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, 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 July 20, 2007, there were 9,683,861 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 as of
May 31, 2007 (Unaudited) and November 30, 2006........... 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended
May 31, 2007 and 2006.................................... 4
Condensed Consolidated Statements of Operations
(Unaudited) for the Six Months Ended
May 31, 2007 and 2006.................................... 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended
May 31, 2007 and 2006.................................... 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 6. Exhibits................................................. 17
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, 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
May 31, November 30,
2007 2006
------------ ------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 487,000 $ 769,000
Accounts receivable 58,000 14,000
Inventory 7,500,000 7,685,000
Prepaid expenses and other current assets 45,000 157,000
Assets of discontinued operations (Note 7) - 33,000
------------ ------------
Total current assets 8,090,000 8,658,000
Deferred charges 7,000 20,000
Property and equipment, net 151,000 171,000
------------ ------------
Total assets $ 8,248,000 $ 8,849,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 310,000 $ 188,000
Accrued expenses 120,000 206,000
Customer deposits 143,000 -
Other current liabilities 32,000 51,000
Current portion of notes payable 4,319,000 5,370,000
------------ ------------
Total current liabilities 4,924,000 5,815,000
------------ ------------
Notes payable, less current maturities 979,000 -
------------ ------------
Total liabilities 5,903,000 5,815,000
------------ ------------
Commitments and contingencies - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
10,697,855 shares issued at May 31, 2007 and November 30, 2006;
9,683,861 and 9,592,746 shares outstanding at May 31, 2007
and November 30, 2006, respectively 484,000 480,000
Additional paid-in capital 9,923,000 10,547,000
Accumulated deficit (2,950,000) (2,344,000)
Less cost of shares held in treasury, 1,013,994 and 1,105,109 shares
as of May 31, 2007 and November 30, 2006, respectively (5,112,000) (5,765,000)
Accumulated other comprehensive income - 116,000
------------ ------------
Total shareholders' equity 2,345,000 3,034,000
------------ ------------
Total liabilities and shareholders' equity $ 8,248,000 $ 8,849,000
============ ============
See notes to condensed consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2007 AND 2006
(UNAUDITED)
Three Months Ended May 31,
2007 2006
----------- -----------
REVENUE
Homebuilding $ 524,000 $ 2,572,000
----------- -----------
COSTS AND EXPENSES
Cost of sales, homebuilding 470,000 1,849,000
Selling, general and administrative 351,000 629,000
----------- -----------
821,000 2,478,000
----------- -----------
Income (loss) from operations (297,000) 94,000
OTHER INCOME (EXPENSE)
Interest income 2,000 2,000
Interest expense (117,000) (34,000)
Gain on sale of marketable securities 137,000 -
Other expense (2,000) (1,000)
----------- -----------
Income (loss) before discontinued operations (277,000) 61,000
and income taxes
LOSS FROM DISCONTINUED OPERATIONS (NOTE 8) - (3,000)
----------- -----------
Income (loss) before income taxes (277,000) 58,000
Income tax expense - -
----------- -----------
NET INCOME (LOSS) $ (277,000) $ 58,000
=========== ===========
INCOME (LOSS) PER SHARE
Basic and Diluted $ (0.03) $ 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,630,000 9,516,000
Diluted 9,630,000 9,691,000
See notes to condensed consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 2007 AND 2006
(UNAUDITED)
Six Months Ended May 31,
2007 2006
----------- -----------
REVENUE
Homebuilding $ 1,226,000 $ 4,755,000
----------- -----------
COSTS AND EXPENSES
Cost of sales, homebuilding 1,068,000 3,397,000
Selling, general and administrative 671,000 1,193,000
----------- -----------
1,739,000 4,590,000
----------- -----------
Income (loss) from operations (513,000) 165,000
OTHER INCOME (EXPENSE)
Interest income 4,000 4,000
Interest expense (230,000) (82,000)
Gain on sale of marketable securities 137,000 -
Other income (expense) (4,000) 27,000
----------- -----------
Income (loss) before discontinued operations (606,000) 114,000
and income taxes
LOSS FROM DISCONTINUED OPERATIONS (NOTE 8) - (36,000)
----------- -----------
Income (loss) before income taxes (606,000) 78,000
Income tax expense - (9,000)
----------- -----------
NET INCOME (LOSS) $ (606,000) $ 69,000
=========== ===========
INCOME (LOSS) PER SHARE
Basic and Diluted $ (0.06) $ 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,612,000 9,507,000
Diluted 9,612,000 9,673,000
See notes to condensed consolidated financial statements
5
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2007 AND 2006
(UNAUDITED)
Six Months Ended May 31,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (606,000) $ 69,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation from continuing operations 20,000 20,000
Depreciation from discontinued operations - 6,000
Amortization of deferred charges 18,000 20,000
Increase in deferred charges (5,000) (9,000)
Stock based compensation 33,000 25,000
Changes in operating assets and liabilities:
Accounts receivable (44,000) 40,000
Inventory 185,000 (3,799,000)
Deposits on land - 320,000
Prepaid expenses and other assets (4,000) (20,000)
Accounts payable, accrued expenses and other liabilities 160,000 (1,327,000)
Changes in assets of discontinued operations 33,000 (53,000)
Changes in liabilities of discontinued operations - 28,000
----------- -----------
Net cash flows from operating activities (210,000) (4,680,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and software from continuing operations - (6,000)
Purchase of equipment and software from discontinued operations - (5,000)
----------- -----------
Net cash flows from investing activities - (11,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) notes payable, net (72,000) 2,904,000
----------- -----------
Net cash flows from financing activities (72,000) 2,904,000
----------- -----------
Net decrease in cash and cash equivalents (282,000) (1,787,000)
Cash and cash equivalents at beginning of period 769,000 2,737,000
----------- -----------
Cash and cash equivalents at end of period $ 487,000 $ 950,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 266,000 $ 87,000
Cash paid for income taxes - -
See notes to condensed consolidated financial statements.
6
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, 2007, the results of operations for the three and six months
ended May 31, 2007 and 2006 and the cash flows for the six months ended
May 31, 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 and six months ended May
31, 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 does not
expect the adoption of FAS 159 to 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 $606,000 and used cash in continuing operations of $210,000 during
the six months ended May 31, 2007. Additionally, the Company has
significant completed and work-in-process inventory of approximately
$5.8 million which is the collateral for the $4.3 million current
maturities of notes payable. The Company's $6.5 million credit facility
expired on May 31, 2007. The bank has since reduced the credit facility
to $4,790,000 to include only homes currently under construction and
land currently held by the Company with no available funding for future
homes to be constructed, and extended the term through December 31,
2007. These conditions raise doubt as to the ability of the Company to
continue its normal business operations as a going concern. Since May
31, 2007 the Company has delivered two homes and has three home sale
contracts pending as of July 20, 2007, which are anticipated to be
completed by January, 2008. As of May 31, 2007, the Company had
$3,166,000 in working capital, which with additional amounts to be
generated from operations, is anticipated to be sufficient to fund the
current operating plan during the fiscal year ending on November 30,
2007.
7
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, continued curtailment
of expenses to the extent appropriate and raising additional debt or
equity capital from external sources, if necessary.
3. INVENTORY
Inventory consists of the following as of May 31, 2007 and November 30,
2006:
May 31, November 30,
2007 2006
---------- ----------
Land and developed lots $2,389,000 $2,504,000
Work in process 2,482,000 1,589,000
Speculative and model homes 2,629,000 3,592,000
---------- ----------
$7,500,000 $7,685,000
========== ==========
The Company capitalizes interest on loans directly associated with real
estate development projects while under construction. During the six
months ended May 31, 2007 and 2006, the Company capitalized $32,000 and
$64,000 in interest, respectively.
4. NOTES PAYABLE
Notes payable includes borrowings under a note payable with National
City Bank (formerly Harbor Federal Savings Bank). The credit facility is
secured by inventories and related homebuilding assets. The note
payable, due for renewal on June 1, 2007, has been renewed through
December 31, 2007. However, the total credit facility was reduced from
$6.5 million to $4.8 million to include only homes currently under
construction and land currently held by the Company with no available
funding for future homes to be constructed. 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% (9.25% at May 31, 2007).
Future principal maturities of notes payable are as follows:
Twelve months ending May 31,
2008 $4,319,000
2009 979,000
----------
$5,298,000
==========
8
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SHAREHOLDERS' EQUITY
During the six months ended May 31, 2007 and 2006, 91,115 and 37,085
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 quarters ended May 31, 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.
SHARE-BASED COMPENSATION TRANSACTIONS
Stock option activity is summarized as follows:
Weighted
Average
Exercise
Options Price
------------------------
Outstanding
As of December 1, 2006 717,000 $ 0.45
Granted at market price or above 305,000 0.22
Expired or cancelled (195,000) 0.53
Outstanding as of May 31, 2007 827,000 0.35
------------------------
Exercisable as of May 31, 2007 522,000 $ 0.43
========================
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.
9
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
The weighted average grant date fair value of the options granted during
the six month period ended May 31, 2007, was $0.18. The range of
exercise prices for exercisable options and the weighted average
remaining lives are reflected in the following table:
Options Outstanding Exercisable
--------------------------------------------------------------------- ----------------------------------
Weighted Weighted Aggregate Weighted Aggregate
Range of Average Average Intrinsic Average Intrinsic
Prices Number Remaining Life Exercise Price Value Number Exercise Price Value
------------- -------- -------------- -------------- ----------- -------- -------------- ---------
$ 0.16 - 0.83 827,000 2.81 yrs. $ 0.35 $ 15,125 522,000 $ 0.43 $ 9,225
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss) items. Other comprehensive income during the
2006 period presented represents the changes in unrealized gains on
available-for-sale equity securities which are included in prepaid
expenses and other current assets in the 2006 consolidated balance
sheet. 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 income (loss) for the six months
ended May 31, 2007 and 2006:
Six months ended May 31,
-------------------------
2007 2006
--------- ---------
Net income (loss) ($606,000) $ 69,000
Other comprehensive income (loss) (116,000) 75,000
--------- ---------
Comprehensive income (loss) ($722,000) $ 144,000
========= =========
10
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. 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 Six months ended
May 31, May 31,
-------------------------- --------------------------
2007 2006 2007 2006
--------- ---------- --------- ----------
Income (loss) - (numerator) $(277,000) $ 58,000 $(606,000) $ 69,000
========= ========== ========= ==========
Basic:
Weighted average shares
outstanding - (denominator) 9,630,000 9,516,000 9,612,000 9,507,000
========= ========== ========= ==========
Income (loss) per common share $ (0.03) $ 0.01 $ (0.06) $ 0.01
========= ========== ========= ==========
Diluted:
Weighted average shares outstanding 9,630,000 9,516,000 9,612,000 9,507,000
Effect of dilutive securities - 175,000 - 166,000
--------- ---------- --------- ----------
Adjusted weighted average
shares - (denominator) 9,630,000 9,691,000 9,612,000 9,673,000
========= ========== ========= ==========
Income (loss) per common share - diluted $ (0.03) $ 0.01 $ (0.06) $ 0.01
========= ========== ========= ==========
The effects of 827,000 and 703,800 stock options outstanding as of May
31, 2007 and 2006, respectively, have been excluded from common stock
equivalents because their effect on income (loss) per share would be
anti-dilutive.
11
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
8. 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 and six months ended May 31, 2006, are
summarized below:
Three Months Ended Six Months Ended
May 31, 2006 May 31, 2006
------------ ------------
Net revenues $ 204,000 $ 379,000
Cost of good sold 104,000 208,000
--------- ---------
Gross profit 100,000 171,000
Operating expense (103,000) (206,000)
Other expense - (1,000)
--------- ---------
Loss from discontinued operations $ (3,000) $ (36,000)
========= =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2007
AND 2006
REVENUES: Revenues for the three months ended May 31, 2007 decreased to
$524,000 compared to $2,572,000 for the three months ended May 31, 2006.
Revenues for the six months ended May 31, 2007 decreased to $1,226,000
from $4,755,000 for the six months ended May 31, 2006. The decrease for
both the quarter and six months is primarily attributable to the
depressed market for new homes in central Florida. There was one home
delivery in the quarter ended May 31, 2007 compared to four home
deliveries in the quarter ended May 31, 2006, and two home deliveries in
the first six months of 2007 compared to seven in the first six months
of the prior year. The home delivered in the second quarter of 2007 was
sold at a reduced price which caused a decrease in gross margin from 28%
to 10% compared to the same quarter of 2006.
COST OF SALES: Cost of sales was $470,000 for the quarter ended May 31,
2007 compared to $1,849,000 for the quarter ended May 31, 2006. Cost of
goods sold was $1,068,000 for the six months ended May 31, 2007,
compared to $3,397,000 for the six months ended May 31, 2006. The
reductions in cost of sales for both the quarter and the six-month
period were caused by fewer homes being delivered.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended May 31, 2007 were $351,000
compared to $629,000 for the quarter ended May 31, 2006. Selling,
general and administrative expenses for the six months ended May 31,
2007 were $671,000 compared to $1,193,000 for the six months ended May
31, 2006. The decrease in expenses was primarily attributable to
reductions in personnel and sales and marketing expenditures. In
addition, certain expenses incurred during the six months ended May 31,
2006, in connection with developing new model designs and the Company's
Web site did not recur in the six months ended May 31, 2007, as a result
of the completion of the projects.
INTEREST INCOME: Interest income is derived principally from interest on
depository accounts and money market-type accounts. Interest income was
$2,000 for each of the quarters ended May 31, 2007 and 2006 and $4,000
for each of the six-month periods ended May 31, 2007 and 2006.
INTEREST EXPENSE: Interest expense amounted to $117,000 for the three
months ended May 31, 2007 compared to $34,000 for the three months ended
May 31, 2006. Interest expense amounted to $230,000 and $82,000 for the
six months ended May 31, 2007 and 2006, respectively. The increase is
attributable to higher interest rates, a greater level of borrowings,
and less capitalization of interest on homes under construction during
the three and six months ended May 31, 2007. 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. We held approximately
$5,018,000 in completed homes and vacant land during the six months
ended May 31, 2007, of which interest was expensed. During the three and
six months ended May 31, 2007, we capitalized $32,000 and $64,000 in
interest, respectively.
OTHER INCOME AND GAIN ON SALE OF MARKETABLE SECURITIES: The sale of
marketable securities resulted in other income of $137,000 in the
quarter ended May 31, 2007 compared to other expense of $1,000 in the
quarter ended May 31, 2006. The securities sold were 342,000 shares of
CorVu stock and represented our entire holding in available-for-sale
equity securities.
13
SALES ACTIVITY AND BACKLOG:
Contract Number
Backlog of Homes
----------- -----------
Backlog as of November 30, 2006 $ 0 0
Less: Homes delivered during the
six months ended May 31, 2007 (1,178,000) (2)
Plus: New contracts signed during the
six months ended May 31, 2007 3,406,000 6
----------- -----------
Backlog as of May 31, 2007 $ 2,228,000 4
=========== ===========
We are currently constructing homes in the community of Pointe West,
located in Vero Beach, Florida. In addition, we are continuing our
Custom Home Division, in which we seek to act as the contract builder
for individual landowners. In Decemeber 2005, we acquired an undeveloped
ten acre parcel in Vero Beach, Florida, on which we intend to start
construction of 21 single family homes during fiscal year 2008.
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 $606,000 during the six months ended May 31, 2007. Additionally, we
have significant completed and work-in-process inventories of
approximately $5.8 million which are collateral for the $4.3 million
current maturities of notes payable. The $6.5 million credit facility
expired on May 31, 2007. The bank has since reduced the note payable to
$4,790,000 to include only homes under construction and land currently
held by the Company with no available funding for future homes to be
constructed, and extended the term through December 31, 2007. However,
since May 31, 2007, we have delivered two homes and have three home sale
contracts pending as of July 20, 2007, which we anticipate completing by
January, 2008.
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
$210,000 was used for operating activities during the six months ended
May 31, 2007, compared to $4,680,000 during the six months ended May 31,
2006. The decrease reflects a dramatic reduction in homebuilding
activities and curtailed expenses per management's operating plan for
the fiscal year ending on November 30, 2007.
14
CASH FLOWS FROM INVESTING ACTIVITIES
There were no investing activities during the six months ended May 31,
2007. $11,000 was used in investing activities during the six months
ended May 31, 2006 for the purchase of equipment and software.
CASH FLOWS FROM FINANCING ACTIVITIES
$72,000 was used to pay down the construction line of credit during the
six months ended May 31, 2007, compared to draws on the construction
line of credit of $2,904,000 during the six months ended May 31, 2006.
The amount drawn in the first six months 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 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 our
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.
LOAN AGREEMENT
We currently maintain a 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 May 31, 2007,
$4,298,000 of advances under the line of credit was outstanding. The
line of credit, due for renewal on June 1, 2007, has been renewed
through December 31, 2007. However, the total credit facility was
reduced from $6.5 million to $4.8 million to include only homes under
construction and land currently held by the Company, with no funds
available for future homes to be constructed.
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.
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 May 31, 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.
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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 May 31, 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.
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PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2007 Annual Meeting of Shareholders (the "Meeting")
on May 9, 2007. At the Meeting, shareholders were asked to elect each of
Mark N. Fessel and John G. Yates as directors for four-year terms
expiring at the 2011 annual meeting. The results of the voting were as
follows:
Broker
For Against Withheld Abstain Non-Vote
--------- --------- --------- --------- ---------
Mark N. Fessel 5,517,666 0 18,639 0 0
John G. Yates 5,518,066 0 18,239 0 0
The terms of each of J. Ernest Brophy, Anthony J. Caldarone, Kenneth D.
Hill and Frank C. Smith, Jr. (the other directors of the Company)
continued after the Meeting.
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
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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 20, 2007
18