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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, 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, 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 21, 1998, Registrant had outstanding 5,533,938 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 21, 1998 as reported on the Nasdaq Stock Market, was approximately
$5,100,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1999 annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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INDEX
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Page
Reference
Form 10-K
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PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 10
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 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and
Reports on Form 8-K 21
</TABLE>
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PART I
ITEM 1. BUSINESS
OUR OBJECTIVE
Calloway's Nursery, Inc. is a leading, specialty retailer of lawn and garden
products. Today, we operate sixteen retail store locations in the Dallas-Fort
Worth Metroplex market. Our objective is to provide an unmatched retail level of
excellence in quality and variety of living plants, and related products. We
intend to consistently and dependably provide quality products, information,
presentation, and service, at the least comparable cost.
OUR COMPETITIVE ADVANTAGES
We believe that Calloway's success is and will be based on these significant
competitive advantages:
o Our people
o Our retail stores
o Our merchandise
o Our growing facility
o Our suppliers
o Our management team
OUR PEOPLE
Our employees represent a significant competitive advantage. All Calloway's
retail store managers and support teams bring a mastery of the botanical,
horticultural and nursery disciplines to the retail environment that allows us
to serve our customers beyond their expectations. We are committed to observe
closely the ways of nature, view the wonders of growing plants, and experience
the excitement of nurturing them, so that our first-hand knowledge may benefit
our customers.
We have about 200 full-time employees. During our very busy spring and
Christmas seasons, we supplement their efforts with seasonal and part-time
employees. We consider our relations with employees to be good.
Nearly one-half of our full-time 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 employ more of these Texas Master Certified Nursery
Professionals than any other organization in the state of Texas.
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At Calloway's, 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 a fast-paced retail environment. 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.
In recognition of their contributions, all of our retail Store Managers and
Assistant Managers, Regional Managers, Merchandise Managers, and the management
of Miller Plant Farms are eligible to receive a significant portion of their
compensation in the form of bonuses based on financial performance. Through
September 30, 1998 the annual profit sharing pools were calculated based upon
pre-tax profit as a percentage of sales with emphasis upon increases in profit
over the previous year. For fiscal 1999, the programs have been improved to
focus the incentives on achieving improvements in sales, gross profit and
expense control for specific profit centers.
OUR RETAIL STORES
Our modern, spacious retail store facilities are also a significant competitive
advantage. Most of our retail stores have similar floorplans and designs that
provide over 60,000 square feet of selling space, approximately one-third of
which is covered on a year-round basis.
We select our retail store locations on the basis of demographic data, traffic
patterns and shopping habits. All of the sixteen Calloway's retail stores are
Company-operated. We lease twelve of the store locations and own the other
four.
We've opened three new store locations within the past year (including two that
opened in November 1998). We've also closed three unprofitable stores since
September 1997. One of the new stores -Calloway's at Stonegate -- produced its
first $1,000,000 of sales faster than any store in the Company's history.
[GRAPH]
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Each Calloway's retail store is arranged to provide maximum exposure to its
selection of merchandise using appropriate traffic patterns and seasonally
rotated displays. The retail store management team develops a floor plan in
conjunction with our in-store visual marketing department. This plan is
designed to provide a rewarding shopping experience.
OUR MERCHANDISE
The quality and breadth of selection of living plants and related garden
products is another competitive advantage. We search for and provide
appropriate living plants, and we inform our customers about the care and
nurturing of those plants, and the proper use of the related products. We
always treat our customers with caring respect, and we guarantee their
satisfaction.
We sell a wide variety of lawn and garden products at each and every retail
store. Our merchandising programs are designed to promote sales of products
having the greatest appeal during a particular season of the year.
We focus 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 cut and flocked Christmas trees and
poinsettias.
Approximately two-thirds of our annual sales are derived from living plants,
while the remaining one-third are made up of products that primarily relate to
the care and feeding of living plants.
We 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 work 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 FACILITY
Our growing facility, Miller Plant Farms, is a competitive advantage. In 1997
our commitment to excellence led us to acquire an established facility for the
production of living plants: Miller Plant Farms.
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
Propagators Society - Southern Region, Past President, Northeast Texas Nursery
Growers Association, Past Director, Texas Association of Nurserymen Region III,
and is a Texas Certified Nursery Professional. He received his BS in
Horticulture from Kansas State University in 1974.
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This growing facility enhances our proven ability to consistently, dependably
provide our customers with the very best selection of top-quality living plants
at the least comparable cost.
OUR SUPPLIERS
Yet another of our competitive advantages is our strong relationship with our
suppliers. We purchase most of the living plants we sell, growing the remainder
at our wholly owned Miller Plant Farms growing facility. We do not manufacture
any of the related products.
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 Dallas and Fort Worth allowing us to procure
merchandise with relatively short lead times. We work with our suppliers to
attain consistency of quality, appropriate service and completeness in
selection of plant varieties.
We offer our customers our own private label products that are manufactured
expressly for Calloway's to ensure superior quality.
Our commitment to our suppliers is guided by the Golden Rule. By treating
suppliers fairly and with consideration, we establish trust and develop
mutually advantageous relationships. We 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, we are able to obtain the
quality, variety, timely delivery and reasonable prices that allow us to
surprise and delight our customers.
OUR MANAGEMENT TEAM
The qualifications and experience of our senior management team represents a
competitive advantage.
JIM ESTILL, 51, 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 Past Vice-Chairman, Texas Certified Nursery
Professional Board and Past Chairman, Texas Association of Nurserymen Education
and Research Foundation.
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JOHN COSBY, 55, 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, 47, is Vice President -- Operations and a Director. 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. He currently has primary
responsibility for store operations, merchandising, advertising and marketing,
distribution, human resources and administration. 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 Association of Nurserymen.
SAM WEGER, 48, is Vice President - Merchandising. Sam started with Calloway's
in retail store management in 1987. He has primary responsibility for 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 Association of Nurserymen,
Region 5, and Past Chairman, TAN Education Committee.
DAN REYNOLDS, 41, 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 Peat Marwick LLP
as Supervising Senior Accountant. Dan received his BBA in Accounting from the
University of Texas at Arlington. A Certified Public Accountant, Dan is a Vice
President and Director of Financial Executives Institute, Fort Worth Chapter.
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THE CHALLENGES
Like any business, we face certain challenges. The major challenges are:
o The retail nursery business is highly competitive
o Our business is also highly seasonal
o We are concentrated in a single market area
HIGHLY COMPETITIVE MARKET
The retail nursery business is highly competitive in the United States, and
there may be no market more competitive than the Dallas - Fort Worth Metroplex.
In this market, 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 is 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.
HIGHLY SEASONAL BUSINESS
Our business is highly seasonal. Over 1/2 of the annual sales occur in the
third fiscal quarter, which is usually the only profitable quarter. Depending
upon weather conditions in any given year, sales in March (which falls in the
second fiscal quarter) can be strong enough or weak enough to cause major
percentage swings in comparative financial results.
[GRAPH]
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The other three fiscal quarters have not typically been profitable. We have had
success in recent years at selling Christmas trees and poinsettias during the
Christmas season (which falls in the first fiscal quarter) which has tended to
improve our performance for the first quarter.
[GRAPH]
CONCENTRATION IN A SINGLE MARKET AREA
All of our retail stores are in the Dallas-Fort Worth Metroplex market area.
Therefore, economic, weather and other circumstances that may exist from
time-to-time in the Metroplex can have a significant short-term impact on our
results of operations.
This past fiscal year, 1998, saw a summer heat wave of record proportions that
resulted in reduced consumer demand for plants and related gardening products
in the Metroplex from June through September (the third and fourth fiscal
quarters).
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ITEM 2. PROPERTIES
Our retail stores are typically located in high-traffic shopping areas and 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 prototype 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.
As of September 30, 1998 we operated fourteen retail stores. We opened two more
stores in November 1998. We own four stores and lease the other twelve
(including the two we opened in November 1998).
We lease our corporate office in an office building in Fort Worth, Texas. We
also lease a warehouse/distribution center in Fort Worth, Texas.
We own a wholesale nursery production facility near Tyler, Texas. That facility
includes approximately 100 greenhouses and approximately 80 acres.
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.
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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:
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High Low Close
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<S> <C> <C> <C>
FISCAL YEAR 1994
First Quarter 3.625 2.250 3.000
Second Quarter 3.125 2.313 2.750
Third Quarter 3.250 1.750 2.000
Fourth Quarter 2.125 1.000 1.500
- -----------------------------------------------------------------------------------------------
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
===============================================================================================
</TABLE>
The closing price of the common stock on December 21, 1998, as reported by
Nasdaq, was $1.1875.
As of December 7, 1998 there were approximately 319 shareholders of record, and
approximately 1,100 beneficial shareholders.
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.
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ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with the:
o Consolidated Financial Statements included in Item 8, and
o 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)
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STATEMENT OF OPERATIONS DATA 1998 1997 1996 1995 1994
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Net sales $ 27.1 $ 26.2 $ 24.0 $ 22.5 $ 30.6
Net income (loss) ($ .3) $ 1.7 $ .2 $ .2 ($ 4.1)
Income loss per common share:
Basic ($ .05) $ .33 $ .04 $ .03 ($ .86)
Diluted ($ .05) $ .33 $ .04 $ .03 ($ .86)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
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BALANCE SHEET DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total assets $ 14.7 $ 13.1 $ 8.9 $ 8.4 $ 11.6
Long-term debt, net of current portion $ 3.0 $ 1.8 $ -- $ -- $ .8
- ----------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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.
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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.
SALES (UNAUDITED)
[GRAPH]
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.
GROSS PROFIT MARGIN
[GRAPH]
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.
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OTHER EXPENSES include depreciation and amortization, gains on sales of
properties, and net interest expense (income). Other expense increased from
$248,000 for fiscal 1997 to $342,000 for fiscal 1998 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; and
o We maintained generally lower levels of excess cash
during 1998, resulting in reduced interest income.
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.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
Our results for 1997 were improved over those of 1996. We recorded net income
for fiscal 1997 of $1,727,000, compared to net income of $201,000 for fiscal
1996. Pre-tax operating income increased from $228,000 for fiscal 1996 to
$767,000 for fiscal 1997. The improvement in pre-tax operating income resulted
from continued sales growth, strong gross margins and expenses that increased
at less than the rate of sales growth.
SALES increased by just under 10%, from approximately $24.0 million for fiscal
1996 to approximately $26.2 million for fiscal 1997. Same-store sales increased
by the same amount, since all store locations have been open for more than one
year. The continued growth in sales resulted from:
o A broader and more consistent selection of living plants
and related products, and
o The "10th Anniversary" promotion featuring the
introduction of over 70 new living plant products.
GROSS PROFIT increased from approximately $11.2 million for fiscal 1996 to
approximately $12.4 million for fiscal 1997. Gross margin (gross profit as a
percentage of net sales) was 47% for the third consecutive year; therefore, the
increase in gross profit was a direct result of the growth in sales.
OPERATING EXPENSES increased by 9% to approximately $7.3 million for fiscal
1997 from approximately $6.8 million for fiscal 1996. The increase was
primarily attributable to the costs associated with the enhanced merchandise
mix, special "10th Anniversary" promotion, and continuing to provide
outstanding customer service to a larger number of customers.
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OCCUPANCY EXPENSES decreased by 4% to approximately $2.8 million for fiscal
1997 from approximately $2.9 million for fiscal 1996. The decrease was due to
renegotiation of certain retail store leases that resulted in lower rent
payments and a one-time income statement credit of $113,000, and to the
Company's purchase, in December 1996, of one retail store that had previously
been leased.
ADVERTISING EXPENSES increased by 10% to $1,261,000 for fiscal 1997 from
$1,149,000 for fiscal 1996. The increase was primarily the result of increased
newspaper advertising rates, and to costs associated with the special "10th
Anniversary" promotion.
OTHER EXPENSES include depreciation and amortization, gains on sales of
properties, and net interest expense (income). Other expense increased from
$147,000 for fiscal 1996 to $248,000 for fiscal 1997 due to:
o Gains on sales of properties recognized during fiscal
1996 that did not reoccur in 1997, partially offset by
o An increase in net interest income resulting from higher
levels of available cash during fiscal 1997 compared to
fiscal 1996.
We recorded an income tax benefit of $960,000 for fiscal 1997. This credit
resulted from (1) utilization of net operating loss carryforwards generated in
prior years, and (2) a change in the valuation allowance for deferred tax
assets. [See Note 7 to Financial Statements]
We have determined that it is more likely than not that the deferred tax assets
will be realized; therefore, no valuation allowance was necessary as of
September 30, 1997. 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. Positive
evidence considered include our history of profitable operations, and the
availability of its existing Net Operating Loss (NOL) carryforwards that expire
in 2009 and 2010.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows used by operating activities totaled $617,000 for fiscal 1998,
compared to cash flows provided by operations totaling $1,320,000 for fiscal
1997. The reduction was primarily attributable to the lower pre-tax operating
income and increased inventory levels at the retail stores and at Miller Plant
Farms.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used by investing activities totaled $3,055,000 for fiscal 1998,
compared to cash flows used by investing activities of $1,973,000 for fiscal
1997. The increase was due to acquisition of land and construction costs for
the new prototype retail store we opened in April 1998, partially offset by the
sale of land adjacent to the retail store site. We own an additional parcel of
land adjacent to that same retail store site that we are actively marketing for
sale.
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities totaled $1,633,000 for fiscal 1998,
compared to $1,983,000 for fiscal 1997. We raised $151,000 by issuance of
common stock to our employee stock purchase plan and through employees'
exercise of stock options. [See Notes 10 and 11 to Financial Statements] In
addition, we received approximately $1.2 million from long-term financing from
a financial institution to provide funds for the new prototype retail store
opened in April 1998. [See "Cash Flows from Investing Activities"] We also
received $562,000 from a sale-leaseback of computer hardware and software that
was accounted for as a capital lease.
We anticipate that cash flows from operations and existing lines of credit are
sufficient to meet our working capital needs.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards No. 128, Earnings Per
Share, ("SFAS 128") in the first quarter of fiscal 1998. SFAS 128 required
restatement of all prior-period EPS data presented.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, ("SFAS 130") was issued in June 1997 and establishes standards for
reporting and display of comprehensive income and its components in a set of
general-purpose financial statements. SFAS 130 is effective for financial
statements issued for fiscal years beginning after December 15, 1997, and
reclassification of financial statements for earlier periods provided for
comparative purposes is required. Initial application of SFAS 130 should be as
of the beginning of the fiscal year and must be applied to all interim periods
after initial application. We will adopt SFAS 130 in the first quarter of
fiscal 1999. It is not expected to have a material impact on the consolidated
financial statements.
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, ("SFAS 131") was issued in June 1997
and 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. SFAS 131 is effective for
financial statements issued for fiscal years beginning after December 15, 1997,
and comparative information requires restatement in the initial year of
application. As SFAS 131 need not be applied to interim financial statements in
the initial year of application, we must implement the disclosure requirements
in the consolidated financial statements for the year ending September 30,
1999. It is not expected to have a material impact on the consolidated
financial statements.
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Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, ("SFAS 132") was issued in
February 1998. SFAS 132 revised employer's disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when FASB Statements No.
87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, were issued. SFAS 132 suggests combined formats
for presentation of pension and other postretirement benefit disclosures. SFAS
132 is effective for financial statements issued for fiscal years beginning
after December 15, 1997, and comparative information requires restatement in
the initial year of application. We must implement the disclosure requirements
in the consolidated financial statements for the year ending September 30,
1999. It is not expected to have a material impact on the consolidated
financial statements.
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.
IMPACT OF YEAR 2000 ISSUE
Our Year 2000 Project (the `Project") is in progress. The Project is addressing
the Year 2000 issue that can be caused by certain computer programs being
written to utilize two digits rather than four digits to define an applicable
year. As a result, there is a possibility that computer equipment, software and
devices with embedded technology that are time sensitive may misinterpret the
actual date beginning on January 1, 2000. This could result in system failures
or miscalculations causing disruptions of operations; for example, a temporary
inability to process transactions.
We intend 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 has been accomplished with our own personnel and within the normal
information technology budget.
17
<PAGE> 18
We have initiated correspondence with our significant suppliers and service
providers to determine the extent that they are vulnerable to Year 2000 issues.
We expect them to respond that their Year 2000 issues are being addressed on a
timely basis. Due to the fragmentation of the wholesaler nursery industry, we
are not dependent upon a single supplier for inventory. Nevertheless, we intend
to develop appropriate contingency plans for any significant supply disruptions
that may result from its suppliers' Year 2000 issues. We will also develop
appropriate contingency plans for any disruptions that may result from our
service providers' Year 2000 issues. We expect that communications with third
parties and development of contingency plans will be completed during fiscal
1999.
As a retailer, we are not dependent upon a single customer, so we do not intend
to address any Year 2000 issues that our customers may have.
We have not yet developed a most reasonably likely worst case scenario with
respect to Year 2000 issues, but instead have focused our efforts on reducing
uncertainties through the reviews described above. We do not plan to develop
contingency plans other than those described above unless merited by the
results of our continuing reviews.
We do not expect to incur significant operational problems due to the Year 2000
issue. However, if all Year 2000 issues are not properly and timely identified,
assessed, remediated and tested, there can be no assurance that the Year 2000
issue will not materially impact the results of operations or adversely affect
our relationships with suppliers or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
impact our systems or our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
The following documents are filed as part of this report: Page
- --------------------------------------------------------- ----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Auditors - KPMG Peat Marwick LLP F-1
Report of Independent Accountants - PricewaterhouseCoopers L.L.P. F-2
Consolidated Balance Sheets - September 30, 1998 and 1997 F-3
Consolidated Statements of Operations - Years Ended September 30, 1998,
1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity - Years Ended September
30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - Years Ended September 30, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
18
<PAGE> 19
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 Independent Accountants,
PricewaterhouseCoopers L.L.P. (formerly Coopers & Lybrand L.L.P.,
which became PricewaterhouseCoopers L.L.P. on July 1, 1998) were
dismissed and replaced by KPMG Peat Marwick LLP.
2) The reports of PricewaterhouseCoopers L.L.P. on the financial
statements for the past two fiscal years contained no adverse
opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principle.
3) Our Audit Committee and Board of Directors participated in and
approved the decision to change independent accountants.
4) In connection with its audits for the two most recent fiscal years
and through August 19, 1998 there have been no disagreements with
PricewaterhouseCoopers L.L.P. 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 L.L.P., would have caused them to make
reference thereto in their report on the financial statements for
such years.
5) During the two most recent fiscal years and through August 19, 1998
there have been no reportable events (as defined in Regulation S-K
Item 304(a)(1)(v)).
NEW INDEPENDENT ACCOUNTANTS
1) On August 19, 1998 KPMG Peat Marwick LLP was engaged as our new
Independent Accountants.
2) During the two most recent fiscal years and through August 19, 1998
we have not consulted with KPMG Peat Marwick LLP regarding (i)
either 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))).
19
<PAGE> 20
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.
20
<PAGE> 21
<TABLE>
<CAPTION>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
<S> <C> <C>
(a) The following documents are filed as part of this Report: Page
(1) Financial Statements:
Report of Independent Auditors - KPMG Peat Marwick LLP F-1
Report of Independent Accountants - PricewaterhouseCoopers L.L.P. F-2
Consolidated Balance Sheets - September 30, 1998 and 1997 F-3
Consolidated Statements of Operations - Years Ended September 30, 1998,
1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity - Years Ended September
30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows - Years Ended September 30, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
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.
(2) 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.)
21
<PAGE> 22
Exhibit No. Description
----------- -----------
(10) (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)
(l) Extension of Employment Agreement between the
Registrant and James C. Estill dated July 2, 1996
(Exhibit (10)(m))(4)
(m) Extension of Employment Agreement between the
Registrant and John T. Cosby dated July 2, 1996
(Exhibit (10)(n))(4)
(n) Extension of Employment Agreement between the
Registrant and John S. Peters dated July 2, 1996
(Exhibit (10)(o))(4)
(23) (d) Consent of KPMG Peat Marwick LLP.(7)
(23) (e) Consent of PricewaterhouseCoopers L.L.P.(7)
(27) (a) Financial Data Schedule.(7)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit
(28))(2)
(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))(3)
(99) (d) Calloway's Nursery, Inc. 1996 Stock Option Plan
(Exhibit (99)(d)(5)
(99) (e) Calloway's Nursery, Inc. 1997 Stock Option Plan
(Exhibit (99)(e))(6)
(99) (f) Calloway's Nursery, Inc. 1998 Stock Option Plan(7)
(b) On August 19, 1998 the Registrant filed a Form 8-K Report reporting a
change in its independent accountants (See Item 9).
- -------------
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 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.
3 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Form 10-K Report for the fiscal year ended
September 30, 1996.
4 Incorporated by reference to Amendment No. 1 to the Exhibit
shown in parenthesis to the Company's Form 10-Q Report for
the quarter ended June 30, 1996.
5 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Proxy Statement for its 1997 Annual Meeting
of Shareholders.
6 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Proxy Statement for its 1998 Annual Meeting
of Shareholders.
7 Filed herewith.
22
<PAGE> 23
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 22, 1998
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ James C. Estill Director December 22, 1998
- -------------------
James C. Estill
/s/ John T. Cosby Director December 22, 1998
- -----------------
John T. Cosby
/s/ John S. Peters Director December 22, 1998
- ------------------
John S. Peters
/s/ Robert E. Glaze Director December 22, 1998
- -------------------
Robert E. Glaze
/s/ Dr. Stanley Block Director December 22, 1998
- ---------------------
Dr. Stanley Block
</TABLE>
23
<PAGE> 24
Report of Independent Auditors
The Board of Directors and Shareholders
Calloway's Nursery, Inc.:
We have audited the accompanying consolidated balance sheet of Calloway's
Nursery, Inc. and subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
November 2, 1998
F-1
<PAGE> 25
Report of Independent Accountants
The Board of Directors and Shareholders
Calloway's Nursery, Inc.
We have audited the accompanying consolidated balance sheet of Calloway's
Nursery, Inc. as of September 30, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the two years in
the period ended September 30, 1997. 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Calloway's
Nursery, Inc. as of September 30, 1997, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles.
PricewaterhouseCoopers L.L.P.
Fort Worth, Texas
November 10, 1997
F-2
<PAGE> 26
CALLOWAY'S NURSERY, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 1,649 $ 3,688
Property held for sale 448 --
Accounts receivable 148 132
Inventories 2,341 1,533
Deferred income taxes 496 428
Prepaids and other assets 112 60
-------------- --------------
Total current assets 5,194 5,841
Property and equipment, net 7,815 5,466
Goodwill, net of accumulated amortization of $1,125,000 and
$1,017,000, respectively 1,065 1,173
Deferred income taxes 565 581
Other assets 46 50
-------------- --------------
Total assets $ 14,685 $ 13,111
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,913 $ 1,745
Accrued expenses 831 880
Current portion of long-term debt 338 97
-------------- --------------
Total current liabilities 3,082 2,722
Deferred rent payable 1,093 1,098
Long-term debt, net of current portion 3,044 1,803
-------------- --------------
Total liabilities 7,219 5,623
-------------- --------------
Commitments and contingencies
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; 5,735,695 and 5,582,364 shares issued,
respectively; 5,485,695 and 5,332,364 shares outstanding,
respectively 57 55
Additional paid-in capital 8,666 8,406
Retained earnings 139 423
-------------- --------------
8,862 8,884
Less: treasury stock, at cost (250,000 shares) (1,396) (1,396)
-------------- --------------
Total shareholders' equity 7,466 7,488
-------------- --------------
Total liabilities and shareholders' equity $ 14,685 $ 13,111
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE> 27
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $27,069 $26,245 $23,959
Cost of goods sold 14,874 13,819 12,748
--------------- --------------- ---------------
Gross profit 12,195 12,426 11,211
Operating expenses 8,041 7,334 6,750
Occupancy expenses 2,773 2,816 2,937
Advertising expenses 1,366 1,261 1,149
Other 342 248 147
--------------- --------------- ---------------
Total expenses 12,522 11,659 10,983
--------------- --------------- ---------------
Income (loss) before income taxes (327) 767 228
Income tax expense (benefit) (43) (960) 27
--------------- --------------- ---------------
Net income (loss) ($284) $ 1,727 $ 201
=============== =============== ===============
Weighted average number of common shares:
Basic 5,405 5,244 5,047
Diluted 5,405 5,244 5,047
Net income (loss) per common share:
Basic ($.05) $.33 $.04
Diluted ($.05) $.33 $.04
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE> 28
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Retained
Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1995 5,204 $ 52 $ 8,107 $(1,505) $(1,396) $ 5,258
Issuance of common stock 188 2 145 -- -- 147
Net income -- -- -- 201 -- 201
------- ------- ------- ------- ------- -------
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 153 2 260 -- -- 262
Net loss -- -- -- (284) -- (284)
------- ------- ------- ------- ------- -------
Balance as of September 30, 1998 5,735 $ 57 $ 8,666 $ 139 $(1,396) $ 7,466
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE> 29
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September September September
30, 1998 30, 1997 30, 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (284) $ 1,727 $ 201
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 519 381 421
Gains on property sales (153) (1) (167)
Deferred income taxes (52) (975) 27
Stock compensation 111 72 77
(Increase) decrease(net of effects from
acquisition) in:
Accounts receivable (16) -- (77)
Inventories (808) (365) 11
Prepaid expenses and other assets (48) 15 (7)
Increase (decrease) in:
Accounts payable 168 291 85
Accrued expenses (49) 246 (34)
Deferred rent payable (5) (71) 38
------------ ------------ ------------
Net cash flows provided by (used for) operating
activities (617) 1,320 575
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (2,792) (1,216) (221)
Purchase of wholesale nursery production facility -- (758) --
Proceeds from property sales 560 1 888
Purchase of property held for sale (823) -- --
------------ ------------ ------------
Net cash flows provided by (used for) investing
activities (3,055) (1,973) 667
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 151 83 70
Proceeds from issuance of long-term debt 1,204 1,933 --
Proceeds from sale and leaseback 562 -- --
Repayments of long-term debt (134) (33) --
Lease payments under capital lease (150) -- --
------------ ------------ ------------
Net cash flows provided by
financing activities 1,633 1,983 70
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,039) 1,330 1,312
Cash and cash equivalents at beginning of year 3,688 2,358 1,046
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,649 $ 3,688 $ 2,358
============ ============ ============
Supplemental disclosure of cash flow information: Cash paid (received) during
the year for:
Interest $ 237 $ 61 $ 3
Income taxes 10 -- --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE> 30
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. All of its retail stores are located in the
Dallas-Fort Worth area; thus, economic, weather and other circumstances that may
exist from time-to-time in the Dallas-Fort Worth area can have 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.
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
F-7
<PAGE> 31
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company continually reevaluates the propriety of the carrying
amounts of its properties as well as the amortization period to determine
whether current events and circumstances warrant adjustments to the carrying
amounts or a revised estimate of the useful life. At September 30, 1998, 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.
Net income (loss) per share - The Company adopted FASB issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128") in
the first quarter of fiscal 1998. SFAS 128 simplified the standards for
computing earnings per share ("EPS") previously found in APB Opinion No. 15,
Earnings Per Share, ("APB 15"), and made them comparable to international EPS
standards. SFAS 128 replaced the presentation of primary EPS with a presentation
of basic EPS. Basic EPS excludes dilution and 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. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB 15. SFAS 128 also required
presentation of both basic and diluted EPS on the face of the statement of
operations 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 requires restatement of all
prior-period EPS data presented.
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.
F-8
<PAGE> 32
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangibles - In 1988 the Company recorded goodwill in the amount of
$2,471,000 as a result of "push-down" accounting used to record a significant
change in ownership as of that date. Goodwill was reduced by the tax benefit of
$281,000 related to the utilization of preacquisition net operating loss
carryforwards in a prior year. 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. In 1995 the FASB issued SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS 123") which, if fully
adopted by the Company, would have changed the method the Company applies in
recognizing the cost of its stock-based compensation. Adoption of the cost
recognition provisions of SFAS 123 is optional, and the Company has elected the
pro forma disclosure provisions for its financial statements. These pro forma
disclosures show the effect on the Company's net income (loss) and net income
(loss) per share as if the Company adopted the cost recognition provisions of
SFAS 123. [See Note 10] 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.
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, 1998 and 1997 has been estimated based on the weight of available
evidence at September 30, 1998 and 1997. Such estimate could change in the
future based on the occurrence of one or more future events.
F-9
<PAGE> 33
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying values of the Company's financial instruments 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, 1998.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Money market fund with an annualized yield
of 5.8% as of September 30, 1998 $ 1,598 $ 3,546
Demand deposit accounts 28 121
Petty cash 23 21
-------- --------
$ 1,649 $ 3,688
======== ========
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 1,510 $ 1,197
Work in process 739 294
Supplies 92 42
-------- --------
$ 2,341 $ 1,533
======== ========
</TABLE>
F-10
<PAGE> 34
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Land $ 3,047 $ 2,183
Land improvements 620 368
Leasehold improvements 600 667
Buildings 3,309 2,132
Furniture, fixtures and equipment 2,164 1,972
Vehicles 423 377
Less: accumulated depreciation and
amortization (2,348) (2,233)
-------- --------
$ 7,815 $ 5,466
======== ========
</TABLE>
The gross amounts of equipment and related accumulated amortization
recorded under capital leases as of September 30, 1998 were $556,000 and
$71,000, respectively.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Accrued salaries and related taxes $ 172 $ 138
Accrued bonuses -- 238
Accrued property taxes 351 313
Accrued sales and use taxes 107 94
Other 201 97
-------- --------
$ 831 $ 880
======== ========
</TABLE>
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Revolving line of credit (a) $-- $--
Notes payable - financial institutions (b),
(c), (d), (e) 2,897 1,874
Obligations under capital lease (f) 406 --
Other 79 26
-------- --------
3,382 1,900
Less: amounts due within one year (338) (97)
-------- --------
$ 3,044 $ 1,803
======== ========
</TABLE>
F-11
<PAGE> 35
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) In March 1998 the Company entered into a revolving line of
credit arrangement with a bank which matures on April 1, 1999,
and is collateralized by inventory, accounts receivable and
certain real property. The line of credit (as well as the
previous line of credit) is established to supplement sources
available to meet the Company's seasonal working capital
needs. No amounts were outstanding under the line of credit at
September 30, 1998 or 1997. The interest rate is variable
(8.75% at September 30, 1998).
(b) In December 1996 the Company entered into a note payable to a
financial institution. At September 30, 1998 the outstanding
balance was $497,000. 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 (9.25% at September 30, 1998).
(c) In July 1997 a wholly owned subsidiary of the Company entered
into a note payable to a financial institution. At September
30, 1998 the outstanding balance was $964,000. 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 (9.125%
at September 30, 1998).
(d) In July 1997 the Company entered into a note payable to a
financial institution. At September 30, 1998 the outstanding
balance was $319,000. 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 (9.5% at September 30, 1998).
(e) In October 1997 the Company entered into a note payable to a
financial institution. At September 30, 1998 the outstanding
balance was $1,117,000. The note is collateralized by certain
real estate and requires payments, including interest, of
approximately $155,000 annually. The note is amortized over a
twelve year period, with a balloon payment due in six years.
The interest rate is variable (9.25% at September 30, 1998).
(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, 1998
was $406,000. 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.
Maturities of long-term debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
<S> <C>
1999 $ 338
2000 346
2001 301
2002 221
2003 234
Thereafter 1,942
-------
$ 3,382
=======
</TABLE>
F-12
<PAGE> 36
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At September
30, 1998, the Company has net operating loss carryforwards of approximately
$1,242,000 for income tax purposes, which will expire in 2009, 2010 and 2013 if
not used.
Components of income tax expense (benefit) consist of the following
(amounts in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current expense (benefit):
Federal $ 9 $ 15 $ --
State -- -- --
-------- -------- --------
Total current 9 15 --
-------- -------- --------
Deferred expense (benefit):
Federal (52) (879) 27
State -- (96) --
-------- -------- --------
Total deferred (52) (975) 27
-------- -------- --------
-------- -------- --------
Total expense (benefit) $ (43) $ (960) $ 27
======== ======== ========
</TABLE>
The differences between the Company's effective tax rate and the
federal statutory tax rate of 34% for the fiscal years ended September 30, 1998,
1997 and 1996 relate primarily to goodwill amortization, which is not deductible
for tax purposes, and to changes in the valuation allowance. The following is an
analysis of such differences (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (111) $ 261 $ 78
State income tax, net of federal benefit -- 26 --
Amortization of goodwill 37 37 37
Tax-exempt interest income -- -- --
Other, net 31 31 26
Valuation allowance -- (1,315) (114)
-------- -------- --------
Total income tax expense (benefit) $ (43) $ (960) $ 27
======== ======== ========
Effective tax rate (13%) (125%) 12%
</TABLE>
F-13
<PAGE> 37
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and
liabilities as of September 30, 1998 and 1997 are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation ($ 69) ($ 18)
-------- --------
Total deferred tax liabilities (69) (18)
-------- --------
Deferred tax assets:
Deferred rent 404 397
Inventory costs capitalized for tax purposes 37 25
Net operating loss carryforward 459 383
AMT credit carryforward 27 19
Assets marked to market 203 203
-------- --------
Total deferred tax assets 1,130 1,027
-------- --------
Less: valuation allowance -- --
-------- --------
Net deferred tax asset $ 1,061 $ 1,009
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1996
and 1997 was $1,315,000 and $0, respectively. The net change in the valuation
allowance for the years ended September 30, 1998 and 1997 was $0 and a decrease
of $1,315,000, respectively.
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, 1998 and 1997. 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 include the Company's
history of profitable operations, and the availability of its existing Net
Operating Loss (NOL) carryforwards, which expire in 2009, 2010 and 2013.
NOTE 8 - SHAREHOLDERS' EQUITY
During 1997 and 1998, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 11) and stock option
plan, receiving proceeds as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, September 30,
1998 1997
-------- --------
<S> <C> <C>
Number of shares issued 143,351 189,890
Proceeds $151,000 $ 83,000
Compensation expense $111,000 $ 72,000
</TABLE>
F-14
<PAGE> 38
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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 can not participate in the discounted purchase of common stock.
The Rights are redeemable at any time at $.01 per Right.
NOTE 10 - STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
The Company's stock option plans provide for the awarding of incentive
stock options to employees and non-qualified stock options to employees and
independent directors. The employee plans are administered by the Compensation
Committee of the Board of Directors, which consists entirely of independent
directors. The independent director stock options are initially granted on a
formula basis. Additional nonqualified stock options are provided to independent
directors on an individual grant basis. All options are exercisable according to
predetermined vesting schedules (all options vest within three years of the date
of the grant) and remain in effect for ten years from the date of the grant. An
aggregate of 1,225,000 shares of common stock have been reserved for issuance
under the Company's stock option plans.
As permitted by SFAS 123, the Company applies Accounting Principles
Board (APB) Opinion 25 and related interpretations in accounting for its stock
option plans. Accordingly, no expense has been recognized for its stock option
plans as the exercise price equals the stock price on the date of grant. No
options were granted during the fiscal years ended September 30, 1998 and 1996.
Had compensation expense been determined for stock options granted in 1997 based
on the "fair value" at grant dates provided for in SFAS 123, the Company's pro
forma net income (loss) and net income (loss) per share for 1998, 1997 and 1996
would approximate the amounts below (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) ($ 284) $ 1,474 $ 201
Net income (loss) per share ($ .05) $ .28 $ .04
</TABLE>
F-15
<PAGE> 39
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for stock
options granted in 1997 (no options were granted in fiscal 1998 and 1996):
<TABLE>
<CAPTION>
Year Ended
September 30,
1997
-------------
<S> <C>
Weighted average expected life
(years) 10
Expected volatility 80.73%
Expected dividends $ --
Risk free interest rate 6.58%
Weighted average fair value of
options granted $ .922
</TABLE>
The following tables summarizes activity in the stock option plans for
the three years ended September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
---------------- ---------------
<S> <C> <C>
October 1, 1995 658,800 $1.055
Granted -- --
Exercised -- --
Forfeited 36,300 $1.000
Expired -- --
---------------- ---------------
September 30, 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
================ ===============
Exercisable, September 30, 1998 887,450 $1.073
================ ===============
</TABLE>
F-16
<PAGE> 40
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes information regarding stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Range of Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Life Prices Exercisable Prices
- ----------------------------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$0.875 to $1.188 914,500 7 $ 1.036 880,450 $ 1.033
$1.189 to $6.125 7,000 2 $ 6.125 7,000 $ 6.125
-------- -------- -------- -------- --------
921,500 7 $ 1.075 887,450 $ 1.073
======== ======== ======== ======== ========
</TABLE>
NOTE 11 - 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.
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, 1998, 1997 and 1996 were
$111,000, $72,000 and $77,000, respectively.
NOTE 12 - 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.
F-17
<PAGE> 41
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 13 - COMMITMENTS AND CONTINGENCIES
As of September 30, 1998 the Company had twelve retail store locations
(including two that opened in November 1998) 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.
Future minimum lease payments under noncancellable operating leases as
of September 30, 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1999 $ 2,040
2000 2,022
2001 2,067
2002 1,972
2003 1,492
Thereafter 6,156
--------
$ 15,749
========
</TABLE>
Rental expense for operating leases during the fiscal years ended
September 30, 1998, 1997 and 1996 were approximately $2.2 million, $2.3 million,
and $2.3 million, respectively.
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the Company's potential
liability in all pending actions and claims, in the aggregate, is not material.
F-18
<PAGE> 42
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - NET INCOME (LOSS) PER SHARE
A reconciliation between the weighted average shares outstanding used
in the basic and diluted net income (loss) per share computations is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) ($ 284) $ 1,727 $ 201
Weighted average shares
outstanding - basic 5,405 5,244 5,047
Effective of dilutive securities:
Assumed exercise of stock
options -- -- --
Weighted average shares
outstanding - diluted 5,405 5,244 5,047
Net income (loss) per share -
basic and diluted ($ .05) $ .33 $ .04
</TABLE>
NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED)
Amounts (except share data) are expressed in thousands:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------- -------------------- ------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 4,495 $ 4,261 $ 4,227 $ 5,303 $15,047 $13,108 $ 3,300 $ 3,573
Gross profit 2,029 1,773 2,122 2,661 6,964 6,254 1,080 1,738
Net income (loss) $ (585) $(1,083) $ (436) $ (108) $ 1,667 $ 2,689 $ (930) $ 229
Net income (loss) per share
Basic $ (.11) $ (.21) $ (.08) $ (.02) $ .31 $ .51 $ (.17) $ .04
Diluted $ (.11) $ (.21) $ (.08) $ (.02) $ .28 $ .51 $ (.17) $ .04
</TABLE>
In the fourth quarter of 1997 the Company eliminated the deferred tax
asset valuation allowance, resulting in a deferred tax benefit of $975,000.
NOTE 16 - SUBSEQUENT EVENTS
In October 1998 the Company sold a portion of the real estate property
held for sale. The proceeds of $560,000 will be used for remodeling of the two
new store locations opened in November 1998 and for seasonal working capital
needs.
In November 1998 the Company opened two new retail stores, increasing
the total number of retail stores to 16.
F-19
<PAGE> 43
CALLOWAY'S NURSERY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
(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)
(l) Extension of Employment Agreement between the Registrant and James C. Estill
dated July 2, 1996 (Exhibit (10)(m))(4)
(m) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n))(4)
(n) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o))(4)
(23) (d) Consent of KPMG Peat Marwick LLP.(7)
(23) (e) Consent of PricewaterhouseCoopers L.L.P.(7)
(27) (a) Financial Data Schedule.(7)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))(2)
(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))(3)
(99) (d) Calloway's Nursery, Inc. 1996 Stock Option Plan (Exhibit (99)(d)(5)
(99) (e) Calloway's Nursery, Inc. 1997 Stock Option Plan (Exhibit (99)(e))(6)
(99) (f) Calloway's Nursery, Inc. 1998 Stock Option Plan(7)
</TABLE>
<PAGE> 44
- -----------------
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 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.
3 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Form 10-K Report for the fiscal year ended
September 30, 1996.
4 Incorporated by reference to Amendment No. 1 to the Exhibit
shown in parenthesis to the Company's Form 10-Q Report for the
quarter ended June 30, 1996.
5 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Proxy Statement for its 1997 Annual Meeting
of Shareholders.
6 Incorporated by reference to the Exhibit shown in parenthesis
to the Company's Proxy Statement for its 1998 Annual Meeting
of Shareholders.
7 Filed herewith.
<PAGE> 1
EXHIBIT (23)(d)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
Calloway's Nursery, Inc. on Forms S-8 (File Nos. 33-46170, 33-82192 and
333-63291) of our report dated November 2, 1998, relating to the consolidated
balance sheet of Calloway's Nursery, Inc. and subsidiaries as of September 30,
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended, which report appears in the
September 30, 1998 Annual Report on Form 10-K of Calloway's Nursery, Inc.
KPMG Peat Marwick LLP
Fort Worth, Texas
December 21, 1998
<PAGE> 1
EXHIBIT (23)(e)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Calloway's Nursery, Inc. on Forms S-8 (File Nos. 33-46170, 33-82192 and
333-63291) of our report dated November 10, 1997, on our audits of the
consolidated financial statements of Calloway's Nursery, Inc. as of September
30, 1997 and for each of the two years in the period ended September 30, 1997,
which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers L.L.P.
Fort Worth, Texas
December 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CALLOWAY'S
NURSERY, INC. 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,649
<SECURITIES> 0
<RECEIVABLES> 148
<ALLOWANCES> 0
<INVENTORY> 2,341
<CURRENT-ASSETS> 5,194
<PP&E> 10,163
<DEPRECIATION> 2,348
<TOTAL-ASSETS> 14,685
<CURRENT-LIABILITIES> 3,082
<BONDS> 3,044
0
0
<COMMON> 57
<OTHER-SE> 7,409
<TOTAL-LIABILITY-AND-EQUITY> 14,685
<SALES> 27,069
<TOTAL-REVENUES> 27,069
<CGS> 14,874
<TOTAL-COSTS> 12,180
<OTHER-EXPENSES> 115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> (327)
<INCOME-TAX> (43)
<INCOME-CONTINUING> (284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (284)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
<PAGE> 1
EXHIBIT 99(f)
CALLOWAY'S NURSERY, INC.
1998 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I.........................................................................................................3
THE PLAN.................................................................................................3
1.1 Name...................................................................................3
1.2 Purpose................................................................................3
1.3 Effective Date.........................................................................3
1.4 Eligibility to Participate.............................................................3
1.5 Shares Subject to the Plan.............................................................3
1.6 Maximum Number of Plan Shares..........................................................3
1.7 Options and Stock Granted Under Plan...................................................3
1.8 Conditions Precedent...................................................................4
1.9 Reservation of Shares of Common Stock..................................................4
1.10 Tax Withholding........................................................................4
1.11 Exercise of Options....................................................................5
1.12 Acceleration of Right to Exercise Options..............................................5
1.13 Written Notice Required................................................................6
1.14 Compliance with Securities Laws........................................................6
1.15 Employment of Optionee.................................................................7
1.16 Option Upon Termination of Employment..................................................7
1.17 Termination of Employment for Cause....................................................7
1.18 Option Upon Disability of Optionee.....................................................8
1.19 Option Upon Death of Optionee..........................................................8
1.20 Options Not Transferable...............................................................8
1.21 Information to Optionees...............................................................8
ARTICLE II........................................................................................................9
ADMINISTRATION...........................................................................................9
2.1 Committee..............................................................................9
2.2 Appointment of Committee...............................................................9
2.3 Majority Rule; Unanimous Written Consent...............................................9
2.4 Company Assistance.....................................................................9
ARTICLE III.......................................................................................................9
INCENTIVE STOCK OPTIONS..................................................................................9
3.1 Option Terms and Conditions............................................................9
3.2 Duration of Options....................................................................10
3.3 Purchase Price.........................................................................10
3.4 Maximum Amount of Options First Exercisable in Any Calendar Year.......................10
3.5 Requirements as to Certain Options.....................................................10
3.6 Individual Option Agreements...........................................................10
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE IV........................................................................................................10
NONQUALIFIED STOCK OPTIONS...............................................................................10
4.1 Option Terms and Conditions............................................................10
4.2 Duration of Options....................................................................10
4.3 Purchase Price.........................................................................11
4.4 Individual Option Agreements...........................................................11
ARTICLE V.........................................................................................................11
TERMINATION, AMENDMENT AND ADJUSTMENT....................................................................11
5.1 Termination and Amendment..............................................................11
5.2 Adjustments............................................................................11
ARTICLE VI........................................................................................................12
MISCELLANEOUS............................................................................................12
6.1 Other Option Plans.....................................................................12
6.2 Plan Binding on Successors.............................................................12
6.3 Number and Gender......................................................................12
6.4 Headings...............................................................................12
6.5 Conditions.............................................................................12
ARTICLE VII.......................................................................................................12
DEFINITIONS..............................................................................................12
</TABLE>
2
<PAGE> 3
CALLOWAY'S NURSERY, INC.
1998 STOCK OPTION PLAN
ARTICLE I
THE PLAN
1.1 Name. This Plan shall be known as the "Calloway's Nursery, Inc.
1998 Stock Option Plan."
1.2 Purpose. the purpose of the Plan is to promote the growth and
general prosperity of the Company by permitting the Company to grant to its
full-time employees Options to purchase Common Stock of the Company. This Plan
is designed to help the Company and its subsidiaries and affiliates attract and
retain superior personnel for positions of substantial responsibility and to
provide employees with an additional incentive to contribute to the success of
the Company. The Company intends that Incentive Stock Options granted pursuant
to Article III will qualify as "incentive stock options" within the meaning of
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code").
Any option granted pursuant to Article IV shall be clearly and specifically
designated as not being an incentive stock option as defined in Section 422(b)
of the Code.
1.3 Effective Date. The Plan shall become effective upon the
Effective Date.
1.4 Eligibility to Participate. Any Employee shall be eligible to
participate in the Plan. The Committee may grant Options to an Employee in
accordance with such determinations as the Committee from time to time in its
sole discretion shall make.
1.5 Shares Subject to the Plan. The Plan Shares shall be shares of
Common Stock.
1.6 Maximum Number of Plan Shares. Subject to adjustment pursuant to
the provisions of Section 5.2, and subject to any additional restrictions
elsewhere in the Plan, the number of Plan shares that may be issued and sold
hereunder shall not exceed 276,000 shares. Plan Shares may be either authorized
and unissued shares or shares issued and thereafter acquired by the Company.
1.7 Options and Stock Granted Under Plan. Plan Shares with respect to
which an Option shall have been exercised shall not again be available for grant
hereunder. If Options terminate for any reason without being wholly exercised,
new
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<PAGE> 4
Options may be granted hereunder covering the number of Plan Shares to which
such Option termination relates.
1.8 Conditions Precedent. the Company shall not issue or deliver any
Option Agreement or any certificate for Plan Shares pursuant to the Plan prior
to fulfillment of all of the following conditions:
(a) The admission of the Plan Shares to listing on all stock
exchanges or qualification with any national quotation system on which
the Common Stock is then listed or qualified for trading, unless the
Committee determines in its sole discretion that such listing or
qualification is necessary or advisable;
(b) The completion of any registration or other qualification
of the sale of Plan Shares under any federal or state law or under the
rulings or regulations of the Securities and Exchange Commission or any
other governmental regulatory body that the committee shall in its sole
discretion deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Committee shall in its
sole discretion determine to be necessary or advisable.
1.9 Reservation of Shares of Common Stock. During the term of the
Plan, the Company will at all times reserve and keep available such number of
shares of Common Stock as shall be necessary to satisfy the requirements of the
Plan as to the number of Plan Shares. In addition, the Company will from time to
time, as is necessary to accomplish the purposes of the Plan, use its best
efforts to obtain from any regulatory agency having jurisdiction any requisite
authority necessary to issue Plan Shares hereunder. The inability of the Company
to obtain from any regulatory agency having jurisdiction the authority deemed by
the Company's counsel to be necessary for the lawful issuance of any Plan Shares
shall relieve the Company of any liability in respect of the nonissuance of Plan
Shares as to which the requisite authority shall not have been obtained.
1.10 Tax Withholding.
(a) Condition Precedent. The issuance, delivery or exercise of any
Options under the Plan is subject to the condition that if at any time the
Committee shall determine, in its discretion, that the satisfaction of
withholding tax or other withholding liabilities under any state or federal law
is necessary or desirable as a condition of, or in connection with, the
issuance, delivery or exercise of the Options, then the issuance, delivery or
exercise of the Options shall not be effective unless the withholding shall have
been effected or obtained in a manner acceptable to the Committee.
4
<PAGE> 5
(b) Manner of Satisfying Withholding Obligation. When an Optionee
participating in the Plan is required to pay to the Company an amount required
to be withheld under applicable income tax laws in connection with the exercise
of an Option, the Optionee may satisfy the obligation, in whole or in part, by
electing to (i) have the Company withhold a portion of the Plan Shares acquired
upon the exercise of the Option and having an aggregate Fair Market Value on the
date the amount of tax to be withheld is to be determined (the "Tax Date") equal
to the amount required to be withheld or (ii) deliver to the Company shares of
Common Stock already owned by the Optionee and having an aggregate Fair Market
Value on the Tax Date equal to the amount required to be withheld.
1.11 Exercise of Options.
(a) Method of Exercise. Each Option shall be exercisable in
accordance with the terms of the Option Agreement pursuant to which the Option
was granted. No Option may be exercised for a fraction of a Plan Share.
(b) Payment of Purchase Price. The purchase price of any Plan
shares purchased shall be paid at the time of exercise of the Option either (i)
in cash, (ii) by certified or cashier's check, (iii) by shares of Common Stock,
if permitted by the Committee, (iv) if then permitted under the laws of the
State of Texas, by cash or certified or cashier's check for the par value of the
Plan Shares plus a promissory note for the balance of the purchase price, which
note shall (A) provide for full personal liability of the maker, (B) bear
interest at the lowest rate then possible without causing the maker thereof to
have income imputed in connection therewith, (C) be due and payable both as to
principal and interest five years from the date such note is made, (D) be
secured by the Plan Shares issued in connection therewith, (E) be payable in
advance in whole or in part (with the Plan Shares pledged in connection
therewith released in the same proportion as such prepayment) and (F) contain
such other terms and provisions as the Committee may determine, including
without limitation the right to repay the note partially or wholly with Common
Stock or (v) by delivery of a copy of irrevocable instructions from the Optionee
to a broker or dealer, reasonably acceptable to the Company, to sell certain of
the Plan Shares purchased upon exercise of the Option or to pledge them as
collateral for a loan and promptly deliver to the Company the amount of sale or
loan proceeds necessary to pay such purchase price. If any portion of the
purchase price or a note given at the time of exercise is paid in shares of
Common Stock, those shares shall be valued at the then Fair Market Value.
1.12 Acceleration of Right to Exercise Options. Notwithstanding the
provisions of any Option Agreement regarding the time for exercise of an Option,
the following provisions shall apply:
5
<PAGE> 6
(a) Mergers and Reorganizations. If the Company or its
shareholders enter into an agreement to dispose of all or substantially
all of the assets of the Company by means of a sale, merger or other
reorganization or liquidation, or otherwise in a transaction in which
the Company is not the surviving corporation, any Option shall become
immediately exercisable with respect to the full number of shares
subject to that Option during the period commencing as of the date of
the agreement to dispose of all or substantially all of the assets of
the Company and ending when the disposition of assets contemplated by
that agreement is consummated or the Option is otherwise terminated in
accordance with its provisions or the provisions of the Article
pursuant to which was granted, whichever occurs first. The Option shall
not become immediately exercisable, however, if the transaction
contemplated in the agreement is a merger or reorganization in which
the Company will survive.
(b) Change in Control. In the event of a change in control or
threatened change in control of the Company, all Options granted prior
to the change in control shall become immediately exercisable. The term
"change in control" for purposes of this Section shall refer to the
acquisition of 20 percent or more of the voting securities of the
Company by any person or by persons acting as a group within the
meaning of Section 13(d)(3) of the Exchange Act; provided that no
change in control or threatened change in control shall be deemed to
have occurred if prior to the acquisition of, or offer to acquire, 20
percent or more of the voting securities of the Company, the full Board
shall have adopted by not less than two-thirds vote a resolution
specifically approving such acquisition or offer. The term "person" for
purposes of this Section refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity
not specifically listed herein. Whether a change in control is
threatened shall be determined solely by the Committee.
1.13 Written Notice Required. Any Option shall be deemed to be
exercised for purposes of the Plan when written notice of exercise has been
received by the Company at its principal office from the person entitled to
exercise the Option and payment for the Plan Shares with respect to which the
Option is exercised has been received by the Company in accordance with Section
1.11.
1.14 Compliance with Securities Laws. Plan Shares shall not be
issued with respect to any Option unless the exercise of the Option and the
issuance and delivery of the Plan Shares shall comply with all relevant
provisions of federal and state law, including without limitation the Securities
Act, the rules and regulations promulgated thereunder and the requirements of
any stock exchange upon which the Plan shares may then be listed or any national
quotation system on which they may be traded, and shall be further subject to
the approval of counsel for the Company with respect to such
6
<PAGE> 7
compliance, which approval shall not be unreasonably withheld. The Committee may
also require an Optionee to furnish evidence satisfactory to the Company,
including a written and signed representation letter and consent to be bound by
any transfer restrictions imposed by law, legend, condition or otherwise, that
the Plan Shares are being acquired only for investment and without any present
intention to sell or distribute the shares in violation of any federal or state
law, rule or regulation. Further each Optionee shall consent to the imposition
of a legend on the certificate representing the Plan Shares issued upon the
exercise of the Option restricting their transferability as required by law or
by this Section.
1.15 Employment of Optionee. Nothing in the Plan or in any Option
granted hereunder shall confer upon any Optionee any right to continued
employment by the Company or any of its subsidiaries or affiliates or limit in
any way the right of the Company or any subsidiary or affiliate at any time to
terminate or alter the terms of that employment.
1.16 Option Upon Termination of Employment. If an Optionee ceases
to be employed by the Company or any of its subsidiaries or affiliates for any
reason other than for cause, retirement, death or disability, his Option may be
exercised (to the extent exercisable on the date of termination of employment)
at any time within three months after the date of termination of employment,
unless either the Option or the Article pursuant to which it was granted
otherwise provides for earlier termination. If an Optionee ceases to be employed
by the Company or any of its subsidiaries or affiliates because the Optionee has
retired under a qualified retirement plan of the Company, as determined by the
Committee, his Option shall be exercisable (to the extent exercisable on the
effective date of such retirement) at any time within 12 months after the
effective date of such retirement unless by its terms the Option expires sooner.
1.17 Termination of Employment for Cause. If an Optionee ceases to
be employed by the Company or any of its subsidiaries or affiliates because the
Optionee is terminated for cause, the Option shall automatically expire. For
purposes of this Section, "cause" shall mean an act or acts involving a felony,
fraud, willful misconduct, the commission of any act that causes or reasonably
may be expected to cause substantial injury to the Company or other good cause.
The term "other good cause" as used in this Section shall include, but shall not
be limited to, habitual impertinence, a pattern of conduct that tends to hold
the Company up to ridicule in the community, conduct disloyal to the Company,
conviction of any crime of moral turpitude and substantial dependence, as judged
by the Committee, on alcohol or any controlled substance. "Controlled substance"
means a drug, immediate precursor, or other substance listed in Schedules I-V or
Penalty Groups 1-4 of the Texas Controlled Substances Act, as amended, or a
drug, immediate precursor, or other substance listed in Schedules I-V of the
Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as amended.
Notwithstanding the foregoing, if an Optionee is an Employee
7
<PAGE> 8
employed pursuant to a written employment agreement, Employee shall be deemed to
be terminated for "cause" for purposes of the Plan only if Employee is
considered under the circumstances to have been terminated for cause for
purposes of such employment agreement.
1.18 Option Upon Disability of Optionee. If an Optionee becomes
disabled within the meaning of Section 22(e)(3) of the Code while employed by
the Company or any of its subsidiaries or affiliates, his Option shall become
fully exercisable and shall expire 12 months after the date of such termination,
unless either the Option or the Article pursuant to which it was issued
otherwise provides for earlier termination.
1.19 Option Upon Death of Optionee. Except as otherwise limited by
the Committee at the time of the grant of an Option, if an Optionee dies while
employed by the Company or any of its subsidiaries or affiliates, or within
three months after ceasing to be an Employee for reason other than termination
for cause, his Option shall expire 12 months after the date of death, unless by
its terms it expires sooner. During this twelve-month or shorter period, the
Option may be fully exercised, to the extent that it remains unexercised on the
date of death, by the Optionee's personal representative or by the distributees
to whom the Optionee's rights under the Option shall pass by will or by the laws
of descent and distribution.
1.20 Options Not Transferable. Options granted under Article III
may not be sold, pledged, assigned or transferred in any manner otherwise than
by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined by the Code and may be exercised during the
lifetime of an Optionee only by that Optionee or by his legally authorized
representative. Options granted under Article IV may not be sold, pledged,
assigned or transferred in any manner otherwise than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code, and may be exercised during the lifetime of an Optionee
only by that Optionee or by his legally authorized representative; provided,
however, that the Committee, in its discretion, may allow for transferability of
such Options by the Optionee to "Immediate Family Members."
1.21 Information to Optionees. The Company shall furnish to each
Optionee a copy of the annual report, proxy statements and all other reports
sent to the Company's shareholders. Upon written request, the Company shall
furnish to each Optionee a copy of its most recent Annual Report on Form 10-K
and each quarterly report to shareholders issued since the end of the Company's
most recent fiscal year.
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<PAGE> 9
ARTICLE II
ADMINISTRATION
2.1 Committee. The Plan shall be administered by a Committee of
not fewer than two members, who shall be nonemployee members of the Board. No
member of the Committee shall be eligible to receive Options under the Plan
(since they shall not be employees) and each such member shall be a Non-Employee
Director. Subject to the express provisions of the Plan, the Committee shall
have the sole discretion and authority to determine the Employees to whom and
the time or times at which Options may be granted and the number of Plan Shares
subject to each Option.
2.2 Appointment of Committee. The Committee shall be appointed by
the Board and shall consist solely of nonemployee members of the Board; provided
that the Board may remove any Committee member for cause.
2.3 Majority Rule; Unanimous Written Consent. A majority of the
members of the Committee shall constitute a quorum, and any action taken by a
majority present at a meeting at which a quorum is present or any action taken
without a meeting evidenced by a writing executed by all members of the
Committee shall constitute the action of the Committee. Meetings of the
Committee may take place by telephone conference call.
2.4 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to Employees, their
employment, death, retirement, disability or other termination of employment,
and such other pertinent facts as the Committee may require. The company shall
furnish the Committee with such clerical and other assistance as is necessary to
the performance of its duties.
ARTICLE III
INCENTIVE STOCK OPTIONS
3.1 Option Terms and Conditions. The terms and conditions of
Options granted under this Article may differ from one another as the Committee
shall, in its discretion, determine, as long as all Options granted under this
Article satisfy the requirements of this Article.
3.2 Duration of Options. Each Option granted pursuant to this
Article and all rights granted hereunder shall expire on the date determined by
the Committee, but in no event shall any Option granted under this Article
expire earlier than one year or later than ten years after the date on which the
Option is granted. In addition, each Option shall be subject to early
termination as provided elsewhere in the Plan.
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<PAGE> 10
3.3 Purchase Price. The purchase price for each of the Plan Shares
acquired pursuant to the exercise, in whole or in part, of any Option granted
under this Article shall not be less than the Fair Market Value of each of the
Plan Shares at the time the grant of the Option becomes effective.
3.4 Maximum Amount of Options First Exercisable in Any Calendar
Year. The maximum aggregate Fair Market Value of Plan shares (determined at the
time the Option is granted) with respect to which Options issued under this
Article are exercisable for the first time by any Employee during any calendar
year under all incentive stock option plans of the Company and its subsidiaries
and affiliates shall not exceed $100,000. Any Option granted under the Plan and
first exercisable in excess of the foregoing limitation shall be considered
granted pursuant to Article IV and shall be clearly and specifically designated
as not being an incentive stock option.
3.5 Requirements as to Certain Options. In the event of the grant
of any Option under this Article to an individual who, at the time the Option is
granted, owns shares of stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or any of its
subsidiaries or affiliates within the meaning of Section 422(b)(6) of the code,
the purchase price for each of the Plan Shares subject to that Option must be at
least 110% of the Fair Market Value of those Plan Shares at the time the Option
is granted and the Option must not be exercisable after the expiration of five
years from the date of its grant.
3.6 Individual Option Agreements. Each Optionee receiving Options
pursuant to this Article shall be required to enter into a written Option
Agreement with the Company as a precondition to receiving an Option under this
Article. In such Option Agreement, the Optionee shall agree to be bound by the
terms and conditions of the Plan and such other matters as the Committee deems
appropriate.
ARTICLE IV
NONQUALIFIED STOCK OPTIONS
4.1 Option Terms and Conditions. The terms and conditions of
Options granted under this Article may differ from one another as the Committee
shall in its discretion determine, as long as all Options granted under this
Article satisfy the requirements of this Article.
4.2 Duration of Options. Each Option granted pursuant to this
Article and all rights thereunder shall expire on the date determined by the
Committee, but in no event shall any Option granted under this Article expire
later than ten years after the date on which the Option is granted. In addition,
each Option shall be subject to early termination as provided elsewhere in the
Plan.
10
<PAGE> 11
4.3 Purchase Price. The purchase price for each of the Plan Shares
acquired pursuant to the exercise, in whole or in part, of any Option granted
under this Article shall not be less than the Fair Market Value of each of the
Plan Shares at the time the grant of the Option becomes effective.
4.4 Individual Option Agreements. Each Optionee receiving Options
pursuant to this Article shall be required to enter into a written Option
Agreement with the Company as a precondition to receiving an Option under this
Article. In such Option Agreement, the Optionee shall agree to be bound by the
terms and conditions of the Plan and such other matters as the Committee deems
appropriate.
ARTICLE V
TERMINATION, AMENDMENT AND ADJUSTMENT
5.1 Termination and Amendment. The Plan shall terminate ten years
after the Effective Date. No Options shall be granted under the Plan after that
date of termination. Subject to the limitation contained in this Section, the
Committee may at any time amend or revise the terms of the Plan, including the
form and substance of the Option Agreements to be used in connection herewith;
provided that no amendment or revision shall (i) increase the maximum aggregate
number of Plan Shares, except as permitted under Section 5.2, (ii) increase the
maximum term established under the Plan for any Option or (iii) permit the
granting of an Option to anyone other than as provided in the Plan. No
amendment, suspension or termination of the Plan shall, without the consent of
the Employee who has received an Option hereunder, alter or impair any of that
Employee's rights or obligations under any Option granted under the Plan prior
to that amendment, suspension or termination.
5.2 Adjustments. If the outstanding Common Stock is increased,
decreased, changed into or exchanged for a different number or kind of shares or
securities through merger, consolidation, combination, exchange of shares, other
reorganization, recapitalization, reclassification, stock dividend, stock split
or reverse stock split, an appropriate and proportionate adjustment shall be
made in the maximum number and kind of Plan Shares as to which Options may be
granted under the Plan. A corresponding adjustment changing the number and kind
of shares allocated to unexercised Options or portions thereof, which shall have
been granted prior to any such change, shall likewise be made. Any such
adjustment in outstanding Options shall be made without change in the aggregate
purchase price applicable to the unexercised portion of the Option, but with a
corresponding adjustment in the price for each share covered by the Option. The
foregoing adjustments and the manner of application of the foregoing provisions
shall be determined solely by the Committee, and any such adjustment may provide
for the elimination of factional share interests.
11
<PAGE> 12
ARTICLE VI
MISCELLANEOUS
6.1 Other Option Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plan in effect for the
Company or any of its subsidiaries or affiliates, nor shall the Plan preclude
the Company or any of its subsidiaries or affiliates from establishing any other
form of incentive or other compensation for Employees.
6.2 Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company and any of its subsidiaries or affiliates
that adopt the Plan.
6.3 Number and Gender. Whenever used herein, nouns in the singular
shall include the plural where appropriate, and the masculine pronoun shall
include the feminine gender.
6.4 Headings. Headings of articles and sections hereof are inserted
for convenience of reference and constitute no part of the Plan.
6.5 Conditions. No Options granted under the Plan shall become
effective until and unless the Plan has been presented to and approved by the
shareholders of the Company within twelve months before or after the date the
Plan is adopted by the Board.
ARTICLE VII
DEFINITIONS
As used herein with initial capital letters, the following terms have
the meanings hereinafter set forth unless the context clearly indicates to the
contrary:
7.1 "Board" shall mean the Board of Directors of the Company.
7.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
7.3 "Committee" shall mean the Committee appointed in accordance with
Section 2.2.
7.4 "Common Stock" shall mean the Common Stock, par value $0.01 per
share, of the Company or, in the event that the outstanding shares of such
Common
12
<PAGE> 13
Stock are hereafter changed into or exchanged for shares of a different stock or
security of the Company or some other corporation, such other stock or security.
7.5 "Company" shall mean Calloway's Nursery, Inc. a Texas
Corporation.
7.6 "Effective Date" shall mean the date of the shareholder approval
required by Section 6.5 of the Plan.
7.7 "Employee(s)" shall mean employee(s) of the Company or of any
of its subsidiaries or affiliates that adopt the Plan and shall not include
members of the Board who are not otherwise employed by the Company.
7.8 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
7.9 "Fair Market Value" shall mean such value as determined by the
Committee on the basis of such factors as it deems appropriate; provided that if
the Common Stock is traded on a national securities exchange or transactions in
the Common stock are quoted on a national quotation system, such value shall be
determined by the Committee on the basis of the last reported sales price for
the Common Stock on the date for which such determination is relevant, as
reported on the national securities exchange or the national quotation system.
If the Common Stock is not listed and traded upon a recognized securities
exchange or on a national quotation systems, the Committee shall make a
determination of Fair Market Value on the basis of the mean between the closing
bid and asked quotations for such stock on the date for which such determination
is relevant (as reported by a recognized stock quotation service) or, in the
event that there shall be no bid or asked quotations on the date for which such
determination is relevant, then on the basis of the mean between the closing bid
and asked quotations on the date nearest preceding the date for which such
determination is relevant for which such bid and asked quotations were
available.
7.10 "Immediate Family Members" means children, grandchildren,
spouse, siblings or parents of the Optionee or bona fide trusts, partnerships or
other entities controlled by, and of which the beneficiaries are, Immediate
Family members of the Optionee. Any option grants that are transferable are
further conditioned on the Optionee and Immediate Family Members agreeing to
abide by the Company's then current stock option transfer guidelines.
7.ll "Incentive Stock Option" shall mean an Option granted pursuant
to Article III.
7.12 "Non-Employee Director" shall mean a director who:
13
<PAGE> 14
(i) Is not currently an officer (as defined in Rule
16a-1(f)) of the Exchange Act of the issuer or a parent or
subsidiary of the issuer, or otherwise currently employed by
the issuer or a parent or subsidiary of the issuer;
(ii) Does not receive compensation, either directly
or indirectly, from the issuer or a parent or subsidiary of
the issuer, for services rendered as a consultant or in any
capacity other than as a director, except for an amount that
does not exceed the dollar amount for which disclosure would
be required pursuant to Item 404(a) of Reg. S-K of the
Exchange Act ("Reg. S-K");
(iii) Does not possess an interest in any other
transaction for which disclosure would be required pursuant
to Item 404(a) of Reg. S-K; and
(iv) Is not engaged in a business relationship for
which disclosure would be required pursuant to Item 404(b)
of Reg. S-K.
7.13 "Nonqualified Stock Option" shall mean an Option granted
pursuant to Article IV.
7.14 "Option" shall mean an Incentive Stock Option or a Nonqualified
Stock Option.
7.15 "Optionee" shall mean an Employee to whom an Option has been
granted hereunder.
7.16 "Option Agreement" shall mean an agreement between the Company
and an Optionee with respect to one or more Options.
7.17 "Plan" shall mean the Calloway's Nursery, Inc. 1998 Stock Option
Plan, the terms of which are set forth herein.
7.18 "Plan Shares" shall mean shares of Common Stock issuable
pursuant to the Plan.
7.19 "Securities Act" shall mean the Securities Act of 1933, as
amended.
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