Calton: 10-K for Fiscal Year ended 11/30/97 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file no. 1-8846 CALTON, INC. (Exact name of registrant as specified in its charter) New Jersey 22-2433361 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 Craig Road Manalapan, New Jersey 07726-8790 (Addresses of principal executive offices) Zip Code Registrant's telephone number, including area code: (732) 780-1800 Securities registered pursuant to Section 12(b) of the Act: Title of Class -------------- Name of each exchange Title of each class on which registered ------------------------ ----------------------- Common Stock, $.01 par value per share American Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X . Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No The aggregate market value (based upon the last sales price reported by the American Stock Exchange) of voting shares held by non-affiliates of the registrant as of February 2, 1998 was $11,353,000. As of February 2, 1998, 26,632,000 shares of Common Stock were outstanding. Certain items in Parts I and II incorporate information by reference to the 1997 Annual Report to Shareholders and Part III is incorporated by reference to the Proxy Statement for the annual meeting of shareholders to be held on April 30, 1998. Except for portions which are expressly incorporated by reference herein, the Annual Report is not deemed filed a part hereof. Disclosure Concerning Forward-Looking Statements ------------------------------------------------- All statements, other than statements of historical fact, included in this Form 10-K, including without limitation the statements incorporated by reference in Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the statements under "Business," are, or may be deemed to be, "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K. Such potential risks and uncertainties, include without limitation, matters related to national and local economic conditions, the effect of governmental regulation on the Company, the competitive environment in which the Company operates, changes in interest rates, home prices, availability and cost of land for future growth, the timing of land acquisition and product development and the availability and cost of labor and materials, and other risk factors detailed herein and in other of the Company's Securities and Exchange Commission filings. The forward-looking statements are made as of the date of this Form 10-K and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements. PART I ====== Item 1. BUSINESS (a) General Development of Business General - ------- Calton, Inc. (the "Company" or "Calton"), through its subsidiary, Calton Homes, Inc. ("Calton Homes"), designs, constructs and sells single family detached homes in central New Jersey. The Company primarily targets two groups of homebuyers: the second and third time move-up homebuyer of conventional housing and the active adult homebuyer. The Company delivered 480 homes in fiscal 1997 with an average sales price of $215,000. Additionally, the Company sells land and options to acquire land to other builders from time to time after adding value by obtaining entitlements. The Company's current homebuilding activities are conducted through one division, the Northeast division, which is located in central New Jersey. On November 30, 1997, the Company sold its Orlando, Florida homebuilding assets for $16.7 million in cash. This sale resulted from management's determination that the Company's assets could be more profitably invested in New Jersey, the Company's primary market since 1969. As a result of the Florida sale, the Company anticipates that total net sales and total homebuilding revenues generated in 1998 will be less than those of prior years. Calton was incorporated in 1981 for the purpose of acquiring all of the issued and outstanding capital stock of Kaufman and Broad of New Jersey, Inc., a New Jersey corporation, from Kaufman and Broad, Inc., a Maryland corporation. After the acquisition, the name of Kaufman and Broad of New Jersey, Inc. was changed to Calton Homes that continues as a wholly-owned subsidiary of Calton. Calton maintains its executive offices at 500 Craig Road, Manalapan, New Jersey 07726 and its telephone number is (732) 780-1800. As used herein, the term "Company" refers to Calton, Inc. and its subsidiaries, unless the context indicates otherwise. On March 9, 1993, Calton and certain of its subsidiaries filed petitions under Chapter 11 of the United States Bankruptcy Code. The United States Bankruptcy Court confirmed the Plan of Reorganization (the "Reorganization") on May 6, 1993 and the Reorganization was consummated on May 28, 1993. The Reorganization resulted in the discharge of approximately $61.5 million of indebtedness and $22.8 million of interest payments owed to certain creditors. In exchange for the discharge of these obligations, these creditors were issued a combination of cash, equity securities and short-term debt instruments which were retired in September 1993. The equity securities issued to the creditors represented approximately 93.5% of the voting power of the Company's capital stock. -1- Since 1969, the Company and its predecessor have constructed and sold approximately 17,700 homes in 151 residential developments in New Jersey, Florida, Pennsylvania, California and Illinois. At November 30, 1997, the Company had seven communities open for sales, four of which offer conventional housing and three in the Company's entry into the active adult market (age 55 and over), Renaissance. The Company offers a total of nine different single family detached home types within three series of homes in Renaissance. (b) Financial Information About Industry Segments Substantially all revenues and equity in earnings, operating profits and assets of the Company and its subsidiaries are attributable to one line of business, the development and sale of residential housing and the acquisition and sale of real property. (c) Description of Business General - ------- The Company designs, constructs and sells single family detached homes in central New Jersey. The Company markets primarily to second and third time move-up homebuyers with its conventional housing product line and active adult homebuyers. In 1997, the Company delivered 480 homes with an average sales price of $215,000. Additionally, the Company sells land and options to acquire land to other builders from time to time after adding value by obtaining entitlements. Operating Strategy - ------------------ The Company's operating strategy generally consists of: (i) targeting primarily the second and third time move-up homebuyer and the active adult community homebuyer in New Jersey; (ii) conducting homebuilding activities in markets that, based on economic and demographic trends, demonstrate strong growth potential; (iii) designing each residential community to meet the needs of the particular market based on local conditions and demographic factors; (iv) minimizing land risks by purchasing entitled tracts of well-located property through options or contingent purchase contracts and limiting land holdings to those which can be developed within two years from the date of purchase or where available purchasing finished lots on a rolling option basis; (v) developing residential communities in phases which enables the Company to reduce financial exposure, control construction and operating expenses and adapt quickly to changes in customer demands and other market conditions; (vi) utilizing subcontractors to perform land development and home construction on a fixed price basis; and (vii) emphasizing the quality, features and value of its homes. Geographic Markets - ------------------ The Company's current business operations are located in central New Jersey. Generally, the Company has conducted its homebuilding operations in markets that demonstrate a strong growth profile. In 1997, the Company decided to exit from the Florida market by selling its Orlando, Florida homebuilding assets based on the Company's determination that the Company's resources would be better invested in the New Jersey market. The Company selects locations for its residential housing communities that have ready access to major arterial highways and which have experienced increased housing demand. The Company currently conducts homebuilding activities in Burlington, Hunterdon, Mercer, Middlesex, Monmouth and Ocean counties in New Jersey. Products - -------- The Company offers a variety of single-family detached homestyles tailored to meet the specific needs of the particular geographic and demographic markets served, including the second and third time move-up homebuyer, the active adult -2- homebuyer and, to a lesser extent, the first time and first time move-up homebuyer. From time to time, the Company also offers townhomes. Homestyles, prices and sizes are tailored to each community based upon the Company's assessment of specific market conditions and the restrictions imposed by local jurisdictions. In certain projects, recreational amenities such as tennis courts and playground areas are constructed by the Company. The amenities offered in the Company's Renaissance community include a 25,000 square foot clubhouse and outdoor amenities including an eighteen-hole golf course, pool and lighted clay tennis courts. The Company believes that its current product strategy which primarily focuses on the second and third time move up and active adult homebuyer enables it to mitigate some of the risks inherent in the homebuilding industry by providing it with a product mix that supplies markets that are not as susceptible to changing market conditions including interest rate changes. Base prices in the Company's conventional housing communities that offer various styles of two-story colonial homes currently range from $168,000 to $597,000 for homes ranging in size from approximately 1,900 square feet to 4,500 square feet. The Company offers nine different single-family primarily one story detached home types in its active adult community, Renaissance, ranging from $145,000 to $230,000. These homes range in size from approximately 1,500 square feet to 2,200 square feet. The Company generally standardizes its product line. This standardization improves the quality of construction and permits efficient production techniques and bulk purchasing of materials and components, thus reducing construction costs and the time required to build a home. See "Sales and Marketing." Land Acquisition, Planning and Development - ------------------------------------------ Substantially all of the land acquired by the Company is purchased only after necessary entitlements have been obtained so that the Company has certain rights to begin development or construction as market conditions dictate. The term "entitlements" refers to developmental approvals, tentative maps or recorded plats, depending on the jurisdiction within which the land is located. Entitlements generally give a developer the right to obtain building permits upon compliance with certain conditions that are usually within the developer's control. Although entitlements are ordinarily obtained prior to the Company's purchase of the land, the Company is still required to obtain a variety of other governmental approvals and permits during the development process. Although finished lots are generally not available in New Jersey, the Company has entered into a contract to purchase up to 2,000 finished lots on a rolling option basis in Ocean County, New Jersey, in its active adult community marketed under the name Renaissance. Through November 30, 1997, 146 lots have been purchased at Renaissance. The Company's general policy has been to control land for future development or sale through the use of purchase options or contingent purchase contracts whenever practicable and where market conditions permit. The Company generally endeavors to acquire property for development on an installment method, with closings on a portion of a project on a periodic basis. From time to time, the Company acquires property through the use of purchase money mortgages. In certain cases, when available, the Company acquires finished lots on a rolling option basis. These policies enable the Company to limit its financial commitments, including cash expenditures and interest and other carrying costs, and avoid large land inventories which exceed the Company's near term development needs. At the same time, the Company retains any appreciation in the value of the parcel prior to exercising the option or closing the contingent purchase contract. During the option or contingency period, the Company performs feasibility studies, technical, engineering and environmental surveys and obtains the entitlements. -3- In making land acquisitions, the Company considers such factors as: (i) current market conditions; (ii) internal and external demographic and marketing studies; (iii) environmental conditions; (iv) proximity to developed and recreational areas; (v) availability of mass transportation and major arterial highways and ready access to metropolitan areas and other employment centers; (vi) industrial and commercial growth patterns; (vii) financial review as to the feasibility of the proposed community, including projected profit margins, returns on capital employed and payback periods; (viii) the ability to secure governmental approvals and entitlements; (ix) customer preferences; (x) access to materials and subcontractors; and (xi) management's judgement as to the real estate market, economic trends and the Company's experience in a particular market. The Company's development activities include land planning and securing entitlements. These activities are performed by the Company's employees, together with independent engineers, architects and other consultants. The Company's employees also develop long-term planning of future communities. Construction - ------------ The Company employs production managers who are responsible for coordinating all functions pertaining to the construction process. All construction work for the Company is performed by subcontractors on a fixed price basis, with the Company acting as general contractor. In order to maintain control over costs, quality and work schedules, the Company employs an on-site superintendent who is responsible for supervising subcontractor work at each community. The Company's housing is constructed according to standardized design plans that are then customized to each individual contract preference. Generally, the Company seeks to develop communities having a number of lots to absorb deliveries over a minimum one year period in order to reduce the per home cost of the housing products which it sells. Advantages achieved by volume building include lower costs paid to subcontractors and reduced material costs per home. Generally, the Company's policy is to commence construction of a detached home beyond the foundation after a sales contract for that home has been signed. The Company does, however, ordinarily attempt to maintain a predetermined inventory of homes in process in order to match the construction times of homes with the mortgage application process and to accommodate customers who require immediate occupancy, such as relocation homebuyers. In addition, in order to permit construction and delivery of homes on a year round basis, the Company, in anticipation of winter in the Northeast, will start construction of foundations prior to having signed sales contracts. Materials and Subcontractors - ---------------------------- The Company attempts to maintain efficient operations by utilizing standardized material available from a variety of sources. Prices for materials may fluctuate due to various factors, including demand levels or supply shortages. During 1997, prices for gypsum products increased sharply. The prices for asphalt and appliances remained relatively flat while prices for lumber and concrete increased modestly. The Company enters into contracts with numerous subcontractors representing all building trades in connection with the construction of its homes, and has established long-term relationships with a number of subcontractors. These subcontractors bid competitively for each phase of the work at each project and are selected based on quality, price and reliability. Subcontractor bids are solicited after an internal job cost budget estimate has been prepared based on estimated material quantities. These internal estimates serve as the formal baseline budget against which the cost of each trade is measured. The Company is responsible for contracting all trades in each of its communities. The Company closely monitors subcontractor performance and expenditures for each -4- community to assess profitability. Additionally, the Company is generally able to obtain reduced prices from many of its subcontractors due to the volume of work it provides to its subcontractors. Agreements with subcontractors and suppliers generally span three to twelve months, and provide a fixed price for labor and materials. The Company has, from time to time, experienced minor temporary construction delays due to shortages of materials or availability of subcontractors. Such construction delays may extend the period of time between the signing of a purchase contract and the receipt of revenues by the Company at the time of delivery of the home to the homebuyer. To date, the Company has experienced no material adverse financial effects as a result of construction delays. Currently, sufficient materials and subcontractors are available to meet the Company's demands; however, the Company cannot predict the extent to which shortages in necessary materials or labor may occur in the future. Sales and Marketing - ------------------- The Company typically constructs, furnishes and landscapes a model home for each community and maintains an on-site sales office staffed with its own sales personnel. At Renaissance, six different home types are presented in the model park in addition to a decor center. The Company makes use of newspaper, billboard and direct mail advertising, special promotional events and illustrated brochures in a comprehensive marketing program. The Company has established a web site on the Internet (http://www.caltonhomes.com) to provide its customers with additional information on the Company's communities and homes. In marketing its products, the Company emphasizes quality, features and value and provides a 15-year limited warranty on its homes. In addition, the Company offers a customization program, "Your Home Your Way," in order to make the products the Company builds more attractive to homebuyers by tailoring them to individual customer needs. Retail prices, sales strategies and advertising programs are subject to periodic market analysis. The Company's sales personnel participate in an intensive sales training program to develop their skills and knowledge. The Company consults with these personnel in the product development process to obtain and consider feedback from customers and information with respect to the Company's competitors. Sales of the Company's homes are made pursuant to standard sales contracts that are customary in the markets served by the Company. Such contracts require a customer deposit (generally up to 10% of the base selling price and $5,000 for the active adult community, Renaissance) at time of contract signing and provide the customer with a mortgage contingency, if necessary. The contingency period typically is sixty (60) days following execution of the contract. In certain instances, contracts are contingent on the sale of a purchaser's existing home. In such cases, the Company retains the right to sell the lot to a different homebuyer during the period in which the "house-to-sell" condition is not satisfied. The cancellation rate for new contracts signed was approximately 19% in fiscal 1997 (18% in New Jersey). Cancellation rates may vary from year to year. The Company attempts to limit cancellations by training its sales force to determine, at the sales office, the qualifications of potential homebuyers and by obtaining financial information about the prospective purchaser. At February 2, 1998, the Company employed 29 full-time and part-time sales personnel who are paid on a salary and/or sales commission basis. The Company also utilizes the services of independent real estate brokers through a cooperative broker referral plan. Customer Financing - ------------------ The Company sells its homes to customers who generally finance their purchase through conventional and government insured mortgages. The Company provides its -5- customers with information on a wide selection of conventional mortgage products and various mortgage lenders to assist the homebuyer through the mortgage process. Mortgages arranged by mortgage providers in recent years have been mortgage loans underwritten and made directly by a lending institution to the customer. The Company is not liable for repayment of any mortgage loans. Backlog - ------- 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 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. All of the November 30, 1997 backlog is expected to be completed and delivered by November 30, 1998. As of November 30, 1997, sales from the Renaissance community comprised approximately 60% of the Company's backlog. The backlog includes contracts containing financing and certain other contingencies, including, in certain instances, contracts which are contingent on the homebuyer selling their homes. Due to changes in product offerings, the uncertainty of future market conditions and the general economic environment, the sales backlog achieved in the current period may not be indicative of those to be realized in succeeding periods. Residential Development - ----------------------- The Company markets and sells varying types of residential homes ranging in base selling prices from $168,000 to $597,000 for its conventional line of homes and $145,000 to $230,000 for its active adult line of homes. Average base selling prices of homes sold in any period or unsold at any point in time will vary depending on the specific projects and style of homes under development. The Company continually monitors prevailing market conditions, including interest rates and the level of resale activity in the markets in which it operates. The Company may, from time to time, sell all or a portion of a residential project prior to its development by the Company. As of November 30, 1997, the Company had 4 conventional communities and Renaissance, which includes three communities, open for sales including an aggregate of 2,440 single family detached homes to be delivered. The following sets forth certain information as of November 30, 1997 with respect to communities being developed by the Company: Homes Deliv- ered Homes Homes Year Un- Year Deliv- Ended der of Lots ered Nov. Con- First Ap- Incept- 30, tract Un- Community Name Deliv- proved ion to 1997 (Back- sold Sales (Location) ery (a) Date (b) log) Lots Price Range - -------------------- ------ ----- ----- ---- ---- ---- ----------------- Belmont @ Steeple- chase (Burlington) 1995 291 84 29 9 198 $167,990-$226,990 Crown Pointe (West Windsor) 1996 94 29 26 11 54 $397,990-$504,990 The Crossing @ Grover's Mill (Plainsboro) 1998 179 0 0 19 160 $356,990-$453,990 Renaissance (Manchester Twp): Renaissance Series (80' lots) 1997 100 2 2 5 93 $224,990-$229,990 Signature Series (60' lots) 1997 501 11 11 23 467 $172,990-$185,990 Florentine Series (50' lots) 1997 1,411 39 39 38 1,334 $144,990-$176,990 Stanton Ridge (Readington) 1997 34 8 8 4 22 $442,990-$596,990 Other (communities with fewer than 5 homes unsold) 862 859 111 1 2 ----- ----- --- --- ----- TOTAL 3,472 1,032 226 110 2,330 ===== ===== === === ===== -6- (a) Includes homes completed and delivered, homes under construction and homes designated on subdivision or site plans where preliminary and final subdivision or site plan approvals, which in certain instances may be subject to the fulfillment of certain conditions imposed thereby, have been received. Also includes approximately 2,083 planned homes under rolling options in 3 conventional communities (229 planned homes) and the active adult community, Renaissance (1,854 planned homes), currently being developed and marketed by the Company. The exercise of these options will require the following cash payments: $10.2 million in 1998, $6.5 million in 1999, $6.6 million in 2000, $7.5 million in 2001, $7.8 million in 2002 and $33.7 million thereafter. The Renaissance community represents the majority of the capital requirements and lots which are currently planned for development beyond the year 2002. (b) Excludes the last 4 home deliveries from the Chicago division and 250 homes from the Florida division. Land Inventory - -------------- The Company acquires options or contingent purchase contracts on land where practicable and where market conditions and lending availability permit. In other instances, the Company has endeavored to acquire property either subject to purchase money mortgages, or on an installment method, with closings on a portion of a project on a periodic basis. In order to ensure the availability of land for future development, the Company believes it is necessary to control land in New Jersey at an earlier point in time than in other markets. As of November 30, 1997, if all of the options held by the Company were exercised and all of the contingent purchase contracts to which the Company is a party were closed, the Company would have sufficient land to maintain its anticipated level of deliveries for the next five years and beyond. As of November 30, 1997, in addition to the communities currently under development, the Company held options or was a party to contingent contracts to purchase 10 parcels of land in New Jersey for which it has paid options fees and earnest money aggregating $1.0 million. A total of 1,613 homes, of which 1,249 homes are single family and 364 are townhomes, are planned for these parcels. In a number of cases, these properties are subject to obtaining development approvals and satisfactory feasibility studies. As a result, no assurance can be given that the Company will ultimately pursue the development of these properties. Through November 30, 1997, the Company has spent an additional $2.1 million in predevelopment costs on the properties subject to options and contingent contracts. Such costs may not be fully recoverable in the event these options were not exercised or the contracts were not closed, as the case may be. Assuming that in each year the Company makes payments with respect to either options or contingent contracts, exercises options, or closes such contracts with respect to the minimum amount of land necessary to retain its rights to acquire the remainder of the subject properties, the aggregate amount required to retain or exercise such options or close or extend such contingent contracts in periods subsequent to November 30, 1997 is approximately $952,000 in 1998, $7.1 million in 1999, $9.5 million in 2000, $3.7 million in 2001, $1.2 million in 2002 and $3.5 million thereafter. Assuming the Company exercises such options and contingent contracts, the Company will be in a position to acquire title to approximately 60, 353, 681, 215 and 62 lots during fiscal years 1998 through 2002, respectively, and 242 lots thereafter. Commercial Land - --------------- The Company has continued to focus on selling its commercial land. In keeping with this strategy, the Company, in February 1998, closed on the sale of its largest remaining parcel of commercial land, located in eastern Pennsylvania, for $4.1 million in proceeds that resulted in no gain or loss after taking into account a $300,000 impairment charge in the fourth quarter of 1997. The Company owns certain undeveloped properties with a book value of $3.3 million in New Jersey, Florida, California and Pennsylvania. These properties include 56 acres of commercial property in Manalapan, New Jersey; 14 acres -7- consisting of two parcels in Orange County, Florida; and two other properties, one nine-acre site in Pennsylvania and one in California consisting of 22 acres. Competition - ----------- The Company's business is highly competitive. Homebuilders compete for desirable properties, financing, raw materials and skilled labor among other things. The Company competes in each of the geographic areas in which it operates with numerous real estate developers, ranging from small local to larger regional and national builders and developers, some of which have greater sales and financial resources than the Company. Resale homes provide additional competition. The Company competes primarily on the basis of quality, features, value, reputation, price, location, design and amenities. Regulation and Environmental Matters - ------------------------------------ The Company is subject to various local state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, the Company is subject to registration and filing requirements in connection with the construction, advertisement and sale of its communities in certain states and localities in which it operates even if any or all necessary government approvals have been obtained. Generally, the Company must obtain numerous government approvals, licenses, permits, and agreements before it can commence development and construction. Certain governmental authorities impose fees as a means of defraying the cost of providing certain governmental services to developing areas, or have required developers to donate land to the municipality or make certain off-site land improvements. The Company may also be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums that could be implemented in the future in the states in which it operates. Generally, such moratoriums relate to insufficient water or sewage facilities. The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"). The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict development in certain environmentally sensitive regions or areas. For example, in July 1987, New Jersey adopted the Fresh Water Wetlands Protection Act which restricts building in or near certain protected geographic areas designated as fresh water wetlands. The preservation of wetlands located within a project may lessen the number of units that may be built in a particular project. The Company has planned all of its projects containing wetlands to comply with the regulations adopted under the Fresh Water Wetlands Protection Act and does not believe that this legislation will adversely affect its present development activities in New Jersey. In July 1985, New Jersey adopted the Fair Housing Act which established an administrative agency to adopt criteria by which municipalities will determine and provide for their fair share of low and moderate income housing ("Mt. Laurel" housing). This agency promulgated regulations with respect to such criteria effective August 1986. The Company may be required to set aside Mt. Laurel housing in certain municipalities in which it owns or has the right to acquire land. In order to comply with such requirements, the Company may be required to (i) sell some homes at prices which would result in no gain or loss and an operating margin less than would have resulted otherwise, or (ii) contribute to public funding -8- of affordable housing, which contribution will increase the costs of homes to be developed in a community. The Company attempts to recover some of these potential losses or reduced margins through increased density, certain cost saving construction and land development measures and reduced land prices for the sellers of property. Despite the Company's past ability to obtain necessary permits and development approvals for its communities, increasingly stringent requirements may be imposed on developers and homebuilders in the future. Although the Company cannot predict the effect of these requirements, they could result in time consuming and expensive compliance programs and substantial expenditures for pollution and water quality control, which could materially adversely affect the Company. In addition, the continued effectiveness of permits already granted or development approvals already obtained is dependent upon many factors, some of which are beyond the Company's control, such as changes in policies, rules and regulations and their interpretation and application. The foregoing does not purport to be a full description of all of the legislation and regulations impacting the business of the Company. The Company may be subject to numerous other governmental rules and regulations regarding building standards, labor practices, environmental matters and other aspects of real estate development in each jurisdiction in which it does business. Employees - --------- As of February 2, 1998, the Company employed approximately 76 full-time personnel, including 13 corporate employees and 63 employees in the Northeast division. The Company also employs approximately 9 part-time employees in various locations. The Company believes its employee relations are satisfactory. Item 2.COMPANY FACILITIES The Company leases approximately 14,700 square feet of office space in a two- story office building in Manalapan, New Jersey. Management believes that these arrangements provide adequate space for the Company to conduct its operations. The Company also has remote sales offices, when not utilizing a model home, and construction offices on each of its project sites, which include mobile units that are leased for terms varying from one month to one year. From time to time the Company also leases model homes in some of its communities which the Company has previously sold to third parties under a lease-back arrangement. Item 3.LEGAL PROCEEDINGS 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. -9- 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. At this juncture, the FDIC has not appealed this decision and the only remaining causes of action against Calton, Inc. in this matter, which commenced in June 1996, involve a claim that Calton, Inc. breached an alleged agreement with Eliot Savings Bank to maintain a $1,000,000 net worth in a subsidiary that served as a general partner of the issuer of the note. The FDIC alleges actual damages of $1,000,000 (plus interest and costs) and is seeking treble damages under the Massachusetts General Laws Chapter 93A. Inasmuch as Calton, Inc. never entered into any such agreement with Eliot Bank, it believes that the FDIC's position is contrary to applicable law and without merit. The Company is vigorously contesting this matter but there can be no assurances that the case will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 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. Calton's by-laws contain provisions which provide indemnification rights to officers, directors and employees under certain circumstances with respect to liabilities and damages incurred in connection with any proceedings brought against such persons by reason of their being officers, directors or employees of Calton. Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1997, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. Item 4A.EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of February 2, 1998 are listed below and brief summaries of their business experience and certain other information with respect to them is set forth in the following table and in the information which follows the table. Name Age Position - -------------------- --- ----------------------------------------- Anthony J. Caldarone 60 Chairman, President and Chief Executive Officer Robert A. Fourniadis 40 Senior Vice President-Legal and Secretary Bradley A. Little 46 Senior Vice President-Finance, Treasurer and Chief Financial Officer Mr. Caldarone was reappointed as Chairman, President and Chief Executive Officer of Calton in November 1995, having previously served in such capacities from the inception of the Company in 1981 through May 1993 when the Company consummated the Reorganization. From June 1993 through October 1995, Mr. Caldarone served as a Director of the Company. Mr. Fourniadis was named Senior Vice President, Secretary and Corporate Counsel of Calton in June 1993 following the consummation of the Reorganization. Prior thereto, Mr. Fourniadis served as Vice President and Corporate Counsel of Calton Homes from 1988 to June 1993. Mr. Little was named Senior Vice President, Treasurer and Chief Financial Officer of Calton in June 1993 following the consummation of the Reorganization. Prior thereto, Mr. Little had served as Vice President of Accounting of Calton from 1989 to June 1993. -10- PART II ======= Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information pertaining to the market for the Registrant's Common Stock, high and low sales prices of the Common Stock in 1997 and 1996 and the number of holders of Common Stock is presented on page 24 of the 1997 Annual Report to Shareholders, which information is incorporated herein by reference. The Company has not paid dividends on its capital stock in the past. In addition, the terms of the Company's revolving credit facility prohibit the payment of dividends. Item 6. SELECTED FINANCIAL DATA The financial highlights data is presented on page one of the 1997 Annual Report to Shareholders, which information is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is presented on pages 5 through 11 of the 1997 Annual Report to Shareholders, which information is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, including the Report of Independent Accountants thereon and the unaudited Quarterly Financial Results, are presented on pages 12 through 24 of the 1997 Annual Report to Shareholders, which information is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -11- PART III ======== Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Directors is incorporated herein by reference to "Election of Director" contained in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 30, 1998. Certain information relating to executive officers of the Company is set forth in Item 4A of Part I of this Form 10-K under the caption "Executive Officers of the Registrant." Item 11. EXECUTIVE COMPENSATION Information pertaining to executive compensation is incorporated herein by reference to "Executive Compensation" contained in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 30, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of certain beneficial owners and management is incorporated herein by reference to "Principal Shareholders" and "Security Ownership of Management" from the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 30, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS None. -12- PART IV ======= Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page (a) 1. and 2. Financial statements and financial statement schedules Reference is made to the Index of Financial Statements and Financial Statement Schedules hereinafter contained F-1 3. Exhibits Reference is made to the Index of Exhibits hereinafter contained F-5 (b) Reports on Form 8-K The Company filed a report on Form 8-K, dated December 1, 1997, announcing that it had sold its Orlando, Florida homebuilding assets to Beazer Homes USA and to present proforma financial information. -13- SIGNATURES ========== Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALTON, INC. (Registrant) By: /s/ Bradley A. Little BRADLEY A. LITTLE, Senior Vice President-Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - ------------------------ ---------------------------- ----------------- /s/ Anthony J. Caldarone Chairman, Chief Executive February 26, 1998 - ------------------------ Officer and President (Anthony J. Caldarone) (Principal Executive Officer) /s/ Bradley A. Little Senior Vice President February 26, 1998 - ------------------------ Finance & Treasurer (Bradley A. Little) (Principal Financial & Accounting Officer) /s/ J. Ernest Brophy Director February 26, 1998 - ------------------------ (J. Ernest Brophy) /s/ Mark N. Fessel Director February 26, 1998 - ------------------------ (Mark N. Fessel) /s/ Frank Cavell Smith, Jr. Director February 26, 1998 - ------------------------- (Frank Cavell Smith, Jr.) -14- CALTON, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Number Consolidated Balance Sheet at November 30, 1997 and 1996. . . . . . . .* Consolidated Statement of Operations for the years ended November 30, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . .* Consolidated Statement of Cash Flows for the years ended November 30, 1997, 1996 and 1995. . . . . . . . . . . . . . . .* Consolidated Statement of Shareholders' Equity for the years ended November 30, 1997, 1996 and 1995. . . . . . . . . . .* Notes to Consolidated Financial Statements. . . . . . . . . . . . . . .* Report of Independent Accountants . . . . . . . . . . . . . . . . .*,F-2 Consent of Independent Accountants. . . . . . . . . . . . . . . . . .F-3 Schedules** II-Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . .F-4 * The financial statements and notes thereto together with the Report of Independent Accountants on pages 12 through 24 of the 1997 Annual Report to Shareholders are incorporated herein by reference. ** Schedules other than the schedule listed above have been omitted because of the absence of the conditions under which they are required or because the required information is presented in the financial statements or the notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Calton, Inc. and Subsidiaries, dated January 13, 1998 has been incorporated by reference in this Form 10-K to page 24 of the 1997 Annual Report to Shareholders of Calton, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the Index on page F- 1 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey January 13, 1998, except for Note 9(b) as to which the date is February 19, 1998 F-2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Calton, Inc. and Subsidiaries on Form S-8 (Nos. 33-70628, 33-75184 and 333- 28135) of our report, dated January 13, 1998, on our audits of the consolidated financial statements and financial statement schedule of Calton, Inc. and Subsidiaries as of November 30, 1997 and 1996 and for the years ended November 30, 1997, 1996 and 1995, which report has been incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Princeton, New Jersey February 26, 1998 F-3 SCHEDULE II CALTON, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Amounts in Thousands) Additions ---------------------- Balance Charged Balance at Begin- to Costs Charged to at ning of and to Other End of Description Year Expenses Accounts Deductions Year - -------------------- -------- -------- ----------- ---------- ------ Year ended November 30, 1995: Net realizable value reserves for inventory. . . $ 400 $ 1,593 $ -- $ -- $ 1,993 ======== ======== =========== ========== ======= Valuation allowance for net deferred tax asset. . . . . $ 36,892 $ -- $ -- $18,245(A) $18,647 ======== ======== =========== ========== ======= Year ended November 30, 1996: Net realizable value reserves for inventory. . . $ 1,993 $ -- $ -- $ 880(B) $ 1,113 ======== ======== =========== ========== ======= Valuation allowance for net deferred tax asset. . . . . $ 18,647 $ -- $ 981 $ -- $19,628 ======== ======== =========== ========== ======= Year ended November 30, 1997: Net realizable value/impairment reserves for inventory. . . . . $ 1,113 $ 750 $ -- $ 882(B) $ 981 ======== ======== =========== ========== ======= Valuation allowance for net deferred tax asset. . . . . $ 19,628 $ -- $ -- $ 3,538(C) $16,090 ======== ======== =========== ========== ======= (A) Represents the impact of the recalculation of the IRS Code Section 382 limitation and the utilization against taxable income attributable to Talcon, L.P. (B) Represents the utilization of reserves recorded when affected homes are delivered. (C) Represents the change in the valuation allowance due to the changes in the deferred tax assets and the impact of the IRS Code Section 382 limitation on those tax assets. F-4 INDEX TO EXHIBITS ================= 2. Plan of Reorganization of the Registrant and Subsidiaries, incorporated by reference to Exhibit 2 to Amendment No. 1 to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-60022. 2.1 Agreement for Sale and Purchase of Assets dated as of November 26, 1997 between Beazer Homes Corp., Beazer Homes USA, Inc., Calton Homes of Florida, Inc. and Calton Homes, Inc., incorporated by reference to Exhibit 2 to Form 8-K of Registrant dated December 1, 1997. 3.1 Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State, State of New Jersey on May 28, 1993, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-60022, Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on April 27, 1994, incorporated by reference to Exhibit 3(b) to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33- 76312, and Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on May 29, 1997. 3.2 By Laws of Registrant, as amended. 4. Senior Secured Credit Agreement dated as of June 12, 1997, among Calton Homes, Inc., Calton Homes of Florida, Inc. and BankBoston, N.A., incorporated by reference to Exhibit 10.1 to Form 8-K of Registrant dated June 12, 1997. 4.1 Warrant to Purchase Common Stock of Calton, Inc. dated June 12, 1997 issued to BankBoston, N.A., incorporated by reference to Exhibit 10.2 to Form 8-K of Registrant dated June 12, 1997. (*)10.1 1996 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1996. (*)10.3 Registrant's Amended and Restated 1993 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.3 to Form 10-K of Registrant for the fiscal year ended November 30, 1995. (*)10.4 Incentive Compensation Plan of Registrant, incorporated by reference to Exhibit 10.4 to Form 10-K of Registrant for the fiscal year ended November 30, 1996. (*)10.6 Severance Policy for Senior Executives of Registrant incorporated by reference to Exhibit 10.6 of Form 10-K of Registrant for the fiscal year ended November 30, 1994. (**)10.7 Executive Employment Agreement dated as of November 21, 1995 between Registrant and Anthony J. Caldarone, incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for the fiscal year ended November 30, 1995. 13. Certain pages of Registrant's 1997 Annual Report to Shareholders which, except for those portions expressly incorporated herein by reference, are not deemed filed a part hereof. 21. Subsidiaries of the Registrant. 27. Financial Data Schedule. - ---------------------- (*) Constitutes a compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (**) Constitutes a management contract required to be filed pursuant to Item 14(c) of Form 10-K. F-5 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 EXHIBITS FILED WITH ANNUAL REPORT ON FORM 10-K CALTON, INC. 1997 CALTON, INC. FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 1997 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF RESGISTRANT DATED MAY 29, 1997 CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CALTON, INC. To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(3) of the New Jersey Business Corporation Act, the undersigned Corporation executes the following Certificate of Amendment to its Amended and Restated Certificate of Incorporation: 1. The name of the Corporation is "Calton, Inc." 2. The following amendment to the Amended and Restated Certificate of Incorporation (the "Amendment") was approved by the Board of Directors and thereafter duly adopted by the shareholders of the Corporation on the 29th day of May 1997: The second paragraph of Article V of the Amended and Restated Certificated of Incorporation is amended to read in its entirety as follows: The number of directors of the Corporation shall be the number, not less than three (3) nor more than fifteen (15), fixed from time to time by the Board of Directors. The Board of Directors shall be divided into four classes, designated Class I, Class II, Class III and Class IV, as nearly equal in number as possible, and the term of office of directors of one class shall expire at each annual meeting of shareholders, and in all cases as to each director until his successor shall be elected and shall qualify (except in cases where no successor is elected due to a reduction in the size of the board) or until his earlier resignation, removal from office, death or incapacity. The initial term of office of directors of Class I shall expire at the annual meeting of shareholders in 1998; that of Class II shall expire at the annual meeting of shareholders in 1999; that of Class III shall expire at the annual meeting of shareholders in 2000; and that of Class IV shall expire at the annual meeting of shareholders in 2001; and in all cases as to each director until his successor shall be elected and shall qualify (except in cases where no successor is elected due to a reduction in the size of the board) or until his earlier resignation, removal from office, death or incapacity. At each annual meeting of shareholders after 1997, the number of directors equal to the number of directors of the class whose term expires at the time of such meeting (or, if less, the number of directors properly nominated and qualified for election) shall be elected to hold office until the fourth succeeding annual meeting of shareholders after their election or until their successors are elected and -1- qualify. Additional directorships resulting from an increase in the number of directors shall be apportioned among the classes as equally as possible. Vacancies, including vacancies created by an increase in the size of the Board of Directors, shall be filed by the affirmative vote of a majority of the remaining Board of Directors, though less than a quorum, but any such director so elected shall hold office until the next succeeding annual meeting of shareholders. At such annual meeting, such director or a successor to such director shall be elected and qualified in the class to which such director is assigned to hold office for the term or remainder of the term of such class. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. The directors need not be residents of the State of New Jersey and the directors need not be shareholders of the Corporation. This second paragraph of this Article V shall not be amended, altered or repealed except by the affirmative vote of the holders of not less than sixty-six and two-thirds percent (66-2/3%) of the combined voting power of the then outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 3. The number of shares entitled to vote on the adoption of the Amendment was 26,557,313 shares of Common Stock, par value one cent ($.01) per share ("Common Stock"), entitling the holders thereof to one (1) vote per share. 4. The number of shares of Common Stock voted for the Amendment was 9,729,234 shares and against the Amendment was 3,787,034 shares. Dated: May 29, 1997 CALTON, INC. By: /s/ Robert A. Fourniadis ------------------------- Robert A. Fourniadis Senior Vice President and Secretary -2- CALTON, INC. FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 1997 EXHHIBIT 3.2 CALTON, INC. BY-LAWS ________________________ ARTICLE I OFFICES Section 1. The registered office shall be at 500 Craig Road, in the Township of Freehold, County of Monmouth, State of New Jersey. The registered agent of the Corporation at such office is Robert E. Linkin. Section 2. The Corporation may also have offices at such other places, both within and without the State of New Jersey, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All meetings of the shareholders for the election of directors and for any other purpose may be held at such time and place, within or without the State of New Jersey, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of shareholders shall be held on a regular business day of the month of March or April at the offices of the corporation or at such other date, time and place of which shall be established by the Board of Directors, at which they shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. Notice of the annual meeting shall be given by mailing, no more than sixty (60) days nor less than ten (10) days prior thereto, a written notice stating the time and place thereof, directed to each shareholder of record entitled to vote at the meeting at his address as the same appears upon the records of the Corporation. Section 4. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. Such list shall be arranged alphabetically within each class, series, or group of shareholders maintained by the Corporation, showing the address of, and the number of shares held by, each shareholder. Such list shall be produced at the time and place of the meeting; be subject to the inspection of any shareholder during the whole time of the meeting; and be prima facie -1- evidence as to who are the shareholders entitled to examine such list or to vote at any such meetings. Section 5. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or the president , and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of shareholders owning a majority in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written or telegraphic notice of a special meeting of shareholders, stating the time, place and object thereof, shall be given to each shareholder entitled to vote thereat, not more than twenty (20) nor less than two (2) days before the date fixed for the meeting. Section 7. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present, in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. -2- Section 10. Each shareholder shall, at every meeting of the shareholders, be entitled to that number of votes in person or by proxy as provided in the certificate of incorporation for each share of capital stock having voting power held by such shareholder. Every shareholder entitled to vote at a meeting of shareholders or to express consent without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his agent, except that a proxy may be given by a shareholder or his agent by telegram or cable or by any means of electronic communication which results in a writing. No proxy shall be valid for more than 11 months, unless a longer time is expressly provided therein. Unless it is irrevocable as provided below in this Article II, Section 10, a proxy shall be revocable at will. The grant of a later proxy revokes any earlier proxy unless the earlier proxy is irrevocable. A proxy shall not be revoked by the death or incapacity of a shareholder but such proxy shall continue in force until revoked by the personal representative or guardian of the shareholder. The presence at any meeting of any shareholder who has given a proxy does not revoke the proxy unless the shareholder files written notice of the revocation with the secretary of the meeting prior to the voting of the proxy or votes the shares subsequent to the proxy by written ballot. A proxy which states that it is irrevocable is irrevocable if coupled with an interest either in the stock itself or in the Corporation and, in particular and without limitation, if it is held by any of the following or a nominee of any of the following: (a) a pledgee; (b) a person who has purchased or agreed to purchase the shares; (c) a creditor of the Corporation who has extended credit or has agreed to continue to extend credit to the Corporation if the proxy is given in consideration of the extension or continuation; (d) a person who has agreed to perform services as an employee of the Corporation if the proxy is given in consideration of the agreement; or (e) a person designated pursuant to the terms of an agreement as to voting between two or more shareholders. An irrevocable proxy becomes revocable when the interest which supports the proxy has terminated. Unless noted conspicuously on the share certificate, an otherwise irrevocable proxy may be revoked by a person who becomes the holder of the shares without actual knowledge of the restriction. A person named in a proxy as the attorney or agent of a shareholder may, if the proxy so provides, substitute another person to act in his place, including any other person named as an attorney or agent in the same proxy. The substitution shall not be effective until an instrument effecting it is filed with the secretary of the Corporation. -3- Section 11. Whenever the vote of shareholder at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of the statutes or of the Certificate of Incorporation, the meeting and the vote of shareholders may be dispensed with if all the shareholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken, and in the case of any action to be taken pursuant to Chapter 10 of Title 14A of the Revised Statutes of the State of New Jersey, the Corporation provides to all other shareholders the advance notification required by N.J.S.A. 14A:5-6(2)(b). Subject to the provisions of N.J.S.A. 14A:5-6(2), whenever the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of the statutes or of the Certificate of Incorporation, other than the election of directors, the meeting and vote of shareholders may be dispensed with and the action may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes which would be necessary to authorize such action at a meeting at which all shareholders entitled to vote thereon were present and voting. Section 12. At each meeting of shareholders, the Chairman of the Company's Board of Directors or in his or her absence the President of the Company or in his or her absence any Vice President of the Company or in his or her absence a chairman chosen by the vote of a majority in interest of the shareholders present in person or represented by proxy and entitled to vote thereat, shall act as chairman. The Secretary or in his or her absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof. The Board of Directors of the Corporation shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, the chairman shall have the authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the Corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry at the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for -4- balloting on matters which are to be voted on by ballot. The chairman shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. The chairman may rule that a resolution, nomination or motion not be submitted to the shareholders for a vote unless seconded by a shareholder or a proxy for a shareholder. The chairman may require that any person who is neither a bona fide shareholder nor a proxy for a bona fide shareholder leave the meeting, and upon the refusal of a shareholder to comply with a procedural ruling of the chairman which the chairman deems necessary for the proper conduct of the meeting, may require that such shareholder leave the meeting. The chairman may, on his own motion, summarily adjourn any meeting for any period he deems necessary if he rules that orderly procedures cannot be maintained at the meeting. Unless, and to the extent, determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with rules of parliamentary procedure. Section 13. To be properly brought before an annual meeting of shareholders, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than 90 days prior to the meeting anniversary date of the immediately preceding annual meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 13 of Article II and any other applicable requirements, provided, however, that nothing in this Section 13 of Article II shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. -5- The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 13 of Article II and any other applicable requirements and if he should so determine, which determination shall be conclusive, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be the number, not less than three nor more than fifteen, fixed from time to time by a majority vote of the whole Board of Directors; provided, no decrease in the number of directors shall shorten the term of any incumbent director. Each director shall serve for the term of the class for which elected or until such time as a successor shall have been duly elected and shall have qualified. Directors need not be shareholders. Section 2. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 90 days prior to the anniversary date of the immediately preceding annual meeting; and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the -6- Securities and Exchange Commission; and (e) the signed consent of each nominee to serve as a director of the Corporation if so elected. The Corporation may require any proposed nominee or shareholder proposing a nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation or to properly complete any proxy or information statements used for the solicitation of proxies in connection with the meeting at which directors are to be elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 3. Whenever any vacancy shall occur in the Board of Directors by death, resignation or otherwise, it shall be filled by a majority vote of the directors then in office, though less than a quorum, but any such director so elected shall hold office only until the next succeeding annual meeting of shareholders. At such annual meeting, such director or a successor to such director shall be elected and qualified in the class to which such director is assigned to hold office for the term or remainder of the term of such class. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Section 4. The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. Section 5. The removal of one or more directors for cause or without case shall be governed by N.J.S.A. 14A:6-6 or any successor provisions thereto. MEETINGS OF THE BOARD OF DIRECTORS Section 6. The Board of Directors of the Corporation may hold meetings, both regular or special, either within or without the State of New Jersey. Section 7. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the shareholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and placed so fixed by the shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors, or upon the conclusion of the shareholders' meeting at which time they were elected, without further notice. At such meeting the Board of Directors shall elect from their own number a chairman of the Board and president for the ensuing year and until their successors are elected and qualify in their stead, elect other officers of the Corporation, and shall transact such other business as may come before the meeting. -7- Section 8. Regular meetings of the Board of Directors may be held without notice at such time and to such place as shall from time-to-time be determined by the Board. Section 9. Special meetings of the Board may be called by the chairman of the Board or president or secretary on three (3) days notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the president or secretary in like manner and on like notice on the written request of any two directors. Section 10. At all meetings of the Board, a majority of the directors in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 11. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. COMPENSATION OF DIRECTORS Section 12. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and directors who are not full-time employees of the Corporation may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as a director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. -8- COMMITTEES OF DIRECTORS Section 13. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 14. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE IV NOTICES Section 1. Notices to directors and shareholders shall be in writing and delivered personally or mailed to the directors or shareholders at their addresses appearing on the books of the Corporation. Notice by mail shall be deemed to be given if given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board, a president, one or more vice-presidents, a secretary, a treasurer and such assistant secretaries and -9- assistant treasurers as the Board of Directors shall from time to time determine. The Board of Directors may also designate one or more vice-presidents to be executive vice-presidents and/or senior vice-presidents. Two or more offices may be held by the same person except that where the offices of president and secretary are held by the same person, such person shall not hold any other office. Section 2. The Board of Directors may appoint each other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 3. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors, except that the Board of Directors may delegate such duty to an officer or officers of the Corporation. Section 4. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors, without the necessity of specifying any cause therefor and without any prior notice of such action to the officer so removed. THE CHAIRMAN OF THE BOARD Section 5. The chairman of the board shall preside at all meetings of the shareholders and the Board of Directors. He shall, in the absence or the disability of the president, perform the duties and exercise the powers of the president, and shall perform such other duties as may be delegated to him by the Board of Directors. THE PRESIDENT Section 6. The President shall be the chief executive officer of the Corporation, shall have general and active management of the business of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 7. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to the officers of the Corporation or to some other officer or agent of the Corporation. -10- THE VICE-PRESIDENT Section 8. The vice-president, or if there shall be more than one, the vice-presidents, shall, in the absence or disability of the president and the Chairman of the Board and the executive vice-president and/or senior vice-president, if any, perform the duties and exercise the powers of the president and shall perform such other duties and have such other powers as the Board of Directors or the president may from time to time prescribe. The Board of Directors may determine the order in which the vice-presidents shall so act in place of the president, and may designate a vice-president to perform all of the duties of the president in the case of the absence or disability of the president. The exercise of any power or the performance of any duty of the president by the vice-president so designated shall be conclusive evidence of the disability of the president and the Chairman of the Board and the executive vice-president and/or senior vice-president. THE SECRETARY AND ASSISTANT SECRETARY Section 9. The secretary or an assistant secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and be, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 10. The assistant secretary, or if there be more than one, the assistant secretaries, in the order determined by the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary, and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURER Section 11. The treasurer shall have the custody of the corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and shall deposit all monies and other valuable effects in the name and to the credit of the -11- Corporation in such depositories as may be designated by the Board of Directors. Section 12. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 13. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in the case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 14. The assistant treasurer, or if there shall be more than one,l the assistant treasurers, in the order determined by the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer as the Board of Directors may from time to time prescribe. ARTICLE VI INDEMNIFICATION Section 1. The Corporation shall indemnify a corporate agent against his expenses and liabilities actually and reasonably incurred in connection with the defense of any proceeding involving the corporate agent by reason of his being or having been such a corporate agent, other than a proceeding by or in the right of the corporation, if (a) such corporate agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and (b) with respect to any criminal proceeding, such corporate agent had no reasonable cause to believe his conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that such corporate agent did not meet the applicable standards of conduct set forth in paragraphs (a) and (b) herein. Section 2. The Corporation shall indemnify a corporate agent against his liabilities and expenses, actually or reasonably incurred by him in connection with the defense, in any proceeding, by or in the right of the Corporation to -12- procure a judgment in its favor which involves the corporate agent by reason of his being or having been such corporate agent, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. However, in such proceeding no indemnification shall be provided in respect of any claim, issue or matter as to which such corporate agent shall have been adjudged liable to the Corporation unless and only to the extent that the New Jersey Superior Court or the court in which such proceeding was brought shall determine upon application that despite the adjudication of liability, but in view of all circumstances of the case, such corporate agent is fairly and reasonably entitled to indemnity for such expenses or liabilities as the New Jersey Superior Court or such other court shall deem proper. Section 3. The Corporation shall indemnify a corporate agent against expenses (including attorneys fees) to the extent that such corporate agent has been successful on the merits or otherwise in any proceeding referred to in Sections 1 and 2 of this Article or in defense of any claim, issue or matter therein. Section 4. Any indemnification under Section 1 of this Article and, unless ordered by a court, under Section 2 of this Article, may be made by the Corporation only as authorized in a specific case upon a determination that indemnification is proper in the circumstances because the corporate agent met the applicable standard of conduct set forth in Sections 1 or 2 of this Article. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to or otherwise involved in the proceeding or (b) if such a quorum is not obtainable, or, even if obtainable and such quorum of the Board of Directors by a majority vote of the disinterested directors so directs, by independent legal counsel in a written opinion, such counsel to be designated by the Board of Directors or; (c) by the shareholders. Section 5. Expenses incurred by a corporate agent in connection with a proceeding may be paid by the Corporation in advance of the final disposition of the proceeding, as authorized by the Board of Directors, upon receipt of an undertaking by or on behalf of the corporate agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified as provided in this Article. Section 6. The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article shall not exclude any other rights to which a corporate agent may be entitled under the certificate of incorporation, a bylaw, agreement, vote of shareholders, or otherwise; provided that no indemnification shall be made to or on behalf of a corporate agent if a judgment or other final adjudication adverse to the corporate agent -13- establishes that his acts or omissions (a) were in breach of his duty of loyalty to the Corporation or its Shareholders, (b) were not in good faith or involved a knowing violation of law or (c) resulted in receipt by the corporate agent of an improper personal benefit. Section 7. The Corporation shall have the power to purchase and maintain insurance on behalf of any corporate agent against any expenses incurred in any proceeding and any liabilities asserted against him by reason of his being or having been a corporate agent, whether or not the Corporation would have the power to indemnify him against such expenses and liabilities under the provisions of this section. The Corporation may purchase such insurance from, or such insurance may be reinsured in whole or in part by, an insurer owned by or otherwise affiliated with the Corporation, whether or not such insurer does business with other insureds. ARTICLE VII CERTIFICATE OF STOCK Section 1. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of, the Corporation by the Chairman of the Board or president or executive vice-president, a senior vice-president or a vice-president and by the treasurer or an assistant treasurer or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Where a certificate is countersigned (a) by a transfer agent other than the Corporation or its employee or (b) by a registrar other than the Corporation or its employee, any other signature on the certificate, including the signatures of the officers of the Corporation, may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. Any person claiming a certificate or certificates of stock of the Corporation to be lost, stolen or destroyed shall provide notice of that fact to the secretary or an assistant secretary of the Corporation. Any two (2) officers of the Corporation, other than an assistant secretary or an assistant treasurer, may direct a new certificate or certificates to be issued in place of and of the same tenor and for the same number of shares as the certificate or certificates theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates of stock to be -14- lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, such officers may, in their discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond or indemnity in form and amount and with one or more sureties satisfactory to such officers as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed. The Board of Directors may at any time authorize the issuance of a new certificate or certificates to replace a certificate or certificates alleged to be lost, stolen or destroyed upon such other lawful terms and conditions as the Board of Directors shall prescribe. TRANSFER OF STOCK Section 4. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, not more than sixty (60) days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments, a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have -15- express or other notice thereof, except as otherwise provided by the laws of New Jersey. ARTICLE VIII LOANS AND GUARANTEES Section 1. The Corporation may make loans to, may guarantee the indebtedness of, and may otherwise provide financial assistance to any director, officer or employee of the Corporation, provided that the Board determines, in its judgment, that the action may reasonably be expected to benefit the Corporation. Loans, guarantees, and other financial assistance made pursuant to this Section shall contain all terms and conditions that the Board of Directors deems appropriate at the time the loans, guarantees, or assistance are made. ARTICLE IX GENERAL PROVISIONS Section 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends, such sum or sums as the directors from time-to-time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT Section 3. The Board of Directors shall present at each annual meeting, and at any special meeting of the shareholders when called for by vote of the shareholders, a full and clear statement of the business and condition of the Corporation. CHECKS Section 4. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. -16- Section 5. The officers of the Corporation and such other persons as may be designated by the Board of Directors, shall severally have full power and authority to receive and give receipt for all monies due and payable to this Corporation from any source whatever, and to endorse for deposit warrants and checks in its name, and on its behalf, and to give full discharge for the same. FISCAL YEAR Section 6. The fiscal year of the Corporation shall begin on the first day of December of each year. SEAL Section 7. The corporate seal shall have inscribed thereon the following: "CALTON, INC., 1981, Corporate Seal, New Jersey". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE X DEFINITIONS All terms used in these By-laws shall have the meaning defined in the New Jersey Business Corporation Act, which are incorporated herein by reference, unless otherwise defined in these By-laws. ARTICLE XI AMENDMENTS Section 1. These By-Laws may be altered, amended or repealed, or new by-laws may be adopted by the Board of Directors, at any regular meeting of the Board of Directors or at any special meeting of the Board of Directors. These By-Laws may also be altered, amended or repealed, or new by-laws may be adopted, by the shareholders, at any regular meeting or at any special meeting if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. Amended as of: January 30, 1991 May 29, 1997 -17- CALTON, INC. FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 1997 EXHIBIT 13 CERTAIN PAGES OF 1997 ANNUAL REPORT TO SHAREHOLDERS Financial Highlights (in thousands, except per share amounts) Six Six Months Months Years Ended November 30, Ended Ended Selected -------------------------------------- Nov. 30, May 31, Operating Data 1997 1996 1995 1994 1993 1993 - ------------------- -------- -------- -------- -------- -------- -------- Revenues . . . . . $126,588 $122,435 $180,843 $168,723 $ 83,351 $ 76,555 Gross profit . . . 16,169 16,790 19,560 28,984 15,878 4,867 Income (loss) from operations. . . . 491 1,837 (1,225) 8,595 5,560 (15,593) Income (loss) before income taxes and extra- ordinary gain . . 323 1,031 (2,307) 6,560 4,756 (56,494) Income (loss) before extra- ordinary gain . . 114 453 (3,138) 4,193 2,872 (56,494) Net income (loss). 1,377 453 (3,138) 4,193 2,872 1,817 Income (loss) per share before extra- ordinary gain . . -- .02 (.12) .16 .11 (1.67) Net income (loss) per share . . . . .05 .02 (.12) .16 .11 .05 At November 30, At Selected Balance ------------------------------------------------ May 31, Sheet Data 1997 1996 1995 1994 1993 1993 - ------------------- -------- -------- -------- -------- -------- -------- Total assets . . . $67,587 $88,757 $91,416 $122,144 $110,930 $117,462 Total debt . . . . 20,559 43,945 46,227 69,398 62,792 70,242 Shareholders' equity. . . . . . 32,850 28,086 27,013 29,045 23,893 21,000 The selected operating data for the six months ended May 31, 1993 are not comparable to the amounts reflected for subsequent periods due to the adoption of fresh-start accounting and reporting that reflected the effects of the Reorganization as of May 31, 1993. -1- Management's Discussion And Analysis Of Financial Condition And Results Of Operations RESULTS OF OPERATIONS 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. Commercial land sale - -------------------- The Company has continued to focus on selling its commercial land. In keeping with this strategy, the Company, in February 1998, closed on the sale of its largest remaining parcel of commercial land, located in eastern Pennsylvania, for $4.1 million in proceeds that resulted in no gain or loss. 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 -5- efforts to reduce general and administrative costs that were offset by an increase in marketing costs resulting primarily from the promotion of the Company's new active adult community, Renaissance. The Florida division's selling, general and administration costs for 1997 were $5.1 million. The decrease in selling, general and administrative expenses as a percentage of revenues for fiscal 1997 is 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 initial three year 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. As a result of the sale of the Orlando, Florida homebuilding assets for net proceeds of $15.8 million and the corresponding reduction of borrowings under the Company's revolving credit facility to $17.5 million as of November 30, 1997, the Company anticipates that the average debt outstanding and related interest costs under the facility will be lower in 1998 than the prior year. However, the effective interest rate of the Company will remain high due to the fixed amortization of debt issuance costs over the initial three year term of the new facility. 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. The Company anticipates both the interest capitalization rate and the amount of interest capitalized in fiscal 1998 to be less than 1997 levels due to a strong debt-to-equity ratio primarily from reduced indebtedness, and lower inventory levels subject to capitalization due to the sale of the Orlando, Florida assets. The capitalized amounts will reduce future gross profit levels assuming no relative increase in selling prices. 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 is $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 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 (see Note 8). Extraordinary gain - ------------------ In June 1997, the Company entered into a new, secured revolving credit facility with BankBoston, N.A. Proceeds from the new facility were used to retire the prior revolving credit facility of $42.0 million which was discounted and paid off for $39.4 million. Based on the accounting principles in effect at the time of the extinguishment of debt, the Company recorded an extraordinary gain of approximately $1.3 million, after deducting a $842,000 provision in lieu of income taxes. Included in the gain is the 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 -6- 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 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 is primarily due to the opening of the Renaissance community. The current average sales price of the homes in backlog at Renaissance, including base house and options, is approximately $200,000 with base sales prices ranging from $145,000 to $230,000. 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 total net sales and total homebuilding revenues generated in 1998, after taking into account the sale of the Orlando, Florida assets, will be less than those of prior years. Consistent with net sales results during 1997, Renaissance will continue to be a significant contributor to the Company's net sales and operating results. The Company opened two new conventional communities during the first quarter of 1998. New accounting standard - ----------------------- Statement of Financial Accounting Standards No. 128, "Earnings per Share" requires the presentation of basic and fully diluted per share amounts, effective for financial statements issued for periods ending after December 15, 1997. Although early adoption is not permitted, the basic earnings per share calculation should approximate the current primary earnings per share calculation; however, the diluted per share calculation, when adopted, may be lower than the basic. RESULTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995 ==================================================================== Revenues - -------- Revenues for the year ended November 30, 1996 were $122.4 million compared to revenues of $180.8 million for the year ended November 30, 1995. Deliveries of 549 homes resulted in housing revenues of $110.3 million for the year ended November 30, 1996. For the year ended November 30, 1995, the Company delivered 749 homes which generated $171.3 million of housing revenues. Housing revenues decreased for the year ended November 30, 1996 by $61.0 million or thirty-six percent (36%) compared to the year ended November 30, 1995, reflecting a decrease in deliveries and average selling prices realized on the deliveries to $201,000 in 1996 from $229,000 in 1995. Housing revenues decreased primarily due to a fifty percent (50%) decrease in homes delivered by the Company's Northeast division. The Northeast division deliveries were adversely impacted by a significantly lower level of backlog entering 1996 compared to 1995, the close out of seven communities during the year, and the opening and timing of fewer replacement communities as a result of conserving cash, repositioning the Northeast to one division and refocusing on the division's target markets. These results were partially offset by a sixty-five percent (65%) and forty-two percent (42%) increase in 1996 in the Florida division housing revenues and home deliveries, respectively, compared to the prior year. The Florida division benefited in 1996 from higher sales activity due to more communities open for sale including five new communities opened during the first half of 1996 which contributed to the improved delivery levels realized in the fourth quarter of 1996. The decrease in the average sales price was attributable to the greater proportion of the Company's homes delivered in 1996 coming from the Florida division, where average selling prices are typically lower than in the communities served in the Northeast. Revenues include the sales of land, options, and commercial land and buildings of $12.0 million for the period ended November 30, 1996 compared to $8.5 million for 1995. -7- Gross profit - ------------ The Company's gross profit margin on homes delivered was approximately thirteen percent (13%) during the year ended November 30, 1996, compared to a gross profit on homes, excluding the $1.6 million charge for impaired homebuilding assets, of twelve percent (12%) in the year ended November 30, 1995. The gross profit margin on homes delivered in 1996 was favorably impacted by the increased deliveries and related gross profit from the Company's Florida division. The Company's gross profit margin from the Northeast division also improved from the prior year due to deliveries from new communities reflecting the division's strategy to focus on the second and third time move-up buyer and its marketing strategy to emphasize quality, features and value. However, the overall gross profit margin for the year reflected intensive competition and sales incentives to homebuyers. Housing gross profit declined by $5.8 million for the year ended November 30, 1996, due to the decreased deliveries in the Northeast which was partially offset by the Florida division increases in deliveries and related gross profit. Included in the Company's gross profit is the profit from the sales of land and commercial land and buildings for the years ended 1996 and 1995 of $2.3 million and $500,000, respectively. During the year ended November 30, 1996, the Company resolved certain issues relating to sales tax, litigation and construction obligations and, therefore, reversed approximately $440,000 in accrued liabilities. These reductions were reflected in Cost of revenues. During the second quarter of fiscal 1995, as a result of the consolidation of the New Jersey-North and New Jersey-South divisions and economic and market conditions including a decreased sales pace, the Company decided not to incur further preacquisition costs on nine properties controlled under option. These actions resulted in a pretax charge of approximately $1.1 million that was reflected in Cost of revenues. Also included in Cost of revenues is a $1.1 million pretax credit realized from the reversal of a reserve previously provided on a community completed in 1995. This reserve related to a $1.1 million payable that the Company, in finalizing the accounting for this community in the second quarter of 1995, determined, based upon further review and advice of counsel, had been discharged by reason of the creditor's failure to take certain actions in connection with the Company's bankruptcy reorganization. In the year ended November 30, 1995, the Company recorded non-cash charges for impaired assets of $1.6 million. This determination was based upon decreased sales absorption levels in the Northeast which continued into the fourth quarter of 1995 and the reevaluation of the ultimate use of a parcel in Florida. Selling, general and administrative expenses - -------------------------------------------- Selling, general and administrative expenses decreased to $15.0 million (12% of reven