1
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, 2000
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 5, 2000
----- -----------------
Common Stock, par value $.01 per share 5,853,544
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CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 31, 2000
TABLE OF CONTENTS
PAGE
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Index to Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 9
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
Items 1-6 12
2
3
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. We are including this
statement for the express purpose of providing Calloway's the protections of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
with respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements contained in this Report.
Our expected future results, products and service performance or other
non-historical facts are forward-looking and reflect our current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of our business, geographic concentration, the impact of weather
and other growing conditions, risks associated with the Cornelius Acquisition
and the ability to integrate Cornelius in a timely and cost effective manner,
the ability to manage growth, the impact of competition, the ability to obtain
future financing, government regulations, market risks associated with
variable-rate debt, and other risks and uncertainties defined from time to time
in our Securities and Exchange Commission filings.
Therefore, each reader of this report is cautioned to consider carefully these
factors as well as the specific factors discussed with each forward-looking
statement in this Report and disclosed in our filings with the Securities and
Exchange Commission as such factors, in some cases, have affected, and in the
future (together with other factors) could affect, our ability to implement our
business strategy and may cause actual results to differ materially from those
contemplated by the statements expressed in this Report.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
MARCH 31, SEPTEMBER 30, MARCH 31,
2000 1999 1999
--------- ------------- ---------
Cash and cash equivalents $ 1,244 $ 62 $ 483
Property held for sale -- -- 448
Accounts receivable 1,843 54 134
Inventories 11,455 9,736 4,479
Deferred income taxes -- -- 1,064
Prepaids and other assets 50 137 255
-------- -------- --------
Total current assets 14,592 9,989 6,863
Property and equipment, net 14,869 13,859 8,049
Goodwill, net 902 956 1,011
Deferred income taxes 1,380 1,392 565
Other assets 199 139 45
-------- -------- --------
Total assets $ 31,942 $ 26,335 $ 16,533
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 8,640 $ 3,356 $ 4,719
Accrued expenses 1,452 1,210 847
Notes payable, current 185 463 --
Current portion of long-term debt 1,438 558 314
Deferred income taxes 378 622 --
-------- -------- --------
Total current liabilities 12,093 6,209 5,880
Deferred rent payable 1,136 1,113 1,108
Long-term debt, net of current portion 9,075 9,003 2,922
-------- -------- --------
Total liabilities 22,304 16,325 9,910
-------- -------- --------
Commitments and contingencies
Non-voting preferred stock, with mandatory
redemption provisions 1,741 1,890 --
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 60 59 58
Additional paid-in capital 9,060 8,927 8,783
Retained earnings (accumulated deficit) 173 530 (822)
-------- -------- --------
9,293 9,516 8,019
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 7,897 8,120 6,623
-------- -------- --------
Total liabilities and shareholders' equity $ 31,942 $ 26,335 $ 16,533
======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $ 25,269 $ 11,072 $ 12,289 $ 5,597
Cost of goods sold 13,699 6,020 6,664 2,903
-------- -------- -------- --------
Gross profit 11,570 5,052 5,625 2,694
-------- -------- -------- --------
Operating expenses 8,872 4,075 4,194 1,964
Occupancy expenses 1,560 1,345 788 684
Advertising expenses 730 677 347 300
Depreciation and amortization 439 343 230 176
Interest expense 466 162 238 87
Interest income (5) (22) -- (2)
-------- -------- -------- --------
Total expenses 12,062 6,580 5,797 3,209
-------- -------- -------- --------
Loss before income taxes (492) (1,528) (172) (515)
Income tax benefit (145) (567) (52) (173)
-------- -------- -------- --------
Net loss (347) (961) (120) (342)
Accretion of preferred stock (125) -- (64) --
Retirement of preferred stock 115 -- -- --
-------- -------- -------- --------
Net loss attributable to common shareholders $ (357) $ (961) $ (184) $ (342)
======== ======== ======== ========
Weighted average number of common shares
outstanding
Basic 5,751 5,534 5,715 5,560
Diluted 5,751 5,534 5,715 5,560
Net loss per common share
Basic $ (.06) $ (.17) $ (.03) $ (.06)
Diluted $ (.06) $ (.17) $ (.03) $ (.06)
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
----------------
2000 1999
------- -------
Cash flows from operating activities:
Net loss $ (347) $ (961)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 439 343
Net change in operating assets and liabilities 1,836 3
------- -------
Net cash provided by (used for) operating activities 1,928 (615)
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,395) (523)
------- -------
Net cash used for investing activities (1,395) (523)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 134 118
Retirement of preferred stock (159) --
Borrowings on debt 2,967 --
Repayments of debt (2,293) (146)
------- -------
Net cash used provided by (used for) financing
activities 649 (28)
------- -------
Net decrease in cash and cash equivalents 1,182 (1,166)
Cash and cash equivalents at beginning of period 62 1,649
------- -------
Cash and cash equivalents at end of period $ 1,244 $ 483
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim consolidated financial statements were prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In
management's opinion, all adjustments considered necessary for a fair
presentation of the financial position at March 31, 2000, and the results of
operations for the three-month and six-month periods ended March 31, 2000 and
1999, and cash flows for the six-month periods ended March 31, 2000 and 1999
have been made. Such adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations for the
three-month and six-month periods ended March 31, 2000 and cash flows for the
six-month period ended March 31, 2000 are not necessarily indicative of expected
results of operations and cash flows for the fiscal year ending September 30,
2000.
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 SEC rules and regulations
referred to above. Accordingly, these financial statements should be read in
conjunction with the audited financial statements and related notes for the
fiscal year ended September 30, 1999 included in the Form 10-K covering such
period.
2. RECLASSIFICATIONS
Certain amounts for 1999 have been reclassified to conform to the 2000
presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, September 30, March 31,
2000 1999 1999
--------- ------------- ---------
Finished goods $ 5,469 $ 4,424 $ 3,464
Work in process 5,086 4,952 686
Supplies 901 360 329
------- ------- -------
$11,455 $ 9,736 $ 4,479
======= ======= =======
4. LONG-TERM DEBT
In February 2000 the Company entered into two notes payable to a financial
institution. The notes are collateralized by certain real estate, and require
payments, including interest at a fixed rate of 8.5%, of approximately $190,000
annually. The notes mature in September 2014. At March 31, 2000 the outstanding
balance was approximately $2,245,000.
In conjunction with the financing described above, the Company used some of the
proceeds of the two notes to retire approximately $1,732,000 of its $6,500,000
note payable to a financial institution. That note matures in five years and has
a variable interest rate (10.0% at March 31, 2000). At March 31, 2000, the
outstanding balance of that note was approximately $4,664,000.
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8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
The Company has two reportable segments: Retail, and Growing and Wholesale.
Most of the Company's operating units use Land and Buildings under long-term
operating leases. However, some operating units (several within both of the
reportable segments) use Land and Buildings that the Company owns. To ensure
comparability between operating units, the measure of total assets, as provided
to the chief operating decision maker, does not include Land and Buildings for
any operating segment. Likewise, the measure of profit or loss, as reported to
the chief operating decision maker, includes an internal charge for rental of
any Land and Buildings that are owned by the Company and used by an operating
segment. Therefore, the total assets listed in each operating segment are less
than the total assets of the Company. The assets owned by the Company that are
charged to operating segments as rentals are included in the line "Corporate and
Eliminations" to reconcile the assets used by operating segments to the total
assets owned by the Company.
The following is a tabulation of business segment information as of and for the
three-month and six-month periods ended March 31, 2000 and 1999. Intersegment
elimination information is included to reconcile segment data to the condensed
consolidated financial statements. Amounts are in thousands:
Six-Month Periods Three-Month Periods
Ended Ended
March 31, March 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES
From external customers
Retail $ 20,305 $ 11,072 $ 9,134 $ 5,580
Growing and Wholesale 4,964 -- 3,155 17
-------- -------- -------- --------
Totals 25,269 11,072 12,289 5,597
-------- -------- -------- --------
From other operating
segments
Retail -- -- -- --
Growing and Wholesale 1,245 658 483 432
-------- -------- -------- --------
Totals 1,245 658 483 432
-------- -------- -------- --------
Inter-segment eliminations (1,245) (658) (483) (432)
-------- -------- -------- --------
Total consolidated net sales $ 25,269 $ 11,072 $ 12,289 $ 5,597
======== ======== ======== ========
PRE-TAX OPERATING PROFIT (LOSS)
Retail $ 226 (1,663) $ 158 (559)
Growing and Wholesale (675) 27 (279) 22
-------- -------- -------- --------
Totals (449) (1,636) (121) (537)
Corporate and inter-segment
eliminations (43) 108 (51) 22
-------- -------- -------- --------
Total consolidated pre-tax
operating profit (loss) $ (492) $ (1,528) $ (172) $ (515)
======== ======== ======== ========
March 31, March 31,
2000 1999
--------- ----------
TOTAL ASSETS
Retail $ 7,297 $ 5,105
Growing and Wholesale 8,413 1,131
Corporate and inter-segment eliminations 16,232 10,297
------- -------
Totals $31,942 $16,533
======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In September 1999 we completed the Acquisition of Cornelius Nurseries, Inc. and
affiliated companies (the "Cornelius Acquisition"). The quarter ended March 31,
2000 is the second fiscal period where we have reported results of operations
inclusive of the Cornelius Acquisition.
(Amounts in millions, except per share
amounts, number of stores, and current
ratio)
--------------------------------------
Second quarter highlights (unaudited) Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ----------- -----------
Consolidated net sales 12.3 5.6 4.2
Retail segment sales 9.1 5.6 4.2
Wholesale and growing segment sales 3.7 .4 --
Less: internal sales (.5) (.4) --
Sales increase (decrease) 120% 32% (20%)
Same-store sales increase (decrease) 17% 22% (16%)
Number of retail stores (end of quarter) 20 16 15
Gross profit margin 46% 48% 50%
Pre-tax operating loss (.2) (.5) (.8)
Net loss per share (basic and diluted) (.03) (.06) (.08)
Cash flows from operations 1.0 (.6) 1.1
Retail store inventories 5.0 3.5 2.5
Current ratio 1.21 1.17 1.10
Property, plant and equipment (net) 14.9 8.0 8.3
Long-term debt (including current portion) 10.5 3.2 3.0
Quarter Ended March 31, 2000 Compared with Quarter Ended March 31, 1999
After achieving the best first quarter operating results in its history,
Calloway's Nursery continued the improvement with sharply improved results for
its second quarter. The continued outstanding results were primarily due to
substantially improved sales and margins at the existing Calloway's Nursery
retail stores in Dallas and Fort Worth.
Sales increased by 120%. The sixteen Calloway's Nursery retail stores in Dallas
and Fort Worth enjoyed a 17% sales increase. Retail segment sales were
approximately $9.1 million, or over 70% of total sales. Wholesale and Growing
segment sales were approximately $3.7 million, with about $0.5 million of those
sales to our own retail stores and wholesale distribution centers.
Gross profit margins decreased to 46% from 48% last year. The Calloway's Nursery
retail stores achieved improved margins as a result of continued improvements in
merchandise procurement and presentation, and the Cornelius Nurseries retail
stores in Houston achieved their typical gross margins for the Winter season,
which approximated those achieved by the Calloway's Nursery retail stores this
year. However, gross profit margins were lower overall due to the increased
volume of Wholesale and Growing sales, which typically earn lower gross profit
margins than retail sales.
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Expenses increased due to the Cornelius Acquisition. However, the Cornelius
Acquisition and continued growth of sales in the Calloway's retail stores has
resulted in sales that have risen faster than expenses. As a result, total
expenses have decreased as a percentage of net sales.
As the following table illustrates, every expense component was higher in the
quarter ended March 31, 2000 than for the quarter ended March 31, 1999. Except
for Interest Expense, however, every expense component was reduced as a
percentage of net sales:
(Amounts in thousands)
----------------------------------------------
Fiscal 2000 Fiscal 1999
-------------------- ---------------------
Amount % Sales Amount % Sales
Consolidated net sales $12,289 $ 5,597
Operating expenses 4,194 34% 1,964 35%
Occupancy expenses 788 6% 684 12%
Advertising expenses 347 3% 300 5%
Depreciation and amortization 230 2% 176 3%
Interest expense $ 238 2% $ 87 2%
Six-Month Period Ended March 31, 2000 Compared with Six-Month Period Ended March
31, 1999
The results for the first six months of fiscal 2000 were substantially improved
from those of one year ago -- Calloway's reduced its pre-tax operating loss for
the first six months by 68%.
Sales increased by 128%. The sixteen Calloway's Nursery retail stores in Dallas
and Fort Worth enjoyed a 13% sales increase. Retail segment sales were
approximately $20.3 million, and Wholesale and Growing segment sales were
approximately $6.2 million, with about $1.2 million of those sales to our own
retail stores and wholesale distribution centers.
Gross profit margins remained at 46%. The Calloway's Nursery retail stores
achieved improved margins as a result of continued improvements in merchandise
procurement and presentation, and the Cornelius Nurseries retail stores in
Houston achieved their typical gross margins, which approximated those achieved
by the Calloway's Nursery retail stores this year. However, gross profit margins
were lower overall due to the increased volume of Wholesale and Growing sales,
which typically earn lower gross profit margins than retail sales.
Expenses increased due to the Cornelius Acquisition. However, the Cornelius
Acquisition and continued growth of sales in the Calloway's retail stores has
resulted in sales that have risen faster than expenses. As a result, total
expenses have decreased as a percentage of net sales.
As the following table illustrates, every expense component was higher in the
six-month period ended March 31, 2000 than for the six-month period ended March
31, 1999. Except for Interest Expense, however, every expense component was
reduced as a percentage of net sales:
(Amounts in thousands)
----------------------------------------------
Fiscal 2000 Fiscal 1999
------------------- ---------------------
Amount % Sales Amount % Sales
Consolidated net sales $25,269 $11,072
Operating expenses 8,872 35% 4,075 37%
Occupancy expenses 1,560 6% 1,345 12%
Advertising expenses 730 3% 677 6%
Depreciation and amortization 439 2% 343 3%
Interest expense $ 466 2% $ 162 1%
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CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities totaled approximately $1.9 million
for the six-month period ended March 31, 2000, compared to cash flows used by
operating activities of $615,000 for the comparable period one year ago. Most of
the improvement was due to the approximately $1.0 million improvement in pre-tax
operating results.
Cash flows used by investing activities of approximately $1.4 million for the
six-month period were increased from $523,000 one year ago. Most of the increase
was due to the construction of a new Calloway's retail store, which opened in
April 2000.
Cash flows provided by financing activities totaled approximately $0.6 million
for the six-month period, compared to cash flows used by financing activities of
$28,000 for the comparable period one year ago. We borrowed approximately
$700,000 to finance the construction of our newest Calloway's retail store,
which opened in April 2000. We also refinanced a portion of the $6.5 million
term loan with our bank. We were able to secure fifteen-year, 8.5% fixed-rate
financing of $2,245,000, and reduced our existing debt by approximately
$1,732,000. (See Note 4 to Condensed Consolidated Financial Statements) We
applied most of the excess proceeds from the new financing towards the
acquisition and construction of the new retail store we opened in April 2000.
In October 1999 we redeemed 5,798 shares of Preferred Stock for a cash payment
of approximately $159,000. The redeemed Preferred Stock had a redemption value
of approximately $580,000 and a carrying amount of approximately $274,000. Thus,
the remaining redemption amount of the Preferred Stock was reduced to
approximately $3.4 million.
We believe that the cash flows from operations, supplemented on a seasonal basis
by revolving credit lines, should adequately support servicing of debt and other
obligations. As noted above, we refinanced a portion of the five-year, $6.5
million note payable to our bank with notes payable having a longer maturity. We
expect to either extend the maturity of the remaining balance, or arrange for
alternative financing that is for a longer term.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Calloway's is exposed to certain market risks, including fluctuations in
interest rates and its common stock price. We do not enter into transactions
designed to mitigate such market risks for trading or speculative purposes. As
of March 31, 2000, we had no foreign exchange contracts and/or options
outstanding.
We manage our interest rate risk by balancing (a) the amount of variable-rate
long-term debt with (b) the amounts due under long-term leases, which typically
have fixed rental payments that do not fluctuate with interest rate changes. For
our variable-rate debt, interest rate changes generally do not affect the fair
market value of such debt, but do impact future earnings and cash flows,
assuming other factors are held constant.
At March 31, 2000 Calloway's had variable rate debt of $7.5 million. In
addition, we had future minimum lease payments under noncancellable operating
leases of $13.7 million. Holding other variables, such as debt levels, constant,
a one percentage point increase in interest rates would be expected to have an
estimated impact on pre-tax earnings and cash flows for next year of
approximately $75,000 for the variable-rate debt.
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PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the shareholders of the Company was held on February
17, 2000. The voting results at that meeting were as follows:
Election of Directors:
Nominee For Withheld
- ---------------------- --- --------
James C. Estill 5,096,089 56,575
Dr. Stanley Block 5,097,589 55,075
C. Sterling Cornelius 5,098,089 54,575
John T. Cosby 5,101,489 51,175
Robert E. Glaze 5,102,489 50,175
John S. Peters 5,096,389 56,275
Approval of Calloway's Nursery, Inc. 1999 Stock Option Plan:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,982,845 146,145 23,674 -0-
Appointment of KPMG LLP as auditors for fiscal year 2000:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
5,125,700 11,760 15,204 -0-
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None.
12
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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 5, 2000
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
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule