1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding as
Title of July 31, 2001
----- ---------------------
Common Stock, par value $.01 per share 6,196,530
2
CALLOWAY'S NURSERY, INC.
FORM 10-Q
JUNE 30, 2001
TABLE OF CONTENTS
PAGE
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Index to Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 20
PART II -- OTHER INFORMATION
Items 1-6 21
2
3
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. We are including this
statement for the express purpose of providing Calloway's the protections of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
with respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect future results and could
cause those results to differ materially from those expressed in the
forward-looking statements contained in this Report.
Our expected future results, products and service performance or other
non-historical facts are forward-looking and reflect our current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of our business, geographic concentration, the impact of weather
and other growing conditions, the ability to manage growth, the impact of
competition, the ability to obtain future financing, government regulations,
market risks associated with variable-rate debt, the anticipated costs and
benefits of discontinuing certain operations, 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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4
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
JUNE 30, SEPTEMBER 30, JUNE 30,
2001 2000 2000
-------- ------------- --------
Cash and cash equivalents $ 2,667 $ 413 $ 3,643
Accounts receivable 207 250 114
Inventories 6,145 5,843 5,451
Prepaids and other assets 245 316 143
Deferred income taxes -- current 1,541 -- --
Current assets of discontinued operations 2,321 6,907 6,980
-------- -------- --------
Total current assets 13,126 13,729 16,331
-------- -------- --------
Property and equipment, net 14,056 14,228 14,345
Goodwill, net 767 848 875
Deferred income taxes -- noncurrent 1,297 1,348 1,369
Other assets 273 187 193
Noncurrent assets of discontinued
operations 629 637 640
-------- -------- --------
Total assets $ 30,148 $ 30,977 $ 33,753
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,630 $ 3,202 $ 4,276
Accrued expenses 1,335 1,672 1,929
Accrued income taxes 1,078 1,518 2,159
Notes payable, current -- 55 --
Current portion of long-term debt 721 555 780
Deferred income taxes, current -- 118 165
Current liabilities of discontinued
operations 1,572 1,049 583
-------- -------- --------
Total current liabilities 8,336 8,169 9,892
Deferred rent payable 958 1,056 1,132
Long-term debt, net of current portion 9,883 9,870 9,755
-------- -------- --------
Total liabilities 19,177 19,095 20,779
-------- -------- --------
Commitments and contingencies
Non-voting preferred stock, with
mandatory redemption provisions 2,102 1,877 1,808
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 64 62 62
Additional paid-in capital 9,526 9,288 9,163
Retained earnings 675 2,051 3,337
-------- -------- --------
10,265 11,401 12,562
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
-------- -------- --------
Total shareholders' equity 8,869 10,005 11,166
-------- -------- --------
Total liabilities and shareholders'
equity $ 30,148 $ 30,977 $ 33,753
======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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5
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 37,586 $ 38,276 $ 20,251 $ 17,940
Cost of goods sold 18,578 18,705 9,491 8,037
-------- -------- -------- --------
Gross profit 19,008 19,571 10,760 9,903
-------- -------- -------- --------
Operating expenses 10,140 10,350 3,759 3,920
Occupancy expenses 1,943 2,104 656 710
Advertising expenses 1,301 1,211 577 485
Depreciation and amortization 676 669 208 249
Interest expense 878 770 260 304
Interest income (30) (58) (25) (53)
-------- -------- -------- --------
Total expenses 14,908 15,046 5,435 5,615
-------- -------- -------- --------
Income from continuing operations
before income taxes 4,100 4,525 5,325 4,288
Income taxes 1,577 1,720 2,006 1,600
-------- -------- -------- --------
Income from continuing operations 2,523 2,805 3,319 2,688
-------- -------- -------- --------
Discontinued wholesale operations:
Income (loss) from discontinued
operations (net of income taxes
(benefit) of ($371), $45, ($346),
and $310, respectively) (647) 79 (607) 543
Loss on disposal of Wholesale
operations (net of income tax
benefit of $1,736)
(3,027) -- (3,027) --
-------- -------- -------- --------
(3,674) 79 (3,634) 543
-------- -------- -------- --------
Net income (loss) (1,151) 2,884 (315) 3,231
Accretion of preferred stock (225) (192) (75) (67)
Retirement of preferred stock -- 115 -- --
-------- -------- -------- --------
Net income (loss) attributable to
common shareholders $ (1,376) $ 2,807 $ (390) $ 3,164
======== ======== ======== ========
Weighted average number of common shares outstanding
Basic 6,074 5,789 6,136 5,865
Diluted 6,074 5,930 6,136 6,048
Basic net income (loss) per common share:
Income from continuing operations $ .38 $ .47 $ .53 $ .45
Discontinued operations (.61) .01 (.59) .09
-------- -------- -------- --------
Net income (loss) $ (.23) $ .48 $ (.06) $ .54
======== ======== ======== ========
Diluted net income (loss) per common share:
Income from continuing operations $ .38 $ .46 $ .53 $ .43
Discontinued operations (.61) .01 (.59) .09
-------- -------- -------- --------
Net income (loss) $ (.23) $ .47 $ (.06) $ .52
======== ======== ======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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6
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,151) $ 2,884
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss from discontinued operations 3,674 --
Depreciation and amortization 676 669
Net change in operating assets and liabilities (886) 1,255
------- -------
Net cash provided by operating activities 2,313 4,729
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (423) (1,741)
------- -------
Net cash used for investing activities (423) (1,741)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 240 239
Retirement of preferred stock -- (159)
Borrowings on debt 8,017 3,100
Repayments of debt (7,893) (2,589)
------- -------
Net cash provided by financing activities 364 591
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,254 3,581
Cash and cash equivalents at beginning of period 413 62
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,667 $ 3,643
======= =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim unaudited consolidated financial statements were prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC). In
management's opinion, all adjustments considered necessary for a fair
presentation of the financial position at June 30, 2001, and the results of
operations for the three-month and nine-month periods ended June 30, 2001 and
2000, and cash flows for the nine-month periods ended June 30, 2001 and 2000
have been made. Such adjustments are of a normal recurring nature, except for
those related to the discontinued operations as discussed in Note 7.
Because of seasonal and other factors, the results of operations for the
three-month and nine-month periods ended June 30, 2001 and cash flows for the
nine-month period ended June 30, 2001 are not necessarily indicative of expected
results of operations and cash flows for the fiscal year ending September 30,
2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
SEC rules and regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited financial statements
and related notes for the fiscal year ended September 30, 2000 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for 2000 have been reclassified to conform to the 2001
presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
June 30, September 30, June 30,
2001 2000 2000
-------- ------------- --------
Finished goods $4,344 $5,668 $4,423
Work in process 1,577 1,020 943
Supplies 224 65 85
------ ------ ------
$6,145 $5,843 $5,451
====== ====== ======
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CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. SEGMENT INFORMATION
Through June 2001 the Company had two reportable segments: (i) Retail, and (ii)
Growing and Wholesale. On August 7, 2001 the Company adopted a formal plan to
dispose of the wholesale operations which had been a part of its Wholesale and
Growing segment see Note 7). Accordingly, the following segment information
reflects the aforementioned two segments, as well as elimination of the
wholesale operations from Consolidated Sales, Income from Continuing Operations
before Income Taxes, and Total Assets. For future periods, the Company will have
two reportable segments as follows: (i) Retail, and (ii) Growing.
The following is a tabulation of business segment information as of and for the
three-month and nine-month periods ended June 30, 2001 and 2000. Intersegment
elimination information and the elimination of the wholesale operations are
included to reconcile segment data to the condensed consolidated financial
statements. Amounts are in thousands:
Nine Nine Three Three
month month month month
period period period period
ended ended ended ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
SALES
From external customers
Retail $ 37,482 $ 38,199 $ 20,216 $ 17,893
Growing and Wholesale 5,391 7,963 2,374 3,000
-------- -------- -------- --------
Totals 42,873 46,162 22,590 20,893
-------- -------- -------- --------
From other operating segments
Retail -- -- -- --
Growing and Wholesale 2,166 2,484 1,288 1,239
-------- -------- -------- --------
Totals 2,166 2,484 1,288 1,239
-------- -------- -------- --------
Less: wholesale sales (5,287) (7,886) (2,339) (2,953)
Less: elimination of intersegment sales (2,166) (2,484) (1,288) (1,239)
-------- -------- -------- --------
Total consolidated net sales $ 37,586 $ 38,276 $ 20,251 $ 17,940
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Retail $ 4,126 $ 4,571 $ 4,863 $ 4,090
Growing and Wholesale (1,044) 78 (491) 1,051
-------- -------- -------- --------
Totals 3,082 4,649 4,372 5,141
-------- -------- -------- --------
Loss (income) from discontinued wholesale
operations (before income taxes) 1,018 (124) 953 (853)
-------- -------- -------- --------
Total consolidated income from
continuing operations before income
taxes $ 4,100 $ 4,525 $ 5,325 $ 4,288
======== ======== ======== ========
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CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 June 30, 2000
------------- -------------
TOTAL ASSETS
Retail $ 22,053 $ 22,139
Growing and wholesale 11,192 19,327
Less: assets of discontinued wholesale operations (2,950) (7,620)
Less: elimination of profit on intersegment sales (147) (93)
-------- --------
Totals $ 30,148 $ 33,753
======== ========
5. STOCK OPTION PLAN
In February 2001 the Company's shareholders approved its 2000 Stock Option Plan
(the "2000 Plan"). The 2000 Plan provides for the awarding of incentive and
non-qualified stock options to employees, and is administered by the
Compensation Committee of the Board of Directors, which consists entirely of
independent directors. 302,000 shares of common stock have been reserved for
issuance under the 2000 Plan. An aggregate of 2,267,000 shares of common stock
have been reserved for issuance under all of the Company's stock option plans.
6. LONG TERM DEBT
In April 2001 the Company entered into a note payable to a financial institution
for $1,100,000, using $1,040,000 of the proceeds to reduce the balance of a note
payable to another financial institution. The new note is collateralized by
certain real estate and requires payments, including interest, of approximately
$ 114,000 annually for a term of 20 years. The interest rate is 8.5% fixed. The
note matures in April 2021. The note payable and applicable real estate relate
to the WLD wholesale operations, which are being sold, as discussed in Note 7.
7. SUBSEQUENT EVENT -- DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On August 7, 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its Wholesale and Growing segment. The
Company plans to exit its wholesale operations by the end of November 2001.
Specifically, the Company will cease in an orderly fashion production and
marketing of plants and related products grown or purchased for sale to
wholesale customers, including other nursery retailers and landscape
contractors. The wholesale operation includes the wholesale growing operations
of Turkey Creek Farms as well as the wholesale landscape distribution centers
("WLD") in Austin and Houston. At Turkey Creek Farms, the Company will
exclusively grow plants for sale at its retail stores. The adopted disposal plan
includes: (i) the sale of the Turkey Creek Farms wholesale inventories to
unaffiliated customers, and (ii) the active marketing for sale of the WLD
operations.
The Company has incurred operating losses and negative cash flows in the
wholesale operations for most of the last two fiscal years. The continued
pressure from lower cost wholesalers has impacted the profitability and
competitive position of these operations. The Company has concluded that market
conditions today and for the foreseeable future are such that these operations
are likely to remain uncompetitive. Additionally, incremental future investments
would not generate sufficient income to recover the cost of such investments.
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10
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded a loss on disposal of discontinued operations of
approximately $3.0 million (net of income taxes) in the quarter ended June 30,
2001 to cover the expected cash and non-cash costs of the discontinued
operations. The loss includes the write down to estimated net realizable value
of the investment in facilities and equipment, inventory, and accounts
receivable, as well as the accrual of anticipated operating losses during the
period after the date the disposal plan was adopted, through the date the
disposition is completed.
Prior to this decision, the Company grew plants for sale to external customers
in addition to plants grown for sale in its retail stores. The Company intends
to grow a greater amount of plants that are solely for sale in its retail
stores.
Following is a summary of the asset and liabilities of the discontinued
wholesale operations as of the applicable periods (amounts in thousands):
June 30, September 30, June 30,
2001 2000 2000
-------- ------------- --------
ASSETS
Accounts receivable $ 887 $ 818 $1,167
Inventories 1,434 6,089 5,813
------ ------ ------
Current assets of discontinued operations $2,321 $6,907 $6,980
====== ====== ======
Property and equipment, net $ 629 $ 637 $ 640
------ ------ ------
Noncurrent assets of discontinued operations
$ 629 $ 637 $ 640
====== ====== ======
LIABILITIES
Accounts payable $ 615 $ 799 $ 491
Accrued expenses 957 250 92
------ ------ ------
Current liabilities of discontinued operations
$1,572 $1,049 $ 583
====== ====== ======
As discussed in Note 6, long-term debt (including current portion) of $1,100,000
that is collateralized by the WLD real property is included in the condensed
consolidated balance sheet as of June 30, 2001. That note payable was entered
into in April 2001 with the proceeds being used to reduce the amount outstanding
on a note payable to another financial institution. Prior to April 2001 there
was no separate indebtedness related only to the WLD real property. A portion of
the proceeds from the sale of the WLD real property will be used to pay off the
$1,100,000 note payable referred to above.
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11
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the operating results of the discontinued wholesale
operations for the applicable periods (amounts in thousands):
Nine Nine Three Three
month month month month
period period period period
ended ended ended ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Sales $ 5,287 $ 7,886 $ 2,339 $ 2,953
Cost of goods sold 4,591 5,395 2,657 1,464
------- ------- ------- -------
Gross profit (loss) 696 2,491 (318) 1,489
Operating expenses 1,400 2,092 529 550
Occupancy expenses 266 240 84 74
Advertising expenses 6 8 2 4
Depreciation and amortization 40 27 20 8
Interest expense 2 -- -- --
------- ------- ------- -------
Total expenses 1,714 2,367 635 636
------- ------- ------- -------
Income (loss) from discontinued
operations before income taxes (1,018) 124 (953) 853
Income taxes (benefit) (371) 45 (346) 310
------- ------- ------- -------
Income (loss) from discontinued
operations ($ 647) $ 79 ($ 607) $ 543
======= ======= ======= =======
The Company recorded a loss on disposal of discontinued operations (net of
income tax) of $3,027,000 for the nine-month and three-month periods ended June
30, 2001. The loss included the expected loss on the disposal of the Turkey
Creek Farms wholesale inventory, partially offset by expected gains on the sale
of other assets, and estimated income tax benefits of $1,736,000.
The discontinuance of the wholesale operations has not caused the Company to be
in violation of its various bank covenants. However, the Company could require a
waiver of the debt coverage ratio (a ratio comparing net income plus
depreciation and amortization to current portion of long-term debt) at some time
during fiscal 2002. In the event this occurs, the Company will seek a waiver
from its bank lender.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In September 1999 we completed the Acquisition of Cornelius Nurseries, Inc. and
affiliated companies (the "Cornelius Acquisition"). The results of operations
for fiscal 2000 and fiscal 2001 include the Cornelius Acquisition.
On August 7, 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its Wholesale and Growing segment (see Note
7 to Financial Statements). Accordingly, the following discussion of results of
operations has been separated into (i) Continuing Operations and (ii)
Discontinued Operations.
CONTINUING OPERATIONS
QUARTER ENDED JUNE 30, 2001 COMPARED WITH QUARTER ENDED JUNE 30, 2000
(Amounts in millions, except per share amounts)
-------------------------------------------------------------------------------
THIRD QUARTER HIGHLIGHTS (UNAUDITED) Fiscal 2001 Fiscal 2000
------------------------------------ ----------- -----------
Consolidated net sales $20.3 $17.9
Retail segment sales 20.2 17.9
Growing segment sales 1.4 1.2
Less: internal sales $(1.3) $(1.2)
Sales increase (decrease) 13% 19%
Same-store sales increase (decrease) 15% (7%)
Number of retail stores (end of quarter) 20 21
Gross profit margin 53% 55%
Income from continuing operations before income taxes $ 5.3 $ 4.3
Income from continuing operations per share (basic) $ .53 $ .45
Cash flows from operations $ 5.7 $ 2.8
Retail store inventories $ 4.3 $ 4.1
Growing inventories $ 1.8 $ 1.4
Current ratio 1.57 1.65
Property, plant and equipment (net) $14.1 $14.3
Long-term debt (including current portion) $10.6 $10.5
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CONSOLIDATED NET SALES increased 13%. Same-store sales (sixteen Calloway's
stores in Dallas-Fort Worth and three Cornelius stores in Houston) increased
15%. The increase in Retail sales was primarily attributable to greater consumer
demand in the Company's market areas for the April - June period (offsetting
reduced demand during the January - March period).
GROSS MARGIN was 53% for the fiscal 2001 quarter compared to 55% for the fiscal
2000 quarter. The reduction was primarily related to an increase in promotional
pricing coordinated with increased advertising during the April - May period
that helped fuel the sales increase achieved for the quarter.
OPERATING EXPENSES declined 4%, from approximately $3.9 million for the fiscal
2000 quarter to approximately $3.8 million for the fiscal 2001 quarter. The
decline was primarily due to lower bonus expenses. Bonuses are tied to
improvements in profitability and related measures. The fiscal 2000 period had
significant improvement in most of those measures for most units, while results
for the fiscal 2001 period did not improve for most units.
ADVERTISING EXPENSES increased 19%, from $485,000 for the fiscal 2000 quarter to
$577,000 for the fiscal 2001 quarter. The timing of expenditures was adjusted to
allocate more to the later part of the spring season due to poor weather
conditions that had a negative impact on consumer demand during the earlier part
of the spring season.
OCCUPANCY EXPENSES declined 8% from $710,000 for the fiscal 2000 quarter to
$656,000 for the fiscal 2001 quarter. The reduction was primarily due to lower
estimated property taxes for fiscal 2001 than had been expected for the
comparable period in fiscal 2000.
DEPRECIATION AND AMORTIZATION EXPENSES declined 16% from $249,000 for the fiscal
2000 quarter to $208,000 for the fiscal 2001 quarter, due to some long-lived
assets becoming fully depreciated during the fiscal 2001 quarter.
INTEREST EXPENSE declined 14%, from $304,000 for the fiscal 2000 quarter to
$260,000 for the fiscal 2001 quarter due debt refinanced with lower, fixed
interest rates during fiscal 2000 and fiscal 2001.
INVENTORIES increased 13%, from $5.5 million at June 30, 2000 to $6.1 million at
June 30, 2001. The increase was primarily related to earlier receipt of most
Christmas merchandise in fiscal 2001 than in the comparable period in fiscal
2000. Total purchases of Christmas merchandise for the year are expected to
increase modestly compared to purchases of Christmas merchandise for 2000.
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14
NINE-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED WITH NINE-MONTH PERIOD ENDED
JUNE 30, 2000
NINE MONTH HIGHLIGHTS (UNAUDITED) Fiscal 2001 Fiscal 2000
--------------------------------- ----------- -----------
Consolidated net sales $37.6 $38.3
Retail segment sales 37.5 38.2
Growing segment sales 2.3 2.6
Less: internal sales $(2.2) $(2.5)
Sales increase (decrease) (2%) 77%
Same-store sales increase (decrease) (2%) 4%
Gross profit margin 51% 51%
Income from continuing operations before income taxes $ 4.1 $ 4.5
Income from continuing operations per share (basic) $ .38 $ .47
Cash flows from operations $ 2.3 $ 4.7
CONSOLIDATED NET SALES declined by 2%. Same-store sales (sixteen Calloway's
stores in Dallas-Fort Worth and three Cornelius stores in Houston) also declined
2%. The decline in Retail sales was primarily attributable to reduced consumer
demand in the Company's market areas during the fall (October - November 2000)
and winter (January - March 2001) periods, partially offset by stronger consumer
demand during the spring (April - June 2001) period.
GROSS MARGIN was 51% for both the fiscal 2001 and fiscal 2000 nine-month
periods.
OPERATING EXPENSES declined 2%, from $10.4 million for the fiscal 2000
nine-month period to approximately $10.1 million for the fiscal 2001 nine-month
period. The decline was primarily due to lower bonus expenses. Bonuses are tied
to improvements in profitability and related measures. The fiscal 2000 period
had significant improvement in most of those measures for most units, while
results for the fiscal 2001 period did not improve for most units.
ADVERTISING EXPENSES increased 7% from approximately $1.2 million for the fiscal
2000 nine-month period to approximately $1.3 million for the fiscal 2001
nine-month period. The increase was primarily due to additional expenses
incurred during spring 2001 to stimulate consumer demand for the Company's
Retail stores.
OCCUPANCY EXPENSES declined 8% from approximately $2.1 million for the fiscal
2000 nine-month period to approximately $1.9 million for the fiscal 2001
nine-month period. The reduction was primarily due to lower estimated property
taxes for fiscal 2001 than had been expected for the comparable period in fiscal
2000.
INTEREST EXPENSE rose 14%, from $770,000 to $878,000, primarily as a result of
increased seasonal borrowings under the Company's revolving line of credit. The
increased borrowings were necessary because of the reduced Sales for the first
six months of fiscal 2001 compared to the first six-months of fiscal 2000. All
of those seasonal borrowings were repaid during April 2001.
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DISCONTINUED OPERATIONS
QUARTER ENDED JUNE 30, 2001 COMPARED WITH QUARTER ENDED JUNE 30, 2000
SALES decreased 21%. The decrease in sales was primarily attributed to continued
pressure from lower cost wholesalers.
GROSS PROFIT declined from 50% for the fiscal 2000 quarter to (14%) for the
fiscal 2001 period. The decline was caused by the substantial decline in sales
for the quarter and nine-month period, which caused excessive quantities of
inventory, resulting in a $1.1 million markdown to lower of cost or market at
June 30, 2001.
OPERATING EXPENSES declined 4%. The decline was a result of reduced expenses
needed to support the reduced volume of sales.
OCCUPANCY EXPENSES increased 14%. The increase was a result of an increase in
property tax expenses.
DEPRECIATION AND AMORTIZATION increased 150%. The increase was a result of the
addition of fixtures and equipment during fiscal 2001.
INVENTORY declined 76%. The decrease in inventory was due to the $1.1 million
markdown referred to above, as well as the expected losses on disposal through
discontinued operations of the Turkey Creek Farms inventory.
NINE MONTH PERIOD ENDED JUNE 30, 2001 COMPARED WITH NINE MONTH PERIOD ENDED
JUNE 30, 2000
SALES declined 33%. The decrease in sales was primarily attributed to continued
pressure from lower cost wholesalers.
GROSS PROFIT declined from 32% for the fiscal 2000 quarter to 13% for the fiscal
2001 period. The decline was caused by the substantial decline in sales for the
quarter and nine-month period, which caused excessive quantities of inventory,
resulting in a $1.1 million markdown to lower of cost or market at June 30,
2001.
OPERATING EXPENSES declined 33%. The decline was a result of reduced expenses
needed to support the reduced volume of sales.
OCCUPANCY EXPENSES increased 11%. The increase was a result of an increase in
property tax expenses.
DEPRECIATION AND AMORTIZATION increased 48%. The increase was a result of the
addition of fixtures and equipment during fiscal 2001.
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CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES
The Company had Cash Provided by Operating Activities of approximately $2.3
million for the fiscal 2001 nine-month period compared to Cash Provided by
Operating Activities of approximately $4.7 million for the fiscal 2000
nine-month period.
The primary causes of the difference were: (i) approximately $1.4 million in
estimated Federal Income Tax payments, that were accrued in fiscal 2000, were
paid during fiscal 2001, and (ii) income from continuing operations declined
from $2.8 million for the fiscal 2000 nine-month period to $2.5 million for the
fiscal 2001 nine-month period.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company had approximately $423,000 in Cash Used for Investing Activities for
the fiscal 2001 nine-month period compared to approximately $1.7 million in Cash
Used for Investing Activities for the fiscal 2000 nine-month period. Most of the
$1.7 million in capital expenditures for the fiscal 2000 nine-month period was
for a new store that the Company built and opened in April 2000. There was no
new store construction during the fiscal 2001 nine-month period.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company had approximately $364,000 in Cash Provided by Financing Activities
for the fiscal 2001 nine-month period compared to Cash Provided by Financing
Activities of approximately $591,000 for the fiscal 2000 nine-month period.
During the fiscal 2001 nine-month period the Company entered into three notes
payable totaling approximately $4.9 million.
(i) One of the three notes was for approximately $2.6 million, and
it refinanced approximately $2.5 million of a separate real
estate note payable, reducing the balance from approximately
$4.5 million to approximately $2.0 million, extending the
maturity date, and providing a fixed interest rate instead of
a variable interest rate.
(ii) The second note payable was for approximately $1.1 million,
and it refinanced approximately $1.0 million of the same real
estate note payable described in (i) above, further reducing
the balance from approximately $2.0 million to approximately
$1.0 million, extending the maturity date, and providing a
fixed interest rate instead of a variable interest rate. (See
Note 6 to Financial Statements)
(iii) The third note payable was for approximately $1.2 million, and
it replaced a construction loan of approximately $0.8 million,
extending the maturity date and providing a fixed interest
rate instead of a variable interest rate.
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We anticipate that cash flows from operations and our $5,000,000 revolving line
of credit arrangement will be sufficient to meet our working capital needs. On
August 7, 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its Wholesale and Growing segment (see Note
7 to Financial Statements). The discontinuance of the wholesale operations has
not caused the Company to be in violation of its various bank covenants.
However, the Company could require a waiver of the debt coverage ratio (a ratio
comparing net income plus depreciation and amortization to current portion of
long-term debt) at some time during fiscal 2002. In the event this occurs, the
Company will seek a waiver from its bank lender.
DISCONTINUED OPERATIONS
On August 7, 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its Wholesale and Growing segment. The
Company plans to exit its wholesale operations by the end of November 2001.
Specifically, the Company will cease in an orderly fashion production and
marketing of plants and related products grown or purchased for sale to
wholesale customers, including other nursery retailers and landscape
contractors. The wholesale operation includes the wholesale growing operations
of Turkey Creek Farms as well as the wholesale landscape distribution centers
("WLD") in Austin and Houston. At Turkey Creek Farms, the Company will
exclusively grow plants for sale at its retail stores. The adopted disposal plan
includes: (i) the sale of the Turkey Creek Farms wholesale inventories to
unaffiliated customers, and (ii) the active marketing for sale of the WLD
operations.
The Company has incurred operating losses and negative cash flows in the
wholesale operations for most of the last two fiscal years. The continued
pressure from lower cost wholesalers has impacted the profitability and
competitive position of these operations. The Company has concluded that market
conditions today and for the foreseeable future are such that these operations
are likely to remain uncompetitive. Additionally, incremental future investments
would not generate sufficient income to recover the cost of such investments.
The Company recorded a loss on disposal of discontinued operations of
approximately $3.0 million (net of income taxes) in the quarter ended June 30,
2001 to cover the expected cash and non-cash costs of the discontinued
operations. The loss includes the write down to estimated net realizable value
of the investment in facilities and equipment, inventory, and accounts
receivable, as well as the accrual of anticipated operating losses during the
period after the date the disposal plan was adopted, through the date the
disposition is completed.
Prior to this decision, the Company grew plants for sale to external customers
in addition to plants grown for sale in its retail stores. The Company intends
to grow a greater amount of plants that are solely for sale in its retail
stores.
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Following is a summary of the asset and liabilities of the discontinued
wholesale operations as of the applicable periods (amounts in thousands):
June 30, September 30, June 30,
2001 2000 2000
-------- ------------- --------
ASSETS
Accounts receivable $ 887 $ 818 $1,167
Inventories 1,434 6,089 5,813
------ ------ ------
Current assets of discontinued operations $2,321 $6,907 $6,980
====== ====== ======
Property and equipment, net $ 629 $ 637 $ 640
------ ------ ------
Noncurrent assets of discontinued operations $ 629 $ 637 $ 640
====== ====== ======
LIABILITIES
Accounts payable $ 615 $ 799 $ 491
Accrued expenses 957 250 92
------ ------ ------
Current liabilities of discontinued operations $1,572 $1,049 $ 583
====== ====== ======
As discussed in Note 6, long-term debt (including current portion) of $1,100,000
that is collateralized by the WLD real property is included in the condensed
consolidated balance sheet as of June 30, 2001. That note payable was entered
into in April 2001 with the proceeds being used to reduce the amount outstanding
on a note payable to another financial institution. Prior to April 2001 there
was no separate indebtedness related only to the WLD real property. A portion of
the proceeds from the sale of the WLD real property will be used to pay off the
$1,100,000 note payable referred to above.
Following is a summary of the operating results of the discontinued wholesale
operations for the applicable periods (amounts in thousands):
Nine Nine Three Three
month month month month
period period period period
ended ended ended ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Sales $ 5,287 $ 7,886 $ 2,339 $ 2,953
Cost of goods sold 4,591 5,395 2,657 1,464
------- ------- ------- -------
Gross profit 696 2,491 (318) 1,489
Operating expenses 1,400 2,092 529 550
Occupancy expenses 266 240 84 74
Advertising expenses 6 8 2 4
Depreciation and amortization 40 27 20 8
Interest expense 2 -- -- --
------- ------- ------- -------
Total expenses 1,714 2,367 635 636
------- ------- ------- -------
Income (loss) from discontinued
operations before income taxes (1,018) 124 (953) 853
Income taxes (benefit) (371) 45 (346) 310
------- ------- ------- -------
Income (loss) from discontinued
operations ($ 647) $ 79 ($ 607) $ 543
======= ======= ======= =======
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The Company recorded a loss on disposal of discontinued operations (net of
income tax) of $3,027,000 for the nine-month and three-month periods ended June
30, 2001. The loss included the expected loss on the disposal of the Turkey
Creek Farms wholesale inventory, partially offset by expected gains on the sale
of other assets, and estimated income tax benefits of $1,736,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the FASB issued Statement No. 141, Business Combinations and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of Statement 142. Statement 142
will also require that intangible assets with indefinite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately.
Statement 142 is effective January 1, 2002. Companies with fiscal years
beginning after March 15, 2001 who have not yet issued financial statements for
their first interim period may early adopt Statement 142. The Company is in the
process of determining whether or not it will early adopt Statement 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Upon adoption of Statement 142 the Company will be required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
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As of October 1, 2001 the Company expects to have unamortized goodwill in the
amount of $740,000 that will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $108,000
for the fiscal year ended September 30, 2000 and $81,000 for the nine-month
period ended June 30, 2001. Because of the extensive effort that will be needed
to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
consolidated financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
ITEM 3. 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 June 30, 2001, we had no
foreign exchange contracts and/or options outstanding.
We manage our interest rate risk by arranging for most long-term debt to be at
fixed rates, and for debt with shorter maturities, (including our revolving line
of credit) to have variable interest rates. 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 June 30, 2001 Calloway's had variable rate debt of approximately $2.0
million, out of total debt of $10.6 million. Holding other variables, such as
debt levels, constant, a one percentage point increase in interest rates would
be expected to have an estimated annual impact on income before income taxes and
cash flows of approximately $20,000.
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PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2001
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
----------------------------------
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
----------------------------------
Daniel G. Reynolds, Vice President
and Chief Financial Officer
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