UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
(Mark
One)
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarter ended May 31, 2008
[ ]
|
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
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
2050
40
th
Avenue, Suite One
|
|
Vero
Beach, Florida
|
32960
|
(Addresses
of principal executive offices)
|
(
Zip
Code)
|
Registrant's
telephone number,
including area code:
(772) 794-1414
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the past 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 whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): [ ] Yes [X]
No
As of
July 11, 2008, there were 10,106,836 shares of Common Stock
outstanding.
Transitional
Small Business Disclosure Format (check one): [ ]
Yes [X] No
CALTON,
INC. AND SUBSIDIARIES
INDEX
PART
I.
|
Financial
Information
|
Page No.
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of
May 31, 2008 (Unaudited) and
November 30, 2007
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the
Three
Months Ended May 31, 2008 and 2007
|
4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the
Six
Months Ended May 31, 2008 and 2007
|
5
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the
Six
Months Ended May 31, 2008 and 2007
|
6
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or
Plan of Operation
|
13
|
|
|
|
|
|
Item
3.
|
Controls
and Procedures
|
16
|
|
|
|
|
PART
II.
|
Other
Information
|
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders..
|
17
|
|
|
|
|
|
Item
5.
|
Other
Information..
|
17
|
|
|
|
|
|
Item
6.
|
Exhibits..
|
18
|
|
|
|
|
|
|
|
|
SIGNATURES
|
18
|
Certain
information included in this report and other Company filings (collectively,
“SEC filings”) under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC filings) contains or may contain
forward looking information that is subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from expected
results. Among these risks, trends and uncertainties are the Company’s ability
to raise capital, national and local economic conditions, conditions and trends
in the homebuilding industry in general, changes in interest rates, commercial
acceptance of the Company’s co-branded customer loyalty credit card program, the
competitive environment in which the Company operates, the Company’s ability to
acquire property for development, the impact of severe weather on the Company’s
homebuilding operations, the effect of governmental regulation on the Company,
and other factors described from time to time in our filings with the Securities
and Exchange Commission.
PART
I – FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
May
31,
|
|
|
November
30,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
146,000
|
|
|
$
|
578,000
|
|
Accounts
receivable
|
|
|
22,000
|
|
|
|
20,000
|
|
Inventory
|
|
|
4,001,000
|
|
|
|
4,861,000
|
|
Prepaid
expenses and other current assets
|
|
|
19,000
|
|
|
|
23,000
|
|
Deferred finance
charges
|
|
|
3,000
|
|
|
|
5,000
|
|
Total
current assets
|
|
|
4,191,000
|
|
|
|
5,487,000
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
119,000
|
|
|
|
136,000
|
|
Total
assets
|
|
$
|
4,310,000
|
|
|
$
|
5,623,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
159,000
|
|
|
$
|
157,000
|
|
Accrued
expenses
|
|
|
149,000
|
|
|
|
151,000
|
|
Customer
deposits
|
|
|
-
|
|
|
|
60,000
|
|
Billings
in excess of costs and estimated earnings
|
|
|
|
|
|
|
|
|
on
uncompleted contracts
|
|
|
160,000
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
23,000
|
|
|
|
59,000
|
|
Notes
payable
|
|
|
2,447,000
|
|
|
|
3,255,000
|
|
Total
current liabilities
|
|
|
2,938,000
|
|
|
|
3,682,000
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $.05 par value, 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
10,697,855
shares issued at May 31, 2008 and
|
|
|
|
|
|
|
|
|
November
30, 2007; 10,106,836 and 9,898,506 shares outstanding
|
|
|
|
|
|
|
|
|
at
May 31, 2008 and November 30, 2007, respectively
|
|
|
505,000
|
|
|
|
495,000
|
|
Additional
paid-in capital
|
|
|
7,158,000
|
|
|
|
8,407,000
|
|
Accumulated
deficit
|
|
|
(3,990,000
|
)
|
|
|
(3,388,000
|
)
|
Less
cost of shares held in treasury, 591,019 and 799,349
shares
|
|
|
|
|
|
|
|
|
as
of May 31, 2008 and November 30, 2007, respectively
|
|
|
(2,301,000
|
)
|
|
|
(3,573,000
|
)
|
Total
shareholders' equity
|
|
|
1,372,000
|
|
|
|
1,941,000
|
|
Total
liabilities and shareholders' equity
|
|
$
|
4,310,000
|
|
|
$
|
5,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three
Months Ended May 31, 2008 and 2007
(Unaudited)
|
|
Three
Months Ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
982,000
|
|
|
$
|
524,000
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Cost
of sales, homebuilding
|
|
|
859,000
|
|
|
|
470,000
|
|
Selling,
general and administrative
|
|
|
317,000
|
|
|
|
351,000
|
|
|
|
|
1,176,000
|
|
|
|
821,000
|
|
Loss
from operations
|
|
|
(194,000
|
)
|
|
|
(297,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,000
|
|
|
|
2,000
|
|
Interest
expense
|
|
|
(49,000
|
)
|
|
|
(117,000
|
)
|
Gain
on sale of marketable securities
|
|
|
-
|
|
|
|
137,000
|
|
Other
income (expense)
|
|
|
1,000
|
|
|
|
(2,000
|
)
|
Loss
before income taxes
|
|
|
(238,000
|
)
|
|
|
(277,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(238,000
|
)
|
|
$
|
(277,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
Basic
and Diluted:
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
10,003,803
|
|
|
|
9,630,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Six
Months Ended May 31, 2008 and 2007
(Unaudited)
|
|
Six
Months Ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
1,767,000
|
|
|
$
|
1,226,000
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Cost
of sales, homebuilding
|
|
|
1,590,000
|
|
|
|
1,068,000
|
|
Selling,
general and administrative
|
|
|
668,000
|
|
|
|
671,000
|
|
|
|
|
2,258,000
|
|
|
|
1,739,000
|
|
Loss
from operations
|
|
|
(491,000
|
)
|
|
|
(513,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,000
|
|
|
|
4,000
|
|
Interest
expense
|
|
|
(115,000
|
)
|
|
|
(230,000
|
)
|
Gain
on sale of marketable securities
|
|
|
-
|
|
|
|
137,000
|
|
Other
expense
|
|
|
-
|
|
|
|
(4,000
|
)
|
Loss
before income taxes
|
|
|
(602,000
|
)
|
|
|
(606,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(603,000
|
)
|
|
$
|
(606,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
9,952,012
|
|
|
|
9,612,000
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six
Months Ended May 31, 2008 and 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(603,000
|
)
|
|
$
|
(606,000
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
18,000
|
|
|
|
20,000
|
|
Amortization
of deferred charges
|
|
|
16,000
|
|
|
|
18,000
|
|
Increase
in deferred charges
|
|
|
(14,000
|
)
|
|
|
(5,000
|
)
|
Stock
based compensation
|
|
|
33,000
|
|
|
|
33,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,000
|
)
|
|
|
(44,000
|
)
|
Inventory
|
|
|
860,000
|
|
|
|
185,000
|
|
Prepaid
expenses and other assets
|
|
|
4,000
|
|
|
|
(4,000
|
)
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(96,000
|
)
|
|
|
160,000
|
|
Billings
in excess of costs and estimated earnings
|
|
|
160,000
|
|
|
|
-
|
|
Changes
in assets of discontinued operations
|
|
|
-
|
|
|
|
33,000
|
|
Net
cash flows from operating activities
|
|
|
376,000
|
|
|
|
(210,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment
of notes payable, net
|
|
|
(808,000
|
)
|
|
|
(72,000
|
)
|
Net
cash flows from financing activities
|
|
|
(808,000
|
)
|
|
|
(72,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(432,000
|
)
|
|
|
(282,000
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
578,000
|
|
|
|
769,000
|
|
Cash
and cash equivalents at end of period
|
|
$
|
146,000
|
|
|
$
|
487,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
102,000
|
|
|
$
|
266,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Basis of
Presentation
|
|
|
|
The
accompanying unaudited condensed consolidated financial statements of
Calton, Inc. (the “Company”) have been prepared in accordance with
generally accepted accounting principles for interim financial information
and in accordance with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company’s financial position as
of May 31, 2008, the results of operations for the three and six months
ended May 31, 2008 and 2007 and the cash flows for the six months ended
May 31, 2008 and 2007 have been included. These interim
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company’s Annual
Report on Form 10-KSB, as filed with the Securities and Exchange
Commission on February 28, 2008. Operating results for the
three and six months ended May 31, 2008 are not necessarily indicative of
the results that may be expected for the year ending November 30,
2008.
|
|
|
2.
|
Significant
Accounting Policies
|
|
|
|
Impairment
Evaluation
|
|
|
|
The
Company records valuation adjustments on land inventory, homes under
construction and speculative and model homes when events and circumstances
indicate that they may be impaired and when the cash flows estimated to be
generated by those assets are less than their carrying
amounts. Such indicators include gross margin or sales paces
significantly below expectations, construction costs or land development
costs significantly in excess of budgeted amounts, increased interest
rates, the potential need to offer increasing sales incentives,
significant delays or changes in the planned development of a residential
project being undertaken by the Company, and other known qualitative
factors. The Company also considers potential changes to the
product offerings in its residential projects and any alternative
strategies, such as the sale of the land either in whole or in
parcels.
|
|
|
|
Should
the Company’s land, homes under construction or speculative and model
homes demonstrate potential impairment indicators, they are accordingly
tested for impairment by comparing the expected cash flows for these
assets to their carrying values. For those assets having
carrying values that exceed the expected cash flows, the Company
calculates the net realizable value of the asset. Impairment
charges are then recorded if the net realizable value of the asset is less
than its carrying amount.
|
|
|
|
The
Company determines the net realizable value of its land, homes under
construction and speculative and model homes by estimating the current
market prices for which the land and the homes could be sold, reduced by
selling costs. Significant estimates include expected average
selling prices, sales incentives, and anticipated land development,
construction and overhead costs. For current market values,
recent sales data from the county appraiser’s and real estate
association’s Web sites is obtained and factors of location, size and
amenities are compared to the Company’s properties. The Company
also monitors the sales prices of other homes in each respective community
and attempts to identify any pertinent sales trends in its local
market. The Company’s estimated selling costs include the
standard closing costs, sales commissions, and home
warranties.
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Cost
of Sales
|
|
|
|
Cost
of sales includes land, direct costs, and indirect costs associated with
homes sold. Direct costs consist of preconstruction costs, such
as permitting, surveys, and site preparation and amounts paid to
subcontractors for construction materials and labor. Indirect
costs consist of overhead, indirect labor, real estate taxes, capitalized
interest, closing costs, incentives given, and estimated future costs for
home warranties.
|
|
|
|
Selling,
General and Administrative
|
|
|
|
Selling,
general and administrative expenses represent the operations at the
Company’s business offices located in the sales model in the Pointe West
development in Vero Beach, Florida, and its two corporate offices in Vero
Beach, Florida and Red Bank, New Jersey. These expenses include
rents and maintenance of our models and offices, personnel and costs
related to marketing, advertising, human resources, corporate accounting,
public reporting, and training, as well as professional fees such as
audit, legal and consulting.
|
|
|
3.
|
Liquidity
and Management’s
Plans
|
|
|
|
The
Company’s consolidated financial statements are prepared on a going
concern basis, which assumes that it will realize its assets and discharge
its liabilities in the normal course of business. As reflected in
the consolidated financial statements, the Company has incurred losses of
$238,000 and $603,000 during the three months and six months ended May 31,
2008, respectively. Several factors continue to weigh on the
housing industry, including an oversupply of new and resale homes
available for sale, foreclosure activity, heightened competition for home
sales, turmoil in the mortgage finance and credit markets, diminished real
estate speculation, and decreased consumer confidence in purchasing
homes. The Company’s results for the six months ended May 31,
2008 reflect the impact of these difficult conditions.
|
|
|
|
Management
believes the fundamentals that support homebuyer demand in the Company’s
construction area, in the long-term, remain solid and the current market
conditions will moderate over time; however, the duration and severity of
the current market conditions cannot be predicted. The Company
continues to adjust operations in response to market conditions by
reducing unsold inventory and lowering expenses. The Company is
also working to reduce the costs of constructing homes, although in many
cases, cost savings will not be realized until future
periods.
|
|
|
|
Additionally,
the Company has completed and work-in-process inventories of approximately
$1.6 million and developed lots of approximately $0.8 million, which are
collateral for its credit facility with a $1.5 million balance at May 31,
2008. The facility, which was to expire in July 2008, was
renewed on June 26, 2008 and limits future funding to the completion of
the Company’s three speculative homes under
construction. Maximum available borrowings are reduced as each
speculative home or developed lot is sold. The maximum amount
available under the current facility, which does not expire until July 1,
2009, is $1.9 million. The Company also has a mortgage note of
nearly $1 million from National City Bank, secured by the land purchased
in the Magnolia Plantation subdivision, due in September
2008. Since March 2007, the Company has been making monthly
payments of principal and interest and has reduced the mortgage principal
by $90,000. The Company plans to renew the note with the same
terms as the current note, if
possible.
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Under the
terms of the credit facilities in effect since July 2007, the Company has
significantly reduced its debt and cut debt-service costs. However,
debt repayment and limited ability to borrow additional funds have negatively
impacted cash flows. The Company has not generated sufficient cash flow from
operations to sustain operations and has, therefore, obtained three loans for a
total amount of $250,000 from AFP Enterprises, Inc., a company owned by Anthony
J. Caldarone, President and Chief Executive Officer of the Company, Maria F.
Caldarone, Executive Vice President of the Company, and other members of the
Caldarone family. These loans are secured by two mortgages of $75,000
each on unencumbered lots in the Pointe West development, and a mortgage of
$100,000 subordinate to the mortgage held by National City Bank on a completed
spec home at Pointe West. National City Bank released the subject
properties from the bank’s spreader mortgage and the notes were executed on July
8, 2008. The notes are payable on demand and require monthly payments
of interest only. The interest rate is equal to the Prime Rate, as
published in the Money Rates column of the Wall Street Journal, plus
1%. The initial rate of interest is 6%.
These
conditions raise doubt as to the Company’s ability to continue its normal
business operations as a going concern. As of May 31, 2008, the Company
had $1.25 million in working capital. However, this working capital
includes significant inventory of homes and developed and undeveloped land which
must be liquidated in order to cover operating costs and debt-service
obligations. The Company’s ability to meet its debt service and other
obligations will depend upon its future performance. While no
assurance can be given that the Company will be successful, the Company
currently has no plan to discontinue operations.
4.
Inventory
Inventory
consists of the following as of May 31, 2008 and November 30, 2007:
|
|
May
31,
|
|
|
November
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Land
and developed lots
|
|
$
|
2,397,000
|
|
|
$
|
2,404,000
|
|
Work
in process
|
|
|
1,111,000
|
|
|
|
1,586,000
|
|
Speculative
and model homes
|
|
|
493,000
|
|
|
|
871,000
|
|
|
|
$
|
4,001,000
|
|
|
$
|
4,861,000
|
|
Due to
uncertainties in the estimation process used to determine the need for
impairment, such as the significant volatility in demand for new housing and the
long life cycle of certain residential development projects, actual results
could differ from such estimates. No impairment charges were recorded
during the six month periods ended May 31, 2008 or 2007; however, if market
conditions deteriorate or costs increase, it is possible that the Company’s
estimates of the net realizable value of its inventory may decline, resulting in
future impairment charges. For example, a negative 10% change in the
Company’s assumptions would have resulted in an impairment charge of $62,000
recorded to spec homes and $243,000 recorded to land during the six months ended
May 31, 2008.
The
Company capitalizes interest on loans directly associated with real estate
development projects while under construction. During the six months
ended May 31, 2008 and 2007, the Company capitalized $2,000 and $32,000 in
interest, respectively.
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.
Notes
Payable
As of May
31, 2008, notes payable includes borrowings under a note payable to National
City Bank. The credit facility is secured by inventories and related
homebuilding assets. Effective May 29, 2008, the bank renewed the
credit facility and extended the maturity date of the note to July 1,
2009. The credit facility, as amended, provides funding for
construction on the Company’s three unfinished speculative homes. As
each spec home or developed lot is sold, maximum available borrowings are
reduced. As of May 31, 2008, $1.5 million was outstanding under the
facility.
Notes
payable also includes a $1 million mortgage note from National City Bank due in
September 2008. The mortgage note is secured by the land purchased in
the Magnolia Plantation subdivision. The annual interest rate on both
the notes payable is the bank’s prime rate plus 1% (6% at May 31,
2008).
6.
Shareholders’
Equity
During
the six months ended May 31, 2008 and 2007, 208,330 and 91,115 shares,
respectively, of treasury stock were issued to non-employee directors in lieu of
fees. The Company records stock-based compensation associated with
the issuance of common stock to non-employee directors based upon the fair
market value of the shares on the date issued. Stock-based
compensation expense related to director compensation for both of the six-month
periods ended May 31, 2008 and 2007, amounted to $25,000 under this
method. Treasury stock was relieved using the first-in, first-out
method of accounting with the difference being recorded as a reduction in
paid-in capital.
Stock
Compensation Programs and Transactions
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes valuation model that uses assumptions for expected volatility,
expected dividends, expected term and the risk-free interest
rate. Expected volatilities are based on implied volatilities from
traded options on the Company’s stock, historical volatility of the Company’s
stock and other factors estimated over the expected term of the
options. The expected term of options granted is derived using the
“simplified method” which computes expected term as the average of the sum of
the vesting term
plus
contract term. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for the period of the expected
term.
During
the six month period ended May 31, 2008, there were 50,000 options granted for
the directors’ annual formula awards. The options granted have an
exercise price of $0.12 and a grant date fair value of
$0.08. Stock-based compensation expense related to outstanding
options was $8,000 for the six months ended May 31, 2008 and $6,000 for the six
months ended May 31, 2007.
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The range
of exercise prices for exercisable options and the weighted average remaining
lives are reflected in the following table:
Options
Outstanding
|
|
|
Exercisable
|
|
Range
of
Prices
|
|
|
Number
|
|
Weighted
Average Remaining
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
|
|
Weighted
Average Remaining Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$
|
0.12
- 0.83
|
|
|
|
837,000
|
|
4.38
yrs.
|
|
$
|
0.34
|
|
|
$
|
-
|
|
|
|
610,000
|
|
3.24
yrs.
|
|
$
|
0.40
|
|
|
$
|
-
|
|
7.
Other Comprehensive
Loss
Under
Statements of Financial Accounting Standards No. 130 (SFAS 130) Reporting
Comprehensive Income, the Company is required to display comprehensive loss and
its components as part of its full set of financial
statements. Comprehensive loss is comprised of net loss and other
comprehensive loss items. Other comprehensive loss during the periods
presented represents the changes in unrealized losses on available-for-sale
equity. On May 29, 2007, the Company sold the available-for-sale
equity securities and recognized a gain of approximately
$137,000. The following table reflects comprehensive loss for the six
months ended May 31, 2008 and 2007:
|
|
Six
months ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(603,000
|
)
|
|
$
|
(606,000
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
(116,000
|
)
|
Comprehensive
loss
|
|
$
|
(603,000
|
)
|
|
$
|
(722,000
|
)
|
8.
Loss per Common
Share
The
following table reconciles the numerators and denominators of the basic and
diluted loss per share computations:
|
|
Three
months ended May 31,
|
|
|
Six
months ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss - (numerator)
|
|
$
|
(238,000
|
)
|
|
$
|
(277,000
|
)
|
|
$
|
(603,000
|
)
|
|
$
|
(606,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
- (denominator)
|
|
|
10,003,803
|
|
|
|
9,630,000
|
|
|
|
9,952,012
|
|
|
|
9,612,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
The
effects of 837,000 and 827,000 stock options outstanding as of May 31, 2008 and
2007, respectively, have been excluded from the determination of net loss per
share because their effect would be anti-dilutive.
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Costs,
Estimated Earnings and Billings on Uncompleted
Contracts:
Costs,
estimated earnings and billings on uncompleted homebuilding contracts on
customer-owned lots consist of the following as of May 31, 2008:
Costs
incurred on uncompleted project
|
|
$
|
337,000
|
|
Gross
profit recognized on uncompleted project
|
|
|
109,000
|
|
|
|
|
446,000
|
|
Less
billings to date
|
|
|
(606,000
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted
contract
|
|
$
|
(160,000
|
)
|
Item 2
.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
Results
of Operations for the Three and Six Months ended May 31, 2008 and
2007
Revenues:
Revenues
for the three months ended May 31, 2008 were $982,000 compared to $524,000 for
the three months ended May 31, 2007. Revenues for the six
months ended May 31, 2007 increased to $1,767,000 from $1,226,000 for the six
months ended May 31, 2007. The increase for both the quarter and six
months is attributable to revenue recognized on the percentage-of-completion
basis on a custom home begun during the first quarter of fiscal 2008 and
amortization of deferred revenue related to sale-leaseback
agreements. There was one home delivery in each quarter ended May 31,
2008 and May 31, 2007, respectively; and two home deliveries in the first six
months of fiscal years 2008 and 2007, respectively. Our profit
margins were 13% and 10% in the three months ended May 31, 2008 and 2007,
respectively, and 10% and 13% in the six months ended May 31, 2008 and 2007,
respectively.
Cost of Sales:
Cost
of sales was $859,000 for the quarter ended May 31, 2008 compared to $470,000
for the quarter ended May 31, 2007; and $1,590,000 for the six months ended May
31, 2008 compared to $1,068,000 for the six months ended May 31,
2007. The increase in cost of goods sold for both the quarter and the
six month period was attributable to costs recognized according to the
percentage-of-completion method for the custom home under construction and
amortization of deferred costs related to sale-leaseback
agreements.
There
were no impairment charges on our inventory for the three- or six-month periods
ended May 31, 2008 and 2007. However, negative market conditions in
the homebuilding industry, interest rate levels, and our plans to offer sales
incentives in order to liquidate inventory in fiscal 2008 might result in future
impairment charges.
Selling, General and Administrative
Expenses:
Selling, general and administrative expenses for the
quarter ended May 31, 2008 were $317,000 compared to $351,000 for the quarter
ended May 31, 2007. Selling, general and administrative expenses for
the six months ended May 31, 2008 and 2007 were $668,000 and $671,000,
respectively.
Interest
Income:
Interest income was $4,000 and $2,000 for the quarters
ended May 31, 2008 and 2007, respectively. Interest income in 2007
was derived principally from interest on depository accounts and money-market
type accounts. In 2008 we closed these accounts to fund operating
activities, and therefore, received nominal interest income from these
accounts. The interest income realized in the quarter ended May 31,
2008 was interest earned on impact fees prepaid to Indian River County in 2005
and refunded to us in March 2008.
Interest
Expense:
Interest is incurred on real estate loans and, to the
extent required under generally accepted accounting principles, capitalized in
real estate inventory. The remaining interest is expensed as
incurred. Interest expense amounted to $49,000 for the three months
ended May 31, 2008, compared to $117,000 for the three months ended May 31,
2007. Interest expense amounted to $115,000 and $230,000 for
the six months ended May 31, 2008 and 2007, respectively. The
reduction in quarterly interest is due to the reduction of our outstanding
debt. During the three and six months ended May 31, 2008, we
capitalized $0.00 and $2,000 in interest, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
General
Our
consolidated financial statements are prepared on a going concern basis, which
assumes that we will realize our assets and discharge our liabilities in the
normal course of business. As reflected in the consolidated financial
statements, we incurred losses of $238,000 and $603,000 during the three months
and six months ended May 31, 2008, respectively. Several factors
continue to weigh on the housing industry, including an oversupply of new and
resale homes available for sale, foreclosure activity, heightened competition
for home sales, turmoil in the mortgage finance and credit markets, diminished
real estate speculation, and decreased consumer confidence in purchasing
homes. Our results for the three and six months ended May 31, 2008
reflect the impact of these difficult conditions.
We
believe the fundamentals that support homebuyer demand in our local construction
area, in the long-term, remain solid and the current market conditions will
moderate over time; however, we cannot predict the duration and severity of the
current market conditions. We continue to adjust our operations in
response to market conditions by reducing unsold inventory and lowering
expenses. We are also working to reduce the costs of constructing homes,
although in many cases, cost savings will not be realized until future
periods.
Additionally,
we have completed and work-in-process inventories of approximately $1.6 million
and developed lots of approximately $0.8 million, which are collateral for the
credit facility with a $1.5 million balance at May 31, 2008. The
facility, which was to expire in July 2008, was renewed on June 26, 2008, and
limits future funding to the completion of the three speculative homes under
construction. Maximum available borrowings are reduced as each speculative home
or developed lot is sold. The maximum amount available under the
current facility, which does not expire until July 2009, is $1.9
million. We also have a mortgage note of nearly $1 million from
National City Bank, secured by the land purchased in the Magnolia Plantation
subdivision, due in September 2008. Since March 2007, we have been
making monthly payments of principal and interest and have reduced the mortgage
principal by $90,000. We plan to renew the note with the same terms
as the current note, if possible.
Under the
terms of the credit facilities in effect since July 2007, we have significantly
reduced debt and cut debt-service costs. However, debt repayment and
limited ability to borrow additional funds have negatively impacted cash flows.
We have not generated sufficient cash flow from operations to sustain operations
and have, therefore, obtained three loans for a total amount of $250,000 from
AFP Enterprises, Inc., a company owned by Anthony J. Caldarone, our President
and Chief Executive Officer, Maria F. Caldarone, our Executive Vice President,
and other members of the Caldarone family. These loans are secured by
two mortgages of $75,000 each on unencumbered lots in the Pointe West
development, and a mortgage of $100,000 subordinate to the mortgage held by
National City Bank on a completed spec home at Pointe West. National
City Bank released the subject properties from the bank’s spreader mortgage and
the notes were executed on July 8, 2008. The notes are payable on
demand and require monthly payments of interest only. The interest
rate is equal to the Prime Rate, as published in the Money Rates column of the
Wall Street Journal, plus 1%. The initial rate of interest is
6%.
These
conditions raise significant doubt as to our ability to continue our normal
business operations as a going concern. As of May 31, 2008, we had $1.25
million in working capital. However, this working capital includes
significant inventory of homes and developed and undeveloped land which must be
liquidated in order to cover operating costs and debt-service
obligations. Our ability to meet our debt service and other
obligations will depend upon our future performance. While no
assurance can be given that we will be successful, we currently have no plan to
discontinue operations.
Cash Flows from Operating
Activities
Our cash
flows from operating activities during the six months ended May 31, 2008, were
$376,000, produced primarily from a reduction in inventory. We used
$210,000 for operations during the six months ended May 31, 2007.
Cash Flows from Financing
Activities
We have
used proceeds from current year sales to pay down $808,000 of the construction
line of credit during the six months ended May 31, 2008, compared to $72,000
during the six months ended May 31, 2007.
As a
result of the above cash flow activities, cash decreased from $578,000 at
November 30, 2007 to $146,000 at May 31, 2008. Total working capital
decreased from $1,829,000 at November 30, 2007 to $1,253,000 at May 31,
2008.
COMMITMENTS,
GUARANTEES AND OFF BALANCE SHEET ITEMS
Loan
Agreement
We
currently maintain a construction line of credit with National City Bank
(formerly Harbor Federal Savings Bank). Interest on advances, which
are secured by a mortgage on homebuilding properties, accrues at a rate equal to
the prime rate plus one percent (1%) per annum.
Effective May 29, 2008,
the bank renewed the credit facility and extended the maturity date of the note
to July 1, 2009. The credit facility provides funding for
construction on our three unfinished speculative homes. As each spec
home or developed lot is sold, maximum available borrowings are
reduced. As of May 31, 2008, $1.5 million was outstanding under the
facility.
In
December 2005, we financed the purchase of a ten-acre undeveloped land parcel in
Vero Beach, Florida through a $1 million mortgage note from National City Bank
and working capital. Interest on the note, which is secured by the
land purchased, accrues at a rate equal to the prime rate plus one percent (1%)
per annum. As of May 31, 2008, $1 million was outstanding under the
note, which matures in September 2008.
SENSITIVE
ACCOUNTING ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
notes. Significant estimates include management’s estimate of the
carrying value of homebuilding inventories, estimated warranty costs charged to
cost of sales, estimated construction costs used to determine the percentage of
completion of fixed price construction contracts for revenue recognition
purposes and the establishment of reserves for contingencies. Actual
results could differ from those estimates. Critical accounting
policies relating to certain of these items are described in the Company’s
Annual Report on Form 10-KSB for the year ended November 30, 2007. As
of May 31, 2008, there have been no material additions to our critical
accounting policies and there have been no changes in the application of
existing accounting principles.
Item
3.
|
CONTROLS
AND PROCEDURES
|
As of the
end of the period covered by this report, the we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our Chairman and Chief Executive
Officer, along with our Acting Chief Financial Officer, who concluded that our
disclosure controls and procedures were effective as of the date of the
evaluation. There were no significant changes in our internal controls during
the quarter ended May 31, 2008 that have materially affected, or are reasonably
likely to have materially affected, our internal controls subsequent to the date
we carried out our evaluation.
Disclosure
controls and procedures are controls and other procedures that are designed to
provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange
Act”) is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to provide reasonable assurance that information required to
be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Acting
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
PART
II: OTHER INFORMATION
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
We held
our 2008 Annual Meeting of Shareholders (the “Meeting”) on May 7,
2008. At the Meeting, shareholders were asked to elect Frank Cavell
Smith, Jr. as a director for a four-year term expiring at the 2012 annual
meeting. The results of the voting were as follows:
|
|
|
|
|
Broker
|
|
For
|
Against
|
Withheld
|
Abstain
|
Non-Vote
|
|
|
|
|
|
|
Frank
Cavell Smith, Jr.
|
9,242,789
|
-0-
|
59,982-0-
|
-0-
|
-0-
|
The
remaining terms of the other directors, J. Ernest Brophy, Anthony J. Caldarone,
Mark N. Fessel, Kenneth D. Hill and John G. Yates, continue to be in
effect.
Item
5.
|
OTHER
INFORMATION
|
On July
14, 2008, Aidman, Piser & Company, P.A. (“Aidman Piser”) resigned as our
independent registered public accounting firm. Aidman Piser’s
practice was acquired by Cherry, Bekaert & Holland, L.L.P. (“Cherry
Bekaert”) in a transaction pursuant to which Aidman Piser merged its operations
into Cherry Bekaert and certain of the professional staff and shareholders of
Aidman Piser joined Cherry Bekaert either as employees or partners of Cherry
Bekaert and will continue to practice as members of Cherry
Bekaert. The Audit Committee of our Board of Directors is currently
evaluating whether to engage Cherry Bekaert as our independent registered public
accounting firm for the fiscal year ending November 30, 2008, and we expect to
make an announcement with regard to this matter in the near future.
The
report of Aidman Piser regarding our financial statements for the past two
fiscal years ended November 30, 2007 and 2006 did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles, except that substantial doubt
was raised as to our ability to continue as a going concern. During
the two most recent fiscal years and during the period from the end of the most
recently completed fiscal year through July 14, 2008, the date of resignation,
there were no disagreements with Aidman Piser on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Aidman
Piser would have caused it to make reference to such disagreements in its
reports.
We
provided Aidman Piser with a copy of this Quarterly Report on Form 10-Q prior to
its filing with the Securities and Exchange Commission and requested that Aidman
Piser furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements set forth above in this
Item 5 and, if it does not agree, the respects in which it does not
agree. A copy of the letter, dated July 14, 2008, is filed as Exhibit
16.1 to this Report.
Item
6. EXHIBITS
|
16.1
-
|
Letter
from Aidman, Piser & Company, P.A.
|
|
31.1
-
|
Certification
of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
|
|
31.2
-
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Certification
of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
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|
32.1
-
|
Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
|
|
32.2
-
|
Certification
of Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
Calton, Inc.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
By
:
|
/s/ Vicky F. Savage
|
|
|
|
Vicky
F. Savage
|
|
|
|
Acting
Chief Financial Officer and Treasurer
|
|
|
(Principal
Financial and Accounting Officer)
|
Date: July
14, 2008
18