UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal
executive offices and Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
6,847,797 shares of the Registrant's Common Stock, $.01 par value, were
outstanding as of July 31, 2003.
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 2003
TABLE OF CONTENTS
PAGE
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
ITEM 1
Index to Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 13
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 20
ITEM 4
Controls and Procedures 20
PART II - OTHER INFORMATION
Items 1-6 20
2
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. We are including this
statement for the express purpose of providing Calloway's the protections of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
with respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements contained in this Report.
Our expected future results, products and service performance or other
non-historical facts are forward-looking and reflect our current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of our business, geographic concentration, the impact of weather
and other growing conditions, general economic conditions, 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
costs and benefits of discontinuing certain operations, 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.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
2003 2002 2002
---- ---- ----
Cash and cash equivalents $ 4,131 $ 2,475 $ 6,044
Accounts receivable 498 356 350
Inventories 4,507 4,006 2,809
Prepaids and other assets 36 59 102
Deferred income taxes, current 219 263 55
Income taxes receivable -- 119 --
Current assets of discontinued operations 931 2,344 2,118
------- ------- --------
Total current assets 10,322 9,622 11,478
Property and equipment, net 10,959 11,342 11,120
Goodwill, net 631 631 658
Deferred income taxes 1,568 1,568 1,122
Other assets 189 211 219
Noncurrent assets of discontinued operations -- 751 2,262
------- ------- --------
Total assets $23,669 $24,125 $ 26,859
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,296 $ 2,694 $ 3,044
Accrued expenses 1,648 2,017 1,348
Accrued income taxes -- -- 680
Current portion of long-term debt 390 501 557
Deferred income taxes, current -- -- --
Current liabilities of discontinued operations 193 544 431
------- ------- --------
Total current liabilities 6,527 5,756 6,060
Deferred rent payable 680 805 846
Long-term debt, net of current portion 7,079 8,246 8,318
------- ------- --------
Total liabilities 14,286 14,807 15,224
------- ------- --------
Commitments and contingencies
Non-voting preferred stock, with mandatory redemption
provisions 2,846 2,538 2,442
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 71 68 67
Additional paid-in capital 10,127 9,885 9,819
Accumulated deficit (2,265) (1,777) 703
------- ------- --------
7,933 8,176 10,589
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
------- ------- --------
Total shareholders' equity 6,537 6,780 9,193
------- ------- --------
Total liabilities and shareholders'
equity $23,669 $24,125 $ 26,859
======= ======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE-MONTHS ENDED THREE-MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $40,174 $36,721 $20,090 $19,518
Cost of goods sold 21,226 19,296 10,034 9,846
------- ------- ------- -------
Gross profit 18,948 17,425 10,056 9,672
------- ------- ------- -------
Operating expenses 13,004 9,991 4,690 3,607
Occupancy expenses 2,492 2,094 871 696
Advertising expenses 1,508 1,188 525 463
Depreciation and amortization 457 650 150 197
Interest expense 580 666 175 224
Interest income (15) (21) (8) (12)
------- ------- ------- -------
Total expenses 18,026 14,568 6,403 5,175
------- ------- ------- -------
Income from continuing operations before income
taxes 922 2,857 3,653 4,497
Income tax expense 354 1,211 1,400 1,784
------- ------- ------- -------
Income from continuing operations 568 1,646 2,253 2,713
Discontinued operations:
Loss from discontinued operations, net of
income tax benefits of $395, $215, $45 and
$170 (631) (293) (51) (218)
Loss on disposal of discontinued operations,
net of income tax benefits of $74, $--,
$331, and $-- (117) -- (537) --
------- ------- ------- -------
Loss from discontinued operations (748) (293) (588) (218)
------- ------- ------- -------
Net income (loss) (180) 1,353 1,665 2,495
Accretion of preferred stock (308) (262) (102) (96)
------- ------- ------- -------
Net income (loss) attributable to common
shareholders $ (488) $ 1,091 $ 1,563 $ 2,399
======= ======= ======= =======
Weighted average number of common shares
outstanding
Basic 6,663 6,347 6,758 6,408
Diluted 6,663 6,381 6,758 6,512
Basic net income (loss) per common share
Income from continuing operations $ .04 $ .22 $ .32 $ .41
Loss from discontinued operations (.11) (.05) (.09) (.04)
------- ------- ------- -------
Net income (loss) ($.07) $ .17 $ .23 $ .37
------- ------- ------- -------
Diluted net income (loss) per common share
Income from continuing operations $ .04 $ .22 $ .32 $ .40
Loss from discontinued operations (.11) (.05) (.09) (.03)
------- ------- ------- -------
Net income (loss) ($.07) $ .17 $ .23 $ .37
===== ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE-MONTHS ENDED
JUNE 30,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) ($180) $ 1,353
Adjustments to reconcile net loss to net cash provided by
operating activities:
Loss from discontinued operations (net of tax) 748 293
Depreciation and amortization 457 650
Net change in operating assets and liabilities 673 3,818
------- -------
Net cash provided by operating activities 1,698 6,114
------- -------
Cash flows from investing activities -
Additions to property and equipment (74) (209)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 245 211
Repayments of debt (1,278) (1,233)
------- -------
Net cash used for financing activities (1,033) (1,022)
------- -------
Net increase in cash and cash equivalents from continuing operations 591 4,883
Net increase in cash and cash equivalents from discontinued operations 1,065 882
------- -------
Net increase in cash and cash equivalents 1,656 5,765
Cash and cash equivalents at beginning of period 2,475 279
------- -------
Cash and cash equivalents at end of period $ 4,131 $ 6,044
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim unaudited condensed consolidated financial statements were
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, all adjustments considered necessary
for a fair presentation of the consolidated financial position at June 30, 2003,
and the results of operations and cash flows for the nine-month and three-month
periods ended June 30, 2003 and 2002 have been made. Such adjustments are of a
normal recurring nature.
Because of seasonal and other factors, the results of operations for the
nine-month and three-month periods ended June 30, 2003, and the cash flows for
the nine-month period ended June 30, 2003, are not necessarily indicative of
expected results of operations and cash flows for the fiscal year ending
September 30, 2003.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
SEC rules and regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited financial statements
and related notes for the fiscal year ended September 30, 2003 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for fiscal 2002 have been reclassified to conform to the fiscal
2003 presentation. (See Note 4 - "Exit from Growing Segment")
3. INVENTORIES
Inventories consist of finished goods.
4. DISCONTINUED OPERATIONS
Disposal of Wholesale Operations
In August 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its wholesale and growing segment.
Specifically, the Company ceased in an orderly fashion production and marketing
of plants and related products grown or purchased for sale to wholesale
customers, including other nursery retailers and landscape contractors. The
disposal of the wholesale operations was completed by December 31, 2001.
Exit from Growing Segment
The Company has operated two growing facilities: Turkey Creek Farms ("Turkey"),
near Houston, and Miller Plant Farms ("Miller"), near Tyler. Together, Turkey
and Miller comprised the growing segment of the Company's business.
7
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Turkey Creek Farms
In September 2002 the Company decided to sell Turkey and discontinue the
merchandise that it produced. The Company incurred operating losses and negative
cash flows on Turkey in fiscal 2002 and concluded that market conditions then
and for the foreseeable future were such that Turkey was likely to remain
uncompetitive.
Turkey was sold in March 2003. A gain of $420,000, net of income taxes, was
recorded.
The Company recorded an inventory write-down of approximately $1.2 million in
fiscal 2002. The assets, liabilities and results of operations for Turkey have
been reclassified as discontinued operations in the accompanying condensed
consolidated financial statements in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("Statement 144"). (See Note 2 - "Reclassifications")
Miller Plant Farms
In April 2003 the Company decided to sell Miller and discontinue the merchandise
it produced. The strategic move will allow the Company to dedicate its resources
toward the growth of its retail operations. The assets, liabilities and results
of operations for Miller have been reclassified as discontinued operations in
the accompanying condensed consolidated financial statements in accordance with
Statement 144. (See Note 2 - "Reclassifications"). In July 2003 the Company
entered into a contract to sell Miller. An impairment loss of $537,000 (net of
tax) was recorded on the assets of Miller for the three-month and nine-month
periods ended June 30, 2003 in accordance with Statement 144. (See Note 9 -
"Subsequent Event")
Following is a summary of the assets and liabilities of the discontinued
operations as of the applicable years (amounts in thousands):
June 30, September 30, June 30,
2003 2002 2002
---- ---- ----
Cash $ 3 $ 15 $ 21
Accounts receivable -- 1 59
Inventories 200 1,152 2,038
Property and equipment held for sale 728 1,176 --
---- ------ ------
Current assets of discontinued operations $931 $2,344 $2,118
==== ====== ======
Noncurrent assets of discontinued operations -
property and equipment $ -- $ 751 $2,262
==== ====== ======
Accounts payable $154 $ 531 $ 410
Accrued expenses 39 13 21
---- ------ ------
Current liabilities of discontinued operations $193 $ 544 $ 431
==== ====== ======
The property and equipment of the discontinued Turkey Creek Farms operation was
classified as a current asset at September 30, 2002 since it was sold in fiscal
2003.
8
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the operating results of the discontinued operations
for the applicable periods (amounts in thousands):
Nine- Nine- Three-month
month Period month Period Period Ended Three-month
Ended June Ended June June Period Ended
30, 30, 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 1,553 $5,031 $ 837 $2,713
Cost of goods sold 1,553 4,954 837 2,713
------- ------ ----- ------
Gross profit -- 77 -- --
Expenses 1,026 585 96 388
------- ------ ----- ------
Loss from discontinued operations before income
taxes (1,026) (508) (96) (388)
Income tax benefit (395) (215) (45) (170)
------- ------ ----- ------
Loss from discontinued operations ($631) ($293) ($51) ($218)
======= ====== ===== ======
5. SEGMENT INFORMATION
In April 2003 the Company decided to dispose of its only remaining growing
operation, Miller Plant Farms, near Tyler, Texas (see Note 4 - "Exit from
Growing Segment"). Accordingly, historical results of the growing segment are
classified as discontinued operations. The Company now has only one reportable
segment: Retail.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Statement 142
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142") as of October 1, 2002 and
no longer amortizes goodwill. As of the adoption date the Company had
unamortized goodwill in the amount of $631,000 which was subject to the
transition provisions of Statement 142.
In connection with the transitional goodwill impairment evaluation, Statement
142 required the Company to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company identified its reporting units and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company then determined the fair value of each reporting
unit and compared it to the reporting unit's carrying amount.
Based on those tests, there was no indication that any reporting unit's goodwill
was impaired. Accordingly, no transitional impairment losses were required to be
recognized as the cumulative effect of a change in accounting principle.
There was no amortization expense for the three-month and nine-month periods
ended June 30, 2003. The Company's reported net income for the three-month and
nine-month periods ended June 30, 2002, adjusted for excluding the effects of
goodwill amortization, would have been $2,522,000 and $1,434,000, respectively.
The effect on adjusted net loss per share for the three-month and nine-month
periods ended June 30, 2002 was insignificant.
9
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Statement 148
In December 2002 the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123
("Statement 148"). Statement 148 provides alternative methods of transition for
a voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, Statement 148 amends the disclosure
requirements of FASB Statement No. 123, Accounting for Stock-Based Compensation
("Statement 123") to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation arrangements in each period presented, and provides for a specific
tabular format of the pro forma disclosures required by Statement 123.
The Company accounts for its stock options plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net loss and
loss per share if the Company had applied the fair value recognition provisions
of Statement 123 to stock-based employee compensation (amounts in thousands,
except per share amounts):
Nine- Nine- Three-month
month month Period Period Ended Three-month
Period Ended June June Period Ended
Ended June 30, 30, 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported ($180) $1,353 $1,665 $2,495
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
income tax effects -- 432 -- --
----- ------ ------ ------
Pro forma net income (loss) ($180) $ 921 $1,665 $2,495
===== ====== ====== ======
Net income per share - basic
As reported ($.07) $ .17 $ .23 $ .37
Pro forma ($.07) $ .10 $ .23 $ .37
Net income per share - diluted
As reported ($.07) $ .17 $ .23 $ .37
Pro forma ($.07) $ .10 $ .23 $ .37
Statement 150
In May 2003 the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("Statement
150"). Statement 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity.
10
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Statement 150 requires an issuer to classify the following instruments as
liabilities (or assets in some circumstances):
- A financial instrument issued in the form of shares that is
mandatorily redeemable -- that embodies an unconditional
obligation requiring the issuer to redeem it by transferring
its assets at a specified or determinable date (or dates) or
upon an event that is certain to occur
- A financial instrument, other than an outstanding share, that,
at inception, embodies an obligation to repurchase the
issuer's equity shares, or is indexed to such an obligation,
and that requires or may require the issuer to settle the
obligation by transferring assets (for example, a forward
purchase contract or written put option on the issuer's equity
shares that is to be physically settled or net cash settled)
- A financial instrument that embodies an unconditional
obligation, or a financial instrument other than an
outstanding share that embodies a conditional obligation, that
the issuer must or may settle by issuing a variable number of
its equity shares, if, at inception, the monetary value of the
obligation is based solely or predominantly on any of the
following:
a. A fixed monetary amount known at inception, for
example, a payable settleable with a variable number
of the issuer's equity shares.
b. Variations in something other than the fair value of
the issuer's equity shares, for example, a financial
instrument indexed to the S&P 500 and settleable with
a variable number of the issuer's equity shares.
c. Variations inversely related to changes in the fair
value of the issuer's equity shares, for example, a
written put option that could be net share settled.
The requirements of Statement 150 apply to issuers' classification and
measurement of freestanding financial instruments, including those that comprise
more than one option or forward contract.
Statement 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted.
The Company is required to adopt Statement 150 on July 1, 2003. At June 30, 2003
the Company had outstanding 34,202 shares of Non-Voting Acquisition Preferred
Stock (the "Preferred Stock"), $.01 par value, that were issued in 1999 in
connection with an acquisition, with a carrying amount of $2,846,000. Any
unredeemed shares outstanding at September 21, 2004 must be redeemed for $100
per share. Adoption of Statement 150 will cause the Preferred Stock to be
classified as a current liability on the balance sheet at September 30, 2003.
11
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
In fiscal 2002 the Company entered the San Antonio market by leasing seven
retail store locations (the "San Antonio Market Entry"). Three of those leases
were entered into with Mr. George J. Wechsler (the "Affiliate Leases"), who was
elected to the Company's Board of Directors and was named a Vice President of
the Company at the time of the San Antonio Market Entry. The Affiliate leases
have three year terms. Rental expense under the Affiliate Leases was $107,000
for the nine-month period ended June 30, 2003 and $36,000 for the three-month
period ended June 30, 2003. No rental expense under the Affiliate Leases was
incurred for the nine-month or three-month periods ended June 30, 2002.
8. ADVERTISING EXPENSES
The substantial majority of the Company's advertising consists of printed
newspaper advertisements and radio announcements. Occasionally the Company will
use direct mail and other media.
The Company expenses all advertising costs as they are incurred.
9. SUBSEQUENT EVENT
In July 2003 the Company entered into a contract to sell Miller (see Note 4 -
"Discontinued Operations - Exit from Growing Segment - Miller Plant Farms"). An
impairment loss of $537,000 (net of tax) was recorded on the assets of Miller
for the three-month and nine-month periods ended June 30, 2003 in accordance
with Statement 144.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment. In fiscal
2003 the Company sold its Turkey Creek Farms ("Turkey") growing operation and
discontinued the merchandise that it produced, and in April 2003 the Company
decided to sell its Miller Plant Farms growing operation ("Miller") and
discontinue the merchandise that it produced. (see Note 4 to Condensed
Consolidated Financial Statements). Accordingly, the following discussion of
results of operations has been separated into (i) Continuing Operations and (ii)
Discontinued Operations.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
NINE-MONTH PERIOD ENDED JUNE 30, 2003 COMPARED WITH NINE-MONTH PERIOD ENDED JUNE
30, 2002
During the quarter ended September 30, 2002 the Company entered the San Antonio,
Texas market by opening seven (7) retail stores there (the "San Antonio Market
Entry"). Results for the first nine months of fiscal 2003 (the "June 2003
Period") include revenues and expenses for the San Antonio Market Entry, while
results for the first nine months of fiscal 2002 (the "June 2002 Period") do
not.
Income from Continuing Operations before Income Taxes for the June 2003 Period
was lower than it was for the June 2002 Period, primarily due to expenses that
increased at a higher rate than sales.
Sales increased 9%, from $36.7 million for the June 2002 Period to $40.2 million
for the June 2003 Period. The increase was primarily attributable to the San
Antonio Market Entry. The San Antonio Market Entry was also the primary factor
in the 60% increase in inventories, from $2.8 million at June 30, 2002 to $4.5
million at June 30, 2003.
Same-store sales declined 4%, from $36.0 million for the June 2002 Period to
$34.7 million for the June 2003 Period, indicating reduced demand for the
Company's living plants and related gardening products.
Gross Profit increased 9%, from $17.4 million for the June 2002 Period to $18.9
million for the June 2003 Period. Gross Profit as a percentage of net sales
("Gross Margin"), was unchanged at 47% for both the June 2002 Period and the
June 2003 Period.
Operating expenses increased 30%. The increase was primarily attributable to the
San Antonio Market Entry. Same-store operating expenses increased 7%. The
increase in same-store operating expenses was primarily attributable to
increased labor costs associated with increased staffing.
Occupancy expenses increased 19%. The increase was primarily attributable to the
San Antonio Market Entry.
Advertising expenses increased 27%. The increase was primarily attributable to
the San Antonio Market Entry.
13
Depreciation and amortization declined 30%. The decrease was primarily
attributable to (i) goodwill no longer being amortized (See Note 6 to the
Condensed Consolidated Financial Statements) and (ii) lower capital expenditures
over the past several fiscal years, which has resulted in an increasing number
of assets becoming fully-depreciated.
Interest expense declined 13%. The decline was primarily attributable to (i)
lower amounts of long-term debt, (ii) lower seasonal borrowings under the
revolving line of credit, and (iii) lower interest rates.
Income tax expense declined 71%. The increase was primarily attributable to the
reduced income from continuing operations before income taxes. The effective tax
rate was 38.4% for the June 2003 Period compared to 42.4% for the June 2002
Period. The difference was primarily attributable to state income tax
adjustments recorded in the June 2002 Period that were not necessary for the
June 2003 Period.
QUARTER ENDED JUNE 30, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002
Income from Continuing Operations before Income Taxes for the third quarter of
fiscal 2003 (the "June 2003 Quarter") was lower than it was for the third
quarter of fiscal 2002 (the "June 2002 Quarter"), primarily due to expenses that
increased at a higher rate than sales.
Sales increased 3%, from $19.5 million for the June 2002 Quarter to $20.1
million for the June 2003 Quarter. The increase was primarily attributable to
the San Antonio Market Entry.
Same-store sales declined 8%, from $19.1 million for the June 2002 Quarter to
$17.5 million for the June 2003 Quarter, indicating reduced demand for the
Company's living plants and related gardening products.
Gross Profit increased 4%, from $9.7 million for the June 2002 Quarter to $10.1
million for the June 2003 Quarter. The increase was primarily attributable to
the increased sales. Gross Margin was unchanged at 47% for both the June 2002
Quarter and the June 2003 Quarter.
Operating expenses increased 30%. The increase was primarily attributable to the
San Antonio Market Entry. Same-store operating expenses increased 8%. The
increase in same-store operating expenses was primarily attributable to
increased labor costs associated with increased staffing.
Occupancy expenses increased 25%. The increase was primarily attributable to the
San Antonio Market Entry.
Advertising expenses increased 13%. The increase was primarily attributable to
the San Antonio Market Entry.
Depreciation and amortization declined 24%. The decrease was primarily
attributable to (i) goodwill no longer being amortized (See Note 6 to the
Condensed Consolidated Financial Statements) and (ii) lower capital expenditures
over the past several fiscal years, which has resulted in an increasing number
of assets becoming fully-depreciated.
Interest expense declined 22%. The decline was primarily attributable to (i)
lower amounts of long-term debt and (iii) lower interest rates.
Income tax expense declined 22%. The increase was primarily attributable to the
reduced income from continuing operations before income taxes. The effective tax
rate was 38.3% for the June 2003 Quarter compared to 39.7% for the June 2002
Quarter.
14
DISCONTINUED OPERATIONS
NINE-MONTH PERIOD ENDED JUNE 30, 2003 COMPARED WITH NINE-MONTH PERIOD ENDED JUNE
30, 2002
Sales declined from $5,031,000 for the June 2002 Period to $1,553,000 for the
June 2003 Period. The decline was primarily attributable to the exit from Turkey
(see Note 4 to Condensed Consolidated Financial Statements).
Gross Profit declined from $77,000 for the June 2002 Period to $-0- for the June
2003 Period. The decline was primarily attributable to the decline in sales.
Expenses increased from $585,000 for the June 2002 Period to $1,026,000 for the
June 2003 Period. The increase was primarily attributable to the requirements of
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("Statement 144"), which requires
that costs and expenses of discontinued operations be recognized as they are
incurred (see Note 6 to Condensed Consolidated Financial Statements). The
estimated costs of discontinuing the wholesale operations had been accrued
during fiscal 2001. The Company early adopted Statement 144 in fiscal 2002;
therefore, the costs of exiting Turkey were expensed as incurred in fiscal 2003,
and the costs of exiting Miller are being expensed as incurred.
The aforementioned factors caused the Loss before Income Taxes to increase from
$508,000 for the June 2002 Period to $1,026,000 for the June 2003 Period.
QUARTER ENDED JUNE 30, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002
Sales declined from $2,713,000 for the June 2002 Quarter to $837,000 for the
June 2003 Quarter. The decline was primarily attributable to the exit from
Turkey (see Note 4 to Condensed Consolidated Financial Statements).
Gross Profit was $-0- for both the June 2002 Quarter and the June 2003 Quarter.
Expenses declined from $388,000 for the June 2002 Quarter to $96,000 for the
June 2003 Quarter. The decline was primarily attributable to the exit from
Turkey.
The aforementioned factors caused the Loss before Income Taxes to decline from
$388,000 for the June 2002 Quarter to $96,000 for the June 2003 Quarter.
FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
Cash Flows Provided by Operating Activities were $1.7 million for the June 2003
Period compared to $6.1 million for the June 2002 Period. The decline was
primarily attributable to: (i) the decline in income from continuing operations,
from $1.6 million for the June 2002 period to $0.5 million for the June 2003
period; (ii) an increase in Inventories of $0.5 million for the June 2003
Period, compared to a reduction in Inventories of $1.1 million for the June 2002
Period; and (iii) the reduction in income tax refunds receivable from $1.2
million for the June 2002 Period to $0.1 million for the June 2002 Quarter.
15
Cash flows Used for Investing Activities were $74,000 for the June 2003 Period
compared to $209,000 for the June 2002 Period. The decrease was primarily
attributable to a difference in the timing of certain replacements of furniture,
fixtures and vehicles. The Company continues to limit the amount spent on
capital expenditures during each fiscal year, and has no significant capital
projects planned for the remainder of fiscal 2003.
Cash Flows Used for Financing Activities were $1.0 million for both the June
2003 Period and the June 2002 Period.
Cash Flows from Discontinued Operations were $1.1 million for the June 2003
Period compared to $0.9 million for the June 2002 Period. The loss from
discontinued operations was higher for the June 2003 Period (see "Results of
Operations - Discontinued Operations"). In addition, Company realized a gain on
disposal of discontinued operations of $0.4 million (net of tax) on the Sale of
Turkey in March 2003 and a loss of $0.5 million (net of tax) on the impairment
of the Miller assets in June 2003.
LINE OF CREDIT ARRANGEMENT
The Company's business is seasonal, and it relies on a revolving line of credit
arrangement provided by a bank (the "Line of Credit") to supplement its working
capital during seasons of lower sales volumes.
Typically, the Company borrows from the Line of Credit during the quarter ending
June 30, and repays those borrowings during the spring selling season included
in the quarter ending June 30. The amount which may be borrowed under the line
of credit is tied to amounts of accounts receivable and inventories, with a
maximum of $3.0 million.
The Company owed $-0- under the Line of Credit as of June 30, 2003 and 2002, and
September 30, 2002. The maximum and weighted average amounts borrowed under the
Line of Credit were as follows (amounts in thousands):
Nine- Nine- Three-month Three-month
month Period month Period Period Ended Period Ended
Ended June Ended June 30, June 30, June 30,
30, 2003 2002 2003 2002
-------- ---- ---- ----
Maximum amount borrowed $2,985 $1,676 $-0- $--
Weighted-average amount borrowed $379 $200 $-0- $-0-
The Line of Credit was renewed on May 29, 2003 for a one year term expiring May
28, 2004. The Company typically renews the Line of Credit for an additional
one-year term each year. The Company expects to be able to renew the current
Line of Credit.
The Line of Credit contains financial covenants requiring the Company to meet a
minimum amount for tangible net worth, a maximum ratio of liabilities to
tangible net worth, and an annual ratio of earnings before interest and non-cash
charges to current maturities of long-term debt. At June 30, 2003 the Company
was in compliance with the financial covenants required by the Line of Credit.
16
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of June 30, 2003 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
----------------------------------------------------------------------------
2003(1) 2004 2005 2006 2007 There-after Totals
------- ---- ---- ---- ---- ----------- ------
Long-term debt (including
current portion) $ 93 $ 500 $ 550 $ 620 $ 600 $5,106 $ 7,469
Future minimum lease
payments under
noncancellable operating
leases 620 2,408 1,923 1,366 850 1,868 9,035
Preferred stock with
mandatory redemption
provisions (2) -- 3,420 -- -- -- -- 3,420
---- ------ ------ ------ ------ ------ -------
Totals $713 $6,328 $2,473 $1,986 $1,450 $6,974 $19,924
==== ====== ====== ====== ====== ====== =======
(1)Amounts for 2003 represent obligations due during the remainder of fiscal
2003 (three months).
(2) Carrying amount of $2,846 as of June 30, 2003, $2,538 as of September 30,
2002 and $2,442 as of June 30, 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Some assets and liabilities by their nature are subject to estimates and
assumptions. For the Company, those assets and liabilities include:
- Inventories;
- Deferred income taxes;
- Property and equipment;
- Goodwill;
- Accrued expenses;
- Impairment of assets held for sale.
Inventories - The Company values its inventories using the lower of cost or
market on a first-in, first-out basis. The Company conducts physical inventories
three times each year: December, June and September.
The Company's retail inventories turn-over several times each year; therefore,
the cost of each inventory item is approximately the same as its current
replacement cost. Merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis. The physical
inventories are taken at retail prices and adjusted to cost using sampling
techniques that determine a markup percentage for each merchandise category in
each market area.
17
Deferred income taxes - As of June 30, 2003 and 2002, and September 30, 2002 the
Company has recorded a valuation allowance of $0 for its deferred tax assets on
the weight of available evidence at those balance sheet dates. The primary
factor in not providing for a valuation allowance is the expectation that future
taxable income and the reversal of temporary differences will be sufficient for
the Company to realize the deferred tax assets. Such estimate could change in
the future based on the occurrence of one or more future events.
Property and Equipment - 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. Recoverability of
assets to be held and used is measured by the comparison of the carrying amount
of an asset to future cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of June 30, 2003 and September 30, 2002 management
believes that no impairment has occurred and that no reduction of the estimated
useful lives is warranted.
Goodwill - As discussed in Note 6 to the Condensed Consolidated Financial
Statements, the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("Statement 142") effective October 1,
2002, and no longer amortizes goodwill.
In connection with the transitional goodwill impairment evaluation, Statement
142 required the Company to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company identified its reporting units and determined the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company then determined the fair value of each reporting
unit and compared it to the reporting unit's carrying amount.
Based on those tests, there was no indication that any reporting unit's goodwill
was impaired. Accordingly, no transitional impairment losses were required to be
recognized as the cumulative effect of a change in accounting principle.
Accrued expenses - The Company routinely accrues for various costs and expenses
for which it has received goods or services, but for which it has not been
invoiced. Typically, accrued expenses include such items as salaries and related
taxes, bonuses, and sales and use taxes for which amounts are readily
determinable and significant estimates are not necessary. Property taxes are
estimated and accrued based on the amounts paid for such taxes for the previous
year, until a new tax bill is received. Various other expenses are accrued from
time to time before an invoice is rendered based on the estimated costs of those
goods or services.
Impairment of assets held for sale - The Company has recorded an impairment loss
of $536,000 (net of tax) based on estimated net proceeds from the sale of Miller
(see Note 9 to Condensed Consolidated Financial Statements). The sale price of
certain of the assets will be determined by a physical inventory to be taken on
or near the closing date.
18
SUPPLIERS
The wholesale market for living plants, related gardening products and Christmas
merchandise is highly competitive. The Company uses dozens of suppliers for its
living plants, related gardening products and Christmas merchandise, and there
are readily available alternative sources for substantially all of the products
sold by the Company. The Company has not encountered significant difficulties in
procuring merchandise to sell. The Company considers its relations with
suppliers to be good.
EMPLOYEES
The Company's employees are not covered by collective bargaining agreements. The
Company has not experienced any work stoppages. The Company considers its
relations with employees to be good.
COMPETITION
On February 13, 2003 The Home Depot ("Home Depot") opened a free-standing
nursery store ("Landscape Supply") in the Dallas - Fort Worth Market, where
Calloway's operates sixteen of its twenty-six retail stores. Home Depot is a
much larger competitor with substantially greater financial resources than
Calloway's.
In a press release dated February 6, 2003 Home Depot stated that Landscape
Supply will be "focusing on the professional landscapers and avid do-it-yourself
garden enthusiasts." In addition, Home Depot stated that it intends to open four
additional Landscape Supply stores in the Dallas-Fort Worth market, and has
already opened some of those four stores.
The retail nature of Landscape Supply's locations, and the retail orientation of
its merchandise, causes management to believe it could represent a change in the
competitive environment in Dallas-Fort Worth.
The Company has experienced reduced consumer demand for its living plants and
related gardening products in most of its market areas over the past two years.
Such reduced demand is the result of many factors, including, but not limited
to: economic conditions in the market areas served by the Company's retail
stores, the impact of weather and other growing conditions, and the impact of
competition. Management does not believe that the Landscape Supply stores, by
themselves, had a significant impact on the Company's results of operations for
the nine-month or three-month periods ended June 30, 2003.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Calloway's is exposed to certain market risks, including fluctuations in
interest rates. We do not enter into transactions designed to mitigate such
market risk, nor do we enter into any transactions in derivative securities for
trading or speculative purposes. As of June 30, 2003, we had no foreign exchange
contracts 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 operations and cash flows,
assuming other factors are held constant.
At June 30, 2003 Calloway's had variable rate debt of $1.9 million, out of total
long-term debt of $7.5 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 $19,000 for the variable-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), has conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a 15(b), as of the end of the period covered by this report. Based on that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures are effective in ensuring that all material information required to
be disclosed in this report has been made known to them in a timely manner.
There were no changes in the Company's internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K:
A list of the exhibits required by Item 601 of Regulation S-K and
filed as part of this report is set forth in the Index to Exhibits
on page 23, which immediately precedes such exhibits.
(b) Reports on Form 8-K:
(1) On April 30, 2003 the Company filed a Form 8-K disclosing that
On October 24, 2002 the Company received a letter from NASDAQ
indicating that the Company's common stock had closed below
the minimum $1.00 per share requirement for continued
inclusion under Marketplace Rule 4310(c)(4), and that the
Company would be provided 180 calendar days, or until April
22, 2003, to demonstrate compliance. On April 23, 2003 the
Company received a letter from NASDAQ indicating that the
Company meets the initial listing requirements for the NASDAQ
SmallCap Market under Marketplace Rule 4310(c)(2)(A). Since
the Company meets the initial listing requirements, the
Company was granted an additional 180 calendar day grace
period, or until October 20, 2003, to demonstrate compliance.
If compliance with the aforementioned rule cannot be
demonstrated by October 20, 2003, the NASDAQ will again
determine whether the Company meets the initial listing
requirements; if so, the Company will then be granted an
additional 90 calendar day grace period to demonstrate
compliance.
(2) On May 21, 2003 the Company filed a Form 8-K disclosing that
on May 7, 2003, the Registrant issued a press release setting
forth its results of operations and financial condition as of
and for the three-month and six-month periods ended March 31,
2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2003
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
---------------------------
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
---------------------------
Daniel G. Reynolds, Vice President
and Chief Financial Officer
22
INDEX TO EXHIBITS
Exhibit
Number Description
31(a)(1) Rule 13a-14(a) Certification of the Chief Financial Officer of Calloway's Nursery, Inc.
31(b)(1) Rule 13a-14(a) Certification of the Chief Executive Officer of Calloway's Nursery, Inc.
32(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
--------------------------------
(1) Filed with this report
23