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 August 31, 2008
|
o
|
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
(
State or other
jurisdiction of
incorporation
or organization)
|
22-2433361
(IRS
Employer
Identification
Number)
|
|
|
|
|
|
|
|
2050
40
th
Avenue, Suite One
Vero
Beach, Florida
(Addresses
of principal executive offices)
|
32960
(
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):
o
Yes
x
No
As of
October 11, 2008, there were 10,202,991 shares of Common Stock
outstanding.
Transitional
Small Business Disclosure Format (check one):
o
Yes
x
No
CALTON,
INC. AND SUBSIDIARIES
INDEX
|
PART
I.
|
Financial
Information
|
Page
No.
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|
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|
|
Item
1.
|
Financial
Statements
|
|
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Condensed
Consolidated Balance Sheets as of August 31, 2008 (Unaudited) and November
30, 2007
|
3
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended August 31, 2008 and 2007
|
4
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the Nine Months
Ended August 31, 2008 and 2007
|
5
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended August 31, 2008 and 2007
|
6
|
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
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|
|
|
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|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
13
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|
|
Item
3.
|
Controls
and Procedures
|
16
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|
PART
II.
|
Other
Information
|
|
|
|
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|
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|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
17
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|
Item
5.
|
Other
Information
|
17
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|
Item
6.
|
Exhibits
|
17
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SIGNATURES
|
|
17
|
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 August 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
|
|
|
August
31,
|
|
|
November
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,000
|
|
|
$
|
578,000
|
|
|
Accounts
receivable
|
|
|
2,000
|
|
|
|
20,000
|
|
|
Inventory
|
|
|
3,824,000
|
|
|
|
4,861,000
|
|
|
Prepaid
expenses and other current assets
|
|
|
23,000
|
|
|
|
23,000
|
|
|
Deferred finance
charges
|
|
|
6,000
|
|
|
|
5,000
|
|
|
Total
current assets
|
|
|
3,903,000
|
|
|
|
5,487,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
111,000
|
|
|
|
136,000
|
|
|
Total
assets
|
|
$
|
4,014,000
|
|
|
$
|
5,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
122,000
|
|
|
$
|
157,000
|
|
|
Accrued
expenses
|
|
|
132,000
|
|
|
|
151,000
|
|
|
Customer
deposits
|
|
|
-
|
|
|
|
60,000
|
|
|
Other
current liabilities
|
|
|
23,000
|
|
|
|
59,000
|
|
|
Notes
payable
|
|
|
2,711,000
|
|
|
|
3,255,000
|
|
|
Total
current liabilities
|
|
|
2,988,000
|
|
|
|
3,682,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
Common
stock, $.05 par value, 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
10,697,855
shares issued at August 31, 2008 and
|
|
|
|
|
|
|
|
|
|
November
30, 2007; 10,202,991 and 9,898,506 shares outstanding
|
|
|
|
|
|
|
|
|
|
at
August 31, 2008 and November 30, 2007, respectively
|
|
|
510,000
|
|
|
|
495,000
|
|
|
Additional
paid-in capital
|
|
|
6,774,000
|
|
|
|
8,407,000
|
|
|
Accumulated
deficit
|
|
|
(4,353,000
|
)
|
|
|
(3,388,000
|
)
|
|
Less
cost of shares held in treasury, 494,864 and 799,349
shares
|
|
|
|
|
|
|
|
|
|
as
of August 31, 2008 and November 30, 2007, respectively
|
|
|
(1,905,000
|
)
|
|
|
(3,573,000
|
)
|
|
Total
shareholders' equity
|
|
|
1,026,000
|
|
|
|
1,941,000
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
4,014,000
|
|
|
$
|
5,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three
Months Ended August 31, 2008 and 2007
(Unaudited)
|
|
|
Three
Months Ended August 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
321,000
|
|
|
$
|
2,181,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
Cost
of sales, homebuilding
|
|
|
232,000
|
|
|
|
1,888,000
|
|
|
Inventory
impairment
|
|
|
204,000
|
|
|
|
-
|
|
|
Total
cost of sales
|
|
|
436,000
|
|
|
|
1,888,000
|
|
|
Selling,
general and administrative
|
|
|
209,000
|
|
|
|
347,000
|
|
|
|
|
|
645,000
|
|
|
|
2,235,000
|
|
|
Loss
from operations
|
|
|
(324,000
|
)
|
|
|
(54,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
|
1,000
|
|
|
Interest
expense
|
|
|
(37,000
|
)
|
|
|
(86,000
|
)
|
|
Gain
on sale of marketable securities
|
|
|
-
|
|
|
|
17,000
|
|
|
Other
expense
|
|
|
(1,000
|
)
|
|
|
(3,000
|
)
|
|
Loss
before income taxes
|
|
|
(362,000
|
)
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(362,000
|
)
|
|
$
|
(119,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted:
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
10,107,881
|
|
|
|
9,685,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine
Months Ended August 31, 2008 and 2007
(Unaudited)
|
|
|
Nine
Months Ended August 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
Homebuilding
|
|
$
|
2,089,000
|
|
|
$
|
3,407,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
Cost
of sales, homebuilding
|
|
|
1,823,000
|
|
|
|
2,956,000
|
|
|
Inventory
impairment
|
|
|
204,000
|
|
|
|
|
|
|
Total
cost of sales
|
|
|
2,027,000
|
|
|
|
2,956,000
|
|
|
Selling,
general and administrative
|
|
|
877,000
|
|
|
|
1,019,000
|
|
|
|
|
|
2,904,000
|
|
|
|
3,975,000
|
|
|
Loss
from operations
|
|
|
(815,000
|
)
|
|
|
(568,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,000
|
|
|
|
5,000
|
|
|
Interest
expense
|
|
|
(152,000
|
)
|
|
|
(316,000
|
)
|
|
Gain
on sale of marketable securities
|
|
|
-
|
|
|
|
154,000
|
|
|
Other
expense
|
|
|
(1,000
|
)
|
|
|
(6,000
|
)
|
|
Loss
before income taxes
|
|
|
(964,000
|
)
|
|
|
(731,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
(1,000
|
)
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(965,000
|
)
|
|
$
|
(725,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
10,055,842
|
|
|
|
9,636,000
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
|
|
CALTON,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine
Months Ended August 31, 2008 and 2007
(Unaudited)
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(965,000
|
)
|
|
$
|
(725,000
|
)
|
|
Adjustments
to reconcile net loss to net cash flows
|
|
|
|
|
|
|
|
|
|
from
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
26,000
|
|
|
|
30,000
|
|
|
Amortization
of deferred charges
|
|
|
20,000
|
|
|
|
26,000
|
|
|
Increase
in deferred charges
|
|
|
(21,000
|
)
|
|
|
(19,000
|
)
|
|
Stock
based compensation
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
18,000
|
|
|
|
(4,000
|
)
|
|
Inventory
|
|
|
1,037,000
|
|
|
|
1,622,000
|
|
|
Prepaid
expenses and other assets
|
|
|
-
|
|
|
|
7,000
|
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(151,000
|
)
|
|
|
(134,000
|
)
|
|
Changes
in assets of discontinued operations
|
|
|
-
|
|
|
|
33,000
|
|
|
Net
cash flows from operating activities
|
|
|
14,000
|
|
|
|
886,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment and software
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
Net
cash flows from investing activities
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Repayment
of notes payable, net
|
|
|
(544,000
|
)
|
|
|
(1,263,000
|
)
|
|
Net
cash flows from financing activities
|
|
|
(544,000
|
)
|
|
|
(1,263,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(530,000
|
)
|
|
|
(382,000
|
)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
578,000
|
|
|
|
769,000
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
48,000
|
|
|
$
|
387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
141,000
|
|
|
$
|
383,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 August 31, 2008, the results of operations for the three and nine
months ended August 31, 2008 and 2007 and the cash flows for the nine
months ended August 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 nine months ended August 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 office; 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
$362,000 and $965,000 during the three months and nine months ended August
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, and turmoil in the mortgage finance and credit
markets. The Company’s results for the nine months ended August
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, lowering expenses and introducing new services,
such as remodeling and maintenance, to provide additional
revenue. 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 August
31, 2008. The facility 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 December
2008. Since March 2007, the Company has been making monthly
payments of principal and interest and has reduced the mortgage principal
by $107,000. 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 previously 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%. Currently, the 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 August 31, 2008, the
Company had $915,000 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 August 31, 2008 and November 30,
2007:
|
|
|
|
August
31,
|
|
|
November
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and developed lots
|
|
$
|
2,193,000
|
|
|
$
|
2,404,000
|
|
|
Work
in process
|
|
|
1,137,000
|
|
|
|
1,586,000
|
|
|
Speculative
and model homes
|
|
|
494,000
|
|
|
|
871,000
|
|
|
|
|
$
|
3,824,000
|
|
|
$
|
4,861,000
|
|
|
|
Due
to continued market deterioration during the third quarter of 2008, the
estimation process used to determine the need for impairment indicated the
net realizable value of the Company’s undeveloped land inventory had
declined. Further analysis resulted in impairment charges of
$204,000 recorded to land during the quarter ended August 31,
2008. The estimation process did not show a need to impair lots
and spec homes at the Pointe West development at this time; however, it is
possible that future estimates of the net realizable value of these
properties may result in impairment
charges.
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
The
Company capitalizes interest on loans directly associated with real estate
development projects while under construction. During the nine
months ended August 31, 2008 and 2007, the Company capitalized $8,000 and
$93,000 in interest, respectively.
|
|
|
|
|
5.
|
Notes
Payable
|
|
|
|
|
|
As
of August 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 its 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 August 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 December 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 August 31, 2008).
|
|
|
|
|
|
Additionally,
the Company has three loans payable to AFP Enterprises, Inc. secured by
mortgages on properties at Pointe West. The total amount
outstanding on the loans at August 31, 2008, was $250,000 and the annual
interest rate matches that charged by National City (currently
6%).
|
|
|
|
|
6.
|
Shareholders’
Equity
|
|
|
|
|
|
During
the nine months ended August 31, 2008 and 2007, 304,485 and 166,870
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 nine-month periods ended August 31, 2008 and
2007, amounted to $37,500 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.
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
During
the nine month period ended August 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 $22,000 for the nine months ended August 31, 2008 and $10,000
for the nine months ended August 31, 2007.
|
|
|
|
|
|
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
|
|
|
4.13
yrs.
|
|
|
$
|
0.34
|
|
|
$
|
500
|
|
|
|
583,000
|
|
|
3.17
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 August 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 nine months ended August 31, 2008 and
2007:
|
|
|
|
Nine
months ended August 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(965,000
|
)
|
|
$
|
(725,000
|
)
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
(116,000
|
)
|
|
Comprehensive
loss
|
|
$
|
(965,000
|
)
|
|
$
|
(841,000
|
)
|
CALTON,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
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 August 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
loss - (numerator)
|
|
$
|
(362,000
|
)
|
|
$
|
(119,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
|
outstanding
- (denominator)
|
|
|
10,107,881
|
|
|
|
9,685,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
|
The
effects of 837,000 and 827,000 stock options outstanding as of August 31,
2008 and 2007, respectively, have been excluded from the determination of
net loss per share because their effect would be
anti-dilutive.
|
|
Item 2
.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
|
|
|
|
|
Results
of Operations for the Three and Nine Months ended August 31, 2008 and
2007
|
|
|
|
|
|
Revenues:
Revenues
for the three months ended August 31, 2008 were $321,000 compared to
$2,181,000 for the three months ended August 31,
2007. Revenues for the nine months ended August 31, 2007
decreased to $2,089,000 from $3,407,000 for the nine months ended August
31, 2007. The decrease for both the quarter and nine months is
attributable to fewer deliveries of homes. There was one home
delivery in the quarter ended August 31, 2008 and three in the quarter
ended August 31, 2007. Further, the home delivered in the third
quarter of 2008 was a custom home on the buyer’s lot. Revenue
was recognized on a percentage-of-completion basis and most of the revenue
had been recognized in prior quarters. This home was also
a sale-leaseback and $62,000 of revenue will be recognized over the lease
period of one year, beginning in September 2008. There were
three home deliveries in the first nine months of fiscal year 2008 and six
home deliveries in the first nine months of fiscal year
2007.
|
|
|
|
|
|
Cost of
Sales:
Cost of sales was $436,000 for the quarter ended
August 31, 2008 compared to $1,888,000 for the quarter ended August 31,
2007; and $2,027,000 for the nine months ended August 31, 2008 compared to
$2,956,000 for the nine months ended August 31, 2007. Included
in cost of goods sold for both the quarter and the nine month period
ending August 31, 2008, is $204,000 in an impairment charge on our
inventory. This charge caused cost of sales to exceed revenues
in the three-month period ending August 31, 2008, resulting in no profit
margin for the period. Our profit margin for the same period in
2007 was 13%. Profit margins were 3% and 13% in the nine months
ended August 31, 2008 and 2007, respectively. Pre-impairment
profit margins for the three and nine months ending August 31, 2008, were
28% and 13%, respectively.
|
|
|
|
|
|
Selling, General and
Administrative Expenses:
Selling, general and
administrative expenses for the quarter ended August 31, 2008 were
$209,000 compared to $347,000 for the quarter ended August 31,
2007. Selling, general and administrative expenses for the nine
months ended August 31, 2008 and 2007 were $877,000 and $1,019,000,
respectively.
|
|
|
|
|
|
Interest
Income:
Interest income was $4,000 and $5,000 for the
nine months ended August 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 nine months ended
August 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 $33,000 for
the three months ended August 31, 2008, compared to $78,000 for the three
months ended August 31, 2007. Interest expense amounted
to $132,000 and $290,000 for the nine months ended August 31, 2008 and
2007, respectively. The reduction in quarterly interest is due
to the reduction of our outstanding debt. During the three and
nine months ended August 31, 2008, we capitalized $6,000 and $8,000 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 $362,000 and
$965,000 during the three months and nine months ended August 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, and
turmoil in the mortgage finance and credit markets. Our results
for the three and nine months ended August 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, lowering expenses and introducing new services,
such as remodeling and maintenance, to provide additional
revenue. 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 $.8 million, which are
collateral for the credit facility with a $1.5 million balance at August
31, 2008. The facility 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 December 2008. Since
March 2007, we have been making monthly payments of principal and interest
and have reduced the mortgage principal by $107,000. 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 previously 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 current 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 August 31,
2008, we had $915,000 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
net cash flows from operating activities during the nine months ended
August 31, 2008 and 2007 were $14,000 and $886,000,
respectively.
|
|
|
|
|
|
Cash Flows from
Financing Activities
|
|
|
|
|
|
We
have used proceeds from current year sales to pay down $544,000 of the
construction line of credit during the nine months ended August 31, 2008,
compared to $1,263,000 during the nine months ended August 31,
2007.
|
|
|
|
|
|
As
a result of the above cash flow activities, cash decreased from $578,000
at November 30, 2007 to $48,000 at August 31, 2008. Total
working capital decreased from $1,829,000 at November 30, 2007 to $915,000
at August 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 August 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 $1,068,000 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 August 31,
2008, $961,000 was outstanding under the note, which matures in December
2008.
|
|
|
|
|
|
On
July 8, 2008, we obtained three loans for a total amount of $250,000 from
AFP Enterprises, Inc. These loans, secured by mortgages on
properties in the Pointe West development, are payable on demand and
require monthly payments of interest only. The current rate of
interest is 6%.
|
|
|
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 August
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.
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Item
3.
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CONTROLS
AND PROCEDURES
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|
|
|
|
|
As
of the end of the period covered by this report, 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
changes in our internal controls over financial reporting during the
quarter ended August 31, 2008 that have materially affected, or are
reasonably likely to have materially affected, our internal controls over
financial reporting subsequent to the date we carried out our
evaluation.
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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.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
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None.
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Item
5.
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OTHER
INFORMATION
|
|
|
|
|
|
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None.
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|
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Item
6.
|
EXHIBITS
|
|
|
|
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|
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31.1
-
|
Certification
of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
|
|
|
31.2
-
|
Certification
of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
|
|
|
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.
|
|
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Calton, Inc.
|
|
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(Registrant)
|
|
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By
:
|
/s/ Vicky F.
Savage
|
|
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Vicky
F. Savage
|
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Acting
Chief Financial Officer and Treasurer
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(Principal
Financial and Accounting Officer)
|
Date: October
15, 2008
17