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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, 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, 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 22, 1999, Registrant had outstanding 5,741,258 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 22, 1999 as reported on the Nasdaq Stock Market, was approximately
$5,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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INDEX
Page
Reference
Form 10-K
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K 18
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
In September 1999 we completed the acquisition (the "Cornelius Acquisition") of
certain assets of Cornelius Nurseries, Inc. ("CN"), Turkey Creek Farms, Inc.
("TCF") and Wholesale Landscape Distributors, Inc. ("WLD") (together
"Cornelius"). The Cornelius Acquisition is described in Item 7 of this Form
10-K.
OUR OBJECTIVE
Calloway's Nursery, Inc. is a leading, specialty retailer of lawn and garden
products in the Dallas and Fort Worth markets with sixteen retail store
locations in the Metroplex. Calloway's also owns Miller Plant Farms, a growing
operation of 86 acres, near Tyler, Texas. Our objective is to provide an
unmatched retail level of excellence in quality and variety of living plants,
and related products through retail and wholesale venues.
In September 1999 we expanded into the Houston market through the acquisition of
Cornelius Nurseries, a well-established, highly regarded retail and wholesale
nursery company in that market. This gives us a strong presence in plants, and
related products in three of the best retail markets in Texas. We intend to
continue to consistently and dependably provide quality products, information,
presentation, and service, representing value in all the markets we serve.
THE NURSERY INDUSTRY
Texas is the country's third largest retail market for lawn and garden center
"green goods" and the third largest producer of green goods for the retail and
landscape markets.
According to the Texas Agricultural Extension Service of Texas A&M, the Texas
retail market for green goods has grown from an estimated $3.2 billion in 1993
to $4.1 billion in 1997. Of this amount, approximately half of the sales are
done in retail garden centers and half are done in stores whose primary business
is not nursery related, such as mass merchandisers, hardware and grocery stores
and home centers. In spite of the intrusion into the market by such well-known
retailers as Home Depot and Lowe's this percentage has remained relatively
constant.
Wholesale green goods produced in Texas are sold primarily in Texas. The size of
the state offers varying climates and soils allowing for a broad range of plant
production. Wholesale sales of green goods have risen from an estimated $742
million in 1993 to $961 million in 1997.
Two geographic areas where green goods production is predominant are Houston
(the location of Turkey Creek Farms) and Tyler (the location of Miller Plant
Farms). In the Houston area mild weather, humidity and a long growing season
combine to make conditions favorable for production of a wide variety of
ornamental and blooming plants. In Tyler climatic cycles, soils and water make
production of roses and woody evergreens favorable.
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OUR COMPETITIVE ADVANTAGES
We believe that joining with Cornelius will further enhance Calloway's success
based on these jointly held significant competitive advantages:
o Our people
o Our retail stores
o Our merchandise
o Our growing and wholesale operations
o Our suppliers
o Our management team
OUR PEOPLE
Our employees represent a significant competitive advantage. All Calloway's and
Cornelius retail store managers and support teams blend a mastery of the
botanical, horticultural and nursery disciplines with years of retail sales
experience. We are committed to observe closely the ways of nature, view the
wonders of growing plants, and experience the excitement of nurturing them. Then
to communicate our first-hand knowledge to our customers so they may enjoy the
pleasures of creating beautiful landscapes for themselves.
Calloway's and Cornelius both have about 250 full-time employees. During our
very busy spring and Christmas seasons, we supplement the efforts of our
full-time employees with seasonal and part-time employees. Both companies
consider their relations with employees to be good.
Nearly one-half of our full-time retail 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
weeklong intensive course and examination conducted at Texas A&M University in
College Station. We believe that we as a combined group will employ more of
these Texas Master Certified Nursery Professionals than any other organization
in the state of Texas.
In both companies we believe in direct, face-to-face communications. We know one
another by name, appreciate the work others perform, encourage one another to
improve and advance, and take an interest in each other's families. We bring as
many involved individuals to the decision-making process as possible. We believe
in the spirit of the team and that team's ability to transcend the abilities of
any one individual.
Ours is a wholesome business, offering a physically active workplace, fresh air
and the challenges of fast-paced retail, growing and wholesale distribution
environments. We all share the same fundamental goals, and believe we have a
kinship that transcends a typical workplace. We believe in thrift and
self-sufficiency, empowering our employees to do their best to achieve the
team's objectives, and deliver for our customers at a level unlike any they will
find elsewhere.
OUR RETAIL STORES
The management of each of the companies selected the retail store locations on
the basis of demographic data, traffic patterns and shopping habits. All of the
sixteen Calloway's and the four Cornelius retail stores are Company-operated. We
lease twelve of the Calloway's store locations and own the other four. We also
own all four of the Cornelius retail store sites.
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OUR MERCHANDISE
Throughout both of our companies the quality and breadth of selection of living
plants and related garden products is a major competitive advantage. Each
searches for and provides appropriate living plants, and the customers are
informed about the care and nurturing of those plants, and the proper use of the
related products. Each of our two companies is known for treating every customer
with caring respect, and their satisfaction is guaranteed.
A wide variety of lawn and garden products are sold at each and every retail
store. The merchandising programs are designed to promote sales of products
having the greatest appeal during a particular season of the year.
Our focus is on quality and breadth of selection in bedding plants and nursery
stock complemented by soil amendments, fertilizers and other related garden
products. The exception is that period between Thanksgiving and Christmas, at
which time most sales result from Christmas merchandise including cut and
flocked Christmas trees and poinsettias.
Other than Christmas, approximately two-thirds of our annual retail sales are
derived from living plants. The remaining one-third is made up of products that
primarily relate to the care and feeding of living plants. Substantially all of
our growing and wholesale sales are derived from living plants.
We all believe that the living plants we sell do more than provide our customers
with decoration: it is a spiritual, as well as physical, buffer against the
rush, noise and press of urban life. Living plants are ecologically sound
investments: taming the extremes of temperatures, reducing heat, glare and
chilly winds, cleansing the air, and replenishing the earth's oxygen.
We all seek to maintain balance with our natural habitat by informing our
customers so they may use our products in harmony with our habitat. The future
will see us leading efforts to encourage the development of our urban
environment in ways that allow all the elements to exist in harmony.
OUR GROWING AND WHOLESALE OPERATIONS
Miller Plant Farms
In 1997 Calloway's acquired an established facility for the production of living
plants: Miller Plant Farms. Its primary customers, since the acquisition, are
the Calloway's Nursery retail stores.
Miller Plant Farms was developed by, and has been managed for two decades by,
Mr. Mike Miller. Mr. Miller is also Past President, International Plant
Propagation Society - Southern Region, Past President, Northeast Texas Nursery
Growers Association, Past Director, Texas Nursery and Landscape Association
Region III, and is a Texas Certified Nursery Professional. He received his
Bachelor of Science degree in Horticulture from Kansas State University in 1974.
This growing facility affords Calloway's the ability to dependably provide its
customers with the very best selection of top-quality living plants at more
favorable costs. The facility primarily produces roses, ground covers,
caladiums, perennials, hollies and flowering shrubs.
Turkey Creek Farms
In 1951 the Cornelius family started this growing facility to afford them the
opportunity to meet the demand for quality nursery grown products, primarily in
Texas. However, the operation maintains a nice business with customers in
Arkansas, Louisiana, Mississippi and Oklahoma. Its customers are nurseries and
garden centers, including our Calloway's and Cornelius retail stores, national
chain stores, wholesale distributors of nursery products, grocery stores,
landscape contractors, developers and interior designers.
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Turkey Creek Farms is professionally managed by Mr. Tom Henry. Mr. Henry is a
member of International Plant Propagation Society. He received his Bachelor of
Science degree with a double major in Agriculture and Business from Stephen F.
Austin State University in 1989.
The products grown for sale, using state-of-the-art techniques, include
flowering shrubs, grasses, trees, annuals, perennials, and blooming tropicals.
The sales staff consists of a sales manager and three salespersons.
Wholesale Landscape Distributors
In 1998 Cornelius created Wholesale Landscape Distributors as a separate
operation from Turkey Creek Farms to provide brokered plants and hard lines to
the fast-growing landscape contractor market. Wholesale Landscape Distributors
sells plants to this segment of the market produced by Turkey Creek Farms, as
well as other growers, on time and to specification throughout the Houston and
Austin markets.
OUR SUPPLIERS
Yet another of the competitive advantages enjoyed by each company is its strong
relationship with its suppliers. Each company purchases most of the living
plants it sells from independent suppliers, and grows the remainder at Miller
Plant Farms and Turkey Creek Farms.
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 the various operations - allowing each company to procure
merchandise with relatively short lead times. Each company works with its
suppliers to attain consistency of quality, appropriate service and completeness
in selection of plant varieties.
Each of the companies offers its retail customers private label products that
are manufactured expressly for each company to ensure superior quality.
Both companies have a commitment to their suppliers that is guided by the Golden
Rule. By treating suppliers fairly and with consideration, we establish trust
and develop mutually advantageous relationships. We each expect good,
competitive prices, but realize our suppliers must make a profit to stay in
business and progress alongside us. Through the relationships we establish, each
is able to obtain the quality, variety, timely delivery and reasonable prices
that allow us to surprise and delight our customers.
OUR MANAGEMENT TEAM
JIM ESTILL, 52, is Chairman of the Board, President and Chief Executive Officer.
Jim was, along with John Cosby and John Peters, a co-founder of Calloway's in
1986. He developed a totally new chain of sixteen retail nursery stores into the
leading garden center chain in North Texas. Prior to 1986, Jim was with Sunbelt
Nursery Group, Inc. as President and Chief Executive Officer and Pier 1 Imports,
Inc. as Vice President and General Manager. He started in retail store
management. Jim received his BBA in Finance from Texas Christian University in
1969, and his MBA from TCU in 1977. A Texas Master Certified Nursery
Professional, Jim is Vice-Chairman, Texas Certified Nursery Professional
Committee. Member of the nursery/Floral Advisory Committee of the Texas
Department of Agriculture and Past Chairman, Texas Nursery and Landscape
Association Education and Research Foundation.
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STERLING CORNELIUS, 77, is President of Cornelius Nurseries, and a Director of
Calloway's Nursery, Inc. Sterling has been with Cornelius Nurseries since his
father founded the business in 1937, except for the period 1941-1945, where he
served in the U.S. Navy during World War II. Sterling is a recognized leader in
the nursery industry, having been President of the Texas Nursery and Landscape
Association (TNLA), President of the Houston Landscape Nurserymen's Association,
Chairman, Drafting Committee - Texas Certified Nursery Professional Manual and
Examination, Member of the Board of Trustees of the Texas Agricultural Lifetime
Leadership Board, and a member of the Texas Certified Nurserymen's Professional
Committee. He is the only two-time recipient of the ARP Award - the highest
honor that TNLA can bestow on one of its members. Sterling is also active in
many community efforts, including past membership of the Board of Directors of
the Houston Chamber of Commerce and President's Council of Houston Baptist
University.
JOHN COSBY, 56, is Vice President -- Corporate Development, Secretary and a
Director. John was, along with Jim Estill and John Peters, a co-founder of
Calloway's in 1986. He developed all of Calloway's retail store locations,
including site selection and development, and lease and acquisition
negotiations. Prior to 1986, John was with Sunbelt Nursery Group, Inc. as Vice
President -- Corporate Development and Pier 1 Imports, Inc. as Real Estate
Manager. He started in retail store management. John received his BBA in
Management from Texas Wesleyan College in 1969 and his MBA in Management from
the University of Dallas in 1983. A Certified Master Mediator, John is Past
Chairman of Optical Federal Credit Union, and Director, President, Dispute
Resolution Services of Tarrant County.
JOHN PETERS, 48, is President of Calloway's Nursery of Texas, Inc., Vice
President and Director of Calloway's Nursery, Inc. John was, along with Jim
Estill and John Cosby, a co-founder of Calloway's in 1986. He developed the
Calloway's team of people. As President he has primary responsibility for store
operations, merchandising, advertising and marketing, distribution, human
resources and administration related to the north Texas Calloway's retail stores
and Miller Plant Farms. Prior to 1986, John was with Sunbelt Nursery Group, Inc.
as Senior Vice President, Operations, where he was responsible for operations of
all subsidiaries, including over 100 stores in five states, and two growing
operations. John started in retail store management. John attended Texas
Christian University. A Texas Master Certified Nursery Professional, John is
Past Chairman, Texas Nursery and Landscape Association.
DAN REYNOLDS, 42, is Vice President - Chief Financial Officer and Assistant
Secretary. Dan joined Calloway's in 1990. He developed the Calloway's financial,
operating and merchandising decision-support systems. He is responsible for all
financial and management reporting, treasury management, credit facilities,
corporate and shareholder records, SEC and stock market compliance, public,
media and investor relations, risk management and budgeting. He also oversees
design, development, implementation and review of all transactional and
decision-support systems. Prior to 1990, Dan was with Atmos Energy Corporation
as Financial Systems Manager and KPMG LLP as Supervising Senior Accountant. Dan
received his BBA in Accounting from the University of Texas at Arlington. A
Certified Public Accountant, Dan is President of the Financial Executives
Institute, Fort Worth Chapter.
SAM WEGER, 49, is Vice President - Merchandising. Sam started with Calloway's in
retail store management in 1987. He has primary responsibility for the
administration of planning, procurement and replenishment of all merchandise
lines. Prior to 1987, Sam was Landscape Designer with Odessa Nursery. He has
also been Co-Owner of Lessmon-Weger Garden Center in Colby, Kansas. Sam received
his BBA in Political Science / Education from Fort Hays State University. A
Texas Master Certified Nursery Professional, Sam is Past President of Texas
Nursery and Landscape Association, Region 5, and Past Chairman, TNLA Education
Committee.
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THE CHALLENGES
Like any business, we face certain challenges. The biggest challenges are:
o The retail nursery business is highly competitive
o Our business is seasonal
HIGHLY COMPETITIVE MARKET
The retail nursery business is highly competitive in the United States. In the
Dallas, Fort Worth and Houston markets, we compete for the loyalty of our
customers with large "mass merchants" such as Home Depot, Lowe's, Kmart,
Wal-Mart, and several 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
does Calloway's. Dallas, Fort Worth and Houston are also home to many
independent garden centers.
For us to succeed in this environment, we must consistently and dependably
represent to our customers a clearly superior value.
SEASONAL BUSINESS
Our business is seasonal. Over one-half of Calloway's annual sales have occurred
in the third fiscal quarter, which has usually been the only profitable quarter.
Weather conditions in the Dallas and Fort Worth markets have caused sizable
swings in quarterly sales and operating results.
SALES BY QUARTER (UNAUDITED)
[GRAPHIC]
1st 2nd 3rd 4th
----- ----- ----- -----
Fiscal 1997 4.3 5.3 13.1 3.6
Fiscal 1998 4.5 4.2 15.0 3.3
Fiscal 1999 5.5 5.6 15.1 4.2
Cornelius Nurseries has experienced a somewhat more moderate seasonal sales
pattern. The Houston market typically enjoys an earlier start to warmer spring
weather. Also, Cornelius' more extensive Christmas and gift accessories sales
should provide additional sales in periods other than the spring season.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K 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, the impact of the Year 2000 Issue, 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.
ITEM 2. PROPERTIES
The typical Calloway's (Dallas and Fort Worth markets) retail store is located
in a high-traffic shopping area. All are free standing stores. The typical
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).
We opened a new concept store, "Calloway's at Stonegate", in April 1998 that
occupies a similar-sized site, but has a different configuration. Calloway's at
Stonegate features stone buildings, a glass greenhouse and wrought iron fencing
surrounding a landscaped courtyard. We have a new store under construction in
McKinney that will provide another retail concept. We want each new store to fit
with the community in which it is located. We plan to open the McKinney store in
time for the 2000 spring season.
As of September 30, 1999 we operated sixteen Calloway's retail stores. We own
the land and buildings at four locations. The other twelve locations are leased
under the terms of long-term leases.
We own a nursery growing facility near Tyler, Texas. That facility includes
approximately 115 greenhouses and approximately 80 acres.
With the acquisition of Cornelius Nurseries in September 1999 we acquired
ownership of four retail stores, two wholesale landscape distribution centers,
and Turkey Creek Farms, a 160-acre nursery growing facility north of Houston.
All of the Cornelius retail stores are free standing. Three of them are located
in high-traffic retail shopping areas, and the fourth is located adjacent to
Turkey Creek Farms. Though each Cornelius store has a somewhat different
configuration, they are about the same overall size as a Calloway's retail
store.
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We lease our corporate office in an office building in Fort Worth, Texas. We
also lease a warehouse/distribution center in Fort Worth, Texas.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any litigation that we believe will materially and
adversely affect financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market under the symbol
CLWY since the Initial Public Offering in June 26, 1991. The following table
sets forth the high, low and closing price information for each quarter of the
most recent five fiscal years:
- ----------------------------------------------------------------------------
High Low Close
------ ------ --------
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
------ ------ --------
FISCAL YEAR 1997
First Quarter 1.063 .719 .750
Second Quarter .938 .688 .813
Third Quarter 1.094 .688 1.063
Fourth Quarter 1.375 1.000 1.281
------ ------ --------
FISCAL YEAR 1998
First Quarter 2.063 1.094 1.375
Second Quarter 2.875 1.313 2.844
Third Quarter 3.125 1.875 2.250
Fourth Quarter 2.313 .938 1.188
------ ------ --------
FISCAL YEAR 1999
First Quarter 1.375 1.000 1.125
Second Quarter 1.500 1.125 1.313
Third Quarter 2.000 1.250 1.375
Fourth Quarter 1.563 1.125 1.125
- ---------------------------------------------------------------------------
The closing price of the common stock on December 22, 1999, as reported by
Nasdaq, was $1.063. As of December 22, 1999 there were approximately 300
shareholders of record, and approximately 1,200 beneficial shareholders.
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We have never paid cash dividends on common stock. We intend to retain earnings
for further development of the business and, therefore, do not intend to pay
cash dividends on common stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with the Consolidated Financial Statements included in Item 8, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7.
SELECTED FINANCIAL DATA
(Amounts in millions, except per share amounts)
- ------------------------------------------------------------------------------------------
Statement of operations data 1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Net sales $30.4 $27.1 $26.2 $24.0 $22.5
Net income (loss) $ .4 $ (.3) $ 1.7 $ .2 $ .2
Income loss per common share:
Basic $ .07 $(.05) $ .33 $ .04 $ .03
Diluted $ .07 $(.05) $ .33 $ .04 $ .03
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Balance sheet data 1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Total assets $26.3 $14.7 $13.1 $ 8.9 $ 8.4
Long-term obligations $10.9 $ 3.0 $ 1.8 $ -- $ --
- ------------------------------------------------------------------------------------------
Total assets and long-term obligations increased significantly in 1999 due to
the Cornelius Acquisition. [See Item 7]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
The results for 1999 were substantially improved over those for 1998. We had our
most profitable year (on a pre-tax basis) of operations since fiscal 1992.
PRE-TAX OPERATING PROFIT (LOSS)
[GRAPHIC]
YEAR SALES
---- -----
1995 184
1996 228
1997 767
1998 (327)
1999 799
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Sales increased by 12% over 1998, marking the fifth consecutive year that sales
have risen. The sixteen Calloway's stores we operated for most of fiscal 1999 is
the same number of stores that we operated five years ago.
SALES
[GRAPHIC]
YEAR SALES
---- -----
1995 22.5
1996 24.0
1997 26.2
1998 27.1
1999 30.4
Gross profit rose by over $2.8 million on a sales increase of about $3.3
million. We made a concerted effort to improve our gross margins (gross profit
as a percentage of net sales) and had success in these key areas:
o Our new incentive programs rewarded store management and other middle
managers for focus on improving gross margins by reducing the amount
of stock loss.
o Our Miller Plant Farms wholesale growing operation sharply improved
its delivery of high-quality, timely merchandise to our retail stores.
o Our merchandise computer system, implemented in 1998, provided us with
accurate and timely sales and inventory information to support rapid
replenishment, particularly during peak seasons.
o Our new line of direct-import pottery, unique to our markets, earned
higher gross margins than many of our existing merchandise lines.
GROSS MARGIN
[GRAPHIC]
YEAR SALES
---- -----
1995 47.0%
1996 46.8%
1997 47.3%
1998 45.1%
1999 49.3%
Operating expenses increased 17% from $7.8 million to $9.1 million.
Substantially all of the increase was for bonuses earned for generating improved
sales, gross profit, and reduced expenses as a percentage of sales. Store
management teams and other middle managers earned most of the bonuses.
Occupancy expenses were reduced by 2%. The two new stores we opened early in
fiscal 1999 increased the total number of retail stores in Dallas-Fort Worth to
sixteen. However, those two stores essentially replaced stores that had been
closed during fiscal 1997 and fiscal 1998, and the newer stores have generally
lower rents than the ones that had been closed.
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Advertising expenses rose by only 5%. We focused our use of the advertising
media to coincide with seasonal peaks in demand, which led to the 12% sales gain
with only a 5% increase in advertising expenses.
Depreciation and amortization rose from $519,000 for fiscal 1998 to $696,000 for
fiscal 1999. That increase was primarily due to a full year's depreciation on a
new, company-owned store we opened in the middle of fiscal 1998 and the
depreciation on the merchandise computer system that was also implemented in the
middle of fiscal 1998.
Net interest expense also increased, from $100,000 for fiscal 1998 to $216,000
for fiscal 1999. That increase was also primarily due to full year's interest
expense on a new, company-owned store we opened in the middle of fiscal 1998 and
the interest expense on the merchandise computer system that was also
implemented in the middle of fiscal 1998.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1997
The results for 1998 were disappointing. After reporting pre-tax income of
$767,000 for fiscal 1997, we reported a pre-tax loss of $327,000 for fiscal
1998.
A summer heat wave of record proportions reduced consumer demand for living
plants and related garden products in the Metroplex. While we reported an
overall 3.1% sales increase (5.0% for the thirteen comparable stores) that sales
increase was achieved at reduced gross profit margins and higher operating and
advertising expenses.
Sales increased for the fourth consecutive year, even though we operated fewer
stores for most of 1998 than we did for the years 1995 through 1997.
Gross margin (gross profit as a percentage of net sales) declined to 45.1% for
1998; it had been about 47% for the previous three years. Our reduced gross
margins were the result of promotional pricing we used to stimulate sales and
reduce inventories during this past summer's heat wave.
Operating expenses increased by 9.6% to approximately $8.0 million for fiscal
1998 from approximately $7.3 million for fiscal 1997. Most of that increase was
labor costs. Labor was higher in 1998 because of our effort to improve customer
service and maintain larger inventories in the retail stores.
Occupancy expenses decreased by 1.5% to approximately $2.7 million for fiscal
1998 from approximately $2.8 million for fiscal 1997. We were able to negotiate
lower rents at certain stores in 1997 that had a full-year's impact in 1998. We
also closed two retail stores in 1998 that had previously been leased.
Advertising expenses increased by 8.3% to $1,366,000 for fiscal 1998 from
$1,261,000 for fiscal 1997. We increased the size and frequency of newspaper
advertising in 1998, and the newspaper advertising rates also increased.
Net interest expense was $100,000 for fiscal 1998 compared to net interest
income of $133,000 for fiscal 1997 because:
o We incurred interest expense on the long-term debt we used to buy the
property for the new prototype store we opened in April 1998.
o We also incurred interest expense on the long-term debt we used to buy
the Miller Plant Farms growing operation.
o Our seasonal borrowings under the working capital line of credit were
higher in 1998, resulting in higher interest expense.
o We maintained generally lower levels of excess cash during 1998,
resulting in reduced interest income.
13
14
Depreciation and amortization, increased from $381,000 for fiscal 1997 to
$519,000 for fiscal 1998 because of the additional depreciation on the new
prototype store and Miller Plant Farms.
We adjusted the deferred tax asset valuation allowance in 1997. We determined it
is more likely than not that the deferred tax assets will be realized, and that
no valuation allowance is necessary. In assessing the need for a valuation
allowance, we considered future reversals of existing taxable temporary
differences and future taxable income exclusive of such reversing differences.
We also considered positive evidence such as our history of profitable
operations, and the availability of Net Operating Loss (NOL) carryforwards that
expire in 2009, 2010 and 2013.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities were $1,164,000 for fiscal 1999,
compared to cash flows used by operations of $617,000 for fiscal 1998.
The improvement was primarily the result of improved pre-tax operating income.
In addition, year-end bonuses, primarily to store management teams and other
middle managers, totaling approximately $508,000 were accrued at September 30,
1999, so they did not impact operating cash flows for fiscal 1999. Most of those
bonuses were paid in December 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used by investing activities increased to $9,927,000 for fiscal 1999
from $3,055,000 for fiscal 1998. Substantially all of those cash flows were for
the Cornelius Nurseries acquisition completed in September 1999. Additions to
property and equipment (other than those acquired in the Cornelius Nurseries
acquisition) were almost completely offset by the proceeds from the sale in
September 1999 of land that had been held for sale.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities increased to $7,176,000 for fiscal
1999 from $1,633,000 for fiscal 1998. Most of the increase was the $6.5 million
we borrowed from a financial institution to help finance the Cornelius Nurseries
acquisition. We also borrowed a net of $463,000 under our seasonal working
capital line of credit.
We anticipate that cash flows from operations and existing lines of credit are
sufficient to meet our working capital needs.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998 the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities,
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. It is effective for financial statements for
fiscal years beginning after December 15, 1998. We must implement SOP 98-5 for
the fiscal year ending September 30, 2000. It is not expected to have a material
impact on the consolidated financial statements.
14
15
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133") was issued in June 1998. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, deferred the effective date of SFAS
133 to fiscal years beginning after June 15, 2000. We will adopt SFAS 133 on
October 1, 2000. We do not believe it will have a material impact on the
consolidated financial statements.
IMPACT OF YEAR 2000 ISSUE
Our Year 2000 Project (the "Project") was completed during fiscal 1999. The
Project addressed 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 was to ensure 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 was accomplished with our own personnel and within the normal
information technology budget.
When we acquired the assets of Cornelius Nurseries, we immediately extended our
Year 2000 Project to identify and remediate Cornelius' Year 2000 issues. We
completed that Project in November 1999.
Due to the fragmentation of the wholesale nursery industry, we are not dependent
upon a single supplier for inventory, nor are we dependent upon a single
customer for sales. Also, since the month of January is typically the slowest
sales month for the nursery industry in our markets, we believe that our
contingency plans are appropriate for any disruptions that may occur.
We do not expect to incur significant operational problems due to the Year 2000
issue. However, 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.
CORNELIUS NURSERIES ACQUISITION
In September 1999 we completed the Cornelius Acquisition. [See Note 18 to
Consolidated Financial Statements]
Cornelius operates four retail garden centers in the Houston market, a growing
operation near Houston and two wholesale distribution centers (one each in
Houston and near Austin). Cornelius' annual sales were approximately $20 million
in 1999.
We acquired substantially all of the inventories and property, plant and
equipment of Cornelius for cash of approximately $8.5 million and $4.0 million
redemption value of non-dividend, preferred stock with a mandatory redemption
after five years. [See Note 19 to Consolidated Financial Statements] Other than
the obligation to pay approximately $845,000 to suppliers for certain
inventories, we did not assume any material liabilities of Cornelius.
15
16
The Cornelius Acquisition was recorded under the purchase method of accounting.
The purchase price totaled approximately $11.8 million as follows (amounts in
thousands):
Cash $ 8,500
Preferred stock, non-dividend, mandatory redemption after five
years, $4.0 million redemption value, at estimated fair value 1,890
Accounts payable 845
Acquisition costs 551
-------
Total purchase price $11,786
=======
We financed the cash portion of the purchase price with a real estate note
payable from our bank totaling $6.5 million. The note has monthly payments of
about $67,000 based on a fifteen-year amortization. The note matures in five
years with a balloon payment due at that time. The interest rate is variable,
tied to our bank's current prime lending rate. [See Note 7 to Consolidated
Financial Statements]
The purchase price was allocated to assets acquired and liabilities assumed
based on estimated fair market values at the date of the acquisition. Since the
fair market value of assets acquired and liabilities assumed exceeded the
purchase price, the resulting excess was allocated proportionately to reduce the
carrying amounts of noncurrent assets, resulting in assets being recorded as
follows (amounts in thousands):
Inventories $ 6,500
Property and equipment 5,286
-------
Total assets $11,786
=======
The assets acquired and liabilities assumed have been included in the
consolidated balance sheet as of September 30, 1999. The operating results for
Cornelius for the period between September 22, 1999 and September 30, 1999 have
not been included in the consolidated financial statements for the Company for
the fiscal year ended September 30, 1999 because, in our view, they were not
material to the consolidated financial statements.
In connection with the Cornelius Acquisition we issued 40,000 shares of
Non-Voting Acquisition Preferred Stock (the "Preferred Stock"), $.01 par value
to the shareholders of Cornelius. The Preferred Stock has a liquidation
preference of $100 per share and no voting rights, except as otherwise required
by law. We may, at any time prior to September 21, 2004, redeem any portion or
all of the outstanding shares of Preferred Stock for $100 per share. Any
unredeemed shares outstanding at September 21, 2004 must be redeemed for $100
per share.
The Preferred Stock has been recorded at its estimated fair value of
approximately $1,890,000. The carrying amount of the Preferred Stock will be
accreted at each balance sheet date to its redemption amount using the interest
method. The resulting increase in the carrying amount of the Preferred Stock
will reduce income applicable to common shareholders.
In October 1999 we redeemed 5,798 shares of Preferred Stock for a cash payment
of $158,500. The redeemed Preferred Stock had a redemption value of $579,800 and
a carrying amount of $274,000. Thus, the remaining redemption amount of the
Preferred Stock was reduced to $3,420,200.
We believe that the cash flows from operations, supplemented on a seasonal basis
by revolving credit lines, should adequately support servicing of the debt
related to the Cornelius Acquisition. We expect to either extend the maturity of
the five-year, $6.5 million note payable to our bank, or arrange for alternative
financing that is for a longer term.
16
17
ITEM 7.A. 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 September 30, 1999, 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 September 30, 1999 Calloway's had variable rate long-term debt of $9.2
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 $92,000 for the variable-rate debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are included in a separate section
of this Report. The index is included under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
a) PREVIOUS INDEPENDENT ACCOUNTANTS
1) On August 19, 1998 the Registrant's former Independent Accountants,
PricewaterhouseCoopers LLP, were dismissed and replaced by KPMG LLP.
2) The reports of PricewaterhouseCoopers LLP on the financial statements as
of and for the years ended September 30, 1997 and 1996 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
3) The Registrant's Audit Committee and Board of Directors participated in and
approved the decision to change Independent Accountants.
4) In connection with its audits of the financial statements as of and for the
years ended September 30, 1997 and 1996 and through August 19, 1998 there
were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principle or practices, financial statement disclosure, or
auditing scope or procedure which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused them to
make reference thereto in their report on the financial statements for such
years.
5) During the years ended September 30, 1997 and 1996 and through August 19,
1998 there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
b) CURRENT INDEPENDENT AUDITORS
1) On August 19, 1998 KPMG LLP was engaged as the Registrant's current
Independent Auditors.
17
18
2) During the years ended September 30, 1997 and 1996 and through August 19,
1998 the Registrant had not consulted with KPMG LLP regarding either (1)
the application of accounting principles to a specified transaction, either
completed or proposed or the type of audit opinion that might be rendered
on the financial statements, or (ii) any matter that was either the subject
of a disagreement (as defined in paragraph 304(a)(1)(iv)) or a reportable
event (as described in paragraph 304(a)(1)(v))).
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 Proxy Statement.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report - KPMG LLP F-1
Report of Independent Accountants - PricewaterhouseCoopers LLP F-2
Consolidated Balance Sheets - September 30, 1999 and 1998 F-3
Consolidated Statements of Operations - Years Ended September 30, 1999,
1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity - Years Ended September 30,
1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows - Years Ended September 30, 1999,
1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
18
19
(a)(2) SCHEDULES
Schedules, for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission, are omitted because they either are
not required under the related instructions, are inapplicable, or the required
information is shown in the financial statements or notes thereto.
(a)(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 E. Glaze and Dr. Stanley Block.
(Exhibit (10)(i)) (1)
(h) Extension of Employment Agreement between the Registrant and James
C. Estill dated July 2, 1997 (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and John
T. Cosby dated July 2, 1997 (Exhibit (10)(n)) (2)
(j) Extension of Employment Agreement between the Registrant and John
S. Peters dated July 2, 1997 (Exhibit (10)(o)) (2)
(k) Employment Agreement between the Registrant and C. Sterling
Cornelius dated September 21, 1999.(3)
(21) (a) Subsidiaries of the Registrant. (3)
(23) (d) Consent of KPMG LLP. (3)
(23) (e) Consent of PricewaterhouseCoopers LLP (3)
(27) (a) Financial Data Schedule. (3)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))(4)
(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 (99)(c))(5)
(99) (d) Calloway's Nursery, Inc. 1997 Stock Option Plan (Exhibit (99)(d)(6)
(99) (e) Calloway's Nursery, Inc. 1998 Stock Option Plan (Exhibit (99)(e))(7)
(99) (f) Calloway's Nursery, Inc. 1999 Stock Option Plan (3)
(99) (g) Cornelius Nurseries, Inc. and Turkey Creek Farms, Inc. Combined
Financial Statements as of and for the years ended September 30,
1998 and 1997 (Exhibit 99.1)(8)
(99) (h) Calloway's Nursery, Inc. and Subsidiaries Unaudited Pro Forma
Condensed Financial Information as of June 30, 1999 and for the
nine month period ended June 30, 1999 and for the year ended
September 30, 1998 (Exhibit 99.2)(8)
- --------
(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.
19
20
(2) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-Q Report for the quarter ended June 30, 1996.
(3) Filed herewith.
(4) 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.
(5) 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.
(6) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 8-K Report filed October 1, 1999.
(b) REPORTS ON FORM 8-K
On October 1, 1999 the Registrant filed a Form 8-K Report with the Securities
and Exchange Commission to report the acquisition of certain assets of Cornelius
Nurseries, Inc., Turkey Creek Farms, Inc. and Wholesale Landscape Distributors,
Inc.
20
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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 28, 1999
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 28, 1999
- -------------------
James C. Estill
/s/ John T. Cosby Director December 28, 1999
- -----------------
John T. Cosby
/s/ John S. Peters Director December 28, 1999
- ------------------
John S. Peters
/s/ Robert E. Glaze Director December 28, 1999
- -------------------
Robert E. Glaze
/s/ Dr. Stanley Block Director December 28, 1999
- ---------------------
Dr. Stanley Block
/s/ C. Sterling Cornelius Director December 28, 1999
- -------------------------
C. Sterling Cornelius
21
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Calloway's Nursery, Inc.:
We have audited the accompanying consolidated balance sheets of Calloway's
Nursery, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Calloway's Nursery,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas
November 19, 1999
F-1
23
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Calloway's Nursery, Inc.
In our opinion, the accompanying consolidated statements of operations,
shareholders' equity and cash flows present fairly, in all material respects,
the consolidated results of operations and cash flows of Calloway's Nursery, Inc
for the year ended September 30, 1997 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
November 10, 1997
F-2
24
CALLOWAY'S NURSERY, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
September 30, September 30,
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 62 $ 1,649
Property held for sale -- 448
Accounts receivable 54 148
Inventories 9,736 2,341
Deferred income taxes -- 496
Prepaids and other assets 137 112
-------- --------
Total current assets 9,989 5,194
Property and equipment, net 13,859 7,815
Goodwill, net of accumulated amortization of $1,017,000 and
$908,000, respectively
956 1,065
Deferred income taxes 1,392 565
Other assets 139 46
-------- --------
Total assets $ 26,335 $ 14,685
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,356 $ 1,913
Accrued expenses 1,210 831
Notes payable, current 463 --
Current portion of long-term debt 558 338
Deferred income taxes, current 622 --
-------- --------
Total current liabilities 6,209 3,082
Deferred rent payable 1,113 1,093
Long-term debt, net of current portion 9,003 3,044
-------- --------
Total liabilities 16,325 7,219
-------- --------
Commitments and contingencies
Non-Voting Acquisition Preferred Stock with mandatory
redemption provisions; par value $.01 per share; 40,000
shares authorized, issued and outstanding 1,890 --
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;
9,960,000 shares authorized; no shares issued or outstanding -- --
Common stock; par value $.01 per share; 30,000,000 shares
authorized; 5,940,766 and 5,735,695 shares issued,
respectively; 5,690,766 and 5,485,695 shares outstanding,
respectively
59 57
Additional paid-in capital 8,927 8,666
Retained earnings 530 139
-------- --------
9,516 8,862
Less: treasury stock, at cost (250,000 shares) (1,396) (1,396)
-------- --------
Total shareholders' equity 8,120 7,466
-------- --------
Total liabilities and shareholders' equity $ 26,335 $ 14,685
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
25
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Net sales $ 30,355 $ 27,069 $ 26,245
Cost of goods sold 15,397 14,874 13,819
------------- ------------- -------------
Gross profit 14,958 12,195 12,426
Operating expenses 9,101 7,764 7,334
Occupancy expenses 2,709 2,773 2,816
Advertising expenses 1,437 1,366 1,261
Depreciation and amortization 696 519 381
Interest expense 321 237 61
Interest income (105) (137) (194)
------------- ------------- -------------
Total expenses 14,159 12,522 11,659
------------- ------------- -------------
Income (loss) before income taxes 799 (327) 767
Income tax expense (benefit) 408 (43) (960)
------------- ------------- -------------
Net income (loss) $ 391 $ (284) $ 1,727
============= ============= =============
Weighted average number of common shares:
Basic 5,579 5,405 5,244
Diluted 5,758 5,405 5,244
Net income (loss) per common share:
Basic $ .07 $ (.05) $ .33
Diluted $ .07 $ (.05) $ .33
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
26
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
Common Stock Additional Retained
-------------------- Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
-------- -------- ---------- --------- -------- ---------
Balance as of September 30, 1996 5,392 $ 54 $ 8,252 $ (1,304) $ (1,396) $ 5,606
Issuance of common stock 190 1 154 -- -- 155
Net income -- -- -- 1,727 -- 1,727
-------- -------- ---------- --------- -------- ---------
Balance as of September 30, 1997 5,582 55 8,406 423 (1,396) 7,488
Issuance of common stock 154 2 260 -- -- 262
Net loss -- -- -- (284) -- (284)
-------- -------- ---------- --------- -------- ---------
Balance as of September 30, 1998 5,736 57 8,666 139 (1,396) 7,466
Issuance of common stock 205 2 261 263
Net income 391 391
-------- -------- ---------- --------- -------- ---------
Balance as of September 30, 1999 5,941 $ 59 $ 8,927 $ 530 $ (1,396) $ 8,120
======== ======== ========== ========= ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
27
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 391 $ (284) $ 1,727
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 696 519 381
Gains on property sales (21) (153) (1)
Deferred income taxes 291 (52) (975)
Stock compensation 116 111 72
(Increase) decrease (net of effects from acquisition) in:
Accounts receivable 94 (16) --
Inventories (895) (808) (365)
Prepaid expenses and other assets (22) (48) 15
Increase (decrease) (net of effects from acquisition) in:
Accounts payable 115 168 291
Accrued expenses 379 (49) 246
Deferred rent payable 20 (5) (71)
------------- ------------- -------------
Net cash flows provided by (used for) operating activities 1,164 (617) 1,320
------------- ------------- -------------
Cash flows from investing activities:
Additions to property and equipment (1,333) (2,792) (1,216)
Acquisition of Cornelius Nurseries (9,051) -- --
Purchase of wholesale nursery production facility -- -- (758)
Proceeds from property sales 457 560 1
Purchase of property held for sale -- (823) --
------------- ------------- -------------
Net cash flows used for investing activities (9,927) (3,055) (1,973)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 147 151 83
Proceeds from issuance of long-term debt 6,522 1,204 1,933
Proceeds from sale and leaseback -- 562 --
Net borrowings under revolving line of credit 463 -- --
Repayments of long-term debt (197) (134) (33)
Lease payments under capital lease (146) (150) --
Bank overdraft 483 -- --
Payment of debt issuance costs (96) -- --
------------- ------------- -------------
Net cash flows provided by financing activities 7,176 1,633 1,983
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,587) (2,039) 1,330
Cash and cash equivalents at beginning of year 1,649 3,688 2,358
------------- ------------- -------------
Cash and cash equivalents at end of year $ 62 $ 1,649 $ 3,688
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 321 $ 237 $ 61
Income taxes 72 10 --
The Company issued non-dividend preferred stock with mandatory redemption
provisions with a fair value of $1,890, and assumed accounts payable of $845, in
exchange for certain assets relating to the Cornelius acquisition.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
28
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED 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 retail stores in 1987.
The Company derives its revenues from sales to consumers of living plants and
related products. No single product or customer accounts for a material portion
of its revenues. Until September 1999, all of its retail stores were located in
the Dallas-Fort Worth area; thus, economic, weather and other circumstances that
existed from time-to-time in the Dallas-Fort Worth area had a significant impact
on the Company's results of operations.
During 1997 the Company formed two wholly owned subsidiaries, Miller Plant
Farms, Inc. and Reynolds Land, Inc. Miller Plant Farms is the Company's
wholesale nursery production facility, and Reynolds Land, Inc. holds certain
real estate assets and related indebtedness. All significant intercompany
accounts and transactions have been eliminated.
In September 1999 the Company acquired certain assets of Cornelius Nurseries,
Inc and two affiliated entities ("Cornelius"). Cornelius operates four retail
garden centers in the Houston market, a growing operation near Houston and two
wholesale distribution centers (one each in Houston and near Austin).
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
The Company reevaluates the propriety of the carrying amounts of its properties
as well as the amortization periods when events and circumstances indicate that
impairment may have occurred. At September 30, 1999, the Company believes that
no impairment has occurred and that no reduction of the estimated useful lives
is warranted.
Pre-opening expenses - Pre-opening expenses, which consist primarily of labor,
supplies and occupancy costs incurred prior to each new retail store's opening
and promotional costs incurred during the grand opening period, are expensed as
incurred.
F-7
29
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income (loss) per share - Basic EPS is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Income taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Intangibles - Goodwill is being amortized on a straight-line basis over 20
years. The Company assesses the recoverability of this goodwill by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows. The amount of
goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. 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.
Stock Based Compensation - The Company sponsors a stock-based compensation plan
for its employees and directors. The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. See Note 11 for pro forma
disclosures that show the effect on the Company's net income (loss) and net
income (loss) per share as if the Company had adopted the cost recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123").
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.
The amount of the valuation allowance related to deferred tax assets at
September 30, 1999 and 1998 has been estimated based on the weight of available
evidence at September 30, 1999 and 1998. Such estimate could change in the
future based on the occurrence of one or more future events.
F-8
30
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments -The carrying values of the Company's
financial instruments, other than long-term debt, approximate fair values due to
the short maturities of such instruments. The Company's borrowings, if
recalculated based on current interest rates, would not differ significantly
from the amounts recorded at September 30, 1999 and 1998.
Segment Information - The Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"), in 1999. SFAS 131 establishes standards for the way
that a public business enterprise reports information about operating segments
in the annual financial statements and requires that those enterprises report
selected information about operating segments in interim reports to shareholders
and requires restatement of prior year information. Operating segments are
defined as components of an enterprise for which separate financial information
is available that is evaluated regularly by the chief operating decision
maker(s) in deciding how to allocate resources and in assessing performance.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 did not affect the Company's
results of operations or financial position but did affect the disclosure of
segment information, as presented in Note 21.
Reporting of Comprehensive Income- The Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), in
1999. The Company does not have any such items of "other comprehensive income";
therefore, comprehensive income (loss) and net income (loss) are identical, and
the adoption of SFAS 130 had no effect on the Company's consolidated financial
statements.
Reclassifications - Certain amounts for 1997 and 1998 have been reclassified to
conform to the 1999 presentation.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Money market fund $ 4 $ 1,598
Demand deposit accounts 31 28
Petty cash 27 23
------------- -------------
$ 62 $ 1,649
============= =============
NOTE 4 - INVENTORIES
Inventories consist of the following (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Finished goods $ 4,424 $ 1,510
Work in process 4,952 739
Supplies 360 92
------------- -------------
$ 9,736 $ 2,341
============= =============
F-9
31
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Land $ 6,248 $ 3,047
Land improvements 1,975 620
Leasehold improvements 988 600
Buildings 4,073 3,309
Furniture, fixtures and equipment 3,002 2,164
Vehicles 502 423
Less: accumulated depreciation and
amortization (2,929) (2,348)
------------- --------------
$ 13,859 $ 7,815
============= ==============
The gross amounts of equipment and related accumulated amortization recorded
under capital leases as of September 30, 1999 and 1998 were as follows:
September 30, September 30,
1999 1998
------------- -------------
Equipment $ 556 $ 556
Less: accumulated amortization (240) (71)
------------- -------------
$ 316 $ 485
============= =============
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Accrued salaries and related taxes $ 171 $ 172
Accrued bonuses 508 --
Accrued property taxes 341 351
Accrued sales and use taxes 110 107
Other 80 201
------------- -------------
$ 1,210 $ 831
============= =============
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
In September 1999 the Company entered into a $5,000,000 revolving line of credit
arrangement with a bank that matures on June 1, 2000, and is collateralized by
inventory, accounts receivable and certain real property. The line of credit was
established to supplement sources available to meet the Company's seasonal
working capital needs. At September 30, 1999 the outstanding balance was
$463,000 and the unused available credit was $4,537,000. No amounts were
outstanding under the line of credit at September 30, 1998. The interest rate is
variable, tied to the bank's current prime lending rate. The interest rate was
8.75% at September 30, 1999.
F-10
32
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Notes payable - financial institutions
(a), (b), (c), (d), (e) $ 9,237 $ 2,897
Obligations under capital lease (f) 260 406
Other 64 79
------------- -------------
9,561 3,382
Less: amounts due within one year (558) (338)
------------- -------------
$ 9,003 $ 3,044
============= =============
(a) In September 1999 the Company entered into a note payable to a
financial institution. At September 30, 1999 the outstanding
balance was $6,500,000. The note is collateralized by certain
real estate and requires payments, including interest, of
approximately $800,000 annually. Payments are based on a
fifteen-year amortization. The note matures in five years with a
balloon payment due at that time. The interest rate is variable,
tied to the bank's current prime lending rate. The interest rate
was 9.25% at September 30, 1999.
(b) In December 1996 the Company entered into a note payable to a
financial institution. At September 30, 1999 the outstanding
balance was $455,000. The note is collateralized by certain real
estate and requires payments, including interest, of
approximately $86,000 annually for a term of ten years. The
interest rate is variable, tied to the institution's prime
lending rate. The interest rate was 9.25% at September 20, 1999.
(c) In July 1997 a wholly owned subsidiary of the Company entered
into a note payable to a financial institution. At September 30,
1999 the outstanding balance was $929,000. The note is
collateralized by certain real estate and requires payments,
including interest, of approximately $123,000 annually for a term
of fifteen years. The interest rate is variable, tied to the
institution's prime lending rate. The interest rate was 9.125% at
September 20, 1999.
(d) In July 1997 the Company entered into a note payable to a
financial institution. At September 30, 1999 the outstanding
balance was $295,000. The note is collateralized by certain real
estate and requires payments, including interest, of
approximately $53,000 annually for a term of ten years. The
interest rate is variable, tied to the institution's prime
lending rate. The interest rate was 9.3% at September 20, 1999.
(e) In October 1997 the Company entered into a note payable to a
financial institution. At September 30, 1999 the outstanding
balance was $1,058,000. The note is collateralized by certain
real estate. Payments are based on a twelve-year amortization.
The note matures in six years with a balloon payment due at that
time. The interest rate is variable, tied to the institution's
current prime lending rate. The interest rate was 9.25% at
September 30, 1999.
(f) In May 1998 the Company entered into a sale-leaseback of computer
equipment with a computer leasing company. The lease is being
accounted for as a capital lease. The outstanding balance of the
capital lease obligation at September 30, 1999 was $260,000. The
lease requires payments of $180,000 annually for 39 months. The
interest portion of these payments totals $56,000 and is excluded
from the maturities schedule below.
F-11
33
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of long-term debt are as follows (amounts in thousands):
Year Ending September 30,
2000 $ 558
2000 525
2001 457
2002 481
2003 6,605
Thereafter 935
---------
$ 9,561
=========
At September 30, 1999 the Company was in compliance with all of its loan
covenants.
NOTE 8 - INCOME TAXES
Components of income tax expense (benefit) consist of the following (amounts in
thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Current expense (benefit):
Federal $ 8 $ 9 $ 15
State 109 -- --
------------- ------------- -------------
Total current 117 9 15
------------- ------------- -------------
Deferred expense (benefit):
Federal 291 (52) (879)
State -- -- (96)
------------- ------------- -------------
Total deferred 291 (52) (975)
------------- ------------- -------------
------------- ------------- -------------
Total expense (benefit) $ 408 $ (43) $ (960)
============= ============= =============
The differences between the Company's effective tax rate and the federal
statutory tax rate of 34% for the fiscal years ended September 30, 1999, 1998
and 1997 are as follows (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Income tax expense (benefit) at statutory rate $ 272 $ (111) $ 261
State income tax, net of federal benefit 72 -- 26
Amortization of goodwill 37 37 37
Other, net 27 31 31
Valuation allowance -- -- (1,315)
------------- ------------- -------------
Total income tax expense (benefit) $ 408 $ (43) $ (960)
============= ============= =============
Effective tax rate 51% (13)% (125)%
F-12
34
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities as
of September 30, 1999 and 1998 are as follows (amounts in thousands):
September 30, September 30,
1999 1998
------------- -------------
Deferred tax liabilities:
Depreciation $ (74) $ (69)
Basis difference in inventories attributable to
acquisition (852) --
------------- -------------
Total deferred tax liabilities (926) (69)
------------- -------------
Deferred tax assets:
Deferred rent 411 404
Inventory costs capitalized for tax purposes 48 37
Net operating loss carryforward 147 459
AMT credit carryforward 35 27
Assets marked to market 203 203
Basis difference in property and equipment
attributable to acquisition
852 --
------------- -------------
Total deferred tax assets 1,696 1,130
------------- -------------
Net deferred tax asset $ 770 $ 1,061
============= =============
Management has determined that it is more likely than not that the Company's
deferred tax assets will be realized; therefore, no valuation allowance was
necessary as of September 30, 1999 and 1998. In assessing the need for a
valuation allowance, management has considered future reversals of existing
taxable temporary differences and future taxable income exclusive of such
reversing differences. Positive evidence considered includes the Company's
history of profitable operations, and the availability of its existing net
operating loss carryforwards. At September 30, 1999, the Company has net
operating loss carryforwards of approximately $398,000 for income tax purposes,
which will expire in 2009, 2010 and 2013 if not used.
NOTE 9 - SHAREHOLDERS' EQUITY
During 1999, 1998 and 1997, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 12) and stock option
plan, receiving proceeds as follows (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Number of shares issued 205 154 190
Proceeds $ 147 $ 151 $ 83
Compensation expense $ 116 $ 111 $ 72
F-13
35
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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 cannot participate in the discounted purchase of common stock. The
Rights are redeemable at any time at $.01 per Right.
NOTE 11 - STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
The Company's stock option plans provide for the awarding of incentive stock
options to employees and non-qualified stock options to employees and
independent directors. The employee plans are administered by the Compensation
Committee of the Board of Directors, which consists entirely of independent
directors. The independent director stock options are initially granted on a
formula basis. Additional nonqualified stock options are provided to independent
directors on an individual grant basis. All options are exercisable according to
predetermined vesting schedules (all options vest within three years of the date
of the grant) and remain in effect for ten years from the date of the grant. An
aggregate of 1,501,000 shares of common stock have been reserved for issuance
under the Company's stock option plans.
As permitted by SFAS 123, the Company applies Accounting Principles Board (APB)
Opinion 25 and related interpretations in accounting for its stock option plans.
Accordingly, no expense has been recognized for its stock option plans, as the
exercise price equals the stock price on the date of grant. No options were
granted during the fiscal year ended September 30, 1998. Had compensation
expense been determined for stock options granted based on the "fair value" at
grant dates provided for in SFAS 123, the Company's pro forma net income (loss)
and net income (loss) per share for 1999, 1998 and 1997 would approximate the
amounts below (amounts in thousands, except per share amounts):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Net income (loss) $ 326 $ (284) $ 1,474
Net income (loss) per share $ .06 $ (.05) $ .28
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. The pro forma amounts were estimated using the Black Scholes
option pricing model with the following assumptions:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
Weighted average expected life (years)
10 N/A 10
Expected volatility 88.21% -- 80.73%
Expected dividends -- -- --
Risk free interest rate 5.88% -- 6.58%
Weighted average fair value of options granted
$ 1.0174 -- $ .922
F-14
36
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the stock option plans for the three
years ended September 30, 1999:
Weighted
Average
Exercise
Shares Price
------------ ------------
October 1, 1996 622,500 $ 1.059
Granted 326,000 1.107
Exercised -- --
Forfeited 7,000 1.094
Expired -- --
------------ ------------
September 30, 1997 941,500 1.075
Granted -- --
Exercised 10,000 1.025
Forfeited 10,000 1.063
Expired -- --
------------ ------------
September 30, 1998 921,500 1.075
Granted 64,000 1.156
Exercised 400 1.000
Forfeited -- --
Expired -- --
------------ ------------
September 30, 1999 985,100 $ 1.0806
============ ============
Exercisable, September 30, 1999 957,100 $ 1.0785
The following table summarizes information regarding stock options outstanding
at September 30, 1999:
Weighted Weighted Weighted
Average Average Average
Range of Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Life Prices Exercisable Prices
- ---------------------- ---------- ---------- ---------- ---------- ----------
$0.875 to $1.188 978,100 6.6 $ 1.0445 950,100 $ 1.0413
$1.189 to $6.125 7,000 1.8 6.1250 7,000 6.1250
---------- ---------- ---------- ---------- ----------
985,100 6.6 $ 1.0806 957,100 $ 1.0785
========== ========== ========== ========== ==========
NOTE 12 - 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.
F-15
37
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The
Company contributions for the years ended September 30, 1999, 1998 and 1997 were
$116,000, $111,000 and $72,000, respectively.
NOTE 13 - 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 does not provide matching contributions for the 401(k)
plan. The 401(k) plan did not have a material impact on the Company's financial
condition or results of operations.
NOTE 14 - 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.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
As of September 30, 1999 the Company leased twelve retail stores under
noncancellable operating leases. The leases expire in various years through
2013. 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.
F-16
38
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments under noncancellable operating leases as of
September 30, 1999 are as follows (amounts in thousands):
Year Ending September 30,
2000 $ 2,022
2000 2,067
2001 1,830
2002 1,645
2003 1,335
Thereafter 4,807
-------
$13,706
=======
Rental expense for operating leases during the fiscal years ended September 30,
1999, 1998 and 1997 was approximately $2.2 million, $2.2 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.
NOTE 16 - NET INCOME (LOSS) PER SHARE
A reconciliation between the weighted average shares outstanding used in the
basic and diluted net income (loss) per share computations is as follows (in
thousands, except per share amounts):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------ ------------ ------------
Net income (loss) $ 391 $ (284) $ 1,727
Weighted average shares
outstanding - basic 5,579 5,405 5,244
Effective of dilutive securities:
Assumed exercise of stock options 179 -- --
Weighted average shares
outstanding - diluted 5,758 5,405 5,244
Net income (loss) per share -
basic and diluted $ .07 $ (.05) $ .33
For the year ended September 30, 1999, 7,000 options were excluded from the
diluted EPS computation because they would have been antidilutive. For the years
ended September 30, 1998 and 1997, all outstanding options were excluded from
the diluted EPS computation, because they would have been antidilutive.
F-17
39
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SELECTED QUARTERLY DATA (UNAUDITED)
Amounts (except share data) are expressed in thousands:
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------------- --------------------- -------------------- ---------------------
1999 1998 1999 1998 1999 1998 1999 1998
Net sales $ 5,475 $ 4,495 $ 5,597 $ 4,227 $ 15,065 $ 15,047 $ 4,218 $ 3,300
Gross profit 2,358 2,029 2,694 2,122 7,822 6,964 2,084 1,080
Net income (loss) $ (619) $ (585) $ (342) $ (436) $ 2,133 $ 1,667 $ (781) $ (930)
Net income (loss) per share
Basic
Diluted $ (.11) $ (.11) $ (.06) $ (.08) $ .38 $ .31 $ (.14) $ (.17)
$ (.11) $ (.11) $ (.06) $ (.08) $ .37 $ .28 $ (.14) $ (.17)
NOTE 18 - ACQUISITION OF CORNELIUS NURSERIES
On September 21, 1999 the Company completed its acquisition (the "Cornelius
Acquisition") of certain assets and liabilities of Cornelius Nurseries, Inc.
("CN"), Turkey Creek Farms, Inc. ("TCF") and Wholesale Landscape Distributors,
Inc. ("WLD") (together "Cornelius").
The Cornelius Acquisition, recorded under the purchase method of accounting,
included the purchase of substantially all of the inventories and property,
plant and equipment of Cornelius for cash of approximately $8.5 million and $4.0
million redemption value of non-dividend, preferred stock with a mandatory
redemption after five years.
The purchase price totaled approximately $11.8 million as follows (amounts in
thousands):
Cash $ 8,500
Preferred stock, non-dividend, mandatory redemption
after five years, $4.0 million redemption value, at
estimated fair value 1,890
Accounts payable 845
Acquisition costs 551
-------
Total purchase price $11,786
=======
The purchase price was allocated to assets acquired and liabilities assumed
based on estimated fair market values at the date of the acquisition. Since the
fair market value of assets acquired and liabilities assumed exceeded the
purchase price, the resulting excess was allocated proportionately to reduce the
carrying amounts of noncurrent assets, resulting in assets being recorded as
follows (amounts in thousands):
Inventories $ 6,500
Property and equipment 5,286
-------
Total assets $11,786
=======
The assets acquired and liabilities assumed have been included in the
consolidated balance sheet as of September 30, 1999. The operating results for
Cornelius for the period between September 22, 1999 and September 30, 1999 have
not been included in the consolidated financial statements for the Company for
the fiscal year ended September 30, 1999 because, in management's view, they
were not material to the consolidated financial statements.
F-18
40
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma summary data for the years ended September 30,
1999 and 1998 (in thousands, except per share amounts) combines the results of
operations of the Company and Cornelius as if the Cornelius Acquisition had
occurred as of October 1, 1997, after giving effect to certain adjustments,
including increased interest expense on acquisition debt, increased depreciation
and amortization expense on assets acquired, the related income tax effects, and
the effect on net income (loss) per share attributable to common shareholders
for the accretion of the preferred stock discount discussed in Note 19. The pro
forma accretion amounts for 1999 and 1998 were $355,000 and $306,000,
respectively. The unaudited pro forma 1999 and 1998 results do not necessarily
represent results that would have occurred if the Company had acquired Cornelius
on October 1, 1997, nor are they necessarily indicative of the results of future
consolidated operations. The 1998 pro forma amounts for net loss and net loss
per share have been restated from the amounts previously reported in the
Company's Form 8-K Report related to the Cornelius Acquisition.
Pro Forma Pro Forma
1999 1998
(unaudited) (unaudited)
----------- -----------
Sales $ 51,212 $ 48,550
Net loss attributable to common shareholders (1,465) (2,117)
Net loss per share - basic and diluted ($.26) ($.39)
NOTE 19 - PREFERRED STOCK WITH MANDATORY REDEMPTION PROVISIONS
On September 21, 1999 the Company issued 40,000 shares of Non-Voting Acquisition
Preferred Stock (the "Preferred Stock"), $.01 par value, in connection with the
Cornelius Acquisition. The Preferred Stock has a liquidation preference of $100
per share and no voting rights, except as otherwise required by law. The Company
may, at any time prior to September 21, 2004, redeem any portion or all of the
outstanding shares of Preferred Stock for $100 per share. Any unredeemed shares
outstanding at September 21, 2004 must be redeemed for $100 per share.
The Preferred Stock has been recorded at its estimated fair value of
approximately $1,890,000. The carrying amount of the Preferred Stock will be
accreted at each balance sheet date to its redemption amount using the interest
method. The resulting increase in the carrying amount of the Preferred Stock
will reduce income applicable to common shareholders.
NOTE 20 - SUBSEQUENT EVENT
In October 1999 the Company redeemed 5,798 shares of Preferred Stock for a cash
payment of $158,500. The redeemed Preferred Stock had a redemption value of
$579,800 and a carrying amount of $274,000.
NOTE 21 - SEGMENT INFORMATION
The Company has two reportable segments: Retail, and Growing and Wholesale.
The Company aggregates its individual retail stores because they are all managed
in a similar way, they serve a similar type of customer, they use similar
methods to distribute their products and services, they carry similar product
lines, and they use similar marketing approaches. For example, the retail stores
sell plants, garden supplies and other merchandise, primarily to individuals, on
a cash-and-carry basis, at each retail store.
F-19
41
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Likewise, the Company aggregates its two Growing operations with its two
Wholesale distribution centers. These operations are distinguished from the
Retail segment, but are similar to each other, in the way they are managed, in
the type of customer they serve, in the methods they use to produce and ship
their products, in the product lines they carry, and in the way they market
their products. For example, the Growing and Wholesale segment operations sell
plants to the Company's retail stores, other retailers and landscape contractors
by extending credit and shipping goods via truck to the customer's location.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies (see Note 2). Management evaluates a segment's
performance based upon pre-tax profit or loss from operations. Intersegment
sales or transfers are recorded based upon prevailing market prices.
The following is a tabulation of business segment information for each of the
past three years. Intersegment elimination information is included to reconcile
segment data to the consolidated financial statements. Amounts are in thousands:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- -------------
REVENUES
From external customers
Retail $ 30,305 $ 26,949 $ 26,245
Growing and Wholesale 50 120 --
------------- ------------- -------------
Totals 30,355 27,069 26,245
------------- ------------- -------------
From other operating segments
Retail -- -- --
Growing and Wholesale 1,510 1,143 --
------------- ------------- -------------
Totals 1,510 1,143 --
Elimination of intersegment sales (1,510) (1,143) --
------------- ------------- -------------
Total consolidated net sales $ 30,355 $ 27,069 $ 26,245
============= ============= =============
PRE-TAX OPERATING PROFIT (LOSS)
Retail $ 748 $ (189) $ 767
Growing and Wholesale 129 (138) --
Totals 877 (327) 767
------------- ------------- -------------
Elimination of intersegment profits (78) -- --
------------- ------------- -------------
Total consolidated pre-tax operating profit (loss) $ 799 $ (327) $ 767
============= ============= =============
TOTAL ASSETS
Retail $ 17,785 $ 12,889 $ 12,197
Growing and Wholesale 8,550 1,796 914
------------- ------------- -------------
Totals $ 26,335 $ 14,685 $ 13,111
============= ============= =============
INTEREST REVENUE
Retail $ 105 $ 137 $ 194
Growing and Wholesale -- -- --
------------- ------------- -------------
Totals $ 105 $ 137 $ 194
============= ============= =============
INTEREST EXPENSE
Retail $ 293 $ 209 $ 61
Growing and Wholesale $ 28 $ 28 --
------------- ------------- -------------
Totals $ 321 $ 237 $ 61
============= ============= =============
DEPRECIATION AND AMORTIZATION EXPENSE
Retail $ 688 $ 514 $ 381
Growing and Wholesale 8 5 --
------------- ------------- -------------
Totals $ 696 $ 519 $ 381
============= ============= =============
F-20
42
CALLOWAY'S NURSERY, INC.
Annual Report on Form 10-K
Fiscal Year Ended September 30, 1999
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)
(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 E. Glaze and Dr. Stanley Block.
(Exhibit (10)(i)) (1)
(h) Extension of Employment Agreement between the Registrant and James
C. Estill dated July 2, 1997 (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and John
T. Cosby dated July 2, 1997 (Exhibit (10)(n)) (2)
(j) Extension of Employment Agreement between the Registrant and John
S. Peters dated July 2, 1997 (Exhibit (10)(o)) (2)
(k) Employment Agreement between the Registrant and C. Sterling
Cornelius dated September 21, 1999.(3)
(21) (a) Subsidiaries of the Registrant. (3)
(23) (d) Consent of KPMG LLP. (3)
(23) (e) Consent of PricewaterhouseCoopers L.L.P. (3)
(27) (a) Financial Data Schedule. (3)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))(4)
(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 (99)(c))(5)
(99) (d) Calloway's Nursery, Inc. 1997 Stock Option Plan (Exhibit (99)(d)(6)
(99) (e) Calloway's Nursery, Inc. 1998 Stock Option Plan (Exhibit (99)(e))(7)
(99) (f) Calloway's Nursery, Inc. 1999 Stock Option Plan (3)
(99) (g) Cornelius Nurseries, Inc. and Turkey Creek Farms, Inc. Combined
Financial Statements as of and for the years ended September 30,
1998 and 1997 (Exhibit 99.1)(8)
(99) (h) Calloway's Nursery, Inc. and Subsidiaries Unaudited Pro Forma
Condensed Financial Information as of June 30, 1999 and for the
nine month period ended June 30, 1999 and for the year ended
September 30, 1998 (Exhibit 99.2)(8)
43
- --------
(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 the
Company's Form 10-Q Report for the quarter ended June 30, 1996.
(3) Filed herewith.
(4) 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.
(5) 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.
(6) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 8-K Report filed October 1, 1999.