SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended May 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file no. 1-8846
CALTON, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2433361
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Craig Road
Manalapan, New Jersey 07726-8790
(Addresses of principal executive offices) Zip Code
Registrant's telephone number,
including area code: (732) 780-1800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of June 30, 1998, 26,710,000 shares of Common Stock were outstanding.
CALTON, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at
May 31, 1998 and November 30, 1997. . . . . . . . . . . 3
Consolidated Statement of Operations for the
Three Months Ended May 31, 1998 and 1997. . . . . . . . 4
Consolidated Statement of Operations for the
Six Months Ended May 31, 1998 and 1997. . . . . . . . . 5
Consolidated Statement of Cash Flows for the
Six Months Ended May 31, 1998 and 1997. . . . . . . . . 6
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended May 31, 1998. . . . . . 7
Notes to Consolidated Financial Statements. . . . . .8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 11-15
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders . .15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . .15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Certain information included in this report and other Company filings
(collectively, "SEC filings") under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended (as well as information
communicated orally or in writing between the dates of such SEC filings)
contains or may contain forward looking information that is subject to
certain risks, trends and uncertainties that could cause actual results to
differ materially from expected results. Among these risks, trends and
uncertainties are matters related to national and local economic
conditions, the effect of governmental regulation on the Company, the
competitive environment in which the Company operates, changes in interest
rates, home prices, availability and cost of land for future growth, the
timing of land acquisitions and project development, adverse weather
conditions and the availability and cost of labor and materials. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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PART I. FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS.
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
May 31, Nov. 30,
1998 1997
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents . . . . . . . . . . $ 3,903,000 $ 7,142,000
Receivables . . . . . . . . . . . . . . . . . 5,238,000 5,430,000
Inventories . . . . . . . . . . . . . . . . . 62,505,000 43,972,000
Commercial land . . . . . . . . . . . . . . . 1,351,000 7,120,000
Prepaid expenses and other assets . . . . . . 3,865,000 3,923,000
----------- -----------
Total assets. . . . . . . . . . . . . . . . $76,862,000 $67,587,000
=========== ===========
Liabilities and Shareholders' Equity
Revolving credit agreement. . . . . . . . . . $24,860,000 $17,325,000
Mortgages payable . . . . . . . . . . . . . . 3,045,000 3,234,000
Accounts payable. . . . . . . . . . . . . . . 5,578,000 3,630,000
Cash overdraft. . . . . . . . . . . . . . . . -- 2,981,000
Accrued expenses and other liabilities. . . . 10,703,000 7,567,000
----------- -----------
Total liabilities . . . . . . . . . . . . . 44,186,000 34,737,000
----------- -----------
Commitments and contingencies
Shareholders' equity
Common stock. . . . . . . . . . . . . . . . . 267,000 266,000
Paid in capital . . . . . . . . . . . . . . . 26,783,000 26,827,000
Retained earnings . . . . . . . . . . . . . . 5,626,000 5,757,000
----------- -----------
Total shareholders' equity. . . . . . . . . 32,676,000 32,850,000
----------- -----------
Total liabilities and shareholders' equity. $76,862,000 $67,587,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended May 31,
(Unaudited)
1998 1997
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $17,939,000 $24,596,000
----------- -----------
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 14,779,000 21,616,000
Selling, general and administrative . . . . . 2,107,000 3,397,000
----------- -----------
16,886,000 25,013,000
----------- -----------
Income (loss) from operations . . . . . . . . . 1,053,000 (417,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 310,000 443,000
Other income. . . . . . . . . . . . . . . . . -- (200,000)
----------- -----------
Income (loss) before income taxes . . . . . . . 743,000 (660,000)
Provision (benefit) in lieu of income taxes . . 337,000 (330,000)
----------- -----------
Net income (loss) . . . . . . . . . . . . . . . $ 406,000 $ (330,000)
=========== ===========
Basic income (loss) per share . . . . . . . . . $ .02 $ (.01)
=========== ===========
Diluted income (loss) per share . . . . . . . . $ .01 $ (.01)
=========== ===========
Basic weighted average number of
shares outstanding . . . . . . . . . . . . . . 26,707,000 26,551,000
=========== ===========
Diluted weighted average number of
shares outstanding . . . . . . . . . . . . . . 28,035,000 26,551,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended May 31,
(Unaudited)
1998 1997
----------- -----------
Revenues. . . . . . . . . . . . . . . . . . . . $30,743,000 $47,205,000
----------- -----------
Costs and expenses
Cost of revenues. . . . . . . . . . . . . . . 26,441,000 41,871,000
Selling, general and administrative . . . . . 3,997,000 6,427,000
----------- -----------
30,438,000 48,298,000
----------- -----------
Income (loss) from operations . . . . . . . . . 305,000 (1,093,000)
Other charges (credits)
Interest expense, net . . . . . . . . . . . . 539,000 723,000
Other income. . . . . . . . . . . . . . . . . -- (200,000)
----------- -----------
Loss before income taxes. . . . . . . . . . . . (234,000) (1,616,000)
Benefit in lieu of income taxes . . . . . . . . (103,000) (808,000)
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . $ (131,000) $ (808,000)
=========== ===========
Basic and diluted loss per share. . . . . . . . $ (.00) $ (.03)
=========== ===========
Basic and diluted weighted average
number of shares outstanding . . . . . . . . . 26,667,000 26,542,000
=========== ===========
See accompanying notes to consolidated financial statements.
-5-
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended May 31,
(Unaudited)
1998 1997
----------- -----------
Cash Flows from Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . $ (131,000) $ (808,000)
Adjustments to reconcile net loss to net
cash used by operating activities
Benefit in lieu of income taxes . . . . . . (103,000) (808,000)
Issuance of stock under 401(k) Plan
and other . . . . . . . . . . . . . . . . 60,000 21,000
Depreciation and amortization . . . . . . . 323,000 539,000
Amortization of deferred financing fees . . 629,000 98,000
Decrease in receivables . . . . . . . . . . 192,000 3,491,000
Increase in inventories . . . . . . . . . . (14,716,000) (1,187,000)
Decrease (increase) in commercial land. . . 4,007,000 (55,000)
Increase in prepaid expenses and
other assets. . . . . . . . . . . . . . . (580,000) (198,000)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities. . 2,763,000 (3,518,000)
----------- -----------
(7,556,000) (2,425,000)
----------- -----------
Cash Flows from Investing Activities
Increase in property and equipment. . . . . . (13,000) (24,000)
----------- -----------
Cash Flows from Financing Activities
Proceeds under new facility . . . . . . . . . 15,700,000 --
Repayments under new facility . . . . . . . . (8,200,000) --
Repayment of cash overdraft . . . . . . . . . (2,981,000) --
Repayments of mortgages payable . . . . . . . (189,000) (372,000)
Proceeds under revolving credit agreement . . -- 2,500,000
----------- -----------
4,330,000 2,128,000
----------- -----------
Net decrease in cash and cash equivalents . . . (3,239,000) (321,000)
Cash and cash equivalents at
beginning of period. . . . . . . . . . . . . . 7,142,000 4,292,000
----------- -----------
Cash and cash equivalents at end of period. . . $ 3,903,000 $ 3,971,000
=========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended May 31, 1998
(Unaudited)
Common Paid In Retained
Stock Capital Earnings Total
-------- ----------- ---------- -----------
Balance,
November 30, 1997. . . . .$266,000 $26,827,000 $5,757,000 $32,850,000
Net loss. . . . . . . . . . -- -- (131,000) (131,000)
Benefit in lieu of
income taxes . . . . . . . -- (103,000) -- (103,000)
Issuance of stock
under 401(k) Plan. . . . . 1,000 49,000 -- 50,000
Shares issued under
stock option plan. . . . . -- 10,000 -- 10,000
Balance, May 31, 1998 . . .$267,000 $26,783,000 $5,626,000 $32,676,000
======== =========== ========== ===========
See accompanying notes to consolidated financial statements.
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CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These interim
financial statements should be read in conjunction with the Company's
annual report for the year ended November 30, 1997. Operating results for
the three and six month periods ended May 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended November
30, 1998. Certain reclassifications have been made to prior year financial
statements in order to conform with the 1998 presentation.
2. Inventories
-----------
Inventories consist of the following (amounts in thousands):
May 31, Nov. 30,
1998 1997
----------- -----------
Land and land development costs . . . . . . $ 32,609 $ 21,936
Homes, lots and improvements in production. 26,088 17,468
Land purchase options and costs of
projects in planning . . . . . . . . . . . 3,808 4,568
----------- -----------
$ 62,505 $ 43,972
=========== ===========
Homes, lots and improvements in production represents all costs of homes
under construction, including model homes, land and land development costs,
and the related carrying costs of these lots.
Interest capitalized in inventories is charged to interest expense as
part of Cost of revenues when the homes are delivered or land sales are
closed. Interest incurred, capitalized and expensed for the three and six
month periods ended May 31, 1998 and 1997 is as follows (amounts in
thousands):
Three Six
Months Ended Months Ended
May 31, May 31,
1998 1997 1998 1997
------ ------ ------ ------
Interest expense incurred . . . . . . . . . . $ 987 $1,488 $1,839 $2,737
Interest capitalized. . . . . . . . . . . . . 648 1,019 1,234 1,984
------ ------ ------ ------
Interest expense-net. . . . . . . . . . . 339 469 605 753
Capitalized interest amortized in
Cost of revenues . . . . . . . . . . . . . . 519 952 847 1,675
------ ------ ------ ------
Interest cost reflected in pretax earnings. . $ 858 $1,421 $1,452 $2,428
====== ====== ====== ======
3. Commercial Land
---------------
For the six month period ended May 31, 1998, the Company closed on the
sale of two parcels of commercial land for combined revenues of $4,600,000,
pretax profit of $200,000 and net cash proceeds of $4,290,000 utilized for
operations.
-8-
In the second quarter of 1998, the Company received approval for the
rezoning of 60 acres of land located in New Jersey from commercial to
residential development. The Company intends to develop 128 active adult
homes at this site and, therefore, reclassified $1,800,000 from Commercial
land to Inventories.
The balance of $1,351,000 as of May 31, 1998 represents a total of four
parcels located in California, Pennsylvania and Florida that are available
for sale. In June 1998, the Company closed on the sale of one of these
parcels for $300,000 that resulted in no gain or loss. The largest
remaining parcel is under contract for sale.
4. Commitments and Contingent Liabilities
--------------------------------------
(a) In July 1994, an action was filed against Calton Homes, Inc., the
Township of Plainsboro, New Jersey and its planning board, certain real
estate brokers and certain unnamed officers of Calton Homes, Inc., by
approximately 60 purchasers in the Company's Princeton Manor development
seeking compensatory and punitive damages arising out of an alleged
failure to disclose that a portion of the property adjacent to the
community could be developed by Plainsboro Township as a public works
site. A report submitted to the court by the plaintiffs' expert indicates
that the values of only 18 of the plaintiffs' homes were affected by the
development of the public works site. Notwithstanding the submission of
the expert's report, the Company does not believe that the values of any
of the plaintiffs' homes have been impaired. The Company is vigorously
contesting this matter and, although there can be no assurances, does not
believe that the case will have any material effect on the financial
position, results of operations or cash flows of the Company.
(b) In February 1998, the United States District Court, District of
Massachusetts, dismissed, by summary judgment, the claim made by the
Federal Deposit Insurance Corporation (the "FDIC"), in its capacity as
Liquidating Agent/Receiver of Eliot Savings Bank, that Calton, Inc. had
assumed approximately $8,700,000 of liability under a promissory note
issued by a joint venture in which a Talcon, L.P. ("Talcon") subsidiary
had an interest.
In March 1998, the FDIC agreed to dismiss the remaining causes of
action in its lawsuit against Calton, Inc. in exchange for a payment by
Calton, Inc. of $50,000. This agreement was approved by the FDIC
committee overseeing this lawsuit on April 9, 1998. On June 5, 1998, the
Company exchanged general releases with the FDIC and the lawsuit was
dismissed upon the filing of a stipulation of dismissal.
(c) The Company is involved from, time to time, in other litigation in
the ordinary course of business. Management presently believes that the
resolution of any such matter should not have a material, adverse effect
on the financial condition, results of operations or cash flows of the
Company.
5. Shareholders' Equity
--------------------
In January 1998, the Company's Compensation Committee approved the grant
to various employees of the Company of options to acquire 343,000 shares of
Common Stock under the Company's 1996 Equity Incentive Plan. The options
are awarded to eligible employees based upon a number of criteria including
years of employment and base compensation. Each of such options has an
exercise price of $.50 per share, the fair market value of the Common Stock
on the date of the grant, vests in equal installments over a period of five
years and a term of ten years.
Effective December 1, 1997, the Company adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings per Share," which requires the
disclosure of basic and diluted income per share. For the three months
ended May 31, 1998, the basic and diluted income (loss) per share were $.02
and $ .01, respectively, compared to $(.01) for both basic and diluted loss
per share in the same period in 1997. For the six months ended May 31, 1998
and 1997, the basic and diluted income (loss) per share were both $(.00)
and $(.03), respectively. The basic and diluted income (loss) per share for
the three and six month periods ended May 31, 1998 and 1997 is calculated
based upon the weighted average common shares outstanding of 26,707,000 and
26,667,000 for 1998, respectively, and 26,551,000 and 26,542,000 for the
comparable periods in 1997. The diluted income per share calculated for the
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three months ended May 31, 1998 includes additional common stock
equivalents of 1,328,000 to arrive at a diluted weighted average common
shares outstanding of 28,035,000. Common stock equivalents from various
employee stock option plans used in calculating the diluted income per
share have been excluded from the loss per share calculations for the six
months ended May 31, 1998 and both periods of 1997 because the effect would
be antidilutive.
In April 1998, non-employee members of the Board of Directors were
granted options to acquire 30,000 shares of Common Stock under the
Company's 1996 Equity Incentive Plan. The options have an exercise price of
$.625, the fair market value of the Common Stock on the date of the grant,
have a term of ten years and become exercisable after one year from the
date of grant.
A total of 2,828,000 stock options have been granted and are outstanding
under the 1993 Non-Qualified Stock Option Plan and the 1996 Equity
Incentive Plan. In addition, a warrant to purchase 1,000,000 shares of
Common Stock was issued to BankBoston as a component of refinancing the
Company's debt facility in June 1997.
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 1998 AND 1997
Revenues
Revenues for the three and six months ended May 31, 1998 were $17.9 million
and $30.7 million, respectively, compared to $24.6 million and $47.2 million
for the comparable periods ended May 31, 1997. Deliveries of 56 and 93 homes
resulted in housing revenues of $14.8 million and $23.6 million, respectively,
for the three and six months ended May 31, 1998. For the comparable periods of
1997, the Company delivered 113 and 201 homes that generated housing revenues
of $24.6 million and $43.9 million, respectively. Revenues for the three and
six month periods ended May 31, 1998 include the sale of two parcels of
commercial land and land under option for $3.1 million and $7.2 million,
respectively, that resulted in an aggregate of $100,000 in pretax profit.
Revenues for the three and six months ended May 31, 1997 included a first
quarter sale of a parcel of land previously under option for $3.3 million that
resulted in no significant gain or loss.
Housing revenues decreased by $9.8 million and $20.3 million for the three
and six month periods ended May 31, 1998, respectively, when compared to the
same periods in 1997. The decrease in housing revenues for both periods is
primarily attributable to the sale of the Company's Orlando, Florida
homebuilding assets at the end of fiscal 1997. The Florida division delivered
53 homes and 98 homes for the three and six months ended May 31, 1997,
respectively, contributing housing revenues of $8.6 million and $15.4 million
during those periods. For the six month period ended May 31, 1998, the
Northeast division experienced a decrease in housing revenue of $4.3 million or
sixteen percent (16%) compared to the same period in 1997, due primarily to
seven (7) fewer homes delivered, resulting in 93 homes delivered compared to
100 homes delivered in the same period in 1997. For the six months ended May
31, 1998, the Company delivered homes from primarily six active communities
compared to eight conventional communities during the six months ended May 31,
1997. The Company anticipates delivering from nine communities during the
second half of the year. Also contributing to the decrease in housing revenue
was the decrease in the average revenue per home from $279,000 in 1997 to
$253,000 in 1998 as a result of the increased proportion of homes being
delivered from the Company's active adult communities at Renaissance, where the
average revenue per home for the six months ended May 31, 1998 was
approximately $198,000 and that represented two-thirds of the number of homes
delivered by the division. The Company anticipates higher delivery levels in
the second half of the fiscal year as compared to the first half of 1998 due to
the start of delivery activity from the three conventional communities opened
for sales at the end of fiscal 1997 and in the first quarter of 1998 and the
delivery of homes reflected in the Company's backlog. These deliveries should
increase the average revenue per home for the remainder of fiscal year 1998.
Gross profit
The Company's housing gross profit margin on homes delivered increased
substantially for the three and six months ended May 31, 1998 to twenty-one
percent (21%) and eighteen percent (18%), respectively. The comparable periods
in 1997 resulted in a twelve percent (12%) housing gross profit margin.
Excluding the impact of the Florida division in the first half of 1997, the
Company realized a housing gross profit margin of eleven percent (11%) for both
periods. The improvement in the gross profit margin over the prior periods was
the result of deliveries from newer communities, primarily Renaissance, which
represented two-thirds of the homes delivered in the first half of 1998. Due to
improved market conditions, the Company has also been able to improve its gross
profit margin by increasing base selling prices and offering fewer sales
incentives on its homes. A substantial increase in the gross profit margin
occurred from the first to second quarter of 1998, primarily due to the
increase in home deliveries from 37 homes to 56 homes which resulted in a lower
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ratio of fixed production costs compared to housing revenues. The Company
anticipates continuing to realize a similar gross profit margin as delivery
levels increase in the second half of the fiscal year.
Selling, general and administrative
Selling, general and administrative expenses were $2.1 million (11.7% of
revenues) and $4.0 million (13.0% of revenues) for the three and six month
periods ended May 31, 1998, respectively compared to $3.4 million (13.8% of
revenues) and $6.4 million (13.6% of revenues) for the same periods in 1997.
The Florida division incurred approximately $1.2 million and $2.2 million of
selling, general and administrative expenses in the three and six month periods
ended May 31, 1997, respectively. Excluding the effect of the Florida division,
the Company's selling, general and administrative costs decreased by $200,000
for the six months ended May 31, 1998 compared to May 31, 1997. The decrease is
primarily attributable to lower broker commissions as a result of the high
percentage of the division's deliveries coming from Renaissance that have less
broker participation. In addition, the Company continues to benefit from
management's efforts to reduce fixed costs.
Other income (expense)
In the second quarter of 1997, the Company received a $200,000 payment on a
note previously reserved against and recorded this amount in Other income
(expense).
Interest
Gross interest cost was approximately $1.0 million and $1.8 million for the
three and six month periods ended May 31, 1998 compared to $1.5 million and
$2.7 million, respectively, in the corresponding periods of the prior year. The
gross interest cost resulted from lower debt levels since the end of fiscal
1997 as a result of the sale of the Company's Orlando, Florida homebuilding
assets and the corresponding reduction of the amount outstanding under the
Company's revolving credit facility to $17.5 million at November 30, 1997. As
of May 31, 1998, the amount outstanding under the revolving credit facility was
$25.0 million compared to $42.0 million at May 31, 1997. The Company's weighted
average debt outstanding on its Facility for the three and six month periods
ended May 31, 1998 amounted to $24.7 million and $22.0 million, respectively,
compared to $42.0 million and $41.2 million for the same periods ended May 31,
1997. Partially offsetting the decrease in the weighted average debt is the
Company's higher effective interest rate of 14.5% and 15.2% for the three and
six month periods ended May 31, 1998, respectively, compared to 13.2% and 12.3%
for the comparable periods of 1997. The Company will continue to be impacted by
a higher effective interest rate through June 2000 due to the amortization of
underwriting and debt issuance costs incurred in obtaining the new revolving
credit facility in June 1997. The Company is amortizing approximately $300,000
per quarter over the remaining two-year commitment period of the facility.
Interest capitalized in the three and six month periods ended May 31, 1998
was $648,000 and $1.2 million compared to $1.0 million and $2.0 million,
respectively, in the corresponding periods of the prior year. The decrease in
interest capitalization is primarily attributable to lower inventory levels
subject to interest capitalization due to the sale of the Orlando, Florida
homebuilding assets. The Company will continue to utilize its line of credit in
the future to fund its operations or land acquisitions as needed.
Taxes
Included in the net income and net loss for the three and six month periods
ended May 31, 1998 is a provision in lieu of income taxes of $337,000 and a
benefit in lieu of income taxes of $103,000, respectively. The net tax benefit
recorded by the Company is calculated using the Company's effective rate which
-12-
is based upon estimates of annual results for 1998. The tax benefit for the six
month period ended May 31, 1998 is recorded as an adjustment to Paid in
capital. Realization of the benefit is dependent on generating sufficient
income through the remainder of 1998. Although realization is not assured,
management believes the benefit will be realized.
Sales Activity and Backlog
The Company recorded net sales contracts of $45.4 million (151 homes) and
$75.7 million (245 homes) for the three and six month periods ended May 31,
1998, respectively, compared to $19.1 million (80 homes) and $29.7 million (119
homes) for the corresponding periods in 1997 for the Northeast division. The
Company continued its improved net sales activity trend from the first quarter
of 1998 into the second quarter when compared to the prior year. In the
Northeast division, net sales activity increased by eighty-nine percent (89%)
over the prior year from 80 homes to 151 homes and one hundred thirty-eight
percent (138%) in net sales contract dollars from $19.1 million to
$45.4 million. Accordingly, the combined activity of the first two quarters has
led to an increase in net sales contracts for the six month period ended
May 31, 1998 compared to the comparable period of 1997 of one hundred and six
percent (106%) from 119 homes to 245 homes and an increase of one hundred and
fifty-five percent (155%) in net sales contract dollars from $29.7 million to
$75.7 million.
The increase in net sales activity in the Northeast division is primarily
attributable to significant improvement in the conversion rate of prospective
customers and, to a lesser extent, the number of active communities available
for sales during the first six months of 1998 compared to the same period in
the prior year. The Company's net sales for the second quarter continued to
benefit from the three new conventional communities opened in late fiscal 1997
and the first quarter of 1998 along with an increase in net sales activity at
Renaissance from the first quarter of 1998. The three new conventional
communities, that are expected to begin deliveries late in the third quarter of
1998, contributed approximately thirty-two percent (32%) and forty percent
(40%) to the Company's net sales activity for the three and six month periods
ended May 31, 1998. The Company also benefited from a full six months of sales
activity in 1998 in its active adult communities, Renaissance, that did not
begin entering into binding sales contracts until the second quarter of fiscal
1997. The factors discussed above, in combination with continued favorable
market conditions, including positive economic factors for the state of New
Jersey such as low unemployment resulting from positive job growth, low and
stable mortgage interest rates and high consumer confidence, have contributed
to the net sales activity improvements discussed above.
The Company's backlog position in the Northeast division has continued to
improve to the end of the second quarter as a result of improved net sales
activity for the three and six month periods of 1998. At May 31, 1998,
excluding the impact of the Florida division, the backlog of homes under sales
contract increased one hundred and fifty-nine (159%) in quantity and one
hundred eighty-seven percent (187%) in sales backlog dollars to 262 homes,
having an aggregate dollar value of $83.1 million compared to 101 homes having
an aggregate dollar value of $28.9 million as of May 31, 1997. The level of
backlog in the Northeast division is at its highest dollar value level since
November 30, 1994. As discussed previously, the number of homes in backlog is
primarily due to the opening of the Renaissance community in the second quarter
of 1997 and the net sales activity from the opening of the three conventional
communities. The average sales prices of homes in backlog as of May 31, 1998
increased to $317,000 from $287,000 in the prior year (excluding the impact of
the Florida division). The increase is attributable to the higher proportion of
conventional homes in backlog as of May 31, 1998 compared to the May 31, 1997
backlog of homes which had a higher proportion of Renaissance homes that
typically have a lower average sales price than homes from conventional
communities. The Company expects that approximately fifteen percent (15%) of
the homes in backlog will be delivered in the first half of 1999.
The backlog in both years includes contracts containing financing and other
contingencies customary in the industry, including contracts that are
contingent on purchasers selling their existing homes. The sales backlog, homes
delivered, average selling prices and gross profit achieved in the current and
prior periods may not be indicative of those to be realized in succeeding
periods due to changes in product offerings, the uncertainty of future market
conditions and the general economic environment. The Company anticipates that,
consistent with net sales results to date, Renaissance will continue to be a
significant contributor to the Company's net sales results and operating
results for 1998.
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New Accounting Standard
Effective December 1, 1997, the Company has adopted the Financial Accounting
Standards Board Statement No. 128, "Earnings per Share," which requires the
disclosure of basic and diluted earnings per share. For the three month periods
ended May 31, 1998 and 1997 the basic and diluted income (loss) per share are
$.02 and $ .01 respectively, for 1998 compared to $(.01) for both basic and
diluted loss per share in 1997. For the six month periods ended May 31, 1998
and 1997, the basic and diluted income (loss) per share are $(.00) and $(.03),
respectively. The basic and diluted income (loss) per share for the three and
six month periods ended May 31, 1998 and 1997 is calculated based upon the
weighted average common shares outstanding of 26,707,000 and 26,667,000 for
1998, respectively, and 26,551,000 and 26,542,000 for the same periods in 1997.
The diluted income per share calculated for the three month period ended
May 31, 1998 includes an additional 1,328,000 shares representing common stock
equivalents to arrive at a diluted weighted average common stock shares
outstanding of 28,035,000. Common stock equivalents from various employee stock
option plans used in calculating the diluted income per share have been
excluded from the loss per share calculations for the six month period ended
May 31, 1998 and both periods of 1997 because the effect would be antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
During the past several years, the Company has financed operations primarily
from internally generated funds from home deliveries, land sales and sales of
commercial land and buildings. The Company also utilizes a secured, revolving
credit facility (the "Facility") that it entered into in June 1997 to finance
its operations as needed. The Facility provides borrowing availability of
$45.0 million (subject to "borrowing base" limitations) during its initial
three-year term, expiring in June 2000.
For the twelve month period (June 1, 1997 to May 31, 1998) and six month
period ended May 31, 1998, the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA") were $8.9 million and $1.5 million,
respectively. As of May 31, 1998, the Company's unused commitment under the
Facility was approximately $19.0 million, of which $13.3 million was available
for borrowing, based upon a prescribed borrowing base calculation. As of
May 31, 1998, $25.0 million was outstanding under the Facility in addition to
$1.0 million of letters of credit as compared to $42.0 million under the
Company's prior revolving credit agreement at May 31, 1997. The Company's
average debt outstanding on its Facility during the three and six month periods
ended May 31, 1998 was $24.7 million and $22.0 million, respectively, compared
to $42.0 million and $41.2 million for the same periods ended May 31, 1997. The
Company anticipates the average debt outstanding in fiscal 1998 to continue to
be less than the comparable periods in 1997 as part of its strategy to finance
a greater proportion of its inventories with its equity, thereby, maintaining
an improved financial statement debt-to-equity ratio over the prior years.
During the second quarter of 1998, the Company's lender, BankBoston,
syndicated a portion of its $45.0 million commitment to include two additional
lenders, Morgan Stanley Senior Funding, Inc. and Bank United, in the Facility.
The syndication, along with certain favorable modifications to the Facility,
completes the successful refinancing of the Company's debt with the inclusion
of two additional substantial lenders and improves the Company's operating
flexibility.
The Company believes that funds generated by its operating activities, income
tax payment reductions derived from NOL utilization, financing land
acquisitions through rolling options and seller mortgages when available, and
borrowing availability under the Facility will provide sufficient capital to
support the Company's operations.
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Cash Flows from Operating Activities
Operating activities resulted in the use of $7.6 million of cash compared to
$2.4 million in the prior year. The utilization of cash by operations is
primarily attributable to the increase in inventories of approximately
$18.5 million from the beginning of the fiscal year. The increase in inventory
is primarily due to the acquisition of new land and options of $10.2 million
coupled with land improvement costs of approximately $10.2 million and
corresponding direct construction increases incurred to meet the anticipated
delivery of homes in backlog. Offsetting the net increase in inventory is the
delivery of homes for the six month period ended May 31, 1998. The sale of two
parcels of commercial land and land under option generated approximately
$5.0 million of cash proceeds during the six month period ended May 31, 1998.
The funding of the cash overdraft of $3.0 million, classified as a financing
activity, took place in the first quarter of 1998. The impact of the cash
overdraft on the change in accounts payable, accrued expenses and other
liabilities resulted in the corresponding increase to cash provided by
operations of $3.0 million.
The Company will continue to seek opportunities to obtain control of land for
future communities at advantageous prices and terms. Funds generated by the
Company's operations will be utilized for the acquisition of such properties.
In addition, borrowings from the Facility will be utilized to the extent
possible to minimize risks, conserve cash and optimize the Company's land
pipeline.
Cash Flows from Financing Activities
The Company used approximately $7.3 million of cash primarily from the
Facility to finance the net acquisitions of new land and other related
operating activities during the six month period ended May 31, 1998.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In February 1998, the United States District Court, District of
Massachusetts, dismissed, by summary judgment, the claim made by the
Federal Deposit Insurance Corporation (the "FDIC"), in its capacity as
Liquidating Agent/Receiver of Eliot Savings Bank, that Calton, Inc. had
assumed approximately $8,700,000 of liability under a promissory note
issued by a joint venture in which a Talcon, L.P. ("Talcon") subsidiary
had an interest. This matter was reported in the Company's Form 10-K for
the fiscal year ended November 30, 1997.
In March 1998, the FDIC agreed to dismiss the remaining causes of
action against Calton, Inc. in exchange for a payment by Calton, Inc. of
$50,000. This agreement was approved by the FDIC committee overseeing
this lawsuit on April 9, 1998. On June 5, 1998, the Company exchanged
general releases with the FDIC and the lawsuit was dismissed upon the
filing of a stipulation of dismissal.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its 1998 Annual Meeting of Shareholders (the
"Meeting") on April 30, 1998. At the Meeting, shareholders of the Company
were asked to reelect one director, J. Ernest Brophy, for the term ending
in 2002. Of the 25,961,770 shares of common stock voted, 25,576,761
shares of common stock were voted in favor of Mr. Brophy's reelection and
the holders of 385,009 shares of common stock withheld votes on the
reelection.
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Item 6. Exhibits and reports on Form 8-K.
---------------------------------
A) Exhibits
27. Financial Data Schedule as of May 31, 1998.
B) Reports on Form 8-K.
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Calton, Inc.
---------------------------------
(Registrant)
By: /s/ Bradley A. Little
---------------------------------
Bradley A. Little
Senior Vice President-Finance,
Treasurer and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Date: July 13, 1998
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