UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
6,651,950 shares of the Registrant's Common Stock, $.01 par value, were
outstanding as of February 12, 2003.
CALLOWAY'S NURSERY, INC.
FORM 10-Q
DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
ITEM 1
Index to Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 18
ITEM 4
Controls and Procedures 18
PART II - OTHER INFORMATION
Items 1-6 18
2
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, general economic 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
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.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2002 2002 2001
--------------- --------------- ---------------
Cash and cash equivalents $ 2,194 $ 2,475 $ 2,534
Accounts receivable 101 356 125
Inventories 4,051 5,017 3,472
Prepaids and other assets 169 59 197
Deferred income taxes, current 1,117 263 298
Income taxes receivable 119 119 1,180
Current assets of discontinued operations 1,178 1,333 1,085
--------------- --------------- ---------------
Total current assets 8,929 9,622 8,891
Property and equipment, net 11,993 12,093 12,481
Goodwill, net 631 631 713
Deferred income taxes 1,568 1,568 1,301
Other assets 204 211 258
Noncurrent assets of discontinued operations -- -- 1,231
--------------- --------------- ---------------
Total assets $ 23,325 $ 24,125 $ 24,875
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 3,725 $ 2,749 $ 2,770
Accrued expenses 1,985 2,019 1,680
Notes payable, current -- -- 28
Current portion of long-term debt 509 501 564
Deferred income taxes, current -- -- 187
Current liabilities of discontinued operations 109 487 289
--------------- --------------- ---------------
Total current liabilities 6,328 5,756 5,518
Deferred rent payable 753 805 901
Long-term debt, net of current portion 8,148 8,246 8,708
--------------- --------------- ---------------
Total liabilities 15,229 14,807 15,127
--------------- --------------- ---------------
Commitments and contingencies
Non-voting preferred stock, with mandatory redemption provisions 2,641 2,538 2,258
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock 69 68 66
Additional paid-in capital 9,966 9,885 9,686
Accumulated deficit (3,184) (1,777) (866)
--------------- --------------- ---------------
6,851 8,176 8,886
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
--------------- --------------- ---------------
Total shareholders' equity 5,455 6,780 7,490
--------------- --------------- ---------------
Total liabilities and shareholders'
equity $ 23,325 $ 24,125 $ 24,875
=============== =============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
DECEMBER 31,
----------------------------------
2002 2001
--------------- ---------------
Net sales $ 10,863 $ 10,228
Cost of goods sold 6,478 5,894
--------------- ---------------
Gross profit 4,385 4,334
--------------- ---------------
Operating expenses 4,169 3,301
Occupancy expenses 821 687
Advertising expenses 554 472
Depreciation and amortization 182 236
Interest expense 200 227
Interest income (4) (3)
--------------- ---------------
Total expenses 5,922 4,920
--------------- ---------------
Loss from continuing operations before income taxes (1,537) (586)
Income tax benefit (604) (223)
--------------- ---------------
Loss from continuing operations (933) (363)
Loss from discontinued operations, net of income tax benefits of $250 and $20 (371) (37)
--------------- ---------------
Net loss (1,304) (400)
Accretion of preferred stock (103) (78)
--------------- ---------------
Net loss attributable to common shareholders $ (1,407) $ (478)
=============== ===============
Weighted average number of common shares outstanding - basic and diluted 6,569 6,281
Net loss per common share - basic and diluted
Loss from continuing operations $ (.16) $ (.07)
Loss from discontinued operations $ (.05) $ (.01)
Net loss $ (.21) $ (.08)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (1,304) $ (400)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss from discontinued operations (net of tax) 371 37
Depreciation and amortization 182 236
Net change in operating assets and liabilities 1,154 2,615
------------- -------------
Net cash provided by operating activities 403 2,488
------------- -------------
Cash flows from investing activities -
Additions to property and equipment (82) (35)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 82 77
Repayments of debt (90) (808)
------------- -------------
Net cash used for financing activities (8) (731)
------------- -------------
Net increase in cash and cash equivalents from continuing operations 313 1,722
Net increase (decrease) in cash and cash equivalents from discontinued operations (594) 533
------------- -------------
Net increase (decrease) in cash and cash equivalents (281) 2,255
Cash and cash equivalents at beginning of period 2,475 279
------------- -------------
Cash and cash equivalents at end of period $ 2,194 $ 2,534
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These interim unaudited condensed 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 consolidated financial position at December 31,
2002, and the results of operations and cash flows for the three-month periods
ended December 31, 2002 and 2001 have been made. Such adjustments are of a
normal recurring nature.
Because of seasonal and other factors, the results of operations and cash flows
for the three-month period ended December 31, 2002 are not necessarily
indicative of expected results of operations and cash flows for the fiscal year
ending September 30, 2003.
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, 2002 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for fiscal 2002 have been reclassified to conform to the fiscal
2003 presentation. (See Note 5 - "Exit from Turkey Creek Farms".)
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
December 31, September 30, December 31,
2002 2002 2001
------------- ------------- -------------
Finished goods $ 2,695 $ 4,006 $ 2,052
Work in process 1,175 929 1,198
Supplies 181 82 222
------------- ------------- -------------
$ 4,051 $ 5,017 $ 3,472
============= ============= =============
7
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. SEGMENT INFORMATION
The Company has two reportable segments: (i) Retail, and (ii) Growing.
The following is a tabulation of business segment information as of and for the
three-month periods ended December 31, 2002 and 2001. Intersegment elimination
information is included to reconcile segment data to the condensed consolidated
financial statements. Amounts are in thousands:
Three month Three month
period ended period ended
December 31, December 31,
2002 2001
------------------ ------------------
REVENUES
From external customers
Retail $ 10,848 $ 10,218
Growing 15 10
--------------- ---------------
Totals 10,863 10,228
--------------- ---------------
From other operating segments
Retail -- --
Growing 131 180
--------------- ---------------
Totals 131 180
Elimination of intersegment sales (131) (180)
--------------- ---------------
Total consolidated net sales $ 10,863 $ 10,228
=============== ===============
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Retail $ (1,518) $ (502)
Growing (19) (84)
--------------- ---------------
Total loss from continuing operations before income taxes $ (1,537) $ (586)
=============== ===============
December 31, September 30, December 31,
2002 2002 2001
--------------- --------------- ---------------
TOTAL ASSETS
Retail $ 20,815 $ 21,715 $ 21,043
Growing 1,332 1,077 1,516
--------------- --------------- ---------------
Totals $ 22,147 $ 22,792 $ 22,559
=============== =============== ===============
8
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
Disposal of Wholesale Operations
In August 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 exited its wholesale operations as of December 31, 2001. Specifically,
the Company ceased 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 disposal of the wholesale operations was completed by December 31, 2001.
Exit from Turkey Creek Farms
In September 2002 the Company decided to sell its Turkey Creek Farms growing
operation and discontinue the merchandise that it produced. The Company incurred
operating losses and negative cash flows on Turkey Creek Farms in fiscal 2002
and concluded that market conditions then and for the foreseeable future were
such that Turkey Creek Farms was likely to remain uncompetitive.
The Company recorded an inventory write-down of approximately $1.2 million in
fiscal 2002. The assets, liabilities and results of operations for Turkey Creek
Farms have been reclassified as discontinued operations in the accompanying
condensed consolidated financial statements in accordance with Statement 144
(see Note 2).
Following is a summary of the assets and liabilities of the discontinued
operations as of the applicable years (amounts in thousands):
December 31, September 30, December 31,
2002 2002 2001
--------------- --------------- ---------------
Cash $ 2 $ 15 $ 2
Accounts receivable -- 1 262
Inventories -- 141 821
Property and equipment held for sale 1,176 1,176 --
--------------- --------------- ---------------
Current assets of discontinued operations $ 1,178 $ 1,333 $ 1,085
=============== =============== ===============
Noncurrent assets of discontinued operations - property
and equipment $ -- $ -- $ 1,231
=============== =============== ===============
Accounts payable $ 109 $ 476 $ 230
Accrued expenses -- 11 59
--------------- --------------- ---------------
Current liabilities of discontinued operations $ 109 $ 487 $ 289
=============== =============== ===============
The property and equipment of the discontinued Turkey Creek Farms operation was
classified as a current asset at December 31, 2002 and September 30, 2002 since
it is expected to be sold in fiscal 2003. The Company has entered into a
contract to sell the property and equipment for an amount in excess of its
carrying value that, if completed, would be recorded in fiscal 2003.
9
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the operating results of the discontinued operations
for the applicable periods (amounts in thousands):
Three Month Three Month
Period Ended Period Ended
December 31, December 31,
2002 2001
--------------- ---------------
Sales $ 200 $ 1,400
Cost of goods sold 230 1,181
--------------- ---------------
Gross profit (loss) (30) 219
Expenses 591 276
--------------- ---------------
Loss from discontinued operations before income taxes (621) (57)
Income tax benefit (250) (20)
--------------- ---------------
Loss from discontinued operations $ (371) $ (37)
=============== ===============
6. NEW ACCOUNTING PRONOUNCEMENTS
Statement 142
The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142") as of October 1, 2002 and
no longer amortizes goodwill. As of the adoption date the Company had
unamortized goodwill in the amount of $631,000 which was subject to the
transition provisions of Statement 142.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but not later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statements of operations, effective as of the first quarter of fiscal 2003.
Because of the extensive effort that will be needed to comply with adopting
Statement 142, it is not practicable to reasonably estimate the impact of
adopting Statement 142 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.
10
CALLOWAY'S NURSERY, INC. AND SUSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
There was no amortization expense for the three month period ended December 31,
2002. The Company's reported net loss for the three month period ended December
31, 2001 adjusted for excluding the effects of goodwill amortization would have
been $373,000 compared to $1,304,000 for the three month period ended December
31, 2002. The effect on adjusted net loss per share for the three month period
ended December 31, 2001 was insignificant.
Statement 148
In December 2002 the Financial Accounting Standards Board ("FASB") issued
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123 ("Statement 148"). Statement
148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure requirements of FASB Statement No.
123, Accounting for Stock-Based Compensation ("Statement 123") to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation arrangements in each
period presented, and provides for a specific tabular format of the pro forma
disclosures required by Statement 123.
The Company accounts for its stock options plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net loss and
loss per share if the Company had applied the fair value recognition provisions
of Statement 123 to stock-based employee compensation (amounts in thousands,
except per share amounts):
Three Month Three Month
Period Ended Period Ended
December 31, December 31,
2002 2001
--------------- ---------------
Net loss, as reported $ (1,304) $ (400)
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related income tax effects -- --
--------------- ---------------
Pro forma net loss $ (1,304) $ (400)
=============== ===============
Net loss per share:
Basic and diluted - as reported $ (.21) $ (.08)
Basic and diluted - pro forma $ (.21) $ (.08)
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment. In fiscal
2002 the Company decided to sell its Turkey Creek Farms growing operation and
discontinue the merchandise that it produced (see Note 5 to the Condensed
Consolidated Financial Statements). Accordingly, the following discussion of
results of operations has been separated into (i) Continuing Operations and (ii)
Discontinued Operations.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
QUARTER ENDED DECEMBER 31, 2002 COMPARED WITH QUARTER ENDED DECEMBER 31, 2001
Loss from Continuing Operations before Income Taxes for the first quarter of
fiscal 2003 (the "December 2002 Quarter") was higher than it was for the first
quarter of fiscal 2002 (the "December 2001 Quarter"), primarily due to increased
expenses and lower gross margin (gross profit as a percentage of sales).
Sales increased 6%, from $10.2 million for the December 2001 Quarter to $10.9
million for the December 2002 Quarter. The increase was primarily attributable
to the addition of 7 new retail stores in the San Antonio Market in the fourth
quarter of fiscal 2002. The addition of the San Antonio retail stores was also
the primary factor in the 17% increase in inventories, from $3.5 million at
December 31, 2001 to $4.1 million at December 31, 2002.
Same-store sales declined 6%, from $10.0 for the December 2001 Quarter to $9.5
for the December 2002 Quarter, indicating reduced demand for the Company's
Christmas merchandise, living plants and related gardening products.
Gross Profit increased 1%, from $4.3 million for the December 2001 Quarter to
$4.4 million for the December 2002 Quarter. However, gross margin declined from
42% for the December 2001 Quarter to 40% for the December 2002 Quarter. The
decline was primarily attributable to aggressive price discounting at Christmas
to increase sales.
Operating expenses increased 26%. The increase was primarily attributable to the
opening of 7 retail stores in the San Antonio market. Same-store operating
expenses increased 9%.
Occupancy expenses increased 20%. The increase was primarily attributable to the
leasing of 7 retail stores in the San Antonio market.
Advertising expenses increased 17%. The increase was primarily attributable to
the advertising in the San Antonio market to support the opening of 7 retail
stores there.
12
Depreciation and amortization declined 23%. The decrease was primarily
attributable to (i) goodwill no longer being amortized (See Note 6 to the
Condensed Consolidated Financial Statements) and (ii) lower capital expenditures
over the past several fiscal years, which has resulted in an increasing number
of assets becoming fully-depreciated.
Interest expense declined 12%. The decline was primarily attributable to (i)
lower amounts of long-term debt, (ii) lower seasonal borrowings under the
revolving line of credit, and (iii) lower interest rates.
DISCONTINUED OPERATIONS
Quarter Ended December 31, 2002 Compared with Quarter Ended December 31, 2001
Sales declined 86%, from $1.4 million for the December 2001 Quarter to $0.2
million for the December 2002 Quarter. For the December 2001 Quarter, the
Company was selling its discontinued wholesale inventories to unrelated third
parties. For the fiscal 2002 Quarter, the Company used the remaining inventories
of its discontinued Turkey Creek Farms growing operation in its own retail
stores.
Gross Profit declined 114%, from $219,000 for the December 2001 Quarter to a
loss of $30,000 for the December 2002 Quarter. The decline was primarily
attributable to the decline in sales.
Expenses increased 114%, from $276,000 for the December 2001 Quarter to $591,000
for the December 2002 Quarter. The increase was primarily attributable to the
requirements of Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("Statement 144"), which
requires that costs and expenses of discontinued operations be recognized as
they are incurred. The estimated costs of discontinuing the wholesale operations
had been accrued during fiscal 2001. The Company early adopted Statement 144 in
fiscal 2002.
The aforementioned factors caused the Loss before Income Taxes to increase from
$57,000 for the December 2001 Quarter to $621,000 for the December 2002 Quarter.
See Note 5 to the Condensed Consolidated Financial Statements.
13
FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
Cash Flows Provided by Operating Activities declined from $2.5 million for the
December 2001 Quarter to $0.4 million for the December 2002 Quarter. The decline
was primarily attributable to (i) a reduction in Inventories of $1.0 million for
the December 2002 Quarter, compared to a reduction in Inventories of $1.7 for
the December 2001 Quarter, and (ii) a Net Loss of $1.3 million for the December
2002 Quarter compared to a Net Loss of $0.4 million for the December 2001
Quarter.
Cash flows Used for Investing Activities were $82,000 for the December 2002
Quarter compared to $35,000 for the December 2001 Quarter. The increase was
primarily attributable to a difference in the timing of certain replacements of
furniture, fixtures and vehicles. The Company continues to limit the amount
spent on capital expenditures during each fiscal year.
Cash Flows Used for Financing Activities were $8,000 for the December 2002
Quarter compared to $731,000 for the December 2001 Quarter. During the December
2001 Quarter the Company repaid $702,000 of seasonal borrowings under its line
of credit arrangement. By comparison, there were no borrowings or repayments
under the revolving line of credit arrangement during the December 2002 Quarter.
The Company's business is seasonal, and it relies on its revolving line of
credit arrangement to provide working capital during seasons of lower sales
volumes. Typically, the Company borrows from the revolving line of credit during
the quarter ending March 31, and repays those borrowings during the spring
selling season included in the quarter ending June 30. Continued availability of
funds from the revolving line of credit depends upon the Company's continued
compliance with its loan covenants. At December 31, 2002 the Company was in
compliance with all of its loan covenants.
14
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of September 30, 2002 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
--------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Totals
-------- -------- -------- -------- -------- ---------- --------
Long-term debt (including current portion) $ 501 $ 575 $ 645 $ 720 $ 651 $ 5,655 $ 8,747
Future minimum lease payments under noncancellable
operating leases 2,480 2,408 1,923 1,366 850 1,868 10,895
Preferred stock with mandatory redemption
provisions (1) -- 3,420 -- -- -- -- 3,420
-------- -------- -------- -------- -------- -------- --------
Totals $ 2,981 $ 6,403 $ 2,568 $ 2,086 $ 1,501 $ 7,523 $ 23,062
-------- -------- -------- -------- -------- -------- --------
During the December 2002 Quarter there were no changes to the September 30, 2002
amounts other than scheduled principal payments on long-term debt and scheduled
rental payments on operating leases.
(1) Carrying amount of $2,538 as of September 30, 2002 and $2,641 as of December
31, 2002.
15
CRITICAL ACCOUNTING POLICIES
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.
Some assets and liabilities by their nature are subject to estimates and
assumptions. For the Company, those assets and liabilities include:
o Inventories;
o Deferred income taxes;
o Property and equipment;
o Goodwill;
o Accrued expenses;
Inventories - The Company values its inventories using the lower of cost or
market on a first-in, first-out basis. The Company conducts physical inventories
three times each year: December, June and September.
The Company's retail inventories turn-over several times each year; therefore,
the cost of each inventory item is approximately the same as its current
replacement cost. Merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis. The physical
inventories are taken at retail prices and adjusted to cost using sampling
techniques that determine a markup percentage for each merchandise category in
each market area.
The Company's growing inventories turn over more slowly than the retail
inventories, and items continue to grow and absorb costs until they are sold. At
each physical inventory, the accumulated cost of growing inventories is compared
to published wholesale prices from competing growers on a gallon-equivalent
basis, with allowance for the estimated costs of disposal of such inventories.
The growing inventories are then recorded at the lower of cost or market. In
addition, merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis.
Deferred income taxes - As of December 31, 2002 and 2001, and September 30, 2002
the Company has recorded a valuation allowance of $0 for its deferred tax assets
on the weight of available evidence at those balance sheet dates. The primary
factor in not providing for a valuation allowance is the expectation that future
taxable income and the reversal of temporary differences will be sufficient for
the Company to realize the deferred tax assets. Such estimate could change in
the future based on the occurrence of one or more future events.
16
Property and Equipment - 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 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. As of December 31, 2002 and September 30, 2002
management believes that no impairment has occurred and that no reduction of the
estimated useful lives is warranted.
Goodwill - The Company has assessed the recoverability of its 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, has been measured based on the 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 could be impacted if estimated future operating cash flows are not
achieved. Management believes that no impairment has occurred.
As discussed in Note 6 to the Condensed Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets effective October 1, 2002, and no longer amortizes
goodwill.
Accrued expenses - The Company routinely accrues for various costs and expenses
for which it has received goods or services, but for which it has not been
invoiced. Typically, accrued expenses include such items as salaries and related
taxes, bonuses, and sales and use taxes for which amounts are readily
determinable and significant estimates are not necessary. Property taxes are
estimated and accrued based on the amounts paid for such taxes for the previous
year, until a new tax bill is received. Various other expenses are accrued from
time to time before an invoice is rendered based on the estimated costs of those
goods or services.
17
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 risk, nor do we enter into any transactions in derivative securities for
trading or speculative purposes. As of December 31, 2002, we had no foreign
exchange contracts 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 operations and cash flows,
assuming other factors are held constant.
At December 31, 2002 Calloway's had variable rate debt of $3.1 million, out of
total long-term debt of $8.7 million. Holding other variables, such as debt
levels, constant, a one percentage point increase in interest rates would be
expected to have an estimated impact on pre-tax earnings and cash flows for next
year of approximately $31,000 for the variable-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
On January 31, 2003 (the "Evaluation Date") an evaluation was performed by the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the CEO and CFO concluded that the
Company's disclosure controls and procedures were effective as of the Evaluation
Date. Subsequent to the Evaluation Date there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls and procedures for financial reporting.
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:
Exhibit 99(l) Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 12, 2003
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
19
CERTIFICATIONS
I, Daniel G. Reynolds, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calloway's
Nursery, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
a. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 12, 2003
/s/ Daniel G. Reynolds
------------------------------------------
Daniel G. Reynolds
Vice President and Chief Financial Officer
20
CERTIFICATIONS (CONT.)
I, James C. Estill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calloway's
Nursery, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
d. All significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
e. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 12, 2003
/s/ James C. Estill
--------------------------------------
James C. Estill
President and Chief Executive Officer
21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99(l) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.