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, 2004
[ ] 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)
2013 INDIAN RIVER BLVD.
VERO BEACH, FLORIDA 32960
(Addresses of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (772) 794-1414
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
--- ---
As of October 14, 2004, 9,336,646 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
Consolidated Balance Sheets at
August 31, 2004 (Unaudited) and November 30, 2003............ 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended August 31, 2004 and August 31, 2003....... 4
Consolidated Statements of Operations (Unaudited) for the
Nine Months Ended August 31, 2004 and August 31, 2003........ 5
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended August 31, 2004 and August 31, 2003........ 6
Notes to Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 14
Item 3. Controls and Procedures...................................... 18
PART II. OTHER INFORMATION
Item 5. Other Information............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 19
SIGNATURES ............................................................. 20
- --------------------------------------------------------------------------------
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 continued operating losses and their effect on liquidity, 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, Internet and technology industries 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 the risks described under the caption "Certain Risks" in the Company's
Annual Report on Form 10-KSB for the fiscal year ended November 30, 2003.
- --------------------------------------------------------------------------------
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
2004 2003
------------ ------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 1,949,000 $ 1,821,000
Accounts receivable, net of allowance for doubtful accounts of $6,000 86,000 101,000
Inventory 4,290,000 4,335,000
Deposits on land 312,000 --
Prepaid expenses and other current assets 253,000 95,000
------------ ------------
Total current assets 6,890,000 6,352,000
------------ ------------
Deferred charges 134,000 233,000
Property and equipment, net 51,000 52,000
------------ ------------
Total assets $ 7,075,000 $ 6,637,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued expenses and other liabilities $ 1,981,000 $ 1,228,000
Notes payable 2,273,000 1,843,000
------------ ------------
Total current liabilities 4,254,000 3,071,000
------------ ------------
Noncurrent portion of notes payable -- 1,098,000
Commitments and contingent liabilities (Note 9) -- --
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
9,337,000 and 9,240,000 shares outstanding at August 31, 2004
and November 30, 2003, respectively 467,000 462,000
Additional paid-in capital 11,557,000 12,185,000
Retained earnings (deficit) (1,731,000) (1,913,000)
Less cost of shares held in treasury, 1,361,000 and 1,457,000 shares
as of August 31, 2004 and November 30, 2003, respectively (7,602,000) (8,266,000)
Accumulated other comprehensive income 130,000 --
------------ ------------
Total shareholders' equity 2,821,000 2,468,000
------------ ------------
Total liabilities and shareholders' equity $ 7,075,000 $ 6,637,000
============ ============
See notes to consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
REVENUE
Homebuilding and consulting $ 3,193,000 $ --
Technical staffing -- 77,000
Website design and implementation 158,000 111,000
----------- -----------
3,351,000 188,000
----------- -----------
COSTS AND EXPENSES
Cost of sales
Homebuilding 2,598,000 --
Internet development/technical staffing 72,000 104,000
Selling, general and administrative 628,000 576,000
----------- -----------
3,298,000 680,000
----------- -----------
Income/(loss) from operations 53,000 (492,000)
----------- -----------
OTHER (EXPENSE) INCOME
Interest income 2,000 3,000
Interest expense (3,000) --
Litigation settlements 5,000 25,000
Other (expense) income (4,000) 17,000
----------- -----------
-- 45,000
----------- -----------
NET INCOME/(LOSS) $ 53,000 $ (447,000)
=========== ===========
INCOME/(LOSS) PER SHARE
Basic $ 0.01 $ (0.09)
=========== ===========
Diluted $ 0.01 $ (0.09)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic shares 9,299,000 4,846,000
Diluted shares 9,400,000 4,846,000
See notes to consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
REVENUE
Homebuilding and consulting $ 7,753,000 $ --
Technical staffing -- 440,000
Website design and implementation 475,000 361,000
Credit card loyalty program revenue 1,000 13,000
----------- -----------
8,229,000 814,000
----------- -----------
COSTS AND EXPENSES
Cost of sales
Homebuilding 6,271,000 --
Internet development/technical staffing 218,000 514,000
Credit card loyalty program 1,000 --
Selling, general and administrative 1,766,000 1,845,000
----------- -----------
8,256,000 2,359,000
----------- -----------
Loss from operations (27,000) (1,545,000)
----------- -----------
OTHER (EXPENSE) INCOME
Interest income 6,000 18,000
Loss on disposal of long-lived assets -- (13,000)
Realized gain on sale of marketable securities 228,000 --
Interest expense (26,000) --
Litigation settlements (15,000) (13,000)
Other income 15,000 23,000
----------- -----------
208,000 15,000
----------- -----------
NET INCOME/(LOSS) $ 181,000 $(1,530,000)
=========== ===========
INCOME/(LOSS) PER SHARE
Basic $ 0.02 $ (0.32)
=========== ===========
Diluted $ 0.02 $ (0.32)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic shares 9,268,000 4,712,000
Diluted shares 9,405,000 4,712,000
See notes to consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 181,000 $(1,530,000)
Adjustments to reconcile net income/(loss) to net cash used in
operating activities:
Realized gain on sale of marketable securities (228,000) --
Depreciation and amortization 124,000 36,000
Loss on disposal of long-lived assets -- 13,000
Stock based compensation 42,000 20,000
Changes in operating assets and liabilities:
Accounts receivable 15,000 157,000
Inventory 45,000 (4,847,000)
Deposits on land (312,000) --
Prepaid expenses and other assets (28,000) (251,000)
Accounts payable, accrued expenses and other liabilities 753,000 (220,000)
----------- -----------
Net cash flows from operating activities 592,000 (6,622,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts from holdback escrow account -- 88,000
Purchase of equipment and software (24,000) --
Proceeds from the sale of marketable securities 228,000 --
----------- -----------
Net cash flows from investing activities 204,000 88,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from construction financing 430,000 3,529,000
Proceeds from sale of common stock -- 1,080,000
Payments on notes payable (1,098,000) --
----------- -----------
Net cash flows from financing activities (668,000) 4,609,000
----------- -----------
Net increase/(decrease) in cash and cash equivalents 128,000 (1,925,000)
Cash and cash equivalents at beginning of period 1,821,000 3,286,000
----------- -----------
Cash and cash equivalents at end of period $ 1,949,000 $ 1,361,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized $ 28,000 --
Cash paid for income taxes -- --
See notes to consolidated financial statements.
6
CALTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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,
2004, the results of operations for the three and nine months ended
August 31, 2004 and 2003 and the cash flows for the nine months ended
August 31, 2004 and 2003 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 1, 2004. Operating results for the three and nine months ended
August 31, 2004 are not necessarily indicative of the results that may
be expected for the year ending November 30, 2004.
2. INVENTORY
Inventory consists of the following as of August 31, 2004 and November
30, 2003:
August 31, Nov. 30,
2004 2003
---------- ----------
Developed land $ 799,000 $1,829,000
Work in process 3,168,000 1,593,000
Speculative and model homes 323,000 913,000
---------- ----------
$4,290,000 $4,335,000
========== ==========
The Company capitalizes interest on loans directly associated with real
estate development projects. During the three and nine month periods
ended August 31, 2004, the Company capitalized $21,000 and $51,000,
respectively.
7
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of August 31, 2004
and November 30, 2003:
August 31, Nov. 30,
2004 2003
--------- ---------
Computer equipment and furniture $ 156,000 $ 132,000
Leasehold improvements 65,000 65,000
Other 3,000 3,000
--------- ---------
224,000 200,000
Less: Accumulated Depreciation (173,000) (148,000)
--------- ---------
$ 51,000 $ 52,000
========= =========
4. ACCOUNTS PAYABLE, OTHER ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, other accrued expenses and other liabilities consist
of the following as of August 31, 2004 and November 30, 2003:
August 31, Nov. 30,
2004 2003
---------- ----------
Accounts payable, trade $ 321,000 $ 125,000
Other accrued expenses 231,000 229,000
Customer deposits 1,272,000 694,000
Deferred revenue 157,000 180,000
---------- ----------
$1,981,000 $1,228,000
========== ==========
5. NOTES PAYABLE
Notes payable consists of borrowings under a $6.5 million demand
revolving line of credit with Harbor Federal Savings Bank. Inventories
and related homebuilding assets secure the credit facilities. The annual
interest rate is the bank's prime rate plus 1% (5.25% at August 31,
2004).
6. SHAREHOLDERS' EQUITY ACTIVITY
During the three and nine months ended August 31, 2004, 38,000 and
96,000 shares of treasury stock, respectively, 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. Compensation expense for the three and nine-month
periods ended August 31, 2004, amounted to $12,000 and $42,000
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.
8
OTHER COMPREHENSIVE INCOME (LOSS):
Under Statements on Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income, the Company is required to display
comprehensive income and its components as part of its full set of
financial statements. Comprehensive income comprises net income (loss)
and other comprehensive income (loss) items. Other comprehensive income
(loss) during the periods presented represents the changes in unrealized
gains and losses on available for sale securities. The following table
reflects comprehensive income (loss) for the three and nine-month
periods ended August 31, 2004 and 2003:
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) $ 53,000 ($ 447,000) $ 181,000 ($1,530,000)
Other comprehensive items (133,000) -- 130,000 --
----------- ----------- ----------- -----------
Comprehensive income (loss) ($ 80,000) ($ 447,000) $ 311,000 ($1,530,000)
=========== =========== =========== ===========
7. NET 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 Nine Months Ended
August 31, August 31,
---------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
$ 53,000 $ (447,000) $ 181,000 $(1,530,000)
=========== =========== =========== ===========
Weighted average shares
outstanding - (denominator) 9,299,000 4,846,000 9,268,000 4,712,000
=========== =========== =========== ===========
Net income/(loss) per common
share $ 0.01 $ (0.09) $ 0.02 $ (0.32)
=========== =========== =========== ===========
Weighted average shares
outstanding 9,299,000 4,846,000 9,268,000 4,712,000
101,000 - 137,000 -
----------- ----------- ----------- -----------
Adjusted weighted average
shares - (denominator) 9,400,000 4,846,000 9,405,000 4,712,000
=========== =========== =========== ===========
$ 0.01 $ (0.09) $ 0.02 $ (0.32)
=========== =========== =========== ===========
The effects of 707,400 stock options outstanding as of August 31, 2004
have been excluded from common stock equivalents because their effect on
income per share would be anti-dilutive. The effects of 735,400 stock
options outstanding as of August 31, 2003 have been excluded from common
stock equivalents because their effect on loss per share would be
anti-dilutive.
9
8. SEGMENT REPORTING
The Company accounts for reportable segments using the "management
approach". The management approach focuses on disclosing financial
information that the Company's management uses to make decisions about
the Company's operating matters. During the operating periods presented
in the accompanying financial statements, the Company operated in four
identifiable business segments as follows:
HOMEBUILDING AND CONSTRUCTION SERVICES
Homes by Calton, LLC ("Homes by Calton"), which commenced operations in
the fourth quarter of fiscal 2003, constructs single-family residential
homes in the state of Florida. Revenues and related profits from the
homebuilding segment are recognized using the full accrual method, as
the term is defined in Statements on Financial Accounting (SFAS) No. 66.
Revenue is recognized under the full accrual method when the earning
process of constructing the home has been completed as follows:
o The Company recognizes revenue at the time of closing
and title transfer. Prior to closing, the customer
performs walkthroughs of the home and any other
procedures that they consider necessary to accept the
home. The Company remedies any issues with its customers
prior to closing. The Company does not provide customer
financing.
o In all instances, the buyer's commitment to repay
financing obtained to purchase the property is between
the buyer and the buyer's lender. The Company does not
provide customer financing and there is no recourse
against the Company for non-payment by the buyers.
o The risks and rewards of ownership of the home pass to
the customer at closing and the Company has no
substantial continuing involvement with the property.
INTERNET DEVELOPMENT AND STAFFING
The Internet development division of eCalton.com, Inc. ("eCalton")
provides Internet consulting services and develops comprehensive
Internet-based solutions for its clients. Its mission is to help
businesses and organizations optimize their competitive business
advantages through strategic use of the Internet and related
technologies. This division of eCalton provides its services to medium
and large size companies in various industries, as well as one prime
vertical market - the homebuilding industry. Revenues from the Internet
development division are derived under short-term time-and-material and,
to a lesser extent, fixed-price contracts with principally commercial
business customers. Internet development revenues under
time-and-material contracts are recognized upon acceptance by the
customer of the website. Internet development revenues under fixed-price
contracts are recognized as the contract progresses, using the
cost-to-cost method to determine percentage of completion.
In the fourth quarter of fiscal 2003, the Company wound down the
technical staffing division of eCalton due to the severe downturn in
economic conditions in its regional market of Houston, Texas. Revenues
for this division were generated under contracts with its customers to
provide staffing services. The Company charged hourly rates for the
services
10
of its employees. The Company recorded revenues as the services were
performed, based upon service delivery evidence provided by its
employees that were directly engaged in the service. The Company did not
report the wind down of the technical staffing division as a
discontinued operation as, in accordance with FAS 141 - paragraph 41,
the division's operations and cash flows could not be clearly
distinguished operationally and for financial reporting purposes from
the rest of the entity. In addition, the Company previously concluded
that the staffing activities did not rise to the level of an operating
segment, as that term is defined in paragraph 10 of FAS 131, since
discrete financial information was not fully available. The Company does
not anticipate incurring any restructuring or impairment charges,
including severance or similar employment separation charges, as a
result of the wind down of the division's operations.
CREDIT CARD LOYALTY BUSINESS
PrivilegeONE Networks, LLC ("PrivilegeONE") was formed to develop and
implement the PrivilegeONE Loyalty Program. The patent pending program
was developed to aggregate disparate entities under the PrivilegeONE
umbrella to create customer loyalty and retention to the individual
entity through the issuance of co-branded credit cards and membership
cards. To introduce the program, PrivilegeONE elected the initial target
customer base of automobile dealers throughout the United States. This
segment recognizes revenue upon receipt of its proportionate share of
finance charges incurred on existing PrivilegeONE credit card accounts
and upon receipt of fees associated with new card issuances.
CORPORATE
The corporate segment provides senior management, accounting, human
resources and investor relations services to all wholly-owned
subsidiaries of Calton, Inc.
11
Operating results, by industry segment, for the nine months ended August
31, 2004 and 2003 are as follows (in thousands):
NINE MONTHS ENDED AUGUST 31, 2004
------------------------------------------------------------------------
Credit Card Homebuilding
Internet Loyalty and Construction Total
Development Business Services Corporate Company
Total revenues $ 475 $ 1 $ 7,753 $ - $ 8,229
Total cost of revenues 218 1 6,271 6,490
Depreciation and amortization 3 - 101 20 124
Income/(loss) from operations 67 (3) 836 (927) (27)
Interest income/(expense), net - - (26) 6 (20)
Net income/(loss) 67 (3) 809 (692) 181
Total assets $ 218 $ 1 $ 6,110 $ 746 $ 7,075
NINE MONTHS ENDED AUGUST 31, 2003
------------------------------------------------------------------------
Internet Credit Card Homebuilding
Development Loyalty and Construction Total
and Staffing Business Services Corporate Company
Total revenues $ 801 $ 13 $ - $ - $ 814
Total cost of revenues 511 3 - - 514
Depreciation and amortization - - - 36 36
Loss from operations (109) (473) - (963) (1,545)
Interest income - - - 18 18
Net loss (148) (474) - (908) (1,530)
Total assets $ 155 $ 5 $ - $ 6,623 $ 6,783
9. COMMITMENTS AND CONTINGENT LIABILITIES
WARRANTY COMMITMENTS ON HOMES BY CALTON
The Company provides a basic limited warranty on workmanship and
materials for all homes for a period of one year. The Company estimates
the costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time the product
revenue is recognized. Factors that affect the Company's warranty
liability include the number of homes sold, historical and anticipated
rates of warranty claims and average cost per claim. Estimated future
warranty costs are charged to cost of sales in the period when the
revenues from home closings are recognized. Such estimated warranty
costs are 0.5% of total revenue. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amount as
necessary.
12
Following is the Company's warranty reserve activity for the nine months
ended August 31, 2004:
Balance at beginning of period $ 11,000
Reserves 38,000
Payments (2,000)
--------------
Balance at end of period $ 47,000
==============
LAND PURCHASE AGREEMENTS
In April 2004, the Company entered into a rolling option contract to
purchase forty-one (41) developed, golf course lots in the Pointe West
development located in Vero Beach, Florida. If the Company does not
perform under the contract, its liability is limited to the deposit
money held by the seller. The total deposit required is $300,000. As of
August 31, 2004, the full deposit has been made and two lots have been
purchased under the land purchase agreement.
In December 2003, the Company entered into a contract to purchase eight
(8) developed lots in the Amelia Plantation development located in Vero
Beach, Florida. If the Company does not perform under the contract, its
liability is limited to the deposit money held by the seller. The full
deposit of $24,000 was made during the nine months ended August 31,
2004. Four lots have been purchased under this Land Purchase Agreement
as of August 31, 2004.
The Company anticipates purchasing all of the lots it has under its
existing land contracts. The estimated cost to the Company to perform
all of its obligations under the existing land contracts is
approximately $4.4 million.
10. SUBSEQUENT EVENTS
In September 2004, Hurricanes Frances and Jeanne hit Vero Beach,
Florida, causing the President of the United States to declare a State
of Emergency for Indian River County. Under the State of Emergency there
were mandatory evacuations and limited, if any, access to various areas
of the county.
The Company's corporate headquarters were hit by a tornado during
Hurricane Frances rendering the space uninhabitable. Immediately after
the storm, eCalton's Internet Development operation was relocated to
office space in Melbourne, Florida. eCalton was operational within days
of Hurricane Frances and remained operational through the majority of
Hurricane Jeanne.
The Company's homebuilding operation is experiencing significant delays
in utility installations and obtaining inspections, as well as modest
delays in the procurement of materials and availability of
subcontractors. As a result, Homes by Calton is currently anticipating
four to six-week delays in deliveries of homes currently under
construction. The homes that were under construction during both
Hurricane Frances and Hurricane Jeanne sustained minimal damage.
The Company is currently in the process of moving its corporate
headquarters to new office space. As with many other companies located
in Vero Beach, employees are working from various remote locations and
home offices while awaiting the restoration and the availability of
utility services.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31,
2004 AND 2003
REVENUES: Consolidated revenues for the three months ended August 31,
2004 increased to $3,351,000 compared to $188,000 for the three months
ended August 31, 2003. Revenues for the nine months ended August 31,
2004 and 2003 were $8,229,000 and $814,000, respectively. This increase
for both the quarter and nine-month periods is directly attributable to
the Company's Homebuilding and Construction Services Segment which
commenced operations in the fourth quarter of fiscal 2003 and
contributed $3,193,000 (or 95%) and $7,753,000 (or 94%) of total
revenues, respectively. Homebuilding operations are expected to continue
to contribute the majority of the Company's forward-looking revenues.
Revenues for the Internet Development and Technical Staffing Segment for
the three months ended August 31, 2004 decreased to $158,000 compared to
$188,000 for the comparable period of the prior year. Such revenues for
the nine months ended August 31, 2004 decreased to $475,000 from
$801,000 in 2003. The decreases resulted from the Staffing division
which contributed $77,000 and $440,000 of revenues for the three and
nine months ended August 31, 2003, respectively, and which was wound
down in the fourth quarter of fiscal 2003. All continuing revenues of
this segment pertain to Internet Development activities.
COST OF SALES: Cost of sales consists of cost of goods sold for the
Homebuilding Segment, project personnel and expenses associated with the
Internet Development/Technical Staffing Segment and direct expenses of
the credit card loyalty segment. Homebuilding cost of goods sold was
$2,598,000 and $6,271,000 for the quarter and nine months ended August
31, 2004. As the Homebuilding Segment began operations in the fourth
quarter of fiscal 2003, there were no expenses recorded for the three
and nine months ended August 31, 2003. Project personnel and expenses
decreased from $104,000 in the three months ended August 31, 2003 to
$72,000 in the three months ended August 31, 2004. Project personnel and
expenses decreased from $514,000 in the nine months ended August 31,
2003 to $218,000 in the nine months ended August 31, 2004. The decrease
in both the quarter and nine-month results is primarily attributable to
the Technical Staffing division of eCalton being wound down in the
fourth quarter of 2003. Gross profit margin for the Homebuilding Segment
was 19% for both the quarter and nine months ended August 31, 2004.
Gross profit margin for the Internet Development/Technical Staffing
segment was 54% and 45% for the quarters ended August 31, 2004 and 2003,
respectively. Gross profit margin for the Internet Development/Technical
Staffing segment was 54% and 36% for the nine months ended August 31,
2004 and 2003, respectively. The increase in gross profit margin for
both the quarter and nine-month results for eCalton is primarily
attributable to the lower-margin Technical Staffing division of eCalton
being wound down in the fourth quarter of fiscal 2003.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended August 31, 2004 were
$628,000 compared to $576,000 for the quarter ended August 31, 2003.
Selling, general and administrative expenses for the nine months ended
August 31, 2004 were $1,766,000 compared to $1,845,000 for the nine
months ended August 31, 2003. The slight increase in expenses for the
quarter ended August 31, 2004 is primarily attributable to new product
development, hiring of personnel and costs related to the commencement
of development activities at new communities.
INTEREST INCOME: Interest income is derived principally from interest on
depository accounts and money market-type accounts. Interest income
decreased from $3,000 during the quarter ended August 31, 2003 to $2,000
during the quarter ended August 31, 2004. Interest income decreased from
$18,000 during the nine months ended August 31, 2003 to $6,000 during
the nine months ended August 31, 2004. The decrease was a result of
lower average deposited balances. Currently, cash is being used in
operating activities and accordingly, interest income is expected to
decline during fiscal 2004.
INTEREST EXPENSE: Interest expense amounted to $3,000 for the three
months ended August 31, 2004 (none in 2003). Interest expense amounted
to $26,000 for the nine months ended August 31, 2004 (none in 2003).
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 and nine months
ended August 31, 2004, the Company capitalized $21,000 and $51,000
respectively.
REALIZED GAIN ON SALES OF MARKETABLE SECURITIES: During the nine months
ended August 31, 2004, the Company recognized a gain of $228,000 from
the sale of 237,500 shares of available-for-sale marketable securities.
The Company has additional available-for-sale marketable securities with
a current value of $130,000 based on the trading market price of the
underlying securities. The unrealized gains and losses on
available-for-sale securities are reflected as other comprehensive
income, a component of stockholder's equity, until realized.
LITIGATION SETTLEMENTS: The Company paid $20,000 in litigation
settlements for the nine months ended August 31, 2004 and received
$5,000 from certain matters in the third quarter. The Company paid
$60,000 in litigation settlements for the nine months ended August 31,
2003 and received $43,000 in proceeds from the settlement of a
previously written-off account and insurance proceeds.
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SALES ACTIVITY AND BACKLOG:
Contract Number
Backlog of Homes
-------------- ------------
Backlog as of November 30, 2003 $6,700,000 13
Less: Homes delivered during the
nine months ended Aug. 31, 2004 ($7,700,000) (16)
Plus: New contracts signed during the
nine months ended Aug. 31, 2004 $8,700,000 17
-------------- ------------
Backlog as of August 31, 2004 $7,700,000 14
============== ============
The Company is currently taking lot reservations in two new communities:
Amelia Plantation and Pointe West, both located in Vero Beach, Florida.
Although the Company's communities under development did not suffer
significant damage as a result of the recent hurricane activity in
Florida, the damage caused by the hurricanes in the region has adversely
impacted the Company's ability to obtain building permits and the
availability of labor and materials. As a result, the Company
anticipates delays in deliveries of homes.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
With the strategic decisions to capitalize on senior management's
experience in the homebuilding market and curtailment of operations in
the credit card loyalty and technical staffing businesses, the Company
has realized profitable operations during the first nine months of
fiscal year ended November 30, 2004 and, as discussed below, has
generated cash flow from operations during the same period. As a result,
management believes that cash on hand as of August 31, 2004, plus
amounts to be generated from operations and borrowing availability under
the Company's revolving credit facility, will be sufficient to support
consolidated operations during the next twelve months.
The Company's working capital as of August 31, 2004 was $2,636,000, a
decline of $645,000 compared to $3,281,000 at November 30, 2003. Total
current assets increased $538,000 to $6,890,000, primarily reflecting
increases in homebuilding assets of $267,000, available-for-sale
securities of $130,000 and cash in the bank of $128,000. Total current
liabilities increased $1,183,000 to $4,254,000, reflecting increases in
customer deposits of $578,000, borrowings on the credit facility of
$430,000 and trade accounts payable related to homebuilding operations
of $198,000.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company generated cash of $592,000 from its operating activities
during the nine months ended August 31, 2004, compared to using cash of
$6,622,000 (largely attributable to the purchase of homebuilding assets)
during the same period of the prior year. The
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current period's cash generation reflects a $578,000 increase in
customer deposits (included in other liabilities) and a $198,000
increase in trade accounts payable. It also reflects increases of
$267,000 in homebuilding operating inventories and deposits.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company generated $204,000 in cash from its investing activities
during the nine months ended August 31, 2004, primarily related to the
sale of certain available-for-sale marketable securities. The Company
continues to carry $130,000 of available-for-sale marketable securities
as of August 31, 2004. However, there can be no assurance that such
securities will be able to be sold at this level.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company used $668,000 of cash in its financing activities during the
nine months ended August 31, 2004 representing net payments on the Notes
Payable outstanding in the homebuilding segment. As of August 31, 2004,
the Company has $4.2 million available under this line of credit with
Harbor Federal Savings Bank.
COMMITMENTS, GUARANTEES AND OFF BALANCE SHEET ITEMS
LAND PURCHASE AGREEMENTS:
In April 2004, the Company entered into a rolling option contract to
purchase forty-one (41) developed, golf course lots in the Pointe West
development located in Vero Beach, Florida. If the Company does not
perform under the contract, its liability is limited to the deposit
money held by the seller. The total deposit required is $300,000. As of
August 31, 2004, the full deposit has been made and two of the lots have
been purchased.
In December 2003, the Company entered into a contract to purchase eight
(8) developed lots in the Amelia Plantation development located in Vero
Beach, Florida. If the Company does not perform under the contract, its
liability is limited to the deposit money held by the seller. The full
deposit of $24,000 was made during the nine months ended August 31,
2004. Four lots have been purchased under this Land Purchase Agreement
as of August 31, 2004.
The Company anticipates purchasing all of the lots it has under its
existing land contracts. The estimated cost to the Company to perform
all of its obligations under the existing land contracts is
approximately $4.4 million.
PROFIT SHARING ARRANGEMENT:
The Company has entered into an arrangement with John G. Yates, its
President, and Thomas C. Corley, Senior Vice President of PrivilegeONE,
pursuant to which Mr. Yates and Mr. Corley have agreed to serve as
unpaid officers of the Company and PrivilegeONE and pursue business
opportunities on behalf 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.
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LOAN AGREEMENT:
The Company entered into a loan agreement with Harbor Federal Savings
Bank in August of 2003. The loan agreement provides for $1.2 million of
acquisition and construction financing and a $5 million line of credit
that is due on demand. Interest on advances, which are secured by a
mortgage on the Company's homebuilding properties, accrues at a rate
equal to the prime rate plus one percent (1%) per annum. In July 2004,
Harbor Federal Savings Bank increased the Company's demand revolving
line of credit to $6.5 million. The $1.2 million loan has been fully
paid off as of August 31, 2004.
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, homebuilding inventories and the
establishment of reserves for contingencies. Actual results could differ
from those estimates. The Company's 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, 2003. As of August
31, 2004, 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 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, 2004 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's 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 Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure.
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PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In July 2004, one of the Company's directors, Robert E. Naughton, passed
away. The Company's Board of Directors is now comprised of six directors
with one vacancy. The Company currently does not anticipate appointing a
director to fill the vacancy at this time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
31.1 Certification by Chief Executive Officer pursuant to
Section 302 of Sarbanes- Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to
Section 906 of Sarbanes- Oxley Act of 2002
32.2 Certification by Chief Financial Officer pursuant to
Section 906 of Sarbanes- Oxley Act of 2002
B) Reports on Form 8-K
On July 15, 2004, the Company filed a report on Form 8-K to
report that it had issued a news release that disclosed its
financial results for the quarter and six-months ended May 31,
2004.
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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/ Laura A. Camisa
----------------------------------------
Laura A. Camisa
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: October 14, 2004
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