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, 1998
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of May 13, 1998
Common Stock, par value $.01 per share 5,410,725
CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 31, 1998
PART I - FINANCIAL INFORMATION Page
Item 1
Index to Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 11
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
March 31, September 30, March 31,
1998 1997 1997
Cash and cash equivalents $ 242 $ 3,688 $ 2,826
Accounts receivable 655 132 611
Inventories 3,642 1,533 1,912
Deferred income taxes 1,150 428 --
Prepaids and other assets 24 60 29
Total current assets $5,713 $5,841 $5,378
Property and equipment, net 8,317 5,466 4,687
Goodwill, net 1,119 1,173 1,227
Deferred income taxes 581 581 34
Other assets 49 50 37
Total assets $ 15,779 $ 13,111 $ 11,363
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,522 $ 1,745 $ 4,431
Accrued expenses 578 880 675
Current portion of long-term debt 97 97 35
Total current liabilities 5,197 2,722 5,141
Deferred rent payable 1,077 1,098 1,196
Long-term debt, net of current portion
2,908 1,803 519
Total liabilities 9,182 5,623 6,856
Commitments
Shareholders equity:
Voting convertible preferred stock; par value
$.625 per share; 3,200,000 shares authorized;
no shares issued or outstanding -- -- --
Preferred stock; par value $.01 per share;
10,000,000 shares authorized; no shares
issued or outstanding -- -- --
Common stock; par value $.01 per share;
30,000,000 shares authorized; 5,660,725,
5,582,364 and 5,503,284 shares issued,
respectively, 5,410,725, 5,332,364 and 56 55 55
5,253,284 shares outstanding, respectively
Additional paid-in capital 8,537 8,406 8,343
Retained earnings (accumulated deficit) (600) 423 (2,495)
7,993 8,884 5,903
Less: Treasury stock, at cost
(250,000 shares) (1,396 (1,396) (1,396)
Total shareholders' equity 6,597 7,488 4,507
Total liabilities and shareholders'
equity $ 15,779 $ 13,111 $ 11,363
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31 March 31
1998 1997 1998 1997
Net sales $4,227 $5,303 $8,722 $9,564
Cost of goods sold 2,105 2,642 4,571 5,130
Gross profit 2,122 2,661 4,151 4,434
Operating expenses 1,756 1,646 3,651 3,327
Occupancy expenses 727 736 1,405 1,498
Advertising expenses 278 284 601 628
Other, net 121 103 232 172
Total expenses 2,882 2,769 5,889 5,625
Loss before provision for
income taxes (760) (108 (1,738) (1,191)
Income tax benefit (324) -- (715) --
Net loss ($ 436) ($ 108) ($1,023) ($1,191)
Net loss per common share
Basic ($.08) ($.02) ($.19) ($.23)
Diluted ($.08) ($.02) ($.19) ($.23)
Weighted average number of common
shares outstanding 5,393 5,222 5,372 5,195
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net loss $ (1,023) $ (1,191)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 194 197
Net change in assets and liabilities (863) 1,698
Net cash provided by (used for) operating activities (1,692) 704
Cash flows from investing activities:
Additions to property and equipment (2,991) (882)
Net cash used for investing activities (2,991) (882)
Cash flows from financing activities:
Proceeds from issuance of common stock 132 92
Net borrowings of debt 1,105 554
Net cash provided by financing activities 1,237 646
Net increase (decrease) in cash and cash equivalents (3,446) 468
Cash and cash equivalents at beginning of period 3,688 2,358
Cash and cash equivalents at end of period $ 242 $ 2,826
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The interim financial statements contained herein have been prepared by
Calloway's Nursery, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments considered necessary for a fair presentation
of the financial position at March 31, 1998, and the results of operations
and cash flows for the six-month and three-month periods ended March 31,
1998 and 1997 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, 1998 and cash flows for
the six-month period ended March 31, 1998 are not necessarily indicative
of expected results of operations and cash flows for the fiscal year ending
September 30, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these
financial statements should be read in conjunction with the audited
financial statements and related notes of the Company for the fiscal year
ended September 30, 1997 included in the Company's Form 10-K.
2. Earnings Per Share
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128").
SFAS 128 simplifies the standards for computing earnings per share ("EPS")
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share, ("APB 15"), and make them comparable to international EPS standards.
SFAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB 15. SFAS 128 also
requires presentation of both basic and diluted EPS on the face of the
income statement for entities with complex capital structures and a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is
not permitted. SFAS 128 requires restatement of all prior-period EPS data
presented.
Under SFAS 128, a potentially dilutive security is actually dilutive if its
inclusion in the computation reduces EPS or increases a loss per share. If
the inclusion of the security increases earnings per share or decreases a
loss per share, then the security is considered anti-dilutive. Anti-dilutive
securities are not reflected in EPS computations. For each of the quarters
and six month periods ended March 31, 1998 and 1997, respectively, the
Company incurred a loss from continuing operations. Therefore, none of its
potentially dilutive securites are considered actually dilutive for such
periods, and the basic EPS and diluted EPS are the same.
EPS for the quarters and six month periods ended March 31, 1998 and 1997 is
computed as follows (amounts, except per share amounts, in thousands):
Three Months Ended Six Months Ended
March 31 March 31 March 31 March 31
Basic EPS 1998 1997 1998 1997
Net loss $(436) $(108) $(1,023) $(1,191)
Weighted average number of shares
outstanding 5,393 5,222 5,372 5,195
Net loss per common share $(.08) $(.02) $(.19) $(.23)
Diluted EPS 1998 1997 1998 1997
Net loss $(436) $(108) $(1,023) $(1,191)
Weighted average number of shares
outstanding 5,393 5,222 5,372 5,195
Net loss per common share $(.08) $(.02) $(.19) $(.23)
The Company had 941,500 and 636,000 outstanding stock options at March 31,
1998 and 1997, respectively. Such stock options are not included in the
above EPS computations since they were anti-dilutive. Such stock options
could potentially dilute EPS in a future period.
3. New store construction
In October 1997 the Company purchased land and began construction of a new
retail store location in Fort Worth, Texas. The purchase and construction
are being financed with an interim construction loan from a financial
institution. The Company has obtained a commitment from the financial
institution to provide permanent financing with a long-term note payable.
At March 31, 1998 the outstanding balance of the interim construction loan
was $1,125,000. The interest rate is variable (9.5% at March 31, 1998).
4. Inventories
Inventories consist of the following (amounts in thousands):
March 31, September 30, March 31,
1998 1997 1997
Finished goods $ 2,546 $ 1,197 $ 1,912
Work in process 857 294 --
Supplies 239 42 --
$3,642 $1,533 $1,912
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
General
The information presented below sets forth, for the periods indicated, the
amounts of certain items derived from the statements of operations and the
relative percentages that they bear to net sales of the Company (amounts in
thousands):
Three Months Ended March 31, Six Months Ended March 31,
1998 1997 1998 1997
Amount % Amount % Amount % Amount %
Net sales 4,227 100 5,303 100 8,722 100 9,564 100
Gross profit 2,122 50 2,661 5 4,151 48 4,434 46
Operating expenses 1,756 41 1,646 31 3,651 42 3,327 35
Occupancy expenses 727 17 736 14 1,405 16 1,498 16
Advertising expenses 278 7 284 5 601 7 628 7
Other, net 121 3 103 2 232 3 172 2
Total expenses 2,882 68 2,769 52 5,889 68 5,625 59
Loss before provision for
income taxes (760) (18) (108) (2) (1,738) (20) (1,191 (13)
Provision for income
taxes (324) (8) -- -- (715) (8) -- --
Net loss (436) (10) (108) (2) (1,023) (12) (1,191) (13)
Quarter Ended March 31, 1998 Compared with Quarter Ended March 31, 1997
This year's spring selling season occurred later and, therefore, led to
reductions in net sales and an increased pre-tax loss and an increased net
loss for the quarter ended March 31, 1998. Income tax benefits of $324,000
offset part of the pre-tax loss in 1998 quarter; no tax benefits were
recorded for the 1997 quarter. The tax benefits in 1998 were recorded due
to the adjustment of the valuation allowance recorded during the fourth
quarter of fiscal 1997.
Net sales decreased by 20% to $4,227,000 for the quarter ended March 31,
1998 from $5,303,000 for the quarter ended March 31, 1997. Early-season
demand for garden products in the Dallas-Fort Worth market was weaker during
March in 1998 compared to relatively strong demand during March of 1997.
Gross profit decreased by 20% from $2,661,000 for the quarter ended March
31, 1997 to $2,122,000 for the quarter ended March 31, 1998. Gross margins
were steady at 50% for the both of the quarters ended March 31, 1998 and
1997. Execution of the Company's merchandising programs, which provide fresh
inventory to the Company's retail stores based on actual rates of sale, and
reduce stock loss, caused gross margins to hold steady.
Operating expenses increased by 7% from $1,646,000 for the quarter ended
March 31, 1997 to $1,756,000 for the quarter ended March 31, 1998, primarily
due to increased payroll and related expenses.
Occupancy expenses decreased by 1% from $736,000 for the quarter ended March
31, 1997 to $727,000 for the quarter ended March 31, 1998, primarily due to
reduced rents at certain of the Company's retail stores.
Advertising expenses decreased by 2% from $284,000 for the quarter ended
March 31, 1997 to $278,000 for the quarter ended March 31, 1998. The
decrease was primarily due to reduced costs associated with the Company's
in-store visual marketing programs, offset somewhat by increased advertising
in newspapers and on radio.
Other (net) expenses increased by 19% from $102,000 for the quarter ended
March 31, 1997 to $121,000 for the quarter ended March 31, 1998. The
increase was primarily due to interest expense on the increased long term
debt in 1998 as compared to 1997, partially offset by slightly lower
depreciation expense for the three months ended March 31, 1998 than for the
three months ended March 31, 1997.
Six Months Ended March 31, 1998 Compared with Six Months Ended March 31, 1997
This year's spring selling season occurred later and, therefore, led to
reductions in net sales and an increased pre-tax loss for the six months
ended March 31, 1998. The net loss for the six months ended March 31, 1998
was smaller than the net loss for the same period in 1997, because income
tax benefits of $715,000 offset part of the pre-tax loss in 1998 period; no
tax benefits were recorded for the 1997 period. The tax benefits in 1998
were recorded due to the adjustment of the valuation allowance recor
rth quarter of fiscal 1997.
Net sales decreased by 9% to $8,722,000 for the six months ended March 31,
1998 from $9,564,000 for the six months ended March 31, 1997. Early-season
demand for garden products in the Dallas-Fort Worth market was weaker during
the transitional month of March in 1998 compared to relatively strong demand
during March of 1997.
Gross profit decreased by 6% from $4,434,000 for the six months ended March
31, 1997 to $4,151,000 for the six months ended March 31, 1998. Gross
margins improved to 48% for the six months ended March 31, 1998 from 46% for
the six months ended March 31, 1997. The increased gross margins were a
result of execution of the Company's merchandising programs, which provide
fresh inventory to the Company's retail stores based on actual rates of
sale, and have been demonstrated to improve gross margins by reducing stock
loss.
Operating expenses increased by 10% from $3,327,000 for the six months ended
March 31, 1997 to $3,650,000 for the six months ended March 31, 1998
primarily due to increased payroll expenses.
Occupancy expenses decreased by 6% from $1,497,000 for the six months ended
March 31, 1997 to $1,404,000 for the six months ended March 31, 1998,
primarily due to reduced rents at certain of the Company's retail stores.
Advertising expenses decreased by 4% from $628,000 for the six months ended
March 31, 1997 to $601,000 for the six months ended March 31, 1998. The
decrease was primarily due to reduced costs associated with the Company's
in-store visual marketing programs, offset somewhat by increased advertising
in newspapers and on radio.
Other (net) expenses increased by 36% from $171,000 for the six months ended
March 31, 1997 to $232,000 for the six months ended March 31, 1998 The
increase was primarily due to interest expense on the mortgage debt entered
into during fiscal 1997.
Capital Resources and Liquidity
Cash flows used by operating activities were $1,692,000, compared to cash
flows provided by operations of $704,000 for the six months ended March 31,
1998. The change from positive cash flows from operations for the six-month
period to negative cash flows from operations resulted from:
1.Reduced early-season sales volumes and the accompanying larger pre-tax loss
for the period;
2.Reduced early-season sales volumes that led to increased inventory levels
in the retail stores at the end of the period, leading into the Company's
peak selling period;
3.Investment in work-in-process and supplies inventories at Miller Plant
Farms, the Company's newly acquired nursery production facility. Shipments
of finished goods merchandise to the retail stores from Miller Plant Farms
are expected to peak during the months of April and May.
In October 1997 the Company purchased land and constructed a new retail
store location in Fort Worth, Texas. The purchase and construction were
partially financed with an interim construction loan from a financial
institution. The Company has obtained a commitment from the financial
institution to provide permanent financing with a long-term note payable,
and expects to convert the interim construction loan into a permanent loan
during the third quarter of fiscal 1998. The new store opened on April 10,
1998.
The Company believes it has adequate working capital and lines of credit to
provide liquidity during future off-seasons.
Balance Sheet
Cash and cash equivalents at March 31, 1998 were $242,000, compared to
$2,826,000 at March 31, 1997. The decrease was due to the factors noted
above (See "Capital Resources and Liquidity").
Inventories at March 31, 1998 were $3,642,000, compared to $1,912,000 at
March 31, 1997. The increase was due to the factors noted above (See
"Capital Resources and Liquidity").
Deferred income taxes (current and long-term) at March 31, 1998 totaled
$1,731,000 compared to $34,000 at March 31, 1997. The increase was due to
the Company's recognition, in the fourth quarter of fiscal 1997, of the tax
benefits associated with net operating loss carryforwards generated in prior
years and a change in the valuation allowance for deferred tax assets.
Property and equipment at March 31, 1998 was $8,317,000 compared to
$4,687,000 at March 31, 1997. The increase was due to the new store
construction noted above (See "Capital Resources and Liquidity"), as well
as the implementation of a new merchandising computer system and acquisition
of a nursery production facility during 1997.
Accounts receivable, accounts payable, and accrued expenses vary seasonally.
The amounts at March 31, 1998 were not significantly changed from the
comparable period in 1997.
Prepaids and other assets (current and long-term), goodwill, and deferred
rent payable do not typically fluctuate seasonally. The amounts at March 31,
1998 were not significantly changed from the comparable period in 1997.
Long-term debt (including current portion) at March 31, 1998 was $3,005,000
compared to $519,000 at March 31, 1997. The increase was due to long-term
debt incurred during 1997 and the new store construction noted above (See
"Capital Resources and Liquidity").
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the shareholders of the Company was held on February
11, 1998. The voting results at that meeting were as follows:
Election of Directors:
Nominee For Withheld Broker Non-Votes
James C. Estill 4,562,798 25,389 -0-
John T. Cosby 4,562,798 25,389 -0-
John S. Peters 4,562,798 25,389 -0-
Robert E. Glaze 4,562,798 25,389 -0-
Dr. Stanley Block 4,562,798 25,389 -0-
Approval of Calloway's Nursery, Inc. 1997 Stock Option Plan:
For Against Abstain Broker Non-Votes
4,414,202 67,848 17,125 89,012
Appointment of Coopers & Lybrand, LLP as auditors for fiscal year 1998:
For Against Abstain Broker Non-Votes
4,558,386 22,701 7,100 -0-
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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 13, 1998
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