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, 1997
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of August 14, 1997
Common Stock, par value $.01 per share 5,298,452
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 1997
PART I - FINANCIAL INFORMATION Page
Item 1
Index to Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 12
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)
ASSETS
June 30, September 30,
1997 1996
Cash and cash equivalents $ 6,462 $ 2,358
Accounts receivable 184 132
Inventories 1,095 985
Prepaids and other assets 26 86
Total current assets 7,767 3,561
Property and equipment, net 4,733 3,947
Goodwill, net 1,200 1,282
Other assets 91 73
Total assets $ 13,791 $ 8,863
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,843 $ 1,454
Accrued expenses 1,102 634
Current portion of long-term debt 38 --
Total current liabilities 4,983 2,088
Deferred rent payable 1,071 1,169
Long-term debt, net of current portion 507 --
Total liabilities 6,561 3,257
Commitments
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;
10,000,000 shares authorized; no shares
issued or outstanding -- --
Common stock; par value $.01 per share;
30,000,000 shares authorized; 5,548,452
and 5,392,474 shares issued, respectively;
5,298,452 and 5,142,474 shares outstanding,
respectively 55 54
Additional paid-in capital 8,377 8,252
Retained earnings (accumulated deficit) 194 (1,304)
8,626 7,002
Less: Treasury stock, at cost (250,000 shares) (1,396) (1,396)
Total shareholders' equity 7,230 5,606
Total liabilities and shareholders' equity $ 13,791 $ 8,863
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share amounts)
Three Months Ended Nine months Ended
June 30 June 30
1997 1996 1997 1996
Net sales $13,108 $12,347 $22,672 $20,734
Cost of goods sold 6,854 6,278 11,984 10,856
Gross profit 6,254 6,069 10,688 9,878
Operating expenses 2,454 2,143 5,781 5,406
Occupancy expenses 583 760 2,081 2,195
Advertising expenses 510 431 1,138 1,002
Other, net 18 48 190 256
Total expenses 3,565 3,382 9,190 8,859
Income before provision for income
taxes 2,689 2,687 1,498 1,019
Provision for income taxes -- -- -- --
Net income $ 2,689 $ 2,687 $ 1,498 $ 1,019
Net income per common share $.51 $.53 $.29 $.20
Weighted average number of
common shares outstanding 5,276 5,068 5,222 5,020
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months Ended
June 30,
1997 1996
Cash flows from operating activities:
Net income $ 1,498 $ 1,019
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 291 324
Net change in operating assets and liabilities 2,639 1,920
Net cash provided by operating activities 4,428 3,263
Cash flows from investing activities:
Additions to property and equipment (996) (64)
Net cash (used for) investing activities (996) (64)
Cash flows from financing activities:
Proceeds from issuance of common stock 127 119
Payable to bank -- 524
Net borrowings of debt 545 --
Net cash provided by financing activities 672 643
Net increase in cash and cash equivalents 4,104 3,842
Cash and cash equivalents at beginning of period 2,358 1,046
Cash and cash equivalents at end of period $ 6,462 $ 4,888
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The interim consolidated financial statements contained herein have been
prepared by Calloway's Nursery, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments considered necessary for a fair presentation of the
financial position at June 30, 1997, and the results of operations and cash
flows for the nine-month and three-month periods ended June 30, 1997 and 1996
have been made. Such adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations for the three-
month and nine-month periods ended June 30, 1997 and cash flows for the nine-
month period ended June 30, 1997 are not necessarily indicative of expected
results of operations and cash flows for the fiscal year ending September 30,
1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the audited financial statements and related
notes of the Company for the fiscal year ended September 30, 1996 included in
the Company's Form 10-K.
2. Recent Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion No. 15, Earnings Per Share ("APB 15"), and make them
comparable to international EPS standards. SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is
computed by dividing income 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 that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
15. SFAS 128 also requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. SFAS
128; however, management does not believe that SFAS 128 will have a material
impact on the financial statements of the Company.
3. Line of Credit Arrangement
In April 1997 the Company extended its revolving line of credit arrangement
with a bank until April 1, 1998. Terms and conditions of the extended
arrangement are substantially identical to the previous arrangement. No amounts
were outstanding under the line of credit at June 30, 1997.
4. Subsequent Events
In July 1997 a wholly-owned subsidiary of the Company entered into a loan
arrangement with a financial institution, receiving proceeds of approximately
$1,000,000. The loan is collateralized by one retail store location owned by
such subsidiary, and requires payments of approximately $120,000 annually for
fifteen years.
In July 1997 the Company acquired an established wholesale nursery production
facility near Tyler, Texas. The purchase was financed, in part, by a $345,000
loan from a financial institution. The loan is collateralized by the acquired
property, and requires payments of approximately $50,000 annually for ten years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
General
The information presented below sets forth, for the periods indicated, the
amounts of certain items derived from the statements of operations and the
relative percentages that they bear to net sales of the Company (amounts in
thousands):
Three Months Ended June 30, Nine Months Ended June 30,
1997 1996 1997 1996
Amount % Amount % Amount % Amount %
Net sales 13,108 100 12,347 100 22,672 100 20,734 100
Gross profit 6,254 48 6,069 49 10,688 47 9,878 48
Operating expenses 2,454 19 2,143 17 5,781 25 5,406 26
Occupancy expenses 583 4 760 6 2,081 9 2,195 11
Advertising expenses 510 4 431 4 1,138 5 1,002 5
Other, net 18 -- 48 -- 190 1 256 1
Total expenses 3,565 27 3,382 27 9,190 40 8,859 43
Income before provision
for income taxes 2,689 21 2,687 22 1,498 7 1,019 5
Provision for income
taxes -- -- -- -- -- -- -- --
Net income 2,689 21 2,687 22 1,498 7 1,019 5
Quarter Ended June 30, 1997 Compared with Quarter Ended June 30, 1996
Net sales increased by 6% to $13,108,000 for the quarter ended June 30, 1997
from $12,347,000 for the quarter ended June 30, 1996. Consumers responded
favorably to the Company's:
* Enhanced selection of merchandise;
* Remodeled and updated retail stores;
* Special "10th Anniversary" promotion featuring dozens of new product
introductions.
Gross profit improved by 3% from $6,069,000 for the quarter ended June 30, 1996
to $6,254,000 for the quarter ended June 30, 1997. Gross margins declined
slightly to 48% for the quarter ended June 30, 1997 from 49% for the quarter
ended June 30, 1996. The slight gross margin decrease was expected, and resulted
primarily from the Company's new merchandising practice, implemented during the
first quarter of fiscal 1997, of requiring that merchandise be sold-out at the
end of its "selling season" as opposed to carrying excess merchandise into
future seasons. The effect of this approach was partially offset by continued
improvement in the Company's ability to reduce stock loss using its proprietary
merchandise planning and replenishment programs.
Operating expenses increased by 15% from $2,143,000 for the quarter ended
June 30, 1996 to $2,454,000 for the quarter ended June 30, 1997. The increase
was due to higher payroll expenses to enhance customer service for the increased
traffic in the Company's retail stores, and to accrual of bonuses, to be paid
after year-end, rewarding store and corporate management personnel for the
substantial improvement in year-over-year profitability.
Occupancy expenses decreased by 23% from $760,000 for the quarter ended
June 30, 1996 to $583,000 for the quarter ended June 30, 1997. The Company
negotiated reduction in rents for certain of the Company's retail store
locations. The rent reductions mean that accruals for future rent increases
required by Statement of Financial Accounting Standards No. 13 "Accounting for
Leases" for such stores are no longer needed. The accumulated accruals of
$138,000 for those two stores were eliminated during the quarter ended June 30,
1997.
Advertising expenses increased by 18% from $431,000 for the quarter ended June
30, 1996 to $510,000 for the quarter ended June 30, 1997. The increase was
primarily due to increased costs of advertising in local newspapers.
Other (net) expenses decreased by 60% from $48,000 for the quarter ended
June 30, 1996 to $18,000 for the quarter ended June 30, 1997. The reduction was
primarily the result of increased interest income on higher cash balances in
1997 than the same period in 1996.
Nine months Ended June 30, 1997 Compared with Nine months Ended June 30, 1996
The Company improved net income by $479,000, or 47%, on a sales increase of
$1,938,000, or 9%.
Net sales increased by 9% to $22,672,000 for the nine months ended June 30,
1997 from $20,734,000 for the nine months ended June 30, 1996. Early-season
demand for garden products in the Dallas-Fort Worth market was strong, and
consumers responded favorably to the Company's:
* Enhanced selection of merchandise;
* Remodeled and updated retail stores;
* Special "10th Anniversary" promotion featuring dozens of new product
introductions.
Improved sales were also generated by Christmas merchandise, where the
Company's efforts to improve merchandise quality and the related in-store visual
marketing met with favorable results for that season.
Gross profit increased by 8% from $9,878,000 for the nine months ended June 30,
1996 to $10,688,000 for the nine months ended June 30, 1997. Gross margins
declined slightly to 47.1% for the nine months ended June 30, 1997 from 47.6%
for the nine months ended June 30, 1996. The slight gross margin decrease was
expected, and resulted primarily from the Company's new merchandising practice,
implemented during the first quarter of fiscal 1997, of requiring that
merchandise be sold-out at the end of its "selling season" as opposed to
carrying excess merchandise into future seasons. The effect of this approach
was partially offset by continued improvement in the Company's ability to reduce
stock loss using its proprietary merchandise planning and replenishment
programs.
Operating expenses increased by 7% from $5,406,000 for the nine months ended
June 30, 1996 to $5,781,000 for the nine months ended June 30, 1997. The
increase was due to higher payroll expenses to enhance customer service for the
increased traffic in the Company's retail stores, and to accrual of bonuses, to
be paid after year-end, rewarding store and corporate management personnel for
the substantial improvement in year-over-year profitability.
Occupancy expenses decreased by 5% from $2,195,000 for the nine months ended
June 30, 1996 to $2,081,000 for the nine months ended June 30, 1997. The Company
negotiated reduction in rents at two of the Company's retail store locations.
The rent reductions mean that accruals for future rent increases required by
Statement of Financial Accounting Standards No. 13 "Accounting for Leases" for
such stores are no longer needed. The accumulated accruals of $138,000 for
those two stores were eliminated during the nine-months ended June 30, 1997.
Advertising expenses increased by 14% from $1,002,000 for the nine months ended
June 30, 1996 to $1,138,000 for the nine months ended June 30, 1997. The
increase was primarily due to increased costs of advertising in local
newspapers.
Other (net) expenses decreased by 26% from $256,000 for the nine months ended
June 30, 1996 to $190,000 for the nine months ended June 30, 1997, primarily due
to increased interest income on consistently larger cash balances.
Capital Resources and Liquidity
Cash flows provided by operating activities improved to $4,428,000 for the nine
months ended June 30, 1997 from $3,263,000 in cash flows provided by operating
activities for the nine months ended June 30, 1996. The improvement was a result
of the substantially improved operating results combined with continued careful
management of the Company's inventories.
In December 1996 the Company purchased one retail store location that had
previously been leased. The purchase was financed with a long-term note payable
to a financial institution for $562,000. The lease on the property was to expire
in 2007, and the minimum lease payments were $125,000 annually.
In April 1997 the Company extended its revolving line of credit arrangement
with a bank until April 1, 1998. Terms and conditions of the extended
arrangement are substantially identical to the previous arrangement. No amounts
were outstanding under the line of credit at June 30, 1997.
In July 1997 a wholly-owned subsidiary of the Company entered into a loan
arrangement with a financial institution, receiving proceeds of approximately
$1,000,000. The loan proceeds are expected to be used for business expansion
purposes. The loan is collateralized by one retail store location owned by such
subsidiary, and requires payments of approximately $120,000 annually for fifteen
years.
In July 1997 the Company acquired an established wholesale nursery production
facility near Tyler, Texas. The facility will be used primarily to produce
living plants to the company's exacting specifications for sale at its retail
store locations in the Dallas-Fort Worth area, to supplement the procurement of
merchandise from its existing group of suppliers. The purchase was financed, in
part, by a $345,000 mortgage loan from a financial institution. The loan is
collateralized by the acquired property, and requires payments of of
approximately $50,000 annually for ten years.
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On May 20, 1997 the Registrant filed a Form 8-K for the purpose of
providing evidence to the Nasdaq Stock Market that the Registrant meets
the net tangible assets requirements set forth in Nasdaq Marketplace
Rule 4450(a)(5).
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, 1997
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
Daniel G. Reynolds, Vice President
and Chief Financial Officer
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