UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of August 14, 2002
----- ---------------------
Common Stock, par value $.01 per share 6,464,503
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
PAGE
----
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
ITEM 1
Index to Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Items 1-6 20
2
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. We are including this
statement for the express purpose of providing Calloway's the protections of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
with respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements contained in this Report.
Our expected future results, products and service performance or other
non-historical facts are forward-looking and reflect our current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of our business, geographic concentration, the impact of weather
and other growing conditions, the ability to manage growth, the impact of
competition, the ability to obtain future financing, government regulations,
market risks associated with variable-rate debt, the entrance into the San
Antonio market and other risks and uncertainties defined from time to time in
our Securities and Exchange Commission filings.
Therefore, each reader of this report is cautioned to consider carefully these
factors as well as the specific factors discussed with each forward-looking
statement in this Report and disclosed in our filings with the Securities and
Exchange Commission as such factors, in some cases, have affected, and in the
future (together with other factors) could affect, our ability to implement our
business strategy and may cause actual results to differ materially from those
contemplated by the statements expressed in this Report.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
2002 2001 2001
-------- ------------- --------
Cash and cash equivalents $ 6,044 $ 279 $ 2,667
Accounts receivable 359 433 207
Inventories 4,848 6,042 6,145
Prepaids and other assets 102 230 245
Deferred income taxes, current 55 55 1,541
Income taxes receivable -- 1,180 --
Current assets of discontinued operations 70 2,847 2,321
-------- -------- --------
Total current assets 11,478 11,066 13,126
Property and equipment, net 13,382 13,888 14,056
Goodwill, net 658 740 767
Deferred income taxes 1,122 1,301 1,297
Other assets 219 266 273
Noncurrent assets of discontinued operations -- -- 629
-------- -------- --------
Total assets $ 26,859 $ 27,261 $ 30,148
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,453 $ 2,128 $ 3,630
Accrued expenses 1,370 1,534 1,335
Income taxes payable 680 -- 1,078
Notes payable, current -- 730 --
Current portion of long-term debt 557 732 721
Deferred income taxes, current -- 187 --
Current liabilities of discontinued operations -- 2,304 1,572
-------- -------- --------
Total current liabilities 6,060 7,615 8,336
Deferred rent payable 846 929 958
Long-term debt, net of current portion 8,318 8,646 9,883
-------- -------- --------
Total liabilities 15,224 17,190 19,177
-------- -------- --------
Commitments and contingencies
Non-voting preferred stock, with mandatory redemption
provisions 2,442 2,180 2,102
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock (6,447,522, 6,248,346 and 6,167,541
shares outstanding, respectively) 67 65 64
Additional paid-in capital 9,819 9,610 9,526
Retained earnings (accumulated deficit) 703 (388) 675
-------- -------- --------
10,589 9,287 10,265
Less: Treasury stock, at cost (250,000 common
shares) (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 9,193 7,891 8,869
-------- -------- --------
Total liabilities and shareholders'
equity $ 26,859 $ 27,261 $ 30,148
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 36,783 $ 37,586 $ 19,563 $ 20,251
Cost of goods sold 19,539 18,578 10,082 9,491
-------- -------- -------- --------
Gross profit 17,244 19,008 9,481 10,760
-------- -------- -------- --------
Operating expenses 10,034 9,839 3,697 3,676
Occupancy expenses 2,295 2,244 783 739
Advertising expenses 1,188 1,301 462 577
Depreciation and amortization 699 676 219 208
Interest expense 668 878 224 260
Interest income (20) (30) (11) (25)
-------- -------- -------- --------
Total expenses 14,864 14,908 5,374 5,435
-------- -------- -------- --------
Income from continuing operations before
income taxes 2,380 4,100 4,107 5,325
Income tax expense 1,009 1,577 1,614 2,006
-------- -------- -------- --------
Income from continuing operations 1,371 2,523 2,493 3,319
-------- -------- -------- --------
Discontinued operations:
Income (loss) from discontinued operations,
(net of income taxes (benefit) of
($12), ($371),$1, and ($346), respectively)
(18) (647) 2 (607)
Loss on disposal of discontinued
operations, (net of income tax benefit of
$1,736 in 2001) -- (3,027) -- (3,027)
-------- -------- -------- --------
(18) (3,674) 2 (3,634)
-------- -------- -------- --------
Net income (loss) 1,353 (1,151) 2,495 (315)
Accretion of preferred stock (262) (225) (96) (75)
-------- -------- -------- --------
Net income (loss) attributable to common
shareholders $ 1,091 $ (1,376) $ 2,399 $ (390)
======== ======== ======== ========
Weighted average number of common shares
outstanding
Basic 6,347 6,074 6,408 6,136
Diluted 6,381 6,074 6,512 6,136
Basic net income (loss) per common share:
Income from continuing operations $ .17 $ .38 $ .37 $ .53
Discontinued operations -- (.61) -- $ (.59)
-------- -------- -------- --------
Net income (loss) $ .17 $ (.23) $ .37 $ (.06)
======== ======== ======== ========
Diluted net income (loss) per common share:
Income from continuing operations $ .17 $ .38 $ .37 $ .53
Discontinued operations -- (.61) -- (.59)
-------- -------- -------- --------
Net income (loss) $ .17 $ (.23) $ .37 $ (.06)
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
----------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,353 $(1,151)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Loss from discontinued operations (net of tax) 18 3,674
Depreciation and amortization 699 676
Net change in operating assets and liabilities 4,373 (2,329)
------- -------
Net cash provided by operating activities 6,443 870
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (111) (423)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 211 240
Borrowings on debt -- 8,017
Repayments of debt (1,233) (7,893)
------- -------
Net cash provided by (used for) financing activities
(1,022) 364
------- -------
Net increase in cash and cash equivalents from continuing operations
5,310 811
Net increase in cash and cash equivalents from discontinued operations
455 1,443
------- -------
Net increase in cash and cash equivalents 5,765 2,254
Cash and cash equivalents at beginning of period 279 413
------- -------
Cash and cash equivalents at end of period $ 6,044 $ 2,667
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim unaudited consolidated financial statements were prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC). In
management's opinion, all adjustments considered necessary for a fair
presentation of the financial position at June 30, 2002, and the results of
operations for the three-month and nine-month periods ended June 30, 2002 and
2001, and cash flows for the nine-month periods ended June 30, 2002 and 2001
have been made. Such adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations and cash flows
for the nine-month period ended June 30, 2002 are not necessarily indicative of
expected results of operations and cash flows for the fiscal year ending
September 30, 2002.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
SEC rules and regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited financial statements
and related notes for the fiscal year ended September 30, 2001 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for fiscal 2001 have been reclassified to conform to the fiscal
2002 presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
June 30, September 30, June 30,
2002 2001 2001
------ ------ ------
Finished goods (retail) $2,810 $3,921 $4,344
Work in process (growing) 1,678 1,884 1,577
Supplies (growing) 360 237 224
------ ------ ------
$4,848 $6,042 $6,145
====== ====== ======
4. NOTES PAYABLE AND LONG-TERM DEBT
During June 2002 the Company amended its revolving line of credit agreement to
extend the maturity date to May 29, 2003. The amounts outstanding under the
revolving line of credit agreement at June 30, 2002, September 30, 2001 and June
30, 2001 are $0, $730,000, and $0, respectively. Those amounts are classified as
current liabilities in the accompanying condensed consolidated financial
statements.
In addition, the Company amended two of its term loan agreements as follows:
(a) A term loan with a balance of $863,000 at June 30, 2002 had the
maturity date extended to June 2012, and the monthly payment was
reduced to $9,508.
(b) A term loan with a balance of $994,000 at June 30, 2002 had the
maturity date extended to October 2014, and the monthly payment
was reduced to $9,433.
7
5. SEGMENT INFORMATION
The Company has two reportable segments: (i) Retail, and (ii) Growing.
The following is a tabulation of business segment information as of and for the
nine-month periods ended June 30, 2002 and 2001. Intersegment elimination
information is included to reconcile segment data to the condensed consolidated
financial statements. Amounts are in thousands:
Nine Nine Three Three
Months Ended Months Ended Months Ended Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
REVENUES
From external customers
Retail $ 36,720 $ 37,482 $ 19,517 $ 20,216
Growing 63 104 46 35
-------- -------- -------- --------
Totals 36,783 37,586 19,563 20,251
-------- -------- -------- --------
From other operating segments
Retail -- -- -- --
Growing 3,878 2,166 2,967 1,288
-------- -------- -------- --------
Totals 3,878 2,166 2,967 1,288
Elimination of intersegment sales (3,878) (2,166) (2,967) (1,288)
-------- -------- -------- --------
Total consolidated net sales $ 36,783 $ 37,586 $ 19,563 $ 20,251
======== ======== ======== ========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Retail $ 2,857 $ 4,126 $ 4,497 $ 5,367
Growing (477) (26) (390) (42)
-------- -------- -------- --------
Total income from continuing operations before
income taxes $ 2,380 $ 4,100 $ 4,107 $ 5,325
======== ======== ======== ========
June 30, September 30, June 30,
2002 2001 2001
------- ------- -------
TOTAL ASSETS
Retail $24,513 $21,973 $22,053
Growing 2,276 2,441 5,145
------- ------- -------
Totals $26,789 $24,414 $27,198
======= ======= =======
8
6. DISCONTINUED OPERATIONS
On August 7, 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its wholesale and growing segment. The
Company exited its wholesale operations during fiscal 2002. The wholesale
operation included the wholesale growing operations of Turkey Creek Farms as
well as the wholesale landscape distribution centers ("WLD") in Austin and
Houston. At Turkey Creek Farms, the Company now exclusively grows plants for
sale at its retail stores. The adopted disposal plan included: (i) the sale of
the Turkey Creek Farms wholesale inventories to unaffiliated customers, and (ii)
the sale of the WLD operations as an ongoing business to an unaffiliated third
party.
The sale of the WLD operations was completed in October 2001 and indebtedness
related to the WLD real property was repaid. The Turkey Creek Farms wholesale
inventory was completely sold or otherwise liquidated by the end of December
2001.
Following is a summary of the asset and liabilities of the discontinued
wholesale operations as of the applicable periods (amounts in thousands):
June 30, September 30, June 30,
2002 2001 2001
------- ------------- --------
Cash $ 21 $ 41 $ --
Accounts receivable 49 717 887
Inventories -- 1,458 1,434
Property and equipment -- 631 --
---- ------ ------
Current assets of discontinued operations $ 70 $2,847 $2,321
==== ====== ======
Noncurrent assets of discontinued operations $-- $ -- $ 629
==== ====== ======
Accounts payable $-- $ 693 $ 615
Accrued expenses -- 495 957
Current portion of long-term debt -- 1,116 --
---- ------ ------
Current liabilities of discontinued operations $-- $2,304 $1,572
==== ====== ======
Following is a summary of the operating results of the discontinued wholesale
operations for the applicable periods (amounts in thousands):
Nine Nine Three Three
Ended Ended Ended Ended
Months Months Months Months
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Sales $ 1,389 $ 5,287 $ -- $ 2,339
Cost of goods sold 1,132 4,591 -- 2,657
------- ------- ------- -------
Gross profit 257 696 -- (318)
Expenses 287 1,714 (3) 635
------- ------- ------- -------
Income (loss) from discontinued operations
before income taxes (30) (1,018) 3 (953)
Income tax expense (benefit) (12) (371) 1 (346)
------- ------- ------- -------
Income (loss) from discontinued operations
$ (18) $ (647) $ 2 $ (607)
======= ======= ======= =======
9
7. COMMITMENTS AND CONTINGENCIES
In July 2002 the Company opened seven retail stores in the San Antonio, Texas
market. The seven retail stores, plus an office and warehouse facility, were
leased under noncancellable operating leases. All of the leases expire in 2005
and contain renewal options for three years, which, in some cases, may be
extended for up to nine years. All of the leases require the Company to pay all
executory costs (such as property taxes, maintenance and insurance). Rental
payments include minimum rentals plus, in some cases, contingent rentals, based
on sales. The Company does not expect to be required to pay contingent rentals.
Future minimum lease payments under the aforementioned leases are as follows
(amounts in thousands):
YEAR ENDING SEPTEMBER 30,
2002 $ 60
2003 499
2004 500
2005 380
2006 --
Thereafter --
------
Totals $1,439
======
8. RELATED PARTY TRANSACTIONS
A board member and vice president of the Company is the landlord for three of
the newly signed lease facilities in the San Antonio market that have three year
terms (see Note 7). These new lease agreements were entered into after June 30,
2002. Future lease payments under the aforementioned leases are as follows
(amounts in thousands):
YEAR ENDING SEPTEMBER 30,
2002 $ 6
2003 142
2004 142
2005 107
2006 --
Thereafter --
------
Totals $ 397
======
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In August 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment (see Note 6
to Condensed Consolidated Financial Statements). Accordingly, the following
discussion of results of operations has been separated into (i) Continuing
Operations and (ii) Discontinued Operations.
CONTINUING OPERATIONS
(Amounts in millions, except per share amounts)
Third quarter highlights (unaudited) Fiscal 2002 Fiscal 2001
----------------------------------- ---------- -----------
Consolidated net sales $ 19.6 $ 20.3
Retail segment sales $ 19.5 20.2
Growing segment sales 3.0 1.3
Less: internal sales $ (2.9) $ (1.3)
Sales increase (decrease) (3%) 13%
Number of retail stores (end of quarter) 19 20
Gross profit margin 48% 53%
Income from continuing operations before income taxes $ 4.1 $ 5.3
Income from continuing operations per common share (diluted) $ .37 $ .52
Cash flows provided by operations $ 5.8 $ 2.9
Retail inventories 2.8 4.3
Growing inventories $ 2.0 $ 1.8
Current ratio 1.89 1.57
Property and equipment (net) $ 13.4 $ 14.1
Long-term debt (including current portion) $ 8.9 $ 10.6
QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001
Sales decreased 3%. Aggressive price discounting late in the 2002 spring season
did not generate enough additional sales to offset a weaker start to the 2002
spring season.
Income from Continuing Operations before Income Taxes fell to $4.1 million for
the quarter ended June 30, 2002 (the "June 2002 Quarter") from $5.3 million for
the quarter ended June 30, 2001 (the "June 2001 Quarter") because of the lower
Sales volume and lower Gross Margin.
11
Gross Margin (Gross Profit divided by Sales) was 48% for the June 2002 Quarter
compared to 53% for the June 2001 Quarter. The primary cause of the reduction in
Gross Margin was the reduced Sales volume. For the 2002 Quarter the Company had
produced, at its own growing operations, a substantially higher proportion of
the plants to be sold by its retail stores. When Sales for the 2002 Quarter
declined 3%, the Company was left with unsold plants at its retail stores and
growing operations, which had to be addressed. The disposal of those plants was
done partially through promotions at the retail stores, where consumer prices
were sharply reduced, and by disposing of some unsold plants at the growing
operations.
Operating Expenses were essentially flat, increasing from $3,676,000 for the
June 2001 Quarter to $3,697,000 for the June 2002 Quarter.
Occupancy Expenses increased from $739,000 for the June 2001 Quarter to $783,000
for the June 2002 Quarter, primarily due to higher estimated property taxes for
the June 2002 Quarter than had been estimated for the June 2001 Quarter.
Advertising Expenses decreased 20% from $577,000 for the June 2001 Quarter to
$462,000 for the June 2002 Quarter, primarily due to reduced use of media other
than newspapers and radio.
Depreciation and Amortization Expenses Increased 1% from $208,000 for the June
2001 Quarter to $219,000 for the June 2002 Quarter as a result of capital
additions completed and placed in service during fiscal 2001.
Interest Expense decreased 14%, from $260,000 for the June 2001 Quarter to
$224,000 for the June 2002 Quarter, due to lower levels of long-term debt and
lower interest rates on variable-rate debt.
Inventories decreased from $6.0 million at June 30, 2001 to $4.8 million at June
30, 2002. Retail inventories declined $1.5 million from $4.3 million at June 30,
2001 to $2.8 million at June 30, 2002, while growing inventories rose from $1.8
million at June 30, 2001 to $2.0 million at June 30, 2002. The decrease in
retail inventories was due to clearance of slower moving merchandise items. The
increase in growing inventories was primarily due to additional supplies and
work in process for plants being grown for sale during the fall 2002 season.
12
NINE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH NINE MONTH PERIOD ENDED JUNE
30, 2001
Sales declined 2%, indicating similar consumer demand for Christmas merchandise,
living plants and related gardening products. While aggressive price discounting
at Christmas and late in the 2002 spring season had a positive effect on Sales,
it was not enough to offset a weaker start to the Christmas season and the 2002
spring season.
Income from Continuing Operations before Income Taxes fell to $2.4 million for
the nine month period ended June 30, 2002 (the "2002 Nine Month Period") from
$4.1 million for the nine month period ended June 30, 2001 (the "2001 Nine Month
Period") because of the lower Sales volume and lower Gross Margin.
Gross Margin (Gross Profit divided by Sales) was 47% for the June 2002 Period
compared to 51% for the 2001 Nine Month Period. The primary cause of the
reduction in Gross Margin was the reduced Sales volume. For the 2002 Nine Month
Period the Company had produced, at its own growing operations, a substantially
higher proportion of the plants to be sold by its retail stores. When Sales for
the 2002 Nine Month Period declined 2%, the Company was left with unsold plants
at its retail stores and growing operations, which had to be addressed. The
disposal of those plants was done partially through promotions at the retail
stores, where consumer prices were sharply reduced, and by disposing of some
unsold plants at the growing operations.
Operating Expenses increased 2% from approximately $9.8 million for the 2001
Nine month Period to approximately $10.0 million for the 2002 Nine month Period.
Occupancy Expenses increased from approximately $2.2 million for the 2001 Nine
month Period to approximately $2.3 million for the 2002 Nine Month Period,
primarily due to higher estimated property taxes for the 2002 Nine Month Period
than had been estimated for the 2001 Nine Month Period.
Advertising Expenses declined 9% from approximately $1.3 million for 2001 Nine
Month Period to approximately $1.2 million for the 2002 Nine Month Period,
primarily due to reduced use of media other than newspapers and radio.
Depreciation and Amortization Expenses rose 3% from $676,000 for the 2001 Nine
Month Period to $699,000 for the 2002 Nine Month Period as a result of capital
additions completed and placed in service during fiscal 2001.
Interest Expense decreased 24%, from $878,000 for the 2001 Nine Month Period to
$668,000 for the 2002 Nine Month Period, because of reduced amounts of long-term
debt and lower interest rates on variable-rate debt.
13
DISCONTINUED OPERATIONS
QUARTER ENDED JUNE 30, 2002 COMPARED WITH QUARTER ENDED JUNE 30, 2001
Sales decreased 100%. The WLD operations were sold near the end of October 2001,
and substantially all of the Turkey Creek Farms wholesale operation was
liquidated by the end of December 2001.
Gross Profit decreased 100%, for the same reasons as the decrease in Sales.
Expenses decreased 100%, for the same reasons as the decrease in Sales.
Income before Income Taxes was $3,000 for the June 2002 Quarter and there was a
Loss before Income Taxes of $953,000 for the June 2001 Quarter. The improvement
resulted from the discontinuation of the operations.
NINE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH NINE MONTH PERIOD ENDED JUNE
30, 2001
Sales decreased 74%. The WLD operations were sold near the end of October 2001,
and substantially all of the Turkey Creek Farms wholesale operation was
liquidated by the end of December 2001.
Gross Profit decreased 63%, for the same reasons as the decrease in Sales.
Expenses decreased 83%, for the same reasons as the decrease in Sales.
Loss before Income Taxes was $30,000 for the 2002 Nine Month Period compared to
$1,018,000 for the 2001 Nine Month Period. The improvement resulted from the
discontinuation of the operations.
CHANGES IN ASSETS AND LIABILITIES
Accounts Receivable decreased from $887,000 at June 30, 2001 to $49 at June 30,
2002 because most of the receivables related to the discontinued operations were
either collected or written-off. The Company expects to collect the remaining
balances.
Inventories decreased from $1,434,000 at June 30, 2001 to $0 at June 30, 2002
because substantially all of the inventories related to the discontinued
operations were either sold or otherwise liquidated.
Accounts Payable decreased from $615,000 at June 30, 2001 to $0 at June 30, 2002
because substantially all of the payables related to the discontinued operations
were paid.
Accrued Expenses decreased from $957,000 at June 30, 2001 to $0 at June 30, 2002
because substantially all of the accrued expenses related to the discontinued
operations were paid.
14
FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
Cash Flows Provided by Operating Activities were approximately $6.4 million for
the 2002 Nine Month Period, compared to approximately $870,000 for the 2001 Nine
Month Period. The primary causes of the improvement were:
O A refund of federal income taxes of approximately $1.1 million was
received during the 2002 Nine Month Period, as compared to federal
income taxes paid of approximately $1.4 million during the 2001 Nine
Month Period.
O Inventories were reduced by approximately $1.2 million for the 2002
Nine Month Period. Inventories had increased by $302,000 for the 2001
Nine Month Period.
O Accounts Payable and Accrued Expenses increased by approximately $1.1
million for the 2002 Nine Month Period. Accounts Payable and Accrued
Expenses had increased by $91,000 for the 2001 Nine Month Period.
Cash flows Used for Investing Activities were approximately $111,000 for the
2002 Nine Month Period, compared to $423,000 for the 2001 Nine Month Period. The
Company is limiting the amount of capital expenditures for fiscal 2002 to a
greater extent than it did for fiscal 2001.
Cash Flows Used for Financing Activities were approximately $1.0 million for the
2002 Nine Month Period, compared to Cash Flows Provided by Financing Activities
of approximately $0.4 million for the 2001 Nine Month Period. During the 2002
Nine Month Period the Company repaid approximately $1.2 million in long-term
debt.
The Company has improved its liquidity position at June 30, 2002 by (i) reducing
Notes Payable and Long Term Debt by approximately $1.7 million, and (ii)
increasing Cash by $3.4 million.
The Company's business is seasonal, and it relies on its revolving line of
credit arrangement to provide working capital during seasons of lower sales
volumes. Typically, the Company borrows from the revolving line of credit during
the quarter ending March 31, and repays those borrowings quickly during the
spring selling season included in the quarter ending June 30. Continued
availability of funds from the revolving line of credit depends upon the
Company's continued compliance with its loan covenants. At June 30, 2002 the
Company was in compliance with all of its loan covenants. The Company does not
anticipate any problem in meeting its capital requirements or staying within the
requirements of its loan covenants.
15
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of June 30, 2002 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
--------------------------------------------------------------------------------
2002(1) 2003 2004 2005 2006 Thereafter Totals
-------- -------- -------- -------- -------- -------- --------
Long-term debt (including current portion)(2) $ 184 $ 557 $ 608 $ 662 $ 715 $ 6,149 $ 8,875
Future minimum lease payments under
noncancellable operating leases (3)
560 2,144 2,130 1,567 1,001 2,322 9,724
Preferred stock with mandatory redemption
provisions (4) -- -- 3,420 -- -- -- 3,420
-------- -------- -------- -------- -------- -------- --------
Totals $ 744 $ 2,701 $ 6,158 $ 2,229 $ 1,716 $ 8,471 $ 22,019
======== ======== ======== ======== ======== ======== ========
(1) Includes amounts due between July 1, 2002 and September 30, 2002.
(2) Includes the amounts due under the amended term loans described in Note 4
to Condensed Consolidated Financial Statements.
(3) Includes the additional lease obligations described in Note 7 to Condensed
Consolidated Financial Statements.
(4) Carrying amount of $2,442 as of June 30, 2002.
16
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Some assets and liabilities by their nature are subject to estimates and
assumptions. For the Company, those assets and liabilities include:
o Inventories;
o Deferred income taxes;
o Property and equipment;
o Goodwill;
o Accrued expenses;
o Current and noncurrent assets and liabilities of discontinued
operations.
Inventories - The Company values its inventories using the lower of cost or
market on a first-in, first-out basis. The Company conducts physical inventories
three times each year: December, June and September.
The Company's retail inventories turn over several times each year; therefore,
the cost of each inventory item is approximately the same as its current
replacement cost. Merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis. The physical
inventories are taken at retail prices and adjusted to cost using sampling
techniques that determine a markup percentage for each merchandise category in
each market area.
The Company's growing inventories turn over more slowly than the retail
inventories, and items continue to grow and absorb costs until they are sold. At
each physical inventory, the accumulated cost of growing inventories is compared
to published wholesale prices from competing growers on a gallon-equivalent
basis, with allowance for the estimated costs of disposal of such inventories.
The growing inventories are then recorded at the lower of cost or market. In
addition, merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis.
Deferred income taxes - As of June 30, 2002 and 2001, and September 30, 2001 the
Company has recorded a valuation allowance of $0 for its deferred tax assets on
the weight of available evidence at those balance sheet dates. The primary
factor in not providing for a valuation allowance is the expectation that future
taxable income and the reversal of temporary differences will be sufficient for
the Company to realize the deferred tax assets. Such estimate could change in
the future based on the occurrence of one or more future events.
17
Property and Equipment - The Company reevaluates the propriety of the carrying
amounts of its properties as well as the amortization periods when events and
circumstances indicate that impairment may have occurred. Recoverability of
assets to be held and used is measured by the comparison of the carrying amount
of an asset to future cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of June 30, 2002 and 2001, and September 30, 2001
management believes that no impairment has occurred and that no reduction of the
estimated useful lives is warranted. As described below, during the fiscal year
ended September 30, 2001 the Company adopted a formal plan to discontinue
certain operations, and included in a loss on disposal of discontinued
operations an adjustment of the carrying amount of certain property and
equipment to its estimated net realizable value. The Company will adopt
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" as of October 1, 2002.
Goodwill - The Company assesses the recoverability of its goodwill by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows. The
amount of goodwill impairment, if any, is measured based on the projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash flows are not
achieved. Management believes that no impairment has occurred. The Company will
adopt Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" as of October 1, 2002. As of October 1, 2002, the Company
expects to have unamortized goodwill in the amount of $632,000 that will be
subject to the transition provisions. Amortization expense related to goodwill
was $81,000 and $108,000 for the nine months ended June 30, 2002 and the year
ended September 30, 2001, respectively.
Accrued expenses - The Company routinely accrues for various costs and expenses
for which it has received goods or services, but for which it has not been
invoiced. Typically, accrued expenses include such items as salaries and related
taxes, bonuses, and sales and use taxes for which amounts are readily
determinable and significant estimates are not necessary. Property taxes are
estimated and accrued based on the amounts paid for such taxes for the previous
year, until a new tax bill is received. Various other expenses are accrued from
time to time before an invoice is rendered based on the estimated costs of those
goods or services.
Current and Noncurrent Assets and Liabilities of Discontinued Operations -- As
noted above, in August 2001 the Company adopted a formal plan to discontinue
certain operations. Management used estimates to determine the amounts to be
recorded as a loss on disposal of discontinued operations. Those estimates
included:
o Net realizable value of wholesale inventories;
o Net realizable value of accounts receivable;
o Net realizable value of property and equipment;
o Expenses associated with selling and/or terminating
discontinued operations.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Calloway's is exposed to certain market risks, including fluctuations in
interest rates. We do not enter into transactions designed to mitigate such
market risk, nor do we enter into any transactions in derivative securities for
trading or speculative purposes. As of June 30, 2002, we had no foreign exchange
contracts or options outstanding.
We manage our interest rate risk by balancing (a) the amount of variable-rate
long-term debt with (b) the amounts due under long-term leases, which typically
have fixed rental payments that do not fluctuate with interest rate changes. For
our variable-rate debt, interest rate changes generally do not affect the fair
market value of such debt, but do impact future earnings and cash flows,
assuming other factors are held constant.
At June 30, 2002 Calloway's had variable rate debt of $3.2 million, out of total
long-term debt of $8.9 million. Holding other variables, such as debt levels,
constant, a one percentage point increase in interest rates would be expected to
have an estimated impact on pre-tax earnings and cash flows for next year of
approximately $32,000 for the variable-rate debt.
19
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 99 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(b) Reports on Form 8-K:
None.
20
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.
Dated: August 14, 2002
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
------------------------------------------
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
------------------------------------------
Daniel G. Reynolds, Vice President and Chief
Financial Officer
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRITPION
------- -----------
99 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.