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, 2006
[ ] 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 ___
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ NO _X_
As of July 14, 2006, 9,534,576 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, 2006 (Unaudited) and November 30, 2005.......... 3
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended May 31, 2006 and
May 31, 2005............................................ 4
Consolidated Statements of Operations (Unaudited) for
the Six Months Ended May 31, 2006 and May 31, 2005...... 5
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended May 31, 2006 and May 31, 2005...... 6
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis or Plan of
Operation............................................... 13
Item 3. Controls and Procedures................................. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders...... 17
Item 5. Other Information....................................... 17
Item 6. Exhibits................................................ 17
SIGNATURES ........................................................ 18
- --------------------------------------------------------------------------------
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,
2006 2005
---------------- ----------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 950,000 $ 2,737,000
Accounts receivable, net of allowance for doubtful accounts
of $5,000 as of May 31, 2006 and Nov. 30, 2005 261,000 261,000
Inventory 8,533,000 4,734,000
Deposits on land 30,000 350,000
Prepaid expenses and other current assets 272,000 164,000
---------------- ----------------
Total current assets 10,046,000 8,246,000
Deferred charges 8,000 19,000
Property and equipment, net 144,000 159,000
---------------- ----------------
Total assets $ 10,198,000 $ 8,424,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 289,000 $ 1,058,000
Accrued Expenses 416,000 617,000
Other current liabilities 161,000 490,000
Notes payable 4,841,000 1,937,000
---------------- ----------------
Total liabilities 5,707,000 4,102,000
---------------- ----------------
Commitments and contingent liabilities (Note 8) - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
9,534,576 and 9,497,491 shares outstanding at May 31, 2006
and November 30, 2005, respectively 477,000 475,000
Additional paid-in capital 10,935,000 11,178,000
Accumulated deficit (869,000) (938,000)
Less cost of shares held in treasury, 1,163,279 and 1,200,364
shares as of May 31, 2006 and November 30, 2005 respectively (6,182,000) (6,448,000)
Accumulated other comprehensive income 130,000 55,000
---------------- ----------------
Total shareholders' equity 4,491,000 4,322,000
---------------- ----------------
Total liabilities and shareholders' equity $ 10,198,000 $ 8,424,000
================ ================
See notes to consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2006 AND 2005
(UNAUDITED)
Three Months Ended May 31,
2006 2005
---------------- ----------------
REVENUE
Homebuilding $ 2,572,000 $ 1,156,000
Website design and implementation 204,000 168,000
---------------- ----------------
2,776,000 1,324,000
---------------- ----------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 1,849,000 883,000
Website design and implementation 104,000 78,000
Selling, general and administrative 732,000 654,000
---------------- ----------------
2,685,000 1,615,000
---------------- ----------------
Income (loss) from operations 91,000 (291,000)
OTHER INCOME (EXPENSE)
Interest income 2,000 2,000
Interest expense (34,000) (47,000)
Other expense (1,000) (7,000)
---------------- ----------------
Income (loss) before income taxes 58,000 (343,000)
Income tax expense - -
---------------- ----------------
NET INCOME (LOSS) $ 58,000 $ (343,000)
================ ================
INCOME (LOSS) PER SHARE
---------------- ----------------
Basic and Diluted: $ 0.01 $ (0.04)
================ ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,516,000 9,406,000
Diluted 9,691,000 9,406,000
See notes to consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 2006 AND 2005
(UNAUDITED)
Six Months Ended May 31,
2006 2005
---------------- ----------------
REVENUE
Homebuilding $ 4,755,000 $ 3,282,000
Website design and implementation 379,000 319,000
---------------- ----------------
5,134,000 3,601,000
---------------- ----------------
COSTS AND EXPENSES
Cost of sales
Homebuilding 3,397,000 2,495,000
Website design and implementation 208,000 148,000
Selling, general and administrative 1,400,000 1,242,000
---------------- ----------------
5,005,000 3,885,000
---------------- ----------------
Income (loss) from operations 129,000 (284,000)
OTHER INCOME (EXPENSE)
Interest income 4,000 3,000
Interest expense (82,000) (92,000)
Litigation settlements - 71,000
Other income (expense) 27,000 (3,000)
---------------- ----------------
Income (loss) before income taxes 78,000 (305,000)
Income tax expense (9,000) -
---------------- ----------------
NET INCOME (LOSS) $ 69,000 $ (305,000)
================ ================
INCOME (LOSS) PER SHARE
---------------- ----------------
Basic and Diluted: $ 0.01 $ (0.03)
================ ================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,507,000 9,389,000
Diluted 9,673,000 9,389,000
See notes to consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2006 AND 2005
(UNAUDITED)
Six Months Ended May 31,
2006 2005
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 69,000 $ (305,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 26,000 13,000
Amortization of deferred charges 20,000 72,000
Increase in deferred charges (9,000) -
Stock based compensation for directors 25,000 24,000
Changes in operating assets and liabilities:
Accounts receivable - (12,000)
Inventory (3,799,000) (1,854,000)
Deposits on land 320,000 -
Prepaid expenses and other assets (33,000) 98,000
Accounts payable, accrued expenses and other liabilities (1,299,000) 425,000
---------------- ----------------
Net cash flows from operating activities (4,680,000) (1,539,000)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment and software (11,000) (31,000)
---------------- ----------------
Net cash flows from investing activities (11,000) (31,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, net 2,904,000 538,000
---------------- ----------------
Net cash flows from financing activities 2,904,000 538,000
---------------- ----------------
Net decrease in cash and cash equivalents (1,787,000) (1,032,000)
Cash and cash equivalents at beginning of period 2,737,000 2,628,000
---------------- ----------------
Cash and cash equivalents at end of period $ 950,000 $ 1,596,000
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 87,000 $ 35,000
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 May 31, 2006,
the results of operations for the three and six months ended May 31, 2006
and 2005 and the cash flows for the six months ended May 31, 2006 and 2005
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, 2006. Operating results
for the three and six months ended May 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending
November 30, 2006.
REVENUE RECOGNITION
Revenues and related profits from the homebuilding segment are recognized
using the deposit method, as defined in Statements on Financial Accounting
(SFAS) No. 66. Revenue is recognized when the earning process of
constructing and selling 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 addition, the Company recognizes revenue from fixed price and modified
fixed price construction contracts for homebuilding on customer-owned lots
based on the percentage-of-completion method, measured by the percentage
of cost incurred to date to estimated total cost for each contract.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, contract penalty
provisions, claims, change orders and settlements are accounted for as
changes in estimates in the current period. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that
the estimates used will change within the near term.
7
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 recognizes 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. 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. There
were no material incomplete fixed price website design and implementation
contracts as of May 31, 2006.
Hosting revenues are recognized over the term of the service agreement.
STOCK-BASED COMPENSATION
In March 2006, the Company adopted the accounting provisions of Statement
of Financial Accounting Standards No. 123R - Share-based Payments (FAS
123R) which requires the use of the fair-value based method to determine
compensation for all arrangements under which employees and others receive
shares of stock or equity instruments (warrants and options). The adoption
of this standard had no impact on the Company's results of operations for
the three months ended May 31, 2006.
RECLASSIFICATIONS
Certain balances have been reclassified to conform with the current year
presentation.
2. INVENTORY
Inventory consists of the following as of May 31, 2006 and November 30,
2005:
May 31, November 30,
2006 2005
---------------- ----------------
Developed land $ 2,685,000 $ 824,000
Work in process - 1,075,000
Speculative and model homes 5,848,000 2,835,000
---------------- ----------------
$ 8,533,000 $ 4,734,000
================ ================
The Company capitalizes interest on loans directly associated with real
estate development projects. During the six months ended May 31, 2006 and
2005, the Company capitalized $64,000 and $15,000 in interest,
respectively.
8
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of May 31, 2006 and
November 30, 2005:
May 31, November 30,
2006 2005
---------------- ----------------
Computer equipment and furniture $ 285,000 $ 273,000
Leasehold improvements 5,000 6,000
Other 9,000 8,000
---------------- ----------------
299,000 287,000
Less: Accumulated Depreciation (155,000) (128,000)
---------------- ----------------
$ 144,000 $ 159,000
================ ================
4. NOTES PAYABLE
Notes payable consists of borrowings under a $6.5 million revolving line
of credit with Harbor Federal Savings Bank. The credit facility is secured
by inventories and related homebuilding assets. Notes payable also
consists of a $1 million mortgage note due in December 2006 from Harbor
Federal Savings Bank. The mortgage note is secured by the land purchased
in the Magnolia Plantation subdivision. The annual interest rate on both
the revolving credit line and mortgage note is the bank's prime rate plus
1% (8.75% at May 31, 2006).
5. SHAREHOLDERS' EQUITY ACTIVITY
During the three and six months ended May 31, 2006, 19,230 and 37,085
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.
Stock-based compensation expense for the three and six months ended May
31, 2006, amounted to $13,000 and $25,000, 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 equity securities which are included in prepaid expenses and
other current assets. The following table reflects comprehensive income
for the six months ended May 31, 2006 and 2005:
9
Six months ended May 31,
--------------------------------------
2006 2005
------------------ ------------------
Net income (loss) $ 69,000 ($305,000)
Other comprehensive income (loss) 75,000 (52,000)
------------------ ------------------
Comprehensive income (loss) $ 144,000 ($357,000)
================== ==================
6. 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,
------------------------------ ------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Income (loss) - (numerator) $ 58,000 $ (343,000) $ 69,000 $ (305,000)
============== ============== ============== ==============
BASIC:
Weighted average shares
outstanding - (denominator) 9,516,000 9,406,000 9,507,000 9,389,000
============== ============== ============== ==============
Income (loss) per common share $ 0.01 $ (0.04) $ 0.01 $ (0.03)
============== ============== ============== ==============
DILUTED:
Weighted average shares outstanding 9,516,000 9,406,000 9,507,000 9,389,000
Effect of dilutive securities 175,000 - 166,000 -
-------------- -------------- -------------- --------------
Adjusted weighted average
shares - (denominator) 9,691,000 9,406,000 9,673,000 9,389,000
============== ============== ============== ==============
Income (loss) per common share - diluted $ 0.01 $ (0.04) $ 0.01 $ (0.03)
============== ============== ============== ==============
The effects of 703,800 stock options outstanding as of May 31, 2006 have
been excluded from common stock equivalents because their effect on income
per share would be anti-dilutive. 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.
7. 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 two business
segments as follows:
10
HOMEBUILDING AND CONSTRUCTION SERVICES
Homes by Calton, LLC constructs single-family residential homes in the
state of Florida through its qualified contractors.
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.
CORPORATE OVERHEAD
The corporate division provides senior management, accounting, human
resources and investor relations services to all wholly owned subsidiaries
of Calton, Inc.
Operating results, by industry segment, for the six months ended May 31,
2006 and 2005 are as follows (in thousands):
SIX MONTHS ENDED MAY 31, 2006
----------------------------------------------------------
Internet Corporate Total
Development Homebuilding Overhead Company
----------------------------------------------------------
Total revenues $ 379 $ 4,755 $ - $ 5,134
Total cost of revenues 208 3,397 - 3,605
SG&A Expense 208 636 556 1,400
Income (loss) from operations (5) 695 (561) 129
Other income (expense), net - (3) 30 27
Net income (loss) (5) 611 (537) 69
Total assets $ 249 $ 9,511 $ 438 $ 10,198
SIX MONTHS ENDED MAY 31, 2005
----------------------------------------------------------
Internet Corporate Total
Development Homebuilding Overhead Company
----------------------------------------------------------
Total revenues $ 319 $ 3,282 $ - $ 3,601
Total cost of revenues 148 2,495 - 2,643
SG&A Expense 179 525 538 1,242
Income (loss) from operations 1 255 (540) (284)
Other income (expense), net 15 (18) - (3)
Net income (loss) 16 144 (465) (305)
Total assets $ 209 $ 6,085 $ 363 $ 6,657
11
8. 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 the
total sales price of the home. 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, 2006:
Balance, December 1, 2005 $ 59,000
Estimated costs 24,000
Payments and other adjustments (23,000)
-------------
Balance, May 31, 2006 $ 60,000
=============
LAND PURCHASE AGREEMENTS
In December 2005, the Company purchased an undeveloped 10-acre parcel in
Vero Beach, Florida named Magnolia Plantation which will contain 21 single
family homes. Land approvals and development for the property are
proceeding with home construction anticipated to commence by the end of
fiscal 2006.
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 $30,000 remains as of May 31, 2006.
Thirty-eight (38) lots have been purchased under this Land Purchase
Agreement as of May 31, 2006.
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
$300,000.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2006 AND
2005
REVENUES: Consolidated revenues for the three months ended May 31, 2006
increased to $2,776,000 from $1,324,000 for the three months ended May 31,
2005. Revenues for the six months ended May 31, 2006 increased to
$5,134,000 from $3,601,000 for the six months ended May 31, 2005. The
increase for both the quarter and six months is primarily attributable to
the Company's homebuilding segment which delivered more homes at higher
selling prices than during the same periods last year.
COST OF SALES: Cost of sales consists of cost of goods sold for the
homebuilding segment and project personnel and expenses associated with
the Internet development segment. Homebuilding cost of goods sold was
$1,849,000 for the quarter ended May 31, 2006 compared to $883,000 for the
quarter ended May 31, 2005. Homebuilding cost of goods sold was $3,397,000
for the six months ended May 31, 2006 compared to $2,495,000 for the six
months ended May 31, 2005. The increase in cost of goods sold for both the
quarter and six months was a result of more home deliveries during the
same period of the prior year. Gross profit margin for the homebuilding
segment was 28% and 24% for the three months ended May 31, 2006 and 2005,
respectively. Gross profit margin for the homebuilding segment was 29% and
24% for the six months ended May 31, 2006 and 2005, 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
increased from $78,000 in the three months ended May 31, 2005 to $104,000
for the three months ended May 31, 2006. Project personnel and expenses
for the Internet development segment increased from $148,000 for the six
months ended May 31, 2005 to $208,000 for the six months ended May 31,
2006. Gross profit margin for the Internet development segment was 49% and
54% for the quarters ended May 31, 2006 and 2005, respectively. Gross
profit margin for the Internet development segment was 45% and 54% for the
six months ended May 31, 2006 and 2005, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended May 31, 2006 were $732,000
compared to $654,000 for the quarter ended May 31, 2005. Selling, general
and administrative expenses for the six months ended May 31, 2006 were
$1,400,000 compared to $1,242,000 for the six months ended May 31, 2005.
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 both of the quarters ended May 31, 2006 and 2005. Interest
income increased to $4,000 during the six months ended May 31, 2006 from
$3,000 during the six months ended May 31, 2005. The increase was a result
of higher average deposited balances. Currently, cash is being used in
operating activities and accordingly, interest income is expected to
decline during fiscal 2006.
13
INTEREST EXPENSE: Interest expense amounted to $34,000 for the three
months ended May 31, 2006 compared to $47,000 for the three months ended
May 31, 2005. Interest expense amounted to $82,000 and $92,000 for the six
months ended May 31, 2006 and 2005, 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, 2006, the Company
capitalized $18,000 and $64,000 of interest, respectively.
LITIGATION SETTLEMENTS: The Company received $71,000 in litigation
settlements during the six months ended May 31, 2005.
SALES ACTIVITY AND BACKLOG Contract Number
Backlog of Homes
---------------- ------------
Backlog as of November 30, 2005 $2,250,000 4
Less: Homes delivered during the
six months ended May 31, 2006 (4,310,000) (7)
Plus: New contracts signed during the
six months ended May 31, 2006 2,875,000 4
---------------- ------------
Backlog as of May 31, 2006* $815,000 1
================ ============
*Backlog includes full sales price of On Your Lot homes. Please see
Footnote 1 for revenue recognition policies.
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 the Company seeks
to act as the contract builder for individual landowners.
The Company acquired an undeveloped 10-acre parcel in Vero Beach, Florida
known as Magnolia Plantation in December 2005 which will contain 21 single
family homes. The Company anticipates construction to commence in Magnolia
Plantation by the end of fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As of May 31, 2006, the Company had $4,339,000 in working capital compared
to $4,144,000 at November 30, 2005. 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 May 2007.
14
CASH FLOWS FROM OPERATING ACTIVITIES
The Company used $4,680,000 in its operating activities during the six
months ended May 31, 2006 compared to using $1,539,000 in cash for its
operating activities during the six months ended May 31, 2005. The current
year's cash usage reflects a $3,799,000 increase in inventory as a result
of the increased number of homes under construction.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company used $11,000 in investing activities during the six months
ended May 31, 2006 for the purchase of equipment and software. 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.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company generated $2,904,000 and $538,000 in cash from its financing
activities during the six months ended May 31, 2006 and 2005,
respectively. These amounts represented an increase in the Notes Payable
outstanding in the homebuilding segment.
COMMITMENTS, GUARANTEES AND OFF BALANCE SHEET ITEMS
LAND PURCHASE AGREEMENTS:
In December 2005, the Company purchased an undeveloped 10-acre parcel in
Vero Beach, Florida named Magnolia Plantation which will contain 21 single
family homes. Land approvals and development for the property are
proceeding with home construction anticipated to commence by the end of
fiscal 2006.
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 remaining deposit as of May 31, 2006 is $30,000.
Thirty-eight (38) lots have been purchased under this Land Purchase
Agreement as of May 31, 2006.
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
$300,000.
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.
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LOAN AGREEMENT:
The Company maintains a $6.5 million construction revolving line of credit
with Harbor Federal Savings Bank. 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. As of May 31,
2006, $3,841,000 of advances under the line of credit was outstanding.
In December 2005, the Company financed the purchase of a 10-acre
undeveloped land parcel in Vero Beach, Florida through a $1 million
mortgage note from Harbor Federal Savings Bank and working capital.
Interest on the note, which is secured by the land purchased, accrues at a
rate equal to the prime rate plus one percent (1%) per annum.
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, estimated
warranty costs charged to cost of sales, estimated construction costs used
to determine the percentage of completion of fixed price construction
contracts for revenue recognition purposes and the establishment of
reserves for contingencies. Actual results could differ from those
estimates. 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, 2005. As of May 31, 2006, 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, 2006 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company held its 2006 Annual Meeting of Shareholders (the "Meeting")
on May 10, 2006. At the Meeting, shareholders were asked to elect each of
Kenneth D. Hill and J. Ernst Brophy as directors for four-year terms
expiring at the 2010 annual meeting. In addition, the shareholders were
asked to approve the adoption of the Company's 2006 Equity Incentive Plan.
The results of the voting were as follows:
Broker
For Against Withheld Abstain Non-Vote
------------- ------------- ------------ ------------- -------------
Kenneth D. Hill 7,307,355 0 0 27,809 0
J. Ernest Brophy 7,306,360 0 0 28,804 0
Adoption of 2006
Equity Incentive Plan 4,942,157 214,873 0 14,842 2,163,292
The terms of each of Anthony J Caldarone, Mark N. Fessel, Frank C. Smith,
Jr. and John G. Yates (the other directors of the Company) continued after
the Meeting.
ITEM 5. OTHER INFORMATION
On June 7, 2006, PrivilegeONE Networks, LLC received a Notice of Allowance
and Issue Fee Due for its User Rewards Program and Associated
Communications System patent application. Payment of the Issue Fee has
been sent to the Patent Office. Issuance of the formal patent is expected
mid-August 2006.
ITEM 6. EXHIBITS
10.45 Calton, Inc. 2006 Equity Incentive Plan
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
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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 14, 2006
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