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, 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 October 14, 2005, 9,469,081 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, 2005 (Unaudited) and November 30, 2004.......... 3
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended August 31, 2005 and August 31, 2004..... 4
Consolidated Statements of Operations (Unaudited) for the
Nine Months Ended August 31, 2005 and August 31, 2004...... 5
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended August 31, 2005 and August 31, 2004...... 6
Notes to Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis or Plan of Operation.. 14
Item 3. Controls and Procedures.................................... 17
PART II. OTHER INFORMATION
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
August 31, November 30,
2005 2004
--------------- ---------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 2,535,000 $ 2,628,000
Accounts receivable, net of allowance for doubtful accounts of $5,000
as of August 31, 2005 and $23,000 as of November 30, 2004 143,000 119,000
Inventory 4,864,000 2,501,000
Deposits on land 213,000 312,000
Prepaid expenses and other current assets 417,000 270,000
--------------- ---------------
Total current assets 8,172,000 5,830,000
--------------- ---------------
Deferred charges 27,000 97,000
Property and equipment, net 165,000 48,000
--------------- ---------------
Total assets $ 8,364,000 $ 5,975,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued expenses and other liabilities $ 1,788,000 $ 1,391,000
Deferred revenue - related party (Note 9) 359,000 -
Notes payable 2,743,000 1,397,000
--------------- ---------------
Total current liabilities 4,890,000 2,788,000
--------------- ---------------
Commitments and contingent liabilities (Note 10) - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
9,469,000 and 9,372,000 shares outstanding at August 31, 2005
and November 30, 2004, respectively 473,000 469,000
Additional paid-in capital 11,371,000 12,033,000
Accumulated deficit (1,834,000) (2,072,000)
Less cost of shares held in treasury, 1,229,000 and 1,325,000 shares
as of August 31, 2005 and November 30, 2004, respectively (6,652,000) (7,346,000)
Accumulated other comprehensive income 116,000 103,000
--------------- ---------------
Total shareholders' equity 3,474,000 3,187,000
--------------- ---------------
Total liabilities and shareholders' equity $ 8,364,000 $ 5,975,000
=============== ===============
See notes to consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2005 AND 2004
(UNAUDITED)
2005 2004
-------------- --------------
REVENUE
Homebuilding $ 3,584,000 $ 3,193,000
Website design and implementation 223,000 158,000
-------------- --------------
3,807,000 3,351,000
-------------- --------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 2,541,000 2,598,000
Website design and implementation 111,000 72,000
Selling, general and administrative 772,000 628,000
-------------- --------------
3,424,000 3,298,000
-------------- --------------
Income from operations 383,000 53,000
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 2,000 2,000
Interest expense (14,000) (3,000)
Litigation settlements - 5,000
Insurance settlements 194,000 -
Other expense (22,000) (4,000)
-------------- --------------
160,000 -
-------------- --------------
NET INCOME $ 543,000 $ 53,000
============== ==============
INCOME PER SHARE
-------------- --------------
Basic and Diluted: $ 0.06 $ 0.01
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,436,000 9,299,000
Diluted 9,553,000 9,400,000
See notes to consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2005 AND 2004
(UNAUDITED)
2005 2004
-------------- --------------
REVENUE
Homebuilding $ 6,866,000 $ 7,753,000
Website design and implementation 542,000 475,000
Credit card loyalty program - 1,000
-------------- --------------
7,408,000 8,229,000
-------------- --------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 5,036,000 6,271,000
Website design and implementation 259,000 218,000
Credit card loyalty program 1,000 1,000
Selling, general and administrative 2,085,000 1,766,000
-------------- --------------
7,381,000 8,256,000
-------------- --------------
Income (loss) from operations 27,000 (27,000)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 5,000 6,000
Realized gain on sale of marketable securities - 228,000
Interest expense (34,000) (26,000)
Litigation settlements 71,000 (15,000)
Insurance settlements 194,000 -
Other income (expense) (25,000) 15,000
-------------- --------------
211,000 208,000
-------------- --------------
NET INCOME $ 238,000 $ 181,000
============== ==============
INCOME PER SHARE
-------------- --------------
Basic $ 0.03 $ 0.02
============== ==============
Diluted $ 0.02 $ 0.02
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,405,000 9,268,000
Diluted 9,529,000 9,405,000
See notes to consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 2005 AND 2004
(UNAUDITED)
2005 2004
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 238,000 $ 181,000
Adjustments to reconcile net income to net cash
used in operating activities:
Realized gain on sale of marketable securities - (228,000)
Loss on disposal of long lived assets 2,000 -
Depreciation 25,000 124,000
Amortization of deferred charges 70,000 -
Stock based compensation for directors 36,000 42,000
Changes in operating assets and liabilities:
Accounts receivable (24,000) 15,000
Inventory (2,363,000) 45,000
Deposits on land 99,000 (312,000)
Prepaid expenses and other assets (147,000) (28,000)
Accounts payable, accrued expenses and other liabilities 769,000 753,000
--------------- ---------------
Net cash flows from operating activities (1,295,000) 592,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (145,000) (24,000)
Proceeds from the sale of long lived assets 1,000 -
Proceeds from the sale of marketable securities - 228,000
--------------- ---------------
Net cash flows from investing activities (144,000) 204,000
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable 1,346,000 (668,000)
--------------- ---------------
Net cash flows from financing activities 1,346,000 (668,000)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (93,000) 128,000
Cash and cash equivalents at beginning of period 2,628,000 1,821,000
--------------- ---------------
Cash and cash equivalents at end of period $ 2,535,000 $ 1,949,000
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 74,000 $ 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. 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 August 31, 2005, the results of operations for the three and nine
months ended August 31, 2005 and 2004 and the cash flows for the nine
months ended August 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
nine months ended August 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, customers perform 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.
7
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.
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.
FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS In March 2005, the FASB issued interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations", an
interpretation of FASB Statement No 143 ("FIN 47"), which requires an
entity to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability's fair value
can be reasonably estimated. FIN 47 is effective for fiscal years ending
after December 15, 2005. The Company is currently evaluating the effect
of the adoption of FIN 47 on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
2. INVENTORY
Inventory consists of the following as of August 31, 2005 and November
30, 2004:
August 31, 2005 November 30,
(UNAUDITED) 2004
----------------- -----------------
Developed land $ 866,000 $ 351,000
Work in process 3,015,000 1,792,000
Speculative and model homes 983,000 358,000
----------------- -----------------
$ 4,864,000 $ 2,501,000
================= =================
The Company capitalizes interest associated with real estate development
projects. During the nine months ended August 31, 2005 and 2004, the
Company capitalized $40,000 and $51,000 in interest, respectively.
8
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of August 31, 2005
and November 30, 2004:
August 31, 2005 November 30,
(UNAUDITED) 2004
----------------- -----------------
Computer equipment and furniture $ 265,000 $ 129,000
Leasehold improvements 6,000 4,000
Other 9,000 5,000
----------------- -----------------
280,000 138,000
Less: Accumulated Depreciation (115,000) (90,000)
----------------- -----------------
$ 165,000 $ 48,000
================= =================
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following as of August 31, 2005 and November 30, 2004:
August 31, 2005 November 30,
(UNAUDITED) 2004
----------------- -----------------
Accounts payable $ 200,000 $ 264,000
Accrued expenses 284,000 303,000
Customer deposits 944,000 798,000
Deferred revenue 719,000 26,000
----------------- -----------------
$ 2,147,000 $ 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 notes mature upon
delivery of the homes. The annual interest rate is the bank's prime rate
plus 1% (7.25% at August 31, 2005).
6. SHAREHOLDERS' EQUITY ACTIVITY
During the three and nine months ended August 31, 2005, 33,000 and
97,000 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, 2005, amounted to $13,000 and $36,000,
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.
9
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 nine months
ended August 31, 2005 and 2004:
2005 2004
------------- -------------
Net income $ 238,000 $ 181,000
Other comprehensive items 13,000 130,000
------------- -------------
Comprehensive income $ 251,000 $ 311,000
============= =============
7. NET INCOME PER COMMON SHARE
The following table reconciles the numerators and denominators of the
basic and diluted income per share computations:
Three months ended Nine months ended
August 31, August 31,
---------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income - (numerator) $ 543,000 $ 53,000 $ 238,000 $ 181,000
============= ============= ============= =============
BASIC:
Weighted average shares
outstanding - (denominator) 9,436,000 9,299,000 9,405,000 9,268,000
============= ============= ============= =============
Net income per common share $ 0.06 $ 0.01 $ 0.03 $ 0.02
============= ============= ============= =============
DILUTED:
Weighted average shares outstanding 9,436,000 9,299,000 9,405,000 9,268,000
Effect of dilutive securities 117,000 101,000 124,000 137,000
------------- ------------- ------------- -------------
Adjusted weighted average
shares - (denominator) 9,553,000 9,400,000 9,529,000 9,405,000
============= ============= ============= =============
Net income per common share - diluted $ 0.06 $ 0.01 $ 0.02 $ 0.02
============= ============= ============= =============
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:
10
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, customers perform 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.
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
11
accounts and upon receipt of fees associated with new card issuances.
PrivilegeONE is not currently conducting any material business
activities.
Operating results, by industry segment, for the nine months ended August
31, 2005 and 2004 are as follows (in thousands):
NINE MONTHS ENDED AUGUST 31, 2005
---------------------------------------------------------------------
(UNAUDITED)
Credit Card
Internet Loyalty Total
Development Business Homebuilding Corporate Company
---------------------------------------------------------------------
Total revenues $ 542 $ - $ 6,866 $ - $ 7,408
Total cost of revenues 258 1 5,037 5,296
Depreciation and amortization 8 - 10 25
Income (loss) from operations 25 (3) 76 (763) 27
Interest income (expense), net - - (34) 5 (29)
Net income (loss) 40 (3) 69 (495) 238
Total assets $ 234 $ - $ 7,546 $ 584 $ 8,364
NINE MONTHS ENDED AUGUST 31, 2004
---------------------------------------------------------------------
(UNAUDITED)
Credit Card
Internet Loyalty Total
Development Business Homebuilding 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) 83 (927) (27)
Interest income (expense), net - - (26) 6 (20)
Net income (loss) 67 (3) 80 (692) 181
Total assets $ 218 $ 1 $ 6,110 $ 746 $ 7,075
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 August 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 $359,000 has been paid to the
Company as of August 31, 2005 and has been included in the accompanying
condensed consolidated balance sheet as deferred revenue - related
party.
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
12
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 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 nine months
ended August 31, 2005:
Balance at beginning of period $ 57,000
Reserves 39,000
Payments and other adjustments (51,000)
------------
Balance at end of period $ 45,000
============
LAND PURCHASE AGREEMENTS
In April 2004, the Company entered into a rolling option contract to
purchase forty-one 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 $210,000 remains as of August
31, 2005. Twenty lots have been purchased under this Land Purchase
Agreement as of August 31, 2005.
In December 2003, the Company entered into a contract to purchase eight
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 $3,000 remains as of August 31, 2005. Seven lots have been
purchased under this Land Purchase Agreement as of August 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 $2.3 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31,
2005 AND 2004
REVENUES: Consolidated revenues for the three months ended August 31,
2005 increased to $3,807,000 compared to $3,351,000 for the three months
ended August 31, 2004. Revenues for the nine months ended August 31,
2005 and 2004 were $7,408,000 and $8,229,000, respectively. The increase
for the three months is primarily attributable to higher selling prices
of the homes delivered in the homebuilding division and a 41% increase
in revenues for the internet development division over the same period
last year. The decrease for the nine months is primarily attributable to
the Company's homebuilding segment which delivered fewer homes than
during the same period 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 $2,541,000 for the
quarter ended August 31, 2005 compared to $2,598,000 for the quarter
ended August 31, 2004. Homebuilding cost of goods sold was $5,036,000
for the nine months ended August 31, 2005 compared to $6,271,000 for the
nine months ended August 31, 2004. The reduction in cost of goods sold
for the nine months was a result of fewer home deliveries during the
same period of the prior year. Gross profit margin for the homebuilding
segment was 29% and 19% for the quarters ended August 31, 2005 and 2004,
respectively, and 27% and 19% for the nine months ended August 31, 2005
and 2004, respectively. The increase for both the quarter and nine-month
gross profit margins was due to increased sales prices of homes
delivered.
Project personnel and expenses for the Internet development segment
increased to $111,000 in the three months ended August 31, 2005 from
$72,000 in the three months ended August 31, 2004. Project personnel and
expenses for the Internet development segment increased from $218,000 in
the nine months ended August 31, 2004 to $259,000 in the nine months
ended August 31, 2005. The increases in both periods were due to
increased staffing and additional project activity. Gross profit margin
for the Internet development segment was 50% and 54% for the quarters
ended August 31, 2005 and 2004, respectively. Gross profit margin for
the Internet development segment was 52% and 54% for the nine months
ended August 31, 2005 and 2004, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended August 31, 2005 were
$772,000 compared to $628,000 for the quarter ended August 31, 2004.
Selling, general and administrative expenses for the nine months ended
August 31, 2005 were $2,085,000 compared to $1,766,000 for the nine
months ended August 31, 2004. The increase in selling, general and
administrative expenses is primarily attributable to increases in
personnel at the homebuilding division and 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
14
ended August 31, 2005 and 2004. Interest income decreased from $6,000
during the nine months ended August 31, 2004 to $5,000 during the nine
months ended August 31, 2005. 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 2005.
INTEREST EXPENSE: Interest expense amounted to $14,000 and $3,000 for
the three months ended August 31, 2005 and 2004. Interest expense
amounted to $34,000 and $26,000 for the nine months ended August 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 in real estate inventory. During the
three and nine months ended August 31, 2005, the Company capitalized
$25,000 and $40,000 of interest, respectively.
REALIZED GAIN ON SALES OF MARKETABLE SECURITIES: During the nine months
ended August 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 $116,000 as of August 31, 2005.
LITIGATION SETTLEMENTS: The Company received $71,000 in litigation
settlements for the nine months ended August 31, 2005. The Company paid
$15,000 in litigation settlements for the nine months ended August 31,
2004.
OTHER INCOME (EXPENSE): The Company received a $194,000 insurance
settlement during the three months ended August 31, 2005 for business
interruption losses sustained due to Hurricanes Frances and Jeanne.
SALES ACTIVITY AND BACKLOG:
Contract Number
Backlog of Homes
---------------- -------------
Backlog as of November 30, 2004 $ 3,800,000 7
Plus: New contracts signed during the
nine months ended August 31, 2005 12,027,000 20
Less: Homes delivered during the
nine months ended August 31, 2005 (7,035,000) (12)
---------------- -------------
Backlog as of August 31, 2005 $ 8,792,000 15
================ =============
The Company is currently constructing homes in two communities: Amelia
Plantation and Pointe West, 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 August 31, 2005. Management
continues to assess land acquisition opportunities and negotiate with
various landowners, brokers and agents to expand its operations and to
create a more diversified product offering.
15
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of August 31, 2005, the Company had $3,282,000 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 August 31, 2006.
CASH FLOWS FROM OPERATING ACTIVITIES
The Company used $1,295,000 in cash for its operating activities during
the nine months ended August 31, 2005, compared to generating $592,000
in cash during the same period of the prior year. The current year's
cash usage reflects a $2,363,000 increase in inventory as a result of
the increased number of homes under construction.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company used $144,000 in cash in its investing activities during the
nine months ended August 31, 2005 for the purchase of furniture for the
model homes, computer equipment and software. 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 marketable
securities.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company generated $1,346,000 in cash from its financing activities
during the nine months ended August 31, 2005. This represented an
increase in the Notes Payable outstanding in the homebuilding segment.
The Company used $668,000 in its financing activities during the nine
months ended August 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 April 2004, the Company entered into a rolling option contract to
purchase forty-one 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 $210,000 remains as of
August 31, 2005. Twenty lots have been purchased under this Land
Purchase Agreement as of August 31, 2005.
In December 2003, the Company entered into a contract to purchase eight
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 $3,000 remains. Seven lots have been purchased under this
Land Purchase Agreement as of August 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 $2.3 million.
16
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 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 provided 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 August
31, 2005, $2,743,000 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 August
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
August 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
17
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.
PART II: OTHER INFORMATION
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, 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 May 31, 2005.
18
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, 2005
19