<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, 1999
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 11, 2000
----- ---------------------
<S> <C>
Common Stock, par value $.01 per share 5,788,364
</TABLE>
<PAGE> 2
CALLOWAY'S NURSERY, INC.
FORM 10-Q
DECEMBER 31, 1999
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 9
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
Items 1-6 12
</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>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 51 $ 62 $ 1,175
Property held for sale -- -- 448
Accounts receivable 788 54 80
Inventories 8,817 9,736 2,604
Deferred income taxes -- -- 891
Prepaids and other assets 186 137 78
------------ ------------- ------------
Total current assets 9,842 9,989 5,276
Property and equipment, net 14,053 13,859 8,090
Goodwill, net 929 956 1,038
Deferred income taxes 1,371 1,392 565
Other assets 197 139 46
------------ ------------- ------------
Total assets $ 26,392 $ 26,335 $ 15,015
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,962 $ 3,356 $ 2,644
Accrued expenses 1,566 1,210 1,066
Notes payable, current -- 463 --
Current portion of long-term debt 708 558 322
Deferred income taxes, current 498 622 --
------------ ------------- ------------
Total current liabilities 6,734 6,209 4,032
Deferred rent payable 1,110 1,113 1,101
Long-term debt, net of current portion 8,865 9,003 2,978
------------ ------------- ------------
Total liabilities 16,709 16,325 8,111
------------ ------------- ------------
Commitments and contingencies
Non-voting preferred stock, with mandatory
redemption provisions 1,677 1,890 --
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 60 59 57
Additional paid-in capital 8,985 8,927 8,723
Retained earnings (accumulated deficit) 357 530 (480)
------------ ------------- ------------
9,402 9,516 8,300
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
------------ ------------- ------------
Total shareholders' equity 8,006 8,120 6,904
------------ ------------- ------------
Total liabilities and shareholders'
equity $ 26,392 $ 26,335 $ 15,015
============ ============= ============
</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>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 12,980 $ 5,475
Cost of goods sold 7,035 3,117
-------- --------
Gross profit 5,945 2,358
-------- --------
Operating expenses 4,678 2,108
Occupancy expenses 772 661
Advertising expenses 383 377
Depreciation and amortization 209 170
Interest expense 228 75
Interest income (5) (20)
-------- --------
Total expenses 6,265 3,371
-------- --------
Loss before income taxes (320) (1,013)
Income tax benefit (93) (394)
-------- --------
Net loss (227) (619)
Accretion of preferred stock (61) --
Retirement of preferred stock 115 --
-------- --------
Net loss attributable to common shareholders $ (173) $ (619)
======== ========
Weighted average number of common shares outstanding
Basic 5,715 5,509
Diluted 5,715 5,509
Net loss per common share
Basic $ (.03) $ (.11)
Diluted $ (.03) $ (.11)
</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,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (227) $ (619)
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Depreciation and amortization 209 170
Net change in operating assets and liabilities 934 418
---------- ----------
Net cash provided by (used for) operating activities 916 (31)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (376) (418)
---------- ----------
Net cash used for investing activities (376) (418)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 59 57
Retirement of preferred stock (159) --
Borrowings on debt 160 --
Repayments of debt (611) (82)
---------- ----------
Net cash used for financing activities (551) (25)
---------- ----------
Net decrease in cash and cash equivalents (11) (474)
Cash and cash equivalents at beginning of period 62 1,649
---------- ----------
Cash and cash equivalents at end of period $ 51 $ 1,175
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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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 December 31, 1999, and the results of
operations and cash flows for the three-month periods ended December 31, 1999
and 1998 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, 1999 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 1998 have been reclassified to conform to the 1999
presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1999 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Finished goods $ 3,136 $ 4,424 $ 1,638
Work in process 5,280 4,952 860
Supplies 401 360 106
-------------- -------------- --------------
$ 8,817 $ 9,736 $ 2,604
============== ============== ==============
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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
three-month periods ended December 31, 1999 and 1998. Intersegment elimination
information is included to reconcile segment data to the condensed consolidated
financial statements. Amounts are in thousands:
<TABLE>
<CAPTION>
Three month Three month
period ended period ended
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
From external customers
Retail $ 10,889 $ 5,448
Growing and Wholesale 2,091 27
------------ ------------
Totals 12,980 5,475
------------ ------------
From other operating segments
Retail -- --
Growing and Wholesale 479 182
------------ ------------
Totals 1,510 1,143
Elimination of intersegment sales (479) (182)
------------ ------------
Total consolidated net sales $ 12,980 $ 5,475
============ ============
PRE-TAX OPERATING PROFIT (LOSS)
Retail $ 157 (1,017)
Growing and Wholesale (394) 4
------------ ------------
Totals (237) (1,013)
Elimination of intersegment profits (83) --
------------ ------------
Total consolidated pre-tax operating profit (loss) ($ 320) ($ 1,013)
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
TOTAL ASSETS
Retail $ 17,487 $ 13,992
Growing and Wholesale 8,905 1,023
------------ ------------
Totals $ 26,392 $ 15,015
============ ============
</TABLE>
8
<PAGE> 9
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 December
31, 1999 is the first fiscal period where we have reported results of operations
inclusive of the Cornelius Acquisition.
<TABLE>
<CAPTION>
(Amounts in millions, except per share amounts)
----------------------------------------------
First quarter highlights (unaudited) Fiscal 2000 Fiscal 1999 Fiscal 1998
------------ ------------ ------------
<S> <C> <C> <C>
Consolidated net sales 13.0 5.5 4.5
Retail segment sales 10.9 5.5 4.5
Wholesale and growing segment sales 2.6 .2 --
Less: internal sales (.5) (.2) --
Sales increase 137% 22% 5%
Same-store sales increase 17% 18% 10%
Number of retail stores (end of quarter) 20 16 15
Gross profit margin 46% 43% 45%
Pre-tax operating loss (.3) (1.0) (1.0)
Net loss per share (basic and diluted) (.03) (.11) (.11)
Cash flows from operations .9 -- (.6)
Retail store inventories 1.7 1.6 .9
Current ratio 1.46 1.31 1.44
Property, plant and equipment (net) 14.1 8.1 7.5
Long-term debt (including current portion) 9.6 3.3 2.6
</TABLE>
Quarter Ended December 31, 1999 Compared with Quarter Ended December 31, 1998
Calloway's Nursery achieved the best first quarter operating results in its
history. The outstanding results were a combination of:
o Substantially improved sales and margins at the existing Calloway's
Nursery retail stores in Dallas and Fort Worth, and
o The addition this year of the typically strong Fall and Christmas
season at the Cornelius Nurseries retail stores in Houston.
Sales increased by 137%. The sixteen Calloway's Nursery retail stores in Dallas
and Fort Worth enjoyed a 17% sales increase. Retail segment sales were
approximately $10.9 million, or 84% of total sales. Wholesale and Growing
segment sales were approximately $2.6 million, with about $0.8 million of those
sales to our own retail stores and wholesale distribution centers.
9
<PAGE> 10
Gross profit margins increased to 46% from 43% last year. The Calloway's Nursery
retail stores achieved improved margins as a result of continued improvements in
merchandise procurement and presentation. The Cornelius Nurseries retail stores
in Houston achieved their typical gross margins for the Fall and Christmas
seasons, which approximated those achieved by the Calloway's Nursery retail
stores this year. Gross margins for the Retail segment were 46%, and gross
margins for the Wholesale and Growing segment were 34%.
Expenses increased due to the Cornelius Acquisition. As the following table
illustrates, every expense component was higher in the quarter ended December
31, 1999 than for the quarter ended December 31, 1998. Except for Interest
Expense, however, every expense component was reduced as a percentage of net
sales:
<TABLE>
<CAPTION>
(Amounts in thousands)
----------------------------------------------------------
Fiscal 2000 Fiscal 1999
--------------------------- ---------------------------
Amount % Sales Amount % Sales
<S> <C> <C> <C> <C>
Consolidated net sales 12,980 5,475
Operating expenses 4,678 36% 2,108 39%
Occupancy expenses 772 6% 661 12%
Advertising expenses 383 3% 377 7%
Depreciation and amortization 209 2% 170 3%
Interest expense 228 2% 75 1%
</TABLE>
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Cash flows provided by operating activities totaled approximately $0.9 million
for the quarter, compared to cash flows used by operations of $31,000 for the
comparable quarter one year ago. Most of that improvement was due to the
approximately $0.7 million improvement in pre-tax operating results. In
addition, the strong Fall and Christmas sales allowed us to reduce our
inventories at the end of the quarter at a faster rate than in prior years.
Cash flows used by investing activities of approximately $0.4 million were
substantially unchanged from the comparable quarter one year ago.
Cash flows used by financing activities totaled approximately $0.6 million for
the quarter, compared to $25,000 for the comparable quarter one year ago. The
increase was primarily due to repaying seasonal borrowings under our revolving
credit facility during the quarter. We had no borrowings or repayments under the
revolving credit facility during the comparable quarter one year ago.
In October 1999 we redeemed 5,798 shares of Preferred Stock for a cash payment
of approximately $159,000. The redeemed Preferred Stock had a redemption value
of approximately $580,000 and a carrying amount of approximately $274,000. Thus,
the remaining redemption amount of the Preferred Stock was reduced to
approximately $3.4 million.
We believe that the cash flows from operations, supplemented on a seasonal basis
by revolving credit lines, should adequately support servicing of the debt
related to the Cornelius Acquisition. We expect to either extend the maturity of
the five-year, $6.5 million note payable to our bank, or arrange for alternative
financing that is for a longer term.
10
<PAGE> 11
- --------------------------------------------------------------------------------
IMPACT OF YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
Our Year 2000 Project (the "Project") was completed during fiscal 1999. The
Project addressed 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 was a possibility that computer
equipment, software and devices with embedded technology that are time sensitive
may have misinterpreted the actual date beginning on January 1, 2000. That could
have resulted in system failures or miscalculations causing disruptions of
operations such as a temporary inability to process transactions.
Our objective was to ensure that our computer equipment and software would
function properly with respect to dates in the Year 2000 and thereafter ("Year
2000 Compliant"). Identification and assessment of systems was completed during
fiscal 1999, and substantially all computer equipment and software was either
already Year 2000 Compliant or was upgraded or replaced with computer equipment
and/or software that was Year 2000 Compliant. The testing, upgrading and
replacement process was accomplished with our own personnel and within the
normal information technology budget.
When we acquired the assets of Cornelius Nurseries, we immediately extended our
Year 2000 Project to identify and remediate Cornelius' Year 2000 issues. We
completed that Project in November 1999.
We did not incur any operational problems due to the Year 2000 issue.
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 December 31, 1999, 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, 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 December 31, 1999 Calloway's had variable rate debt of $9.5 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 $95,000 for the variable-rate debt.
11
<PAGE> 12
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:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
12
<PAGE> 13
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 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
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 788
<ALLOWANCES> 0
<INVENTORY> 8,817
<CURRENT-ASSETS> 9,842
<PP&E> 14,053
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,392
<CURRENT-LIABILITIES> 6,734
<BONDS> 8,865
1,677
0
<COMMON> 60
<OTHER-SE> 7,946
<TOTAL-LIABILITY-AND-EQUITY> 26,392
<SALES> 12,980
<TOTAL-REVENUES> 12,980
<CGS> 7,035
<TOTAL-COSTS> 6,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> (320)
<INCOME-TAX> (93)
<INCOME-CONTINUING> (227)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
