Exhibit 24
ODD-LOT PURCHASE OFFER
OF
CALLOWAY'S NURSERY, INC.
January 30, 2004
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE ODD-
LOT PURCHASE OFFER DESCRIBED HEREIN, PASSED UPON THE MERITS
OF OR FAIRNESS OF THE ODD-LOT PURCHASE OFFER OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
SUMMARY 1
THE ODD-LOT PURCHASE OFFER 3
Background and Description of the Odd-Lot Purchase
Offer 3
Appraisal Rights 3
Special Provisions for Unaffiliated Shareholders 4
Source of Funds 4
Persons Implementing the Odd-Lot Purchase Offer 4
Federal Income Tax Consequences 4
Accounting Treatment 5
SPECIAL FACTORS 5
Purpose and Reasons for the Odd-Lot Purchase Offer 5
Alternatives to the Odd-Lot Purchase Offer 7
Effects of the Odd-Lot Purchase Offer 7
Fairness of the Odd-Lot Purchase Offer 8
Fairness of the Offer Price 9
Approval of the Odd-Lot Purchase Offer 11
Recommendation of the Board 13
THE COMPANY 13
MARKET FOR THE COMMON STOCK 14
MANAGEMENT 16
Board of Directors 16
Non-Director Executive Officers 18
Security Ownership of Management 19
Certain Transactions with Management 21
SUMMARY FINANCIAL INFORMATION 22
WHERE YOU CAN FIND MORE INFORMATION 23
SUMMARY
Calloway's Nursery, Inc. (the "Company") operates retail
garden centers in the four largest metropolitan areas in
Texas, Dallas, Fort Worth, Houston and San Antonio, reaching
a combined population of 11.4 million. Founded in 1986, the
Company's first four retail stores opened in Dallas in 1987.
Since that time, the Company has grown to 26 retail stores
in its four market areas.
To improve the Company's financial performance, the Company
hereby offers to purchase from record holders of fewer than
100 shares of the Company's common stock all their shares of
Company common stock, with the intended result that the
Company's common stock will cease to be registered under the
Securities Exchange Act of 1934 (the "Exchange Act").
This summary briefly describes an offer (the "Odd-Lot
Purchase Offer") approved by the Board of Directors (the
"Board") of the Company that would allow the Company to
purchase the common stock of the Company from certain
shareholders. This summary describes the material terms and
features of the Odd-Lot Purchase Offer, but a more detailed
description is also included in this disclosure statement.
See "THE ODD-LOT PURCHASE OFFER; FAIRNESS OF THE ODD-LOT
PURCHASE OFFER."
The Odd-Lot Purchase Offer
* The Company offers to purchase from all holders of
record of fewer than 100 shares of the Company's common
stock all their shares of Company common stock for $0.90 per
share.
* The Company seeks to reduce the number of record
holders of its common stock to fewer than 300 (a "successful
completion").
* The offer is not conditioned on acceptance of the offer
by a minimum number of holders or for a minimum or maximum
number of shares.
* To participate in the offer, a shareholder must deliver
a letter of transmittal along with his odd-lot shares to the
Company prior to the termination of the offer.
* The Company will not purchase any odd-lot shares prior
to February 20, 2004. The Company will not terminate or
withdraw the offer prior to February 29, 2004.
Effects of the Odd-Lot Purchase Offer
* If upon the completion of the Odd-Lot Purchase Offer
the Company has fewer than 300 record holders of common
stock, the Company intends to terminate its registration
under the Exchange Act.
-1-
Benefits of the Odd-Lot Purchase Offer
* If successfully completed, the Odd-Lot Purchase Offer
will enable the Company to terminate the registration of its
common stock under the Exchange Act and thus suspend its
obligation to file annual and periodic reports and other
filings with the Securities and Exchange Commission (the
"SEC"). The Board estimates that the Company will save
approximately $500,000 annually, once the termination of the
common stock's registration becomes effective, by
eliminating the substantial costs associated with being a
public company, including the preparation and filing of
periodic reports with the SEC.
Disadvantages of the Odd-Lot Purchase Offer
* Following the successful completion of the Odd-Lot
Purchase Offer, the shareholders of the Company, including
unaffiliated shareholders, will likely experience reduced
liquidity for their shares of common stock.
* After the Company ceases to make SEC filings,
unaffiliated shareholders will not receive the same
information about the Company that would be available
through SEC filings and will accordingly have greater
difficulty obtaining information about the operations and
financial condition of the Company.
* There can be no assurance that the Odd-Lot Purchase
Offer will be successfully completed. If an insufficient
number of shareholders accept the Company's offer, the
Company will not be able to terminate the registration of
its common stock under the Exchange Act.
Board Determination of Fairness of the Odd-Lot Purchase
Offer
* The Board has determined that the Odd-Lot Purchase
Offer is advisable, fair and in the best interests of the
Company and its shareholders, including the Company's
unaffiliated shareholders. The Odd-Lot Purchase Offer is
fair to the Company's shareholders, including unaffiliated
shareholders, not selling their shares because the Company
will benefit substantially from the elimination upon
deregistration of the substantial costs of being a public
company. Unaffiliated shareholders selling their shares in
the Odd-Lot Purchase Offer will receive a fair purchase
price substantially in excess of current market prices. The
Board recommends that shareholders holding fewer than 100
shares of the Company's common stock accept the Company's
offer to purchase and sell their shares of common stock to
the Company pursuant to the Odd-Lot Purchase Offer, because
doing so will facilitate the successful completion of the
Odd-Lot Purchase Offer.
-2-
THE ODD-LOT PURCHASE OFFER
Background and Description of the Odd-Lot Purchase Offer
Upon a review of the Company's financial condition and
results of operations and the poor performance of the
Company's common stock on the NASDAQ SmallCap Market, the
Board determined it was appropriate to consider the
possibility of going private.
The members of management were instructed to explore
business strategies and alternatives for the Company and its
shareholders going forward. The management presented the
Board with several options for changing the Company's status
from a public to a private company. The Board, after
consultation with its outside legal counsel and management,
unanimously determined that the Odd-Lot Purchase Offer is
the fairest and most efficient available means to reduce the
number of shareholders and permit the Company to go private.
In the Odd-Lot Purchase Offer the Company offers to purchase
all of the shares of the Company's common stock held by
shareholders of record holding fewer than 100 shares of the
Company's common stock. The purchase price is $0.90 per
share. The Company presently intends to hold any purchased
shares as treasury stock. The Company offer is not
conditioned on acceptance of the offer by a minimum number
of holders or for a minimum or maximum number of shares. The
Company will not purchase any odd-lot shares prior to
February 20, 2004. The Company will not terminate or
withdraw the offer prior to February 29, 2004.
To participate in the Odd-Lot Purchase Offer, a shareholder
must deliver a properly completed letter of transmittal and
the certificates evidencing the shares of common stock being
tendered pursuant to the Odd-Lot Purchase Offer to the
Company prior to the termination of the offer. The
consideration for tendering the odd-lot shares pursuant to
the Odd-Lot Purchase Offer will be delivered as soon as
practicable after the acceptance of the odd-lot shares by
the Company. Only holders of record are authorized to tender
their odd-lot shares.
Appraisal Rights
Shareholders do not have the right to demand the appraised
value of their shares (dissenter's rights) in conjunction
with the Odd-Lot Purchase Offer under the Texas Business
Corporation Act. There may exist other rights or actions
under the Texas Business Corporation Act, Texas common law
or federal or state securities laws for shareholders who
object to the Odd-Lot Purchase Offer. Although the nature
and extent of such rights or actions are uncertain and may
vary depending on the facts or circumstances, shareholder
challenges to corporate action in general are related to the
fiduciary responsibilities of corporate officers and
directors, to the fairness of the corporate transactions and
the adequacy of disclosure.
-3-
Special Provisions for Unaffiliated Shareholders
No provisions have been made to grant unaffiliated
shareholders access to the corporate files of the Company or
to obtain counsel or appraisal services at the expense of
the Company. However, under Texas law, certain shareholders
of a corporation may examine the books and records of the
corporation. Upon a written demand stating the purpose of
the demand, a shareholder holding the Company's common stock
for at least six months immediately preceding a demand or a
shareholder holding at least 5% of all outstanding shares of
the Company's common stock has the right to examine and
extract information from the Company's relevant books and
records of account, minutes and share transfer records. A
shareholder may examine or extract information from such
records in person or by agent at any reasonable time for any
proper purpose.
Source of Funds
The total cost of implementing the Odd-Lot Purchase Offer
transactions is not expected to exceed $85,000. Costs
include legal fees, stock transfer agent fees, and the cost
of acquiring shares. The funds will come from the operating
cash flows provided by the Company's business and existing
credit facilities. As required by the Company's bank loan
agreement, the Company has obtained the approval of its
lender to purchase shares of the Company's common stock
pursuant to the Odd-Lot Purchase Offer.
Persons Implementing the Odd-Lot Purchase Offer
John T. Cosby and Daniel G. Reynolds, both Vice Presidents
of the Company, will have primary responsibility for
implementing the Odd-Lot Purchase Offer. Such officers will
be assisted by other officers and employees of the Company.
None of such persons will receive any special compensation
for his efforts in implementing the Odd-Lot Purchase Offer.
The Company does not intend to use any non-employees to
contact its shareholders in connection with the Odd-Lot
Purchase Offer.
Federal Income Tax Consequences
A shareholder who chooses to sell his shares of Company
common stock held as a capital asset will recognize a
capital gain or loss on such sale equal to the difference
between the cash received for the shares and the
shareholder's adjusted tax basis in his stock. Such capital
gain or loss will be treated as a long-term capital gain or
loss if, at the time of the sale, the shareholder has held
such stock for more than one year; otherwise, the capital
gain or loss will be short term. Non-corporate taxpayers are
generally subject to a maximum federal rate of (a) 15% on
their long-term capital gains and (b) 35% on their short-
term capital gains. All taxpayers are subject to certain
limitations on the deductibility of their capital losses. In
addition, a shareholder who sells his common stock to the
Company may be required to furnish the shareholder's social
security number or taxpayer identification number to the
Company or the transfer agent. Failure to provide such
information or the providing of incorrect information may
result in backup withholding. Each shareholder should
consult his own tax advisors in order to determine the tax
consequences to him of the proposed purchase under the Odd-
Lot Purchase Offer.
-4-
Accounting Treatment
The purchase of shares by the Company will be accounted for
as a purchase of treasury stock. The Company records
treasury stock purchases at cost. The par value of the
purchased shares will reduce common stock, and the excess of
the cost over par value will reduce additional paid-in
capital.
SPECIAL FACTORS
Purpose and Reasons for the Odd-Lot Purchase Offer
The purpose of the Odd-Lot Purchase Offer is to reduce the
number of common shareholders to fewer than 300 shareholders
of record, thus allowing the Company to terminate its common
stock's registration under the Exchange Act. The Board
believes that the proposed Odd-Lot Purchase Offer will
maximize shareholder value by relieving the Company of the
substantial costs of remaining a public company with
reporting requirements. The direct and indirect costs
associated with the Company's compliance with the filing and
reporting requirements of the Exchange Act have a material
adverse effect on the Company's financial performance and
the various costs associated with remaining a public company
are expected to increase further as a result of recent
legislative and regulatory initiatives to improve corporate
governance. Shareholders eligible to sell their shares in
the Odd-Lot Purchase Offer are provided an opportunity to
sell their shares at a fair price substantially in excess of
current market prices.
For the fiscal year ended September 30, 2003, the Company
spent $487,000, 16% of its December 31, 2003 market
capitalization, in costs related to being a public company,
the largest portion of which were attributable to fees paid
for audit services and audit related services. The Company
estimates that those costs will increase to approximately
$730,000 for fiscal year 2004.
By terminating its common stock's registration and relieving
itself of the reporting requirements of the Exchange Act and
other obligations, the Company estimates it will save
approximately $500,000 annually, once the termination of the
registration becomes effective. The Company believes the
savings will result from the elimination of NASDAQ stock
market fees, press release expenses and certain legal fees,
as well as a significant reduction in audit fees,
independent directors compensation, officers and directors
liability insurance, tax compliance, printing and mailing
costs, filing fees, stock transfer agent expenses and other
direct expenses associated with the required SEC filings and
being a public company. These savings result from relief
from the costs of complying with securities laws and
regulations, as well as reduction of other costs which are
typically higher for public companies, such as directors and
officers liability insurance.
-5-
The following table describes these estimated costs and
savings:
<Table>
<Caption>
Estimated
Estimated 2004 Estimated
2003 2004 Expenses Annual
Expenses Expenses if Private Savings
-------- --------- ---------- --------
Audit fees, including quarterly reviews $144,000 $225,000 $50,000 $175,000
Independent directors compensation 111,000 100,000 80,000 20,000
Directors and officers liability
insurance 65,000 125,000 50,000 75,000
NASDAQ stock market fees 23,000 60,000 -- 60,000
Audit-related fees (filing of Form S-8,
audit of employee benefit plan, due
diligence assistance 23,000 100,000 8,000 92,000
Other non-audit services (tax compliance) 32,000 35,000 20,000 10,000
Printing and EDGAR filing fees 16,000 30,000 10,000 20,000
Stock transfer agent fees 20,000 20,000 10,000 10,000
Press release fees 12,000 12,000 -- --
Legal fees (annual report, quarterly
reports and proxy) 36,000 12,000 -- --
Annual meeting costs & other 6,000 10,000 2,000 8,000
-------- --------- --------- --------
Total public company related costs $487,000 $729,000 $230,000 $499,000
======== ========= ========= ========
</Table>
The Company also incurs indirect costs as a result of
management's time expended in preparation and review of such
filings.
The Company has no present intention or, in the Board's
judgment, any current or foreseeable ability to raise
capital through sales of securities in a public offering or
to acquire other business entities using its stock as the
consideration for any such acquisition. Therefore, the
Company is unlikely to take advantage of its current status
as a public company for these purposes.
-6-
Based on the Company's size and resources the Board does not
believe the costs associated with remaining a public company
are justified. Because the Company is not receiving any
material benefits from its current status as a public
company and the costs of remaining a public company are
high, the Board has determined that it would be
irresponsible to continue as a public company in such
circumstances. In light of these disproportionate costs, the
Board believes that it is in the best interests of the
Company and its shareholders, including its unaffiliated
shareholders, to eliminate the administrative and financial
burden of remaining a public company subject to the
reporting requirements of the Exchange Act. As discussed
below, the Odd-Lot Purchase Offer was determined to be the
best method for becoming a non-reporting company. See"--
Alternatives to the Odd-Lot Purchase Offer."
Alternatives to the Odd-Lot Purchase Offer
In addition to the Odd-Lot Purchase Offer, the Board
considered conducting a series of negotiated transactions
with individual shareholders holding not more than 500
shares and two reverse stock split proposals as a method for
reducing the number of shareholders. Of the four
alternatives, the Odd-Lot Purchase Offer was the most
efficient and cost effective method for reducing the number
of Company shareholders to fewer than 300. Because of
applicable tender offer rules, the negotiated purchase
proposal would be difficult to implement in a manner that
would likely enable the Company to reduce its shareholders
of record to less than 300. Both reverse stock split
proposals considered would require more time to complete and
cost the Company substantially more money than the proposed
Odd-Lot Purchase Offer. The Board believes that the Odd-Lot
Purchase Offer provides the most efficient and economical
method for changing the Company's status from a reporting
company under the Exchange Act to a non-reporting company.
Effects of the Odd-Lot Purchase Offer
The Company is offering to purchase all the shares of all
record holders of fewer than 100 shares of the Company's
common stock for $.90 per share. The Company will not offer
to purchase shares from the holders of more than 100 shares
of the Company's common stock. Upon consummation of a
purchase between a shareholder and the Company, the
shareholder will be paid the purchase price in cash.
-7-
When, as a result of the Odd-Lot Purchase Offer, the total
number of shareholders is reduced to less than 300, the
Company intends promptly to terminate the common stock's
registration under the Exchange Act. The Company anticipates
there will be no organized public market for the Company's
common stock. Upon termination of the registration of the
common stock, the reduction in public information concerning
the Company and the termination of the Company's status as a
reporting company will likely adversely affect the liquidity
of the common stock. Upon the termination of the common
stock's registration under the Exchange Act, the Company
will no longer be subject to certain provisions of the
Exchange Act, including the requirement to file periodic
reports with the SEC or provide annual reports to
shareholders. Consequently, unaffiliated shareholders who
retain an equity interest in the Company will not receive
the same information regarding the Company's operations and
financial status that is currently available to them through
SEC filings. After deregistration, an unaffiliated
shareholder may request the Company for access to
information that is reasonably related to such person's
interest in the Company as a shareholder. Under Texas law, a
shareholder holding shares of the Company's common stock for
at least six months immediately preceding a demand or a
shareholder holding at least 5% of all outstanding shares
has the right for a proper purpose to examine and extract
information from the Company's relevant books and records of
account, minutes and share transfer records. The Board has
not yet determined what information regarding the Company's
operations it will continue to provide to the shareholders
retaining an equity interest in the Company.
Fairness of the Odd-Lot Purchase Offer
The Board believes that the Odd-Lot Purchase Offer is fair
and in the best interests of the Company and its
shareholders, including the Company's unaffiliated
shareholders.
To determine the best interests of the Company and its
shareholders, the Board considered a number of factors
arguing in favor of or against the Odd-Lot Purchase Offer.
On the positive side, the Board and members of management
reviewed and discussed:
- The Company's potential cost savings resulting from the
termination of the registration of the Company's common
stock;
- The anticipated effect of such savings on the Company's
total expenses and future prospects; and
- The elimination of the substantial amount of time and
effort currently expended by management in complying
with the requirements of being a public company.
-8-
The Board also considered the following negative effects of
termination of common stock registration:
- The inability of the Company to access the public
capital markets;
- The reduced ability of the Company to use its shares to
effect acquisitions;
- The likely adverse effect on the market for the common
stock and the shareholders' ability to buy and sell
shares; and
- The reduced access of unaffiliated shareholders to
Company information that is now available through SEC
filings.
Taking all of these factors into consideration, the Board
determined that the advantages of terminating registration
of the common stock outweighed the potential detriments of
deregistration. In particular, the Board concluded that
because the Company has no present intention or, in the
Board's judgment, any current or foreseeable ability to
raise capital through sales of securities in a public
offering or to acquire other business entities using its
publicly traded stock as consideration, the estimated annual
savings of approximately $500,000 would significantly
benefit the Company. The Board also considered the reduction
in the liquidity of the common stock and the shareholders'
ability to buy and sell shares, but concluded that the
favorable effect of the anticipated cost savings on the
Company's financial performance and future prospects
exceeded any detriment arising from the loss of liquidity.
The Board considered alternatives to the Odd-Lot Purchase
Offer, such as a series of negotiated purchases with
individual shareholders and a reverse stock split, but
determined that the Odd-Lot Purchase Offer was the most
expeditious and economical way of changing the Company's
status from that of a public company to a private company.
Fairness of the Offer Price
The Board made its initial determination of the purchase
price to be offered to certain of its shareholders at a
meeting of the Board held on September 11, 2003, where the
Board approved a plan to reduce the number of Company
shareholders of record below 300 through a series of
negotiated purchases with individual shareholders. Members
of management of the Company prepared a report (the
"Management Report") analyzing the significant factors, in
management's view, affecting the value of the common stock
of the Company. The Board was also provided all requested
financial information about the Company. After a
determination was made that applicable tender offer rules
would make the negotiated purchase plan difficult to
implement in a manner that would likely enable the Company
to reduce its shareholders of record to less than 300, the
Board approved the Odd-Lot Purchase Offer at its meeting
held on November 12, 2003. At such meeting, the Board also
confirmed $.90 as the purchase price in the Odd-Lot Purchase
Offer.
-9-
In determining the purchase price, the Board considered the
following methods of valuation: market prices, net book
value, estimated sale value, discounted cash flows, and
liquidation value.
Market Prices. At its September meeting, the Board looked at
the average closing price for the twelve-month period ended
August 31, 2003, both weighted for trading volume and
unweighted. The average closing price for such period was
$0.83 and the average weighted closing price was also $0.83.
At the November meetings the Board considered recent trading
prices of the common stock, which was in the $0.60 per share
range. The closing price on January 23, 2004, was $.51.
Net Book Value. At its September meeting, the Board
considered the Company's net book value per common share of
$0.96 as of June 30, 2003. Because of year-to-date
performance and the seasonality of the Company's business,
the Board anticipated that the net book value per common
share would decrease substantially in the fourth quarter.
Net book value per common share is the shareholders' equity
of the Company in excess of its redeemable preferred stock
divided by the number of shares outstanding determined in
accordance with United States generally accepted accounting
principles ("GAAP"). Net book value may not necessarily be
indicative of the fair value of the Company because GAAP
book values do not necessarily reflect the fair market value
of the Company's assets.
Other Valuation Methods Considered. At its September meeting
the Board also considered the relevance of other valuation
methods, such as: (i) discounted estimated future cash
flows, (ii) value of the Company if sold to an unaffiliated
third party, and (iii) liquidation value.
The Company's EBITDA was $264,000 in fiscal 2002 and the
Company had negative EBITDA of ($1,412,000) in fiscal year
2001. At its September meeting the Board noted that the
Company anticipated negative cash flows from operating
activities and negative EBITDA for fiscal year 2003.
Accordingly, the Board believed that trying to estimate
future cash flows for purposes of valuing the Company would
be speculative. "EBITDA" means the sum of the Company's net
income plus its expenses for interest, taxes, depreciation
and amortization.
Similarly, because of the Company's negative or low EBITDA
in recent years and anticipated negative EBITDA and negative
operating cash flows in 2003, at its September meeting the
Board concluded that the Company could not likely be sold to
an unaffiliated third party for an amount approaching the
Company's June 30, 2003 net book value. The Board also
considered the likely improvement to the Company's cash
flows and EBITDA in the event of the successful completion
of the Odd-Lot Purchase Offer, and concluded that the
Company could still not likely be sold for an amount
approaching the Company's June 30, 2003 net book value.
Management confirmed to the Board that during the last 4
years it had not been contacted by any persons interested in
acquiring the Company through a purchase or business
combination transaction and that it was not aware of any
likely suitors.
-10-
At the September meeting the Board also considered the
liquidation value of the Company's assets. Although very
difficult to quantify, based on discussions with management
the Board determined that, in a liquidation, it was unlikely
that the Company would realize gains from sales of
appreciated assets, such as the Company's real estate, in
excess of the substantial losses it would likely realize on
the sale of its inventory, much of it perishable.
Accordingly, the Board concluded that liquidation value
would likely not approach the Company's June 30, 2003 net
book value.
The Board did not assign specific weight to any particular
valuation method in the determination of the purchase price
for the purposes of the Odd-Lot Purchase Offer, instead
considering all the foregoing information and giving it such
weight as it deemed relevant. As a result, the Board
concluded at its September meeting that $0.90 per share was
a fair purchase price to all unaffiliated shareholders
selling in connection with the Odd-Lot Purchase Offer, and
the Board remains of that view.
In addition, the Board determined that the purchase price
pursuant to the Odd-Lot Purchase Offer was fair to all
shareholders of the Company, including those shareholders
who do not sell pursuant to the Odd-Lot Purchase Offer. At
an estimated cost of $85,000, including expenses, the
elimination upon deregistration of the substantial costs
associated with compliance with the filing and reporting
requirements imposed on public companies would more than
offset the costs of the Odd-Lot Purchase Offer. Therefore,
even though not all shareholders will participate in the Odd-
Lot Purchase Offer, the successful completion of the Odd-Lot
Purchase Offer and the resulting benefits to the Company are
in the best interests of the Company and fair to all of its
shareholders.
Approval of the Odd-Lot Purchase Offer
The Board has unanimously approved the Odd-Lot Purchase
Offer. The Board, including all the directors who are not
employees of the Company, determined that it was not in the
best interests of the Company or its shareholders, including
the Company's unaffiliated shareholders, to retain an
independent financial advisor, third-party advisor or
unaffiliated representative to act solely on behalf of
unaffiliated shareholders to negotiate the terms of the Odd-
Lot Purchase Offer or to prepare a report or opinion as to
the procedural and/or substantive fairness of the proposed
Odd-Lot Purchase Offer. The Board determined that the
expense of retaining such representation would outweigh the
benefits to the Company and its shareholders.
-11-
In considering whether an independent financial advisor,
third-party advisor or unaffiliated representative was
necessary in order to make this transaction procedurally
fair to the Company's shareholders, including its
unaffiliated shareholders, the Board evaluated whether the
interests of the unaffiliated shareholders would be
adequately represented and whether the proposed purchase
price could be fairly determined by the Board. The Board
determined that there was sufficient representation in the
decision-making at the Board level to protect the interests
of unaffiliated shareholders. The Board is comprised of
seven members, three of whom are not employees of the
Company or an affiliate of the Company. All members of the
Board hold in excess of 100 shares of the Company's common
stock and will not be eligible to participate in the Odd-Lot
Purchase Offer. The successful completion of the Odd-Lot
Purchase Offer will have no material effect on the Board
members' interest in the Company since it would reduce net
book value per common share by about $0.01 per share, and
would increase their respective percentage ownership of the
Company by approximately 0.05%. The Board also noted that
the cost of being a public company is adversely affecting
all of its shareholders, whether or not affiliated with the
Company. In addition, the Board found that no independent
committee of the Board was necessary to review the fairness
of the Odd-Lot Purchase Offer, noting that each Board member
could adequately convey his opinions and concerns to the
entire Board without the need for the establishment of such
a committee.
The Board has determined it is unnecessary to require a
majority vote of the unaffiliated shareholders to approve
the Odd-Lot Purchase Offer. Unaffiliated shareholders
holding fewer than 100 shares will have an opportunity to
determine whether or not they want to remain a shareholder
or participate in the Odd-Lot Purchase Offer with the
Company following the announcement of the proposed plan.
Unaffiliated shareholders holding 100 or more shares of the
Company's common stock have an opportunity to sell their
shares prior to the completion of the proposed Odd-Lot
Purchase Offer and the resulting deregistration, although
that opportunity is somewhat limited by the thin trading
market for the Company's common stock. No executive officer
or director intends to try to sell his shares in advance of
the Company terminating the common stock's Exchange Act
registration. The Board considered the consequences to
unaffiliated shareholders who will remain shareholders of
the Company following the successful completion of the Odd-
Lot Purchase Offer and the resulting deregistration. The
Board determined that the lack of a public market for the
shares will be offset by the cost savings that will result
from terminating the common stock's Exchange Act
registration. The past performance of the Company's common
stock is poor, the shares trade infrequently and with
minimal volume, and therefore there is currently a thin
trading market. In addition, the successful completion of
the proposed Odd-Lot Purchase Offer will not materially
change the rights, preferences or limitations of the
unaffiliated shareholders who retain an equity interest in
the Company, reducing net book value per common share by
about $0.01 and increasing their percentage ownership in the
Company by about 0.05%.
-12-
Those unaffiliated shareholders who retain an equity
interest in the Company following the successful completion
of the Odd-Lot Purchase Offer will indirectly bear the cost
of the proposed plan. However, the Board believes that the
proposed plan is efficient and economical and that, if
successful, the cost of the Odd-Lot Purchase Offer will be
offset by the anticipated savings of being a private company
without the duty to comply with the periodic reporting
requirements of the Exchange Act. In addition, the Company
will save a substantial amount of time and funds by
eliminating the administrative burdens of complying with
such requirements.
Recommendation of the Board
After consideration of all of the facts, the Board has
unanimously determined that the proposed Odd-Lot Purchase
Offer, taken as a whole, is substantively and procedurally
fair to, and in the best interests of the Company and its
shareholders, including the Company's unaffiliated
shareholders. The Board recommends that unaffiliated
shareholders holding of record fewer than 100 shares of the
Company's common stock accept the Company's offer and sell
their shares to the Company because doing so will facilitate
the successful completion of the Odd-Lot Purchase Offer.
THE COMPANY
Calloway's Nursery, Inc. (the "Company") operates retail
garden centers in the four largest metropolitan areas in
Texas: Dallas, Fort Worth, Houston and San Antonio, reaching
a combined population of 11.4 million. The address of its
principal executive offices is 4200 Airport Freeway, Suite
200, Fort Worth, Texas 76117-6200. The telephone number of
its principal executive offices is (817) 222-1122. The total
number of shares of the Company's common stock, $0.01 par
value, outstanding on December 31, 2003 was 6,961,890.
The Company's management team consists of professionals that
have worked together for most of the time that the Company
has been in operation. Several members of the management
team have been actively involved in the retail garden
industry or green industry throughout their professional
career. The goal of the management team is to continuously
improve the Company's products and services.
Founded in 1986, the Company's first four retail stores
opened in Dallas in 1987. Since that time, the Company has
grown to 26 retail stores: 16 Calloway's Nursery retail
stores in the Dallas and Fort Worth markets ("Dallas and
Fort Worth Markets"), 7 Calloway's Nursery retail stores in
the San Antonio market ("San Antonio Market") and 3
Cornelius Nurseries retail stores in the Houston market
("Houston Market").
-13-
Locations are selected on the basis of demographic data,
traffic patterns and shopping habits. All 26 retail stores
are Company-operated. The Company focuses on quality and
breadth of selection in bedding plants and nursery stock,
complemented by other related garden products such as soil
amendments and fertilizers. Apart from Christmas
merchandise, approximately two-thirds of its retail sales
are derived from living plants. The remaining one-third is
made up of products that primarily relate to their care and
nurturing.
All retail stores sell Christmas merchandise. The Houston
Market stores have developed a stronger and more financially
beneficial focus on Christmas than have the Dallas, Fort
Worth and San Antonio market stores.
Texas is the third largest retail market in the United
States for "green industry" sales, which includes (i)
wholesale grower sales, (ii) landscape-related sales, (iii)
home center and mass merchandiser retail sales and (iv)
retail garden center sales (which includes the Company's
retail stores).
According to the Office of the Comptroller of Public
Accounts, Texas green industry sales increased from
approximately $6.3 billion in 1997 to approximately $8.0
billion in 2001. However, retail garden center sales have
declined each year from 1997 - 2001, from approximately $1.8
billion in 1997 to approximately $1.5 billion in 2001. The
most rapid growth for green industry sales over that period
has been in home center and mass merchandiser retail sales.
The Company has retail stores in the four largest markets in
Texas: the Dallas, Fort Worth, Houston and San Antonio
Markets. Together, these four markets account for
approximately 38% of Texas' retail garden center sales.
During the last five years, the Company has not been
convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or been a party to a
civil proceeding of a judicial or administrative body of
competent jurisdiction that resulted in a judgment, decree
or final order enjoining future violations of, or
prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of any such
law.
MARKET FOR THE COMMON STOCK
The Company's common stock traded on NASDAQ under the symbol
CLWY since June 26, 1991. Through March 20, 2002 the common
stock traded on the NASDAQ National Market. Since March 21,
2002 the common stock traded on the NASDAQ SmallCap Market.
NASDAQ has notified the company that its common stock will
be delisted from the NASDAQ SmallCap Market with the opening
of business on January 30, 2004.
-14-
The following table sets forth the high, low and closing
price information for each quarter of the most recent five
fiscal years, as well as the current fiscal year:
<Table>
<Caption>
High Low Close
Fiscal Year 1999
First Quarter $1.375 $1.000 $1.125
Second Quarter 1.500 1.125 1.313
Third Quarter 2.000 1.250 1.375
Fourth Quarter 1.563 1.125 1.125
Fiscal Year 2000
First Quarter 1.438 .938 1.188
Second Quarter 1.500 .969 1.375
Third Quarter 1.500 .813 1.188
Fourth Quarter 1.750 1.125 1.375
Fiscal Year 2001
First Quarter 1.750 1.063 1.250
Second Quarter 1.625 1.141 1.188
Third Quarter 1.600 1.000 1.300
Fourth Quarter 1.390 .850 .940
Fiscal Year 2002
First Quarter 1.210 .680 .950
Second Quarter 1.300 .800 1.130
Third Quarter 1.280 1.000 1.050
Fourth Quarter 1.140 .700 .890
Fiscal Year 2003
First Quarter 1.000 .620 .880
Second Quarter .950 .710 .800
Third Quarter .880 .620 .800
Fourth Quarter .940 .500 .600
Fiscal Year 2004
First Quarter .680 .330 .450
Second Quarter
(through January 23, 2004) $.550 $.420 $.460
</Table>
The closing price of the common stock on January 23, 2004 as
reported by NASDAQ was $.46. As of December 31, 2003 there
were 294 shareholders of record.
The Company has never paid cash dividends on its common
stock. The Company's loan agreement prohibits payment of
cash dividends on its common stock. The Company intends to
retain earnings for further development of the business and,
therefore, does not intend to pay cash dividends on its
common stock in the foreseeable future. The Company has not
purchased any shares of its common stock during the past two
years.
-15-
MANAGEMENT
<Table>
<Caption>
Name Age Position
Stanley Block 63 Director
John T. Cosby 60 Vice President, Secretary and Director
Jim Estill 56 Chairman of the Board, President and Chief Executive Officer
Daniel R. Feehan 52 Director
Timothy J. McKibben 54 Director
John S. Peters 51 Vice President and Director
George L. Wechsler 87 Vice President and Director
Daniel G. Reynolds 46 Vice President and Chief Financial Officer
Marce E. Ward 36 Vice President
David S. Weger 52 Vice President
</Table>
Board of Directors
Dr. Stanley Block, 63, a Chartered Financial Analyst, has
been a Professor of Finance at Texas Christian University,
located at 2900 Lubbock Street, Fort Worth, Texas 76109,
since 1967. Dr. Block is also an author, consultant and
lecturer in the area of finance. He has served as a member
of the Board of Directors of the Company since completion of
its initial public offering in June of 1991.
John T. Cosby, 60, is Vice President, Secretary and a
Director. Mr. Cosby, along with Jim Estill and John Peters,
co-founded the Company in 1986. He develops Calloway's
Nursery retail store locations, including site selection and
development, as well as conducting lease and acquisition
negotiations. Prior to 1986, Mr. Cosby worked at Sunbelt
Nursery Group, serving as Vice President -- Corporate
Development and at Pier 1 Imports as Real Estate Manager.
Mr. Cosby received his BBA in Management from Texas Wesleyan
College in 1969 and his MBA in Management from the
University of Dallas in 1983. A Certified Mediator, Mr.
Cosby is Past Chairman of Optical Federal Credit Union, and
Past President of Dispute Resolution Services of Tarrant
County.
-16-
Jim Estill, 56, is Chairman of the Board, President and
Chief Executive Officer. Along with John Cosby and John
Peters, Mr. Estill co-founded the Company in 1986. Prior to
that, Mr. Estill worked with Sunbelt Nursery Group, as
President and Chief Executive Officer. Mr. Estill received
his BBA in Finance from Texas Christian University in 1969,
and his MBA from TCU in 1977.Mr. Estill is a Texas Master
Certified Nursery Professional ("TMCNP").
Daniel R. Feehan, 52, is president and chief executive
officer and a member of the board of directors of Cash
America International, Inc., whose principal place of
business is located at 1600 West Seventh Street, Fort Worth,
Texas 76102. He joined Cash America in 1988 as chief
financial officer and was named president and chief
operating officer in January 1990. In February 2002 he was
appointed chief executive officer. He is also a member of
the board of directors of AZZ Incorporated and RadioShack
Corporation.
Timothy J. McKibben, 54, is chairman of the board for Ancor
Holdings, Inc., an acquisitions and management company he co-
founded in 1994 that now manages ten companies in four
diverse industries. The principal place of business of Ancor
Holdings, Inc. is located at 201 Main Street, Fort Worth,
Texas 76102. He has more than 27 years experience in the
medical supply industry. He is also a member of the board of
directors of Cash America International, Inc.
John S. Peters, 51, is Vice President and Director of the
Company. Mr. Peters, along with Jim Estill and John Cosby,
co-founded the Company in 1986. He developed the original
staff into a team of industry professionals. He has primary
responsibility for distribution, human resources and
administration. Prior to 1986, Mr. Peters worked with
Sunbelt Nursery Group as Senior Vice President of
Operations, where he was responsible for operations of all
subsidiaries, including more than 100 stores in five states,
and two growing operations. Mr. Peters attended Texas
Christian University. A TMCNP, Mr. Peters is Past Chairman
of the TNLA, and currently serves on the TNLA Education and
Research Foundation.
George J. Wechsler, 87, is Vice President and a Director of
the Company. Mr. Wechsler joined the Company and was elected
to the Board of Directors in 2002. Prior to joining the
Company Mr. Wechsler was self-employed. He is a Past
President of the TNLA, and a past recipient of their
"Outstanding Nurseryman Award". Mr. Wechsler offices out of
the Company's location at 1507 Ruiz Street, San Antonio,
Texas 78230.
-17-
Non-Director Executive Officers
Daniel G. Reynolds, 46, is Vice President, Chief Financial
Officer and Assistant Secretary. Mr. Reynolds joined the
Company in 1990, where he developed its financial, operating
and merchandising decision-support systems. His
responsibilities include financial and management reporting,
treasury management, credit facilities, corporate and
shareholder records, SEC and stock market compliance,
public, media and investor relations, risk management and
budgeting. Mr. Reynolds also oversees design, development,
implementation and review of all transactional and decision-
support systems. Prior to 1990, Mr. Reynolds worked with
Atmos Energy Corporation as Financial Systems Manager and
KPMG LLP as Supervising Senior Accountant. Mr. Reynolds
received his BBA in Accounting from the University of Texas
at Arlington. A Certified Public Accountant, Mr. Reynolds is
Past President of the Fort Worth Chapter of Financial
Executives International.
Marce E. Ward, 36, is Vice President, Dallas and Fort Worth
Markets. Mr. Ward began with the Company in retail store
management in 1987. He has primary responsibility for the
sixteen retail stores serving the Dallas and Fort Worth
Markets. Prior to being named Vice President, Mr. Ward
served as General Manager, Dallas and Fort Worth Markets
since 2002, and Merchandise Manager since 1995.
David S. Weger, 52, is Vice President, Merchandising. Mr.
Weger began with the Company in retail store management in
1987 with the opening of the first stores. He has
responsibility for the administration of planning,
procurement and replenishment of merchandise lines. Prior to
1987, Mr. Weger was Landscape Designer with Odessa Nursery.
He has also been Co-Owner of Lessmon-Weger Garden Center in
Colby, Kansas. Mr. Weger received his BBA in Political
Science and Education from Fort Hays State University. A
TMCNP, Mr. Weger is a Director of the TNLA, Past President
of TNLA, Region 5, and Past Chairman of the TNLA Education
Committee.
To the knowledge of Calloway's, during the last five years,
none of the foregoing directors or executive officers has
been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or has been a party to a
civil proceeding of a judicial or administrative body of
competent jurisdiction that resulted in a judgment, decree
or final order enjoining future violations of, or
prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of any such
law. All of the foregoing directors and executive officers
are citizens of the United States.
-18-
Security Ownership of Management
The following table sets forth certain information as to the
number of shares of Company common stock beneficially owned
as of December 31, 2003, by (i) each executive officer, (ii)
each director, and (iii) all of the executive officers and
directors of the Company as a group.
Except as otherwise indicated, each of the persons named
below has sole voting and investment power with respect to
the shares of Common Stock beneficially owned by that
person.
<Table>
<Caption>
Percent
Number of
Of Shares
Name of Beneficial Owner Shares Outstanding
- -------------------------------- ------------ -----------
Dr. Stanley Block (1) 105,891 1.5%
John T. Cosby (2) 574,399 8.0%
James C. Estill (3) 1,307,735 17.8%
Daniel R. Feehan (4) 104,997 1.5%
Timothy J. McKibben (5) 154,311 2.2%
John S. Peters (6) 251,996 3.5%
Daniel G. Reynolds (7) 162,591 2.3%
Marce E. Ward (8) 59,468 0.8%
George J. Wechsler 6,325 0.1%
David S. Weger (9) 224,460 3.2%
------------ ------------
All Directors and Executive Officers
as a group (10 persons) 2,952,173 36.4%
------------ ------------
</Table>
(1) Includes 1,500 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.00 per
share, 16,000 shares that could be acquired through options
granted on an individual grant basis in fiscal 1997 which
are exercisable at $1.125 per share, 32,000 shares that
could be acquired through options granted on an individual
grant basis in fiscal 1999 which are exercisable at $1.156
per share, and 44,000 shares that could be acquired through
options granted on an individual grant basis in fiscal 2001
which are exercisable at $1.438 per share.
(2) Includes 120,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, and 105,000 shares that
could be acquired through options granted under the 1997
Stock Option Plan which are exercisable at $1.09 per share.
(3) Includes 260,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, and 130,000 shares that
could be acquired through options granted under the 1997
Stock Option Plan which are exercisable at $1.09 per share.
-19-
(4) Includes 3,000 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.438 per
share, and 36,000 shares that could be acquired through
options granted on an individual grant basis in fiscal 2002
which are exercisable at $1.438 per share.
(5) Includes 3,000 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.438 per
share, and 36,000 shares that could be acquired through
options granted on an individual grant basis in fiscal 2002
which are exercisable at $1.438 per share.
(6) Includes 45,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 25,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 70,000
shares that could be acquired through options granted under
the 1998 Stock Option Plan which are exercisable at $1.09
per share.
(7) Includes 24,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 10,000 shares that were
granted under the 1991 Stock Option Plan which are
exercisable at $.94 per share, 16,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 50,000
shares that could be acquired through options granted under
the 1999 Stock Option Plan which are exercisable at $1.09
per share.
(8) Includes 6,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 8,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 26,000
shares that could be acquired through options granted under
the 1999 Stock Option Plan which are exercisable at $1.09
per share.
(9) Includes 25,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 10,000 shares that could be
acquired through options granted under the 1991 Stock Option
Plan which are exercisable at $.940 per share, 15,000 shares
that could be acquired through options granted under the
1996 Stock Option Plan which are exercisable at $1.125 per
share, and 50,000 shares that could be acquired through
options granted under the 1999 Stock Option Plan which are
exercisable at $1.09 per share.
-20-
Certain Transactions with Management
Employment Contracts. The Company's employment agreements
with Messrs. Estill, Cosby and Peters extend through July 2,
2006. Mr. Estill's agreement provides (i) for a minimum
annual base salary of $225,000, (ii) that the Company will
continue to maintain life insurance for Mr. Estill in the
amount of $1,500,000, the beneficiary of which may be
designated by Mr. Estill, (iii) that the Company will
purchase disability insurance for Mr. Estill sufficient to
provide three years' compensation should he become disabled
and (iv) that, if Mr. Estill's employment is terminated for
any reason other than just cause or is constructively
terminated, Mr. Estill (a) will be entitled to receive,
within 15 days after such termination, a cash payment in an
amount equal to three times the sum of (X) Mr. Estill's then
current annual base salary and (Y) the amount of the bonus,
if any, earned by Mr. Estill in respect of the previous
fiscal year and (b) will be entitled to participate in all
benefit programs of the Company for a period of one year
following such termination. The Company will be deemed to
have terminated the agreement without "just cause" unless
such termination resulted from (i) Mr. Estill's willful and
intentional failure to substantially perform his duties,
(ii) the commission by Mr. Estill of an illegal act in
connection with his employment or (iii) the death or
disability of Mr. Estill. Mr. Estill's employment will be
deemed to have been "constructively terminated" (i) if his
responsibilities or authority have been significantly
reduced, (ii) if Mr. Estill is required to relocate outside
of the Dallas-Fort Worth area or his salary is reduced in
violation of his employment agreement or (iii) if a change
in control of the Company occurs, as defined in the
employment agreement.
Mr. Cosby's employment agreement is identical to Mr.
Estill's except that Mr. Cosby is Vice President-Corporate
Development and his minimum annual base salary is $175,000.
Mr. Peters' employment agreement is also identical to Mr.
Estill's except that Mr. Peters is Vice President of the
Company, his minimum annual base salary is $175,000 and his
life insurance is in the amount of $500,000.
Affiliate Leases. In fiscal 2002 the Company entered the San
Antonio market by leasing seven retail store locations.
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 transaction. The Affiliate
Leases have three year terms. Rental expense under the
Affiliate Leases was $142,000 and $6,000 for the years ended
September 30, 2003 and 2002, respectively. The Company
occupied the premises for less than three months in fiscal
2002.
-21-
SUMMARY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
(in thousands, except per share amounts)
Fiscal Year Ended
September 30,
--------- ---------- ---------
2003 2002 2001
Balance Sheet Information:
Current assets $6,974 $10,373 $11,066
Noncurrent assets 11,023 13,752 16,195
Current liabilities 8,710 5,756 7,615
Noncurrent liabilities 7,336 9,051 9,575
Redeemable preferred stock -- 2,538 2,180
Book value per share $0.28 $1.04 $1.26
Income Statement Information:
Net sales $47,346 $43,251 $43,385
Gross profit 21,985 20,333 21,099
Income (loss) from continuing
Operations (3,481) 161 1,393
Net loss ($4,841) ($1,031) ($2,136)
Income (loss) per common share from continuing operations:
Basic ($.57) ($.03) $.18
Diluted ($.57) ($.03) $.17
Net loss per common share:
Basic ($.77) ($.22) ($.58)
Diluted ($.77) ($.22) ($.56)
Ratio of earnings to fixed charges (1.17) 1.49 2.88
</Table>
-22-
WHERE YOU CAN FIND MORE INFORMATION
The Company files reports, proxy statements and other
information with the SEC under the Securities Exchange Act
of 1934. You may read and copy this information at the
following locations of the SEC:
<Table>
Public Reference Room Northeast Regional Office Midwest Regional Office
Room 1024 233 Broadway 175 W. Jackson Blvd.
450 Fifth Street, N.W. New York, NY 10279 Suite 900
Washington, D.C. 20549 Chicago, IL 60604
</Table>
You may also obtain copies of this information by mail from
the public reference section of the SEC, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC also
maintains an Internet World Wide Web site that contains
reports, proxy statements and other information about
issuers, including the Company, who file electronically with
the SEC. The address of that site is http://www.sec.gov.
The Company is incorporating by reference in this Disclosure
Statement some information it files with the SEC, which
means that the Company is disclosing important information
to you by referring you to those documents. Specifically,
the Company incorporates by reference its historical
financial statements from its Annual Report on Form 10-K for
the fiscal year ended September 30, 2003.
Upon request to the Company's offices at 4200 Airport
Freeway, Suite 200, Fort Worth, Texas 76117-6200, (817) 222-
1122, the Company will provide to any shareholder of the
Company, without charge, a copy of any and all documents
filed with the SEC incorporated by reference herein that are
not included with this Disclosure Statement.
-23-