<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares Outstanding as
Title of February 12, 1999
----- ---------------------
<S> <C>
Common Stock, par value $.01 per share 5,556,238
</TABLE>
<PAGE> 2
CALLOWAY'S NURSERY, INC.
FORM 10-Q
DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
Item 1
Index to Consolidated Financial Statements
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3
Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
Items 1-6 11
</TABLE>
2
<PAGE> 3
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS OR INFORMATION
- --------------------------------------------------------------------------------
Certain of the statements made in this Form 10-Q Report are not based on
historical facts, but are forward-looking information based on assumptions about
future conditions that may ultimately prove to be inaccurate. Actual events and
results may materially differ from anticipated results described in such
statements. Our ability to achieve such results is subject to certain risks and
uncertainties. These include, without limitation: general economic conditions
and weather in the Dallas-Fort Worth area and competition from home improvement
warehouses, discount stores, grocery stores and other retailers of nursery
products.
3
<PAGE> 4
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents $ 1,175 $ 1,649 $ 1,788
Property held for sale 448 448 --
Accounts receivable 80 148 19
Inventories 2,604 2,341 1,482
Deferred income taxes 891 496 819
Prepaids and other assets 78 112 67
------------ ------------ ------------
Total current assets 5,276 5,194 4,175
------------ ------------ ------------
Property and equipment, net 8,090 7,815 7,532
Goodwill, net 1,038 1,065 1,146
Deferred income taxes 565 565 581
Other assets 46 46 49
------------ ------------ ------------
Total assets $ 15,015 $ 14,685 $ 13,483
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,644 $ 1,913 $ 1,890
Accrued expenses 1,066 831 901
Current portion of long-term debt 322 338 106
------------ ------------ ------------
Total current liabilities 4,032 3,082 2,897
------------ ------------ ------------
Deferred rent payable 1,101 1,093 1,074
Long-term debt, net of current portion 2,978 3,044 2,537
------------ ------------ ------------
Total liabilities 8,111 7,219 6,508
------------ ------------ ------------
Commitments
Shareholders equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 57 57 56
Additional paid-in capital 8,723 8,666 8,478
Retained earnings (accumulated deficit) (480) 139 (163)
------------ ------------ ------------
8,300 8,862 8,371
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
------------ ------------ ------------
Total shareholders' equity 6,904 7,466 6,975
------------ ------------ ------------
Total liabilities and shareholders'
equity $ 15,015 $ 14,685 $ 13,483
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $ 5,475 $ 4,480
Cost of goods sold 3,117 2,451
---------- ----------
Gross profit 2,358 2,029
---------- ----------
Operating expenses 2,136 1,894
Occupancy expenses 661 677
Advertising expenses 377 323
Net interest expense 27 12
Depreciation and amortization 170 100
---------- ----------
Total expenses 3,371 3,006
---------- ----------
Loss before income taxes (1,013) (977)
Income tax benefit (394) (391)
---------- ----------
Net loss $ (619) $ (586)
========== ==========
Net loss per common share
Basic $ (.11) $ (.11)
Diluted $ (.11) $ (.11)
Weighted average number of common shares
outstanding
Basic 5,509 5,351
Diluted 5,509 5,351
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (619) $ (586)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 170 100
Net change in operating assets and liabilities 418 (91)
---------- ----------
Net cash used for operating activities (31) (577)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (418) (2,139)
---------- ----------
Net cash used for investing activities (418) (2,139)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 57 73
Net borrowings (repayments) of debt (82) 743
---------- ----------
Net cash provided by (used for) by financing
activities
(25) 816
---------- ----------
Net decrease in cash and cash equivalents (474) (1,900)
Cash and cash equivalents at beginning of period 1,649 3,688
---------- ----------
Cash and cash equivalents at end of period $ 1,175 $ 1,788
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
These interim consolidated financial statements were prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). In
management's opinion, all adjustments considered necessary for a fair
presentation of the financial position at December 31, 1998, and the results of
operations and cash flows for the three-month periods ended December 31, 1998
and 1997 have been made. Such adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations and cash flows
for the three-month period ended December 31, 1998 are not necessarily
indicative of expected results of operations and cash flows for the fiscal year
ending September 30, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the SEC rules and regulations
referred to above. Accordingly, these financial statements should be read in
conjunction with the audited financial statements and related notes for the
fiscal year ended September 30, 1998 included in the Form 10-K covering such
period.
2. INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Finished goods $ 1,638 $ 1,510 $ 898
Work in process 860 739 509
Supplies 106 92 75
------------ ------------ ------------
$ 2,604 $ 2,341 $ 1,482
============ ============ ============
</TABLE>
3. 401(k) PLAN
On January 1, 1999 the Company initiated a 401(k) plan for its employees. The
401(k) plan provides employees with a way to save and invest for their
retirement. The Company is continuing the Stock Purchase Plan, which provides
for Calloway's matching contributions based on each employee's years of
participation. The Company does not expect to provide matching contributions
for the 401(k) plan. The 401(k) plan is not expected to have a material impact
on financial condition or results of operation.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------
First quarter highlights (unaudited) Fiscal 1999 Fiscal 1998 Fiscal 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 5,475 4,480 4,261
Sales increase 22% 5% 2%
Same-store sales increase 18% 10% 2%
Number of stores (end of quarter) 16 15 16
Gross profit margin 43% 45% 42%
Pre-tax operating loss (1,013) (977) (1,083)
Net loss per share (basic and diluted) (.11) (.11) (.21)
Cash flows from operations (31) (577) 31
Retail store inventories 1,638 898 406
Current ratio 1.31 1.44 1.17
Property, plant and equipment (net) 8,090 7,532 4,553
Long-term debt (including current portion) 3,300 2,643 562
- ----------------------------------------------------------------------------------------------------
</TABLE>
Quarter Ended December 31, 1998 Compared with Quarter Ended December 31, 1997
Sales increased by 22%, led by strength in:
o Gardening-related products,
o Christmas merchandise, and
o New direct-import pottery lines.
Same-store sales rose a healthy 18%.
We opened two new stores, giving us sixteen stores, just before the Christmas
shopping season. For the first six weeks of the quarter, we had fourteen stores,
one less than a year ago.
Gross profit margins declined to 43% from 45% last year. Sales were strong for
the quarter; however, our bedding plant sales were somewhat less than expected,
leading to higher stock loss in that merchandise category during the quarter.
Our operating expenses were up by 13% over last year. The increased expense was
due, in part, to the costs of opening the two new stores. Due to the increased
sales volume, operating expenses this quarter were 39% of sales, compared to 43%
of sales for the comparable quarter last year.
Occupancy expenses decreased by 2%, mostly because we closed two underperforming
stores during fiscal 1998. Due to the increased sales volume, occupancy expenses
were 12% of sales for the quarter, compared to 15% of sales for the comparable
quarter last year.
8
<PAGE> 9
Net interest expense increased by 125% over last year due to increased interest
expense on debt used to:
o Build or remodel the three new stores we opened in the past nine months,
o Acquire and more fully develop our growing operation, and
o Acquire and implement our merchandise computer system.
Depreciation expense increased by 70% over last year, mainly due to the
depreciation on the assets noted above.
Advertising expenses were 7% of sales for both this quarter and the comparable
quarter last year. Advertising expenses increased by 17%, in line with the 22%
sales increase. The increased amount spent was due, in part, to greater use of
television to promote Christmas sales.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Cash flows used by operations were $31,000 for the quarter compared to $577,000
used for the comparable quarter last year. Our financial strength and excellent
relationships with our suppliers enabled us to achieve an increased inventory
investment that was more than offset by increased accounts payable to our
suppliers. Our increased inventory investment is primarily related to:
o Adding a new line of direct-import pottery that is unique in our
marketplace, and
o Launching production of spring 1999 merchandise at our growing
operation earlier than we did last year, which we expect to lead to
continued improvements in quality and selection of plants that we
produce for sale in our retail stores.
Cash flows used by investing activities for the quarter were much lower than
they were for the comparable quarter last year. This past quarter, we spent
about $400,000, mostly to remodel the two new stores we opened before the
Christmas season. Last year, we spent about $2.1 million, mostly to acquire land
and start construction of our new prototype store, Calloway's at Stonegate,
which opened in April 1998.
Financing activities used cash flows this past quarter. We paid down $82,000 on
long-term debt as scheduled. Last year, we had net borrowings of over $700,000,
mostly to help finance land acquisition for the new prototype store. (We
ultimately used permanent financing of $1,125,000 from a bank to help finance
that store.)
The retail nursery business is very seasonal. Usually, we use cash in our
operations during the first (ending December 31) and fourth (ending September
30) fiscal quarters, which are also typically not profitable. The business
generates most of the operating cash flow during the profitable third fiscal
quarter (ending June 30). We have obtained a revolving line of credit from a
bank to help support our seasonal working capital requirements. Borrowings, if
any, typically occur during February and March, and are usually repaid by April.
9
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- --------------------------------------------------------------------------------
IMPACT OF YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
Our Year 2000 Project (the "Project") continues. 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.
Our objective is to make sure 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.
We are corresponding with our significant suppliers and service providers to
determine the extent that they are vulnerable to Year 2000 issues. To date, the
responses indicate that their Year 2000 issues are being addressed on a timely
basis. Due to the fragmentation of the wholesale nursery industry, we are not
dependent upon a single supplier for inventory. Nevertheless, we are developing
appropriate contingency plans for any significant supply disruptions that may
result from our 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 on our systems or our results of operations.
10
<PAGE> 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 12, 1999
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
----------------------------------------
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
----------------------------------------
Daniel G. Reynolds, Vice President
and Chief Financial Officer
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
- -------- ----
<S> <C>
27.01 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,175
<SECURITIES> 0
<RECEIVABLES> 80
<ALLOWANCES> 0
<INVENTORY> 2,604
<CURRENT-ASSETS> 5,276
<PP&E> 8,090
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,015
<CURRENT-LIABILITIES> 4,032
<BONDS> 2,978
0
0
<COMMON> 57
<OTHER-SE> 6,847
<TOTAL-LIABILITY-AND-EQUITY> 15,015
<SALES> 5,475
<TOTAL-REVENUES> 5,475
<CGS> 3,117
<TOTAL-COSTS> 3,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (1,013)
<INCOME-TAX> (394)
<INCOME-CONTINUING> (619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (619)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
