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 March 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 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 May 10, 2002
----- ---------------------
Common Stock, par value $.01 per share 6,400,614
CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 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 10
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Items 1-6 18
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, 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
MARCH 31, SEPTEMBER 30, MARCH 31,
2002 2001 2001
------------ ------------- ------------
Cash and cash equivalents $ 597 $ 279 $ 133
Accounts receivable 1,031 433 922
Inventories 7,671 6,042 7,712
Prepaids and other assets 108 230 152
Deferred income taxes, current 758 55 --
Income taxes receivable -- 1,180 --
Current assets of discontinued operations 70 2,847 8,157
------------ ------------ ------------
Total current assets 10,235 11,066 17,076
Property and equipment, net 13,572 13,888 14,231
Goodwill, net 686 740 794
Deferred income taxes 1,301 1,301 1,684
Other assets 226 266 271
Noncurrent assets of discontinued operations -- -- 593
------------ ------------ ------------
Total assets $ 26,020 $ 27,261 $ 34,649
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 4,722 $ 2,128 $ 5,611
Accrued expenses 1,973 1,534 1,843
Income taxes payable -- -- 200
Notes payable, current 70 730 3,184
Current portion of long-term debt 574 732 659
Deferred income taxes, current 74 187 --
Current liabilities of discontinued operations 36 2,304 1,002
------------ ------------ ------------
Total current liabilities 7,449 7,615 12,499
Deferred rent payable 872 929 981
Long-term debt, net of current portion 8,630 8,646 9,966
------------ ------------ ------------
Total liabilities 16,951 17,190 23,446
------------ ------------ ------------
Commitments and contingencies
Non-voting preferred stock, with mandatory redemption
provisions 2,346 2,180 2,027
Shareholders' equity:
Voting convertible preferred stock -- -- --
Preferred stock -- -- --
Common stock (6,385,970, 6,248,346 and 6,109,304
shares outstanding, respectively) 66 65 63
Additional paid-in capital 9,749 9,610 9,444
Retained earnings (accumulated deficit) (1,696) (388) 1,065
------------ ------------ ------------
8,119 9,287 10,572
Less: Treasury stock, at cost (250,000 common shares) (1,396) (1,396) (1,396)
------------ ------------ ------------
Total shareholders' equity 6,723 7,891 9,176
------------ ------------ ------------
Total liabilities and shareholders'
Equity $ 26,020 $ 27,261 $ 34,649
============ ============ ============
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)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 17,220 $ 17,335 $ 6,992 $ 7,423
Cost of goods sold 9,457 9,037 3,563 3,809
------------ ------------ ------------ ------------
Gross profit 7,763 8,298 3,429 3,614
------------ ------------ ------------ ------------
Operating expenses 6,337 6,385 3,036 3,053
Occupancy expenses 1,512 1,304 825 619
Advertising expenses 726 724 254 278
Depreciation and amortization 480 444 244 221
Interest expense 444 621 217 359
Interest income (9) (5) (6) --
------------ ------------ ------------ ------------
Total expenses 9,490 9,473 4,570 4,530
------------ ------------ ------------ ------------
Loss from continuing operations before income
taxes (1,727) (1,175) (1,141) (916)
Income tax benefit (605) (409) (382) (328)
------------ ------------ ------------ ------------
Loss from continuing operations (1,122) (766) (759) (588)
Income (loss) from discontinued operations,
net of income tax (20) (70) 17 (17)
------------ ------------ ------------ ------------
Net loss (1,142) (836) (742) (605)
Accretion of preferred stock (166) (150) (88) (78)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (1,308) $ (986) $ (830) $ (683)
============ ============ ============ ============
Weighted average number of common shares outstanding
Basic and diluted 6,317 6,043 6,353 6,078
Net income (loss) per common share - basic and diluted
Loss from continuing operations $ (.21) $ (.15) $ (.13) $ (.11)
Income (loss) from discontinued operations -- $ (.01) -- --
------------ ------------ ------------ ------------
Net loss $ (.21) $ (.16) $ (.13) $ (.11)
============ ============ ============ ============
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)
SIX MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,142) $ (836)
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Loss from discontinued operations (net of tax) 20 70
Depreciation and amortization 480 444
Net change in operating assets and liabilities 1,275 (1,728)
------------ ------------
Net cash provided by (used for) operating activities
633 (2,050)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (110) (393)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 140 157
Borrowings on debt -- 6,904
Repayments of debt (834) (3,575)
------------ ------------
Net cash provided by (used for) financing activities
(694) 3,486
------------ ------------
Net increase (decrease) in cash and cash equivalents from continuing
operations (171) 1,043
Net increase (decrease) in cash and cash equivalents from discontinued
operations 489 (1,323)
------------ ------------
Net increase (decrease) in cash and cash equivalents 318 (280)
Cash and cash equivalents at beginning of period 279 413
------------ ------------
Cash and cash equivalents at end of period $ 597 $ 133
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
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 March 31, 2002, and the results of
operations and cash flows for the six-month periods ended March 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 six-month period ended March 31, 2002 are not necessarily indicative of
expected results of operations and cash flows for the fiscal year ending
September 30, 2002.
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, 2001 included in the
Form 10-K covering such period.
2. RECLASSIFICATIONS
Certain amounts for fiscal 2001 have been reclassified to conform to the fiscal
2002 presentation.
3. INVENTORIES
Inventories consist of the following (amounts in thousands):
March 31, September 30, March 31,
2002 2001 2001
------------- ------------- -------------
Finished goods (retail) $ 4,313 $ 3,921 $ 6,130
Work in process (growing) 3,016 1,884 1,476
Supplies (growing) 342 237 106
------------- ------------- -------------
$ 7,671 $ 6,042 $ 7,712
============= ============= =============
4. NOTES PAYABLE AND LONG-TERM DEBT
On March 31, 2002 the Company amended its revolving line of credit agreement and
one of its term loan agreements to amend certain defined terms relating to
financial covenants.
7
5. 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
six-month periods ended March 31, 2002 and 2001. Intersegment elimination
information is included to reconcile segment data to the condensed consolidated
financial statements. Amounts are in thousands:
Six Six Three Three
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
From external customers
Retail $ 17,203 $ 17,266 $ 6,985 $ 7,382
Growing 17 69 7 41
------------ ------------ ------------ ------------
Totals 17,220 17,335 6,992 7,423
------------ ------------ ------------ ------------
From other operating segments
Retail -- -- -- --
Growing 911 441 731 333
------------ ------------ ------------ ------------
Totals 911 441 731 333
Elimination of intersegment sales (911) (441) (731) (333)
------------ ------------ ------------ ------------
Total consolidated net sales $ 17,220 $ 17,335 $ 6,992 $ 7,423
============ ============ ============ ============
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Retail $ (1,640) $ (1,191) $ (1,138) $ (935)
Growing (87) 16 (3) 19
------------ ------------ ------------ ------------
Total loss from continuing operations before
income taxes $ (1,727) $ (1,175) $ (1,141) $ (916)
============ ============ ============ ============
March 31, September 30, March 31,
2002 2001 2001
------------ ------------- ------------
TOTAL ASSETS
Retail $ 22,295 $ 21,973 $ 24,211
Growing 3,655 2,441 1,688
------------ ------------ ------------
Totals $ 25,950 $ 24,414 $ 25,899
============ ============ ============
8
6. 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 exited its wholesale operations by the end of March 2002. The wholesale
operation included 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 now exclusively grows plants for
sale at its retail stores. The adopted disposal plan included: (i) the sale of
the Turkey Creek Farms wholesale inventories to unaffiliated customers, and (ii)
the sale of the WLD operations as an ongoing business to an unaffiliated third
party.
The sale of the WLD operations was completed in October 2001 and indebtedness
related to the WLD real property was repaid. The Turkey Creek Farms wholesale
inventory was completely sold or otherwise liquidated by the end of December
2001.
Following is a summary of the asset and liabilities of the discontinued
wholesale operations as of the applicable periods (amounts in thousands):
March 31, September 30, March 31,
2002 2001 2001
------------ ------------- ------------
Cash $ 24 $ 41 $ 21
Accounts receivable 44 717 1,039
Inventories -- 1,458 7,095
Prepaid expenses 2 -- 2
Property and equipment -- 631 --
------------ ------------ ------------
Current assets of discontinued operations $ 70 $ 2,847 $ 8,157
============ ============ ============
Noncurrent assets of discontinued operations $ -- $ -- $ 593
============ ============ ============
Accounts payable $ 36 $ 693 $ 898
Accrued expenses -- 495 98
Current portion of long-term debt -- 1,116 6
------------ ------------ ------------
Current liabilities of discontinued operations $ 36 $ 2,304 $ 1,002
============ ============ ============
Following is a summary of the operating results of the discontinued wholesale
operations for the applicable periods (amounts in thousands):
Six Six Three Three
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales $ 1,389 $ 3,286 $ 37 $ 2,045
Cost of goods sold 1,132 2,322 -- 1,509
------------ ------------ ------------ ------------
Gross profit 257 964 37 536
Expenses 290 1,079 13 562
------------ ------------ ------------ ------------
Income (loss) from discontinued operations
before income taxes (33) (115) 24 (26)
Income tax expense (benefit) (13) (45) 7 (9)
------------ ------------ ------------ ------------
Income (loss) from discontinued operations
$ (20) $ (70) $ 17 $ (17)
============ ============ ============ ============
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
In August 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment (see Note 6
to Condensed Consolidated Financial Statements). Accordingly, the following
discussion of results of operations has been separated into (i) Continuing
Operations and (ii) Discontinued Operations.
CONTINUING OPERATIONS
(Amounts in millions, except per share amounts)
--------------------------------------------------------------------------------------------------------
Second quarter highlights (unaudited) Fiscal 2002 Fiscal 2001
--------------------------------------------------------------------------------------------------------
Consolidated net sales $ 7.0 $ 7.4
Retail segment sales 7.0 7.4
Growing segment sales .7 .4
Less: internal sales $ (.7) $ (.4)
Sales decrease (6)% (21)%
Number of retail stores (end of quarter) 20 20
Gross profit margin 49% 49%
Loss from continuing operations before income taxes $ (1.1) $ (.9)
Net loss per share (basic and diluted) (.13) (.11)
Cash flows used for operations (1.9) (1.9)
Retail inventories 4.3 6.1
Growing inventories 3.4 1.6
Current ratio 1.4 1.4
Property, plant and equipment (net) 13.6 14.2
Long-term debt (including current portion) $ 9.2 $ 10.6
QUARTER ENDED MARCH 31, 2002 COMPARED WITH QUARTER ENDED MARCH 31, 2001
Sales decreased 6%, primarily due to weaker early-season consumer demand for
living plants and related gardening products for the second quarter of fiscal
2002 (the "March 2002 Quarter") as compared to the prior year (the "March 2001
Quarter").
The Company typically reports a loss during its second fiscal quarter. For the
March 2002 Quarter the Loss from Continuing Operations before Income Taxes was
somewhat larger than it was for the March 2001 Quarter, primarily due to the
reduced Sales.
Gross Margin (Gross Profit divided by Sales) was essentially unchanged at 49%
for both the March 2002 Quarter and the March 2001 Quarter.
Operating Expenses were essentially unchanged at approximately $3.0 million for
both the March 2002 Quarter and the March 2001 Quarter.
10
Occupancy Expenses increased from $619,000 for the March 2001 Quarter to
$825,000 for the March 2002 Quarter, primarily due to higher estimated property
taxes for the March 2002 Quarter than had been estimated for the March 2001
Quarter.
Advertising Expenses decreased 9% from $278,000 for the March 2001 Quarter to
$254,000 for the March 2002 Quarter, primarily due to reduced use of media other
than newspapers and radio.
Depreciation and Amortization Expenses rose 10% from $221,000 for the March 2001
Quarter to $244,000 for the March 2002 Quarter as a result of capital additions
completed and placed in service during fiscal 2001.
Interest Expense decreased 40%, from $359,000 for the March 2001 Quarter to
$217,000 for the March 2002 Quarter, as the Company used proceeds from the sale
of its wholesale operations to reduce debt.
Inventories were essentially unchanged at $7.7 million at both March 31, 2002
and 2001. Retail inventories declined $1.8 million from $6.1 million at March
31, 2001 to $4.3 million at March 31, 2002, while growing inventories rose from
$1.6 million at March 31, 2001 to $3.4 million at March 31, 2002. The decrease
in retail inventories was due to clearance of slower-moving merchandise items,
including certain Christmas items. The increase in growing inventories reflects
the increase in those inventories for use exclusively in the Company's retail
segment. Inventories formerly held by the growing segment for sale at wholesale
were part of the wholesale nursery operations discontinued in 2001 and are not
included in the growing inventory of $1.6 million shown at March 31, 2001 (see
Note 6 to Condensed Consolidated Financial Statements). For 2002 Turkey Creek
Farms has joined Miller Plant Farms in producing plants exclusively for sale at
the Company's retail stores.
SIX MONTH PERIOD ENDED MARCH 31, 2002 COMPARED WITH QUARTER ENDED MARCH 31, 2001
Sales were essentially flat, indicating similar consumer demand for living
plants and related gardening products.
The Company typically reports a loss during its first and second fiscal
quarters. For the first six months of fiscal 2002 (the "2002 Six Month Period"),
the Loss from Continuing Operations before Income Taxes was somewhat larger than
it was for the prior year (the "2001 Six Month Period"). The larger loss was
primarily due to lower Gross Margin (Gross Profit divided by Sales), which
declined from 48% for the 2001 Six Month Period to 45% for the 2002 Six Month
Period.
The reduced Gross Margin was primarily attributable to larger markdowns in the
December 2001 Quarter that were needed to sell the Christmas inventory.
Operating Expenses decreased 1% from approximately $6.4 million for the 2001 Six
Month Period to approximately $6.3 million for the 2002 Six Month Period.
11
Occupancy Expenses increased from approximately $1.3 million for the 2001 Six
Month Period to approximately $1.5 million for the 2002 Six Month Period,
primarily due to higher estimated property taxes for the 2002 Six Month Period
than had been estimated for the 2001 Six Month Period.
Advertising Expenses were essentially unchanged at approximately $0.7 million
for both the 2002 Six Month Period and the 2001 Six Month Period.
Depreciation and Amortization Expenses rose 8% from $444,000 for the 2001 Six
Month Period to $480,000 for the 2002 Six Month Period as a result of capital
additions completed and placed in service during fiscal 2001.
Interest Expense decreased 29%, from $621,000 for the 2001 Six Month Period to
$444,000 for the 2002 Six Month Period, as the Company used proceeds from the
sale of its wholesale operations to reduce debt.
DISCONTINUED OPERATIONS
QUARTER ENDED MARCH 31, 2002 COMPARED WITH QUARTER ENDED MARCH 31, 2001
Sales decreased 98%. The WLD operations were sold near the end of October 2001,
and substantially all of the Turkey Creek Farms wholesale operation was
liquidated by the end of December 2001.
Gross Profit decreased 93%, for the same reasons as the decrease in Sales.
Expenses decreased 98%, for the same reasons as the decrease in Sales.
Income before Income Taxes was $24,000 for the March 2002 Quarter and there was
a Loss before Income Taxes of $26,000 for the March 2001 Quarter.
SIX MONTH PERIOD ENDED MARCH 31, 2002 COMPARED WITH QUARTER ENDED MARCH 31, 2001
Sales decreased 58%. The WLD operations were sold near the end of October 2001,
and substantially all of the Turkey Creek Farms wholesale operation was
liquidated by the end of December 2001.
Gross Profit decreased 73%, for the same reasons as the decrease in Sales.
Expenses decreased 73%, for the same reasons as the decrease in Sales.
Loss before Income Taxes was $33,000 for the 2002 Six Month Period, and there
was a Loss before Income Taxes of $115,000 for the 2001 Six Month Period.
12
FINANCIAL CONDITION - CAPITAL RESOURCES AND LIQUIDITY
Cash Flows Provided By Operating Activities were approximately $0.6 million for
the 2002 Six Month Period, compared to Cash Flows Used For Operating Activities
of approximately $2.1 million for the 2001 Six Month Period. The primary cause
of the improvement was a refund of federal income taxes of approximately $1.1
million received during the 2002 Six Month Period period, as compared to federal
income taxes paid of approximately $1.4 million during the 2001 Six Month Period
period.
Cash flows Used For Investing Activities were approximately $110,000 for the
2002 Six Month Period, compared to $393,000 for the 2001 Six Month Period. The
Company is limiting the amount of capital expenditures for fiscal 2002 to a
greater extent than it did for fiscal 2001.
Cash Flows Used For Financing Activities were approximately $0.7 million for the
2002 Six Month Period, compared to Cash Flows Provided By Financing Activities
of approximately $3.5 million for the 2001 Six Month Period. During 2002 the
Company sold or otherwise disposed of substantially all of its wholesale
operations, using the proceeds to retire certain long-term debt and repay
$702,000 of seasonal borrowings under its line of credit arrangement. By
comparison, during 2001 the Company refinanced certain long-term debt,
increasing the total amount of indebtedness, and borrowed approximately $3.2
million under its revolving line of credit arrangement.
The Company has improved its liquidity position at March 31, 2002 by (i)
reducing Notes Payable and Long Term Debt by approximately $4.5 million, and
(ii) increasing Cash by $464,000.
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 quickly 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 March 31, 2002 the
Company was in compliance with all of its loan covenants. The Company does not
anticipate any problem in meeting its capital requirements or staying within the
requirements of its loan covenants.
13
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of September 30, 2001 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
-------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Totals
------- ------- ------- ------- ------- ---------- -------
Long-term debt (including current portion) $ 732 $ 696 $ 1,405 $ 1,965 $ 704 $ 3,876 $ 9,378
Future minimum lease payments under
noncancellable operating leases
2,000 1,645 1,630 1,187 1,001 2,322 9,785
Preferred stock with mandatory redemption
provisions (1) -- -- 3,420 -- -- -- 3,420
------- ------- ------- ------- ------- --------- -------
Totals $ 2,732 $ 2,341 $ 6,455 $ 3,152 $ 1,705 $ 6,198 $22,583
======= ======= ======= ======= ======= ========= =======
During the March 2002 Quarter there were no material changes to the September
30, 2001 amounts other than scheduled principal payments on long-term debt and
scheduled rental payments on operating leases.
(1) Carrying amount of $2,180 as of September 30, 2001.
14
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;
o Current and noncurrent assets and liabilities of discontinued
operations.
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 March 31, 2002 and 2001, and September 30, 2001
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.
15
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 March 31, 2002 and 2001, and September 30, 2001
management believes that no impairment has occurred and that no reduction of the
estimated useful lives is warranted. As described below, during the fiscal year
ended September 30, 2001 the Company adopted a formal plan to discontinue
certain operations, and included in a loss on disposal of discontinued
operations an adjustment of the carrying amount of certain property and
equipment to its estimated net realizable value. The Company will adopt
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" as of October 1, 2002.
Goodwill - The Company assesses 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, is 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 will be impacted if estimated future operating cash flows are not
achieved. Management believes that no impairment has occurred. The Company will
adopt Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" as of October 1, 2002. As of October 1, 2002, the Company
expects to have unamortized goodwill in the amount of $632,000 that will be
subject to the transition provisions. Amortization expense related to goodwill
was $54,000 and $108,000 for the six months ended March 31, 2002 and the year
ended September 30, 2001, respectively.
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.
Current and Noncurrent Assets and Liabilities of Discontinued Operations -- As
noted above, in August 2001 the Company adopted a formal plan to discontinue
certain operations. Management used estimates to determine the amounts to be
recorded as a loss on disposal of discontinued operations. Those estimates
included:
o Net realizable value of wholesale inventories;
o Net realizable value of accounts receivable;
o Net realizable value of property and equipment;
o Expenses associated with selling and/or terminating
discontinued operations.
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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 March 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 earnings and cash flows,
assuming other factors are held constant.
At March 31, 2002 Calloway's had variable rate debt of $3.3 million, out of
total long-term debt of $9.2 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 $33,000 for the variable-rate debt.
17
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.
The Annual Meeting of Shareholders of the Company was held on February 20,
2002. The voting results at that meeting were as follows:
ELECTION OF DIRECTORS
Nominee For Withheld
---------------------- --- --------
Dr. Stanley Block 5,306,420 34,760
James C. Estill 5,305,920 35,260
C. Sterling Cornelius 5,308,200 32,980
John T. Cosby 5,301,420 39,760
Daniel R. Feehan 5,306,420 34,760
Timothy J. McKibben 5,306,520 34,660
John S. Peters 5,301,920 39,260
APPROVAL OF CALLOWAY'S NURSERY, INC. 2001 STOCK OPTION PLAN
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,914,523 422,610 4,047 -0-
APPOINTMENT OF KPMG LLP AS AUDITORS FOR FISCAL YEAR 2002
For Against Abstain Broker Non-Votes
--- -------- ------- ----------------
5,219,467 118,210 3,503 -0-
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: May 10, 2002
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