<PAGE> 1
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, 1998
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal
executive offices and Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of July 31, 1998
----- ---------------------
Common Stock, par value $.01 per share 5,434,177
<PAGE> 2
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 1998
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1
Index to Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Items 1-6 11
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30, June 30,
1998 1997 1997
-------- ------------ --------
<S> <C> <C> <C>
Cash and cash equivalents $ 4,138 $ 3,688 $ 6,462
Accounts receivable 153 132 184
Inventories 2,487 1,533 1,095
Deferred income taxes 11 428 --
Prepaids and other assets 136 60 26
Property held for sale 857 --
-------- -------- --------
Total current assets 7,782 5,841 7,767
-------- -------- --------
Property and equipment, net 7,134 5,466 4,733
Goodwill, net 1,092 1,173 1,200
Deferred income taxes 581 581 34
Other assets 47 50 57
======== ======== ========
Total assets $ 16,636 $ 13,111 $ 13,791
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,296 $ 1,745 $ 3,843
Accrued expenses 956 880 1,102
Current portion of long-term debt 87 97 38
-------- -------- --------
Total current liabilities 4,339 2,722 4,983
-------- -------- --------
Deferred rent payable 1,081 1,098 1,071
Long-term debt, net of current portion 2,896 1,803 507
-------- -------- --------
Total liabilities 8,316 5,623 6,561
-------- -------- --------
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; 5,684,177,
5,582,364 and 5,548,452 shares issued,
respectively, 5,434,177, 5,332,364 and 56 55 55
5,298,452 shares outstanding, respectively
Additional paid-in capital 8,591 8,406 8,377
Retained earnings 1,069 423 194
-------- -------- --------
9,716 8,884 8,626
Less: Treasury stock, at cost (250,000 shares) (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 8,320 7,488 7,230
======== ======== ========
Total liabilities and shareholders' equity $ 16,636 $ 13,111 $ 13,791
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
<PAGE> 4
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 15,047 $ 13,108 $ 23,769 $ 22,672
Cost of goods sold 8,083 6,854 12,654 11,984
-------- -------- -------- --------
Gross profit 6,964 6,254 11,115 10,688
-------- -------- -------- --------
Operating expenses 2,743 2,454 6,393 5,781
Occupancy expenses 708 583 2,112 2,081
Advertising expenses 621 510 1,222 1,138
Other, net 79 18 311 190
-------- -------- -------- --------
Total expenses 4,151 3,565 10,038 9,190
-------- -------- -------- --------
Income before provision for income taxes
2,813 2,689 1,077 1,498
Provision for income taxes 1,146 -- 431 --
======== ======== ======== ========
NET INCOME $ 1,667 $ 2,689 $ 646 $ 1,498
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ .31 $ .51 $ .12 $ .29
Diluted $ .28 $ .51 $ .11 $ .29
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 5,421 5,276 5,389 5,222
Diluted 5,903 5,276 5,776 5,222
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
<PAGE> 5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 646 $ 1,498
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 306 291
Net change in assets and liabilities 979 2,639
------- -------
Net cash provided by operating activities 1,931 4,428
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,750) (996)
------- -------
Net cash used for investing activities (2,750) (996)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 186 127
Net borrowings of debt 1,083 545
------- -------
Net cash provided by financing activities 1,269 672
------- -------
Net increase in cash and cash equivalents 450 4,104
Cash and cash equivalents at beginning of period 3,688 2,358
======= =======
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,138 $ 6,462
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
<PAGE> 6
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements contained herein have been prepared by
Calloway's Nursery, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, all
adjustments considered necessary for a fair presentation of the financial
position at June 30, 1998, and the results of operations and cash flows for the
nine-month and three-month periods ended June 30, 1998 and 1997 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, 1998 and cash flows for the
six-month period ended June 30, 1998 are not necessarily indicative of expected
results of operations and cash flows for the fiscal year ending September 30,
1998.
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, 1997 included in
the Company's Form 10-K.
2. EARNINGS PER SHARE
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 Accounting Principles Board 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 stock 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 presentation of both
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 requires restatement of all prior-period EPS data
presented.
6
<PAGE> 7
EPS for the quarters and six month periods ended June 30, 1998 and
1997 is computed as follows (amounts, except per share amounts, in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
June 30 June 30 June 30 June 30
Basic EPS 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,667 $ 2,689 $ 646 $ 1,498
Weighted average number of shares
outstanding 5,421 5,276 5,389 5,222
Net income per common share $ .31 $ .51 $ .12 $ .29
</TABLE>
<TABLE>
<CAPTION>
Diluted EPS 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,667 $ 2,689 $ 646 $ 1,498
Weighted average number of shares
outstanding 5,903 5,276 5,776 5,222
Net income per common share $ .28 $ .51 $ .11 $ .29
</TABLE>
The Company had 941,500 and 636,000 outstanding stock options at June 30,
1998 and 1997, respectively.
3. NEW STORE CONSTRUCTION
In October 1997 the Company purchased land and began construction of a new
retail store location in Fort Worth, Texas. The purchase and construction were
financed with an interim construction loan from a financial institution. The
Company has obtained a commitment from the financial institution to provide
permanent financing with a long-term note payable. At June 30, 1998 the
outstanding balance of the interim construction loan was $1,125,000. The
interest rate is variable (9.5% at June 30, 1998).
4. INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1998 1997 1997
-------- ------------- --------
<S> <C> <C> <C>
Finished goods $ 1,667 $ 1,197 $ 1,095
Work in process 734 294 --
Supplies 86 42 --
------- ------- -------
$ 2,487 $ 1,533 $ 1,095
======= ======= =======
</TABLE>
5. PROPERTY HELD FOR SALE
Land currently being offered for sale is classified separately from
property and equipment. The property is carried at cost not to exceed net
realizable value. Disposal is expected to occur within one year.
7
<PAGE> 8
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------------------------
1998 1997 1998 1997
--------------------- ---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- --------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 15,047 100 $ 13,108 100 $ 23,769 100 $ 22,672 100
Gross profit 6,964 46 6,254 48 11,115 47 10,688 47
Operating expenses 2,743 18 2,454 19 6,393 27 5,781 25
Occupancy expenses 708 5 583 4 2,112 9 2,081 9
Advertising expenses 621 4 510 4 1,222 5 1,138 5
Other, net 79 1 18 -- 311 1 190 1
-------- ------- -------- -------- -------- -------- -------- --------
Total expenses 4,151 28 3,565 27 10,038 42 9,190 40
-------- ------- -------- -------- -------- -------- -------- --------
Income before provision for
income taxes 2,813 18 2,689 21 1,077 5 1,498 7
Provision for income taxes
1,146 7 -- -- 431 2 -- --
-------- ------- -------- -------- -------- -------- -------- --------
Net income $ 1,667 11 $ 2,689 21 $ 646 3 $ 1,498 7
======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
Quarter Ended June 30, 1998 Compared with Quarter Ended June 30, 1997
The Company's net sales hit record levels and pre-tax operating income rose
from $2.7 million to $2.8 million. Net income for the 1998 quarter was lower due
to an income tax provision of $1.1 million in 1998, compared to zero income tax
provision for the comparable quarter in 1997. The tax provision in 1998 was
recorded due to the adjustment of the valuation allowance recorded during the
fourth quarter of fiscal 1997.
Net sales increased by 15% to $15,047,000 for the quarter ended June 30,
1998 from $13,108,000 for the quarter ended June 30, 1997. Same store (13
stores) sales were up 14% to $13,155,000 for the quarter ended June 30, 1998
from $11,497,000 for the quarter ended June 30, 1997. Sales were particularly
strong early in the quarter due to the Company's grand opening of its new
prototype retail store in April and to an expanded presentation of merchandise.
However, demand for living plants and related garden products in the Dallas-Fort
Worth area was lower in the later part of the season in 1998.
Gross profit increased by 11% from $6,254,000 for the quarter ended June
30, 1997 to $6,964,000 for the quarter ended June 30, 1998. Gross margins
declined to 46% for the quarter ended June 30, 1998 from 48% for the quarter
ended June 30, 1997. The gross margin reduction resulted from higher late-season
markdowns in 1998 than in 1997.
Operating expenses increased by 12% from $2,454,000 for the quarter ended
June 30, 1997 to $2,743,000 for the quarter ended June 30, 1998, primarily due
to increased payroll and related expenses.
8
<PAGE> 9
Occupancy expenses increased by 21% from $583,000 for the quarter ended
June 30, 1997 to $708,000 for the quarter ended June 30, 1998. The increase was
due to the 1997 rent reductions negotiated by the Company for certain of its
retail stores, which resulted in a benefit recognized during the 1997 quarter
that did not recur during the 1998 quarter.
Advertising expenses increased by 22% from $510,000 for the quarter ended
June 30, 1997 to $621,000 for the quarter ended June 30, 1998. The increase was
primarily due to increased advertising in newspapers, television and radio.
Other (net) expenses increased by 338% from $18,000 for the quarter ended
June 30, 1997 to $79,000 for the quarter ended June 30, 1998. The increase was
primarily due to interest expense on the increased long term debt in 1998 as
compared to 1997, partially offset by slightly lower depreciation expense for
the three months ended June 30, 1998 than for the three months ended June 30,
1997.
Nine months Ended June 30, 1998 Compared with Nine months Ended June 30, 1997
The Company's net sales rose by 5%; however, pre-tax operating income
declined from $1,498,000 to $1,077,000. Net income for the 1998 period was lower
still, due to an income tax provision of $431,000 in 1998, compared to zero
income tax provision for the comparable period in 1997. The tax provision in
1998 was recorded due to the adjustment of the valuation allowance recorded
during the fourth quarter of fiscal 1997.
Net sales increased by 5% to $23,769,000 for the nine months ended June 30,
1998 from $22,672,000 for the nine months ended June 30, 1997. Same store (13
stores) sales were up 6% to $20,899,000 for the nine months ended June 30, 1998
from $19,783,000 for the nine months ended June 30, 1997. The Company's enjoyed
strong sales increases during the peak of its spring selling season in 1998.
However, demand for living plants and related garden products in the Dallas-Fort
Worth area was lower in both the early and later parts of the season in 1998.
Gross profit increased by 4% from $10,688,000 for the nine months ended
June 30, 1997 to $11,115,000 for the nine months ended June 30, 1998. Gross
margins of 47% were achieved for both of the nine-month periods ended June 30,
1998 and 1997.
Operating expenses increased by 11% from $5,781,000 for the nine months
ended June 30, 1997 to $6,393,000 for the nine months ended June 30, 1998
primarily due to increased payroll expenses.
Occupancy expenses increased by 1% from $2,082,000 for the nine months
ended June 30, 1997 to $2,112,000 for the nine months ended June 30, 1998. The
increase was due to the 1997 rent reductions negotiated by the Company for
certain of its retail stores, which resulted in a benefit recognized during the
1997 period that did not reoccur during the 1998 period.
Advertising expenses increased by 7% from $1,138,000 for the nine months
ended June 30, 1997 to $1,222,000 for the nine months ended June 30, 1998. The
increase was primarily due to increased advertising in newspapers, television
and radio.
Other (net) expenses increased by 64% from $190,000 for the nine months
ended June 30, 1997 to $311,000 for the nine months ended June 30, 1998 The
increase was primarily due to interest expense on long term debt that was higher
in 1998 than during the comparable period in 1997.
9
<PAGE> 10
CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities were $1,931,000, compared to
cash flows provided by operations of $4,428,000 for the nine months ended June
30, 1998. The reduced cash flows from operations for the period resulted from:
1. Lower pre-tax income for the period;
2. Higher inventory levels in the retail stores;
3. Investment in work-in-process and supplies inventories at Miller Plant
Farms, the Company's newly acquired nursery production facility.
In October 1997 the Company purchased land and constructed a new retail
store location in Fort Worth, Texas. The purchase and construction were
partially financed with an interim construction loan from a financial
institution. The Company has obtained a commitment from the financial
institution to provide permanent financing with a long-term note payable, and
expects to convert the interim construction loan into a permanent loan during
the fourth quarter of fiscal 1998. The new store opened on April 10, 1998. The
amount outstanding at June 30, 1998 was $1,125,000, and is reflected in the June
30, 1998 Condensed Consolidated Balance Sheet as long-term debt.
The Company believes it has adequate working capital and lines of credit to
provide liquidity during future off-seasons.
BALANCE SHEET
Cash and cash equivalents at June 30, 1998 were lower at June 30, 1998 than
at June 30, 1997 due to the factors noted above (See "Capital Resources and
Liquidity").
Inventories at June 30, 1998 were higher at June 30, 1998 than at June 30,
1997 due to the factors noted above (See "Capital Resources and Liquidity").
Deferred income taxes (current and long-term) at June 30, 1998 totaled
$592,000 compared to $34,000 at June 30, 1997. The increase was due to the
Company's recognition, in the fourth quarter of fiscal 1997, of the tax benefits
associated with net operating loss carryforwards generated in prior years, and
to a change in the valuation allowance for deferred tax assets, reduced by the
income tax provision of $431,000 for the nine month period ended June 30, 1998.
Property and equipment at June 30, 1998 was higher than at June 30, 1997
due to the new store construction noted above (See "Capital Resources and
Liquidity"), as well as the acquisition of the nursery production facility
during the fourth quarter of fiscal 1997.
Accounts receivable, accounts payable, and accrued expenses vary seasonally
along with sales activity. Accounts receivable at June 30, 1998 was not
significantly changed from the comparable period in 1997. Accounts payable at
June 30, 1998 was lower than for the comparable period in 1997. Since
approximately $700,000 of inventory sold in the retail stores was produced by
the Company's wholly owned nursery production facility, there were no accounts
payable associated with that merchandise. Accrued expenses were lower in 1998
than in 1997 since smaller bonus accruals were made due to the reduced pre-tax
operating profits.
Prepaids and other assets (current and long-term), goodwill, and deferred
rent payable do not typically fluctuate seasonally. The amounts at June 30, 1998
were not significantly changed from the comparable period in 1997.
Long-term debt (including current portion) at June 30, 1998 was $2,983,000
compared to $545,000 at June 30, 1997. The increase was due to long-term debt
incurred during 1997 and the new store construction noted above (See "Capital
Resources and Liquidity").
10
<PAGE> 11
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
11
<PAGE> 12
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 3, 1998
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
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<S> <C> <C>
Ex 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,138
<SECURITIES> 0
<RECEIVABLES> 153
<ALLOWANCES> 0
<INVENTORY> 2,487
<CURRENT-ASSETS> 7,782
<PP&E> 7,134
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,636
<CURRENT-LIABILITIES> 4,339
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 8,264
<TOTAL-LIABILITY-AND-EQUITY> 16,636
<SALES> 15,047
<TOTAL-REVENUES> 15,047
<CGS> 8,083
<TOTAL-COSTS> 4,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,813
<INCOME-TAX> 1,146
<INCOME-CONTINUING> 1,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,667
<EPS-PRIMARY> .31
<EPS-DILUTED> .28
</TABLE>
