SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended May 31, 2005
[ ] 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 small business issuer 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)
Issuer's telephone number,
including area code: (772) 794-1414
Check whether the Issuer (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 July 14, 2005, 9,435,746 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
May 31, 2005 (Unaudited) and November 30, 2004................. 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended May 31, 2005 and May 31, 2004............... 4
Consolidated Statements of Operations (Unaudited) for the
Six Months Ended May 31, 2005 and May 31, 2004................. 5
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended May 31, 2005 and May 31, 2004................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation...... 13
Item 3. Controls and Procedures........................................ 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders............. 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
SIGNATURES ................................................................. 19
- --------------------------------------------------------------------------------
Certain information included in this report and other Company filings
(collectively, "SEC filings") under the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended (as well as information
communicated orally or in writing between the dates of such SEC filings)
contains or may contain forward looking information that is subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from expected results. Among these risks, trends and uncertainties
are the Company's ability to raise capital, national and local economic
conditions, the lack of an established operating history for the Company's
current business activities, conditions and trends in the homebuilding, 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 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
CONSOLIDATED BALANCE SHEETS
May 31, November 30,
2005 2004
---------------- ----------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 1,596,000 $ 2,628,000
Accounts receivable, net of allowance for doubtful accounts of $6,000
as of May 31, 2005 and $23,000 as of Nov. 30, 2004 131,000 119,000
Inventory 4,355,000 2,501,000
Deposits on land 312,000 312,000
Prepaid expenses and other current assets 172,000 270,000
---------------- ----------------
Total current assets 6,566,000 5,830,000
---------------- ----------------
Deferred charges 25,000 97,000
Property and equipment, net 66,000 48,000
---------------- ----------------
Total assets $ 6,657,000 $ 5,975,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued expenses and other liabilities $ 1,655,000 $ 1,391,000
Deferred revenue - related party (Note 9) 213,000 -
Notes payable 1,935,000 1,397,000
---------------- ----------------
Total current liabilities 3,803,000 2,788,000
---------------- ----------------
Commitments and contingent liabilities (Note 10) - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
9,436,000 and 9,372,000 shares outstanding at May 31, 2005
and November 30, 2004, respectively 472,000 469,000
Additional paid-in capital 11,599,000 12,033,000
Accumulated deficit (2,377,000) (2,072,000)
Less cost of shares held in treasury, 1,262,000 and 1,325,000 shares
as of May 31, 2005 and November 30, 2004, respectively (6,891,000) (7,346,000)
Accumulated other comprehensive income 51,000 103,000
---------------- ----------------
Total shareholders' equity 2,854,000 3,187,000
---------------- ----------------
Total liabilities and shareholders' equity $ 6,657,000 $ 5,975,000
================ ================
See notes to consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---------------- ----------------
REVENUE
Homebuilding $ 1,156,000 $ 1,997,000
Website design and implementation 168,000 193,000
---------------- ----------------
1,324,000 2,190,000
---------------- ----------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 883,000 1,632,000
Website design and implementation 78,000 83,000
Credit card loyalty program 1,000 1,000
Selling, general and administrative 689,000 574,000
---------------- ----------------
1,651,000 2,290,000
---------------- ----------------
Loss from operations (327,000) (100,000)
---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 2,000 2,000
Realized gain on sale of marketable securites - 228,000
Interest expense (11,000) (11,000)
Litigation settlements - (20,000)
Other expense (7,000) (1,000)
---------------- ----------------
(16,000) 198,000
---------------- ----------------
NET INCOME (LOSS) $ (343,000) $ 98,000
================ ================
INCOME (LOSS) PER SHARE
---------------- ----------------
Basic and Diluted: $ (0.04) $ 0.01
================ ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,406,000 9,264,000
Diluted 9,406,000 9,474,000
See notes to consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---------------- ----------------
REVENUE
Homebuilding $ 3,282,000 $ 4,559,000
Website design and implementation 319,000 317,000
Credit card loyalty program - 1,000
---------------- ----------------
3,601,000 4,877,000
---------------- ----------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 2,495,000 3,673,000
Website design and implementation 148,000 146,000
Credit card loyalty program 1,000 1,000
Selling, general and administrative 1,313,000 1,138,000
---------------- ----------------
3,957,000 4,958,000
---------------- ----------------
Loss from operations (356,000) (81,000)
---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 3,000 4,000
Realized gain on sale of marketable securities - 228,000
Interest expense (20,000) (22,000)
Litigation settlements 71,000 (20,000)
Other income (expense) (3,000) 19,000
---------------- ----------------
51,000 209,000
---------------- ----------------
NET INCOME (LOSS) $ (305,000) $ 128,000
================ ================
INCOME (LOSS) PER SHARE
---------------- ----------------
Basic and Diluted: $ (0.03) $ 0.01
================ ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,389,000 9,252,000
Diluted 9,389,000 9,499,000
See notes to consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (305,000) $ 128,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Realized gain on sale of marketable securities - (228,000)
Depreciation 13,000 81,000
Amortization of deferred charges 72,000 -
Stock based compensation for directors 24,000 30,000
Changes in operating assets and liabilities:
Accounts receivable (12,000) (42,000)
Inventory (1,854,000) 567,000
Deposits on land - (174,000)
Prepaid expenses and other assets 98,000 19,000
Accounts payable, accrued expenses and other liabilities 425,000 1,531,000
---------------- ----------------
Net cash flows from operating activities (1,539,000) 1,912,000
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (31,000) (17,000)
Proceeds from the sale of marketable securities - 228,000
---------------- ----------------
Net cash flows from investing activities (31,000) 211,000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable 538,000 (1,122,000)
---------------- ----------------
Net cash flows from financing activities 538,000 (1,122,000)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,032,000) 1,001,000
Cash and cash equivalents at beginning of period 2,628,000 1,821,000
---------------- ----------------
Cash and cash equivalents at end of period $ 1,596,000 $ 2,822,000
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 35,000 $ 25,000
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. and Subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's financial position as
of May 31, 2005, the results of operations for the three and six months
ended May 31, 2005 and 2004 and the cash flows for the six months ended
May 31, 2005 and 2004 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
February 28, 2005. Operating results for the three and six months ended
May 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending November 30, 2005.
REVENUE RECOGNITION 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 attempts to remedy any
issues with its customers prior to closing.
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.
In accordance with SFAS No. 13, Accounting for Leases, the Company
defers a portion of its revenue on the sale-leasebacks of its model
homes. The Company will recognize the deferred revenue (the net present
value of the lease payments) in equal increments over the term of the
lease.
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. Revenues under
time-and-material contracts are recognized upon acceptance by the
customer of the website. Revenues under fixed-price contracts are
recognized as the contract progresses, using the cost-to-cost method to
determine percentage of completion.
7
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements" and establishes retrospective application as the
required method for reporting a change in accounting principle. SFAS 154
provides guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for reporting a
change when retrospective application is impracticable. The reporting of
a correction of an error by restating previously issued financial
statements is also addressed. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not anticipate that that the
adoption of SFAS 154 will have a material impact on its consolidated
balance sheets and statements of operations, shareholders' equity and
cash flows.
2. INVENTORY
Inventory consists of the following as of May 31, 2005 and November 30,
2004:
May 31, 2005 November 30,
(UNAUDITED) 2004
------------------ ------------------
Developed land $ 923,000 $ 351,000
Work in process 1,205,000 1,792,000
Speculative and model homes 2,227,000 358,000
------------------ ------------------
$ 4,355,000 $ 2,501,000
================== ==================
The Company capitalizes interest on loans directly associated with real
estate development projects. During the six months ended May 31, 2005
and 2004, the Company capitalized $15,000 and $30,000 in interest,
respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of May 31, 2005 and
November 30, 2004:
May 31, 2005 November 30,
(UNAUDITED) 2004
----------------- -----------------
Computer equipment and furniture $ 160,000 $ 129,000
Leasehold improvements 6,000 4,000
Other 2,000 5,000
----------------- -----------------
168,000 138,000
Less: Accumulated Depreciation (102,000) (90,000)
----------------- -----------------
$ 66,000 $ 48,000
================= =================
8
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following as of May 31, 2005 and November 30, 2004:
May 31, 2005 November 30,
(UNAUDITED) 2004
------------------ -----------------
Accounts payable $ 449,000 $ 264,000
Accrued expenses 213,000 303,000
Customer deposits 713,000 798,000
Deferred revenue 280,000 26,000
------------------ -----------------
$ 1,655,000 $ 1,391,000
================== =================
5. NOTES PAYABLE
Notes payable consists of borrowings under a $6.5 million 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% (6.75% at May 31, 2005).
6. SHAREHOLDERS' EQUITY ACTIVITY
During the three and six months ended May 31, 2005, 30,000 and 63,000
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 (average of high and low trading
prices) of the shares on the date issued. Compensation expense for the
three and six-month periods ended May 31, 2005, amounted to $13,000 and
$24,000, 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.
OTHER COMPREHENSIVE INCOME:
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 and
other comprehensive income items. Other comprehensive income during the
periods presented represents the changes in unrealized gains (losses) on
available for sale securities which are included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets.
The following table reflects comprehensive income for the six months
ended May 31, 2005 and 2004:
2005 2004
-------------- --------------
Net income (loss) ($305,000) $ 128,000
Other comprehensive items (52,000) 263,000
-------------- --------------
Comprehensive income (loss) ($357,000) $ 391,000
============== ==============
9
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 Six months ended
May 31, May 31,
---------------------------------- -------------------------------
2005 2004 2005 2004
---------------- ---------------- -------------- --------------
Net income (loss) - (numerator) $ (343,000) $ 98,000 $ (305,000) $ 128,000
================ ================ ============== ==============
BASIC:
Weighted average shares
outstanding - (denominator) 9,406,000 9,264,000 9,389,000 9,252,000
================ ================ ============== ==============
Net income (loss) per common share $ (0.04) $ 0.01 $ (0.03) $ 0.01
================ ================ ============== ==============
DILUTED:
Weighted average shares outstanding 9,406,000 9,264,000 9,389,000 9,252,000
Effect of dilutive securities - 210,000 - 247,000
---------------- ---------------- -------------- --------------
Adjusted weighted average
shares - (denominator) 9,406,000 9,474,000 9,389,000 9,499,000
================ ================ ============== ==============
Net income (loss) per common share - diluted $ (0.04) $ 0.01 $ (0.03) $ 0.01
================ ================ ============== ==============
The effects of 780,200 stock options outstanding as of May 31, 2005 have
been excluded from common stock equivalents because their effect on loss
per share would be anti-dilutive. The effects of 717,400 stock options
outstanding as of May 31, 2004 have been excluded from common stock
equivalents because their effect on income per share would be
anti-dilutive.
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
Homes by Calton, LLC 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
10
that they consider necessary to accept the home. The Company
attempts to remedy any issues with its customers prior to
closing.
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.
In accordance with SFAS No. 13, Accounting for Leases, the Company
defers a portion of its revenue on the sale-leasebacks of its model
homes. The Company will recognize the deferred revenue (the net present
value of the lease payments) in equal increments over the term of the
lease.
INTERNET DEVELOPMENT
eCalton.com, Inc. 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. eCalton provides its services to medium and large size
companies in various industries, as well as one prime vertical market -
the homebuilding industry. Revenues are derived under short-term
time-and-material and, to a lesser extent, fixed-price contracts with
principally commercial business customers. Revenues under
time-and-material contracts are recognized upon acceptance by the
customer of the website. Revenues under fixed-price contracts are
recognized as the contract progresses, using the cost-to-cost method to
determine percentage of completion.
CORPORATE
The corporate division provides senior management, accounting, human
resources and investor relations services to all wholly owned
subsidiaries of Calton, Inc.
CREDIT CARD LOYALTY BUSINESS
PrivilegeONE Networks, LLC 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. PrivilegeONE is not
currently conducting any material business activities.
11
Operating results, by industry segment, for the six months ended May 31,
2005 and 2004 are as follows (in thousands):
SIX MONTHS ENDED MAY 31, 2005
---------------------------------------------------------------------------
(UNAUDITED)
Credit Card
Internet Loyalty Total
Development Business Homebuilding Corporate Company
---------------------------------------------------------------------------
Total revenues $ 319 $ - $ 3,282 $ - $ 3,601
Total cost of revenues 148 1 2,495 - 2,644
Depreciation and amortization 5 - 73 7 85
Income (loss) from operations 1 (1) 18 (539) (356)
Interest income (expense), net - - (20) 3 (17)
Net income (loss) 16 (1) 14 (464) (305)
Total assets $ 209 $ 1 $ 6,085 $ 362 $ 6,657
SIX MONTHS ENDED MAY 31, 2004
---------------------------------------------------------------------------
(UNAUDITED)
Credit Card
Internet Loyalty Total
Development Business Homebuilding Corporate Company
---------------------------------------------------------------------------
Total revenues $ 317 $ 1 $ 4,559 $ - $ 4,877
Total cost of revenues 146 1 3,673 - 3,820
Depreciation and amortization 1 - 65 15 81
Income (loss) from operations 33 (1) 49 (611) (81)
Interest income (expense), net - - (22) 4 (18)
Net income (loss) 46 (1) 47 (392) 128
Total assets $ 197 $ 1 $ 6,097 $ 1,172 $ 7,467
9. DEFERRED REVENUE - RELATED PARTY
The Company provides a uniform Employee Discount Plan which provides a
seven and one half percent discount to employees who purchase a home
from Homes by Calton as their principal residence. As of May 31, 2005,
one corporate officer, Maria Caldarone, has entered into a contract to
purchase a home under the Employee Discount Plan. The contract price is
$551,000 of which $213,000 has been paid to the Company as of May 31,
2005.
10. 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 and is included in accrued expenses on the
Company's consolidated balance sheets. 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
12
total revenue. The Company periodically assesses the adequacy of its
recorded warranty liabilities and adjusts the amount as necessary.
Following is the Company's warranty reserve activity for the six months
ended May 31, 2005:
Balance at beginning of period $ 57,000
Reserves 17,000
Payments and other adjustments (25,000)
---------------
Balance at end of period $ 49,000
===============
LAND PURCHASE AGREEMENTS
In March 2005, the Company entered into a contract to purchase a 39-lot
subdivision in Vero Beach, Florida subject to a due diligence period. In
accordance with the contract, the Company was required to make an
initial deposit of $50,000 that is refundable prior to the expiration of
the due diligence period.
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. A net deposit of $250,000 remains as of May
31, 2005. Sixteen (16) lots have been purchased under this Land Purchase
Agreement as of May 31, 2005.
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. A net
deposit of $12,000 remains as of May 31, 2005. Four lots have been
purchased under this Land Purchase Agreement as of May 31, 2005.
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 $3 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2005
AND 2004
REVENUES: Consolidated revenues for the three months ended May 31, 2005
decreased to $1,324,000 compared to $2,190,000 for the three months
ended May 31, 2004. Revenues for the six months ended May 31, 2005 and
2004 were $3,601,000 and $4,877,000, respectively. The decrease for both
the quarter and six months is primarily attributable to the Company's
homebuilding segment which delivered fewer homes than during the same
periods last year. The homebuilding segment has encountered significant
delays in construction and the procurement of building permits and
materials as a result of the continued hurricane recovery in the county
in which it builds.
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 segment and direct expenses of the credit card
loyalty segment. Homebuilding cost of goods sold was $883,000 for the
quarter ended May 31, 2005 compared to $1,632,000 for the quarter ended
May 31, 2004. Homebuilding cost of goods sold was $2,495,000 for the six
months ended May 31, 2005 compared to $3,673,000 for the six months
ended May 31, 2004. The reduction in cost of goods sold for both the
quarter and six months was a result of fewer home deliveries during the
same period year over year. Gross profit margin for the homebuilding
segment was 24% and 18% for the quarters ended May 31, 2005 and 2004,
respectively. Gross profit margin for the homebuilding segment was 24%
and 19% for the six months ended May 31, 2005 and 2004, respectively.
The increase for both the quarter and six-month gross profit margins was
due to increased sales prices of homes delivered.
Project personnel and expenses for the Internet development segment
decreased from $83,000 in the three months ended May 31, 2004 to $78,000
in the three months ended May 31, 2005. Project personnel and expenses
for the Internet development segment increased from $146,000 in the six
months ended May 31, 2004 to $148,000 in the six months ended May 31,
2005. Gross profit margin for the Internet development segment was 54%
and 57% for the quarters ended May 31, 2005 and 2004, respectively.
Gross profit margin for the Internet development segment was 54% for
both the six months ended May 31, 2005 and 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended May 31, 2005 were $689,000
compared to $574,000 for the quarter ended May 31, 2004. Selling,
general and administrative expenses for the six months ended May 31,
2005 were $1,313,000 compared to $1,138,000 for the six months ended May
31, 2004. The increase in selling, general and administrative expenses
is primarily attributable to increased sales and marketing costs for
both the homebuilding and Internet development divisions.
INTEREST INCOME: Interest income is derived principally from interest on
depository accounts and money market-type accounts. Interest income was
$2,000 for the quarters ended May 31, 2005 and 2004. Interest income
decreased from $4,000 during the six months ended May 31, 2004 to $3,000
during the six months ended May 31, 2005. The decrease was a result of
lower average deposited balances. Currently, cash is being used in
14
operating activities and accordingly, interest income is expected to
decline during fiscal 2005.
INTEREST EXPENSE: Interest expense amounted to $11,000 for both the
three months ended May 31, 2005 and 2004. Interest expense amounted to
$20,000 and $22,000 for the six months ended May 31, 2005 and 2004,
respectively. Interest is incurred on the Company's real estate loans
and, to the extent required under generally accepted accounting
principles, capitalized on real estate inventory. During the three and
six months ended May 31, 2005, the Company capitalized $7,000 and
$15,000 of interest, respectively.
REALIZED GAIN ON SALES OF MARKETABLE SECURITIES: During the quarter
ended May 31, 2004, the Company received $228,000 from the sale of
237,500 shares of CorVu Corporation's common stock. The Company has
additional shares of CorVu Corporation common stock with a current value
of $51,000 as of May 31, 2005.
LITIGATION SETTLEMENTS: The Company received $71,000 in litigation
settlements for the six months ended May 31, 2005. The Company recorded
$20,000 in litigation settlements for the six months ended May 31, 2004.
SALES ACTIVITY AND BACKLOG Contract Number
Backlog of Homes
-------------- ----------
Backlog as of November 30, 2004 $3,800,000 7
Less: Homes delivered during the
six months ended May 31, 2005 (3,300,000) (6)
Plus: New contracts signed during the
six months ended May 31, 2005 6,200,000 10
-------------- ----------
Backlog as of May 31, 2005 $6,700,000 11
============== ==========
The Company is currently constructing homes in three communities:
Riverside at The Island Club, Amelia Plantation and Pointe West, all
located in Vero Beach, Florida. In addition, the Company has begun its
"On-Your-Lot Program" in which it acts as the contract builder for
individual landowners. The Company has one On-Your-Lot home in its
backlog as of May 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of May 31, 2005, the Company had $2,763,000 in working capital
compared to $3,042,000 at November 30, 2004. Management believes that
cash on hand, plus anticipated amounts to be generated from operations
and borrowings availability under the Company's revolving credit
facility, will be sufficient to support consolidated operations through
at least the twelve-month period ending May 31, 2006.
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CASH FLOWS FROM OPERATING ACTIVITIES
The Company used $1,539,000 in cash for its operating activities during
the six months ended May 31, 2005, compared to generating $1,912,000 in
cash during the same period of the prior year. The current year's cash
usage reflects a $1,854,000 increase in inventory as a result of the
increased number of homes under construction.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company used $31,000 in cash in its investing activities during the
six months ended May 31, 2005 for the purchase of equipment and
software. The Company generated $211,000 in cash from its investing
activities during the six months ended May 31, 2004, primarily related
to the sale of marketable securities.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company generated $538,000 in cash from its financing activities
during the six months ended May 31, 2005. This represented an increase
in the Notes Payable outstanding in the homebuilding segment. The
Company used $1,122,000 in its financing activities during the six
months ended May 31, 2004. This represented payments on the Notes
Payable outstanding in the homebuilding segment.
COMMITMENTS, GUARANTEES AND OFF BALANCE SHEET ITEMS
LAND PURCHASE AGREEMENTS:
In March 2005, the Company entered into a contract to purchase a 39-lot
subdivision in Vero Beach, Florida subject to a due diligence period. In
accordance with the contract, the Company was required to make an
initial deposit of $50,000 that is refundable prior to the expiration of
the due diligence period.
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 net deposit of $250,000 remains as of May
31, 2005. Sixteen (16) lots have been purchased under this Land Purchase
Agreement as of May 31, 2005.
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. A net
deposit of $12,000 remains. Four lots have been purchased under this
Land Purchase Agreement as of May 31, 2005.
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 $3 million.
PROFIT SHARING ARRANGEMENT:
The Company has entered into an arrangement with John G. Yates and
Thomas C. Corley, who are the President and Chief Financial Officer of
PrivilegeONE, respectively, pursuant to which Mr. Yates and Mr. Corley
have agreed to serve as unpaid officers of PrivilegeONE
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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.
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.
Interest on advances, which are secured by a mortgage on the Company's
homebuilding inventories and related assets, accrues at a rate equal to
the prime rate plus one percent (1%) per annum.
The Company repaid the $1.2 million acquisition and construction loan.
The $5 million revolving credit facility was increased to $6.5 million
in June 2004. As of May 31, 2005, $1,935,000 of advances under the line
of credit were outstanding.
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, 2004. As of May
31, 2005, 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 May
31, 2005 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
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Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company held its 2005 Annual Meeting of Shareholders (the "Meeting")
on May 11, 2005. At the Meeting, shareholders were asked to elect
Anthony J. Caldarone as a director for a four-year term expiring at the
2009 annual meeting. The results of the voting were as follows:
Broker
For Against Withheld Abstain Non-Vote
------------ ----------- ------------ ----------- ------------
Anthony J. Caldarone 8,057,520 - 15,624 - N/A
The terms of each of J. Ernest Brophy, Mark N. Fessel, Kenneth D. Hill,
Frank C. Smith, Jr. and John G. Yates (the other directors of the
Company) continued after the meeting.
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 April 14, 2005, 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 ended February 28, 2005.
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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: July 15, 2005
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