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 February 28, 2007
[ ] 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 40TH 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 April 16, 2007, there were 9,629,511 shares of Common Stock were
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 at
February 28, 2007 (Unaudited) and November 30, 2006......................... 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended February 28, 2007 and 2006............................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended February 28, 2007 and 2006............................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis or
Plan of Operation........................................................... 10
Item 3. Controls and Procedures..................................................... 13
PART II. OTHER INFORMATION
Item 6. Exhibits.................................................................... 14
SIGNATURES ............................................................................ 15
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, the lack of an established operating history for the Company's
current business activities, conditions and trends in the homebuilding industry
in general, changes in interest rates, continued acceptance of the Company's
co-branded customer loyalty credit card program, 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.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, November 30,
2007 2006
------------ ------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 788,000 $ 769,000
Accounts receivable 63,000 14,000
Inventory 7,438,000 7,685,000
Prepaid expenses and other current assets 144,000 157,000
Assets of discontinued operations (Note 7) -- 33,000
------------ ------------
Total current assets 8,433,000 8,658,000
------------ ------------
Deferred charges 16,000 20,000
Property and equipment, net 161,000 171,000
------------ ------------
Total assets $ 8,610,000 $ 8,849,000
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 97,000 $ 188,000
Accrued expenses 176,000 206,000
Other current liabilities 124,000 51,000
Current portion of notes payable 4,519,000 5,370,000
------------ ------------
Total current liabilities 4,916,000 5,815,000
------------ ------------
Notes payable less current maturities 997,000 --
------------ ------------
Total liabilities 5,913,000 5,815,000
------------ ------------
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
9,629,511 and 9,592,746 shares outstanding at February 28, 2007
and November 30, 2006, respectively 481,000 480,000
Additional paid-in capital 10,295,000 10,547,000
Accumulated deficit (2,673,000) (2,344,000)
Less cost of shares held in treasury, 1,068,344 and 1,105,109 shares
as of February 28, 2007 and November 30, 2006, respectively (5,502,000) (5,765,000)
Accumulated other comprehensive income 96,000 116,000
------------ ------------
Total shareholders' equity 2,697,000 3,034,000
------------ ------------
Total liabilities and shareholders' equity $ 8,610,000 $ 8,849,000
============ ============
See notes to condensed consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
Revenue
Homebuilding $ 702,000 $ 2,183,000
----------- -----------
702,000 2,183,000
----------- -----------
Costs and expenses
Cost of sales
Homebuilding 598,000 1,548,000
Selling, general and administrative 320,000 574,000
----------- -----------
918,000 2,122,000
----------- -----------
Income/(loss) from operations (216,000) 61,000
Other income (expense)
Interest income 2,000 2,000
Interest expense (113,000) (38,000)
Other income (2,000) 28,000
Income (loss) before discontinued operations
----------- -----------
and income taxes (329,000) 53,000
Loss from discontinued operations (Note 7) -- (33,000)
----------- -----------
Income (loss) before income taxes (329,000) 20,000
Income tax expense -- (9,000)
----------- -----------
Net income (loss) $ (329,000) $ 11,000
=========== ===========
Income per share
----------- -----------
Basic and Diluted: $ (0.03) $ 0.00
=========== ===========
Weighted average number of shares outstanding:
Basic and diluted 9,593,000 9,498,000
=========== ===========
See notes to condensed consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (329,000) $ 11,000
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 10,000 13,000
Amortization of deferred charges 9,000 10,000
Increase in deferred charges (5,000) (10,000)
Stock based compensation for directors 13,000 13,000
Changes in operating assets and liabilities:
Accounts receivable (49,000) 3,000
Inventory 247,000 (3,282,000)
Deposits on land -- 260,000
Prepaid expenses and other assets (7,000) (60,000)
Accounts payable, accrued expenses and other liabilities (49,000) (648,000)
Changes in assets of discontinued operations 33,000 (48,000)
Changes in liabilities of discontinued operations -- 26,000
----------- -----------
Net cash flows from operating activities (127,000) (3,712,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and software -- (8,000)
----------- -----------
Net cash flows from investing activities -- (8,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 146,000 2,126,000
----------- -----------
Net cash flows from financing activities 146,000 2,126,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 19,000 (1,594,000)
Cash and cash equivalents at beginning of period 769,000 2,737,000
----------- -----------
Cash and cash equivalents at end of period $ 788,000 $ 1,143,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 125,000 $ 56,000
=========== ===========
See notes to condensed consolidated financial statements.
5
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 February 28,
2007, the results of operations for the three months ended February 28,
2007 and 2006 and the cash flows for the three months ended February 28,
2007 and 2006 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 March 14, 2007.
Operating results for the three months ended February 28, 2007 are not
necessarily indicative of the results that may be expected for the year
ending November 30, 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND
FINANCIAL LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115"
("FAS 159"). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Management currently does not
expect adoption of FAS 159 will have a material effect on the Company's
financial position or results of operations.
2. LIQUIDITY AND MANAGEMENT'S PLANS
--------------------------------
The Company's condensed consolidated financial statements are prepared on
a going concern basis, which assumes that the Company will realize its
assets and discharge its liabilities in the normal course of business. As
reflected in the condensed consolidated financial statements, the Company
has incurred a loss from continuing operations of $329,000 and used cash
in continuing operations of $127,000 during the three months ended
February 28, 2007. Additionally, the Company has minimal pending home
sales and inventory of substantially completed homes of approximately $5
million which are collateral for the $4.5 million current maturities of
notes payable. These conditions raise doubt as to the ability of the
Company to continue its normal business operations as a going concern. As
of February 28, 2007, the Company had $3,517,000 in working capital which,
with additional amounts to be generated from operations and borrowing
available under the Company's revolving credit facility, is anticipated to
be sufficient to fund the current operating plan during the fiscal year
ending on November 30, 2007.
Management's plan to sustain the Company's operations includes targeted
marketing for new home sales, incentive pricing for current inventory
homes, renegotiating pricing with subcontractors, curtailing expenses to
the extent appropriate and raising additional debt or equity capital from
external sources.
6
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORY
---------
Inventory consists of the following as of February 28, 2007 and November
30, 2006:
February 28, November 30,
2007 2006
---------- ----------
Developed land $2,526,000 $2,504,000
Work in process 1,832,000 1,589,000
Speculative and model homes 3,080,000 3,592,000
---------- ----------
$7,438,000 $7,685,000
========== ==========
The Company capitalizes interest on loans directly associated with real
estate development projects while under construction. During the three
months ended February 28, 2007 and 2006, the Company capitalized $22,000
and $18,000 in interest, respectively.
4. NOTES PAYABLE
-------------
Notes payable includes borrowings under a $6.5 million demand revolving
line of credit with National City Bank (formally Harbor Federal Savings
Bank). The credit facility is secured by inventories and related
homebuilding assets. 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 revolving credit line and mortgage note
is the bank's prime rate plus 1% (9.25% at February 28, 2007).
Future principal maturities of notes payable are as follows:
Twelve months ending February 28,
2008 $4,519,000
2009 997,000
----------
$5,516,000
==========
5. SHAREHOLDERS' EQUITY ACTIVITY
-----------------------------
During the three months ended February 28, 2007 and 2006, 36,765 and
17,855 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 for both quarters ended February 28, 2007
and 2006 amounted to $12,500 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.
7
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS):
Under Statements on Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, the Company is required to display
comprehensive income (loss) and its components as part of its full set of
financial statements. Comprehensive income (loss) is comprised of net
income (loss) and other comprehensive income (loss) items. Other
comprehensive income (loss) during the periods presented represents the
changes in unrealized gains (losses) on available-for-sale equity
securities which are included in prepaid expenses and other current
assets. The following table reflects comprehensive income (loss) for the
three months ended February 28, 2007 and 2006:
Three months ended February 28,
---------------------------
2007 2006
--------- ---------
Net income (loss) ($329,000) $ 11,000
Other comprehensive income
(loss) (20,000) 65,000
--------- ---------
Comprehensive income (loss) ($349,000) $ 76,000
========= =========
6. INCOME (LOSS) PER COMMON SHARE
------------------------------
The following table reconciles the numerators and denominators of the
basic and diluted income (loss) per share computations:
Three months ended February 28,
2007 2006
---------- ----------
Income (loss) - (numerator) $ (329,000) $ 11,000
========== ==========
Basic:
Weighted average shares
outstanding - (denominator) 9,593,155 9,498,000
========== ==========
Income (loss) per common share $ (0.03) $ 0.00
========== ==========
Diluted
Weighted average shares
outstanding 9,593,155 9,498,000
Effect of dilutive securities -- 166,000
---------- ----------
Adjusted weighted average
shares - (denominator) 9,593,155 9,664,000
========== ==========
Income (loss) per common share - diluted $ (0.03) $ 0.00
========== ==========
The effects of 562,000 and 758,200 stock options outstanding as of February
28, 2007 and 2006, respectively, have been excluded from common stock
equivalents because their effect on net income per share would be
anti-dilutive.
8
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DISCONTINUED OPERATIONS
-----------------------
On July 31, 2006, the Company sold substantially all of the assets of
eCalton.com, Inc. to Bray Web Development, Inc. for $250,000 less purchase
price adjustments of approximately $41,000.
The condensed consolidated financial statements and related footnotes for
all periods presented have been reclassified to reflect the discontinued
operations. The operating results of the discontinued operations for the
three months ended February 28, 2006, are summarized below:
Net revenues $ 175,000
Cost of good sold 104,000
---------
Gross profit 71,000
Operating expense (104,000)
Other expense --
---------
Loss from discontinued operations $ (33,000)
=========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2007 AND
2006
REVENUES: Revenues for the three months ended February 28, 2007 decreased
to $702,000 compared to $2,183,000 for the three months ended February 28,
2006. There was one home delivery in the quarter ended February 28, 2007
compared to three home deliveries in the quarter ended February 28, 2006.
COST OF SALES: Cost of sales was $598,000 for the quarter ended February
28, 2007 compared to $1,548,000 for the quarter ended February 28, 2006.
One home was delivered in the quarter ended February 28, 2007 compared to
three homes in the quarter ended February 28, 2006, resulting in the
decrease in cost of sales. However, while total cost of sales decreased,
cost of sales per unit increased from the first quarter of 2006 to the
first quarter of 2007. This increase was primarily from the significant
sales incentives needed to produce sales in a depressed housing market and
caused a decrease in gross margin from 29% to 15%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended February 28, 2007 were
$320,000 compared to $574,000 for the quarter ended February 28, 2006. The
decrease in expenses was primarily attributable to reductions in personnel
and sales and marketing expenditures.
INTEREST INCOME: Interest income is derived principally from interest on
depository accounts and money market-type accounts. Interest income was
$2,000 for both of the quarters ended February 28, 2007 and 2006.
INTEREST EXPENSE: Interest expense amounted to $113,000 for the three
months ended February 28, 2007 compared to $38,000 for the three months
ended February 28, 2006. The increase is attributable to higher interest
rates and a greater level of borrowings during the three months ended
February 28, 2007. Interest is incurred on the Company's real estate loans
and, to the extent required under generally accepted accounting
principles, capitalized in real estate inventory. During the three months
ended February 28, 2007 and 2006, the Company capitalized $22,000 and
$18,000 in interest, respectively.
SALES ACTIVITY AND BACKLOG:
Contract Number
Backlog of Homes
----------- -----------
Backlog as of November 30, 2006 $ 0 0
Less: Homes delivered during the
three months ended February 28, 2007 (678,000) (1)
Plus: New contracts signed during the
three months ended February 28, 2007 1,363,000 2
----------- -----------
Backlog as of February 28, 2007 $ 685,000 1
=========== ===========
The Company is currently constructing homes in the community of Pointe
West, located in Vero Beach, Florida. In addition, the Company continues
its "On-Your-Lot Program", in which the Company seeks to act as the
contract builder for individual landowners. In December 2005, the Company
acquired an undeveloped ten-acre parcel in Vero Beach, Florida, on which
we intend to construct 21 single family homes during fiscal year 2008.
10
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
financial statements, we have incurred a loss from continuing operations
of $329,000 during the three months ended February 28, 2007. Additionally,
the Company has minimal pending home sales and inventory of substantially
completed homes of approximately $5 million which are collateral for the
$4.5 million current maturities of notes payable. As of February 28, 2007
the Company had $3,517,000 in working capital compared to $2,843,000 at
November 30, 2006. Management believes that cash on hand, plus anticipated
amounts to be generated from operations and borrowing availability under
the Company's revolving credit facility, will be sufficient to support
operations through November 2007.
To sustain operations, management's plans include targeted marketing for
new home sales, purchase incentives for current inventory homes,
renegotiating subcontractor pricing, curtailing expenses, and raising
additional debt or equity capital from external sources.
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
$127,000 was used for operating activities during the three months ended
February 28, 2007, compared to $3,712,000 during the same quarter of 2006.
The decrease reflects decreased homebuilding activities and curtailed
expenses per management's operating plan for the fiscal year ending on
November 30, 2007.
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
There were no investing activities during the three months ended February
28, 2007 and only minimal activities during the three months ended
February 28, 2006.
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Draws on the construction line of credit generated cash flows of $146,000
during the three months ended February 28, 2007, compared to $2,126,000
during the three months ended February 28, 2006. The amount generated in
the first quarter of 2006 was used to fund construction of spec homes in
anticipation of market demand.
COMMITMENTS, GUARANTEES AND OFF BALANCE SHEET ITEMS
PROFIT SHARING ARRANGEMENT
--------------------------
The Company has entered into an arrangement with John G. Yates and Thomas
C. Corley, who are the President and Chief Financial Officer of
PrivilegeONE, respectively, pursuant to which Mr. Yates and Mr. Corley
have agreed to serve as unpaid officers of PrivilegeONE in consideration
of the Company's agreement to pay them 25% of the net profit attributable
to business arrangements with parties introduced by either of them to
PrivilegeONE. There have been no payments made or accrued in 2007 or 2006.
11
LOAN AGREEMENT
--------------
The Company maintains a $6.5 million construction revolving line of credit
with National City 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. As of February 28, 2007, $4,516,000
of advances under the line of credit was outstanding.
In December 2005, the Company 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.
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 accounts receivable and 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, 2006. As of February 28, 2007, there have
been no material additions to our critical accounting policies and there
have been no changes in the application of existing accounting principles.
12
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Company's Chairman and Chief Executive Officer,
along with the Company's Acting Chief Financial Officer, who concluded
that the Company's disclosure controls and procedures were effective as of
the date of the evaluation. There were no significant changes in the
Company's internal controls during the quarter ended February 28, 2007
that have materially affected, or are reasonably likely to have materially
affected, the Company's internal controls subsequent to the date the
Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to provide reasonable assurance that information required to
be disclosed in the Company 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 Company reports filed under the Exchange Act is accumulated
and communicated to management, including the Company's Chief Executive
Officer and Acting Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
13
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS
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
14
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: April 16, 2007
15