................ 38,221 32,850 28,086 27,013 29,045
</TABLE>
As a result of the sale of the Florida homebuilding assets and the sale of
Calton Homes, Inc. that occurred on December 31, 1998, the financial statements
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."
(1) Continuing operations primarily includes Calton, Inc. general and
administrative costs, and earnings related to commercial buildings for the
years ended November 30, 1996, 1995 and 1994.
(2) Debt is included as part of discontinued operations subsequent to June
1997 since Calton Homes, Inc. was the primary obligor and borrower of the
revolving credit agreement.
1
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CARLTON, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 on December 30, 1998. The purchase price
for the stock of Calton Homes was $48.1 million, which resulted in
an estimated pretax gain of approximately $8.8 million. The gain is
subject to a $5.2 million holdback (see Commitments and
Contingencies), and is subject to certain post closing adjustments.
Cash proceeds upon closing were approximately $41.1 million, net of
the $5.2 million holdback and other closing adjustments. These funds
have been temporarily invested in highly liquid funds. No tax
liability is expected to result from the sale. However, a provision
in lieu of taxes is anticipated to be recorded for financial
reporting purposes in the amount of $4.2 million related to the
sale. 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.
The sale of Calton Homes is part of the Company's overall
strategy to enhance shareholder value. As part of this strategy, the
Company has begun a significant stock repurchase program, pursuant
to which it will seek to repurchase up to 10 million shares of
Common Stock in open market repurchases and privately-negotiated
transactions during 1999. Approximately 1.23 million shares of
Common Stock have been repurchased by the Company since October 31,
1998 at an average price of $1.09 per share. The Company's strategic
plan also involves shifting the Company's business focus to
providing various services to participants in the homebuilding
industry, including equity and debt financing, financial advisory
and consulting services, and investing in, acquiring or combining
with one or more operating businesses within or outside of the
homebuilding industry.
The following discussion included in the Results of Operations
are based on both continuing operations of Calton, Inc. as well as
the discontinued operations of the homebuilding divisions. The
financial statements present the Company's homebuilding business as
discontinued operations in accordance with APB Opinion No. 30,
"Reporting the Effects of Disposal of a Segment of a Business."
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1998 AND 1997
REVENUES
Revenues for the year ended November 30, 1998 were $105.3
million compared to revenues of $126.6 million for the year ended
November 30, 1997, reflecting a seventeen percent (17%) decrease
primarily due to the sale of the Orlando, Florida homebuilding
assets (the "Florida assets") that was completed in November 1997.
Housing revenues amounted to $92.9 million for the year ended
November 30, 1998 from 325 home deliveries compared to $103.1
million in housing revenues from 480 home deliveries in November 30,
1997. The Florida division delivered 250 homes that generated $39.6
million in housing revenues for 1997. Excluding the effect of the
Florida division, the Company's housing revenues increased in the
Northeast division by $30.3 million or forty-eight percent (48%)
from $62.6 million in 1997 to $92.9 million in 1998. Northeast
division revenues increased, primarily due to an increase in home
deliveries of 99 homes, a forty-four percent (44%) increase, from
226 homes in 1997 to 325 homes in 1998, primarily due to the active
adult community, Renaissance, that experienced a full year of
deliveries during 1998, and, to a lesser extent, an increase in the
average revenue per home. Revenues in 1998 also include $12.3
million from the sale of certain commercial land, land and options
as compared to $6.7 million in 1997. The 1997 revenues also include
$16.7 million from the sale of the Florida assets.
4
<PAGE>
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
GROSS PROFIT
Notwithstanding an overall decrease in revenues, the Company's
gross profit increased by $3.2 million to $19.4 million in 1998 from
$16.2 million in 1997, a twenty percent (20%) increase. These
improvements were the result of the Company's operating strategy to
focus on the move-up and active adult community markets in New
Jersey.
The Company's gross profit margin on homes delivered was
approximately nineteen percent (19%) for the year ended November 30,
1998 compared to a gross profit on homes of fourteen percent (14%),
excluding a charge of $350,000 for impaired homebuilding assets, for
the year ended November 30, 1997. The improvements in the housing
gross profit margin in 1998 are a result of deliveries from newer
communities, primarily Renaissance, and three new conventional
communities that opened for sales in 1998 and began deliveries late
in the third quarter of 1998. The Company 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.
Included in the Company's gross profit for the year ended November
30, 1998 is approximately $1.6 million from the sales of commercial
land, land and options. For the year ended November 30, 1997, the
gross profit from the sales of land and options was $800,000, and
$615,000 was from the sale of the Florida assets.
During the year ended November 30, 1997, the Company recorded
a $750,000 impairment loss on certain commercial land in
Pennsylvania and primarily one community it decided to withdraw from
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 EXPENSES
Selling, general and administrative expenses were $12.2
million (11.6% of revenues) for the year ended November 30, 1998,
compared to $14.9 million (11.8% of revenues) for the year ended
November 30, 1997. The Florida division incurred approximately $5.1
million of selling, general and administrative expenses for 1997.
Excluding the effect of the Florida division, the Company's selling,
general and administrative expenses increased $2.4 million in 1998
compared to 1997, of which $1.1 million is attributable to the
increase in homes delivered in the Northeast division in 1998
compared to 1997. Also included in the increase is a reserve that
was recorded on certain litigation outstanding at the end of fiscal
1998 in the amount of $1.3 million (see Commitments and
Contingencies).
Selling, general and administrative costs from continuing
operations for the years ended November 30, 1998 and 1997 was $2.0
million and $2.4 million, respectively. Such costs were
substantially comprised of Calton, Inc.'s salaries, benefits,
insurance, rent and professional services utilized to support both
corporate operations and its homebuilding functions.
The Company anticipates ongoing general and administrative
expenses of approximately $100,000 per month for continuing
operations as it enters into fiscal 1999.
INTEREST
Gross interest cost was approximately $3.7 million for the
year ended November 30, 1998 compared to $5.4 million for the year
ended November 30, 1997. The decrease in gross interest cost
resulted from generally lower debt levels since the end of 1997 as a
result of the sale of the Florida division's assets and the
corresponding reduction in the weighted average outstanding debt on
the Company's revolving credit facility (the "Facility") during
1998. The Company's weighted average debt outstanding under the
Facility amounted to $25.0 million for the year ended November 30,
1998 compared to $40.2 million for the year ended November 30, 1997.
Partially offsetting the decrease in the weighted average debt was
the Company's higher effective interest rate of 13.7% for the year
compared to 12.5% for the prior year due to the amortization of debt
issuance costs related to the Facility. On December 31, 1998, as
part of the sale of Calton Homes, the remaining balance of the
Facility of $19.5 million was repaid by the purchaser.
Interest capitalized in the year ended November 30, 1998 was
$3.0 million compared to $4.0 million for the year ended November
30, 1997. The decrease in interest capitalization is primarily
attributable to lower
5
<PAGE>
CARLTON, INC. AND SUBSIDIARIES
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inventory levels subject to interest capitalization primarily due to
the sale of the Florida assets and the reduction of interest cost of
the Company.
OTHER INCOME
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. The
Company recorded the remaining balance of $1.9 million as an
increase to Paid in capital since the refund related to events
occurring prior to the Company's 1993 restructuring. Also included
in Other income for fiscal 1997 was $525,000 representing the final
payments received from a note previously reserved.
TAXES
Taxes for the year ended November 30, 1998 reflect a provision
for income taxes of $2.2 million resulting in an effective rate of
thirty-four percent (34%). The reduction in the effective tax rate
from sixty-five percent (65%) for the year ended November 30, 1997
was primarily due to realization of future tax benefits of
approximately $603,000, which increased the total tax benefits to
$705,000, of which $649,000 relates to the sale of Calton Homes. In
1997 a provision for income taxes of $209,000 was recorded. The net
operating loss carryforwards and certain other deferred tax assets
are subject to utilization limitations as a result of the changes in
control of the Company that occurred in 1993 and 1995. The Company's
ability to use the annual net operating loss ("NOL") to offset
future income is approximately $1.6 million per year for
approximately 14 years and will be reduced by $500,000 per year as a
result of the sale of Calton Homes (see Note 6).
The effective rate from continuing operations for the years
ended November 30, 1998 and 1997 is based upon a benefit of $125,000
and a provision of $560,000, respectively. The effective rate for
both years is influenced by the tax expense associated with
intercompany charges from continuing operations to discontinued
operations. The effective rate from continuing operations for 1997
was influenced by the tax expense associated with other income.
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 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 an $842,000 provision in lieu of
income taxes. Included in the gain was the write off of deferred
costs and out-of-pocket costs of approximately $550,000.
SALES ACTIVITY AND BACKLOG
Net sales contracts of $135.6 million (436 homes) were
recorded by the Company during the year ended November 30, 1998 as
compared to $106.3 million (521 homes) for the year ended November
30, 1997. Excluding the impact of the Florida division, net sales
contracts increased in the Company's Northeast division from $63.8
million (254 homes) in 1997 to $135.6 million (436 homes) in 1998.
The division also benefited in 1998 from having more communities
open for sales for the entire fiscal year period, including the
active adult community, Renaissance. The increase in net sales
activity experienced by the Northeast division for the period was
also influenced by the strong economic conditions in the State of
New Jersey. This market has experienced low unemployment resulting
from positive job growth, high consumer confidence and low mortgage
rates.
As of November 30, 1998, the Company's backlog amounted to
$73.7 million (221 homes) compared to $31.0 million (110 homes) at
November 30, 1997. The Company's entire backlog of contracts was
assumed by the purchaser of Calton Homes.
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 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 has completed the
process of upgrading
6
<PAGE>
CARLTON, INC. AND SUBSIDIARIES
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its personal computers and, as a result of the sale of Calton Homes,
will convert its information technology systems to a new system that
is Year 2000 compliant. The Company does not believe that it faces
any significant risk relating to non-information technology systems.
The Company estimates that the cost of compliance of the Year 2000
conversion on its systems will not be significant. The Company's
Year 2000 plan is anticipated to be completed before July 1, 1999.
RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
REVENUES
Revenues for the year ended November 30, 1997 were $126.6
million compared to revenues of $122.4 million for the year ended
November 30, 1996, reflecting a three percent (3%) increase
primarily due to the sale of the Orlando, Florida homebuilding
assets for $16.7 million at the end of fiscal 1997. Housing revenues
amounted to $103.1 million for the year ended November 30, 1997 from
480 home deliveries compared to $110.3 million in housing revenues
from 549 home deliveries for fiscal year 1996. The Florida division
delivered 250 homes amounting to $39.6 million or thirty-eight
percent (38%) of total housing revenues for 1997. Housing revenues
decreased for the year ended November 30, 1997 by $7.2 million or
seven percent (7%) primarily reflecting decreased deliveries in the
Company's Northeast division. The decrease in deliveries in the
Northeast is attributable to the effects of shifting resources to
include the active adult market and the timing of deliveries from
the active adult community, Renaissance, where deliveries began in
the third quarter of fiscal 1997. Included in 1996 revenues were
deliveries from the winddown of the Company's Chicago division.
Partially offsetting the decrease in deliveries was an increase in
average selling prices realized from $201,000 in 1996 to $215,000 in
1997. Revenues in 1997 also include $6.7 million from the sale of
certain land and options as compared to $12.0 million in revenue
from the sale of certain land, options and a commercial building
during 1996.
GROSS PROFIT
The Company's gross profit margin on homes delivered,
excluding charges of $350,000 for impaired homebuilding assets, was
approximately fourteen percent (14%) for the year ended November 30,
1997 compared to thirteen percent (13%) for the year ended November
30, 1996. Gross profit margins from housing improved throughout the
year despite the continuing challenge of strong competitive market
conditions in the Florida and Northeast markets. Gross profit margin
in the fourth quarter of fiscal 1997 increased to sixteen percent
(16%), representing the third consecutive quarter in which margins
improved over each preceding quarter. The improvements are
attributable to the Northeast division which, throughout the year,
delivered a higher proportion of homes from its newer communities
which reflect the division's focus on the move-up and active adult
community buyer. The Florida division for fiscal year 1997 generated
housing gross profit dollars of $5.7 million. The pretax profit of
$615,000 from the sale of the Orlando, Florida assets in the fourth
quarter of 1997 is included in the Company's gross profit as well as
the pretax profit from the sales of land and options of
approximately $800,000 compared to $2.3 million in 1996.
During the year ended November 30, 1997, the Company recorded
a $750,000 impairment loss on certain commercial land and primarily
one community in the Northeast division. During the third quarter of
1997, the Company decided to withdraw from a community, in which it
acquired finished lots on a rolling option basis in the Northeast
division, due to local environmental conditions and their effects on
land values and resale activity in the area. In the fourth quarter
of 1997, the Company determined two pieces of commercial land,
located in Florida and eastern Pennsylvania, were below their
carrying inventory value due to changing market conditions.
Therefore, the Company recorded a $400,000 impairment loss on these
properties. In 1996, no such provision was recorded.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $14.9
million (11.8% of revenues) for the year ended November 30, 1997,
compared to $15.0 million (12.2% of revenues) for the year ended
November 30, 1996. Selling, general and administrative expenses
remained constant overall due to management's continued efforts to
reduce general and administrative costs that were offset by an
increase in marketing costs resulting
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CARLTON, INC. AND SUBSIDIARIES
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primarily from the promotion of the Company's active adult
community, Renaissance. The Florida division's selling, general and
administrative costs for 1997 were $5.1 million. The decrease in
selling, general and administrative expenses as a percentage of
revenues for fiscal 1997 was primarily due to the revenues generated
from the sale of the Orlando, Florida homebuilding assets.
INTEREST
Gross interest cost remained relatively constant at $5.4
million for the year ended November 30, 1997 compared to $5.5
million for the year ended November 30, 1996. The underwriting and
debt issuance costs incurred in connection with the new revolving
credit facility obtained in June 1997 are being amortized over the
commitment period at approximately $300,000 per quarter (see
Liquidity and Capital Resources). The average debt outstanding under
the Company's revolving credit facilities was $40.2 million for the
year ended November 30, 1997, compared to $45.4 million in 1996,
representing the fourth consecutive year of reduced average
borrowings.
Interest capitalized in the year ended November 30, 1997 was
$4.0 million compared to $4.1 million for the year ended November
30, 1996. Lower inventory levels subject to interest capitalization
offset a higher effective interest rate.
OTHER INCOME
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. The
Company recorded the remaining balance of $1.9 million as an
increase to Paid in capital since the refund related to events
occurring prior to the Company's 1993 restructuring. Also included
in Other income was $525,000 representing the final payments
received throughout fiscal 1997 from a note previously reserved
compared to $460,000 received during 1996.
TAXES
Results for the year ended November 30, 1997 reflect a
provision for income taxes for financial statement purposes of
$209,000 resulting in an effective tax rate of sixty-five percent
(65%). The 1997 provision for income taxes includes a reduction of
$624,000 of tax reserves due to the resolution of certain state tax
issues. In 1996, a provision in lieu of taxes was recorded in the
amount of $578,000. The net operating loss carryforwards and certain
other deferred tax assets are subject to utilization limitations as
a result of the changes in control of the Company that occurred in
1993 and 1995.
The effective rate from continuing operations for the years
ended November 30, 1997 and 1996 are based upon a provision of
$560,000 and a benefit of $141,000, respectively. The effective rate
for both years are influenced by the tax expense associated with
intercompany charges from continuing operations to discontinued
operations. The effective rate from continuing operations for 1997
was influenced by the tax expense associated with other income.
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 an $842,000
provision in lieu of income taxes. Included in the gain was the
write off of deferred costs and out-of-pocket costs of approximately
$550,000.
SALES ACTIVITY AND BACKLOG
Net sales contracts of $106.3 million (521 homes) were
recorded by the Company during the year ended November 30, 1997 as
compared to $114.5 million (548 homes) for the year ended November
30, 1996. The decrease in dollar value of $8.2 million was primarily
due to the mix of home sales in the Northeast division where
Renaissance net sales comprised forty-six percent (46%) of the
division's total net sales and average selling prices are
approximately $200,000. At November 30, 1997, the backlog of homes
under sales contract increased by thirty-four percent (34%) and
totaled 110 homes from four conventional housing communities and
Renaissance, having an aggregate dollar value of $31.0 million
compared to 82 homes from eight
8
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CARLTON, INC. AND SUBSIDIARIES
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conventional housing communities having an aggregate dollar value of
$27.1 million as of November 30, 1996, excluding the impact of the
Florida division that was sold at the end of fiscal 1997. The
increase in the number of homes in backlog was primarily due to the
opening of the Renaissance community.
LIQUIDITY AND CAPITAL RESOURCES
During the past several years, the Company has financed its
operations primarily from internally generated funds from home
deliveries, land sales and sales of commercial land and buildings.
In June 1997, the Company retired its revolving credit facility
which had been amended and restated in April 1997 (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 provided borrowing availability of $45.0 million
(subject to "borrowing base" limitations) during its initial three
year term, originally set to expire in June 2000, then extended for
one year. The Lender's commitment included an agreement to issue up
to $5.0 million of letters of credit which was applied against
borrowing availability.
The Company's weighted average debt outstanding under the
Facility amounted to $25.0 million for the year ended November 30,
1998 as compared to $40.2 million for the year ended November 30,
1997, a thirty-seven percent (37%) improvement. The Company's
effective interest rate was 13.7% for the year ended November 30,
1998 as compared to 12.5% for the year ended November 30, 1997 due
to the amortization of debt issuance costs of approximately $3.5
million over the term of the New Facility.
The Company's average debt outstanding in fiscal 1998 was less
than in 1997 as part of its strategy to reduce outstanding
indebtedness and finance more inventory with its own equity,
thereby, maintaining an improved debt to equity ratio over prior
years. As of November 30, 1998, $21.0 million was outstanding under
the New Facility in addition to $1.0 million of letters of credit as
compared to $17.5 million at November 30, 1997. On December 31,
1998, as part of the sale of Calton Homes to Centex, the outstanding
balance of the Facility in the amount of $19.5 million was repaid by
Centex.
As a result of the sale of Calton Homes, the Company has
approximately $40.0 million in highly liquid funds as of February
15, 1999. 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.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities of discontinued operations provided $6.7
million of cash for the year ended November 30, 1998 as compared to
$24.0 million in 1997. The increase in cash from discontinued
operations can be attributed primarily to positive operating
earnings for the year in addition to net cash generated from the
sale of commercial land and land options.
Cash utilized from operating activities primarily includes
general and administrative costs. Cash paid for income taxes for the
year ended November 30, 1998 and 1997 amounted to $680,000 and
$30,000, respectively.
On December 31, 1998, the Company received cash of $41.1
million from the sale of Calton Homes stock to Centex, which was net
of a $5.2 million holdback and other closing adjustments, and
subject to post closing adjustments.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company's net financing activities of discontinued
operations used cash of approximately $1.7 million for 1998 compared
to $21.0 million for the year ended November 30, 1997. The cash used
in financing activities was primarily to reduce mortgages and repay
a cash overdraft from November 30, 1997.
9
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CARLTON, INC. AND SUBSIDIARIES
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The Company began a stock repurchase program pursuant to which
it will seek to acquire up to 10 million shares of common stock .
During the fourth quarter of 1998, the Company purchased 142,000
shares of common stock held in Treasury in the amount of $115,000.
For the years ended November 30, 1997 and 1996 the Company
reduced its outstanding debt by $23.2 million and $7.2 million,
respectively. In 1997 the proceeds from the sale of the Florida
division primarily contributed to the debt reduction.
On December 31, 1998, the Company's Facility was repaid as
part of the sale of Calton Homes stock to Centex.
FINANCIAL INSTRUMENT MARKET RISK
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. The Company does not believe that it is currently exposed to
market risk relating to foreign currency exchange risk, commodity
price risk or equity price risk.
FORWARD LOOKING STATEMENTS
All statements, other than statements of historical fact,
included in this Annual Report, including, without limitation, the
statements under "To Our Shareholders" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are,
or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements involve assumptions,
known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. Such potential risks and uncertainties, include without
limitation, 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 and other risk factors detailed herein and in the
Company's Securities and Exchange Commission filings.
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CARLTON, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................ $ 85,000 $ 17,000
Prepaid expenses and other assets .................................... 1,146,000 397,000
Net assets of discontinued operations ................................ 38,851,000 34,728,000
------------ -----------
Total assets ....................................................... $ 40,082,000 $35,142,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ..................................................... $ 195,000 $ 68,000
Accrued expenses and other liabilities ............................... 1,666,000 2,224,000
------------ -----------
Total liabilities .................................................. 1,861,000 2,292,000
------------ -----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 53,700,000 shares authorized; issued and
outstanding 26,635,000 in 1998 and 26,615,000 in 1997 .............. 267,000 266,000
Paid in capital ...................................................... 27,957,000 26,827,000
Retained earnings .................................................... 10,112,000 5,757,000
Less cost of shares held in treasury (142,000 shares) ................ (115,000) --
------------ -----------
Total shareholders' equity ......................................... 38,221,000 32,850,000
------------ -----------
Total liabilities and shareholders' equity ......................... $ 40,082,000 $35,142,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended November 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues .................................................................. $ -- $ -- $ 1,292,000
----------- ----------- -----------
Costs and expenses
Cost of revenues ........................................................ -- -- 709,000
Selling, general and administrative ..................................... 2,029,000 2,396,000 2,512,000
----------- ----------- -----------
2,029,000 2,396,000 3,221,000
----------- ----------- -----------
Loss from operations ...................................................... (2,029,000) (2,396,000) (1,929,000)
Other charges (credits)
Interest expense, net ................................................... 56,000 41,000 408,000
Other income ............................................................ -- (1,096,000) (460,000)
----------- ----------- -----------
Loss from continuing operations before income taxes,
discontinued operations and extraordinary gain .......................... (2,085,000) (1,341,000) (1,877,000)
(Benefit) provision for income taxes ...................................... (125,000) 560,000 (141,000)
----------- ----------- -----------
Loss from continuing operations ........................................... (1,960,000) (1,901,000) (1,736,000)
Income from discontinued operations, net of a provision (benefit) for
income taxes of $2,363,000, ($597,000) and $719,000, respectively ......... 6,315,000 1,646,000 2,189,000
Income from Florida sale transaction, net of a provision
in lieu of income taxes of $246,000 ..................................... -- 369,000 --
Extraordinary gain from extinguishment of debt, net of an
$842,000 provision in lieu of income taxes .............................. -- 1,263,000 --
----------- ----------- -----------
Net income ................................................................ $ 4,355,000 $ 1,377,000 $ 453,000
=========== =========== ===========
Income (loss) per share
Loss from continuing operations ......................................... $ (.07) $ (.07) $ (.06)
Income from discontinued operations ..................................... .23 .06 .08
Income from Florida sale transaction .................................... -- .01 --
Extraordinary gain, net ................................................. -- .05 --
----------- ----------- -----------
Net income per share, basic and diluted ................................... $ .16 $ .05 $ .02
=========== =========== ===========
Basic and diluted weighted average shares outstanding ..................... 26,685,000 26,567,000 26,501,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended November 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................... 4,355,000 1,377,000 453,000
Adjustments to reconcile net income to net cash
provided by operating activities
Income from discontinued operations ........................ (6,315,000) (2,015,000) (2,189,000)
Change in net assets of discontinued operations ............ 3,232,000 32,694,000 5,881,000
Extraordinary gain from extinguishment of debt, net ........ -- (1,263,000) --
Tax refund ................................................. -- 1,871,000 --
Depreciation and amortization .............................. 164,000 173,000 166,000
Amortization of debt financing fees ........................ -- 103,000 316,000
Provision for net realizable value ......................... -- -- 125,000
Issuance of stock under 401(k) Plan and other .............. 91,000 41,000 42,000
Sale of commercial building ................................ -- -- 652,000
Increase (decrease) in accounts payable,
accrued expenses and other liabilities ................... (431,000) (1,042,000) (1,861,000)
(Increase) decrease in prepaid expenses and other assets ... (895,000) 697,000 632,000
----------- ----------- -----------
201,000 32,636,000 4,217,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Distribution from joint venture ................................ -- -- 725,000
Increase in property and equipment ............................. (18,000) (16,000) (20,000)
----------- ----------- -----------
(18,000) (16,000) 705,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds under revolving credit agreement ...................... -- 2,500,000 4,000,000
Repayment under revolving credit agreement ..................... -- -- (9,500,000)
Retirement of revolving credit agreement ....................... -- (39,350,000) --
Stock repurchase ............................................... (115,000) -- --
----------- ----------- -----------
(115,000) (36,850,000) (5,500,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............. 68,000 (4,230,000) (578,000)
Cash and cash equivalents at beginning of year ................... 17,000 4,247,000 4,825,000
----------- ----------- -----------
Cash and cash equivalents at end of year ......................... 85,000 17,000 4,247,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Paid In Retained Shareholders'
Stock Capital Earnings Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, November 30, 1995 ............................ $ 264,000 $ 22,822,000 $ 3,927,000 $ 27,013,000
Net income ............................................ -- -- 453,000 453,000
Issuance of stock under 401(k) Plan ................... 1,000 41,000 -- 42,000
Provision in lieu of income taxes ..................... -- 578,000 -- 578,000
------------ ------------ ------------ ------------
Balance, November 30, 1996 ............................ 265,000 23,441,000 4,380,000 28,086,000
Net income ............................................ -- -- 1,377,000 1,377,000
Issuance of stock under 401(k) Plan ................... 1,000 30,000 -- 31,000
Provision in lieu of income taxes ..................... -- 1,265,000 -- 1,265,000
Tax refund ............................................ -- 1,871,000 -- 1,871,000
Issuance of stock warrants ............................ -- 210,000 -- 210,000
Shares issued under stock option plan and other ....... -- 10,000 -- 10,000
------------ ------------ ------------ ------------
Balance, November 30, 1997 ............................ 266,000 26,827,000 5,757,000 32,850,000
Net income ............................................ -- -- 4,355,000 4,355,000
Issuance of stock under 401(k) Plan ................... 1,000 70,000 -- 71,000
Provision in lieu of income taxes ..................... -- 1,040,000 -- 1,040,000
Shares issued under stock option plan and other ....... -- 20,000 -- 20,000
------------ ------------ ------------ ------------
Subtotal ............................................ 267,000 27,957,000 10,112,000 38,336,000
Less: Purchase of treasury stock (142,000 shares) ..... -- -- -- (115,000)
------------ ------------ ------------ ------------
Total Shareholders' Equity ............................ $ 267,000 $ 27,957,000 $ 10,112,000 $ 38,221,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
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CALTON, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of
Calton, Inc. and all of its wholly-owned and majority-owned
subsidiaries (the "Company"). On November 30, 1997, the Company sold
the Orlando, Florida homebuilding assets, leaving Calton Homes, Inc.
("Calton Homes") as the primary operating subsidiary. On December
31, 1998, the Company completed the sale of Calton Homes to Centex
Real Estate Corporation ("Centex" or the "purchaser"), subject to
certain post closing adjustments (see Note 8).
As a result of the sale of the Florida homebuilding assets and
the sale of Calton Homes, the financial statements 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 1998 presentation.
All significant intercompany accounts and transactions have been
eliminated.
Income recognition
Revenue and cost of revenue on sales of homes are recognized
when individual homes are completed, and title and other attributes
of ownership have been transferred to the buyer by means of a
closing. Revenue and cost of revenue on land sales are recognized
when all conditions precedent to closing have been fulfilled, a
specified minimum down payment has been received and it is expected
that the resulting receivable will be collected.
Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid
investments, with original maturities of three months or less, that
are readily convertible into cash.
Commercial land
Commercial land stated at estimated fair value, includes
certain assumptions in its ultimate disposition such as future cash
flow, the ability of the Company to obtain certain zoning changes
and regulatory or governmental approvals. There is an inherent risk
that those assumptions may not be realized.
Income taxes
Deferred income taxes are determined on the liability method
in accordance with Statement of Financial Accounting Standards No.
109 (see Note 6).
Prepaid expenses and other assets
Prepaid expenses and other assets consist primarily of
deferred costs related to the sale of Calton Homes which will be
expensed as part of the sale in the first quarter of 1999.
Risks and uncertainties
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
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CALTON, INC. AND SUBSIDIARIES
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Per share computations
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. Per share computations are based
upon the basic and diluted weighted average number of shares of
common stock outstanding of 26,685,000, 26,567,000 and 26,501,000
for 1998, 1997 and 1996, respectively.
A total of 2,057,000 stock options have been granted and are
outstanding as of November 30, 1998 under the Company's incentive
stock option plans. In addition, a warrant to purchase 1,000,000
shares of Common Stock is also outstanding (see Note 5). The effect
of stock options and warrants were not included in the calculation
of diluted earnings per share as these options and warrants were
antidilutive due to the loss from continuing operations in 1998,
1997 and 1996.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), establishes a
fair value based method of accounting for stock-based compensation
plans, including stock options. FAS 123 allows the Company to
continue accounting for stock option plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), but requires it to provide pro forma net
income and earnings per share information "as if" the new fair value
approach had been adopted. Because the Company continued to account
for its stock option plans under APB 25, there was no impact on the
Company's consolidated financial statements resulting from
implementation of FAS 123 (see Note 5).
2. COMMERCIAL LAND
During the year ended November 30, 1998, the Company closed on
the sale of two parcels of commercial land including its largest
remaining parcel, located in eastern Pennsylvania, for an aggregate
of $4,900,000 that resulted in an aggregate gain of approximately
$200,000. In the fourth quarter of 1997, the Company recorded a
charge for impaired commercial land in the amount of $400,000.
The Company's remaining two commercial properties consist of
land located in Florida and Pennsylvania, one of which is under
contract for sale and is anticipated to be completed during 1999.
The properties have a book value of $252,000, which has been
included as part of discontinued operations as of November 30, 1998.
3. REVOLVING CREDIT AGREEMENT
In June 1997, the Company retired its revolving credit
facility that had been amended and restated in April 1997 (the
"Amended Facility"). The principal balance outstanding of
$42,000,000 was discounted and paid off for $39,350,000.
The Company refunded and replaced the Amended Facility with a
new, secured revolving credit facility (the "New Facility") from
BankBoston, N.A. (the "Lender"). The New Facility provided borrowing
availability of $45,000,000 (subject to "borrowing base"
limitations) during its initial three-year term expiring in June
2000, then extended to June 2001. The Lender's commitment included
an agreement to issue up to $5,000,000 of letters of credit which
will be applied against borrowing availability.
The weighted average interest rate for the years ended
November 30, 1998 and 1997 was 13.7% and 12.5%, respectively. The
average amounts borrowed for the corresponding years were
$24,964,000 and $40,237,000, respectively. The total amount of
interest paid, net of amounts capitalized, in the years ended
November 30, 1998, 1997 and 1996 was $993,000, $1,499,000 and
$1,445,000, respectively. As of November 30, 1998, $21,000,000 was
outstanding under the New Facility in addition to $1,000,000 of
letters of credit. On December 31, 1998, as part of the sale of
Calton Homes to Centex, the outstanding balance of $19,500,000 was
repaid by Centex.
4. MORTGAGES PAYABLE
The interest rate on each of the two purchase money mortgages
outstanding during 1998 was prime (8.25% at November 30, 1998) and
interest was payable on a monthly or semi-annual basis. One mortgage
16
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CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
in the amount of $1,087,000 was paid off in the fourth quarter of
1998 and the second mortgage in the amount of $962,000 was paid on
December 31, 1998 as part of the sale of Calton Homes by the
purchaser.
5. SHAREHOLDERS' EQUITY
The Company's Certificate of Incorporation provides for
53,700,000 authorized shares of Common Stock (par value $.01 per
share), 2,600,000 shares of Redeemable Convertible Preferred Stock
(par value $.10 per share) and 10,000,000 shares of Class A
Preferred Stock (par value $.10 per share). None of the Preferred
Stock is issued or outstanding.
The Company has begun a significant stock repurchase program
pursuant to which it will seek to repurchase up to 10,000,000 shares
of Common Stock in open market repurchases and privately-negotiated
transactions during fiscal 1998 and 1999. As of November 30, 1998,
there were 142,000 shares held in Treasury in the amount of
$115,000. Through February 12, 1999, the Company repurchased
1,230,000 shares at an average price of $1.09 per share, $1,345,000
in the aggregate.
In May 1993, the Company adopted the Calton, Inc. 1993
Non-Qualified Stock Option Plan (the "1993 Plan") under which a
total of 1,493,000 shares of Common Stock were reserved for
issuance. Under the terms of the 1993 Plan, options may be granted
at an exercise price designated by the Board of Directors. The
exercise price of options granted range from $.31 to $.50 per share.
Options granted under the 1993 Plan have a maximum term of ten
years, with a weighted average contractual life of 2.3 years in 1998
and 4.4 years in 1997. In the fourth quarter of 1998, 685,000
options were repurchased from a former employee for $171,000 or $.25
per option.
In April 1996, the Company's shareholders approved the
Company's 1996 Equity Incentive Plan (the "1996 Plan") under which a
total of 2,000,000 shares of Common Stock were reserved for
issuance. Under the terms of the 1996 Plan, options may be granted
at an exercise price equal to the fair market value of the Common
Stock on the date of grant (110% of such fair market value in the
case of an incentive stock option granted to a 10% shareholder). The
exercise prices of outstanding options range from $.34 to $.50 per
share with vesting ranging from one to five years. The exercise
period is up to ten years, with a weighted average contractual life
of 4.1 years in 1998 and 8.3 years in 1997. In addition, 61,000
shares were issued to non-employee directors in lieu of cash
compensation during the year ended November 30, 1998.
In connection with the sale of Calton Homes, Inc. the Company
has elected to make certain adjustments to the terms of the options
to acquire Calton Common Stock previously granted and outstanding as
of December 31, 1998 under the 1993 Plan and the 1996 Plan.
Effective January 1, 1999, all options became exercisable,
regardless of whether the right to exercise the option had
previously vested; employees of Calton Homes, Inc. have until
December 31, 2000 to exercise any options; and options of employees
of Calton, Inc. will expire in accordance with their original terms.
The effect of the amendments to the stock option plans of
approximately $525,000 is considered to be severance costs and will,
therefore, be recorded as expense in calculating the gain of the
sale transaction in the first quarter of 1999.
Stock option transactions are summarized as follows (shares in
thousands):
1996 1993
Plan Plan
------ ------
Options outstanding, November 30, 1996 ............. 1,224 1,383
Granted .......................................... 35 --
Forfeitures ...................................... (154) (23)
Exercised ........................................ (10) --
------ ------
Options outstanding, November 30, 1997 ............. 1,095 1,360
Granted .......................................... 327 --
Forfeited or repurchased ......................... (36) (685)
Exercised ........................................ (4) --
------ ------
Options outstanding, November 30, 1998 ............. 1,382 675
====== ======
17
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Company accounts for stock option plans under APB 25.
Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with
the methods prescribed under FAS 123, the Company's net income would
have been reduced by approximately $141,000 and $79,000 for the
years ended November 30, 1998 and 1997, respectively. On a pro forma
basis, earnings per share would not have been reduced in either
period. The estimated weighted average fair value of the options
granted in each of the two fiscal years ended November 30, 1998 and
1997 is $.31 and $.26, using the Black-Scholes option-pricing model,
with the following assumptions: dividend yield - none, volatility of
.7 and .9, risk-free interest rate of 5.49%, and 5.13%, assumed
forfeiture rate of 0% and 8% and an expected life of 4.7 years and
3.8 years at November 30, 1998 and 1997, respectively.
In January 1999, the Company's Board of Directors approved the
grant to the Company's Chairman and President of options to acquire
an aggregate of 600,000 shares of Common Stock under the 1993. Plan.
In addition, the Board approved the grant to other employees of
options to acquire an aggregate of 35,000 shares of Common Stock
under the 1996 Plan. Each of the options granted has an exercise
price of $1.22 per share and a term of 10 years. The options granted
under the 1993 Plan vest in equal installments over a three year
period. The options granted under the 1996 Plan vest in equal
installments over a five year period.
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 over three years. The unamortized value of the Warrant was
$105,000 at November 30, 1998. 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
of the Warrant.
In February 1999, the Company's Board of Directors adopted a
shareholder rights plan (the "Rights Plan") and declared a dividend
of one preferred stock purchase right (a "Right") for each
outstanding share of Common Stock. Under the Rights Plan, each Right
represents the right to purchase from the Company one one-hundredth
(1/100th) of a share of Class A Preferred Stock Series One (the
"Preferred Stock") at a price of $5.50 per one one-hundredth
(1/100th) of a share. Each one one-hundredth (1/100th) of a share of
Preferred Stock has economic and voting terms equivalent to those of
one share of the Company's Common Stock. The Rights will not become
exercisable unless and until, among other things, a person or group
acquires or commences a tender offer for 15% or more of the
Company's outstanding Common Stock. In the event that a person or
group, without Board approval, acquires 15% or more of the
outstanding Common Stock, each Right would entitle its holder (other
than such person or group) to purchase shares of Preferred Stock
having a value equal to twice the exercise price. Also, if the
Company is involved in a merger or sells more than 50% of its assets
or earning power, each Right will entitle its holder (other than the
acquiring person or group) to purchase shares of common stock of the
acquiring company having a market value equal to twice the exercise
price. If any person or group acquires at least 15%, but less than
50%, of the Company's Common Stock, the Board may, at its option,
exchange one share of Common Stock for each Right (other than Rights
held by such person or group). The Rights Plan may cause substantial
dilution to a person or group that, without prior Board approval,
acquires 15% or more of the Company's Common Stock, unless the
Rights are first redeemed by the Board. The Rights expire on
February 1, 2009 and may be redeemed by the Company at a price of
$0.01 per Right.
18
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of the provision (benefit) for income taxes are as
follows (amounts in thousands):
Years Ended November 30,
--------------------------
1998 1997 1996
------ ------ ------
Federal
Current ....................................... $1,785 $ 455 $ --
Deferred ...................................... (603) (102) --
Provision in lieu of income taxes ............. 527 257 351
State
Current ....................................... 16 57 --
Provision/(benefit) in lieu of income taxes .. 513 (458) 227
------ ------ ------
2,238 209 578
Less: Discontinued operations provision .......... (2,363) 351 (719)
------ ------ ------
Continuing operations ...................... $ (125) $ 560 $ (141)
====== ====== ======
The following schedule reconciles the federal provision (benefit)
for income taxes computed at the statutory rate to the actual
provision for income taxes (amounts in thousands):
Years Ended November 30,
--------------------------
1998 1997 1996
------ ------ ------
Computed provision for income taxes
at 34% ........................................ $2,242 $ 110 $ 351
Expenses for which deferred tax benefit
cannot be currently recognized ................ -- 501 --
Expenses for which deferred tax benefit is
currently recognized .......................... (399) -- --
State and local tax provision .................... 529 222 227
State tax reserves ............................... -- (624) --
Other ............................................ (134) -- --
------ ------ ------
Total provision for income taxes ................. 2,238 209 578
Less: Discontinued operations provision .......... (2,363) 351 (719)
------ ------ ------
Continuing operations ...................... $ (125) $ 560 $ (141)
====== ====== ======
In 1997, the resolution of certain state tax issues resulted
in $624,000 of state tax reserves being reduced as a reduction to
the 1997 provision for income taxes. In addition, included in the
Company's extraordinary gain is a provision in lieu of income taxes
of $842,000.
19
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at
November 30, 1998 and 1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Continuing
Operations Combined*
-------------------- --------------------------------------------
November 30, 1998 November 30, 1998 November 30, 1997
-------------------- -------------------- --------------------
Deferred Tax Deferred Tax Deferred Tax
Assets/(Liabilities) Assets/(Liabilities) Assets/(Liabilities)
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Fresh-start inventory reserves .. $ 31 $ 322 $ 156
Income from joint ventures ...... 129 129 (356)
Inventory and other reserves .... 594 1,173 1,044
Preproduction interest .......... -- -- (386)
Capitalized inventory costs ..... (263) (479) (827)
Federal net operating losses .... 5,406 8,126 7,744
State net operating losses ...... 2,227 4,265 8,003
Depreciation .................... 83 78 (101)
Deferred state taxes ............ 328 615 729
Other ........................... 40 17 186
-------------------- -------------------- --------------------
8,575 14,246 16,192
Valuation allowance ............. (8,519) (13,541) (16,090)
-------------------- -------------------- --------------------
Total deferred taxes ............ $ 56 $ 705 $ 102
==================== ==================== ====================
</TABLE>
* Includes both continuing and discontinued operations
Deferred income taxes arise from temporary differences between
the tax basis of assets and liabilities and their reported amounts
in the financial statements. For federal and state tax purposes, a
valuation allowance was provided on a significant portion of the net
deferred tax assets due to uncertainty of realization. On December
31, 1998, Calton, Inc. sold the stock of Calton Homes to an
unrelated party. The sale of Calton Homes will result in a
significant portion of the net deferred tax asset ($705,000) being
reversed in the first quarter of the 1999 fiscal year.
The federal net operating loss carryforward for tax purposes
is approximately $23,900,000 at November 30, 1998 and $22,776,000 at
November 30, 1997. The sale of Calton Homes will result in a
reduction of approximately $8,000,000 in Calton Inc.'s federal net
operating loss carryforward. The Company's ability to use its
deferred tax assets including federal net operating loss
carryforwards, created prior to November 21, 1995, to offset future
income is limited to approximately $1,627,000 per year under Section
382 of the Internal Revenue Code as a result of the change in
control of the Company in November of 1995. The limitation will be
reduced by approximately $500,000 per year as a result of the terms
of the sale of Calton Homes. These federal carryforwards will expire
between 2007 and 2014. In 1997, the Company received a tax refund
related to prior periods of $2,442,000. The Company paid income
taxes of $680,000 and $30,000, respectively, in 1998 and 1997.
7. 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, 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
20
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(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
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.
To the extent that the Company makes expenditures to satisfy
the Company's indemnity obligations, the Company will reduce both
the holdback receivable and the gain on the sale of Calton Homes in
future periods.
(c) The Company has assigned its operating lease in New Jersey
for office space expiring November 30, 2002 to Calton Homes. The
Company is obligated, as a sublessor, to lease 1,620 square feet
until May 31, 1999 for approximately $2,600 per month. Rental
expense for the years ended November 30, 1998, 1997 and 1996
amounted to $392,000, $730,000 and $726,000, respectively.
(d) The Company had a qualified contributory retirement plan
(401(k) Plan) which covers all eligible full-time employees with a
minimum of one year of service. The Company terminated the 401(k)
Plan effective December 31, 1998. The Company's contribution to the
plan was $71,000 in 1998, $30,000 in 1997 and $42,000 in 1996. The
Company's matching contribution, in the form of registered Common
Stock of the Company, for 1998 was 50% of participant contributions,
subject to a maximum of 3% of total compensation and $2,000 per
employee.
8. DISCONTINUED OPERATIONS
Subsequent Event, Sale of Calton Homes, Inc.
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 on December 30, 1998. The purchase price for
the stock of Calton Homes was $48,100,000, which resulted in an
estimated gain of approximately $8,800,000. The gain is subject to a
$5,200,000 holdback (see Note 7), and is subject to certain post
closing adjustments. Cash proceeds upon closing were approximately
$41,100,000, net of the $5,200,000 holdback and other closing
adjustments. These funds have been temporarily invested in highly
liquid funds. No tax liability is expected to result from the sale.
However, a provision in lieu of taxes is anticipated to be recorded
in the amount of $4,200,000 related to the sale transaction. Calton
has entered into an agreement to provide consulting services to
Centex that requires payments of $1,300,000 per year over a
three-year period.
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.
21
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Results of operations from discontinued operations are as follows
(amounts in thousands):
Years Ended November 30,
--------------------------------
1998 1997 1996
-------- --------- --------
Revenues .................................... $105,292 $ 126,588 $121,143
-------- --------- --------
Cost of revenues ............................ 85,897 110,419 104,936
Selling, general and administrative ......... 10,172 12,532 12,441
Impairment of assets ........................ -- 750 --
-------- --------- --------
96,069 123,701 117,377
-------- --------- --------
Income from operations ...................... 9,223 2,887 3,766
Interest expense, net ....................... 545 1,223 858
-------- --------- --------
Income before income taxes .................. 8,678 1,664 2,908
Provision (benefit) for income taxes ........ 2,363 (351) 719
-------- --------- --------
Net income from discontinued operations ..... $ 6,315 $ 2,015 $ 2,189
======== ========= ========
Included in revenues for the years ended November 30, 1997 and
1996 are the Orlando, Florida division that generated $56,281,000
and $37,829,000 of revenues, respectively, that included $16,660,000
of revenues from the 1997 Florida assets sale and resulted in a
pretax gain of $615,000.
Interest capitalized in inventories is charged to interest
expense as part of Cost of revenues when the homes are delivered or
land sales close. Interest incurred, capitalized and expensed for
the years ended November 30, 1998, 1997 and 1996 is as follows
(amounts in thousands):
Years Ended November 30,
--------------------------------
1998 1997 1996
-------- --------- --------
Interest expense incurred ................... $ 3,718 $ 5,395 $ 5,472
Interest capitalized ........................ 2,977 4,009 4,067
-------- --------- --------
Interest expense - net .................... 741 1,386 1,405
Capitalized interest amortized in cost of
revenues .................................. 2,911 4,889 3,616
-------- --------- --------
Interest cost reflected in pretax income .... $ 3,652 $ 6,275 $ 5,021
======== ========= ========
Net assets of discontinued operations are as follows (amounts in thousands):
November 30,
---------------------
1998 1997
-------- --------
Assets
Cash ............................................... $ 11,910 $ 7,125
Receivables and other assets ....................... 9,385 9,128
Inventories ........................................ 61,449 43,975
Commercial land .................................... 252 7,120
Liabilities
Revolving credit agreement ......................... (21,000) (17,500)
Mortgages payable .................................. (1,262) (3,234)
Accounts payable and accrued expenses .............. (21,883) (11,886)
-------- --------
Net assets ........................................... $ 38,851 $ 34,728
======== ========
22
<PAGE>
9. INVESTMENTS IN JOINT VENTURES
During the years ended November 30, 1997 and 1996, the Company
received $525,000 and $460,000, respectively, on a fully reserved
note receivable from a previous joint venture. The payment on the
fully reserved note is classified as non-operating Other income.
During 1996, the Company received $725,000 from the liquidation of a
joint venture in which it previously participated. No such activity
was recorded in 1998.
10. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial results for the years ended November 30,
1998 and 1997 are as follows (amounts in thousands, except per share
amounts):
Three Months Ended
--------------------------------------------------
February 28, May 31, August 31, November 30,
1998 1998 1998 1998
----------- ---------- ---------- -----------
Net loss from
continuing operations(A).. $ (301) $ (251) $ (352) $ (1,056)
Net (loss) income from
discontinued operations .. (236) 657 1,052 4,842
----------- ---------- ---------- ----------
Net (loss) income .......... $ (537) $ 406 $ 700 $ 3,786
=========== ========== ========== ==========
Net (loss) income per share,
basic and diluted ........ $ (.02) $ .02 $ .03 $ .13
=========== ========== ========== ==========
Three Months Ended
--------------------------------------------------
February 28, May 31, August 31, November 30,
1997 1997 1997 1997
----------- ---------- ---------- -----------
Net loss from
continuing operations(A).. $ (123) $ (103) $ (120) $ (1,555)
Net (loss) income from
discontinued operations .. (355) (227) 134 2,463
Extraordinary gain,
net of income taxes ...... -- -- 1,263 --
----------- ---------- ---------- ----------
Net (loss) income .......... $ (478) $ (330) $ 1,277 $ 908
=========== ========== ========== ==========
Net (loss) income per share,
basic and diluted ........ $ (.02) $ (.01) $ .05 $ .03
=========== ========== ========== ==========
(A) The increase in the net loss from continuing operations for the three
month periods ended November 30, 1998 and 1997 is primarily a result of
intercompany charges from continuing operations to discontinued
operations.
23
<PAGE>
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders of Calton, Inc.
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, shareholders'
equity and of cash flows present fairly, in all material respects,
the financial position of Calton, Inc. and its subsidiaries (the
"Company") at November 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended November 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As described in Note 8 to the financial statements, the
Company sold its operating subsidiary, Calton Homes, Inc. on
December 31, 1998.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 13, 1999
--------------------------------------------------------------------
CALTON, INC. COMMON STOCK
Calton, Inc. common stock is traded on the American Stock
Exchange ("AMEX") under the symbol CN. The following reflects the
high and low sales prices of the common stock during fiscal 1998 and
1997.
FISCAL 1998 High Low
---- ---
1st Quarter ............. 5/8 7/16
2nd Quarter ............. 7/8 5/8
3rd Quarter ............. 3/4 9/16
4th Quarter ............. 1-1/8 3/4
FISCAL 1997
1st Quarter ............. 7/16 1/4
2nd Quarter ............. 7/16 1/4
3rd Quarter ............. 11/16 3/8
4th Quarter ............. 5/8 7/16
At February 3, 1999, there were approximately 603 record
holders of the Company's common stock. On that date, the last sale
price for the common stock as reported by AMEX was $1.312. The
Company did not pay any dividends on its Common Stock during fiscal
1998 or 1997. The Company's former credit facility prohibited the
payment of dividends.
24
EXHIBIT 21
SUBSIDIARIES
Company State of Incorporation
- --------------------------------------------------------------------------------
Calton Homes of Florida, Inc. Florida
Calton Homes of Chicago, Inc. Illinois
Calton Homes of Pennsylvania, Inc. Pennsylvania
Calton Homes of Pennsylvania at Pennway, Inc. Pennsylvania
Calton Homes of California, Inc. California
Calton Lindenwood Corporation California
Calton Manzanita Corporation California
Calton Tamarack Corporation California
Calton California Equity Corporation California
Calton General, Inc. New Jersey
Calton Homes Finance, Inc. New Jersey
Calton Homes Finance II, Inc. New Jersey
Haddon Group of Virginia, Inc. New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 85,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 38,851,000
<CURRENT-ASSETS> 1,146,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,082,000
<CURRENT-LIABILITIES> 1,861,000
<BONDS> 0
0
0
<COMMON> 267,000
<OTHER-SE> 37,954,000
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,029,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,000
<INCOME-PRETAX> (2,085,000)
<INCOME-TAX> (125,000)
<INCOME-CONTINUING> (1,960,000)
<DISCONTINUED> 6,315,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,355,000
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
