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, 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 October 11, 2007, there were 9,759,616 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
CALTON, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 2007 (Unaudited) and November 30, 2006........ 3
Condensed Consolidated Statements of Operation
(Unaudited) for the Three Months Ended
August 31, 2007 and 2006................................. 4
Condensed Consolidated Statements of Operations
(Unaudited) for the Nine Months Ended
August 31, 2007 and 2006................................. 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended
August 31, 2007 and 2006................................. 6
Notes to Condensed Consolidated Financial Statements..... 7
Item 2. Management's Discussion and Analysis or
Plan of Operation........................................ 12
Item 3. Controls and Procedures.................................. 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 16
Item 5. Other Information........................................ 16
Item 6. Exhibits................................................. 16
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 may contain forward looking information that is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from expected results. Among these risks, trends and uncertainties
are the Company's ability to raise capital, national and local economic
conditions, conditions and trends in the homebuilding industry in general,
changes in interest rates, commercial acceptance of the Company's co-branded
customer loyalty credit card program, the 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
August 31, November 30,
2007 2006
------------ ------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 387,000 $ 769,000
Accounts receivable 18,000 14,000
Inventory 6,063,000 7,685,000
Prepaid expenses and other current assets 34,000 157,000
Assets of discontinued operations (Note 8) - 33,000
------------ ------------
Total current assets 6,502,000 8,658,000
Deferred charges 13,000 20,000
Property and equipment, net 146,000 171,000
------------ ------------
Total assets $ 6,661,000 $ 8,849,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 83,000 $ 188,000
Accrued expenses 154,000 206,000
Customer deposits 28,000 -
Other current liabilities 46,000 51,000
Current portion of notes payable 3,146,000 5,370,000
------------ ------------
Total current liabilities 3,457,000 5,815,000
------------ ------------
Notes payable, less current maturities 961,000 -
------------ ------------
Total liabilities 4,418,000 5,815,000
------------ ------------
Commitments and contingencies - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
10,697,855 shares issued at August 31, 2007 and November 30, 2006;
9,759,616 and 9,592,746 shares outstanding at August 31, 2007
and November 30, 2006, respectively 488,000 480,000
Additional paid-in capital 9,393,000 10,547,000
Accumulated deficit (3,069,000) (2,344,000)
Less cost of shares held in treasury, 938,239 and 1,105,109 shares
as of August 31, 2007 and November 30, 2006, respectively (4,569,000) (5,765,000)
Accumulated other comprehensive income - 116,000
------------ ------------
Total shareholders' equity 2,243,000 3,034,000
------------ ------------
Total liabilities and shareholders' equity $ 6,661,000 $ 8,849,000
============ ============
See notes to condensed consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2007 AND 2006
(UNAUDITED)
Three Months Ended August 31,
2007 2006
----------- -----------
REVENUE
Homebuilding $ 2,181,000 $ 1,337,000
----------- -----------
COSTS AND EXPENSES
Cost of sales, homebuilding 1,888,000 1,162,000
Selling, general and administrative 347,000 492,000
----------- -----------
2,235,000 1,654,000
----------- -----------
Loss from operations (54,000) (317,000)
OTHER INCOME (EXPENSE)
Interest income 1,000 2,000
Interest expense (86,000) (101,000)
Gain on sale of marketable securities 17,000 -
Litigation settlements - (15,000)
Other expense (3,000) (13,000)
----------- -----------
Loss before discontinued operations (125,000) (444,000)
and income taxes
INCOME FROM DISCONTINUED OPERATIONS (NOTE 8) - 187,000
----------- -----------
Loss before income taxes (125,000) (257,000)
Income tax benefit 6,000 -
----------- -----------
NET LOSS $ (119,000) $ (257,000)
=========== ===========
LOSS PER SHARE
Basic and Diluted:
Loss from continuing operations $ (0.01) $ (0.05)
=========== ===========
Income from discontinued operations $ - $ 0.02
=========== ===========
Net loss per share $ (0.01) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 9,685,000 9,535,000
=========== ===========
See notes to condensed consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2007 AND 2006
(UNAUDITED)
Nine Months Ended August 31,
2007 2006
----------- -----------
REVENUE
Homebuilding $ 3,407,000 $ 6,092,000
----------- -----------
COSTS AND EXPENSES
Cost of sales, homebuilding 2,956,000 4,559,000
Selling, general and administrative 1,019,000 1,684,000
----------- -----------
3,975,000 6,243,000
----------- -----------
Loss from operations (568,000) (151,000)
OTHER INCOME (EXPENSE)
Interest income 5,000 6,000
Interest expense (316,000) (183,000)
Gain on sale of marketable securities 154,000 -
Litigation settlements - (15,000)
Other income (expense) (6,000) 14,000
----------- -----------
Loss before discontinued operations (731,000) (329,000)
and income taxes
INCOME FROM DISCONTINUED OPERATIONS (NOTE 8) - 150,000
----------- -----------
Loss before income taxes (731,000) (179,000)
Income tax benefit (expense) 6,000 (9,000)
----------- -----------
NET LOSS $ (725,000) $ (188,000)
=========== ===========
LOSS PER SHARE
Basic and Diluted:
Loss from continuing operations $ (0.08) $ (0.04)
=========== ===========
Income from discontinued operations $ - $ 0.02
=========== ===========
Net loss per share $ (0.08) $ (0.02)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic and Diluted 9,636,000 9,516,000
=========== ===========
See notes to condensed consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 2007 AND 2006
(UNAUDITED)
Nine Months Ended August 31,
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (725,000) $ (188,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation from continuing operations 30,000 29,000
Depreciation from discontinued operations - 9,000
Amortization of deferred charges 26,000 31,000
Increase in deferred charges (19,000) (42,000)
Gain on sale of assets of discontinued operations - (229,000)
Stock based compensation 50,000 37,000
Changes in operating assets and liabilities:
Accounts receivable (4,000) 119,000
Inventory 1,622,000 (3,618,000)
Deposits on land - 350,000
Prepaid expenses and other assets 7,000 (1,000)
Accounts payable, accrued expenses and other liabilities (134,000) (1,608,000)
Changes in assets of discontinued operations 33,000 144,000
Changes in liabilities of discontinued operations - (67,000)
----------- -----------
Net cash flows from operating activities 886,000 (5,034,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of long-lived assets of discontinued operations - 209,000
Purchase of equipment and software for continuing operations (5,000) (7,000)
Purchase of equipment and software for discontinued operations - (9,000)
----------- -----------
Net cash flows from investing activities (5,000) 193,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayment of) notes payable, net (1,263,000) 3,257,000
----------- -----------
Net cash flows from financing activities (1,263,000) 3,257,000
----------- -----------
Net decrease in cash and cash equivalents (382,000) (1,584,000)
Cash and cash equivalents at beginning of period 769,000 2,737,000
----------- -----------
Cash and cash equivalents at end of period $ 387,000 $ 1,153,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 383,000 $ 295,000
=========== ===========
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 August 31, 2007, the results of operations for the three and nine
months ended August 31, 2007 and 2006 and the cash flows for the nine
months ended August 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 nine
months ended August 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 $725,000 and used $382,000 net cash during the nine months ended
August 31, 2007. Additionally, the Company has significant completed and
work-in-process inventories of approximately $3.7 million and developed
lots of approximately $0.8 million which are collateral for the $3.1
million current maturities of notes payable. The Company's $6.5 million
credit facility expired on May 31, 2007. On July 16, 2007, the bank
extended the facility through December 31, 2007, but reduced borrowing
availability under the facility to $4.8 million and revised the terms to
limit future funding to the completion of existing speculative homes
under construction for which a sales contract providing for at least a
10% customer deposit has been signed. Maximum available borrowings are
reduced as each of these homes is sold. These conditions raise doubt as
to the ability of the Company to continue its normal business operations
as a going concern. As of August 31, 2007, the Company had $3,045,000 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. No assurance can be
given that management will be successful in achieving these plans.
3. INVENTORY
Inventory consists of the following as of August 31, 2007 and November
30, 2006:
August 31, November 30,
2007 2006
------------------ -------------------
Land and developed lots $ 2,416,000 $ 2,504,000
Work in process 2,330,000 1,589,000
Speculative and model homes 1,317,000 3,592,000
------------------ -------------------
$ 6,063,000 $ 7,685,000
================== ===================
The Company capitalizes interest on loans directly associated with real
estate development projects while under construction. During the nine
months ended August 31, 2007 and 2006, the Company capitalized $93,000
and $143,000 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. On July 16,
2007, the bank reduced borrowing availability under the facility to $4.8
million and revised the terms to limit future funding to the completion
of existing speculative homes under construction for which a sales
contract providing for at least a 10% customer deposit has been signed.
As each of these homes is sold maximum available borrowings are reduced.
The credit facility has been extended through December 31, 2007, and as
of August 31, 2007, $3.1 million was outstanding under the facility.
Notes payable also includes a $1 million mortgage note from National
City Bank due in September 2008. The mortgage note is secured by the
land purchased in the Magnolia Plantation subdivision. The annual
interest rate on both the notes payable is the bank's prime rate plus 1%
(9.25% at August 31, 2007).
Future principal maturities of notes payable are as follows:
Twelve months ending August 31,
2008 $ 3,146,000
2009 961,000
-----------------
$ 4,107,000
=================
8
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SHAREHOLDERS' EQUITY
During the three and nine months ended August 31, 2007, 75,755 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 the three and nine months ended August 31, 2007
amounted to $12,000 and $38,000 respectively, 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 August 31, 2007 827,000 0.35
==================================
----------------------------------
Exercisable as of August 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.
The weighted average grant date fair value of the options granted during
the nine month period ended August 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 2.60 yrs. $ 0.35 $ 1,350 522,000 $ 0.43 $ 1,350
9
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net 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 $137,000. The
following table reflects comprehensive income (loss) for the nine months
ended August 31, 2007 and 2006:
Nine months ended August 31,
----------------------------
2007 2006
----------- -----------
Net loss ($ 725,000) ($ 188,000)
Other comprehensive income (loss) (116,000) 89,000
----------- -----------
Comprehensive loss ($ 841,000) ($ 99,000)
=========== ===========
7. LOSS PER COMMON SHARE
The following table reconciles the numerators and denominators of the
basic and diluted loss per share computations:
Three months ended Nine months ended
August 31, August 31,
-------------------- ----------------------
2007 2006 2007 2006
--------- --------- --------- -----------
Net loss - (numerator) $(119,000) $(257,000) $(725,000) $ (188,000)
========= ========= ========= ===========
BASIC AND DILUTED:
Weighted average shares
outstanding - (denominator) 9,685,000 9,535,000 9,636,000 9,516,000
========= ========= ========= ===========
Loss per common share $ (0.01) $ (0.03) $ (0.08) $ (0.02)
========= ========= ========= ===========
The effects of 827,000 and 703,800 stock options outstanding as of
August 31, 2007 and 2006, respectively, have been excluded from common
stock equivalents because their effect on loss per share would be
anti-dilutive.
10
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 nine months ended August 31, 2006, are
summarized below:
Three Months Ended Nine Months Ended
August 31, 2006 August 31, 2006
--------------- ---------------
Net revenues $ 130,000 $ 509,000
Cost of good sold 70,000 277,000
--------------- ---------------
Gross profit 60,000 232,000
Operating expense (98,000) (307,000)
Gain on sale of assets 229,000 229,000
Other iexpense (4,000) (4,000)
--------------- ---------------
Income from discontinued operations $ 187,000 $ 150,000
=============== ===============
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31,
2007 AND 2006
REVENUES: Revenues for the three months ended August 31, 2007 were
$2,181,000 compared to $1,337,000 for the three months ended August 31,
2006. The increase is primarily attributable to an increase in the
number of homes delivered, as there were four home deliveries in the
quarter ended August 31, 2007 compared to three in the quarter ended
August 31, 2006. Further, one of the three homes delivered in the third
quarter of 2006 was a home built on a buyer's lot with revenue
recognized by the percentage-of-completion method; and nearly all of the
revenue from the home had been recognized in prior quarters. Revenues
for the nine months ended August 31, 2007 decreased to $3,407,000 from
$6,092,000 for the nine months ended August 31, 2006. The reduction is
due to fewer home deliveries and discounted sale prices on inventory
homes. In the first nine months of fiscal 2007 there were six deliveries
compared to ten in the first nine months of the prior fiscal year.
Profit margins were 13% in both quarters ending August 31, 2007 and
2006, and 13% and 25% in the nine months ending August 31, 2007 and
2006, respectively.
COST OF SALES: Cost of sales was $1,888,000 for the quarter ended August
31, 2007 compared to $1,162,000 for the quarter ended August 31, 2006.
The increase in cost of goods sold was attributable to greater sales
incentives and more home deliveries than in the same quarter of the
prior year. Cost of goods sold was $2,956,000 for the nine months ended
August 31, 2007, compared to $4,559,000 for the nine months ended August
31, 2006. The reduction in cost of sales for the nine-month period was
caused by fewer home deliveries than in the first nine months of 2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended August 31, 2007 were
$347,000 compared to $492,000 for the quarter ended August 31, 2006.
Selling, general and administrative expenses for the nine months ended
August 31, 2007 were $1,019,000 compared to $1,684,000 for the nine
months ended August 31, 2006. The decrease in expenses for both the
three-month and nine-month periods was primarily attributable to
reductions in personnel and marketing expenses. In addition, certain
expenses incurred during the nine months ended August 31, 2006, in
connection with developing new model designs and the Company's Web site,
did not recur in the nine months ended August 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
$1,000 and $2,000 for the quarters ended August 31, 2007 and 2006,
respectively, and $5,000 and $6,000 for the nine-month periods ended
August 31, 2007 and 2006, respectively. Currently, cash is being used in
operating activities causing interest income to decline.
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 $86,000 for the three months
ended August 31, 2007 compared to $101,000 for the three months ended
August 31, 2006. The reduction in quarterly interest expense is due to
the deliveries of three homes from completed inventory during the
quarter ended August 31, 2007. For the nine months ended August 31, 2007
and 2006, interest expense amounted to $316,000 and $183,000,
respectively. The increase is attributable to a greater number of homes
in completed inventory throughout the nine months ended August 31, 2007.
During the three and nine months ended August 31, 2007, we capitalized
$39,000 and $93,000 in interest, respectively.
12
GAIN ON SALE OF MARKETABLE SECURITIES: We exercised warrants with
respect to approximately 89,000 shares of CorVu Company common stock and
sold the shares for a net gain of $17,000 in the quarter ended August
31, 2007. In the nine-month period ended August 31, 2007, we recognized
$154,000 gain on the sale of marketable securities. The securities sold
represented our entire holding of available-for-sale equity securities.
SALES ACTIVITY AND BACKLOG:
Contract Number
Backlog of Homes
----------- -----------
Backlog as of November 30, 2006 0 0
Less: Homes delivered during the
nine months ended August 31, 2007 (3,506,000) (6)
Plus: New contracts signed during the
nine months ended August 31, 2007 4,001,000 7
----------- -----------
Backlog as of August 31, 2007 $ 495,000 1
=========== ===========
We are currently constructing homes in the community of Pointe West,
located in Vero Beach, Florida. In addition, we continue to promote our
Custom Home Division, in which the Company seeks to act as the contract
builder for individual landowners. In December 2005, we acquired an
undeveloped ten acre parcel in Vero Beach, Florida, on which we
anticipate starting construction of 21 single family homes during fiscal
year 2008, subject to availability of financing.
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 $725,000 during the nine months ended August 31, 2007. Additionally,
we have significant completed and work-in-process inventories of
approximately $3.7 million and developed lots of approximately $0.8
million which are collateral for the $3.1 million current maturities of
notes payable. Our $6.5 million credit facility expired on May 31, 2007.
On July 16, 2007, the bank extended the facility through December 31,
2007, but reduced borrowing availability under the facility to $4.8
million and revised the terms to limit future funding to the completion
of existing speculative homes under construction for which a sales
contract providing for at least a 10% customer deposit has been signed.
Maximum available borrowings are therefore reduced as each of these
homes is sold.
To sustain operations, our plans include targeted marketing for new home
sales, purchase incentives for the two remaining inventory homes,
renegotiating subcontractor pricing, curtailing expenses, and raising
additional debt or equity capital from external sources. No assurances
can be given that management will be successful in achieving these
plans.
13
CASH FLOWS FROM OPERATING ACTIVITIES
We generated $886,000 from operating activities during the nine months
ended August 31, 2007, and used $5,034,000 during the nine months ended
August 31, 2006. The increase in cash flows from operating activities is
due primarily to decreasing inventory through sales, combined with
reductions in homebuilding activities and curtailing expenses whenever
possible.
CASH FLOWS FROM INVESTING ACTIVITIES
During the nine months ended August 31, 2007, $5,000 was used in
investing activities for the purchase of software. $193,000 was
generated from investing activities during the nine months ended August
31, 2006 primarily from the sale of assets of eCalton.
CASH FLOWS FROM FINANCING ACTIVITIES
We have used proceeds from current year sales to pay down $1,263,000 of
the construction line of credit during the nine months ended August 31,
2007, compared to draws on the construction line of credit of $3,257,000
during the nine months ended August 31, 2006.
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 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. On July 16, 2007, the bank reduced borrowing
availability under the facility to $4.8 million and revised the terms to
limit future funding to the completion of existing speculative homes
under construction for which a sales contract providing for at least a
10% customer deposit has been signed. Maximum available borrowings are
reduced as each of these homes is sold. The bank extended the credit
facility through December 31, 2007, and as of August 31, 2007, $3.1
million was outstanding under the facility.
In December 2005, we financed the purchase of a ten acre undeveloped
land parcel in Vero Beach, Florida through a $1 million mortgage note
from National City Bank and working capital. Interest on the note, which
is secured by the land purchased, accrues at a rate equal to the prime
rate plus one percent (1%) per annum.
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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 August 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.
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 August 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
10.48 - Builder Line of Credit Revised Commitment dated July 16, 2007
between National City Bank and Homes by Calton, LLC
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: October 11, 2007
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