UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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, zip code and telephone number of principal executive offices)
_______________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K. [X]
As of December 10, 1996, Registrant had outstanding 5,172,347 shares of Common
Stock. The aggregated market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
December 10, 1996 as reported on the Nasdaq Stock Market, was approximately $
3,300,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1997 annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
1
INDEX
Page
Reference
Form 10-K
---------
PART I
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and
Reports on Form 8-K 16
1
PART I
ITEM 1. BUSINESS
GENERAL
Calloway's Nursery, Inc. ("Calloway's" or the "Company"), a Texas
corporation, is a specialty retailer of lawn and garden products. The Company
presently operates sixteen retail store locations in the Dallas and Fort Worth
markets.
STRATEGY
Calloway's objective is to successfully serve its targeted customer group
by consistently offering quality living plants and related products superior
to those of its competitors.
The Company offers a wide variety of high quality products in modern,
spacious facilities. Each retail store has a similar floorplan and design
providing over 60,000 square feet of selling space, approximately one-third of
which is covered on a year-round basis.
All Calloway's store managers and nearly one-half of its other full-time
employees are either Texas Certified Nursery Professionals or Texas Master
Certified Nursery Professionals. Candidates for each such certification must
pass comprehensive examinations in plant identification, identification and cure
of plant problems, landscaping, as well as retail merchandising and sales. The
Master certification includes a week-long intensive course and examination
conducted at Texas A&M University in College Station. The Company believes that
it employs more of these Texas Master Certified Nursery Professionals than any
other organization in the state of Texas.
Management believes that the Company's most important competitive advantage
is its reputation for quality and selection of merchandise and high level of
service supported by:
. Professional, experienced and highly-motivated employees.
. Network of sixteen spacious, attractive and convenient retail store
locations.
. Excellent relations with suppliers known for growing and producing
top-quality plants and related products.
2
RETAIL STORE LOCATIONS
The Company selects its retail store locations on the basis of demographic
data, traffic patterns and shopping habits. All Calloway's retail stores are
Company-operated. Of the sixteen retail stores, fourteen were leased and two
were owned as of September 30, 1996. In December 1996 the Company purchased one
retail store which had previously been leased. [See Note 15 to Financial
Statements]
MERCHANDISE
Calloway's sells a wide variety of lawn and garden products at each of its
retail stores. The Company's merchandising programs are designed to promote
sales of products having the greatest appeal during a particular season of the
year.
The Company focuses on quality and breadth of selection in bedding plants
and nursery stock complemented by soil amendments, fertilizers and other
manufactured garden products. The exception is that period between Thanksgiving
and Christmas, at which time most sales result from cut and flocked Christmas
trees and poinsettias.
Approximately two-thirds of the Company's annual sales are derived from
living plants, while the remaining one-third are made up of products that
primarily relate to the care and feeding of living plants.
SUPPLIERS
The Company believes that one of its competitive advantages is its strong
relationships with its suppliers. Calloway's purchases all of the merchandise it
sells and does not grow any plants or manufacture any products.
The production of plants is a fragmented industry. Plant material may be
purchased from hundreds of different suppliers, most of which are located within
a 150-mile radius of Dallas and Fort Worth - allowing the Company to procure
merchandise with relatively short lead times. The Company works with its
suppliers to attain consistency of quality, appropriate service and completeness
in selection of plant varieties.
The Company sells its own private label products that are manufactured
expressly for Calloway's to ensure superior quality.
3
ADVERTISING AND MERCHANDISING
Advertising programs are developed by the Company through the coordinated
efforts of operations, merchandising and advertising management. Sales
promotions are developed on a seasonal basis, and the Company's in-house
advertising manager creates and produces substantially all of its advertising.
Virtually all of the Company's advertising is done in local newspapers.
Calloway's also supports a popular horticultural program on local radio.
Each Calloway's retail store is arranged to provide maximum exposure to its
selection of merchandise using appropriate traffic patterns and seasonally-
rotated displays. Each retail store is designed by the Company's In-Store Visual
Marketing Department to provide a pleasant shopping experience.
Calloway's offers value-added services such as free home delivery.
COMPETITION
The retail nursery business is highly competitive. Calloway's competes with
Home Depot, Kmart, Wal-Mart, Wolfe Nursery and a number of grocery store chains
that sell plants, flowers, seeds and other gardening products. Most of these
other chains have longer operating histories and considerably greater financial,
marketing and sales resources than Calloway's. The Company also competes with
many independent single unit nurseries.
EMPLOYEES
Management believes that Calloway's employees represent a significant
competitive advantage for the Company.
The Company employs approximately 153 full-time employees and also employs
part-time employees during the spring and Christmas seasons. Management
considers its relations with employees to be good.
SEASONALITY
See "Seasonality" in Item 7 for a discussion of the seasonality of the
Company's business.
STORE MANAGEMENT AND PRODUCT LINE MANAGEMENT INCENTIVE COMPENSATION PROGRAMS
4
Each of the Company's nursery managers and assistant managers is eligible to
receive a significant portion of his or her compensation in the form of bonuses
based on the financial performance of the Company under the Nursery Management
Bonus Plan. An annual profit sharing pool is calculated based upon pre-tax
profit as a percentage of sales with emphasis upon increases in profit over the
previous year. The annual profit sharing pool is distributed 80% to the nursery
managers and 20% to the assistant managers.
Additionally, beginning with fiscal 1996, the Company's Product Line
Managers are eligible to receive incentive compensation awards based on the
financial performance of the Company. An annual profit sharing pool is
calculated based upon pre-tax profits after payment of the Nursery Management
Bonus.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company.
Name Age Positions
- ---- --- ---------
James C. Estill 49 Chairman of the Board, President and Chief
Executive Officer, and Director
John T. Cosby 53 Vice President -- Corporate Development,
Secretary and Director
John S. Peters 45 Vice President -- Operations and Director
David S. Weger 46 Vice President - Merchandising
Daniel G. Reynolds 39 Vice President - Chief Financial Officer
Mr. Estill has been President and a director of the Company since its
inception in March 1986. Mr. Estill is a Texas Master Certified Nursery
Professional.
Mr. Cosby has been Vice President -- Corporate Development of the Company
since its inception in March 1986 and served as a director of the Company from
March 1986 to August 1988, and was elected a director again in July 1991.
Mr. Peters has been Vice President -- Operations of the Company since April
1986 and served as a director of the Company from April 1986 to August 1988, and
was elected a director again in July 1991. Mr. Peters is a Texas Master
Certified Nursery Professional.
5
Mr. Weger has been Vice President -- Merchandising of the Company since July
1995. He joined the Company in March 1987. Mr. Weger is a Texas Master Certified
Nursery Professional.
Mr. Reynolds has been Vice President -- Chief Financial Officer of the
Company since July 1995. He joined the Company in December 1990. Mr. Reynolds is
a Certified Public Accountant.
ENVIRONMENTAL REGULATION
The Company is subject to certain federal, state and local health, safety
and environmental laws and regulations regarding the storage, care and use of
certain of its products. The Company does not anticipate that future
expenditures for compliance with such environmental laws and regulations will
have a material adverse effect on the Company. No assurances can be given,
however, that such compliance, or compliance with other environmental laws and
regulations that may be enacted in the future, will not have such an effect.
ITEM 2. PROPERTIES
The Company's retail stores are typically located in high-traffic shopping
areas and all but one are free-standing. Each retail store consists of a
building (approximately 10,000 square feet), a greenhouse (approximately 12,000
square feet) and an outdoor nursery yard (approximately 40,000 square feet).
As of September 30, 1996 fourteen of the Company's retail stores were
leased from unaffiliated parties. [See Note 13 to Financial Statements.] Two
retail stores were owned by the Company. In December 1996 the Company purchased
one retail store which had previously been leased. [See Note 15 to Financial
Statements.]
The Company's executive offices are located in an office building in Fort
Worth, Texas, and are leased from an unaffiliated party. The Company sold its
former office building in August 1996. [See Management's Discussion and
Analysis - Liquidity and Capital Resources"]
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation which management believes
will materially and adversely affect its financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The shares of the Company's common stock have been traded on the Nasdaq
Stock Market under the symbol CLWY since June 26, 1991. The following table sets
forth the closing price information for each quarter of the most recent five
fiscal years:
Fiscal Year 1992 High Low Close
- ---------------- ---- --- -----
First Quarter 9.125 6.375 9.000
Second Quarter 10.625 6.625 7.625
Third Quarter 7.500 5.375 5.625
Fourth Quarter 6.125 4.750 6.000
Fiscal Year 1993
- ----------------
First Quarter 7.125 5.500 7.125
Second Quarter 7.250 5.250 5.375
Third Quarter 5.875 3.500 4.375
Fourth Quarter 4.500 1.875 3.125
Fiscal Year 1994
- ----------------
First Quarter 3.625 2.250 3.000
Second Quarter 3.125 2.313 2.750
Third Quarter 3.250 1.750 2.000
Fourth Quarter 2.125 1.000 1.500
Fiscal Year 1995
- ----------------
First Quarter 1.625 .750 1.063
Second Quarter 1.625 .875 1.313
Third Quarter 1.438 .750 1.000
Fourth Quarter 1.625 .813 1.156
Fiscal Year 1996
- ----------------
First Quarter 1.219 .625 .750
Second Quarter 1.188 .719 1.063
Third Quarter 1.125 .719 .875
Fourth Quarter 1.188 .813 .938
The closing price of the Company's common stock on December 10, 1996, as
reported on the Nasdaq Stock Market, was $ .8125.
As of December 10, 1996 there were approximately 259 shareholders of
record, and approximately 1,200 beneficial shareholders.
The Company has never paid cash dividends on its common stock. The
Company's Board of Directors currently intends to retain earnings for further
development of the Company's business and, therefore, does not intend to pay
cash dividends on its common stock in the foreseeable future.
7
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with the Company's Financial Statements required by Item 8 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, September 30,
INCOME STATEMENT DATA 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $23,959 $22,527 $30,595 $28,233 $28,818
Gross profit 11,211 10,592 12,376 11,875 12,473
Gross profit percentage 47% 47% 40% 42% 43%
Income (loss) before extraordinary
items and accounting change 201 156 (4,110) (773) 732
Net income (loss) $201 $156 ($4,110) ($494) $825
Income (loss) per common share:
Before extraordinary items and
accounting change $0.04 $0.03 ($0.86) ($0.16) $0.15
Extraordinary item (1) -- -- -- -- 0.02
Accounting change (2) -- -- -- 0.06 --
Net income (loss) $0.04 $0.03 ($0.86) ($0.10) $0.17
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, September 30,
BALANCE SHEET DATA 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Working capital $1,473 $3,301 $3,450 $223 $1,858
Total assets 8,863 8,417 11,588 18,338 15,887
Long-term debt, net of
current portion -- -- 768 907 --
Shareholders' equity $5,606 $5,258 $4,923 $8,974 $9,468
Number of common shares
outstanding 5,142 4,954 4,794 4,750 4,750
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Extraordinary item in the year ended September 30, 1992 related to early
extinguishment of debt.
(2) Accounting change in the year ended September 30, 1993 related to change in
method of accounting for income taxes. See Note 2 to Financial Statements.
8
ITEM 7. 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
relative percentages that certain items derived from the statements of
operations bear to net sales of the Company.
PERCENTAGES OF NET SALES
------------------------------------------------
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1995 1994
----------------- --------------- --------------
Net sales 100% 100% 100%
Cost of goods sold 53 53 60
----------------- --------------- --------------
Gross profit 47 47 40
Operating expenses 28 28 29
Occupancy expenses 12 13 9
Advertising expenses 5 5 6
Special charges (credits) -- (2) 7
Other, net 1 2 2
----------------- --------------- --------------
Total expenses 46 46 53
----------------- --------------- --------------
Income (loss) before income taxes 1 1 (13)
Provision for income taxes -- -- --
----------------- --------------- --------------
Net income (loss) 1% 1% (13%)
================= =============== ==============
9
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
The Company recorded net income for fiscal 1996 of $201,000, compared to
net income of $156,000 for fiscal 1995. The improvement in operating results was
attributable to improved sales from the Company's merchandising programs and in-
store visual marketing.
Net sales increased by 6% from approximately $22.5 million for fiscal 1995
to approximately $24.0 million for fiscal 1996. Same-store net sales increased
by the same amount, since all sixteen locations have been in operation for more
than one year. The increase was primarily attributable to favorable consumer
response to the Company's new:
. Merchandising programs, which are designed to consistently offer quality
living plants and related products superior to those of its competitors.
. In-store visual marketing programs, designed to improve customer traffic
flow and enhance the presentation of Calloway's products.
Gross profit increased from approximately $10.6 million for fiscal 1995 to
approximately $11.2 million for fiscal 1996. Gross margin (gross profit as a
percentage of net sales), was 47% for both fiscal 1996 and fiscal 1995. The
increase in gross profit was due to the increase in net sales.
Operating expenses increased by 7% to approximately $6.8 million for fiscal
1996 from approximately $6.3 million for fiscal 1995. The increase was
attributable to costs of the new merchandising programs and in-store visual
marketing.
Occupancy expenses decreased by 1% to approximately $2.9 million for fiscal
1996 from approximately $3.0 million for fiscal 1995. The decrease was due to
changes in the computation of deferred rent for certain leases.
Advertising expenses increased by 9% to $1,149,000 for fiscal 1996 from
$1,054,000 for fiscal 1995. The increase was primarily the result of increased
newspaper advertising rates, and to costs associated with the in-store visual
marketing programs.
Other expenses include depreciation and amortization, gains on sales of
properties, and net interest income (expense). Other expenses decreased from
$441,000 for fiscal 1995 to $147,000 for fiscal 1996 due to:
. An increase in net interest income resulting from higher levels of
available cash, coupled with the absence of any long-term debt, and
. Gains on sales of properties, and lower depreciation expenses during
1996.
10
YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1994
The Company recorded net income for fiscal 1995 of approximately $0.2
million, compared to a net loss of approximately $4.1 million for fiscal 1994.
The improvement in operating results was directly attributable to the success of
the Company's program to reduce expenses and improve gross profit margins. Total
expenses (exclusive of special charges and credits) were reduced by
approximately $3.6 million for fiscal 1995 from $14.4 million for fiscal 1994 to
$10.8 million for fiscal 1995. In addition, gross profit margins improved to 47%
for fiscal 1995 from 40% for fiscal 1994, helping to offset reduced sales
volumes.
Net sales decreased by 26% from $30.6 million for fiscal 1994 to $22.5
million for fiscal 1995. Same-store net sales decreased by 24% from $27.4
million for fiscal 1994 to $20.7 million for fiscal 1995. The decrease was
attributable to the reduction and/or elimination of certain merchandise lines
which contributed significant sales, but which did not meet the Company's
objectives for gross margin return on investment. The same-store sales
comparison is based on the fifteen retail stores which had been in operation for
at least twelve months at the beginning of fiscal year 1995.
Gross profit decreased from approximately $12.4 million for fiscal 1994 to
approximately $10.6 million for fiscal 1995. Gross margin (gross profit as a
percentage of net sales), however, increased to 47% for fiscal 1995 from 40% for
fiscal 1994. The decline in gross profit was due to the decrease in net sales,
while the substantial improvement in gross margin was achieved by sharply
reducing losses on green goods inventories - a direct result of the Company's
merchandise procurement budget process adopted for fiscal 1995.
Operating expenses decreased by 29% to approximately $6.3 million for
fiscal 1995 from approximately $8.9 million for fiscal 1994. The decrease was
attributable to the Company's program to reduce fixed expenses, including a new
labor budget system which directly ties payroll expenses (the largest individual
component of operating expenses) to current sales volumes.
Occupancy expenses increased by 4% to approximately $3.0 million for fiscal
1995 from approximately $2.9 million for fiscal 1994. The increase was
attributable to the sale-leasebacks in the fall of 1994 of two retail store
locations, one in September 1994, and another in December 1994, partially offset
by the closing of one retail store location in December 1994.
Advertising expenses decreased by 46% to approximately $1.1 million for
fiscal 1995 from approximately $1.9 million for fiscal 1994. The decrease was
primarily the result of eliminating most of the fees and commissions associated
with the Company's advertising programs and reducing the number and size of
exposures in all media used.
11
The special credit of approximately $0.4 million recorded in fiscal 1995
relates to the reduction of certain accrued expenses related to the closing of
one retail store location in December 1994 to the lesser amounts expected to be
incurred. [See Note 14 to Financial Statements]
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities totaled $498,000 for fiscal
1996, an improvement from cash flows used for operations totaling $886,000 for
fiscal 1995. During fiscal 1996, the Company maintained fairly flat inventory
and accounts payable levels compared to fiscal 1995, whereas in fiscal 1995 the
Company sold-down on excessive inventory levels, and liquidated the associated
trade accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows provided by investing activities totaled $667,000 for fiscal
1996, as compared to $1,148,000 for fiscal 1995. During fiscal 1996, the Company
sold its corporate office building and certain other assets, receiving proceeds
of $888,000. The Company also invested $221,000 in property and equipment in
fiscal 1996, mainly to remodel all sixteen retail stores. During fiscal 1995,
the Company sold one retail store location in a sale-leaseback transaction for
approximately $1.2 million, liquidating the related long-term debt of
approximately $0.9 million, and had only insignificant additions to property and
equipment.
The Company has no current plans to construct additional nurseries in the
Dallas or Fort Worth markets. Some nurseries may be relocated as their leases
expire.
In August 1996 the Company sold its executive office building and moved
into leased office space. [See "Properties" in Item 2]
In December 1996 the Company purchased one retail store location that had
previously been leased. [See Note 15 to Financial Statements.]
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities totaled $147,000 for fiscal
1996, as compared to $964,000 for fiscal 1995. The Company raised these funds by
issuance of common stock to the Calloway's Nursery, Inc. Stock Purchase Plan
("Stock Purchase Plan"). There was no long-term debt in fiscal 1996. For fiscal
1995, the Company used $864,000 to retire the long-term debt associated with one
retail store location which was sold and leased back. In addition, the Company
raised $179,000 by
12
issuance of common stock to the Stock Purchase Plan. [See Note 11 to Financial
Statements]
Management believes that the Company has adequate capital resources and
liquidity to meet its working capital needs through the slower selling season
leading up to the spring of 1997.
SEASONALITY
The Company's business is seasonal. Sales and net income are typically
highest during the third fiscal quarter, which includes the spring selling
season - the period during which most gardening is done in the Dallas-Fort Worth
area. Gardening activity in the Dallas-Fort Worth area usually declines after
July 1, and sales remain relatively low throughout the summer season. Sales are
typically lowest during the fourth fiscal quarter, which includes the summer
season. The Company typically incurs higher net losses during the first fiscal
quarter, since profit margins on Christmas merchandise are lower than on the
Company's typical merchandise. The second fiscal quarter is somewhat dependent
on weather patterns in a particular year, with an earlier start to warmer spring
weather tending to increase sales and net income.
The following table sets forth the Company's unaudited selected financial
data (amounts in thousands, except for percentages):
============================================================================================
Quarter Ended (unaudited)
============================================================================================
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
- --------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1996:
- -------------------------------------
Net sales
Amount for each quarter $4,164 $4,223 $12,347 $3,225
Quarter as a percentage of the entire
year 17% 18% 52% 13%
Net income (loss)
Amount for each quarter ($915) ($752) $2,686 ($818)
FISCAL YEAR ENDED SEPTEMBER 30, 1995:
- -------------------------------------
Net sales
Amount for each quarter $3,904 $4,399 $10,783 $3,441
Quarter as a percentage of the entire
year 17% 20% 48% 15%
Net income (loss)
Amount for each quarter ($1,137) ($674) $2,286 ($319)
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report: Page
- -------------------------------------------------------- ----
FINANCIAL STATEMENTS:
Report of Independent Accountants - Coopers & Lybrand L.L.P. F-1
Balance Sheets - September 30, 1996 and 1995 F-2
Statements of Operations - Years Ended September 30, 1996, 1995
and 1994 F-3
Statements of Cash Flows - Years Ended September 30, 1996, 1995
and 1994 F-4
Statements of Shareholders' Equity - Years Ended September 30,
1996, 1995 and 1994 F-5
Notes to Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES
Schedule
--------
2 Valuation and Qualifying Accounts S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with regard to executive officers is
included in Part I of this Report. The other information required by this item
is incorporated by reference from the Company's definitive Proxy Statement for
1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report: Page
----
(1) Financial Statements:
Report of Independent Accountants - Coopers & Lybrand L.L.P. F-1
Balance Sheets - September 30, 1996 and 1995 F-2
Statements of Operations - Years Ended September 30, 1996, 1995
and 1994 F-3
Statements of Cash Flows - Years Ended September 30, 1996, 1995
and 1994 F-4
Statements of Shareholders' Equity - Years Ended September 30,
1996, 1995 and 1994 F-5
Notes to Financial Statements F-6
(2) Financial Statement Schedules:
Schedule
--------
2 Valuation and Qualifying Accounts S-1
16
(3) Exhibits:
Exhibit No. Description
---------- -----------
(3) (a) Restated Articles of Incorporation of the Registrant. (Exhibit
(3)(a))/1/
(b) Form of Bylaws of the Registrant. (Exhibit (3(b))/1/
(c) Amendment to Bylaws Adopted on May 19, 1993. (Exhibit (3(c))/1/
(4) (a) Specimen Stock Certificate. (Exhibit (4)(a)/1/
(b) Form of Shareholder Rights Plan. (Exhibit (4)(b)/1/
(10) (a) Form of Employment Agreement dated July 3, 1991 between the
Registrant and James C. Estill. (Exhibit (10)(a))/1/
(b) Form of Employment Agreement dated July 3 , 1991 between the
Registrant and John T. Cosby. (Exhibit (10)(b))/1/
(c) Form of Employment Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(c))/1/
(d) (Left blank intentionally.)
(e) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of James C. Estill and John T. Cosby.
(Exhibit (10)(g))/1/
(f) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(h))/1/
(g) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of Robert (10)(i))/1/ E. Glaze and Dr.
Stanley Block. (Exhibit
(j) Management Profit Sharing Bonus Plan for Fiscal Year Ending
September 30, 1997. /5/
(k) Product Line Management Profit Sharing Bonus Plan for Fiscal
Year Ending September 30, 1997. /5/
(l) Store Management Compensation Plan for Fiscal Year Ending
September 30, 1997. /5/
(m) Extension of Employment Agreement between the Registrant and
James C. Estill dated July 2, 1996 (Exhibit (10)(m))/4/
(n) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n))/4/
(o) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o))/4/
17
Exhibit No. Description
----------- -----------
(23) (d) Consent of Coopers & Lybrand L.L.P./5/
(27) (a) Financial Data Schedule./5/
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28)) /2/
(99) (b) Calloway's Nursery, Inc. 1991 Stock Option Plan (Exhibit (10)(d))
/1/
(99) (c) Calloway's Nursery, Inc. 1995 Stock Option Plan for Independent
Directors (Exhibit (28)) /3/
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
---------------------------------------------------------------------------
1 Incorporated by reference to the Exhibit shown in parenthesis to
Registration Statement No. 33-40473 on Form S-1, and amendments
thereto, filed by the Company with the Securities and Exchange
Commission and effective June 26, 1991.
2 Incorporated by reference to the Exhibit shown in parenthesis to
Registration Statement No. 33-46170 on Form S-8, and amendments
thereto, filed by the Company with the Securities and Exchange
Commission and effective March 3, 1992.
3 Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30,
1995.
4 Incorporated by reference to Amendment No. 1 to the Exhibit shown in
parenthesis to the Company's Form 10-Q Report for the quarter ended
June 30, 1996.
5 Filed herewith.
---------------------------------------------------------------------------
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CALLOWAY'S NURSERY, INC.
By:
/s/ James C. Estill
______________________________
James C. Estill, President and
Chief Executive Officer
/s/ Daniel G. Reynolds
______________________________
Daniel G. Reynolds, Vice President
and Chief Financial Officer
Dated: December 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following on behalf of the company and in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ James C. Estill
___________________________ Director December 20, 1996
James C. Estill
/s/ John T. Cosby
___________________________ Director December 20, 1996
John T. Cosby
/s/ John S. Peters
___________________________ Director December 20, 1996
John S. Peters
/s/ Robert E. Glaze
___________________________ Director December 20, 1996
Robert E. Glaze
/s/ Dr. Stanley Block
___________________________ Director December 20, 1996
Dr. Stanley Block
19
Report of Independent Accountants
The Board of Directors and Stockholders
Calloway's Nursery, Inc.
We have audited the financial statements and the financial
statement schedule of Calloway's Nursery, Inc. listed in Item
14(a) of this Form 10-K. These financial statements and
financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Calloway's Nursery, Inc. as of September 30, 1996 and 1995,
and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included
therein.
Coopers & Lybrand L.L.P.
Fort Worth, Texas
November 11, 1996
F-1
CALLOWAY'S NURSERY, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
September 30, September 30,
1996 1995
-------------- ---------------
Cash and cash equivalents $ 2,358 $ 1,046
Accounts receivable 132 55
Inventories 985 996
Prepaids and other assets 86 81
Property and equipment held for sale, net -- 3,124
-------- --------
Total current assets 3,561 5,302
Property and equipment, net 3,947 1,630
Goodwill, net of accumulated amortization
of $908,000 and $800,000, respectively 1,282 1,390
Other assets 73 95
-------- --------
Total assets $ 8,863 $ 8,417
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,454 $ 1,369
Accrued expenses 634 659
-------- --------
Total current liabilities 2,088 2,028
Deferred rent payable 1,169 1,131
-------- --------
Total liabilities 3,257 3,159
-------- --------
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; 5,392,474 and
5,204,456 shares issued, respectively;
5,142,474 and 4,954,456 shares outstanding,
respectively 54 52
Additional paid-in capital 8,252 8,107
Accumulated deficit (1,304) (1,505)
-------- --------
7,002 6,654
Less: treasury stock, at cost (250,000
shares) (1,396) (1,396)
-------- --------
Total shareholders' equity 5,606 5,258
-------- --------
Total liabilities and shareholders'
equity $ 8,863 $ 8,417
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
CALLOWAY'S NURSERY, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1995 1994
------------- -------------- --------------
Net sales $ 23,959 $ 22,527 $ 30,595
Cost of goods sold 12,748 11,935 18,219
------------- -------------- ---------------
Gross profit 11,211 10,592 12,376
Operating expenses 6,750 6,301 8,859
Occupancy expenses 2,937 2,978 2,873
Advertising expenses 1,149 1,054 1,942
Special charges (credits) -- (366) 2,074
Other (net) 147 441 738
------------- -------------- ---------------
Total expenses 10,983 10,408 16,486
------------- -------------- ---------------
Income (loss) before income taxes 228 184 (4,110)
Provision for income taxes 27 28 --
------------- -------------- ---------------
Net income (loss) $ 201 $ 156 ($4,110)
============= ============== ===============
Weighted average number of common
shares 5,047 4,870 4,755
------------- -------------- ---------------
Net income (loss) per common share
$0.04 $0.03 ($0.86)
============= ============== ===============
The accompanying notes are an integral part of these financial statements.
F-3
CALLOWAY'S NURSERY, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1995 1994
------------ ------------ -------------
Cash flows from operating activities:
Net income (loss) $ 201 $ 156 ($4,110)
Adjustments to reconcile net income
(loss) to net cash used for operating activities
Depreciation and 421 485 596
amortization
Special charges (credits) -- (366) 2,074
Gains on property sales (167) -- --
(Increase) decrease in:
Accounts receivable (77) (15) 105
Inventories 11 582 645
Prepaid expenses and
other assets 20 269 318
Increase (decrease) in:
Accounts payable 85 (1,941) 58
Accrued expenses (34) (176) (196)
Deferred rent payable 38 120 104
-------------- -------------- ---------------
Net cash flows provided by (used for) operating
activities 498 (886) (406)
-------------- -------------- ---------------
Cash flows from investing activities:
Additions to property and equipment (221) (17) (293)
Proceeds from property sales 888 1,164 1,490
Other -- 1 --
-------------- --------------- ---------------
Net cash flows provided by
investing activities 667 1,148 1,197
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 147 179 59
Payable to bank -- (279) 279
Net advances (repayments) of debt -- (864) (3,531)
-------------- --------------- ---------------
Net cash flows provided by (used
for) financing activities 147 (964) (3,193)
-------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents 1,312 (702) (2,402)
Cash and cash equivalents at beginning of period 1,046 1,748 4,150
-------------- --------------- ---------------
Cash and cash equivalents at end of period $ 2,358 $ 1,046 $ 1,748
============== ============== ===============
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest 3 53 234
Income taxes -- (290) (288)
The accompanying notes are an integral part of these financial statements.
F-4
CALLOWAY'S NURSERY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Additional Retained
Common Stock Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------------------- ------------- --------- --------- ----------
Balance as of September 30, 1993 5,000 $50 7,871 $ 2,449 $(1,396) $ 8,974
Issuance of common stock 44 -- 59 -- -- 59
Net loss -- -- -- (4,110) -- (4,110)
------- ------- ------------ --------- --------- ---------
Balance as of September 30, 1994 5,044 50 7,930 (1,661) (1,396) 4,923
Issuance of common stock 160 2 177 -- -- 179
Net income -- -- -- 156 -- 156
------- ------- ------------ --------- --------- ---------
Balance as of September 30, 1995 5,204 52 8,107 (1,505) (1,396) 5,258
Issuance of common stock 188 2 145 -- 147
Net income -- -- -- 201 -- 201
------- ------- ------------ --------- --------- ---------
Balance as of September 30, 1996 5,392 $54 $8,252 ($1,304) $(1,396) $ 5,606
======= ======= ============ ========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
CALLOWAY'S NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
Calloway's Nursery, Inc. (the "Company") is engaged in the retail nursery
business. The Company opened its first three nurseries in April 1987. As of
September 30, 1996, the Company was operating sixteen retail nurseries in the
Dallas-Fort Worth area.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue recognition - The Company recognizes revenue when the customer
takes possession of the merchandise.
Inventories - Inventories are stated at the lower of cost or market, with
cost being determined principally on a first-in, first-out basis.
Property and equipment - Property and equipment are capitalized at cost and
depreciated using the straight-line method over the estimated useful lives of
the various classes of assets. Leasehold improvements are amortized on a
straight-line basis over the lease term. Expenditures for normal maintenance and
repairs are expensed as incurred. The cost of property and equipment sold or
otherwise retired and the related accumulated depreciation and amortization are
removed from the accounts and any resultant gain or loss is included in
operating results. The useful lives for purposes of calculating depreciation and
amortization are as follows:
Leasehold improvements Term of lease
Land improvements 15 years
Buildings 33 years
Furniture and fixtures 5 years
Vehicles 3 years
Property held for sale - Land and structures currently being offered for
sale are classified separately from property and equipment. These properties are
currently carried at depreciated cost, not to exceed net realizable value.
Disposal is expected to occur within one year. Properties held for sale, which
remain in use, are being depreciated over their remaining useful lives.
Pre-opening expenses - Pre-opening expenses, which consist primarily of
labor, supplies and occupancy costs incurred prior to each new nursery's opening
and promotional costs incurred during the grand opening period, are expensed as
incurred.
F-6
Earnings per share - Net income (loss) per common share is based upon the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period.
Income taxes - In February 1993, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes ("SFAS 109"). SFAS 109 mandates the liability method
of computing deferred income taxes. One of the principal differences from the
deferred method is that changes in tax rates and laws are reflected in income
from continuing operations in the period such changes are enacted; under the
deferred method such changes were reflected over time, if at all.
Intangibles - Effective August 1988, the Company recorded goodwill in the
amount of $2,471,000 as a result of "push-down" accounting used to record a
significant change in ownership as of that date. Goodwill has been reduced by
the tax benefit of $281,000 related to the utilization of preacquisition net
operating loss carryforwards for the year ended January 27, 1991. No retroactive
restatement of the Company's financial statements related to adjustment of
goodwill amortization is reflected in the accompanying financial statements
since the effect of such adjustments would not be material to the financial
statements of the Company. Goodwill is being amortized on a straight-line basis
over 20 years. At each balance sheet date, management assesses whether there has
been a permanent impairment in the value of goodwill by considering factors such
as expected future operating income, current operating results, and other
economic factors. Management believes no impairment has occurred.
Cash equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Recent Accounting Pronouncements - The Company sponsors a stock-based
compensation plan for its employees and directors. The Company currently applies
APB Opinion 25 and related Interpretations in accounting for its stock-based
compensation plan. In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would
change the methods the Company applies in recognizing the cost of its stock-
based compensation. Adoption of the cost recognition provisions of SFAS 123 is
optional and, if the Company decides not to elect the recognition provisions of
SFAS 123, the Company will nevertheless be required to provide footnoted pro
forma disclosures to the Company's financial statements. These pro forma
disclosures would show the effect on the Company's earnings and earnings per
share as if the Company adopted the cost recognition provisions of SFAS 123. The
effective date of the disclosure provisions of SFAS 123 is, for the Company, the
close of the Company's fiscal year ending September 30, 1997.
F-7
To date, the Company has not decided whether to elect the cost recognition
provisions or the pro forma disclosure provision of SFAS 123. Although the
Company is currently considering this election, the Company expects to adopt
only the pro forma disclosure provisions of SFAS 123 and to continue accounting
for its stock-based plan under APB Opinion 25.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121").
SFAS 121 is effective for financial statements for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company is currently
evaluating SFAS 121. However, management does not believe that it will have a
material impact in the Company's financial position, operations or liquidity.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual results could differ from those estimates.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in thousands):
September 30, September 30,
1996 1995
---- ----
Money market fund with an annualized
yield of 5.25% as of September 30, 1996 $ 2,138 $ 772
Demand deposit accounts 203 258
Petty cash 17 16
------ ------
$2,358 $1,046
====== ======
F-8
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
September 30, September 30,
1996 1995
---- ----
Land $ 1,746 $ --
Land improvements 369 165
Leasehold improvements 658 640
Buildings 1,369 852
Furniture, fixtures and equipment 1,444 1,248
Vehicles 334 347
------- -------
5,920 3,252
Less: accumulated depreciation and amortization (1,973) (1,622)
------- -------
$ 3,947 $ 1,630
======= =======
Property held for sale in the amount of $2,467 (net of accumulated
depreciation of $103) was reclassified to property and equipment during
fiscal year 1996.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
September 30, September 30,
1996 1995
---- ----
Accrued salaries and related taxes $ 101 $ 67
Accrued bonuses 59 61
Accrued property taxes 318 366
Accrued sales and use taxes 93 92
Other 63 73
----- -----
$ 634 $ 659
===== =====
F-9
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
As of September 30, 1994, the Company had a real estate note payable to a
financial institution with an outstanding balance of $864,000, $96,000 of which
was classified as current, and $768,000 of which was classified as long-term. On
December 2, 1994, the Company retired in full the remaining outstanding balance
of this real estate note payable with proceeds of a sale-leaseback transaction
on the underlying real property (see Note 14).
In September 1995 the Company entered into a revolving line of credit
arrangement with a bank which matures on April 1, 1997, and is collateralized by
inventory, accounts receivable and certain real property. The line of credit was
established to supplement the Company's seasonal working capital needs. No
amounts were outstanding under the line of credit at September 30, 1996 or 1995.
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At September 30, 1996,
the Company has net operating loss carryforwards of $1,700,000 for income tax
purposes which will expire in 2009 and 2010 if not used.
Components of the provision for income taxes before extraordinary item
consist of the following (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1996 1995 1994
------------- ------------- -------------
Current (benefit) expense:
Federal $-- $28 $(605)
State -- -- --
------------- ------------- -------------
Total current -- 28 (605)
------------- ------------- -------------
Deferred (benefit) expense:
Federal 27 -- 605
State -- -- --
------------- ------------- -------------
Total deferred 27 -- 605
------------- ------------- -------------
------------- ------------- -------------
Total provision $27 $28 $ --
============= ============= =============
F-10
The differences between the Company's effective tax rate and the federal
statutory tax rate of 34% for the fiscal years ended September 30, 1996, 1995
and 1994 relate primarily to goodwill amortization, which is not deductible for
tax purposes. The following is an analysis of such differences (amounts in
thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
--- --- ---
1996 1995 1994
---- ---- ----
Income tax expense
(benefit) at statutory rate $ 78 $ 53 $(1,397)
State income tax, net of federal benefit -- 8 --
Amortization of goodwill 37 37 37
Tax-exempt interest income -- (10) (119)
Other, net 26 3 (13)
Valuation allowance (114) (63) 1,492
----- ---- ------
Total income tax expense (benefit) $ 27 $ 28 $ --
===== ==== ======
Effective tax rate 12% 15% --
Significant components of the Company's deferred tax assets and liabilities
as of September 30, 1996 and 1995 are as follows (amounts in thousands):
September 30, September 30,
--- ---
1996 1995
---- ----
Deferred tax liabilities:
Depreciation $(9) $(3)
---------------- --------------
Total deferred tax liabilities (9) (3)
---------------- --------------
Deferred tax assets:
Deferred rent 432 373
Inventory costs capitalized for tax purposes 24 23
Net operating loss carryforward 659 778
AMT credit carryforward 27 27
Assets marked to market 203 206
Other 13 59
---------------- --------------
Total deferred tax assets 1,358 1,466
Less: valuation allowance (1,315) (1,429)
---------------- --------------
Net deferred tax asset $34 $34
================ ==============
F-11
NOTE 8 - SHAREHOLDERS' EQUITY
During 1995 and 1996, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 11), receiving proceeds
as follows:
Year Ended Year Ended
September 30, September 30,
1996 1995
------------- -------------
Number of shares issued 188,018 160,539
Proceeds $147,000 $179,000
NOTE 9 - COMMON STOCK PURCHASE RIGHTS
Effective July 1991, the Company adopted a shareholder rights plan ("Rights
Plan") that entitles each registered shareholder to one common share purchase
right ("Right") per common share held. The Rights attach to all certificates
representing outstanding shares of common stock; no separate Rights certificates
have been distributed. The terms of the Rights Plan provide that in the event of
an unapproved tender to acquire 20 percent or more of the Company's common
stock, the Right holders, except as noted below, can purchase common stock at
50% of the then current market price. The Rights Plan also provides that all
Rights held by parties to the unapproved tender shall be null and void; thus,
such party can not participate in the discounted purchase of common stock. The
Rights are redeemable at any time at $.01 per Right.
NOTE 10 - STOCK OPTION PLANS
In May 1991, the Company's Board of Directors and shareholders adopted its
1991 Stock Option Plan (the "1991 Plan"). The 1991 Plan permits the granting of
incentive stock options to key employees and non-qualified stock options to
employees and non-employee directors. The 1991 Plan is administered by the
Compensation Committee of the Board of Directors, which consists of two
directors who are not employed by the Company. The exercise price for options
granted under the 1991 Plan may not be less than the fair market value of the
common stock on the date of grant, as determined by the Compensation Committee.
An aggregate of 650,000 shares of common stock have been reserved for issuance
under the 1991 Plan.
Options are exercisable during the period specified in each option
agreement, although no expiration date may be later than ten years after the
date of grant. Options may be exercisable in installments pursuant to a vesting
schedule designated by the Compensation Committee.
F-12
In July 1991, the Company granted non-qualified options to two non-employee
directors upon each such person's initial election to the Board of Directors.
Each such option entitles the director to purchase 3,500 shares of Common Stock
at $6.125 per share. Each such option is immediately exercisable and terminates
on the tenth anniversary of the date of grant.
In July 1991, the Company also granted options to purchase 450,000 shares
at $6.375 per share to management and employees of the Company. One-half of each
such option became exercisable on the first anniversary of date of grant and the
other half became exercisable on the second anniversary. The options terminate
on the tenth anniversary of the date of grant.
In November 1993, the Company granted options to purchase 89,600 shares at
$2.25 per share to employees of the Company (none of whom are executive
officers). Each such option is immediately exercisable and terminates on the
tenth anniversary of the date of grant.
During 1995, the Company cancelled all options previously granted to
employees under the Stock Option Plan, and granted options to purchase 642,800
shares at $1.00 - $1.1875 per share to employees of the Company. Each such
option is immediately exercisable and terminates on the tenth anniversary of the
date of grant.
In May 1995, the Company's Board of Directors adopted its 1995 Stock Option
Plan for Independent Directors (the "1995 Plan"). The 1995 Plan provides for the
granting of non-qualified stock options to non-employee directors on a formula
basis. The exercise price for options granted under the Plan may not be less
than the fair market value of the common stock on the date of grant. An
aggregate of 25,000 shares of common stock have been reserved for issuance under
the 1995 Plan. Options are exercisable pursuant to a predetermined vesting
schedule, and remain in effect for a ten year period from the date of the grant.
In May 1995, the Company granted non-qualified options to two non-employee
directors. Each such option entitles the director to purchase 5,000 shares of
Common Stock at $1.00 per share. Each such option is exercisable in accordance
with the terms of the 1996 Plan and terminates on the tenth anniversary of the
date of grant.
Substantially all options under the two aforementioned stock option plans
remain outstanding.
F-13
NOTE 11 - STOCK PURCHASE PLAN
In February 1992, the Company's Board of Directors and shareholders adopted
a Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is
designed to provide employees and directors with the opportunity to acquire
ownership interest in the Company and thereby provide those who will be
responsible for the continued growth of the Company with a more direct concern
about its welfare and a common interest with the Company's other stockholders.
The Stock Purchase Plan is not subject to the Employee Retirement Income
Security Act of 1974.
All employees who have attained the age of majority in the state of their
residence and have completed 60 days of full-time employment with the Company,
and all members of the Board of Directors, are eligible to participate in the
Stock Purchase Plan. Participants may elect to have payroll deductions of a
maximum of 10% of their compensation each pay period. The Company matches up to
100% of such deductions based upon the participant's years of continuous
participation in the Stock Purchase Plan. Funds deducted from a participant's
pay and contributions made by the Company to the Stock Purchase Plan on behalf
of a participant (all of which is invested for the benefit of the participant)
are taxable to the participant as wages or compensation for services.
NOTE 12 - INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with members of the Board
which, to the extent permitted under applicable law, indemnify such persons
against all expenses, judgments, fines and penalties incurred in connection with
the defense or settlement of actions brought against them by reason of the fact
that they are or were directors or officers of the Company or assumed certain
responsibilities while directing the Company.
In addition, the indemnity agreements between two officers of the Company
and the Company provide additional indemnification for all liabilities and
expenses in respect of certain lease obligations of the Company that have been
personally guaranteed by such officers. If the Company fails to indemnify either
of the officers as required in the indemnity agreement or if either of these
officers are terminated for any reason as an employee of the Company, the
Company will provide the terminated officer with one or more bank letters of
credit to cover an aggregate of $4,000,000 of such liability; however, the
Company shall not be obligated to provide letters of credit aggregating more
than $4,000,000 to these two officers.
F-14
NOTE 13 - COMMITMENTS AND CONTINGENCIES
As of September 30, 1996 the Company leased fourteen retail store locations
under noncancellable operating leases. The leases expire in various years
through 2012. The leases generally contain renewal options for periods ranging
from 5 to 15 years and require the Company to pay all executory costs (such as
property taxes, maintenance and insurance). Rental payments include minimum
rentals plus contingent rentals based on sales. The Company has not had to pay
contingent rentals to date and does not expect to in the future.
Future minimum lease payments under noncancellable operating leases as of
September 30, 1996 are as follows (amounts in thousands):
Fiscal Year Ending
------------------
1997 $ 2,263
1998 2,066
1999 1,825
2000 1,880
2001 1,927
Thereafter 9,036
--------
$ 18,997
========
Rental expense for operating leases during the fiscal years ended September
30, 1996, 1995 and 1994 were approximately $2.3 million, $2.1 million, and $2.3
million, respectively.
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the Company's potential
liability in all pending actions and claims, in the aggregate, is not material.
In December 1996 the Company purchased one retail store location that had
previously been leased. [See Note 15.]
F-15
NOTE 14 - SPECIAL CHARGES (CREDITS)
During the fourth quarter of fiscal 1994, the Company recorded write-downs
of certain property and equipment held for sale, certain property and equipment
for a store closure, and inventories related to certain merchandise lines that
were discontinued to the lower of cost or market. These write-downs, which
aggregated $2,074,000 and are reflected as a special charge in the accompanying
statements of operations for 1994, include $516,000 to write-down property and
equipment and to accrue expenses for the closing of one store; $908,000 to
write-down inventories related to merchandise lines that are being discontinued
to the lower of cost or market; $650,000 for write-downs of three store
locations that have been or are expected to be sold and leased-back, in order to
reflect on the Company's books the amounts expected to be realized from sale of
these assets.
During the fourth quarter of fiscal 1995, the Company settled substantially
all of its obligations related to the closed store location. A credit of
$366,000 was recorded, reflecting the reversal of certain accruals which are no
longer required. Such credit is reflected as a special credit in the
accompanying statements of operations for 1995.
NOTE 15 - SUBSEQUENT EVENT
In December 1996 the Company purchased one retail store location that had
previously been leased. The purchase was financed with a long-term note payable
to a financial institution for $560,000. The lease on the property was to expire
in 2007, and required minimum lease payments of $125,000 annually.
NOTE 16 - SELECTED QUARTERLY DATA (UNAUDITED)
Amounts (except share data) are expressed in thousands:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $4,164 $ 3,904 $4,223 $4,399 $12,347 $10,783 $3,225 $3,441
Gross profit 1,878 1,654 1,932 1,946 6,069 5,430 1,332 1,562
Net income (loss) $ (915) $(1,137) $ (752) $ (674) $ 2,686 $ 2,286 $ (818) $ (319)
Net income (loss) per share $ (.18) $ (.24) $ (.15) $ (.14) $ .53 $ .47 $ (.16) $ (.06)
F-16
CALLOWAY'S NURSERY, INC.
SCHEDULE 2
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Additions Balance
Beginning Charged to at End
Description of Period Expense Deductions of Period
----------- ---------- ---------- ---------- ---------
Fiscal year ended September 30, 1994:
Valuation allowance - $ -0- $1,492 $-0- $1,492
deferred tax asset
Fiscal year ended September 30, 1995:
Valuation allowance - $1,492 $ -0- $ 63 $1,429
deferred tax asset
Fiscal year ended September 30, 1996:
Valuation allowance - $1,429 $ -0- $114 $1,315
deferred tax asset
S-1
CALLOWAY'S NURSERY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1996
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- -------------- ------------ ----
(3) (a) Restated Articles of Incorporation of the Registrant.
(Exhibit (3)(a))/1/
(b) Form of Bylaws of the Registrant. (Exhibit (3(b))/1/
(c) Amendment to Bylaws Adopted on May 19, 1993. (Exhibit
(3(c))/1/
(a) Specimen Stock Certificate. (Exhibit (4)(a)/1/
(b) Form of Shareholder Rights Plan. (Exhibit (4)(b)/1/
(10) (a) Form of Employment Agreement dated July 3 , 1991 between
the Registrant and James C. Estill. (Exhibit (10)(a))
/1/
(b) Form of Employment Agreement dated July 3, 1991 between
the Registrant and John T. Cosby. (Exhibit (10)(b))/1/
(c) Form of Employment Agreement dated July 3, 1991 between
the Registrant and John S. Peters. (Exhibit (10)(c))
/1/
(d) (Left blank intentionally.)
(e) Form of Indemnity Agreement dated July 3, 1991 between
the Registrant and each of James C. Estill and John T.
Cosby. (Exhibit (10)(g))/1/
(f) Form of Indemnity Agreement dated July 3, 1991 between
the Registrant and John S. Peters. (Exhibit (10)(h))
/1/
(g) Form of Indemnity Agreement dated July 3, 1991 between
the Registrant and each of Robert E. Glaze and Dr.
Stanley Block. (Exhibit (10)(i))/1/
(j) Management Profit Sharing Bonus Plan for Fiscal Year
Ending September 30, 1997. /5/
(k) Product Line Management Profit Sharing Bonus Plan for
Fiscal Year Ending September 30, 1997. /5/
(l) Store Management Compensation Plan for Fiscal Year
Ending September 30, 1997. /5/
(m) Extension of Employment Agreement between the Registrant
and James C. Estill dated July 2, 1996 (Exhibit
(10)(m))/4/
(n) Extension of Employment Agreement between the Registrant
and John T. Cosby dated July 2, 1996 (Exhibit (10)(n))
/4/
(o) Extension of Employment Agreement between the Registrant
and John S. Peters dated July 2, 1996 (Exhibit
(10)(o))/4/
CALLOWAY'S NURSERY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1996
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ----
(23) (d) Consent of Coopers & Lybrand L.L.P./5/
(27) (a) Financial Data Schedule./5/
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit
(28)) /2/
(b) Calloway's Nursery, Inc. 1991 Stock Option Plan
(Exhibit (10)(d)) /1/
(c) Calloway's Nursery, Inc. 1995 Stock Option Plan for
Independent Directors (Exhibit (28)) /3/
________________________________________________________________________________
1 Incorporated by reference to the Exhibit shown in parenthesis to
Registration Statement No. 33-40473 on Form S-1, and amendments
thereto, filed by the Company with the Securities and Exchange
Commission and effective June 26, 1991.
2 Incorporated by reference to the Exhibit shown in parenthesis to Registration
Statement No. 33-46170 on Form S-8, and amendments thereto, filed by the
Company with the Securities and Exchange Commission and effective March 3,
1992.
3 Incorporated by reference to the Exhibit shown in parenthesis to the Company's
Form 10-K Report for the fiscal year ended September 30, 1995.
4 Incorporated by reference to Amendment No. 1 to the Exhibit shown in
parenthesis to the Company's Form 10-Q Report for the quarter ended June 30,
1996.
5 Filed herewith.
________________________________________________________________________________