<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 August 9, 2000
----- ---------------------
<S> <C>
Common Stock, par value $.01 per share 5,918,349
</TABLE>
<PAGE> 2
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 2000
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 (unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Items 1-6 13
</TABLE>
2
<PAGE> 3
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. We are including this
statement for the express purpose of providing Calloway's the protections of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
with respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements contained in this Report.
Our expected future results, products and service performance or other
non-historical facts are forward-looking and reflect our current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of our business, geographic concentration, the impact of weather
and other growing conditions, risks associated with the Cornelius Acquisition
and the ability to integrate Cornelius in a timely and cost effective manner,
the ability to manage growth, the impact of competition, the ability to obtain
future financing, government regulations, market risks associated with
variable-rate debt, and other risks and uncertainties defined from time to time
in our Securities and Exchange Commission filings.
Therefore, each reader of this report is cautioned to consider carefully these
factors as well as the specific factors discussed with each forward-looking
statement in this Report and disclosed in our filings with the Securities and
Exchange Commission as such factors, in some cases, have affected, and in the
future (together with other factors) could affect, our ability to implement our
business strategy and may cause actual results to differ materially from those
contemplated by the statements expressed in this Report.
3
<PAGE> 4
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30, JUNE 30,
2000 1999 1999
-------- ------------ --------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 3,643 $ 62 $ 4,211
Property held for sale -- -- 448
Accounts receivable, net of allowance 1,281 54 124
Inventories 11,264 9,736 3,122
Deferred income taxes -- -- 53
Prepaids and other assets 143 137 109
-------- -------- --------
Total current assets 16,331 9,989 8,067
Property and equipment, net 14,985 13,859 8,009
Goodwill, net 875 956 984
Deferred income taxes 1,369 1,392 565
Other assets 193 139 45
-------- -------- --------
Total assets $ 33,753 $ 26,335 $ 17,670
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,767 $ 3,356 $ 2,855
Accrued expenses 2,021 1,210 1,392
Accrued income taxes 2,159 -- 360
Notes payable, current -- 463 --
Current portion of long-term debt 780 558 349
Deferred income taxes, current 165 622 --
-------- -------- --------
Total current liabilities 9,892 6,209 4,956
Deferred rent payable 1,132 1,113 1,108
Long-term debt, net of current portion 9,755 9,003 2,798
-------- -------- --------
Total liabilities 20,779 16,325 8,862
-------- -------- --------
Commitments and contingencies
Non-voting preferred stock, with mandatory
redemption provisions 1,808 1,890 --
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 62 59 59
Additional paid-in capital 9,163 8,927 8,833
Retained earnings 3,337 530 1,312
-------- -------- --------
12,562 9,516 10,204
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 11,166 8,120 8,808
-------- -------- --------
Total liabilities and shareholders' equity $ 33,753 $ 26,335 $ 17,670
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 46,162 $ 26,137 $ 20,893 $ 15,065
Cost of goods sold 24,100 13,263 10,401 7,243
-------- -------- -------- --------
Gross profit 22,062 12,874 10,492 7,822
-------- -------- -------- --------
Operating expenses 12,442 6,948 3,570 2,873
Occupancy expenses 2,344 1,945 784 600
Advertising expenses 1,219 1,294 489 617
Depreciation and amortization 696 522 257 179
Interest expense 770 237 304 75
Interest income (58) (78) (53) (56)
-------- -------- -------- --------
Total expenses 17,413 10,868 5,351 4,288
-------- -------- -------- --------
Income before income taxes 4,649 2,006 5,141 3,534
Income taxes 1,765 833 1,910 1,400
-------- -------- -------- --------
Net income 2,884 1,173 3,231 2,134
Accretion of preferred stock (192) -- (67) --
Retirement of preferred stock 115 -- -- --
-------- -------- -------- --------
Net income attributable to common
shareholders $ 2,807 $ 1,173 $ 3,164 $ 2,134
======== ======== ======== ========
Weighted average number of common shares
outstanding
Basic 5,789 5,557 5,865 5,603
Diluted 5,930 5,735 6,048 5,841
Net income per common share
Basic $ .48 $ .21 $ .54 $ .38
Diluted $ .47 $ .20 $ .52 $ .37
</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>
NINE MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,882 $ 1,173
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 696 522
Net change in operating assets and liabilities 1,153 1,568
------- -------
Net cash provided by operating activities 4,731 3,263
------- -------
Cash flows from investing activities:
Additions to property and equipment (1,741) (635)
------- -------
Net cash used for investing activities (1,741) (635)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 239 169
Retirement of preferred stock (159) --
Proceeds from issuance of debt 3,100 --
Repayments of debt (2,589) (235)
------- -------
Net cash used provided by (used for) financing activities 591 (66)
------- -------
Net increase in cash and cash equivalents 3,581 2,562
Cash and cash equivalents at beginning of period 62 1,649
------- -------
Cash and cash equivalents at end of period $ 3,643 $ 4,211
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
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CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2000, and the results of
operations for the three-month and nine-month periods ended June 30, 2000 and
1999, and cash flows for the nine-month periods ended June 30, 2000 and 1999
have been made. Such adjustments are of a normal recurring nature.
Because of seasonal and other factors, the results of operations for the
three-month and nine-month periods ended June 30, 2000 and cash flows for the
nine-month period ended June 30, 2000 are not necessarily indicative of expected
results of operations and cash flows for the fiscal year ending September 30,
2000.
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, 1999 included in the Form 10-K covering such
period.
2. RECLASSIFICATIONS
Certain amounts for 1999 have been reclassified to conform to the 2000
presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30, September 30, June 30,
2000 1999 1999
--------- -------------- ---------
<S> <C> <C> <C>
Finished goods $ 5,719 $ 4,424 $ 2,250
Work in process 5,165 4,952 814
Supplies 380 360 58
--------- -------------- ---------
$ 11,264 $ 9,736 $ 3,122
========= ============== =========
</TABLE>
7
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CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER SHARE
EPS for the nine-month and three-month periods ended June 30, 2000 and 1999 is
computed as follows (amounts, except per share amounts, in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ---------------------
June 30 June 30 June 30 June 30
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS
Net income attributable to common
shareholders $ 2,807 $ 1,173 $ 3,164 $ 2,134
Weighted average number of shares
outstanding 5,789 5,557 5,865 5,603
Net income per common share $ .48 $ .21 $ .54 $ .38
Diluted EPS
Net income attributable to common
shareholders $ 2,807 $ 1,173 $ 3,164 $ 2,134
Weighted average number of shares
outstanding - basic 5,789 5,557 5,865 5,603
Effective of dilutive securities - assumed
exercise of stock options 141 178 183 238
--------- --------- --------- ---------
Weighted average number of shares
outstanding -- diluted 5,930 5,735 6,048 5,841
========= ========= ========= =========
Net income per common share $ .47 $ .20 $ .52 $ .37
</TABLE>
The Company had 985,100 and 921,500 outstanding stock options at June 30, 2000
and 1999, respectively.
For each of the Nine Month and Three Month Periods Ended June 30, 2000 and 1999,
7,000 options were excluded from the diluted EPS computation because they would
have been antidilutive.
8
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CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
The Company has two reportable segments: Retail, and Growing and Wholesale.
The following is a tabulation of business segment information as of and for the
nine-month and three-month periods ended June 30, 2000 and 1999. Intersegment
elimination information is included to reconcile segment data to the condensed
consolidated financial statements. Amounts are in thousands.
<TABLE>
<CAPTION>
Nine Nine Three Three
Month Month Month Month
Period Period Period Period
ended ended ended ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
From external customers
Retail $ 38,198 $ 26,118 $ 17,893 $ 15,046
Growing and Wholesale 7,964 19 3,000 19
----------- ----------- ----------- -----------
Totals 46,162 26,137 20,893 15,065
----------- ----------- ----------- -----------
From other operating segments
Retail -- -- -- --
Growing and Wholesale 2,483 1,497 1,238 839
----------- ----------- ----------- -----------
Totals 2,483 1,497 1,238 839
----------- ----------- ----------- -----------
Inter-segment eliminations (2,483) (1,497) (1,238) (839)
----------- ----------- ----------- -----------
Total consolidated net sales $ 46,162 $ 26,137 $ 20,893 $ 15,065
=========== =========== =========== ===========
PRE-TAX OPERATING PROFIT
Retail $ 4,194 $ 1,591 $ 3,968 $ 3,254
Growing and Wholesale 414 142 1,089 115
----------- ----------- ----------- -----------
Totals 4,608 1,733 5,057 3,369
Corporate and inter-segment
eliminations 41 273 84 165
----------- ----------- ----------- -----------
Total consolidated pre-tax
operating profit $ 4,649 $ 2,006 $ 5,141 $ 3,534
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------- --------------
<S> <C> <C>
TOTAL ASSETS
Retail $ 6,552 $ 2,759
Growing and Wholesale 8,297 955
Corporate 18,904 13,956
-------------- --------------
Totals $ 33,753 $ 17,670
============== ==============
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In September 1999 we completed the Acquisition of Cornelius Nurseries, Inc. and
affiliated companies (the "Cornelius Acquisition"). The quarter ended June 30,
2000 is the third fiscal period where we have reported results of operations
inclusive of the Cornelius Acquisition.
<TABLE>
<CAPTION>
(Amounts in millions, except per share amounts)
-----------------------------------------------
Third quarter highlights (unaudited) Fiscal 2000 Fiscal 1999 Fiscal 1998
------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Consolidated net sales $20.9 $15.1 $15.0
Retail segment sales 17.9 15.1 15.0
Growing and Wholesale segment sales 4.2 .9 .6
Less: internal sales (1.2) (.9) (.6)
Sales increase 38% 0% 15%
Same-store sales increase (decrease) (7%) (4%) 14%
Number of retail stores (end of quarter) 21 16 14
Gross profit margin 50% 52% 46%
Pre-tax operating income $5.1 $3.5 $2.8
Net income per share (diluted) $.52 $.37 $.31
Cash flows from operations 2.8 3.9 3.6
Retail store inventories 4.5 2.2 1.6
Current ratio 1.65 1.63 1.79
Property, plant and equipment (net) $15.0 $8.0 $7.1
Long-term debt (including current portion) 10.5 3.1 3.0
</TABLE>
Quarter Ended June 30, 2000 Compared with Quarter Ended June 30, 1999
Calloway's Nursery continued a strong positive trend by recording the highest
pre-tax operating profit for any quarter in the Company's history. The continued
outstanding results were primarily due to achieving continued operating
efficiencies at the existing Calloway's Nursery retail stores in Dallas / Fort
Worth, with the additional positive contribution from all operations acquired in
the Cornelius Acquisition.
Management's focus this year has been to achieve solid bottom-line growth by
holding the line on expenses, while smoothly integrating the operations acquired
in the Cornelius Acquisition.
Sales increased by 38%, primarily because of the additional operations acquired
in the Cornelius Acquisition. The seventeen Calloway's Nursery retail stores in
Dallas and Fort Worth recorded a 4% sales decline, with same-store sales off 7%.
Retail segment sales were approximately $17.9 million, or 86% of total sales.
Growing and Wholesale segment sales were approximately $4.2 million, with about
$1.2 million of those sales to our own retail stores and wholesale distribution
centers.
10
<PAGE> 11
Gross profit margins decreased to 50% from 52% last year. The Calloway's Nursery
retail stores achieved improved margins as a result of continued improvements in
merchandise procurement and presentation, and the Cornelius Nurseries retail
stores in Houston achieved comparable gross margins for the Spring season.
However, gross profit margins were lower overall due to the increased volume of
Growing and Wholesale sales, which typically earn lower gross profit margins
than retail sales.
As the following table illustrates, all expense components, except for Interest
Expense, were either flat or lower relative to Sales for the quarter ended June
30, 2000 compared to the same period last year:
<TABLE>
<CAPTION>
(Amounts in thousands)
-------------------------------------------------------
Fiscal 2000 Fiscal 1999
----------------------- -----------------------
Amount % Sales Amount % Sales
<S> <C> <C> <C> <C>
Consolidated net sales $20,893 $15,065
Operating expenses 3,570 17% 2,873 19%
Occupancy expenses 784 4% 600 4%
Advertising expenses 489 2% 617 4%
Depreciation and amortization 257 1% 179 1%
Interest expense (net) 251 1% 19 --
Total expenses $5,351 26% $4,288 28%
Note - percentages will not foot due to rounding
</TABLE>
Interest Expense increased due to the debt associated with the Cornelius
Acquisition and to increased interest rates.
Nine-Month Period Ended June 30, 2000 Compared with Nine-Month Period Ended June
30, 1999
The results for the first nine months of fiscal 2000 were substantially improved
from those of one year ago -- Calloway's improved its pre-tax operating income
for the first nine months by 132%.
Management's focus this year has been to achieve solid bottom-line growth by
holding the line on expenses while smoothly integrating the operations acquired
in the Cornelius Acquisition.
Sales increased by 77%. The seventeen Calloway's Nursery retail stores in Dallas
and Fort Worth recorded a 4% sales increase, with same-store sales rising 2%.
Retail segment sales were approximately $38.2 million, and Growing and Wholesale
segment sales were approximately $10.4 million, with about $2.5 million of those
sales to our own retail stores and wholesale distribution centers.
Gross profit margins declined from 49% to 48%. The Calloway's Nursery retail
stores achieved improved margins as a result of continued improvements in
merchandise procurement and presentation, and the Cornelius Nurseries retail
stores in Houston achieved gross margins which approximated those achieved by
the Calloway's Nursery retail stores this year. However, gross profit margins
were lower overall due to the increased volume of Growing and Wholesale sales,
which typically earn lower gross profit margins than retail sales.
11
<PAGE> 12
Expenses increased due to the Cornelius Acquisition. However, total Expenses
were only 38% of Sales for the first nine months of fiscal 2000, compared to 42%
of sales for the comparable period in fiscal 1999.
CAPITAL RESOURCES AND LIQUIDITY
Cash flows provided by operating activities totaled approximately $4.7 million
for the nine-month period ended June 30, 2000, compared to $3.3 million for the
comparable period one year ago. The improvement was due to the approximately
$2.6 million improvement in pre-tax operating results, offset by increases in
Inventory and Accounts receivable related to the Growing and Wholesale segment
of the business.
Cash flows used by investing activities of approximately $1.7 million were
increased from $0.6 million one year ago. Substantially all of the increase was
due to the construction of a new Calloway's retail store that opened in April
2000.
Cash flows provided by financing activities totaled approximately $0.6 million
for the nine-month period, compared to cash flows used by financing activities
of $.1 million for the comparable period one year ago. Significant transactions
included:
o We borrowed approximately $0.8 million to finance the construction of
the new retail store that opened in April 2000.
o We replaced approximately $1.7 million in variable-rate debt with
approximately $2.2 million in fixed-rate debt that also has a longer
maturity.
o We repaid approximately $0.5 million borrowed at the beginning of
Fiscal 2000 under our revolving line of credit.
In October 1999 we redeemed 5,798 shares of Preferred Stock for a cash payment
of approximately $0.2 million. The redeemed Preferred Stock had a redemption
value of approximately $0.6 million and a carrying amount of approximately $0.3
million. Thus, the remaining redemption amount of the Preferred Stock was
reduced to approximately $3.4 million.
Inventories increased to approximately $11.3 million at June 30, 2000 compared
to approximately $3.1 million at June 30, 1999. Most of the increase was due to
the Cornelius Acquisition. We had Retail Inventories of approximately $4.5
million at June 30, 2000 compared to approximately $2.2 million at June 30,
1999, and Growing and Wholesale Inventories of approximately $6.8 million at
June 30, 2000 compared to approximately $0.9 million at June 30, 1999. It is
normal for the Growing and Wholesale Segment to have higher amounts of
Inventory, since merchandise growing times range from several weeks to over one
year.
We believe that the cash flows from operations, supplemented on a seasonal basis
by revolving credit lines, should adequately support servicing of the debt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Calloway's is exposed to certain market risks, including fluctuations in
interest rates and its common stock price. We do not enter into transactions
designed to mitigate such market risks for trading or speculative purposes. As
of June 30, 2000, we had no foreign exchange contracts and/or options
outstanding.
We manage our interest rate risk by balancing (a) the amount of variable-rate
long-term debt with (b) the amounts due under long-term leases, which typically
have fixed rental payments that do not fluctuate with interest rate changes. For
our variable-rate debt,
12
<PAGE> 13
interest rate changes generally do not affect the fair market value of such
debt, but do impact future earnings and cash flows, assuming other factors are
held constant.
At June 30, 2000 Calloway's had variable rate debt of $7.3 million. In addition,
we had future minimum lease payments under noncancellable operating leases of
$13.7 million. Holding other variables, such as debt levels, constant, a one
percentage point increase in interest rates would be expected to have an
estimated impact on pre-tax earnings and cash flows for next year of
approximately $73,000 for the variable-rate debt.
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.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 11, 2000
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
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
