10QSB 1 t10qsb-7922.txt 10QSB 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