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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, 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, zip code and telephone number of principal executive offices)
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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 20, 2000, Registrant had outstanding 6,050,309 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 20, 2000 as reported on the Nasdaq Stock Market, was approximately
$5,700,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
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INDEX
<TABLE>
<CAPTION>
Page
Reference
Form 10-K
<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and
Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K 16
</TABLE>
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PART I
ITEM 1. BUSINESS
ABOUT CALLOWAY'S NURSERY, INC.
At the largest Retail nursery chain in Texas, all of us feel a responsibility to
our customers to provide timely information about the care and nurturing of
quality plants and the proper use and enjoyment of the related products we sell.
In fact, all of the companies that are part of the Calloway's Nursery, Inc.
("the Company") family are known for treating each of our customers with caring
respect. Satisfaction is guaranteed.
Our management team consists of professionals that have worked together for most
of the time that the Company has been in operation. This hard-working team of
specialists enables each area of our company to evolve and upgrade its services
and products continuously. And by taking full advantage of available technology
we are especially responsive to the ever-changing demands of the market.
Because we hold the largest number of shares in our company, the Company's
team's interests are tightly aligned with those of every shareholder.
ABOUT OUR OPERATIONS
Founded in 1986, the Company has become the largest lawn and garden retailer in
Texas.
We opened the first Calloway's Nursery Retail stores in 1987. Since that time,
we have grown to seventeen Calloway's Nursery Retail stores in the Dallas-Fort
Worth market ("Calloway's").
In 1997 we acquired an established Growing operation for the production of
living plants: Miller Plant Farms, Inc. ("Miller Plant Farms").
Near the end of fiscal 1999 we acquired Cornelius Nurseries, Inc. (the
"Cornelius Acquisition"), adding the Cornelius Nurseries Retail stores in the
Houston market ("Cornelius"), the Turkey Creek Farms Growing operation near
Houston ("Turkey Creek Farms"), and the Wholesale Landscape Distributors
Wholesale operations in Houston and Austin ("WLD"). Fiscal 2000 was the first
year that the operations acquired in the Cornelius Acquisition have been
included in the Company's results of operations.
Today, our Retail Segment, which is comprised of the Calloway's and Cornelius
Retail stores, provides the majority of our Sales. We also have a sizable
Growing and Wholesale Segment, which includes Miller Plant Farms, Turkey Creek
Farms and WLD.
RETAIL
CALLOWAY'S NURSERY
CORNELIUS NURSERIES
We operate seventeen Calloway's stores in the Dallas-Fort Worth and three
Cornelius stores in Houston. Our locations are selected on the basis of
demographic data, traffic patterns and shopping habits. All Calloway's and
Cornelius stores are company-operated. We lease twelve of the Calloway's store
locations and own the other five. We own all three Cornelius store locations.
We focus on quality and breadth of selection in bedding plants and nursery
stock, complemented by other related garden products such as soil amendments and
fertilizers. Apart from Christmas, approximately two-thirds of our annual Retail
sales are derived from living
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plants. The remaining one-third is made up of products that primarily relate to
their care and feeding.
All Calloway's and Cornelius stores sell Christmas merchandise. The Cornelius
stores have a stronger and more financially beneficial focus on Christmas than
do the Calloway's stores.
The quality selection of living plants and garden products found throughout all
Calloway's and Cornelius Retail stores offer our customers appropriate living
plants, while informing them about the care and additional products that may be
required to provide the best results with their selections. Our staff is known
for treating customers with respect and guaranteeing their satisfaction.
Living plants are ecologically sound investments that cleanse the air and
replenish the earth's oxygen and more. We believe that the living plants we sell
do more than just benefit our customers with decoration. They provide spiritual
and physical buffers against the stresses of urban life.
We seek to maintain balance with our natural habitat by informing our customers
as to the manner they may use our products in harmony with the environment. The
future will see us leading efforts to encourage the development of our urban
environment in ways that allow all of its elements to co-exist successfully.
GROWING AND WHOLESALE
MILLER PLANT FARMS
In 1997 Calloway's acquired an established facility for the production of living
plants - Miller Plant Farms. This Growing facility was developed by Mike Miller,
who has continued to manage the facility since that time. Miller Plant Farms
produces roses, ground covers, caladiums, perennials, hollies and flowering
shrubs, and allows Calloway's to provide its customers with the very best
selection and value in top-quality living plants. Since its acquisition, Miller
Plant Farms has been providing the Calloway's stores with first quality products
in the appropriate quantities at the appropriate time.
Founder Mike Miller is Past President of the International Plant Propagation
Society - Southern Region; Past President of Northeast Texas Nursery Growers
Association; and Past Director of the Texas Nursery and Landscape Association
("TNLA") Region III. He is a Texas Certified Nursery Professional and received
his BS in Horticulture from Kansas State University in 1974.
TURKEY CREEK FARMS
The Cornelius family began Turkey Creek Farms in 1951 to meet the demand for
quality nursery-grown products in Texas. The operation's customer base, however,
has grown to include a list of nurseries and garden centers in Texas, Louisiana
and Oklahoma, including our Calloway's and Cornelius Retail stores.
Turkey Creek Farms products include shrubs, ground covers, grasses, trees,
annuals, perennials and blooming tropicals.
Turkey Creek Farms is professionally managed by Tom Henry. A Texas Certified
Nursery Professional and a member of the International Plant Propagation
Society, Tom received his BS with a double major in Agriculture and Business
from Stephen F. Austin State University in 1989.
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WHOLESALE LANDSCAPE DISTRIBUTORS
In 1998, Cornelius created WLD as a separate operation from Turkey Creek Farms
to provide brokered plants and hard lines to the fast-growing landscape
contractor market. WLD sells plants to this segment of the market on time and to
specification throughout the Houston and Austin markets.
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ABOUT OUR INDUSTRY
Texas is the country's third largest Retail market for lawn and garden center
"green goods" and the third largest producer of green goods for the Retail and
landscape markets.
According to the Texas Comptroller's research Division, Texas retailers of
ornamental nursery products reported sales of $1.6 billion in 1999. During the
past ten years, sales by nursery retailers have increased by 26%. This increase
has occurred despite the proliferation of retailers such as Home Depot, Lowe's
and Wal-Mart that do not separately report their sales of nursery products.
Wholesale green goods produced in Texas are sold primarily in Texas. The state
offers varying climates and soils allowing a broad range of plant production.
Reported Wholesale sales of ornamental nursery products in Texas have increased
by 45% during the past ten years.
Two geographic areas where green goods production is predominant are Houston
(the location of Turkey Creek Farms) and Tyler (the location of Miller Plant
Farms). In the Houston area mild weather, humidity and a long growing season
combine to make conditions favorable for production of a wide variety of
ornamental and blooming plants. In Tyler, climatic cycles, soils and water make
production of roses and woody evergreens favorable.
ABOUT OUR MANAGEMENT TEAM
JIM ESTILL, 53, is Chairman of the Board, President and Chief Executive Officer.
Along with John Cosby and John Peters, Jim co-founded Calloway's in 1986. Prior
to that, Jim worked with Sunbelt Nursery Group, as President and Chief Executive
Officer. 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 Vice-Chairman of the Texas Certified Nursery Professional
Committee, Member of the Nursery/Floral Advisory Committee of the Texas
Department of Agriculture and Past Chairman of the TNLA Education and Research
Foundation.
STERLING CORNELIUS, 78, is President of Cornelius Nurseries, and a Director of
Calloway's Nursery, Inc. Sterling has been with Cornelius Nurseries since his
father founded the business in 1937, except for the period 1941-1945, when he
served in the U.S. Navy during World War II. Sterling is a recognized leader in
the nursery industry, having been President of the TNLA, President of the
Houston Landscape Nurserymen's Association, Chairman of the Drafting Committee -
Texas Certified Nursery Professional Manual and Examination, Member of the Board
of Trustees of the Texas Agricultural Lifetime Leadership Board, and a member of
the Texas Certified Nurserymen's Professional Committee. He is the only two-time
recipient of the ARP Award - the highest honor that TNLA can bestow on one of
its members. Sterling is also active in many community efforts, including past
membership on the Board of Directors of the Houston Chamber of Commerce and the
President's Council of Houston Baptist University.
JOHN COSBY, 57, is Vice President, Secretary and a Director. John, along with
Jim Estill and John Peters, co-founded Calloway's in 1986. He developed all of
Calloway's Retail store locations, including site selection and development, as
well as lease and acquisition negotiations. Prior to 1986, John worked at
Sunbelt Nursery Group, serving as Vice President -- Corporate Development and at
Pier 1 Imports as Real Estate Manager. 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 Past President of the Dispute Resolution Services of
Tarrant County.
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JOHN PETERS, 49, is President of Calloway's Nursery of Texas, Inc., and Vice
President and Director of Calloway's Nursery, Inc. John, along with Jim Estill
and John Cosby, co-founded Calloway's in 1986. He developed the original
Calloway's staff into a team of industry professionals. As President he has
primary responsibility for store operations, merchandising, advertising and
marketing, distribution, human resources and administration related to the North
Texas Calloway's Retail stores and Miller Plant Farms. Prior to 1986, John
worked with Sunbelt Nursery Group as Senior Vice President of Operations, where
he was responsible for operations of all subsidiaries, including more than 100
stores in five states, and two Growing operations. John attended Texas Christian
University. A Texas Master Certified Nursery Professional, John is Past Chairman
of the TNLA.
DAN REYNOLDS, 43, is Vice President, Chief Financial Officer and Assistant
Secretary. Dan joined Calloway's in 1990, where he developed its financial,
operating and merchandising decision-support systems. His responsibilities
include 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. Dan also
oversees design, development, implementation and review of all transactional and
decision-support systems. Prior to 1990, Dan worked with Atmos Energy
Corporation as Financial Systems Manager and KPMG LLP as Supervising Senior
Accountant. Dan received his BBA in Accounting from the University of Texas at
Arlington. A Certified Public Accountant, Dan is Past President of the Fort
Worth Chapter of Financial Executives Institute.
SAM WEGER, 50, is Vice President of Merchandising. Sam began with Calloway's in
Retail store management in 1987 with the opening of the first stores. He has
primary responsibility for the administration of 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 and Education
from Fort Hays State University. A Texas Master Certified Nursery Professional,
Sam is a Director of the TNLA, Past President of TNLA, Region 5, and Past
Chairman of the TNLA Education Committee.
ABOUT OUR CHALLENGES
Like any business, we face certain challenges. The biggest challenges are:
The nursery business is highly competitive in the United States. In the
Dallas, Fort Worth and Houston markets, 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 and Houston are 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.
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Our business is seasonal. About 40% of our annual sales occur in the third
fiscal quarter, which is our most profitable quarter. Fiscal 2000 was the
first year for which Sales from the operations acquired in the Cornelius
Acquisition were included.
[GRAPH]
<TABLE>
<CAPTION>
SALES BY QUARTER (UNAUDITED)
($ MILLIONS)
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Fiscal 1998 4.5 4.2 15.0 3.3
Fiscal 1999 5.5 5.6 15.1 4.2
Fiscal 2000 13.0 12.2 20.9 7.7
</TABLE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K 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, 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.
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ITEM 2. PROPERTIES
The typical Calloway's (Dallas and Fort Worth markets) Retail store is located
in a high-traffic shopping area. 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).
Our newer Calloway's stores occupy similar-sized sites, but have different
configurations. They include design features such as stone buildings, glass
greenhouses and wrought iron fencing and landscaped courtyards. We want each new
store to fit with the community in which it is located.
As of September 30, 2000 we operated seventeen Calloway's Retail stores. We own
the land and buildings at five locations. The other twelve locations are leased
under the terms of long-term leases.
All three of the Cornelius Retail stores are free standing and are located in
high-traffic Retail shopping areas. Though each Cornelius store has a somewhat
different configuration, they are about the same overall size as a Calloway's
Retail store.
We own two nursery Growing facilities. Miller Plant Farms, near Tyler, Texas
(approximately 80 acres), and Turkey Creek Farms, north of Houston
(approximately 160 acres).
Each of our two Wholesale facilities is about 10 acres in size. Each contains an
outdoor selling area and an office/warehouse building.
We lease our corporate office in an office building in Fort Worth, Texas. We
also lease a warehouse/distribution center in Fort Worth, Texas.
ITEM 3. LEGAL PROCEEDINGS
None.
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 on 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:
<TABLE>
<CAPTION>
High Low Close
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<S> <C> <C> <C>
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
------ ------ ------
FISCAL YEAR 1999
First Quarter 1.375 1.000 1.125
Second Quarter 1.500 1.125 1.313
Third Quarter 2.000 1.250 1.375
Fourth Quarter 1.563 1.125 1.125
------ ------ ------
FISCAL YEAR 2000
First Quarter 1.438 .938 1.188
Second Quarter 1.500 .969 1.375
Third Quarter 1.500 .813 1.188
Fourth Quarter 1.750 1.125 1.375
------ ------ ------
</TABLE>
The closing price of the common stock on December 20, 2000, as reported by
Nasdaq, was $1.25. As of December 20, 2000 there were approximately 500
shareholders of record, and approximately 1,800 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 Consolidated Financial Statements included in Item 8, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7. Comparability of the Statement of Operations data for 2000
and the Balance Sheet data for 1999 and 2000 was impacted by the Cornelius
Acquisition.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(Amounts in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2000 1999 1998 1997 1996
----------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales $53.8 $30.4 $27.1 $26.2 $24.0
Net income (loss) $ 1.7 $ .4 $ (.3) $ 1.7 $ .2
Income loss per common share:
Basic $ .26 $ .07 $(.05) $ .33 $ .04
Diluted $ .25 $ .07 $(.05) $ .33 $ .04
<CAPTION>
BALANCE SHEET DATA 2000 1999 1998 1997 1996
------------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total assets $31.0 $26.3 $14.7 $13.1 $ 8.9
Long-term obligations $11.7 $10.9 $ 3.0 $ 1.8 $ --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORNELIUS NURSERIES ACQUISITION
In September 1999 we completed the Cornelius Acquisition. Fiscal 2000 was the
first year that results of operations for the business units acquired in the
Cornelius Acquisition have been included in our Consolidated Statements of
Operations.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
The results for 2000 were substantially improved over those for 1999. We had our
most profitable year of operations since becoming a public company in 1991.
[GRAPH]
<TABLE>
<CAPTION>
INCOME (LOSS) BEFORE INCOME TAXES
($ thousands)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes 2,765 799 (327) 767 228
</TABLE>
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Sales increased by 77.3% over 1999, marking the fifth consecutive year that
sales have risen. Most of the increase was a result of the Cornelius
Acquisition. Same-store Sales for the sixteen Calloway's Retail stores open for
over one year were up 1.3%. During 2000, our Retail Segment generated
approximately $44.5 million in external Sales, while our Growing and Wholesale
Segment contributed an additional $9.3 million in external Sales.
[GRAPH]
<TABLE>
<CAPTION>
SALES
($ millions)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales 53.8 30.4 27.1 26.2 24.0
</TABLE>
Gross Profit rose by over 69.0%. Gross Margins (Gross Profit as a percentage of
net Sales) declined to 47.0% in 2000 from 49.3% for 1999. Gross Margins for the
Retail Segment in 2000 were comparable to those earned in 1999. However, with
the Cornelius Acquisition, our Sales include a larger proportion from the
Growing and Wholesale Segment. Since Gross Margins tend to be somewhat lower in
the Growing and Wholesale Segment than those in the Retail Segment, our overall
Gross Margins are lower.
[GRAPH]
<TABLE>
<CAPTION>
GROSS MARGIN
% of sales
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross margin 47.0% 49.3% 45.1% 47.3% 46.8%
</TABLE>
Operating Expenses increased 77.5%. Substantially all of the increase was due to
the Cornelius Acquisition.
Occupancy Expenses increased 12.8%. The percentage increase was much lower than
the percentage increase in Sales because substantially all of the real
properties added in the Cornelius Acquisition are Company-owned instead of
leased. Occupancy Expenses do not include the Depreciation and Amortization or
Interest Expenses related to the cost of Company-owned facilities.
Advertising Expenses decreased 1.7%. We changed the media mix in the Dallas-Fort
Worth markets to optimize our Advertising budget. Those savings were more than
the Advertising Expenses needed for the Houston market.
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Depreciation and Amortization increased 34.3%. The increase was attributable to
the assets added in the Cornelius Acquisition.
Interest Expense increased 224.9%, primarily due to the debt incurred to finance
the Cornelius Acquisition.
Interest Income decreased 23.8%, due to lower levels of Cash maintained during
the year.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
The results for 1999 were substantially improved over those for 1998. We had our
most profitable year of operations since 1992.
Sales increased 12% over 1998, marking the fourth consecutive year that sales
have risen.
Gross Profit rose $2.8 million on a Sales increase of about $3.3 million. We
made a concerted effort to improve our Gross Margins (Gross Profit as a
percentage of net Sales) and had success in these key areas:
o Our new incentive programs rewarded store management and other
middle managers for focus on improving gross margins by
reducing the amount of stock loss.
o Our Miller Plant Farms Growing operation sharply improved its
delivery of high-quality, timely merchandise to our Retail
stores.
o Our merchandise computer system, implemented in 1998, provided
us with accurate and timely sales and inventory information to
support rapid replenishment, particularly during peak seasons.
o Our new line of direct-import pottery, unique to our markets,
earned higher gross margins than many of our existing
merchandise lines.
Operating Expenses increased 17% from $7.8 million to $9.1 million.
Substantially all of the increase was for bonuses earned for generating improved
sales, gross profit, and reduced expenses as a percentage of sales. Store
management teams and other middle managers earned most of the bonuses.
Occupancy Expenses decreased 2%. The two new stores we opened early in fiscal
1999 increased the total number of Retail stores in Dallas-Fort Worth to
sixteen. However, those two stores essentially replaced stores that had been
closed during fiscal 1998, and the newer stores have generally lower rents than
the ones that had been closed.
Advertising Expenses rose 5%. We focused our use of the advertising media to
coincide with seasonal peaks in demand, which led to the 12% sales gain with
only a 5% increase in advertising expenses.
Depreciation and Amortization rose from $519,000 for fiscal 1998 to $696,000 for
fiscal 1999. That increase was primarily due to a full year's depreciation on a
new, company-owned store we opened in the middle of fiscal 1998 and the
depreciation on the merchandise computer system that was also implemented in the
middle of fiscal 1998.
Net Interest Expense also increased, from $100,000 for fiscal 1998 to $216,000
for fiscal 1999. That increase was also primarily due to full year's interest
expense on a new, company-owned store we opened in the middle of fiscal 1998 and
the interest expense on the merchandise computer system that was also
implemented in the middle of fiscal 1998.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Flows Provided by Operating Activities were $1,695,000 for fiscal 2000,
compared to cash flows provided by operations of $1,164,000 for fiscal 1999. The
improvement in Net Income was partially offset by the increased Inventory and
Accounts Receivable associated with the Growing and Wholesale Segment business
units acquired in the Cornelius Acquisition.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Flows Used by Investing Activities decreased to $1,811,000 for fiscal 2000
from $9,927,000 for fiscal 1999. In 1999 substantially all of those cash flows
were for the Cornelius Nurseries acquisition completed in September 1999. The
only major capital expenditure for 2000 was the completion of a new Calloway's
Nursery Retail store, which opened in April 2000.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Flows Provided by Financing Activities decreased to $467,000 for fiscal
2000 from $7,176,000 for fiscal 1999. In 1999 we borrowed $6.5 million from a
financial institution to help finance the Cornelius Nurseries acquisition. We
also borrowed a net of $463,000 under our seasonal working capital line of
credit. For 2000 we borrowed $2.3 million to refinance a portion of the $6.5
million note payable referred to above to obtain lower interest rates and longer
maturities. We also borrowed $750,000 to acquire the Land to construct a new
Retail store, which opened in April 2000. See Note 7 to Consolidated Financial
Statements.
In November 2000, subsequent to the end of our fiscal year, we closed on two
notes payable totaling $3.8 million. One of the two notes reduced the amount
owed on the $6.5 million note referred to above (that had previously been
reduced to $4.5 million) by an additional $2.4 million, leaving a balance of
$2.1 million. That new note has a term of 15 years and a fixed interest rate of
8.5%. The second note payable replaced the $750,000 note payable that we used to
help finance the construction of our new Calloway's Retail store opened during
2000. That new note has a term of 20 years and a 10.0% fixed interest rate for
the first three years. See Note 7 to Consolidated Financial Statements.
In October 1999 we redeemed 5,798 shares of Preferred Stock for a cash payment
of $158,500. The redeemed Preferred Stock had a redemption value of $579,800 and
a carrying amount of $274,000. Thus, the remaining redemption amount of the
Preferred Stock was reduced to $3,420,200.
We anticipate that cash flows from operations and our $5,000,000 revolving line
of credit arrangement (see Note 7 to Consolidated Financial Statements) will be
sufficient to meet our working capital needs.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133") was issued in June 1998. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, deferred the effective date of SFAS
133 to fiscal years beginning after June 15, 2000. We adopted SFAS 133 on
October 1, 2000. It did not have an impact on the consolidated financial
statements.
14
<PAGE> 15
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Calloway's is exposed to certain market risks, including fluctuations in
interest rates. We do not enter into transactions designed to mitigate such
market risks for trading or speculative purposes. As of September 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, 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 September 30, 2000 Calloway's had variable rate long-term debt of $7.9
million. In November 2000 we refinanced $3.2 million of variable-rate long-term
debt with an equivalent amount of fixed-rate debt, reducing the amount of
variable-rate long-term debt to $4.7 million (see Note 7 to Consolidated
Financial Statements). In addition, we had future minimum lease payments under
noncancellable operating leases of $11.9 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 $47,000 for the
variable-rate long-term debt that existed after the November 2000 refinancing
noted above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are included in a separate section
of this Report. The index is included under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report - KPMG LLP F-1
Consolidated Balance Sheets - September 30, 2000 and 1999 F-2
Consolidated Statements of Operations - Years Ended September 30, 2000,
1999 and 1998 F-3
Consolidated Statements of Shareholders' Equity - Years Ended September 30,
2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows - Years Ended September 30, 2000, F-5
1999 and 1998
Notes to Consolidated Financial Statements F-7
</TABLE>
16
<PAGE> 17
(a)(2) SCHEDULES
Schedules, other than those listed above in Item 14(a)(1) 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.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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)
(h) Extension of Employment Agreement between the Registrant and
James C. Estill dated July 2, 1996 (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n))(2)
(j) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o))(2)
(k) Employment Agreement between the Registrant and C. Sterling
Cornelius dated September 21, 1999.(9)
(21) (a) Subsidiaries of the Registrant.(3)
(23) (d) Consent of KPMG LLP.(3)
(27) (a) Financial Data Schedule.(3)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))(4)
(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))(5)
(99) (d) Calloway's Nursery, Inc. 1997 Stock Option Plan (Exhibit (99)(d)(6)
(99) (e) Calloway's Nursery, Inc. 1998 Stock Option Plan (Exhibit (99)(e))(7)
(99) (f) Calloway's Nursery, Inc. 1999 Stock Option Plan Exhibit (99)(f))(8)
(99) (g) Cornelius Nurseries, Inc. and Turkey Creek Farms, Inc. Combined Financial
Statements as of and for the years ended September 30, 1998 and
1997 (Exhibit 99.1)(9)
(99) (h) Calloway's Nursery, Inc. and Subsidiaries Unaudited Pro Forma Condensed
Financial Information as of June 30, 1999 and for the nine month period
ended June 30, 1999 and for the year ended September 30, 1998
(Exhibit 99.2)(8)
(99) (i) Calloway's Nursery, Inc. 2000 Stock Option Plan(3)
</TABLE>
17
<PAGE> 18
----------
(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 the
Company's Form 10-Q Report for the quarter ended June 30, 1996.
(3) Filed herewith.
(4) 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.
(5) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30, 1995.
(6) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.
(9) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 8-K Report filed October 1, 1999.
(b) REPORTS ON FORM 8-K
None.
18
<PAGE> 19
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 21, 2000
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 21, 2000
-------------------------
James C. Estill
/s/ John T. Cosby Director December 21, 2000
-------------------------
John T. Cosby
/s/ John S. Peters Director December 21, 2000
-------------------------
John S. Peters
/s/ Robert E. Glaze Director December 21, 2000
-------------------------
Robert E. Glaze
/s/ Dr. Stanley Block Director December 21, 2000
-------------------------
Dr. Stanley Block
/s/ C. Sterling Cornelius Director December 21, 2000
-------------------------
C. Sterling Cornelius
/s/ Daniel R. Feehan Director December 21, 2000
-------------------------
Daniel R. Feehan
/s/ Timothy J. McKibben Director December 21, 2000
-------------------------
Timothy J. McKibben
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Calloway's Nursery, Inc.:
We have audited the accompanying consolidated balance sheets of Calloway's
Nursery, Inc. and Subsidiaries as of September 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 2000.
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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Fort Worth, Texas
November 10, 2000, except for the third paragraph of Note 7, which is as of
November 30, 2000
F-1
<PAGE> 21
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 413 $ 62
Accounts receivable, less allowance for doubtful
accounts of $91 in 2000 1,068 54
Inventories 11,932 9,736
Prepaids and other assets 316 137
-------- --------
Total current assets 13,729 9,989
Property and equipment, net 14,865 13,859
Goodwill, net of accumulated amortization of $1,125
and $1,017, respectively 848 956
Deferred income taxes 1,348 1,392
Other assets 187 139
-------- --------
Total assets $ 30,977 $ 26,335
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,001 $ 3,277
Accrued expenses 1,922 1,210
Income taxes payable 1,518 79
Notes payable, current 55 463
Current portion of long-term debt 555 558
Deferred income taxes, current 118 622
-------- --------
Total current liabilities 8,169 6,209
Deferred rent payable 1,056 1,113
Long-term debt, net of current portion 9,870 9,003
-------- --------
Total liabilities 19,095 16,325
-------- --------
Commitments and contingencies
Non-Voting Acquisition Preferred Stock with mandatory
redemption provisions; par value $.01 per share; 40,000
shares authorized; 40,000 and 34,202 shares,
respectively issued and outstanding 1,877 1,890
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;
9,960,000 shares authorized; no shares issued or outstanding -- --
Common stock; par value $.01 per share; 30,000,000 shares
authorized; 6,237,760 and 5,940,766 shares issued, respectively;
5,987,760 and 5,690,766 shares outstanding, respectively
62 59
Additional paid-in capital 9,288 8,927
Retained earnings 2,051 530
-------- --------
11,401 9,516
Less: treasury stock, at cost (250,000 common shares) (1,396) (1,396)
-------- --------
Total shareholders' equity 10,005 8,120
-------- --------
Total liabilities and shareholders' equity $ 30,977 $ 26,335
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 22
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
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,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 53,825 $ 30,355 $ 27,069
Cost of goods sold 28,539 15,397 14,874
------------ ------------ ------------
Gross profit 25,286 14,958 12,195
------------ ------------ ------------
Operating expenses 16,155 9,101 7,764
Occupancy expenses 3,055 2,709 2,773
Advertising expenses 1,413 1,437 1,366
Depreciation and amortization 935 696 519
Interest expense 1,043 321 237
Interest income (80) (105) (137)
------------ ------------ ------------
Total expenses 22,521 14,159 12,522
------------ ------------ ------------
Income (loss) before income taxes 2,765 799 (327)
Income tax expense (benefit) 1,098 408 (43)
------------ ------------ ------------
Net income (loss) 1,667 391 (284)
Accretion of preferred stock (261) -- --
Retirement of preferred stock 115 -- --
------------ ------------ ------------
Net income (loss) attributable to common
shareholders $ 1,521 $ 391 $ (284)
============ ============ ============
Weighted average number of common shares
outstanding
Basic 5,823 5,579 5,405
Diluted 6,002 5,758 5,405
Net income (loss) per common share
Basic $ .26 $ .07 $ (.05)
Diluted $ .25 $ .07 $ (.05)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 23
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1997 5,582 $ 55 $ 8,406 $ 423 $ (1,396) $ 7,488
Issuance of common stock 154 2 260 -- -- 262
Net loss -- -- -- (284) -- (284)
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 1998 5,736 57 8,666 139 (1,396) 7,466
Issuance of common stock 205 2 261 263
Net income -- -- -- 391 -- 391
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 1999 5,941 59 8,927 530 (1,396) 8,120
Issuance of common stock 297 3 361 -- -- 364
Net income -- -- -- 1,667 -- 1,667
Accretion of preferred stock -- -- -- (261) -- (261)
Retirement of preferred stock -- -- -- 115 -- 115
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 2000 6,238 $ 62 $ 9,288 $ 2,051 $ (1,396) $ 10,005
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 24
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,667 $ 391 $ (284)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 935 696 519
Allowance for doubtful accounts 91 -- --
Gains on property sales -- (21) (153)
Deferred income taxes (460) 291 (52)
Stock compensation 124 116 111
(Increase) decrease (net of effects from acquisition) in:
Accounts receivable (1,105) 94 (16)
Inventories (2,196) (895) (808)
Prepaid expenses and other assets (179) (22) (48)
Increase (decrease) (net of effects from acquisition) in:
Accounts payable 724 36 168
Accrued expenses 712 379 (49)
Income taxes payable 1,439 79 --
Deferred rent payable (57) 20 (5)
------------ ------------ ------------
Net cash flows provided by (used for) operating
activities 1,695 1,164 (617)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (1,811) (1,333) (2,792)
Acquisition of Cornelius Nurseries -- (9,051) --
Proceeds from property sales -- 457 560
Purchase of property held for sale -- -- (823)
------------ ------------ ------------
Net cash flows used for investing activities (1,811) (9,927) (3,055)
------------ ------------ ------------
</TABLE>
Continued on Page F-6
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 25
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(amounts in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock 240 147 151
Proceeds from issuance of long-term debt 3,138 6,522 1,204
Proceeds from sale and leaseback -- -- 562
Net borrowings (repayments) under revolving line of
credit (408) 463 --
Repayments of long-term debt (2,114) (197) (134)
Lease payments under capital lease (160) (146) (150)
Bank overdraft -- 483 --
Payment of debt issuance costs (70) (96) --
Retirement of preferred stock (159)
------------ ------------ ------------
Net cash flows provided by financing activities 467 7,176 1,633
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 351 (1,587) (2,039)
Cash and cash equivalents at beginning of year 62 1,649 3,688
------------ ------------ ------------
Cash and cash equivalents at end of year $ 413 $ 62 $ 1,649
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,043 $ 321 $ 237
Income taxes -- 72 10
</TABLE>
In 1999 the Company issued non-dividend preferred stock with mandatory
redemption provisions with a fair value of $1,890, and assumed accounts payable
of $845, in exchange for certain assets relating to the Cornelius Acquisition.
In 2000 the Company redeemed 5,798 shares of Preferred Stock for a cash payment
of $159. The redeemed Preferred Stock had a redemption value of $580 and a
carrying amount of $274. In 2000 the carrying amount of the Preferred Stock was
accreted by $261 to a carrying amount of $1,877 at September 30, 2000.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 26
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
Calloway's Nursery, Inc. and Subsidiaries (the "Company") is engaged in the
Retail, and Wholesale and Growing, segments of the nursery business. The Company
opened its first three Retail stores in 1987.
The Company derives the majority of 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.
In September 1999 the Company acquired certain assets of Cornelius Nurseries,
Inc. and two affiliated entities ("the Cornelius Acquisition"). The Cornelius
Acquisition added three Retail stores in the Houston market, a Growing operation
near Houston and two Wholesale distribution centers (one in Houston and one near
Austin).
The Company has three wholly owned subsidiaries:
Calloway's Nursery of Texas, Inc. -- operates the Company's Calloway's
Retail stores in the Dallas-Fort Worth area.
Miller Plant Farms, Inc. - is the Company's Growing facility near Tyler,
Texas.
Cornelius Nurseries, Inc. -- operates three Cornelius Retail stores in the
Houston market, a Growing operation near Houston and two Wholesale
distribution centers.
Economic, weather and other circumstances that may exist from time-to-time in
these areas can have a significant impact on the Company's results of
operations.
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.
Accounts receivable - Certain of the Company's Wholesale and Growing customers
purchase goods on credit. During 2000 the Company recorded an allowance for
doubtful accounts of $91,000. No charge-offs were recorded in 2000.
Inventories - Inventories are stated at the lower of cost or market, with cost
being determined principally on a first-in, first-out basis.
F-7
<PAGE> 27
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
Leasehold improvements Term of lease
<S> <C>
Land improvements 15 years
Buildings 33 years
Furniture and fixtures 5 years
Vehicles 3 years
</TABLE>
The Company reevaluates the propriety of the carrying amounts of its properties
as well as the amortization periods when events and circumstances indicate that
impairment may have occurred. Recoverability of assets to be held and used is
measured by the comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. At September
30, 2000, the Company believes that no impairment has occurred and that no
reduction of the estimated useful lives is warranted.
Net income (loss) per share - Basic EPS 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.
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.
Intangibles - 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.
F-8
<PAGE> 28
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Based Compensation - The Company sponsors a stock-based compensation plan
for its employees and directors. 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. See Note 11 for pro forma
disclosures that show the effect on the Company's net income (loss) and net
income (loss) per share as if the Company had adopted the cost recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123").
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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, 2000 and 1999 has been estimated based on the weight of available
evidence at September 30, 2000 and 1999. Such estimate could change in the
future based on the occurrence of one or more future events.
Fair Value of Financial Instruments -The carrying values of the Company's
financial instruments, other than long-term debt, 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, 2000 and 1999.
Reclassifications - Certain amounts for 1998 and 1999 have been reclassified to
conform to the 2000 presentation.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Money market fund $ 1 $ 4
Demand deposit accounts 376 31
Petty cash 36 27
------------ ------------
$ 413 $ 62
============ ============
</TABLE>
F-9
<PAGE> 29
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Finished goods $ 4,757 $ 4,424
Work in process 6,817 4,952
Supplies 358 360
------------ ------------
$ 11,932 $ 9,736
============ ============
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Land $ 6,898 $ 6,248
Land improvements 2,193 1,975
Leasehold improvements 1,121 988
Buildings 5,039 4,073
Furniture, fixtures and equipment 2,763 2,351
Vehicles 548 502
Construction in Process 14 651
Less: accumulated depreciation and
amortization (3,711) (2,929)
------------ ------------
$ 14,865 $ 13,859
============ ============
</TABLE>
The gross amounts of equipment and related accumulated amortization recorded
under capital leases as of September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Equipment $ 556 $ 556
Less: accumulated amortization (400) (240)
------------ ------------
$ 156 $ 316
============ ============
</TABLE>
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Accrued salaries and related taxes $ 201 $ 171
Accrued bonuses 327 508
Accrued property taxes 589 341
Accrued sales and use taxes 170 110
Other 635 80
------------ ------------
$ 1,922 $ 1,210
============ ============
</TABLE>
F-10
<PAGE> 30
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
The Company entered into a $5,000,000 revolving line of credit arrangement with
a bank that matures on May 31, 2001 and is collateralized by inventory, accounts
receivable and certain real property. The line of credit was established to
supplement sources available to meet the Company's seasonal working capital
needs. At September 30, 2000 and 1999 the outstanding balances were $55,000 and
$463,000, respectively, and the unused available credit was $4,945,000 and
$4,537,000, respectively. The interest rate is variable, tied to the bank's
current prime lending rate. The interest rate was 10.00% at September 30, 2000.
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Notes payable - financial institutions (a),
(b), (c), (d), (e), (g), (h), (i) $ 10,153 $ 9,237
Obligations under capital lease (f) 100 260
Other 172 64
------------ ------------
10,425 9,561
Less: amounts due within one year (555) (558)
------------ ------------
$ 9,870 $ 9,003
============ ============
</TABLE>
(a) In September 1999 the Company entered into a note payable to a
financial institution. At September 30, 1999 the outstanding balance
was $6,500,000. During 2000 the Company reduced the balance by
$1,732,000 with the proceeds of the two notes payable described in (h)
and (i) below. The outstanding balance at September 30, 2000 was
$4,625,000. The note is collateralized by certain real estate and
requires payments, including interest, of approximately $600,000
annually. Payments are based on a fifteen-year amortization. The note
matures in five years with a balloon payment due at that time. The
interest rate is variable, tied to the bank's current prime lending
rate. The interest rate was 10.50% at September 30, 2000. In November
2000 the Company reduced the balance by an additional $2,448,000 with
the proceeds of the note payable described below.
(b) In December 1996 the Company entered into a note payable to a
financial institution. At September 30, 2000 and 1999 the outstanding
balances were $409,000 and $455,000, respectively. 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, tied to the institution's prime lending
rate. The interest rate was 9.50% at September 30, 2000.
(c) In July 1997 a wholly owned subsidiary of the Company entered into a
note payable to a financial institution. At September 30, 2000 and
1999 the outstanding balances were $889,000 and $929,000,
respectively. 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,
tied to the institution's prime lending rate. The interest rate was
9.125% at September 30, 2000.
(d) In July 1997 the Company entered into a note payable to a financial
institution. At September 30, 2000 and 1999 the outstanding balances
were $270,000 and $295,000, respectively. 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, tied to the institution's prime lending rate. The
interest rate was 9.95% at September 30, 2000.
F-11
<PAGE> 31
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) In October 1997 the Company entered into a note payable to a financial
institution. At September 30, 2000 and 1999 the outstanding balances
were $1,003,000 and $1,058,000, respectively. The note is
collateralized by certain real estate. Payments are based on a
twelve-year amortization. The note matures in six years with a balloon
payment due at that time. The interest rate is variable, tied to the
institution's current prime lending rate. The interest rate was 10.50%
at September 30, 2000.
(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, 2000 and 1999 were $100,000
and $260,000, respectively. 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.
(g) In December 1999 the Company entered into a note payable to a
financial institution. At September 30, 2000 the outstanding balance
was $750,000. The note is collateralized by certain real estate. The
interest rate is variable and tied to the bank's current prime lending
rate. The interest rate was 10.5% at September 30, 2000. Payments of
interest only total approximately $83,000 annually. This note was paid
off subsequent to September 30, 2000 as described below.
(h) In April 2000 the Company entered into a note payable to a financial
institution. At September 30, 2000 the outstanding balance was
$1,008,000. The note is collateralized by certain real estate and
requires payments, including interest, of approximately $121,000
annually for a term of fifteen years. The interest rate is 8.5% fixed.
The note matures on March 1, 2015.
(i) In April 2000 the Company entered into a note payable to a financial
institution. At September 30, 2000 the outstanding balance was
$1,199,000. The note is collateralized by certain real estate and
requires payments, including interest, of approximately $144,000
annually for a term of fifteen years. The interest rate is 8.5% fixed.
The note matures on March 1, 2015.
On November 1, 2000 the Company entered into a note payable to a financial
institution for $1,192,000, using $750,000 of the proceeds to pay off the
balance of the note payable described in (g) above. The new note is
collateralized by certain real estate and requires payments, including interest,
of approximately $138,000 annually for a term of 20 years. The interest rate is
10.0% fixed until November 2003, at which time it will become variable based
upon the prime rate of the financial institution. The note matures on November
1, 2020. On November 30, 2000 the Company entered into a note payable to a
financial institution for $2,560,000, using $2,448,000 of the proceeds to reduce
the balance of the note payable described in (a) above. The new note is
collateralized by certain real estate and requires payments, including interest,
of approximately $303,000 annually for a term of 15 years. The interest rate is
8.5% fixed. The note matures on December 1, 2015. Maturities of long-term debt,
inclusive of these two notes payable entered into subsequent to September 30,
2000, are as follows (amounts in thousands):
<TABLE>
<S> <C>
Year Ending September 30,
2001 $ 604
2002 696
2003 605
2004 1,405
2005 1,965
Thereafter 5,704
--------
$ 10,979
========
</TABLE>
F-12
<PAGE> 32
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2000 the Company was in compliance with all of its loan
covenants.
NOTE 8 - INCOME TAXES
Components of income tax expense (benefit) consist of the following (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current expense
Federal $ 1,293 $ 8 $ 9
State 265 109 --
------------ ------------ ------------
Total current 1,558 117 9
------------ ------------ ------------
Deferred expense (benefit):
Federal (460) 291 (52)
------------ ------------ ------------
Total deferred (460) 291 (52)
------------ ------------ ------------
Total expense (benefit) $ 1,098 $ 408 $ (43)
============ ============ ============
</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, 2000, 1999
and 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory rate
$ 940 $ 272 $ (111)
State income tax, net of federal benefit 175 72 --
Amortization of goodwill 37 37 37
Other, net (54) 27 31
------------ ------------ ------------
Total income tax expense (benefit) $ 1,098 $ 408 $ (43)
============ ============ ============
Effective tax rate 39.7% 51% (13)%
</TABLE>
F-13
<PAGE> 33
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities as
of September 30, 2000 and 1999 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Basis difference in inventories $ (118) $ (804)
------------ ------------
Deferred tax assets:
Deferred rent 390 411
Net operating loss carryforward -- 147
AMT credit carryforward -- 35
Assets marked to market 203 203
Basis difference in property and equipment 755 778
------------ ------------
Total deferred tax assets 1,348 1,574
------------ ------------
Net deferred tax asset $ 1,230 $ 770
============ ============
</TABLE>
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, 2000 and 1999. 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.
NOTE 9 - SHAREHOLDERS' EQUITY
During 2000, 1999 and 1998, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 12) and upon the exercise
of stock options (see Note 11), receiving proceeds as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Number of shares issued 297 205 154
Proceeds $ 240 $ 147 $ 151
Compensation expense $ 124 $ 116 $ 111
</TABLE>
NOTE 10 - 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 cannot participate in the discounted purchase of common stock. The
Rights are redeemable, at the Company's option, at any time at $.01 per Right.
F-14
<PAGE> 34
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - 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 1,965,000 shares of common stock have been reserved for issuance
under the Company's stock option plans, including 286,000 shares in connection
with the Company's 1999 Stock Option Plan that was approved in fiscal 2000.
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. Had compensation
expense been determined for stock options granted based on the "fair value" at
grant dates provided for in SFAS 123, the Company's pro forma net income (loss)
and diluted net income (loss) per share for 2000, 1999 and 1998 would
approximate the amounts below (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income (loss) $ 1,667 $ 326 $ (284)
Net income (loss) per share $ .25 $ .06 $ (.05)
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Weighted average expected life
(years) N/A 10 N/A
Expected volatility -- 88.21% --
Expected dividends -- -- --
Risk free interest rate -- 5.88% --
Weighted average fair value of
options granted -- $ 1.0174 --
</TABLE>
F-15
<PAGE> 35
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the stock option plans for the three
years ended September 30, 2000:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------------ ------------
<S> <C> <C>
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
Granted 64,000 1.156
Exercised 400 1.000
Forfeited -- --
Expired -- --
------------ ------------
September 30, 1999 985,100 1.0806
Granted -- --
Exercised -- --
Forfeited 31,400 1.0645
Expired -- --
------------ ------------
September 30, 2000 953,700 $ 1.0813
============ ============
Exercisable, September 30, 2000 937,700 $ 1.0800
</TABLE>
The following table summarizes information regarding stock options outstanding
at September 30, 2000:
<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 $1.188 946,700 5.6 $ 1.0440 930,700 $ 1.042
$1.189 to $6.125 7,000 0.8 6.1250 7,000 6.1250
------------ ------------ ------------ ------------ ------------
953,700 5.6 $ 1.0813 937,700 $ 1.080
============ ============ ============ ============ ============
</TABLE>
NOTE 12 - 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 an
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.
F-16
<PAGE> 36
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000, 1999 and 1998 were
$124,000, $116,000 and $111,000, respectively.
NOTE 13 - 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 does not provide matching contributions for the 401(k)
plan. The 401(k) plan did not have a material impact on the Company's financial
condition or results of operations.
NOTE 14 - 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.
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.
F-17
<PAGE> 37
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES
As of September 30, 2000 the Company leased twelve Retail stores 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, 2000 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Year Ending September 30,
2001 $ 2,067
2002 1,988
2003 1,645
2004 1,530
2005 1,187
Thereafter 3,491
--------
$ 11,908
========
</TABLE>
Rental expense for operating leases during the fiscal years ended September 30,
2000, 1999 and 1998 was approximately $2.1 million, $2.2 million, and $2.2
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> 38
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - 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, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income (loss) $ 1,667 $ 391 $ (284)
Accretion of preferred stock (261) -- --
Retirement of preferred stock 115 -- --
------------ ------------ ------------
Net income (loss) attributable to
common shareholders $ 1,521 $ 391 $ (284)
============ ============ ============
Weighted average shares outstanding - basic 5,823 5,579 5,405
Effective of dilutive securities:
Assumed exercise of stock options
179 179 --
------------ ------------ ------------
Weighted average shares outstanding - diluted 6,002 5,758 5,405
============ ============ ============
Net income (loss) per share:
Basic $ .26 $ .07 $ (.05)
Diluted $ .25 $ .07 $ (.05)
</TABLE>
For the years ended September 30, 2000 and 1999, 7,000 options were excluded
from the diluted EPS computation because they would have been antidilutive. For
the year ended September 30, 1998, all outstanding options were excluded from
the diluted EPS computation because they would have been antidilutive.
NOTE 17 - SELECTED QUARTERLY DATA (UNAUDITED)
Comparability of the quarterly data for 2000 was impacted by the Cornelius
Acquisition. Amounts (except share data) are expressed in thousands:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------- ---------------------- --------------------- ----------------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 12,980 $ 5,475 $ 12,289 $ 5,597 $ 20,893 $ 15,065 $ 7,663 $ 4,218
Gross profit 5,945 2,358 5,625 2,694 10,492 7,822 3,224 2,084
Net income (loss) $ (227) $ (619) $ (120) $ (342) $ 3,231 $ 2,133 $ (1,217) $ (781)
Net income (loss) \
per share
Basic $ (.03) $ (.11) $ (.03) $ (.06) $ .54 $ .38 $ (.22) $ (.14)
Diluted $ (.03) $ (.11) $ (.03) $ (.06) $ .52 $ .37 $ (.22) $ (.14)
</TABLE>
F-19
<PAGE> 39
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - ACQUISITION OF CORNELIUS NURSERIES
On September 21, 1999 the Company completed the Cornelius Acquisition.
The Cornelius Acquisition, recorded under the purchase method of accounting,
included the purchase of substantially all of the inventories and property,
plant and equipment of Cornelius for cash of approximately $8.5 million and $4.0
million redemption value of non-dividend, preferred stock with a mandatory
redemption after five years.
The purchase price totaled approximately $11.8 million as follows (amounts in
thousands):
<TABLE>
<S> <C>
Cash $ 8,500
Preferred stock, non-dividend, mandatory redemption after five years,
$4.0 million redemption value, at estimated fair value 1,890
Accounts payable 845
Acquisition costs 551
--------
Total purchase price $ 11,786
========
</TABLE>
The purchase price was allocated to assets acquired and liabilities assumed
based on estimated fair market values at the date of the acquisition. Since the
fair market value of assets acquired and liabilities assumed exceeded the
purchase price, the resulting excess was allocated proportionately to reduce the
carrying amounts of noncurrent assets, resulting in assets being recorded as
follows (amounts in thousands):
<TABLE>
<S> <C>
Inventories $ 6,500
Property and equipment 5,286
--------
Total assets $ 11,786
========
</TABLE>
NOTE 19 - PREFERRED STOCK WITH MANDATORY REDEMPTION PROVISIONS
On September 21, 1999 the Company issued 40,000 shares of Non-Voting Acquisition
Preferred Stock (the "Preferred Stock"), $.01 par value, in connection with the
Cornelius Acquisition. The Preferred Stock has a liquidation preference of $100
per share and no voting rights, except as otherwise required by law. The Company
may, at any time prior to September 21, 2004, redeem any portion or all of the
outstanding shares of Preferred Stock for $100 per share. Any unredeemed shares
outstanding at September 21, 2004 must be redeemed for $100 per share.
The Preferred Stock was recorded at its estimated fair value of approximately
$1,890,000. The carrying amount of the Preferred Stock will be accreted at each
balance sheet date to its redemption amount using the interest method. The
resulting increase in the carrying amount of the Preferred Stock will reduce
income applicable to common shareholders.
In October 1999 the Company redeemed 5,798 shares of Preferred Stock for a cash
payment of $158,500. The redeemed Preferred Stock had a redemption value of
$579,800 and a carrying amount of $274,000.
F-20
<PAGE> 40
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SEGMENT INFORMATION
The Company has two reportable segments: Retail, and Growing and Wholesale.
The Company aggregates its individual Retail stores because they are all managed
in a similar way, they serve a similar type of customer, they use similar
methods to distribute their products and services, they carry similar product
lines, and they use similar marketing approaches. For example, the Retail stores
sell plants, garden supplies and other merchandise, primarily to individuals, on
a cash-and-carry basis, at each Retail store.
Likewise, the Company aggregates its two Growing operations with its two
Wholesale distribution centers. These operations are distinguished from the
Retail segment, but are similar to each other, in the way they are managed, in
the type of customer they serve, in the methods they use to produce and ship
their products, in the product lines they carry, and in the way they market
their products. For example, the Growing and Wholesale segment operations sell
plants to the Company's Retail stores, other retailers and landscape contractors
by extending credit and shipping goods via truck to the customer's location.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies (see Note 2). Management evaluates a segment's
performance based upon income (loss) before income taxes. Intersegment sales or
transfers are recorded based upon prevailing market prices.
F-21
<PAGE> 41
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a tabulation of business segment information for each of the
past three years. Intersegment elimination information is included to reconcile
segment data to the consolidated financial statements. Amounts are in thousands:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 2000 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUES
From external customers
Retail $ 44,523 $ 30,305 $ 26,949
Growing and Wholesale 9,302 50 120
------------ ------------ ------------
Totals 53,825 30,355 27,069
------------ ------------ ------------
From other operating segments
Retail -- -- --
Growing and Wholesale 2,967 1,510 1,143
------------ ------------ ------------
Totals 2,967 1,510 1,143
Intersegment Eliminations (2,967) (1,510) (1,143)
------------ ------------ ------------
Total consolidated net sales $ 53,825 $ 30,355 $ 27,069
============ ============ ============
INCOME (LOSS) BEFORE INCOME TAXES
Retail $ 3,037 $ 748 $ (189)
Growing and Wholesale (307) 129 (138)
------------ ------------ ------------
Totals 2,730 877 (327)
Intersegment Eliminations 35 (78) --
------------ ------------ ------------
Total consolidated income (loss) before
income taxes $ 2,765 $ 799 $ (327)
============ ============ ============
TOTAL ASSETS
Retail $ 22,243 $ 17,785 $ 12,889
Growing and Wholesale 8,734 8,550 1,796
------------ ------------ ------------
Totals $ 30,977 $ 26,335 $ 14,685
============ ============ ============
INTEREST REVENUE
Retail $ 63 $ 105 $ 137
Growing and Wholesale 17 -- --
------------ ------------ ------------
Totals $ 80 $ 105 $ 137
============ ============ ============
INTEREST EXPENSE
Retail $ 825 $ 293 $ 209
Growing and Wholesale 218 $ 28 $ 28
------------ ------------ ------------
Totals $ 1,043 $ 321 $ 237
============ ============ ============
DEPRECIATION AND AMORTIZATION EXPENSE
Retail $ 801 $ 688 $ 514
Growing and Wholesale 134 8 5
------------ ------------ ------------
Totals $ 935 $ 696 $ 519
============ ============ ============
</TABLE>
F-22
<PAGE> 42
CALLOWAY'S NURSERY, INC.
Annual Report on Form 10-K
Fiscal Year Ended September 30, 2000
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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)
(h) Extension of Employment Agreement between the Registrant and
James C. Estill dated July 2, 1996 (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n))(2)
(j) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o))(2)
(k) Employment Agreement between the Registrant and C. Sterling
Cornelius dated September 21, 1999.(9)
(21) (a) Subsidiaries of the Registrant.(3)
(23) (d) Consent of KPMG LLP.(3)
(27) (a) Financial Data Schedule.(3)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))(4)
(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))(5)
(99) (d) Calloway's Nursery, Inc. 1997 Stock Option Plan (Exhibit (99)(d)(6)
(99) (e) Calloway's Nursery, Inc. 1998 Stock Option Plan (Exhibit (99)(e))(7)
(99) (f) Calloway's Nursery, Inc. 1999 Stock Option Plan Exhibit (99)(f))(8)
(99) (g) Cornelius Nurseries, Inc. and Turkey Creek Farms, Inc. Combined Financial
Statements as of and for the years ended September 30, 1998 and
1997 (Exhibit 99.1)(9)
(99) (h) Calloway's Nursery, Inc. and Subsidiaries Unaudited Pro Forma Condensed
Financial Information as of June 30, 1999 and for the nine month period
ended June 30, 1999 and for the year ended September 30, 1998
(Exhibit 99.2)(8)
(99) (i) Calloway's Nursery, Inc. 2000 Stock Option Plan(3)
</TABLE>
<PAGE> 43
----------
(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 the
Company's Form 10-Q Report for the quarter ended June 30, 1997.
(3) Filed herewith.
(4) 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.
(5) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30, 1995.
(6) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.
(9) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 8-K Report filed October 1, 1999.
