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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 June 30, 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 July 31, 1999
----- ----------------
Common Stock, par value $.01 per share 5,627,556
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CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 1999
PART I - FINANCIAL INFORMATION PAGE
Item 1
Index to Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3
Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Items 1-6 13
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
1999 1998 1998
-------- ------------ --------
Cash and cash equivalents $ 4,211 $ 1,649 $ 4,138
Property held for sale 448 448 857
Accounts receivable 124 148 153
Inventories 3,122 2,341 2,487
Deferred income taxes 53 496 11
Prepaids and other assets 109 112 136
-------- -------- --------
Total current assets 8,067 5,194 7,782
-------- -------- --------
Property and equipment, net 8,009 7,815 7,134
Goodwill, net 984 1,065 1,092
Deferred income taxes 565 565 581
Other assets 45 46 47
-------- -------- --------
Total assets $ 17,670 $ 14,685 $ 16,636
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,974 $ 1,913 $ 3,296
Accrued expenses 1,633 831 956
Current portion of long-term debt 349 338 87
-------- -------- --------
Total current liabilities 4,956 3,082 4,339
-------- -------- --------
Deferred rent payable 1,108 1,093 1,081
Long-term debt, net of current portion 2,798 3,044 2,896
-------- -------- --------
Total liabilities 8,862 7,219 8,316
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 59 57 56
Additional paid-in capital 8,833 8,666 8,591
Retained earnings 1,312 139 1,069
-------- -------- --------
10,204 8,862 9,716
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 8,808 7,466 8,320
-------- -------- --------
Total liabilities and shareholders' equity $ 17,670 $ 14,685 $ 16,636
======== ======== ========
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 NINE MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 15,065 $ 15,047 $ 26,137 $ 23,769
Cost of goods sold 7,243 8,083 13,263 12,654
-------- -------- -------- --------
Gross profit 7,822 6,964 12,874 11,115
-------- -------- -------- --------
Operating expenses 2,789 2,743 6,948 6,393
Occupancy expenses 679 708 1,945 2,112
Advertising expenses 618 621 1,294 1,222
Net interest expense (income) 24 (1) 159 5
Depreciation and amortization 179 80 522 306
-------- -------- -------- --------
Total expenses 4,289 4,151 10,868 10,038
-------- -------- -------- --------
Income before provision for income taxes
3,533 2,813 2,006 1,077
Provision for income taxes 1,400 1,146 833 431
-------- -------- -------- --------
Net income $ 2,133 $ 1,667 $ 1,173 $ 646
======== ======== ======== ========
Net income per common share:
Basic $ .38 $ .31 $ .21 $ .12
Diluted $ .37 $ .28 $ .20 $ .11
Weighted average number of common shares outstanding:
Basic 5,603 5,421 5,557 5,389
Diluted 5,841 5,903 5,735 5,776
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
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
--------------------
1999 1998
------- -------
Cash flows from operating activities:
Net income $ 1,173 $ 646
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 522 306
Net change in operating assets and liabilities 1,568 979
------- -------
Net cash provided by operating activities 3,263 1,931
------- -------
Cash flows from investing activities:
Additions to property and equipment (635) (2,750)
------- -------
Net cash used for investing activities (635) (2,750)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 169 186
Net borrowings (repayments) of debt (235) 1,083
------- -------
Net cash provided by (used for) financing activities (66) 1,269
------- -------
Net increase in cash and cash equivalents 2,562 450
Cash and cash equivalents at beginning of period 1,649 3,688
------- -------
Cash and cash equivalents at end of period $ 4,211 $ 4,138
======= =======
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
The interim financial statements contained herein have been prepared by
Calloway's Nursery, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, all
adjustments considered necessary for a fair presentation of the financial
position at June 30, 1999, the results of operations for the nine-month and
three-month periods ended June 30, 1999 and 1998, and the cash flows for the
nine-month periods ended June 30, 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
nine-month and three-month periods ended June 30, 1999 and cash flows for the
nine-month period ended June 30, 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 rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the audited financial statements and related
notes of the Company for the fiscal year ended September 30, 1998 included in
the Company's Form 10-K covering such period.
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 income available to
common shareholders by the weighted average number of common shares outstanding,
while Diluted EPS reflects the potential dilution that could occur if stock
options were exercised and resulted in the issuance of common stock.
EPS for the quarters and nine month periods ended June 30, 1999 and 1998 is
computed as follows (amounts, except per share amounts, in thousands):
Three Months Ended Nine Months Ended
------------------ ------------------
June 30 June 30 June 30 June 30
Basic EPS 1999 1998 1999 1998
------- ------- ------- -------
Net income $2,133 $1,667 $1,173 $ 646
Weighted average number of shares
outstanding 5,603 5,421 5,557 5,389
Net income per common share $ .38 $ .31 $ .21 $ .12
Diluted EPS 1999 1998 1999 1998
------ ------ ------ ------
Net income $2,133 $1,667 $1,173 $ 646
Weighted average number of shares
outstanding 5,841 5,903 5,735 5,776
Net income per common share $ .37 $ .28 $ .20 $ .11
The Company had 921,500 and 941,500 outstanding stock options at June 30, 1999
and 1998, respectively. The differences between the weighted average shares
outstanding used in the Basic EPS and Diluted EPS computations are due to the
effect of dilutive stock options.
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CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
June 30, September 30, June 30,
1999 1998 1998
-------- ------------ --------
Finished goods $2,250 $1,510 $1,667
Work in process 814 739 734
Supplies 58 92 86
------ ------ ------
$3,122 $2,341 $2,487
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4. 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 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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FORWARD-LOOKING STATEMENTS
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The information herein contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance of the Company, or industry results to be materially different from
any future results or performance expressed or implied by such forward-looking
statements. These factors include, but are not limited to:
o The highly competitive nature of the retail nursery business;
o The seasonality of the retail nursery business;
o The Company's concentration in a single market area.
In addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward-looking
statements can be identified by among other things, by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should", "seeks", "pro forma", "anticipates", "intends" or the negative of any
thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, readers are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligations to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
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RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
==========================================================================================================
Third quarter highlights (unaudited) Fiscal 1999 Fiscal 1998 Fiscal 1997
- ----------------------------------------------------------------------------------------------------------
Sales 15,065 15,047 13,108
Sales increase 0% 15% 6%
Same-store sales increase (decrease) (4%) 14% 6%
Number of stores (end of quarter) 16 14 15
Gross profit margin 52% 46% 48%
Pre-tax operating profit 3,533 2,813 2,689
Net income per share - diluted .37 .31 .51
Cash flows provided by operations 3,878 3,589 3,724
Retail store inventories 2,179 1,591 1,095
Current ratio 1.63 1.79 1.18
Property, plant and equipment (net) 8,009 7,134 4,733
Long-term debt (including current portion) 3,147 2,983 545
==========================================================================================================
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Quarter Ended June 30, 1999 Compared with Quarter Ended June 30, 1998
Sales were unchanged from the comparable quarter in 1998, and same-store sales
dropped by 4%. During the 1998 spring season, pleasant weather in the Dallas and
Fort Worth markets contributed to strong consumer demand for plants and related
garden products, and we had a 15% sales increase for the third quarter in fiscal
1998. By comparison, the 1999 spring season in Dallas and Fort Worth had a more
normal level of consumer demand, and our sales did not increase for the quarter.
(Total sales are up by 10%, and same-store sales are up by 5% for the fiscal
year-to-date, however.)
Gross profit margins improved to 52% from 46% last year. We sharply reduced the
amount of stock loss (merchandise that declines in value and has to be marked
down or discarded) by carefully aligning and coordinating our merchandise
procurement, merchandise production (at our Miller Plant Farms growing
operation) and advertising programs. The improved efficiency at Miller Plant
Farms and improved purchasing execution allowed us to lower many prices for
consumers and, also, achieve improved margins.
Our operating expenses were up by 2% over last year. Most of that increase was
performance bonuses for managers throughout Calloway's and Miller Plant Farms
related to the improved performance of their units.
Occupancy expenses decreased by 4%. The new stores we have opened during the
past 1 1/2 years have generally replaced underperforming stores. We own one of
the newer stores (Calloway's at Stonegate, opened April 1998) and the other
stores' rents are lower than the average of our older stores.
Net interest expense increased over last year due to 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 over last year due to the depreciation on
the assets noted above.
Advertising expenses were relatively unchanged compared to 1998.
Nine Months Ended June 30, 1999 Compared with Nine Months Ended June 30, 1998
Sales increased by 10%, led by strength in:
o Trees, shrubs, ground covers and ferns, and
o Christmas merchandise (during the first quarter).
Same-store sales rose by 5%.
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.
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Gross profit margins improved to 49% from 47% last year. For the 1998 spring
season (March through June) we sharply reduced the amount of stock loss
(merchandise that declines in value and has to be marked down or discarded) by
carefully aligning and coordinating our merchandise procurement, merchandise
production (at our Miller Plant Farms growing operation) and advertising
programs. The improved efficiency at Miller Plant Farms and improved purchasing
execution allowed us to lower many prices for consumers and, also, achieve
improved margins.
Our operating expenses were up by 9% over last year. Most of that increase was
performance bonuses for managers throughout Calloway's and Miller Plant Farms
related to the improved performance of their units.
Occupancy expenses decreased by 8%. The new stores we have opened during the
past 1 1/2 years have generally replaced underperforming stores. We own one of
the newer stores (Calloway's at Stonegate, opened April 1998) and the other
stores' rents are lower than the average of our older stores.
Net interest expense increased 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.
Depreciation and amortization expense over last year due to the depreciation on
the assets noted above.
Advertising expenses increased by 6%, and were 4% of sales for both 1998 and
1999.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Cash flows provided by operations were $3,263,000 for the nine-month period
compared to $1,931,000 for the comparable period last year. The improvement was
due to the improved pre-tax operating results. We started fiscal 1999 with a tax
loss carryforward of $1,242,000, which minimizes the amount of federal income
tax payments we are required to make.
Cash flows used for investing activities for the nine-month period were much
lower than they were for the comparable period last year. This year, we have
spent $635,000, mostly to remodel the two new stores we opened before the
Christmas season. Last year, we spent about $2.8 million, mostly to acquire land
and build our new concept store, Calloway's at Stonegate, which opened in April
1998.
Financing activities have used cash flows so far this year. We paid down
$235,000 on long-term debt as scheduled. Last year, we had net borrowings of
$1,083,000, mostly to help finance land acquisition for the new concept store.
We have entered into a contract to acquire land for a new retail store in
McKinney, a suburb of Dallas, and entered into a lease agreement to provide a
new retail store in Southlake, a suburb in northeast Tarrant County. We expect
to construct those new stores to open during fiscal 2000. We are continuing to
seek appropriate sites for new retail store locations.
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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 typically use 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 revolving line of credit from our bank that we believe is sufficient
for the 1999-2000 seasonal requirements.
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PROPOSED ACQUISITION
- --------------------------------------------------------------------------------
In June 1999 we announced that we had reached an agreement that would allow us
to acquire Cornelius Nurseries of Houston ("Cornelius").
We believe that Cornelius is one of Texas' leading garden center chains based on
its sales and reputation in the industry. Cornelius currently owns and operates
four retail garden centers in the Houston market, together will a large nursery
growing/wholesale division. The wholesale division operates two facilities in
Houston and one in Austin. Total annual sales for the Cornelius operation are
approximately $20 million.
Mr. Sterling Cornelius, who would continue to provide the leadership for his
Cornelius management team, would bring to Calloway's his leadership, extensive
talents, and proven ability to succeed in the nursery industry which he has
demonstrated over many decades.
The planned acquisition of Cornelius would place us in three of the top five
retail markets in Texas (Dallas, Fort Worth and Houston) with highly respected,
well known nurseries in each of those markets. Each of those markets is enjoying
robust economic growth, and we would be in an excellent position to take
advantage of the opportunities that represents.
A further benefit of the planned acquisition is that the greater geographic
diversification of the combined companies would moderate Calloway's seasonal
peaks. The more southern market of Houston has a peak selling period that is
somewhat different than those we experience in Dallas and Fort Worth.
The planned acquisition is subject to completion of due diligence, financing,
approval of the Company's Board of Directors, and other conditions.
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IMPACT OF YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
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.
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We continue to correspond 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 any of our suppliers' and/or service providers' Year 2000
issues.
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 will develop contingency
plans if 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 on our systems or our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This market risk discussion contains forward-looking statements. Actual results
may differ materially from this discussion based upon general market conditions
and changes in domestic financial markets.
The Company is exposed to market risk from changes in interest rate on debt. Our
exposure to interest rate risk consists of variable-rate debt that is
benchmarked to U.S. prime interest rates. The impact on results of operations of
a one-point interest rate change on the outstanding balance of the variable-rate
debt as of June 30, 1999 would not be material.
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PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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: August 5, 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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