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 March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
6,740,095 shares of the Registrant's Common Stock, $.01 par value, were
outstanding as of April 30, 2003.
CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 31, 2003
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 13
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 19
ITEM 4
Controls and Procedures 20
PART II - OTHER INFORMATION
Items 1-6 21
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, general economic 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
costs and benefits of discontinuing certain operations, 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
MARCH 31, SEPTEMBER 30, MARCH 31,
2003 2003 2002
--------- ------------- ---------
Cash and cash equivalents $ 787 $ 2,475 $ 597
Accounts receivable 971 356 1,031
Inventories 7,418 5,017 6,056
Prepaids and other assets 122 59 108
Deferred income taxes, current 1,226 263 758
Income taxes receivable -- 119 --
Current assets of discontinued operations -- 1,333 1,685
--------- ------------- ---------
Total current assets 10,524 9,622 10,235
Property and equipment, net 11,852 12,093 12,363
Goodwill, net 631 631 686
Deferred income taxes 1,568 1,568 1,301
Other assets 197 211 226
Noncurrent assets of discontinued operations -- -- 1,209
--------- ------------- ---------
Total assets $ 24,772 $ 24,125 $ 26,020
========= ============= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,489 $ 2,749 $ 4,378
Accrued expenses 3,351 2,019 1,953
Notes payable, current -- -- 70
Current portion of long-term debt 390 501 574
Deferred income taxes, current -- -- 74
Current liabilities of discontinued operations -- 487 400
--------- ------------- ---------
Total current liabilities 9,230 5,756 7,449
Deferred rent payable 720 805 872
Long-term debt, net of current portion 7,191 8,246 8,630
--------- ------------- ---------
Total liabilities 17,141 14,807 16,951
--------- ------------- ---------
Commitments and contingencies
Non-voting preferred stock, with
mandatory redemption provisions 2,743 2,538 2,346
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 69 68 66
Additional paid-in capital 10,043 9,885 9,749
Accumulated deficit (3,828) (1,777) (1,696)
--------- ------------- ---------
6,284 8,176 8,119
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
--------- ------------- ---------
Total shareholders' equity 4,888 6,780 6,723
--------- ------------- ---------
Total liabilities and shareholders'
equity $ 24,772 $ 24,125 $ 26,020
========= ============= =========
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)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 20,115 $ 17,220 $ 9,252 $ 6,992
Cost of goods sold 11,207 9,457 4,729 3,563
---------- ---------- ---------- ----------
Gross profit 8,908 7,763 4,523 3,429
---------- ---------- ---------- ----------
Operating expenses 8,306 6,377 4,137 3,076
Occupancy expenses 1,690 1,460 869 773
Advertising expenses 984 725 430 253
Depreciation and amortization 318 464 136 228
Interest expense 405 443 205 216
Interest income (7) (9) (3) (6)
---------- ---------- ---------- ----------
Total expenses 11,696 9,460 5,774 4,540
---------- ---------- ---------- ----------
Loss from continuing operations
before income taxes (2,788) (1,697) (1,251) (1,111)
Income tax benefit (1,064) (596) (460) (373)
---------- ---------- ---------- ----------
Loss from continuing operations (1,724) (1,101) (791) (738)
Discontinued operations:
Loss from discontinued
operations, net of income tax
benefits of $330, $22, $80 and $2 (542) (41) (171) (4)
Gain on disposal of discontinued
operations, net of income tax
expense of $257, $--, $257, and $-- 420 -- 420 --
---------- ---------- ---------- ----------
Gain (loss) from discontinued operations (122) (41) 249 (4)
---------- ---------- ---------- ----------
Net loss (1,846) (1,142) (542) (742)
Accretion of preferred stock (205) (166) (102) (88)
---------- ---------- ---------- ----------
Net loss attributable to common shareholders $ (2,051) $ (1,308) $ (644) $ (830)
========== ========== ========== ==========
Weighted average number of
common shares outstanding -
basic and diluted 6,615 6,317 6,663 6,353
Net loss per common share - basic and diluted
Loss from continuing operations $ (.29) $ (.20) $ (.14) $ (.13)
Income (loss) from discontinued operations (.02) (.01) .04 --
---------- ---------- ---------- ----------
Net loss $ (.31) $ (.21) $ (.10) $ (.13)
========== ========== ========== ==========
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)
SIX MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $ (1,846) $ (1,142)
Adjustments to reconcile net loss to net
cash provided by (used for) operating
activities:
Loss from discontinued operations (net of tax) 122 41
Depreciation and amortization 318 464
Net change in operating assets and
liabilities 78 1,705
-------- --------
Net cash provided by (used for)
operating activities (1,328) 1,068
-------- --------
Cash flows from investing activities -
Additions to property and equipment (77) (143)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 159 140
Repayments of debt (1,166) (834)
-------- --------
Net cash used for financing activities (1,007) (694)
-------- --------
Net increase (decrease) in cash and cash
equivalents from continuing operations (2,412) 231
Net increase in cash and cash equivalents from
discontinued operations 724 87
-------- --------
Net increase (decrease) in cash and cash
equivalents (1,688) 318
Cash and cash equivalents at beginning of
period 2,475 279
-------- --------
Cash and cash equivalents at end of period $ 787 $ 597
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim unaudited condensed 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 consolidated financial position at March 31,
2003, and the results of operations and cash flows for the six-month and
three-month periods ended March 31, 2003 and 2002 have been made. Such
adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations for the
six-month and three-month periods ended March 31, 2003, and the cash flows for
the six-month period ended March 31, 2003, are not necessarily indicative of
expected results of operations and cash flows for the fiscal year ending
September 30, 2003.
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, 2003 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for fiscal 2002 have been reclassified to conform to the fiscal
2003 presentation. (See Note 5 - "Exit from Turkey Creek Farms")
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, September 30, March 31,
2003 2003 2002
--------- ------------- ---------
Finished goods $ 5,920 $ 4,006 $ 4,313
Work in process 1,317 929 1,522
Supplies 181 82 221
--------- ------------- ---------
$ 7,418 $ 5,017 $ 6,056
========= ============= =========
7
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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
three-month periods ended March 31, 2003 and 2002. Intersegment elimination
information is included to reconcile segment data to the condensed consolidated
financial statements. Amounts are in thousands:
Six Six Three Three
month month month month
period period period period
ended ended ended ended
March 31, March 31, March 31, March 31,
2003 2003 2003 2002
--------- --------- --------- ---------
REVENUES
From external customers
Retail $ 20,085 $ 17,203 $ 9,237 $ 6,985
Growing 30 17 15 7
--------- --------- --------- ---------
Totals 20,115 17,220 9,252 6,992
--------- --------- --------- ---------
From other operating segments
Retail -- -- -- --
Growing 476 517 345 337
--------- --------- --------- ---------
Totals 476 517 345 337
Elimination of intersegment sales (476) (517) (345) (337)
--------- --------- --------- ---------
Total consolidated net sales $ 20,115 $ 17,220 $ 9,252 $ 6,992
========= ========= ========= =========
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Retail $ (2,733) $ (1,640) $ (1,215) $ (1,252)
Growing (55) (57) (36) 141
--------- --------- -------- ---------
Total loss from continuing operations
before income taxes $ (2,788) $ (1,697) $ (1,251) $ (1,111)
========= ========= ======== =========
March 31, September 30, March 31,
2003 2003 2002
--------- ------------- ---------
TOTAL ASSETS
Retail $ 23,218 $ 21,715 $ 21,306
Growing 1,554 1,077 1,820
--------- ------------- ---------
Totals $ 24,772 $ 22,792 $ 23,216
========= ============= =========
The following table provides the revenues from external customers by groups of
similar products (amounts in thousands):
Six Six Three Three
month month month month
period period period period
ended ended ended ended
March 31, March 31, March 31, March 31,
2003 2003 2003 2002
--------- --------- --------- ---------
REVENUES FROM EXTERNAL CUSTOMERS
Living plants $ 10,266 $ 8,255 $ 6,157 $ 4,590
Gardening related products 5,735 5,107 3,047 2,352
Christmas and other 4,114 3,858 48 50
--------- --------- --------- ---------
Totals $ 20,115 $ 17,220 $ 9,252 $ 6,992
========= ========= ========= =========
8
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
Disposal of Wholesale Operations
In August 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 as of December 31, 2001. Specifically,
the Company ceased in an orderly fashion production and marketing of plants and
related products grown or purchased for sale to wholesale customers, including
other nursery retailers and landscape contractors. The disposal of the wholesale
operations was completed by December 31, 2001.
Exit from Turkey Creek Farms
In September 2002 the Company decided to sell its Turkey Creek Farms growing
operation and discontinue the merchandise that it produced. The Company incurred
operating losses and negative cash flows on Turkey Creek Farms in fiscal 2002
and concluded that market conditions then and for the foreseeable future were
such that Turkey Creek Farms was likely to remain uncompetitive.
The Turkey Creek Farms growing operation was sold in March 2003. A gain of
$420,000, net of income taxes, was recorded.
The Company recorded an inventory write-down of approximately $1.2 million in
fiscal 2002. The assets, liabilities and results of operations for Turkey Creek
Farms have been reclassified as discontinued operations in the accompanying
condensed consolidated financial statements in accordance with Statement 144.
(See Note 2 - "Reclassifications")
Following is a summary of the assets and liabilities of the discontinued
operations as of the applicable years (amounts in thousands):
March 31, September 30, March 31,
2003 2003 2002
--------- ------------- ---------
Cash $ -- $ 15 $ 24
Accounts receivable -- 1 46
Inventories -- 141 1,615
Property and equipment held for sale -- 1,176 --
--------- ------------- ---------
Current assets of discontinued operations $ -- $ 1,333 $ 1,685
========= ============= =========
Noncurrent assets of discontinued
operations - property and equipment $ -- $ -- $ 1,209
========= ============= =========
Accounts payable $ -- $ 476 $ 380
Accrued expenses -- 11 20
--------- ------------- ---------
Current liabilities of discontinued operations $ -- $ 487 $ 400
========= ============= =========
The property and equipment of the discontinued Turkey Creek Farms operation was
classified as a current asset at September 30, 2003 since it was sold in fiscal
2003.
9
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the operating results of the discontinued operations
for the applicable periods (amounts in thousands):
Six Six Three Three
Month Month Month Month
Period Period Period Period
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Sales $ 210 $ 1,784 $ 39 $ 432
Cost of goods sold 210 1,527 39 394
--------- --------- --------- ---------
Gross profit -- 257 -- 38
Expenses 872 320 251 44
--------- --------- --------- ---------
Loss from discontinued operations before income
taxes (872) (63) (251) (6)
Income tax benefit (330) (22) (80) (2)
--------- --------- --------- ---------
Loss from discontinued operations $ (542) $ (41) $ (171) $ (4)
========= ========= ========= =========
In April 2003 the Company decided to sell its Miller Plant Farms growing
operation ("Miller") and discontinue the merchandise that it produced. (See Note
9 - "Subsequent Event")
6. NEW ACCOUNTING PRONOUNCEMENTS
Statement 142
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142") as of October 1, 2002 and
no longer amortizes goodwill. As of the adoption date the Company had
unamortized goodwill in the amount of $631,000 which was subject to the
transition provisions of Statement 142.
In connection with the transitional goodwill impairment evaluation, Statement
142 required the Company to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company identified its reporting units and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company then determined the fair value of each reporting
unit and compared it to the reporting unit's carrying amount.
Based on those tests, there was no indication that any reporting unit's goodwill
was impaired. Accordingly, no transitional impairment losses were required to be
recognized as the cumulative effect of a change in accounting principle.
There was no amortization expense for the three-month and six-month periods
ended March 31, 2003. The Company's reported net loss for the three-month and
six-month periods ended March 31, 2002, adjusted for excluding the effects of
goodwill amortization, would have been $715,000 and $1,792,000, respectively.
The effect on adjusted net loss per share for the three-month and six-month
periods ended March 31, 2002 was insignificant.
10
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Statement 148
In December 2002 the Financial Accounting Standards Board ("FASB") issued
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123 ("Statement 148"). Statement
148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements of FASB Statement No.
123, Accounting for Stock-Based Compensation ("Statement 123") to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation arrangements in each
period presented, and provides for a specific tabular format of the pro forma
disclosures required by Statement 123.
The Company accounts for its stock options plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net loss and
loss per share if the Company had applied the fair value recognition provisions
of Statement 123 to stock-based employee compensation (amounts in thousands,
except per share amounts):
Six Six Three Three
Month Month Month Month
Period Period Period Period
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss, as reported $ (1,846) $ (1,142) $ (542) $ (742)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
income tax effects -- 432 -- 432
--------- --------- --------- ---------
Pro forma net loss $ (1,846) $ (1,574) $ (542) $ (1,174)
========= ========= ========= =========
Net loss per share:
Basic and diluted - as reported $ (.31) $ (.21) $ (.10) $ (.13)
Basic and diluted - pro forma $ (.31) $ (.28) $ (.10) $ (.20)
11
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
In fiscal 2002 the Company entered the San Antonio market by leasing seven
retail store locations (the "San Antonio Market Entry"). Three of those leases
were entered into with Mr. George J. Wechsler (the "Affiliate Leases"), who was
elected to the Company's Board of Directors and was named a Vice President of
the Company at the time of the San Antonio Market Entry. The Affiliate leases
have three year terms. Rental expense under the Affiliate Leases was $71,000 for
the six month period ended March 31, 2003 and $36,000 for the three month period
ended March 31, 2003. No rental expense under the Affiliate Leases was incurred
for the six month or three month periods ended March 31, 2002.
8. ADVERTISING EXPENSES
The substantial majority of the Company's advertising consists of printed
newspaper advertisements and radio announcements. Occasionally the Company will
use direct mail and other media.
The Company expenses all advertising costs as they are incurred.
9. SUBSEQUENT EVENT
Exit from Miller Plant Farms
In April 2003 the Company decided to sell its Miller Plant Farms growing
operation and discontinue the merchandise that it produced. The Company intends
to dedicate its resources towards its retail operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
INTRODUCTION
In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment. In fiscal
2003 the Company sold its Turkey Creek Farms growing operation and discontinued
the merchandise that it produced (see Note 5 to the Condensed Consolidated
Financial Statements). Accordingly, the following discussion of results of
operations has been separated into (i) Continuing Operations and (ii)
Discontinued Operations.
The Company's Miller Plant Farms growing operation ("Miller") is included in
Continuing Operations in this report. In April 2003 the Company decided to sell
Miller and discontinue the merchandise that it produced. In future reports
Miller will be included in Discontinued Operations.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
SIX MONTH PERIOD ENDED MARCH 31, 2003 COMPARED WITH SIX MONTH PERIOD ENDED MARCH
31, 2002
Loss from Continuing Operations before Income Taxes for the first six months of
fiscal 2003 (the "March 2003 Period") was higher than it was for the first six
months of fiscal 2003 (the "March 2002 Period"), primarily due to increased
expenses and lower gross profit as a percentage of net sales ("Gross Margin").
Sales increased 17%, from $17.2 million for the March 2002 Period to $20.1
million for the March 2003 Period. The increase was primarily attributable to
the addition of 7 new retail stores in the San Antonio Market in the fourth
quarter of fiscal 2002. The addition of the San Antonio retail stores was also
the primary factor in the 22% increase in inventories, from $6.1 million at
March 31, 2002 to $7.4 million at March 31, 2003.
Same-store sales were increased 1%, from $16.9 million for the March 2002 Period
to $17.1 for the March 2003 Period.
Gross Profit increased 15%, from $7.8 million for the March 2002 Period to $8.9
million for the March 2003 Period. However, Gross Margin declined from 45% for
the March 2002 Period to 44% for the March 2003 Period. The decline was
primarily attributable to aggressive price discounting at Christmas to increase
sales.
Operating expenses increased 30%. The increase was primarily attributable to the
opening of 7 retail stores in the San Antonio market. Same-store operating
expenses increased 6%. The increase in same-store operating expenses was
primarily attributable to increased labor costs associated with increased
staffing.
Occupancy expenses increased 16%. The increase was primarily attributable to the
leasing of 7 retail stores in the San Antonio market.
Advertising expenses increased 36%. The increase was primarily attributable to
the advertising in the San Antonio market to support the opening of 7 retail
stores there, and to increased advertising intended to help drive the increased
sales.
13
Depreciation and amortization declined 31%. The decrease was primarily
attributable to (i) goodwill no longer being amortized (See Note 6 to the
Condensed Consolidated Financial Statements) and (ii) lower capital expenditures
over the past several fiscal years, which has resulted in an increasing number
of assets becoming fully-depreciated.
Interest expense declined 9%. The decline was primarily attributable to (i)
lower amounts of long-term debt, (ii) lower seasonal borrowings under the
revolving line of credit, and (iii) lower interest rates.
Income tax benefit increased 79%. The increase was primarily attributable to the
increased loss from continuing operations before income taxes.
QUARTER ENDED MARCH 31, 2003 COMPARED WITH QUARTER ENDED MARCH 31, 2002
Loss from Continuing Operations before Income Taxes for the second quarter of
fiscal 2003 (the "March 2003 Quarter") was higher than it was for the second
quarter of fiscal 2003 (the "March 2002 Quarter"), primarily due to increased
expenses.
Sales increased 32%, from $7.0 million for the March 2002 Quarter to $9.2
million for the March 2003 Quarter. The increase was primarily attributable to
the addition of 7 new retail stores in the San Antonio Market in the fourth
quarter of fiscal 2002.
Same-store sales increased 12%, from $6.8 for the March 2002 Quarter to $7.7 for
the March 2003 Quarter, indicating increased demand for the Company's living
plants and related gardening products.
Gross Profit increased 32%, from $3.4 million for the March 2002 Quarter to $4.5
million for the March 2003 Quarter. The increase was directly related to the
increased demand for the Company's living plants and related gardening products.
Operating expenses increased 34%. The increase was primarily attributable to the
opening of 7 retail stores in the San Antonio market. Same-store operating
expenses increased 16%. The increase in same-store operating expenses was
primarily attributable to increased labor costs associated with increased
staffing.
Occupancy expenses increased 12%. The increase was primarily attributable to the
leasing of 7 retail stores in the San Antonio market.
Advertising expenses increased 70%. The increase was primarily attributable to
the advertising in the San Antonio market to support the opening of 7 retail
stores there.
Depreciation and amortization declined 40%. The decrease was primarily
attributable to (i) goodwill no longer being amortized (See Note 6 to the
Condensed Consolidated Financial Statements) and (ii) lower capital expenditures
over the past several fiscal years, which has resulted in an increasing number
of assets becoming fully-depreciated.
Interest expense declined 5%. The decline was primarily attributable to (i)
lower amounts of long-term debt, (ii) lower seasonal borrowings under the
revolving line of credit, and (iii) lower interest rates.
Income tax benefit increased 23%. The increase was primarily attributable to the
increased loss from continuing operations before income taxes.
14
DISCONTINUED OPERATIONS
SIX MONTH PERIOD ENDED MARCH 31, 2003 COMPARED WITH SIX MONTH PERIOD ENDED MARCH
31, 2002
Sales declined from $1,784,000 for the March 2002 Period to $210,000 for the
March 2003 Period. For the March 2002 Period, the Company's Turkey Creek Farms
growing operation was (i) selling its remaining wholesale inventories to
unrelated third parties, and (ii) producing for and selling to the Company's own
retail stores. For the fiscal 2003 Period, the Company used the remaining
inventories of its discontinued Turkey Creek Farms growing operation in its own
retail stores.
Gross Profit declined from $257,000 for the March 2002 Period to $-0- for the
March 2003 Period. The decline was primarily attributable to the decline in
sales.
Expenses increased from $320,000 for the March 2002 Period to $872,000 for the
March 2003 Period. The increase was primarily attributable to the requirements
of Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"), which requires
that costs and expenses of discontinued operations be recognized as they are
incurred. The estimated costs of discontinuing the wholesale operations had been
accrued during fiscal 2001. The Company early adopted Statement 144 in fiscal
2002.
The aforementioned factors caused the Loss before Income Taxes to increase from
$63,000 for the March 2002 Period to $872,000 for the March 2003 Period. See
Note 5 to the Condensed Consolidated Financial Statements.
QUARTER ENDED MARCH 31, 2003 COMPARED WITH QUARTER ENDED MARCH 31, 2002
Sales declined from $432,000 for the March 2002 Quarter to $39,000 for the March
2003 Quarter. For the March 2002 Quarter, the Company's Turkey Creek Farms
growing operation was producing for and selling to the Company's own retail
stores. For the fiscal 2003 Quarter, the Company used the remaining inventories
of its discontinued Turkey Creek Farms growing operation in its own retail
stores.
Gross Profit declined from $38,000 for the March 2002 Quarter to $-0- for the
March 2003 Quarter. The decline was primarily attributable to the decline in
sales.
Expenses increased from $44,000 for the March 2002 Quarter to $251,000 for the
March 2003 Quarter. The increase was primarily attributable to the requirements
of Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"), which requires
that costs and expenses of discontinued operations be recognized as they are
incurred. The estimated costs of discontinuing the wholesale operations had been
accrued during fiscal 2002. The Company early adopted Statement 144 in fiscal
2003.
The aforementioned factors caused the Loss before Income Taxes to increase from
$6,000 for the March 2002 Quarter to $251,000 for the March 2003 Quarter. See
Note 5 to the Condensed Consolidated Financial Statements.
15
--------------------------------------------------------------------------------
FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
--------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities were $1.1 million for the March 2002
Period compared to Cash Flows Used by Operating Activities of $1.4 million for
the March 2003 Quarter. The decline was primarily attributable to (i) a increase
in Inventories of $2.4 million for the March 2003 Period, compared to an
increase in Inventories of $0.8 for the March 2002 Quarter, and (ii) a Net Loss
of $1.8 million for the March 2003 Quarter compared to a Net Loss of $1.1
million for the March 2002 Quarter.
Cash flows Used for Investing Activities were $77,000 for the March 2003 Period
compared to $143,000 for the March 2002 Period. The decrease was primarily
attributable to a difference in the timing of certain replacements of furniture,
fixtures and vehicles. The Company continues to limit the amount spent on
capital expenditures during each fiscal year, and has no significant capital
projects planned for the remainder of fiscal 2003.
Cash Flows Used for Financing Activities were $1.0 million for the March 2003
Period compared to $0.7 million for the March 2002 Period. During the March 2003
Period the Company paid off one note payable that had a balance of $1.0 million.
By comparison, during the March 2002 Period the Company had repaid $0.7 million
in short-term borrowings under its revolving line of credit arrangement.
LINE OF CREDIT ARRANGEMENT
The Company's business is seasonal, and it relies on a revolving line of credit
arrangement provided by a bank (the "Line of Credit") to supplement its working
capital during seasons of lower sales volumes.
Typically, the Company borrows from the Line of Credit during the quarter ending
March 31, and repays those borrowings during the spring selling season included
in the quarter ending June 30. The amount which may be borrowed under the line
of credit is tied to amounts of accounts receivable and inventories, with a
maximum of $5.0 million. The amounts owed under the Line of Credit as of March
31, 2003 and 2002, and September 30, 2002 were $-0-, $70,000 and $-0-,
respectively.
The maximum and weighted average amounts borrowed under the Line of Credit were
as follows (amounts in thousands):
Six Six Three Three
Month Month Month Month
Period Period Period Period
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Maximum amount borrowed $ 2,985 $ 1,676 $ 2,985 $ 1,676
Weighted-average amount borrowed $ 772 $ 300 $ 1,544 $ 528
The Line of Credit has a one year term expiring May 29, 2003. The Company
typically renews the Line of Credit for an additional one-year term each year.
The Company expects to be able to renew the current Line of Credit.
The Line of Credit contains financial covenants requiring the Company to meet a
minimum amount for tangible net worth, a maximum ratio of liabilities to
tangible net worth, and an annual ratio of earnings before interest and non-cash
charges to current maturities of long-term debt. At March 31, 2003 the Company
was in compliance with the financial covenants required by the Line of Credit.
16
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of March 31, 2003 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
---------------------------------------------------------------------------
There-
2003(1) 2004 2005 2006 2007 after Totals
------- -------- -------- -------- -------- ------ --------
Long-term debt (including
current portion) $ 195 $ 500 $ 550 $ 620 $ 600 $5,116 $ 7,581
Future minimum lease
payments under
noncancellable operating
leases 1,240 2,408 1,923 1,366 850 1,868 9,655
Preferred stock with
mandatory redemption
provisions (2) -- 3,420 -- -- -- -- 3,420
------- -------- -------- -------- -------- ------ --------
Totals $ 1,435 $ 6,328 $ 2,473 $ 1,986 $ 1,450 $6,984 $ 20,656
======= ======== ======== ======== ======== ====== ========
(1) Amounts for 2003 represent obligations due during the remainder of fiscal
2003 (six months).
(2) Carrying amount of $2,538 as of September 30, 2002 and $2,743 as of March
31, 2003.
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;
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.
17
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 March 31, 2003 and 2002, and September 30, 2002
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.
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 March 31, 2003 and September 30, 2002 management
believes that no impairment has occurred and that no reduction of the estimated
useful lives is warranted.
Goodwill - As discussed in Note 6 to the Condensed Consolidated Financial
Statements, the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("Statement 142") effective October 1,
2002, and no longer amortizes goodwill.
In connection with the transitional goodwill impairment evaluation, Statement
142 required the Company to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company identified its reporting units and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company then determined the fair value of each reporting
unit and compared it to the reporting unit's carrying amount.
Based on those tests, there was no indication that any reporting unit's goodwill
was impaired. Accordingly, no transitional impairment losses were required to be
recognized as the cumulative effect of a change in accounting principle.
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.
18
SUPPLIERS
The wholesale market for living plants, related gardening products and Christmas
merchandise is highly competitive. The Company uses dozens of suppliers for its
living plants, related gardening products and Christmas merchandise, and there
are readily available alternative sources for substantially all of the products
sold by the Company. The Company has not encountered significant difficulties in
procuring merchandise to sell. The Company considers its relations with
suppliers to be good.
EMPLOYEES
The Company's employees are not covered by collective bargaining agreements. The
Company has not experienced any work stoppages. The Company considers its
relations with employees to be good.
COMPETITION
On February 13, 2003 The Home Depot ("Home Depot") opened a free-standing
nursery store ("Landscape Supply") in the Dallas-Fort Worth Market, where
Calloway's operates sixteen of its twenty-six retail stores. Home Depot is a
much larger competitor with substantially greater financial resources than
Calloway's.
In a press release dated February 6, 2003 Home Depot stated that Landscape
Supply will be "focusing on the professional landscapers and avid do-it-yourself
garden enthusiasts." In addition, Home Depot stated that it intends to open four
additional Landscape Supply stores in the Dallas-Fort Worth market, and has
already opened some of those four stores.
The retail nature of Landscape Supply's locations, and the retail orientation of
its merchandise, causes management to believe it could represent a change in the
competitive environment in Dallas-Fort Worth. However, management does not
believe that the Landscape Supply stores had a significant impact on the
Company's results of operations for the six month or three month periods ended
March 31, 2003.
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 March 31, 2003, 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 operations and cash flows,
assuming other factors are held constant.
At March 31, 2003 Calloway's had variable rate debt of $2.0 million, out of
total long-term debt of $7.6 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 $20,000 for the variable-rate debt.
19
ITEM 4. CONTROLS AND PROCEDURES
On March 31, 2003 (the "Evaluation Date") an evaluation was performed by the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the CEO and CFO concluded that the
Company's disclosure controls and procedures were effective as of the Evaluation
Date. Subsequent to the Evaluation Date there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls and procedures for financial reporting.
20
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.
The Annual Meeting of Shareholders of the Company was held on February 19, 2003.
The voting results of that meeting were as follows:
ELECTION OF DIRECTORS
Nominee For Withheld
----------------------------- ---------- --------
Dr. Stanley Block 5,393,853 44,850
James C. Estill 5,399,353 39,350
C. Sterling Cornelius 5,399,953 38,750
John T. Cosby 5,393,353 44,350
Daniel R. Feehan 5,392,953 45,750
Timothy J. McKibben 5,393,353 45,350
John S. Peters 5,393,353 45,350
George J. Wechsler 5,377,953 60,750
APPROVAL OF CALLOWAY'S NURSERY, INC. 2002 STOCK OPTION PLAN
For Against Abstain Broker Non-Votes
---------- --------- ------- ----------------
5,229,754 194,529 14,420 -0-
APPOINTMENT OF KPMG LP AS AUDITORS FOR FISCAL YEAR 2003
For Against Abstain Broker Non-Votes
---------- --------- ------- ----------------
5,362,794 25,650 50,259 -0-
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 99(m) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
(b) Reports on Form 8-K:
On February 18, 2003 the Company filed a Form 8-K disclosing that on
February 13, 2003 The Home Depot ("Home Depot") opened a free-standing
nursery store ("Landscape Supply") in the Dallas-Fort Worth Market, where
Calloway's operates sixteen of its twenty-six retail stores.
21
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: May 8, 2003
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
22
CERTIFICATIONS
I, Daniel G. Reynolds, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calloway's
Nursery, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
a. significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/s/ Daniel G. Reynolds
----------------------
Daniel G. Reynolds
Vice President and Chief Financial Officer
23
CERTIFICATIONS (CONT.)
I, James C. Estill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calloway's
Nursery, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
d. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/s/ James C. Estill
-------------------
James C. Estill
President and Chief Executive Officer
24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99(m) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.