Item 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
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Calton, Inc. - Recent Material EventResults
of Operations for the Three and Six Months ended May 31, 2008 and
2007
Revenues: Revenues
for the three months ended May 31, 2008 were $982,000 compared to $524,000 for
the three months ended May 31, 2007. Revenues for the six
months ended May 31, 2007 increased to $1,767,000 from $1,226,000 for the six
months ended May 31, 2007. The increase for both the quarter and six
months is attributable to revenue recognized on the percentage-of-completion
basis on a custom home begun during the first quarter of fiscal 2008 and
amortization of deferred revenue related to sale-leaseback
agreements. There was one home delivery in each quarter ended May 31,
2008 and May 31, 2007, respectively; and two home deliveries in the first six
months of fiscal years 2008 and 2007, respectively. Our profit
margins were 13% and 10% in the three months ended May 31, 2008 and 2007,
respectively, and 10% and 13% in the six months ended May 31, 2008 and 2007,
respectively.
Cost of Sales: Cost
of sales was $859,000 for the quarter ended May 31, 2008 compared to $470,000
for the quarter ended May 31, 2007; and $1,590,000 for the six months ended May
31, 2008 compared to $1,068,000 for the six months ended May 31,
2007. The increase in cost of goods sold for both the quarter and the
six month period was attributable to costs recognized according to the
percentage-of-completion method for the custom home under construction and
amortization of deferred costs related to sale-leaseback
agreements.
There
were no impairment charges on our inventory for the three- or six-month periods
ended May 31, 2008 and 2007. However, negative market conditions in
the homebuilding industry, interest rate levels, and our plans to offer sales
incentives in order to liquidate inventory in fiscal 2008 might result in future
impairment charges.
Selling, General and Administrative
Expenses: Selling, general and administrative expenses for the
quarter ended May 31, 2008 were $317,000 compared to $351,000 for the quarter
ended May 31, 2007. Selling, general and administrative expenses for
the six months ended May 31, 2008 and 2007 were $668,000 and $671,000,
respectively.
Interest
Income: Interest income was $4,000 and $2,000 for the quarters
ended May 31, 2008 and 2007, respectively. Interest income in 2007
was derived principally from interest on depository accounts and money-market
type accounts. In 2008 we closed these accounts to fund operating
activities, and therefore, received nominal interest income from these
accounts. The interest income realized in the quarter ended May 31,
2008 was interest earned on impact fees prepaid to Indian River County in 2005
and refunded to us in March 2008.
Interest
Expense: Interest is incurred on real estate loans and, to the
extent required under generally accepted accounting principles, capitalized in
real estate inventory. The remaining interest is expensed as
incurred. Interest expense amounted to $49,000 for the three months
ended May 31, 2008, compared to $117,000 for the three months ended May 31,
2007. Interest expense amounted to $115,000 and $230,000 for
the six months ended May 31, 2008 and 2007, respectively. The
reduction in quarterly interest is due to the reduction of our outstanding
debt. During the three and six months ended May 31, 2008, we
capitalized $0.00 and $2,000 in interest, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
General
Our
consolidated financial statements are prepared on a going concern basis, which
assumes that we will realize our assets and discharge our liabilities in the
normal course of business. As reflected in the consolidated financial
statements, we incurred losses of $238,000 and $603,000 during the three months
and six months ended May 31, 2008, respectively. Several factors
continue to weigh on the housing industry, including an oversupply of new and
resale homes available for sale, foreclosure activity, heightened competition
for home sales, turmoil in the mortgage finance and credit markets, diminished
real estate speculation, and decreased consumer confidence in purchasing
homes. Our results for the three and six months ended May 31, 2008
reflect the impact of these difficult conditions.
We
believe the fundamentals that support homebuyer demand in our local construction
area, in the long-term, remain solid and the current market conditions will
moderate over time; however, we cannot predict the duration and severity of the
current market conditions. We continue to adjust our operations in
response to market conditions by reducing unsold inventory and lowering
expenses. We are also working to reduce the costs of constructing homes,
although in many cases, cost savings will not be realized until future
periods.
Additionally,
we have completed and work-in-process inventories of approximately $1.6 million
and developed lots of approximately $0.8 million, which are collateral for the
credit facility with a $1.5 million balance at May 31, 2008. The
facility, which was to expire in July 2008, was renewed on June 26, 2008, and
limits future funding to the completion of the three speculative homes under
construction. Maximum available borrowings are reduced as each speculative home
or developed lot is sold. The maximum amount available under the
current facility, which does not expire until July 2009, is $1.9
million. We also have a mortgage note of nearly $1 million from
National City Bank, secured by the land purchased in the Magnolia Plantation
subdivision, due in September 2008. Since March 2007, we have been
making monthly payments of principal and interest and have reduced the mortgage
principal by $90,000. We plan to renew the note with the same terms
as the current note, if possible.
Under the
terms of the credit facilities in effect since July 2007, we have significantly
reduced debt and cut debt-service costs. However, debt repayment and
limited ability to borrow additional funds have negatively impacted cash flows.
We have not generated sufficient cash flow from operations to sustain operations
and have, therefore, obtained three loans for a total amount of $250,000 from
AFP Enterprises, Inc., a company owned by Anthony J. Caldarone, our President
and Chief Executive Officer, Maria F. Caldarone, our Executive Vice President,
and other members of the Caldarone family. These loans are secured by
two mortgages of $75,000 each on unencumbered lots in the Pointe West
development, and a mortgage of $100,000 subordinate to the mortgage held by
National City Bank on a completed spec home at Pointe West. National
City Bank released the subject properties from the bank’s spreader mortgage and
the notes were executed on July 8, 2008. The notes are payable on
demand and require monthly payments of interest only. The interest
rate is equal to the Prime Rate, as published in the Money Rates column of the
Wall Street Journal, plus 1%. The initial rate of interest is
6%.
These
conditions raise significant doubt as to our ability to continue our normal
business operations as a going concern. As of May 31, 2008, we had $1.25
million in working capital. However, this working capital includes
significant inventory of homes and developed and undeveloped land which must be
liquidated in order to cover operating costs and debt-service
obligations. Our ability to meet our debt service and other
obligations will depend upon our future performance. While no
assurance can be given that we will be successful, we currently have no plan to
discontinue operations.
Cash Flows from Operating
Activities
Our cash
flows from operating activities during the six months ended May 31, 2008, were
$376,000, produced primarily from a reduction in inventory. We used
$210,000 for operations during the six months ended May 31, 2007.
Cash Flows from Financing
Activities
We have
used proceeds from current year sales to pay down $808,000 of the construction
line of credit during the six months ended May 31, 2008, compared to $72,000
during the six months ended May 31, 2007.
As a
result of the above cash flow activities, cash decreased from $578,000 at
November 30, 2007 to $146,000 at May 31, 2008. Total working capital
decreased from $1,829,000 at November 30, 2007 to $1,253,000 at May 31,
2008.
COMMITMENTS,
GUARANTEES AND OFF BALANCE SHEET ITEMS
Loan
Agreement
We
currently maintain a construction line of credit with National City Bank
(formerly Harbor Federal Savings Bank). Interest on advances, which
are secured by a mortgage on homebuilding properties, accrues at a rate equal to
the prime rate plus one percent (1%) per annum. Effective May 29, 2008,
the bank renewed the credit facility and extended the maturity date of the note
to July 1, 2009. The credit facility provides funding for
construction on our three unfinished speculative homes. As each spec
home or developed lot is sold, maximum available borrowings are
reduced. As of May 31, 2008, $1.5 million was outstanding under the
facility.
In
December 2005, we financed the purchase of a ten-acre undeveloped land parcel in
Vero Beach, Florida through a $1 million mortgage note from National City Bank
and working capital. Interest on the note, which is secured by the
land purchased, accrues at a rate equal to the prime rate plus one percent (1%)
per annum. As of May 31, 2008, $1 million was outstanding under the
note, which matures in September 2008.
SENSITIVE
ACCOUNTING ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
notes. Significant estimates include management’s estimate of the
carrying value of homebuilding inventories, estimated warranty costs charged to
cost of sales, estimated construction costs used to determine the percentage of
completion of fixed price construction contracts for revenue recognition
purposes and the establishment of reserves for contingencies. Actual
results could differ from those estimates. Critical accounting
policies relating to certain of these items are described in the Company’s
Annual Report on Form 10-KSB for the year ended November 30, 2007. As
of May 31, 2008, there have been no material additions to our critical
accounting policies and there have been no changes in the application of
existing accounting principles.
As of the
end of the period covered by this report, the we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our Chairman and Chief Executive
Officer, along with our Acting Chief Financial Officer, who concluded that our
disclosure controls and procedures were effective as of the date of the
evaluation. There were no significant changes in our internal controls during
the quarter ended May 31, 2008 that have materially affected, or are reasonably
likely to have materially affected, our internal controls subsequent to the date
we carried out our evaluation.
Disclosure
controls and procedures are controls and other procedures that are designed to
provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange
Act”) is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to provide reasonable assurance that information required to
be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Acting
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
PART
II: OTHER INFORMATION
We held
our 2008 Annual Meeting of Shareholders (the “Meeting”) on May 7,
2008. At the Meeting, shareholders were asked to elect Frank Cavell
Smith, Jr. as a director for a four-year term expiring at the 2012 annual
meeting. The results of the voting were as follows:
The
remaining terms of the other directors, J. Ernest Brophy, Anthony J. Caldarone,
Mark N. Fessel, Kenneth D. Hill and John G. Yates, continue to be in
effect.
On July
14, 2008, Aidman, Piser & Company, P.A. (“Aidman Piser”) resigned as our
independent registered public accounting firm. Aidman Piser’s
practice was acquired by Cherry, Bekaert & Holland, L.L.P. (“Cherry
Bekaert”) in a transaction pursuant to which Aidman Piser merged its operations
into Cherry Bekaert and certain of the professional staff and shareholders of
Aidman Piser joined Cherry Bekaert either as employees or partners of Cherry
Bekaert and will continue to practice as members of Cherry
Bekaert. The Audit Committee of our Board of Directors is currently
evaluating whether to engage Cherry Bekaert as our independent registered public
accounting firm for the fiscal year ending November 30, 2008, and we expect to
make an announcement with regard to this matter in the near future.
The
report of Aidman Piser regarding our financial statements for the past two
fiscal years ended November 30, 2007 and 2006 did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles, except that substantial doubt
was raised as to our ability to continue as a going concern. During
the two most recent fiscal years and during the period from the end of the most
recently completed fiscal year through July 14, 2008, the date of resignation,
there were no disagreements with Aidman Piser on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Aidman
Piser would have caused it to make reference to such disagreements in its
reports.
We
provided Aidman Piser with a copy of this Quarterly Report on Form 10-Q prior to
its filing with the Securities and Exchange Commission and requested that Aidman
Piser furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements set forth above in this
Item 5 and, if it does not agree, the respects in which it does not
agree. A copy of the letter, dated July 14, 2008, is filed as Exhibit
16.1 to this Report.
Item
6. EXHIBITS
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.
Date: July
14, 2008
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