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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, 1999
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 April 23, 1999
----- -----------------
Common Stock, par value $.01 per share 5,593,025
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CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 31, 1999
PAGE
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
Item 1
Index to 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 13
PART II - OTHER INFORMATION
Items 1-6 13
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- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS OR INFORMATION
- --------------------------------------------------------------------------------
Certain of the statements made in this Form 10-Q Report are not based on
historical facts, but are forward-looking information based on assumptions about
future conditions that may ultimately prove to be inaccurate. Actual events and
results may materially differ from anticipated results described in such
statements. Our ability to achieve anticipated results is subject to certain
risks and uncertainties. These include, without limitation: general economic
conditions and weather in the Dallas-Fort Worth area and competition from home
improvement warehouses, discount stores, grocery stores and other retailers of
nursery products.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
March 31, September 30, March 31,
1999 1998 1998
------------ ------------ ------------
Cash and cash equivalents $ 483 $ 1,649 $ 242
Property held for sale 448 448 --
Accounts receivable 134 148 655
Inventories 4,479 2,341 3,642
Deferred income taxes 1,064 496 1,150
Prepaids and other assets 255 112 24
------------ ------------ ------------
Total current assets 6,863 5,194 5,713
Property and equipment, net 8,049 7,815 8,317
Goodwill, net 1,011 1,065 1,119
Deferred income taxes 565 565 581
Other assets 45 46 49
------------ ------------ ------------
Total assets $ 16,533 $ 14,685 $ 15,779
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,719 $ 1,913 $ 4,522
Accrued expenses 847 831 578
Current portion of long-term debt 314 338 97
------------ ------------ ------------
Total current liabilities 5,880 3,082 5,197
Deferred rent payable 1,108 1,093 1,077
Long-term debt, net of current portion 2,922 3,044 2,908
------------ ------------ ------------
Total liabilities 9,910 7,219 9,182
------------ ------------ ------------
Commitments and contingencies
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 58 57 56
Additional paid-in capital 8,783 8,666 8,537
Retained earnings (accumulated deficit) (822) 139 (600)
------------ ------------ ------------
8,019 8,862 7,993
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
------------ ------------ ------------
Total shareholders' equity 6,623 7,466 6,597
------------ ------------ ------------
Total liabilities and shareholders' equity
$ 16,533 $ 14,685 $ 15,779
============ ============ ============
The accompanying notes are an integral part of these condensed
financial statements.
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CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31 MARCH 31
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $ 5,597 $ 4,227 $ 11,072 $ 8,722
Cost of goods sold 2,903 2,105 6,020 4,571
---------- ---------- ---------- ----------
Gross profit 2,694 2,122 5,052 4,151
---------- ---------- ---------- ----------
Operating expenses 1,964 1,720 4,075 3,602
Occupancy expenses 684 727 1,345 1,405
Advertising expenses 300 278 677 601
Net interest expense 85 44 140 53
Depreciation and amortization 176 113 343 228
---------- ---------- ---------- ----------
Total expenses 3,209 2,882 6,580 5,889
---------- ---------- ---------- ----------
Loss before income taxes (515) (760) (1,528) (1,738)
Income tax benefit (173) (324) (567) (715)
---------- ---------- ---------- ----------
Net loss $ (342) $ (436) $ (961) $ (1,023)
========== ========== ========== ==========
Net loss per common share
Basic $ (.06) $ (.08) $ (.17) $ (.19)
Diluted $ (.06) $ (.08) $ (.17) $ (.19)
Weighted average number of common shares
outstanding 5,560 5,393 5,534 5,372
The accompanying notes are an integral part of these condensed
financial statements.
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CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
------- -------
Cash flows from operating activities:
Net loss $ (961) $(1,023)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 343 228
Net change in assets and liabilities 3 (863)
------- -------
Net cash used for operating activities (615) (1,658)
------- -------
Cash flows from investing activities:
Additions to property and equipment (523) (3,025)
------- -------
Net cash used for investing activities (523) (3,025)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 118 132
Net borrowings (repayments) of debt (146) 1,105
------- -------
Net cash provided by (used for) financing
activities
(28) 1,237
------- -------
Net decrease in cash and cash equivalents (1,166) (3,446)
Cash and cash equivalents at beginning of period 1,649 3,688
------- -------
Cash and cash equivalents at end of period $ 483 $ 242
======= =======
The accompanying notes are an integral part of these condensed
financial statements.
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CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 1999, the results of
operations for the three-month and six-month periods ended March 31, 1999 and
1998, and the cash flows for the six-month periods ended March 31, 1999 and 1998
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, 1999, and the cash flows for
the six-month period ended March 31, 1999 are not necessarily indicative of
expected results of operations and cash flows for the fiscal year ending
September 30, 1999.
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, 1998 included in the Form 10-K covering such
period.
2. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, September 30, March 31,
1999 1998 1998
-------- ------------ --------
Finished goods $3,464 $1,510 $2,546
Work in process 686 739 857
Supplies 329 92 239
------ ------ ------
$4,479 $2,341 $3,642
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2. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS
128") requires presentation of both basic and diluted EPS on the face of the
statement of operations. Basic EPS is computed by dividing the income available
to common shareholders by the average number of shares outstanding, while
diluted EPS reflects the potential dilution that could occur if stock options
were exercised and resulted in the issuance of additional common stock. For each
of the quarters and six-month periods ended March 31, 1999 and 1998,
respectively, the Company incurred a loss from continuing operations. Therefore,
none of its outstanding stock options are considered dilutive for such periods,
and basic EPS and diluted EPS are the same for such periods.
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3. 401(k) PLAN
On January 1, 1999 the Company initiated a 401(k) plan for its employees. The
401(k) plan provides employees with a way to save and invest for their
retirement. The Company is continuing its Stock Purchase Plan, which provides
for Calloway's matching contributions based on each employee's years of
participation. The Company does not expect to provide matching contributions for
the 401(k) plan. The 401(k) plan is not expected to have a material impact on
the Company's financial condition or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
==========================================================================================================
Second quarter highlights (unaudited) Fiscal 1999 Fiscal 1998 Fiscal 1997
- ----------------------------------------------------------------------------------------------------------
Sales 5,597 4,227 5,303
Sales increase (decrease) 32% (20%) 26%
Same-store sales increase (decrease) 22% (16%) 26%
Number of stores (end of quarter) 16 15 16
Gross profit margin 48% 50% 50%
Pre-tax operating loss (514) (760) (108)
Net loss per share (basic and diluted) (.06) (.08) (.02)
Cash flows provided by (used for) operations (584) (1,081) 673
Retail store inventories 3,464 2,546 1,912
Current ratio 1.17 1.10 1.05
Property, plant and equipment (net) 8,049 8,317 4,687
Long-term debt (including current portion) 3,236 3,005 554
==========================================================================================================
Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998
Sales increased by 32%, led by strength in:
o Trees, shrubs, ground covers and ferns,
o Gardening-related products, and
o New direct-import pottery lines.
Same-store sales rose a healthy 22%.
Gross profit margins declined to 48% from 50% last year. The decrease in gross
profit margin was due to increased sales in the product categories noted above,
which generally provide somewhat lower gross margins. Sales in our higher-margin
categories increased at a lesser rate.
Our operating expenses were up by 14% over last year. Due to the increased sales
volume, operating expenses this quarter were 35% of sales, compared to 41% of
sales for the comparable quarter last year.
Occupancy expenses decreased by 6%, mostly because we closed two underperforming
stores during fiscal 1998. Due to the increased sales volume, occupancy expenses
were 12% of sales for the quarter, compared to 17% of sales for the comparable
quarter last year.
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Net interest expense increased by 93% over last year due increased interest
expense on debt used to:
o Build or remodel the three new stores we opened in the past year,
o Acquire and more fully develop our growing operation, and
o Acquire and implement our merchandise computer system.
Depreciation and amortization expense increased by 56% over last year,
mainly due to the depreciation on the assets noted above.
Advertising expenses were 5% of sales for this quarter compared to 7% of sales
for the comparable quarter last year. Advertising expenses increased by 8%.
Six Months Ended March 31, 1999 Compared with Six Months Ended March 31, 1998
Sales increased by 27%, led by strength in:
o Christmas merchandise (during the first quarter),
o Trees, shrubs, ground covers and ferns,
o Gardening-related products, and
o New direct-import pottery lines.
Same-store sales rose a healthy 20%.
We opened two new stores, giving us sixteen stores, just before the Christmas
shopping season. For the first six weeks of the fiscal year, we had fourteen
stores, one less than a year ago.
Gross profit margins declined to 46% from 48% last year. First quarter bedding
plant sales were somewhat less than expected, leading to higher stock loss in
that merchandise category during the first quarter. During the second quarter,
we increased our sales in product categories that generally provide somewhat
lower gross margins. Sales in our higher-margin categories increased at a lesser
rate.
Our operating expenses were up by 13% over last year. The increased expense was
due, in part, to the costs of opening the two new stores. Due to the increased
sales volume, operating expenses were 37% of sales, compared to 41% of sales for
the comparable period last year.
Occupancy expenses decreased by 4%, mostly because we closed two underperforming
stores during fiscal 1998. The stores we opened early in fiscal 1999 have lower
rents than the ones we closed in 1998. Due to the increased sales volume,
occupancy expenses were 12% of sales, compared to 16% of sales for the
comparable period last year.
Net interest expense increased by 164% over last year due to larger seasonal
borrowings from the revolving line of credit in 1999, and increased interest
expense on debt used to:
o Build or remodel the three new stores we opened in the past nine months,
o Acquire and more fully develop our growing operation, and
o Acquire and implement our merchandise computer system.
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Depreciation and amortization expense increased by 50% over last year, mainly
due to the depreciation on the assets noted above.
Advertising expenses were 6% of sales for the first six months of fiscal 1999,
compared to 7% of sales for the comparable period last year. Advertising
expenses increased by 12%, below the 27% sales increase. The increased amount
spent was due, in part, to greater use of television to promote Christmas
sales.
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CAPITAL RESOURCES AND LIQUIDITY
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Cash flows used for operations were $615,000 for the six-month period compared
to $1,658,000 used for the comparable period last year. The improvement was due
to the reduced pre-tax loss, reduced accounts receivable (substantially all of
our accounts receivable are from bank credit cards), and increased sales of
merchandise produced by our wholly-owned Miller Plant Farms growing operation.
Cash flows used for investing activities for the six-month period were much
lower than they were for the comparable period last year. This year, we have
spent $523,000, mostly to remodel the two new stores we opened before the
Christmas season. Last year, we spent about $3.0 million, mostly to acquire land
and build our new prototype store, Calloway's at Stonegate, which opened in
April 1998.
Financing activities have used cash flows so far this year. We paid down
$146,000 on long-term debt as scheduled. Last year, we had net borrowings of
$1,105,000, mostly to help finance land acquisition for the new prototype store.
We have entered into a contract to acquire land for a new retail store in
McKinney, a suburb of Dallas. We expect to construct a new store that would open
for the spring season of 2000. We are continuing to seek appropriate sites for
new retail store locations.
The retail nursery business is very seasonal. Usually, we use cash in our
operations during the first (ending December 31) and fourth (ending September
30) fiscal quarters, which are also typically not profitable. The business
generates most of the operating cash flow during the profitable third fiscal
quarter (ending June 30). We have used a revolving line of credit from a bank
to help support our seasonal working capital requirements. Borrowings, if any,
typically occur during February and March, and are usually repaid by April. We
have a commitment from our bank to provide a revolving line of credit for the
1999-2000 seasonal requirements.
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IMPACT OF YEAR 2000 ISSUE
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Our Year 2000 Project (the "Project") continues. The Project is addressing the
Year 2000 issue that can be caused by certain computer programs being written
to utilize two digits rather than four digits to define an applicable year. As
a result, there is a possibility that computer equipment, software and devices
with embedded technology that are time sensitive may misinterpret the actual
date beginning on January 1, 2000. This could result in system failures or
miscalculations causing disruptions of operations; for example, a temporary
inability to process transactions.
Our objective is to make sure that our computer equipment and software will
function properly with respect to dates in the Year 2000 and thereafter ("Year
2000 Compliant"). Identification and assessment of systems is complete, and
substantially all computer equipment and software was either already Year 2000
Compliant or has been upgraded or replaced with computer equipment and/or
software that is Year 2000 Compliant. The testing, upgrading and replacement
process has been accomplished with our own personnel and within the normal
information technology budget.
We are corresponding with our significant suppliers and service providers to
determine the extent that they are vulnerable to Year 2000 issues. To date, the
responses indicate that their Year 2000 issues are being addressed on a timely
basis. Due to the fragmentation of the wholesale nursery industry, we are not
dependent upon a single supplier for inventory. Nevertheless, we are developing
appropriate contingency plans for any significant supply disruptions that may
result from our suppliers' Year 2000 issues. We are developing appropriate
contingency plans for any disruptions that may result from our service
providers' Year 2000 issues. We expect that communications with third parties
and development of contingency plans will be completed during fiscal 1999.
As a retailer, we are not dependent upon a single customer, so we do not intend
to address any Year 2000 issues that our customers may have.
We have not developed a most reasonably likely worst case scenario with respect
to Year 2000 issues, but instead have focused our efforts on reducing
uncertainties through the reviews described above. We do not plan to develop
contingency plans other than those described above unless merited by the
results of our continuing reviews.
We do not expect to incur significant operational problems due to the Year 2000
issue. However, if all Year 2000 issues are not properly and timely identified,
assessed, remediated and tested, there can be no assurance that the Year 2000
issue will not materially impact the results of operations or adversely affect
our relationships with suppliers or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
impact our systems or our results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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 11,
1999. The voting results at that meeting were as follows:
Election of Directors:
Nominee For Withheld
------- --- --------
James C. Estill 4,946,459 27,382
John T. Cosby 4,944,459 29,382
John S. Peters 4,944,159 29,682
Robert E. Glaze 4,949,459 24,382
Dr. Stanley Block 4,949,459 24,382
Approval of Calloway's Nursery, Inc. 1998 Stock Option Plan:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,870,152 78,391 25,370 -0-
Appointment of KPMG LLP as auditors for fiscal year 1999:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,957,309 9,132 7,400 -0-
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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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: April 26, 1999
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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EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule