Calton: 10-K for year ended 11/30/98 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1998 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file no. 1-8846 CALTON, INC. (Exact name of registrant as specified in its charter) NEW JERSEY 22-2433361 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 CRAIG ROAD MANALAPAN, NEW JERSEY 07726-8790 (Addresses of principal executive offices) Zip Code Registrant's telephone number, including area code: (732) 780-1800 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Class on which registered -------------- ------------------- Common Stock American Stock Exchange $.01 par value per share Rights American Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_|. The aggregate market value (based upon the last sales price reported by the American Stock Exchange) of voting shares held by non-affiliates of the registrant as of February 16, 1999 was $37,513,000. As of February 16, 1999, 27,282,000 shares of Common Stock were outstanding. Certain items in Parts I and II incorporate information by reference to the 1998 Annual Report to Shareholders and Part III is incorporated by reference to the Proxy Statement for the annual meeting of shareholders to be held on April 14, 1999. Except for portions which are expressly incorporated by reference herein, the Annual Report is not deemed filed a part hereof. - -------------------------------------------------------------------------------- Disclosure Concerning Forward-Looking Statements All statements, other than statements of historical fact, included in this Form 10-K, including without limitation the statements incorporated by reference in Part II, Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the statements under "Business," are, or may be deemed to be, "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar phrases are intended to identify such forward-looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements contained in this Form 10-K. Such potential risks and uncertainties, include without limitation, matters related to national and local economic conditions, the effect of governmental regulation on the Company, the competitive environment in which the Company operates, changes in interest rates, and other risk factors detailed herein and in other of the Company's Securities and Exchange Commission filings. The forward-looking statements are made as of the date of this Form 10-K and the Company assumes no obligation to update the forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements. - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS GENERAL Calton, Inc. (the "Company" or "Calton"), through its subsidiary, Calton Homes, Inc. ("Calton Homes"), was previously engaged in the design, construction and sale of single family detached homes in New Jersey. The Company delivered 325 homes in fiscal 1998 with an average sales price of $286,000. On November 30, 1997, the Company sold its Orlando, Florida homebuilding assets for $16.7 million in cash. On December 31, 1998, the Company sold Calton Homes for $48.1 million in cash, subject to a $5.2 million holdback and certain post closing adjustments. See "Sale of Calton Homes." This sale was part of an overall strategy designed to enhance shareholder value. See "Strategic Plan." Calton was incorporated in 1981 for the purpose of acquiring all of the issued and outstanding capital stock of Kaufman and Broad of New Jersey, Inc., a New Jersey corporation, from Kaufman and Broad, Inc., a Maryland corporation. After the acquisition, the name of Kaufman and Broad of New Jersey, Inc. was changed to Calton Homes. Calton maintains its executive offices at 500 Craig Road, Manalapan, New Jersey 07726 and its telephone number is (732) 780-1800. As used herein, the term "Company" refers to Calton, Inc. and its subsidiaries, unless the context indicates otherwise. SALE OF CALTON HOMES On December 31, 1998 (the "Closing Date"), Calton completed the sale of Calton Homes, its wholly owned homebuilding subsidiary, to Centex Real Estate Corporation ("Braewood"), the homebuilding subsidiary of Centex Corporation (NYSE:CTX), one of the nation's largest homebuilders (the "Sale Transaction"). The purchase price for the stock of Calton Homes, which was paid in cash at closing, was $48.1 million, subject to a $5.2 million holdback, and is subject to certain post closing adjustments. Calton has entered into an agreement to provide consulting services to Braewood which will entitle the Company to payments of $1.3 million per year over a three year period. The Company estimates that it will record a pre-tax gain of approximately $8.8 million and a net gain of approximately $4.6 million after recording a non-cash provision in lieu of taxes of $4.2 million as a result of the Sale Transaction in the first quarter of fiscal 1999. Upon completion of the Sale Transaction, substantially all of the employees of Calton and Calton Homes continued their employment with Calton Homes. The current officers of Calton are Anthony J. Caldarone, Chairman, President and Chief Executive Officer, David -1- J. Coppola, Vice President and Treasurer, and Mary Magee, Secretary. Each of the Company's directors continues to serve on the Board of Directors. STRATEGIC PLAN General. The Sale Transaction was effected pursuant to a strategic plan designed to enhance shareholder value. Pursuant to this plan, the Company has (i) initiated a significant stock repurchase program, (ii) intends to shift the Company's business focus to providing various services to participants in the homebuilding industry and (iii) is seeking to invest in, acquire or combine with one or more operating businesses within or outside of the homebuilding industry. The Company anticipates ongoing general and administrative expenses of approximately $100,000 per month during the initial months of fiscal 1999. Pending the implementation of the Company's strategic plan, the Company's cash will be invested as management of the Company deems prudent, which may include, but will not be limited to, mutual funds, money market accounts, stocks, bonds or United States government or municipal securities; provided, however, that the Company will attempt to invest the net proceeds and conduct its activities in a manner which will not result in the Company being deemed to be an investment company under the Investment Company Act of 1940, as amended, or a personal holding company for federal income tax purposes. See "Certain Risks." If within 18 months from the Closing Date, the Company has not redeployed a substantial portion of the proceeds of the Sale Transaction, or developed a plan to redeploy a substantial portion of such proceeds within a reasonable time frame, the Company will be liquidated and dissolved. Stock Repurchase Program. The Company plans to use a portion of the proceeds of the Sale Transaction to fund a stock repurchase program (the "Stock Repurchase Program") pursuant to which it will seek to acquire up to 10,000,000 shares of its Common Stock over a 12 month period. The Company expects to purchase shares from time to time in privately negotiated transactions or in open market purchases. The timing and number of shares purchased will depend on a variety of factors, including market price. The Stock Repurchase Program will reduce the Company's cash and shareholders equity while increasing book value per share to the extent that the average price paid per share is less than the book value per share. The Company is endeavoring to conduct the Stock Repurchase Program in a manner that will not adversely affect the liquidity of the Common Stock. The Company anticipates that there will still be a sufficient number of shares outstanding and publicly traded following the completion of the Stock Repurchase Program to ensure a continued trading market in its Common Stock. Since October 31, 1998, the Company has acquired approximately 1,230,000 shares of Common Stock at an average price of $1.09 per share. Consulting, Investment and Advisory Services. The Board of Directors intends to shift the Company's primary business focus to providing various services to participants in the homebuilding industry, including consulting services (including the consulting services being provided to Braewood pursuant to a consulting agreement entered into in connection with the Sale Transaction (the "Consulting Agreement")), equity and debt financing and financial advisory services. The Company's management believes that emerging growth of small to middle market companies will provide an opportunity which may enable the Company to realize returns on its equity which exceed those which can currently be achieved through direct participation in the homebuilding industry in New Jersey and Pennsylvania. Management believes that these objectives can be achieved by: -2- o Providing consulting services to Braewood and other participants in the homebuilding industry as permitted by the Consulting Agreement and the Company's non-competition agreement with Braewood (the "Non-Competition Agreement"); o Investing in both equity and debt securities, generally of homebuilders and real estate companies operating in diverse geographic areas; o Underwriting project financing for emerging growth homebuilders with participation from institutional investors to provide for additional leverage; o Providing advisory services and investment capital in connection with workouts, restructurings, recapitalizations and mergers and acquisitions; o Acquiring and selling companies; and o Administering Calton's existing real estate subsidiaries and utilizing, to the extent possible, the Company's net loss carryforwards. The Consulting Agreement requires the Company to provide certain consulting services to Braewood, including information, advice and recommendations with respect to the homebuilding market in New Jersey and Pennsylvania. In addition, the Company has agreed to use its best efforts to identify corporate acquisition candidates and other business opportunities for Braewood and Calton Homes in New Jersey and Pennsylvania, and upon Braewood's request, to assist Braewood and Calton Homes in (i) obtaining development entitlements for land, (ii) marketing and promotional activities, (iii) procuring goods and services from third parties and (iv) locating, screening, interviewing and recommending compensation levels for prospective employees. The Company has agreed that it will not provide similar services to others in New Jersey or Pennsylvania during the term of the Consulting Agreement and for a four year period after the expiration of the three year term of the Consulting Agreement. The Consulting Agreement requires Anthony J. Caldarone, the Company's Chairman, President and Chief Executive Officer to participate in the performance of the consulting services to Braewood and for so long as he remains employed by or associated with the Company. In consideration for the services to be provided by the Company under the Consulting Agreement, Braewood will be required to pay the Company a consulting fee of $1.3 million per year, payable in equal quarterly installments during the three year term of the agreement. Other than the Consulting Agreement, the Company has not entered into any arrangements to provide consulting, investment or advisory services to any third parties. The Non-Competition Agreement will limit the scope of the activities that can be conducted by the Company in New Jersey and Pennsylvania. Pursuant to the Non-Competition Agreement, the Company has agreed that until the fourth anniversary of the date on which the Consulting Agreement expires, it will not participate in the provision of homebuilding services, directly or indirectly, in Pennsylvania or New Jersey, either through any form of ownership (except the ownership of up to 5% of a publicly held corporation) or as a principal, agent, employee, employer, advisor, consultant, lender, partner or any other capacity whatsoever. The Company will, however, be permitted to provide second or wraparound mortgage financing to certain small homebuilding companies on a project by project basis. Any such financing may include participating mortgages; provided however, that the Company shall be prohibited from obtaining as a result of such financings or any foreclosures, deeds in lieu of foreclosure or other enforcement proceeding an interest in the equity, capital or profits of any homebuilding company in excess of ten percent (10%), and from directly or indirectly participating in the management of control of any such company. The Company may, in order to preserve its investment if a borrower defaults, acquire a -3- project or projects owned by such defaulting borrower, but following its acquisition, the Company (i) may not expand any such project beyond the investment therein at acquisition (except as necessary to prevent further loss or to fulfill contracts to build and deliver homes), (ii) must provide Braewood a right of first refusal if the Company is presented with an offer to buy and (iii) must fully dispose of any such project within 12 months. Acquisitions and Business Combinations. The Company is seeking to enhance shareholder value by investing in, acquiring or combining with one or more operating businesses within or outside of the homebuilding industry. Such activities could include the acquisition of an entire company or companies, or divisions thereof, either through a merger or a purchase of assets, as well as an investment in the securities of a company or companies, or alternatively, a combination with another business in which the Company would not be the surviving corporation. The Company has not entered into any substantive negotiations concerning such acquisitions or investments. There can be no assurance that the Company will be successful in such efforts, and the redeployment of the Company's assets into new investment and businesses entails risk to its shareholders. In addition, the scope of the Company's activities will be limited by the Non-Competition Agreement, which prohibits the Company from engaging in the operating activity which has historically represented the Company's primary business in its primary market. CERTAIN RISKS Lack of Operating History in New Business. As part of its strategic plan, the Company intends to provide various services to participants in the homebuilding industry, including investment, advisory and consulting services. In addition, the Company has entered into a Consulting Agreement with Braewood; however, the Company has not previously engaged in providing such services to third parties. In addition, the Company has not entered into any agreement to provide such services to any other third party. Further, the Company will be subject to the Non-Competition Agreement with Braewood which will limit the scope of the activities which can be conducted by the Company in New Jersey and Pennsylvania. Moreover, the success of the Company will depend on the Company's ability to attract and retain qualified personnel. As a result, no assurance can be given that the Company will be successful in implementing its strategic plan or that the Company will be able to generate profits from any such activities. Risks Associated with Potential Business Combinations. In addition to engaging in the activities described above under the caption "Lack of Operating History in New Business," the Company is seeking to enhance shareholder value by investing in, acquiring or combining with one or more operating businesses either within or outside of the homebuilding industry. As the Company has not yet identified a prospective business (a "Target Business") with which it is likely to effectuate a merger, exchange of capital stock, stock or asset acquisition or other similar type of transaction (a "Business Combination"), shareholders have no basis on which to evaluate the possible merits or risks of a Target Business. Management of the Company will endeavor to evaluate the risks inherent in any particular Target Business; however, there can be no assurance that the Company will properly ascertain all such risks. In many cases, shareholder approval will not be required to effect such a Business Combination. The fair market value of the Target Business will be determined by the Board of Directors of the Company. Therefore, the Board of Directors has significant discretion in determining whether a Target Business is suitable for a proposed Business Combination. Furthermore, the structure of a Business Combination with a Target Business, which may take the form of a merger, exchange of capital stock or stock or asset acquisition, cannot be determined -4- because, at the present time, no agreements, arrangements or understandings exist with respect to any such proposed Business Combination. Continued Listing on AMEX The Company's Common Stock is currently listed for trading on the American Stock Exchange ("AMEX"). Under AMEX's suspension and delisting policies, AMEX will normally consider suspending dealings in, or removing from listing securities of a company, if the company has sold or otherwise disposed of its principal operating assets, has ceased to be an operating company or has discontinued a substantial portion of its operations or business for any reason. AMEX has indicated that the Common Stock may become subject to delisting if the Company is not engaged in active business operations within a reasonable period of time after the closing of the Sale Transaction. If the Common Stock is delisted, it would trade on the OTC Bulletin Board or in the "pink sheets" maintained by the National Quotation Bureau, Inc., which are generally considered to be less efficient markets. Investment Company Act Considerations. The Investment Company Act of 1940, as amended ("1940 Act"), requires the registration of, and imposes various substantive restrictions on, certain companies that engage primarily, or propose to engage primarily, in the business of investing, reinvesting, or trading in securities, or that fail certain statistical tests regarding the composition of assets and source of income, and are not primarily engaged in a business other than investing, holding, owning or trading securities. The Company intends to conduct its activities in a manner which will not subject the Company to regulation under the 1940 Act; however, there can be no assurance that the Company will not be deemed to be an investment company under the 1940 Act. If the Company were required to register as an investment company under the 1940 Act, it would become subject to substantial regulation with respect to its capital structure, management, operations, transactions with affiliates, the nature of its investments and other matters. In addition, the 1940 Act imposes certain requirements on companies deemed to be within its regulatory scope, including compliance with burdensome registry, recordkeeping, voting, proxy, disclosure and other rules and regulations. In the event of the characterization of the Company as an investment company, the failure of the Company to satisfy regulatory requirements, whether on a timely basis or at all, could have a material adverse effect on the Company. Certain Tax Matters. Section 541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects a corporation which is a "personal holding company," as defined in the IRC, to a 39.6% penalty tax on undistributed personal holding company income in addition to the corporation's normal income tax. The Company could become subject to the penalty tax if (i) 60% or more of its adjusted ordinary gross income is personal holding company income and (ii) 50% or more of its outstanding Common Stock is owned, directly or indirectly, by five or fewer individuals. Personal holding company income is comprised primarily of passive investment income plus, under certain circumstances, personal service income. Indemnity Obligations. The stock purchase agreement pursuant to which the Company sold Calton Homes requires the Company to indemnify the purchaser for, among other things, breaches of the agreement and certain liabilities that arise out of events occurring prior to the closing of the sale. The Company has deposited an aggregate of approximately $5.2 million in escrow, $3 million of which provide security for the Company's indemnity obligations and approximately $2.2 million of which were deposited to fund costs associated with certain specified litigation involving Calton Homes. Under certain circumstances, the Company may be required to deposit -5- additional funds into escrow. In addition, the Company's indemnity obligations are not limited to the amount deposited in escrow. No assurance can be given that the purchaser of Calton Homes will not make claims for indemnity or that a significant portion of the escrowed funds will not be utilized to resolve litigation. See "Legal Proceedings." (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Substantially all revenues and equity in earnings, operating profits and assets of the Company and its subsidiaries in fiscal 1998 were attributable to one line of business, the development and sale of residential housing and the acquisition and sale of real property. (C) DESCRIPTION OF BUSINESS GENERAL During fiscal 1998, the Company designed, constructed and sold single family detached homes in New Jersey. The Company marketed primarily to second and third time move-up homebuyers with its conventional housing product line and active adult homebuyers. In fiscal 1998, the Company delivered 325 homes with an average sales price of approximately $286,000. In addition, the Company sold land and options to acquire land to other builders from time to time after adding value by obtaining entitlements. The Company completed the sale of its homebuilding operations on December 31, 1998. See "Sale of Calton Homes." GEOGRAPHIC MARKETS In fiscal 1998, the Company's homebuilding operations were located in New Jersey. Generally, the Company conducted its homebuilding operations in markets that demonstrated a strong growth profile. In 1997, the Company decided to exit from the Florida market by selling its Orlando, Florida homebuilding assets based on the Company's determination that the Company's resources would be better invested in the New Jersey market. The Company selected locations for its residential housing communities that had ready access to major arterial highways and which experienced increased housing demand. During 1998, the Company conducted homebuilding activities in Burlington, Hunterdon, Mercer, Middlesex, Monmouth and Ocean counties in New Jersey. PRODUCTS The Company offered a variety of single-family detached homestyles tailored to meet the specific needs of the particular geographic and demographic markets served, including the second and third time move-up homebuyer, the active adult homebuyer and, to a lesser extent, the first time and first time move-up homebuyer. From time to time, the Company also offered townhomes. Homestyles, prices and sizes were tailored to each community based upon the Company's assessment of specific market conditions and the restrictions imposed by local jurisdictions. In certain projects, recreational amenities such as tennis courts and playground areas were constructed by the Company. During 1998, base prices in the Company's conventional housing communities that offered various styles of two-story colonial homes ranged from $229,000 to $611,000 for homes ranging in size from approximately 2,700 square feet to 4,500 square feet. The Company offered nine different single-family primarily one story detached home types in its active adult community, Renaissance, ranging from $140,000 to $235,000. These homes ranged in size from approximately 1,500 square feet to 2,200 square feet. -6- LAND ACQUISITION, PLANNING AND DEVELOPMENT Substantially all of the land acquired by the Company was purchased only after necessary entitlements were obtained so that the Company had certain rights to begin development or construction as market conditions dictated. The term "entitlements" refers to developmental approvals, tentative maps or recorded plats, depending on the jurisdiction within which the land was located. Entitlements generally give a developer the right to obtain building permits upon compliance with certain conditions that are usually within the developer's control. Although entitlements were ordinarily obtained prior to the Company's purchase of the land, the Company was still required to obtain a variety of other governmental approvals and permits during the development process. The Company's general policy was to control land for future development or sale through the use of purchase options or contingent purchase contracts whenever practicable and where market conditions permitted. The Company generally endeavored to acquire property for development on an installment method, with closings on a portion of a project on a periodic basis. From time to time, the Company acquired property through the use of purchase money mortgages. In certain cases, when available, the Company acquired finished lots on a rolling option basis. These policies enabled the Company to limit its financial commitments, including cash expenditures and interest and other carrying costs, and avoid large land inventories exceeding the Company's near term development needs. At the same time, the Company retained any appreciation in the value of the parcel prior to exercising the option or closing the contingent purchase contract. During the option or contingency period, the Company performed feasibility studies, technical, engineering and environmental surveys and obtained the entitlements. In making land acquisitions, the Company considered such factors as: (i) current market conditions; (ii) internal and external demographic and marketing studies; (iii) environmental conditions; (iv) proximity to developed and recreational areas; (v) availability of mass transportation and major arterial highways and ready access to metropolitan areas and other employment centers; (vi) industrial and commercial growth patterns; (vii) financial review as to the feasibility of the proposed community, including projected profit margins, returns on capital employed and payback periods; (viii) the ability to secure governmental approvals and entitlements; (ix) customer preferences; (x) access to materials and subcontractors; and (xi) management's judgement as to the real estate market, economic trends and the Company's experience in a particular market. The Company's development activities included land planning and securing entitlements. These activities were performed by the Company's employees, together with independent engineers, architects and other consultants. CONSTRUCTION The Company employed production managers responsible for coordinating all functions pertaining to the construction process. All construction work for the Company was performed by subcontractors on a fixed price basis, with the Company acting as general contractor. In order to maintain control over costs, quality and work schedules, the Company employed an on-site superintendent who was responsible for supervising subcontractor work at each community. The Company's housing was constructed according to standardized design plans that were then customized to each individual contract preference. Generally, the Company sought to develop communities having a number of lots to absorb deliveries over a minimum one year period in order to reduce the per home cost of the housing products which it sold. -7- Advantages achieved by volume building included lower costs paid to subcontractors and reduced material costs per home. Generally, the Company's policy was to commence construction of a detached home beyond the foundation after a sales contract for that home had been signed. The Company, however, ordinarily attempted to maintain a predetermined inventory of homes in process in order to match the construction times of homes with the mortgage application process and to accommodate customers who required immediate occupancy, such as relocation homebuyers. MATERIALS AND SUBCONTRACTORS The Company attempted to maintain efficient operations by utilizing standardized material available from a variety of sources. Prices for materials fluctuated due to various factors, including demand levels or supply shortages. The Company entered into contracts with numerous subcontractors representing all building trades in connection with the construction of its homes, and established long-term relationships with a number of subcontractors. These subcontractors bid competitively for each phase of the work at each project and were selected based on quality, price and reliability. Subcontractor bids were solicited after an internal job cost budget estimate was prepared based on estimated material quantities. These internal estimates served as the formal baseline budget against which the cost of each trade was measured. The Company was responsible for contracting all trades in each of its communities. The Company monitored subcontractor performance and expenditures for each community to assess profitability. Additionally, the Company was generally able to obtain reduced prices from many of its subcontractors due to the volume of work it provided to its subcontractors. Agreements with subcontractors and suppliers generally spanned three to twelve months, and provided a fixed price for labor and materials. SALES AND MARKETING The Company typically constructed, furnished and landscaped a model home for each community and maintained an on-site sales office staffed with its own sales personnel. At Renaissance, six different home types were presented in the model park in addition to a decor center. The Company made use of newspaper, billboard and direct mail advertising, special promotional events and illustrated brochures in a comprehensive marketing program. The Company established a web site on the Internet (http://www.caltonhomes.com) to provide customers with additional information on the Company's communities and homes. In marketing its products, the Company emphasized quality, features and value and provided a 15-year limited warranty on its homes. In addition, the Company offered a customization program, "Your Home Your Way(R)," in order to make the products the Company built more attractive to homebuyers by tailoring them to individual customer needs. Sales of the Company's homes were made pursuant to standard sales contracts that were customary in the markets served by the Company. Such contracts required a customer deposit (generally up to 10% of the base selling price and $5,000 for the active adult community, Renaissance) at time of contract signing and provided the customer with a mortgage contingency, if necessary. The contingency period typically was sixty (60) days following execution of the contract. In certain instances, contracts were contingent on the sale of a purchaser's existing home. In such cases, the Company retained the right to sell the lot to a -8- different homebuyer during the period in which the "house-to-sell" condition was not satisfied. The cancellation rate for new contracts signed was approximately 15% in fiscal 1998. CUSTOMER FINANCING The Company sold its homes to customers who generally financed their purchase through conventional and government insured mortgages. The Company provided its customers with information on a wide selection of conventional mortgage products and various mortgage lenders to assist the homebuyer through the mortgage process. Mortgages arranged by mortgage providers in recent years were mortgage loans underwritten and made directly by a lending institution to the customer. The Company is not liable for repayment of any mortgage loans. COMMERCIAL LAND The Company has continued to focus on selling its commercial land. During fiscal 1998, the Company closed on the sale of two parcels of commercial land, including its largest remaining parcel located in eastern Pennsylvania, for an aggregate of $4.9 million in proceeds that resulted in an aggregate gain of approximately $200,000. The Company's remaining two commercial properties consist of land located in Florida and Pennsylvania, one of which is under contract for sale. These properties have a book value of $252,000. COMPETITION The homebuilding industry is highly competitive. Homebuilders compete for desirable properties, financing, raw materials and skilled labor among other things. The Company competed in each of the geographic areas in which it operated with numerous real estate developers, ranging from small local to larger regional and national builders and developers, some of which had greater sales and financial resources than the Company. Resale homes provided additional competition. The Company competed primarily on the basis of quality, features, value, reputation, price, location, design and amenities. REGULATION AND ENVIRONMENTAL MATTERS The Company was subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulation which imposes restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular locality. In addition, the Company was subject to registration and filing requirements in connection with the construction, advertisement and sale of its communities in certain states and localities in which it operated even if any or all necessary government approvals were obtained. Certain governmental authorities imposed fees as a means of defraying the cost of providing certain governmental services to developing areas, or required developers to donate land to the municipality or make certain off-site land improvements. The Company was also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"). The particular environmental laws applicable to any given community varied greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws sometimes resulted in delays, caused the Company to incur substantial compliance and other costs, and prohibited or severely restricted development in certain environmentally sensitive regions or areas. For example, in July 1987, New Jersey adopted the Fresh Water Wetlands Protection Act which restricts -9- building in or near certain protected geographic areas designated as fresh water wetlands. The preservation of wetlands located within a project sometimes lessened the number of units that could be built in a particular project. In July 1985, New Jersey adopted the Fair Housing Act which established an administrative agency to adopt criteria by which municipalities will determine and provide for their fair share of low and moderate income housing ("Mt. Laurel" housing). This agency promulgated regulations with respect to such criteria effective August 1986. The Company was sometimes required to set aside Mt. Laurel housing in certain municipalities in which it owned or had the right to acquire land. In order to comply with such requirements, the Company was required to (i) sell some homes at prices which would result in no gain or loss and an operating margin less than would have resulted otherwise, or (ii) contribute to public funding of affordable housing, which contribution increaseed the costs of homes to be developed in a community. The Company attempted to recover some of these potential losses or reduced margins through increased density, certain cost saving construction and land development measures and reduced land prices for the sellers of property. The foregoing does not purport to be a full description of all of the legislation and regulations impacting the business of the Company. The Company may be subject to numerous other governmental rules and regulations in each jurisdiction in which it does business. EMPLOYEES As of February 16, 1999, the Company employed 3 full-time personnel. The Company also employed 2 part-time employees. The Company believes its employee relations are satisfactory. ITEM 2. COMPANY FACILITIES In connection with the Sale Transaction, the Company sublet its interest as a tenant in its corporate offices to Calton Homes. Calton Homes has resublet to the Company approximately 1,620 square feet until May 31, 1999 for approximately $2,600 per month. Management believes that this arrangement currently provides adequate space for the Company's operations. The Company will seek to lease office space upon the expiration of its current sublease. ITEM 3. LEGAL PROCEEDINGS The stock purchase agreement pursuant to which the Company sold Calton Homes on December 31, 1998 requires the Company to indemnify the purchaser for, among other things, breaches of the agreement and certain liabilities that arise out of events occurring prior to the closing of the sale, including the cost of warranty work on homes delivered if such costs exceed $600,000. On December 31, 1998, as a condition to the sale of Calton Homes, the Company entered into a holdback escrow agreement with the purchaser pursuant to which approximately $5.2 million of the closing proceeds were deposited into escrow. Of this amount, $3 million (the "General Indemnification Funds") were deposited to provide security for the Company's indemnity obligations and approximately $2.2 million (the "Specific Indemnification Funds") were deposited to fund costs associated with certain specified litigation involving Calton Homes. Subject to claims for indemnification, one-half of the General Indemnification Funds will be disbursed to the Company on December 31, 1999. The remaining General Indemnification Funds will be disbursed to the Company, subject to claims for indemnification, on December 31, 2000. The Specific Indemnification Funds will be disbursed, to the extent not otherwise utilized in the -10- resolution of litigation, on a case by case basis as the litigation is resolved. If all of the specified litigation is not resolved by December 31, 2000, a portion of the General Indemnification Funds will not be disbursed to the Company until the resolution of the litigation. The Company may, under certain circumstances, be required to deposit additional funds in the holdback if all of the specified litigation is not resolved by December 31, 2000. In addition, the Company's indemnity obligations are not limited to the amounts deposited in escrow. In the event that the Company elects to liquidate and dissolve prior to December 31, 2003, it will be required to organize a liquidating trust to secure its obligations to the purchaser. The liquidating trust will be funded with the Specific Indemnification Funds plus $4 million if created before December 31, 1999, $3 million if created between December 31, 1999 and December 31, 2000 and $2 million if created after December 31, 2000. If the liquidation occurs prior to December 31, 2000, the Company may be required to deposit additional amounts in the Liquidating Trust if the specified litigation is not resolved by such date. Any General Indemnification Funds remaining in the holdback escrow fund will be applied as a credit against amounts required to be deposited in the liquidating trust. Calton's by-laws contain provisions which provide indemnification rights to officers, directors and employees under certain circumstances with respect to liabilities and damages incurred in connection with any proceedings brought against such persons by reason of their being officers, directors or employees of Calton. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. On December 30, 1998, the Company held a special meeting of shareholders (the "Special Meeting") at which the Company's shareholders were asked to approve the sale by the Company of Calton Homes. Of the votes cast in person or by proxy at the Special Meeting, 14,313,274 shares voted in favor of the Sale Transaction, 382,281 shares voted against the Sale Transaction and 25,942 shares abstained from voting. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of February 16, 1999 are listed below and brief summaries of their business experience and certain other information with respect to them is set forth in the following table and in the information which follows the table. Name Age Position - ---- --- -------- Anthony J. Caldarone 61 Chairman, President and Chief Executive Officer David J. Coppola 39 Vice President and Treasurer Mr. Caldarone was reappointed as Chairman, President and Chief Executive Officer of Calton in November 1995, having previously served in such capacities from the inception of the Company in 1981 through May 1993. From June 1993 through October 1995, Mr. -11- Caldarone served as a Director of the Company. Mr. Coppola was appointed Treasurer of the Company in January 1999. He served as the Company's Controller from 1992 until 1999 and was appointed as a Vice President of the Company in 1993. Mr. Coppola is a Certified Public Accountant. -12- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information pertaining to the market for the Registrant's Common Stock, high and low sales prices of the Common Stock in 1998 and 1997 and the number of holders of Common Stock is presented on page 24 of the 1998 Annual Report to Shareholders, which information is incorporated herein by reference. The Company has not paid dividends on its capital stock in the past. ITEM 6. SELECTED FINANCIAL DATA The financial highlights data is presented on page one of the 1998 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is presented on pages 4 through 10 of the 1998 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is presented under the caption "Financial Instrument Market Risk" on page 10 of the 1998 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, including the Report of Independent Accountants thereon and the unaudited Quarterly Financial Results, are presented on pages 11 through 24 of the 1998 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -13- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Directors is incorporated herein by reference to "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" contained in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 14, 1999. Certain information relating to executive officers of the Company is set forth in Item 4A of Part I of this Form 10-K under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information pertaining to executive compensation is incorporated herein by reference to "Executive Compensation" contained in the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 14, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information pertaining to security ownership of certain beneficial owners and management is incorporated herein by reference to "Principal Shareholders" and "Security Ownership of Management" from the Registrant's definitive proxy statement for the annual meeting of shareholders to be held on April 14, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS None. -14- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page ---- (a) 1. and 2. Financial statements and financial statement schedules Reference is made to the Index of Financial Statements and Financial Statement Schedules hereinafter contained F-1 3. Exhibits Reference is made to the Index of Exhibits hereinafter contained F-5 (b) Reports on Form 8-K In January 1999, the Company filed a report on Form 8-K, dated December 31, 1998, announcing that it had completed the sale of Calton Homes. -15- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CALTON, INC. ----------------------- (Registrant) Date: February 26, 1999 By: ----------------------- David J. Coppola Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- - ------------------------- Anthony J. Caldarone Chairman, Chief Executive February 26, 1999 Officer and President (Principal Executive Officer) - ------------------------- David J. Coppola Vice President February 26, 1999 (Principal Financial & Accounting Officer) - ------------------------- J. Ernest Brophy Director February 26, 1999 - ------------------------- Mark N. Fessel Director February 26, 1999 - ------------------------- Frank Cavell Smith, Jr. Director February 26, 1999 -16- CALTON, INC. AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page Consolidated Balance Sheet as of November 30, 1998 and 1997 * Consolidated Statements of Operations for the Years Ended November 30, 1998, 1997 and 1996 * Consolidated Statements of Cash Flows for the Years Ended November 30, 1998, 1997 and 1996 * Consolidated Statements of Shareholders' Equity for the Years Ended November 30, 1998, 1997 and 1996 * Notes to Consolidated Financial Statements * Report of Independent Accountants *,F-2 Consent of Independent Accountants F-3 Schedules ** II-Valuation and Qualifying Accounts F-4 - ---------- * The financial statements and notes thereto together with the Report of Independent Accountants on pages 11 through 24 of the 1998 Annual Report to Shareholders are incorporated herein by reference. ** Schedules other than the schedule listed above have been omitted because of the absence of the conditions under which they are required or because the required information is presented in the financial statements or the notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Calton, Inc. Our audits of the consolidated financial statements referred to in our report dated January 13, 1999 appearing in the November 30, 1998 Annual Report to Shareholders of Calton, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Florham Park, New Jersey January 13, 1999 F-2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Calton, Inc. and Subsidiaries on Form S-8 (Nos. 33-70628, 33-75184 and 333-28135) of our report, dated January 13, 1999 appearing in the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to true incorporation by reference of our report on the Financial Statement Schedule, which appears on page F-4 of this Form 10-K. PricewaterhouseCoopers LLP Florham Park, New Jersey February 25, 1999 F-3 SCHEDULE II CALTON, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS) Additions --------------------------- Balance at Charged to Balance Beginning Costs and Charge to At End Description of Year Expenses Other Accounts Deductions of Year - ------------------------------------------- ---------- ---------- -------------- ---------- ---------- Year ended November 30, 1996: Net realizable value reserves for inventory $ 1,993 $ -- $ -- $ 880(A) $ 1,113 ========== ========== ============== ========== ========== Valuation allowance for net deferred tax asset $ 18,647 $ -- $ 981 $ -- $ 19,628 ========== ========== ============== ========== ========== Year ended November 30, 1997: Net realizable value reserves for inventory $ 1,113 $ 750 $ -- $ 882(A) $ 981 ========== ========== ============== ========== ========== Valuation allowance for net deferred tax asset $ 19,628 $ -- $ -- $ 3,538(B) $ 16,090 ========== ========== ============== ========== ========== Year ended November 30, 1998: Net realizable value reserves for inventory $ 981 $ -- $ -- $ 726 $ 255 ========== ========== ============== ========== ========== Valuation allowance for net deferred tax asset $ 16,090 $ -- $ -- $ 2,549 $ 13,541 ========== ========== ============== ========== ========== (A) Represents the utilization of reserves recorded when affected homes are delivered and land is sold. (B) Represents the change in the valuation allowance due to the changes in the deferred tax assets and the impact of the IRS Code Section 382 limitation on those assets. F-4 INDEX TO EXHIBITS 2.1 Agreement for Sale and Purchase of Assets dated as of November 26, 1997 between Beazer Homes Corp., Beazer Homes USA, Inc., Calton Homes of Florida, Inc. and Calton Homes, Inc., incorporated by reference to Exhibit 2 to Form 8-K of Registrant dated December 1, 1997. 2.2 Amended and Restated Stock Purchase Agreement effective September 2, 1998 among Calton, Inc., Calton Homes, Inc. and Centex Real Estate Corp., incorporated by reference to Exhibit 2 to Form 8-K of Registrant dated December 31, 1998. 2.3 Amendment No. 1 to Amended and Restated Stock Purchase Agreement dated as of December 28, 1998 among Calton, Inc., Calton Homes, Inc. and Braewood Development Corp. (assignee of Centex Real Estate Corp.), incorporated by reference to Exhibit 2.1 to Form 8-K of Registrant dated December 31, 1998. 3.1 Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State, State of New Jersey on May 28, 1993, incorporated by reference to Exhibit 3.2 to Amendment No. 1 to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-60022, Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on April 27, 1994, incorporated by reference to Exhibit 3(b) to Form S-1 Registration Statement under the Securities Act of 1933, Registration No. 33-76312, and Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on May 29, 1997, incorporated by reference to Exhibit 3.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1997, and Certificate of Amendment to Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State, State of New Jersey on February 2, 1999. 3.2 By Laws of Registrant, as amended. 4.1 Warrant to Purchase Common Stock of Calton, Inc. dated June 12, 1997 issued to BankBoston, N.A., incorporated by reference to Exhibit 10.2 to Form 8-K of Registrant dated June 12, 1997. 4.2 Rights Agreement dated February 1, 1999 by and between the Registrant and First City Transfer Company as Rights Agent, including forms of Rights Certificate and Election to Purchase included as Exhibit B thereto, incorporated by reference to Exhibit 1 to Form 8-A Registration Statement of Registrant filed with the Securities and Exchange Commission on February 2, 1999. (*) 10.1 1996 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 10-K of Registrant for the fiscal year ended November 30, 1996. (*) 10.3 Registrant's Amended and Restated 1993 Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.3 to Form 10-K of Registrant for the fiscal year ended November 30, 1995. (*) 10.4 Incentive Compensation Plan of Registrant, incorporated by reference to Exhibit 10.4 to Form 10-K of Registrant for the fiscal year ended November 30, 1996. (*) 10.6 Severance Policy for Senior Executives of Registrant, incorporated by reference to Exhibit 10.6 of Form 10-K of Registrant for the fiscal year ended November 30, 1994. F-5 (**) 10.7 Executive Employment Agreement dated as of November 21, 1995 between Registrant and Anthony J. Caldarone, incorporated by reference to Exhibit 10.7 to Form 10-K of Registrant for the fiscal year ended November 30, 1995. 10.8 Senior Secured Credit Agreement dated as of June 12, 1997, among Calton Homes, Inc., Calton Homes of Florida, Inc. and BankBoston, N.A., incorporated by reference to Exhibit 10.1 to Form 8-K of Registrant dated June 12, 1997. 10.9 Consulting Agreement between Registrant and Braewood Development Corp. dated December 31, 1998. 13. Certain pages of Registrant's 1998 Annual Report to Shareholders which, except for those portions expressly incorporated herein by reference, are not deemed filed as part hereof. 21. Subsidiaries of the Registrant. 27. Financial Data Schedule. - ---------- (*) Constitutes a compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (**) Constitutes a management contract required to be filed pursuant to Item 14(c) of Form 10-K. EXHIBIT 3.1 CERTIFICATE OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CALTON, INC. To The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:9-2(2) and Section 14A:7-2(4) of the New Jersey Business Corporation Act, the undersigned Corporation executes this Certificate of Amendment to its Amended and Restated Certificate of Incorporation: The name of the Corporation is "Calton, Inc." (the "Corporation"). The following amendment to the Amended and Restated Certificate of Incorporation (the "Amendment") was approved by the Board of Directors of the Corporation at a meeting held on the 1st day of February, 1999 pursuant to the resolution set forth in the Certificate of Designations of the Class A Preferred Stock, Series One of Calton, Inc. that is annexed to this Certificate of Amendment as Exhibit A: Article IV, Section C of the Amended and Restated Certificate of Incorporation is hereby amended to include the provisions set forth in the Certificate of Designations of the Class A Preferred Stock, Series One of Calton, Inc. that is annexed to this Certificate of Amendment as Exhibit A. The Amendment described above was adopted by the Corporation's Board of Directors pursuant to Section 14A:7-2(2) of the New Jersey Business Corporation Act. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment as of the 2nd day of February, 1999. CALTON, INC. By: --------------------------------------- Anthony J. Caldarone, President CERTIFICATE OF DESIGNATIONS OF CLASS A PREFERRED STOCK, SERIES ONE OF CALTON, INC. I, Anthony J. Caldarone, Chairman of the Board and Chief Executive Officer of Calton, Inc. (the "Corporation"), a corporation organized and existing under the New Jersey Business Corporation Act (the "NJBCA"), in accordance with the provisions of the NJBCA, DO HEREBY CERTIFY that: pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, as amended, and pursuant to the NJBCA the Board of Directors on February 1, 1999 adopted the following resolution which creates a series of 1,000,000 shares of Preferred Stock designated as Class A Preferred Stock, Series One. RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Amended and Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be, and hereby is, created and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Class A Preferred Stock, Series One" (the "Series One Preferred Stock") and the number of shares constituting such series shall be 1,000,000. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series One Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, $0.01 par value per share, of the Corporation (the "Common Stock") and (ii) a preferential cash dividend (the "Preferential Dividends"), if any, on the first day of February, May, August and November of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series One Preferred Stock, in an amount (except in the case of the first Quarterly Dividend Payment Date if the date of the first issuance of Series One Preferred Stock is a date other than a Quarterly Dividend Payment Date, in which case such payment shall be a prorated amount of such amount) equal to $50.00 per share of Series One Preferred Stock less the per share amount of all cash dividends declared on the Series One Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series One Preferred Stock. In the event the Corporation shall, at any time after the issuance of any share or fraction of a share of Series One Preferred Stock, make any distribution on the shares of Common Stock of the Corporation, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Corporation or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence, a distribution of shares of Common Stock or other capital stock of the Corporation or a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less -2- than the Fair Market Value (as hereinafter defined) of such share), then, and in each such event the Corporation shall simultaneously pay on each then outstanding share of Series One Preferred Stock of the Corporation a distribution, in like kind, of 100 times such distribution paid on a share of Common Stock (subject to the provisions for adjustment hereinafter set forth). The dividends and distributions on the Series One Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "Participating Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Participating Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple." In the event the Corporation shall at any time after February 1, 1999 (the "Effective Date") declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation), then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Participating Dividends which holders of shares of Series One Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. -3- (B) The Corporation shall declare each Participating Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Participating Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series One Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series One Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series One Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series One Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. Voting Rights. The holders of shares of Series One Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series One Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. The number of votes which a holder of Series One Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple." In the event the Corporation shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a -4- combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation), then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series One Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Amended and Restated Certificate of Incorporation or By-Laws, the holders of shares of Series One Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) In the event that the Preferential Dividends accrued on the Series One Preferred Stock for four or more quarterly dividend periods, whether consecutive or not, shall not have been declared and paid or set apart for payment, the holders of record of Preferred Stock of the Corporation of all series (including the Series One Preferred Stock), other than any series in respect of which such right is expressly withheld by the Amended and Restated Certificate of Incorporation or the authorizing resolutions included in the Certificate of Designations therefor, shall have the right, at the next meeting of stockholders called for the election of directors, to elect two members to the Board of Directors, which directors shall be in addition to the number required by the By-Laws prior to such event, to serve until the next -5- Annual Meeting and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series One Preferred Stock shall have been paid (or irrevocably set aside for payment) in full. The holders of shares of Series One Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series One Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law; provided, however, that any such action by stockholders shall be taken at a meeting of stockholders and shall not be taken by written consent thereto. (D) Except as otherwise required by the Certificate of incorporation or By-Laws or set forth herein, holders of Series One Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever Preferential Dividends or Participating Dividends are in arrears or the Corporation shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Participating Dividends, whether or not declared, on shares of Series One Preferred Stock outstanding shall have been paid or set aside for payment in full, and in addition to any and all other rights which any holder of shares of Series One Preferred Stock may have in such circumstances, the Corporation shall not -6- (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series One Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series One Preferred Stock, unless dividends are paid ratably on the Series One Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled if the full dividends accrued thereon were to be paid; (iii) except as permitted by subparagraph (iv) of this paragraph 4(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series One Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series One Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series One Preferred Stock, or any shares of stock ranking on a parity with the Series One Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall -7- determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any Subsidiary (as hereinafter defined) of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. A "Subsidiary" of the Corporation shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the Board of Directors or other persons performing similar functions are Beneficially Owned, directly or indirectly, by the Corporation or by any corporation or other entity that is otherwise controlled by the Corporation. (C) The Corporation shall not issue any shares of Series One Preferred Stock except upon exercise of Rights issued pursuant to that certain Rights Agreement dated as of February 1, 1999 between the Corporation and First City Transfer Company, a copy of which is on file with the Secretary of the Corporation at its principal executive office and shall be made available to stockholders of record without charge upon written request therefor addressed to said Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Corporation from issuing for any purpose any series of Preferred Stock with rights and privileges similar to, different from, or greater than, those of the Series One Preferred Stock. Section 5. Reacquired Shares. Any shares of Series One Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares upon their retirement and -8- cancellation shall become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series One Preferred Stock unless the holders of shares of Series One Preferred Stock shall have received, subject to adjustment as hereinafter provided, (A) $100 ($1.00 per one one-hundredth of a share) plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (B) if greater than the amount specified in clause (i)(A) of this sentence, an amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, as the same may be adjusted as hereinafter provided, and (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series One Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series One Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series One Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series One Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Corporation pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Corporation applicable -9- pursuant to said clause to the determination of the Participating Liquidation Amount, as said multiple may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple." In this event the Corporation shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, or issue any of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing or surviving corporation, then in each such case the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series One Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock of the Corporation receive after the Effective Date, in respect of their shares of Common Stock any share of capital stock of the Corporation (other than any share of Common Stock of the Corporation), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise (a "Transaction"), then, and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series One Preferred Stock shall be adjusted so that after such event the holders -10- of Series One Preferred Stock shall be entitled, in respect of each share of Series One Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Corporation receive after the Effective Date, in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Fair Market Value (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series One Preferred Stock shall each be adjusted so that after -11- such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Fair Market Value of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock of the Corporation receive after the Effective Date in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Corporation (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Corporation, (other than Common Stock), at a purchase price per share less than the Fair Market Value of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Corporation of the shares of Series One Preferred Stock shall each be adjusted so that after such event each holder of a share of Series One Preferred Stock shall be entitled, in respect of each share of Series One Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional -12- dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distribution upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Fair Market Value of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Corporation as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Fair Market Value of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Certificate of Designations, the "Fair Market Value" of a share of capital stock of the Corporation (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing price per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such -13- date; provided, however, that, in the event that such Fair Market Value of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after (i) the ex-dividend date for a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) the effective date of any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Fair Market Value shall be appropriately adjusted by the Board of Directors of the Corporation to take into account ex-dividend or post-effective date trading. The closing price for any day shall be the last sale price, regular way, or, in case, no such sale takes place on such day, the average of the closing bid and asked prices, regular way (in either case, as reported in the applicable transaction reporting system with respect to securities listed or admitted to trading on the American Stock Exchange), or, if the shares are not listed or admitted to trading on the American Stock Exchange, as reported in the applicable transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Corporation. The term "Trading Day" shall mean a day in which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any -14- national securities exchange, on which the American Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Corporation is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Fair Market Value thereof as aforesaid, "Fair Market Value" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Corporation. In either case referred to in the foregoing sentence, the determination of Fair Market Value shall be described in a statement filed with the Secretary of the Corporation. Section 8. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series One Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. Effective Time of Adjustments. (A) Adjustments to the Series One Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Corporation shall give prompt written notice to each holder of a share of Series One Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Corporation of such -15- shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Corporation to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. No Redemption. The shares of Series One Preferred Stock shall not be redeemable at the option of the Corporation or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Corporation may acquire shares of Series One Preferred Stock in any other manner permitted by law, the provisions hereof and the Certificate of Incorporation of the Corporation. Section 11. Ranking. Unless otherwise provided in the Amended and Restated Certificate of Incorporation of the Corporation or a Certificate of Designations relating to a series of preferred stock of the Corporation established after the issuance of any share of Series One Preferred Stock or any right, warrant, or option providing for the issuance thereof, the Series One Preferred Stock shall rank, as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up, (i) junior to all other series of the Corporation's Preferred Stock and (iv) senior to the Common Stock. Section 12. Amendment. The provisions hereof and the Certificate of Incorporation of the Corporation shall not be amended in any manner which would adversely affect the rights, privileges or powers of the Series One Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series One Preferred Stock, voting together as a single class. Section 13. Fractional Shares. Series One Preferred Stock may be issued in fractions of a share (in one one-hundredths (1/100th) of a share and integral multiples thereof) -16- that shall entitle the holder thereof, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of shares of Series One Preferred Stock. -17- IN WITNESS WHEREOF, I have executed and subscribed this Certificate to Designations and do affirm the foregoing as true under the penalties of perjury this 2nd day of February, 1999. ---------------------------------- Name: Anthony Caldarone Title: Chairman of the Board and Chief Executive Officer -18- EXHIBIT 3.2 CALTON, INC. BY-LAWS ARTICLE I OFFICES Section 1. The registered office shall be at 500 Craig Road, in the Township of Freehold, County of Monmouth, State of New Jersey. The registered agent of the Corporation at such office is Robert E. Linkin. Section 2. The Corporation may also have offices at such other places, both within and without the State of New Jersey, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All meetings of the shareholders for the election of directors and for any other purpose may be held at such time and place, within or without the State of New Jersey, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of shareholders shall be held on a regular business day of the month of March or April at the offices of the Corporation or at such other date, time and place of which shall be established by the Board of Directors, at which they shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. Notice of the annual meeting shall be given by mailing, no more than sixty (60) days nor less than ten (10) days prior thereto, a written notice stating the time and place thereof, directed to each shareholder of record entitled to vote at the meeting at his address as the same appears upon the records of the Corporation. Section 4. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. Such list shall be arranged alphabetically within each class, series, or group of shareholders maintained by the Corporation, showing the address of, and the number of shares held by, each shareholder. Such list shall be produced at the time and place of the meeting; be subject to the inspection of any shareholder during the whole time of the meeting; and be prima facie evidence as to who are the shareholders entitled to examine such list or to vote at any such meetings. Section 5. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or the president, and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of shareholders owning a majority in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written or telegraphic notice of a special meeting of shareholders, stating the time, place and object thereof, shall be given to each shareholder entitled to vote thereat, not more than sixty (60) nor less than ten (10) days before the date fixed for the meeting. Section 7. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjourned meeting is for more than thirty (30) days, or, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present, in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Each shareholder shall, at every meeting of the shareholders, be entitled to that number of votes in person or by proxy as provided in the certificate of incorporation for each share of capital stock having voting power held by such shareholder. Every shareholder entitled to vote at a meeting of shareholders or to express consent without a meeting may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his agent, except that a proxy may be given by a shareholder or his agent by telegram or cable or by any means of electronic communication which results in a writing. No proxy shall be valid for more than 11 months, unless a longer time is expressly provided therein. Unless it is irrevocable as provided below in this Article II, Section 10, a proxy shall be revocable at will. The grant of a later proxy revokes any earlier proxy unless the earlier proxy is irrevocable. A proxy shall not be revoked by the death or incapacity of a shareholder but such proxy shall continue in force until revoked by the personal representative or guardian of the shareholder. The presence at any meeting of any shareholder who has given a proxy does not revoke the proxy unless the shareholder files written notice of the revocation with the secretary of the meeting prior to the voting of the proxy or votes the shares subsequent to the proxy by written ballot. A proxy which states that it is irrevocable is irrevocable if coupled with an interest either in the stock itself or in the Corporation and, in particular and without limitation, if it is held by any of the following or a nominee of any of the following: (a) a pledgee; (b) a person who has purchased or agreed to purchase the shares; (c) a creditor of the Corporation who has extended credit or has agreed to continue to extend credit to the Corporation if the proxy is given in consideration of the extension or continuation; (d) a person who has agreed to perform services as an employee of the Corporation if the proxy is given in consideration of the agreement; or (e) a person designated pursuant to the terms of an agreement as to voting between two or more shareholders. An irrevocable proxy becomes revocable when the interest which supports the proxy has terminated. Unless noted conspicuously on the share certificate, an otherwise irrevocable proxy may be revoked by a person who becomes the holder of the shares without actual knowledge of the restriction. A person named in a proxy as the attorney or agent of a shareholder may, if the proxy so provides, substitute another person to act in his place, including any other person named as an attorney or agent in the same proxy. The substitution shall not be effective until an instrument effecting it is filed with the secretary of the Corporation. Section 11. Whenever the vote of shareholder at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of the statutes or of the Certificate of Incorporation, the meeting and the vote of shareholders may be dispensed with if all the shareholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken, and in the case of any action to be taken pursuant to Chapter 10 of Title 14A of the Revised Statutes of the State of New Jersey, the Corporation provides to all other shareholders the advanced notification required by N.J.S.A. 14A:5-6(2)(b). Subject to the provisions of N.J.S.A. 14A:5-6(2), whenever the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of the statutes or of the Certificate of Incorporation, other than the election of directors, the meeting and vote of shareholders may be dispensed with and the action may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes which would be necessary to authorize such action at a meeting at which all shareholders entitled to vote thereon were present and voting. Section 12. At each meeting of shareholders, the Chairman of the Company's Board of Directors or in his or her absence the President of the Company or in his or her absence any Vice President of the Company or in his or her absence a chairman chosen by the vote of a majority in interest of the shareholders present in person or represented by proxy and entitled to vote thereat, shall act as chairman. The Secretary or in his or her absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the proceedings thereof. The Board of Directors of the Corporation shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, the chairman shall have the authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the Corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry at the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. The chairman shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. The chairman may rule that a resolution, nomination or motion not be submitted to the shareholders for a vote unless seconded by a shareholder or a proxy for a shareholder. The chairman may require that any person who is neither a bona fide shareholder nor a proxy for a bona fide shareholder leave the meeting, and upon the refusal of a shareholder to comply with a procedural ruling of the chairman which the chairman deems necessary for the proper conduct of the meeting, may require that such shareholder leave the meeting. The chairman may, on his own motion, summarily adjourn any meeting for any period he deems necessary if he rules that orderly procedures cannot be maintained at the meeting. Unless, and to the extent, determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with rules of parliamentary procedure. Section 13. To be properly brought before an annual meeting of shareholders, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board or (c) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than 90 days prior to the meeting anniversary date of the immediately preceding annual meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 13 of Article II and any other applicable requirements, provided, however, that nothing in this Section 13 of Article II shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 13 of Article II and any other applicable requirements and if he should so determine, which determination shall be conclusive, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole Board shall be the number, not less than three nor more than fifteen, fixed from time to time by a majority vote of the whole Board of Directors; provided, no decrease in the number of directors shall shorten the term of any incumbent director. Each director shall serve for the term of the class for which elected or until such time as a successor shall have been duly elected and shall have qualified. Directors need not be shareholders. Section 2. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 90 days prior to the anniversary date of the immediately preceding annual meeting; and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (e) the signed consent of each nominee to serve as a director of the Corporation if so elected. The Corporation may require any proposed nominee or shareholder proposing a nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation or to properly complete any proxy or information statements used for the solicitation of proxies in connection with the meeting at which directors are to be elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 3. Whenever any vacancy shall occur in the Board of Directors by death, resignation or otherwise, it shall be filled by a majority vote of the directors then in office, though less than a quorum, but any such director so elected shall hold office only until the next succeeding annual meeting of shareholders. At such annual meeting, such director or a successor to such director shall be elected and qualified in the class to which such director is assigned to hold office for the term or remainder of the term of such class. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Section 4. The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the shareholders. Section 5. The removal of one or more directors for cause or without cause shall be governed by N.J.S.A. 14A:6-6 or any successor provisions thereto. MEETINGS OF THE BOARD OF DIRECTORS Section 6. The Board of Directors of the Corporation may hold meetings, both regular or special, either within or without the State of New Jersey. Section 7. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the shareholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors, or upon the conclusion of the shareholders' meeting at which time they were elected, without further notice. At such meeting the Board of Directors shall elect from their own number a chairman of the Board and president for the ensuing year and until their successors are elected and qualify in their stead, elect other officers of the Corporation, and shall transact such other business as may come before the meeting. Section 8. Regular meetings of the Board of Directors may be held without notice at such time and to such place as shall from time to time be determined by the Board. Section 9. Special meetings of the Board may be called by the chairman of the Board or president or secretary on three (3) days notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the president or secretary in like manner and on like notice on the written request of any two directors. Section 10. At all meetings of the Board, a majority of the directors in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of 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