EXHIBIT 13
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
Years Ended November 30,
-----------------------------------------------------------------
SELECTED OPERATING DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
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
At November 30,
-----------------------------------------------------------------
SELECTED BALANCE SHEET DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- --------
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
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
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
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
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
7
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
10
CARLTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998 AND 1997
1998 1997
------------ -----------
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
============ ===========
See accompanying notes to consolidated financial statements.
11
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended November 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
See accompanying notes to consolidated financial statements.
12
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended November 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
See accompanying notes to consolidated financial statements.
13
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Paid In Retained Shareholders'
Stock Capital Earnings Equity
------------ ------------ ------------ ------------
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
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
14
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
15
CALTON, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
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
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
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
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):
Continuing
Operations Combined*
-------------------- --------------------------------------------
November 30, 1998 November 30, 1998 November 30, 1997
-------------------- -------------------- --------------------
Deferred Tax Deferred Tax Deferred Tax
Assets/(Liabilities) Assets/(Liabilities) Assets/(Liabilities)
-------------------- -------------------- --------------------
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
==================== ==================== ====================
* 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
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
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
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
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