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, 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 check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes [ ] No [X]
As of October 12, 2006, 9,564,336 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
CALTON, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
August 31, 2006 (Unaudited) and November 30, 2005........................ 3
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months Ended August 31, 2006 and August 31, 2005............... 4
Condensed Consolidated Statements of Operations (Unaudited) for the
Nine Months Ended August 31, 2006 and August 31, 2005.................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended August 31, 2006 and August 31, 2005.................... 6
Notes to Condensed Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation................ 12
Item 3. Controls and Procedures................................................... 15
PART II.OTHER INFORMATION
Item 5. Other Information......................................................... 16
Item 6. Exhibits.................................................................. 16
SIGNATURES .......................................................................... 17
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 industry
in general, changes in interest rates, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, November 30,
2006 2005
------------ ------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 1,153,000 $ 2,737,000
Accounts receivable 20,000 139,000
Inventory 8,352,000 4,734,000
Deposits on land - 350,000
Prepaid expenses and other current assets 215,000 125,000
------------ ------------
Total current assets 9,740,000 8,085,000
Deferred charges 30,000 19,000
Property and equipment, net 116,000 138,000
Assets of discontinued operations (Note 8) 58,000 182,000
------------ ------------
Total assets $ 9,944,000 $ 8,424,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable $ 141,000 $ 1,047,000
Accrued Expenses 256,000 597,000
Other current liabilities 90,000 451,000
Notes payable 5,194,000 1,937,000
Liabilities of discontinued operations (Note 8) 3,000 70,000
------------ ------------
Total current liabilities 5,684,000 4,102,000
------------ ------------
Commitments and contingent liabilities (Note 7) - -
Shareholders' Equity
Common stock, $.05 par value, 25,000,000 shares authorized;
10,697,855 shares issued: 9,564,336 and 9,497,491 shares
outstanding at August 31, 2006 and November 30, 2005, respectively 478,000 475,000
Additional paid-in capital 10,733,000 11,178,000
Accumulated deficit (1,126,000) (938,000)
Less cost of shares held in treasury, 1,133,519 and 1,200,364 shares
as of August 31, 2006 and November 30, 2005, respectively (5,969,000) (6,448,000)
Accumulated other comprehensive income 144,000 55,000
------------ ------------
Total shareholders' equity 4,260,000 4,322,000
------------ ------------
Total liabilities and shareholders' equity $ 9,944,000 $ 8,424,000
============ ============
See notes to condensed consolidated financial statements.
3
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2006 AND 2005
(UNAUDITED)
Three Months Ended August 31,
2006 2005
----------- -----------
REVENUE
Homebuilding $ 1,337,000 $ 3,584,000
----------- -----------
1,337,000 3,584,000
----------- -----------
COSTS AND EXPENSES
Cost of sales 1,162,000 2,541,000
Selling, general and administrative 492,000 645,000
----------- -----------
1,654,000 3,186,000
----------- -----------
Income (loss) from operations (317,000) 398,000
OTHER INCOME (EXPENSE)
Interest income 2,000 2,000
Interest expense (101,000) (44,000)
Litigation settlements (15,000) -
Insurance settlements - 194,000
Other expense (13,000) (22,000)
----------- -----------
Income (loss) before discontinued operations (444,000) 528,000
and income taxes
INCOME FROM DISCONTINUED OPERATIONS (NOTE 8) 187,000 15,000
----------- -----------
Income (loss) before income taxes (257,000) 543,000
Income tax expense - -
----------- -----------
NET INCOME (LOSS) $ (257,000) $ 543,000
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations $ (0.05) $ 0.06
=========== ===========
Income from discontinued operations $ 0.02 $ 0.00
=========== ===========
Net income (loss) $ (0.03) $ 0.06
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,535,000 9,436,000
Diluted 9,701,000 9,553,000
See notes to condensed consolidated financial statements.
4
CALTON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2006 AND 2005
(UNAUDITED)
Nine Months Ended August 31,
2006 2005
----------- -----------
REVENUE
Homebuilding $ 6,092,000 $ 6,866,000
----------- -----------
6,092,000 6,866,000
----------- -----------
COSTS AND EXPENSES
Cost of sales 4,559,000 5,036,000
Selling, general and administrative 1,684,000 1,705,000
----------- -----------
6,243,000 6,741,000
----------- -----------
Income (loss) from operations (151,000) 125,000
OTHER INCOME (EXPENSE)
Interest income 6,000 5,000
Interest expense (183,000) (137,000)
Litigation settlements (15,000) 71,000
Insurance settlements - 194,000
Other income (expense) 14,000 (40,000)
Income (loss) before discontinued operations
----------- -----------
and income taxes (329,000) 218,000
INCOME FROM DISCONTINUED OPERATIONS (NOTE 8) 150,000 22,000
----------- -----------
Income (loss) before income taxes (179,000) 240,000
Income tax expense (9,000) (2,000)
----------- -----------
NET INCOME (LOSS) $ (188,000) $ 238,000
=========== ===========
BASIC INCOME (LOSS) PER SHARE
Income (loss) from continuing operations $ (0.04) $ 0.03
=========== ===========
Income from discontinued operations $ 0.02 $ 0.00
=========== ===========
Net income (loss) $ (0.02) $ 0.03
=========== ===========
DILUTED INCOME (LOSS) PER SHARE
Income (loss) from continuing operations $ (0.04) $ 0.02
=========== ===========
Income from discontinued operations $ 0.02 $ 0.00
=========== ===========
Net income (loss) $ (0.02) $ 0.02
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,516,000 9,405,000
Diluted 9,685,000 9,529,000
See notes to condensed consolidated financial statements.
5
CALTON, INC. AND SUBSIDIARIES
CONOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 2006 AND 2005
(UNAUDITED)
Nine Months Ended August 31,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (188,000) $ 238,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation from continuing operations 29,000 17,000
Depreciation from discontinued operations 9,000 8,000
Amortization of deferred charges 31,000 103,000
Increase in deferred charges (42,000) (33,000)
Gain on sale of assets of discontinued operations (229,000) -
Stock based compensation for directors 37,000 36,000
Changes in operating assets and liabilities:
Accounts receivable 119,000 (48,000)
Inventory (3,618,000) (2,363,000)
Deposits on land 350,000 99,000
Prepaid expenses and other assets (1,000) (115,000)
Accounts payable, accrued expenses and other liabilities (1,608,000) 747,000
Change in assets of discontinued operations, net 144,000 7,000
Change in liabilities of discontinued operations, net (67,000) 9,000
----------- -----------
Net cash flows from operating activities (5,034,000) (1,295,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of long lived assets of discontinued operations 209,000 1,000
Purchase of equipment and software for discontinued operations (9,000) (9,000)
Purchase of equipment and software for continuing operations (7,000) (136,000)
----------- -----------
Net cash flows from investing activities 193,000 (144,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, net 3,257,000 1,346,000
----------- -----------
Net cash flows from financing activities 3,257,000 1,346,000
----------- -----------
Net decrease in cash and cash equivalents (1,584,000) (93,000)
Cash and cash equivalents at beginning of period 2,737,000 2,628,000
----------- -----------
Cash and cash equivalents at end of period $ 1,153,000 $ 2,535,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 295,000 $ 74,000
See notes to condensed 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, 2006, the results of operations for the three and nine
months ended August 31, 2006 and 2005 and the cash flows for the nine
months ended August 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
nine months ended August 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending November 30, 2006.
REVENUE RECOGNITION
Homebuilding revenues and related profits 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
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.
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 and nine months ended
August 31, 2006.
RECLASSIFICATIONS
Certain balances have been reclassified to conform with the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB INTERPRETATION NO. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
(FIN 48) clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with
FASB Statement No. 109, "Accounting for Income Taxes". This
interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN
48 is effective for fiscal years beginning after December 15, 2006. The
Company has not determined the impact of the adoption of FIN 48 on its
consolidated financial statements.
2. INVENTORY
---------
Inventory consists of the following as of August 31, 2006 and November
30, 2005:
August 31, November 30,
2006 2005
---------- ----------
Developed land $2,936,000 $ 824,000
Work in process 1,164,000 1,075,000
Speculative and model homes 4,252,000 2,835,000
---------- ----------
$8,352,000 $4,734,000
========== ==========
The Company capitalizes interest on loans directly associated with real
estate development projects. During the nine months ended August 31,
2006 and 2005, the Company capitalized $143,000 and $40,000 in interest,
respectively.
8
3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following as of August 31, 2006
and November 30, 2005:
August 31, November 30,
2006 2005
--------- ---------
Computer equipment and furniture $ 204,000 $ 236,000
Leasehold improvements 5,000 6,000
Other 9,000 9,000
--------- ---------
218,000 251,000
Less: Accumulated depreciation (102,000) (113,000)
--------- ---------
$ 116,000 $ 138,000
========= =========
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 $1 million mortgage note due in December 2006 that is
payable to 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% (9.25% at August 31, 2006).
5. SHAREHOLDERS' EQUITY ACTIVITY
-----------------------------
During the three and nine months ended August 31, 2006, 29,760 and
66,845 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 nine
months ended August 31, 2006, amounted to $13,000 and $37,000,
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
9
following table reflects comprehensive income for the nine months ended
August 31, 2006 and 2005:
Nine months ended August 31,
----------------------------
2006 2005
---------- ----------
Net income (loss) ($188,000) $ 238,000
Other comprehensive income 89,000 13,000
---------- ----------
Comprehensive income (loss) ($ 99,000) $ 251,000
========== ==========
6. NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
The following table reconciles the numerators and denominators of the
basic and diluted income (loss) per share computations:
Three months ended Nine months ended
August 31, August 31,
--------------------------- ---------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Income (loss) - (numerator) $ (257,000) $ 543,000 $ (188,000) $ 238,000
=========== =========== =========== ===========
BASIC:
Weighted average shares
outstanding - (denominator) 9,535,000 9,436,000 9,516,000 9,405,000
=========== =========== =========== ===========
Income (loss) per common share $ (0.03) $ 0.06 $ (0.02) $ 0.03
=========== =========== =========== ===========
DILUTED:
Weighted average shares outstanding 9,535,000 9,436,000 9,516,000 9,405,000
Effect of dilutive securities 166,000 117,000 169,000 124,000
----------- ----------- ----------- -----------
Adjusted weighted average
shares - (denominator) 9,701,000 9,553,000 9,685,000 9,529,000
=========== =========== =========== ===========
Income (loss) per common share - diluted $ (0.03) $ 0.06 $ (0.02) $ 0.02
=========== =========== =========== ===========
7. 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.
10
Following is the Company's warranty reserve activity for the nine months
ended August 31, 2006:
Balance, December 1, 2005 $ 59,000
Estimated costs 51,000
Payments and other adjustments (54,000)
--------
Balance, August 31, 2006 $ 56,000
========
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. All 41 developed lots have
been purchased as of August 31, 2006.
8. DISCONTINUED OPERATIONS
-----------------------
On July 31, 2006, the Company completed the sale of substantially all of
the assets of eCalton.com, Inc. to Bray Web Development, Inc. for
$250,000 less purchase price adjustments of approximately $41,000.
The condensed consolidated financial statements and related footnotes
for all periods presented have been reclassified to reflect the
discontinued operations. The operating results of the discontinued
operations are summarized as follows:
Three Months Ended Nine Months Ended
August 31, August 31,
----------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net revenues $ 130,000 $ 223,000 $ 509,000 $ 542,000
Cost of goods sold 70,000 111,000 277,000 259,000
--------- --------- --------- ---------
Gross profit 60,000 112,000 232,000 283,000
Operating expense (98,000) (97,000) (307,000) (276,000)
Non-operating expense (income), net (4,000) - (4,000) 15,000
Gain on sale of assets 229,000 - 229,000 -
--------- --------- --------- ---------
Income from discontinued operations $ 187,000 $ 15,000 $ 150,000 $ 22,000
========= ========= ========= =========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED AUGUST 31,
2006 AND 2005
REVENUES: Consolidated revenues for the three months ended August 31,
2006 were $1,337,000 compared to $3,584,000 for the three months ended
August 31, 2005. Revenues for the nine months ended August 31, 2006 and
2005 were $6,092,000 and $6,866,000, respectively. The decrease for both
the three and nine months is primarily attributable to the Company's
homebuilding operations which delivered fewer homes than during the same
periods last year. The Company delivered three homes and six homes
during the three months ended August 31, 2006 and 2005, respectively.
The Company delivered 10 homes and 12 homes during the nine months ended
August 31, 2006 and 2005, respectively.
COST OF SALES: Homebuilding cost of goods sold was $1,162,000 for the
quarter ended August 31, 2006 compared to $2,541,000 for the quarter
ended August 31, 2006. Homebuilding cost of goods sold was $4,559,000
for the nine months ended August 31, 2006 compared to $5,036,000 for the
nine months ended August 31, 2005. The reduction in cost of goods sold
for both the three and nine-month periods was a result of fewer home
deliveries during the same periods of the prior year as discussed above.
Profit margin for the homebuilding segment was 13% and 29% for the
quarters ended August 31, 2006 and 2005, respectively, and 25% and 27%
for the nine months ended August 31, 2006 and 2005, respectively. The
decrease for both the quarter and nine-month profit margins was due to
decreased sales prices of homes delivered due to weakening market
conditions in 2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses for the quarter ended August 31, 2006 were
$492,000 compared to $645,000 for the quarter ended August 31, 2005. The
reduction in selling, general and administrative expenses is primarily
attributable to a reduction in personnel and advertising expenditures
for the quarter ended August 31, 2006. Selling, general and
administrative expenses for the nine months ended August 31, 2006 were
$1,684,000 compared to $1,705,000 for the nine months ended August 31,
2005. The decrease in selling, general and administrative expenses is
primarily attributable to reduced advertising expenditures for the nine
months ended August 31, 2006.
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 August 31, 2006 and 2005. Interest
income increased from $5,000 during the nine months ended August 31,
2005 to $6,000 during the nine months ended August 31, 2006. 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 the remainder of fiscal 2006.
INTEREST EXPENSE: Interest expense amounted to $101,000 and $44,000 for
the three months ended August 31, 2006 and 2005. Interest expense
amounted to $183,000 and $137,000 for the nine months ended August 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 in real estate inventory. During the
three and nine months ended August 31, 2006, the Company capitalized
$38,000 and $143,000 of interest, respectively.
12
LITIGATION SETTLEMENTS: The Company paid $15,000 in litigation
settlements during the three months ended August 31, 2006. The Company
received $71,000 in litigation settlements for the nine months ended
August 31, 2005.
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, 2005 $ 2,250,000 4
Less: Homes delivered during the
nine months ended August 31, 2006 (6,024,000) (10)
Plus: New contracts signed during the
nine months ended August 31, 2006 4,289,000 7
----------- -----------
Backlog as of August 31, 2006 $ 515,000 1
=========== ===========
The Company is currently constructing homes in two communities: Amelia
Plantation and Pointe West, located in Vero Beach, Florida. The Company
is in the process of land development at Magnolia Plantation, a 21
single family home residential community. In addition, the Company is
continuing its "On-Your-Lot Program" in which it acts as the contract
builder for individual landowners. 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.
DISCONTINUED OPERATIONS: On July 31, 2006, eCalton.com, Inc., a
wholly-owned subsidiary of the Company, sold substantially all if its
assets to Bray Web Development, Inc. for $250,000. The transaction
resulted in a gain on the sale of assets to the Company of $229,000. As
a result of the sale, the Company is no longer in the business of
providing Internet business solutions or web site development and design
services. See Note 8 for operating results of the discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
-------
As of August 31, 2006, the Company had $4,056,000 in working capital
compared to $3,983,000 at November 30, 2005. Management believes that
cash on hand, plus anticipated amounts to be generated from operations
and borrowing availability under the Company's revolving credit
facility, will be sufficient to support consolidated operations through
at least the 12-month period ending August 31, 2007.
13
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
The Company used $5,034,000 in cash for its operating activities during
the nine months ended August 31, 2006, compared to using $1,295,000 in
cash during the same period of the prior year. The current year's cash
usage reflects a $3,618,000 increase in inventory as a result of the
increased number of homes under construction. In addition, the Company
reduced its accounts payable levels by $1,608,000.
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
The Company generated $193,000 in cash in its investing activities
during the nine months ended August 31, 2006, primarily attributable to
the sale of assets by eCalton.com, Inc. The Company used $144,000 in
cash in its investing activities during the nine months ended August 31,
2005, primarily related to the purchase of computer equipment and
software.
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
The Company generated $3,257,000 in cash from its financing activities
during the nine months ended August 31, 2006. The Company generated
$1,346,000 in cash from its financing activities during the nine months
ended August 31, 2005. These represented increases in the Company's
notes payable.
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. All 41 developed lots have
been purchased as of August 31, 2006.
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
the Company's wholly-owned subsidiary, PrivilegeONE Networks, LLC
("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.
PrivilegeONE, which was formed to develop a loyalty and co-branded
credit card program, received a patent on its User Rewards Program and
Associated Communications Systems on September 5, 2006. The patent
number is 7,103,573.
LOAN AGREEMENTS:
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
August 31, 2006, $4,127,000 of advances under the line of credit was
outstanding.
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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 August
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
August 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 5. OTHER INFORMATION
On September 5, 2006, PrivilegeONE Networks, LLC formally received a
patent on its User Rewards Program and Associated Communications
Systems. The patent number is 7,103,573.
ITEM 6. EXHIBITS
NUMBER DESCRIPTION
------ -----------
10.47 Asset Purchase Agreement dated July 24, 2006 between Bray Web
Development, Inc. and eCalton.com, Inc.
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: October 12, 2006
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