UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, zip code and telephone number of principal
executive offices)
_______________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III
of this Form 10-K. x
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).
YES NO x
The aggregate market value of the Registrant's Common Stock,
$0.01 par value, held by non-affiliates of the Registrant as
of December 11, 2003, was $1,876,000. For purposes of the
foregoing calculation only, all directors, executive officers
and 5% beneficial owners have been deemed affiliates.
6,961,890 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of December 11, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
Page
Reference
Form 10-K
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
PART II
Item 5. Market for Registrant's Common Stock and
Related Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 7.A.Quantitative and Qualitative Disclosures
about Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
Item 9A. Controls and Procedures 19
PART III
Item 10. Directors and Executive Officers of the
Registrant 19
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management 30
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Principal Accounting Fees and Services 32
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 32
-2-
Part I
Item 1. Business
About Calloway's Nursery, Inc.
Founded in 1986, Calloway's Nursery, Inc. operates 26
retail nursery stores in the four largest metropolitan
areas in Texas: Dallas, Fort Worth, Houston and San
Antonio, reaching a combined population of 11.4 million.
Operations
The Company's first four retail stores opened in the
Dallas market in 1987. Since that time, the Company has
grown to 26 retail stores: 16 Calloway's Nursery stores in
the Dallas and Fort Worth markets, 3 Cornelius Nurseries
retail stores in the Houston market and 7 Calloway's
Nursery retail stores in the San Antonio market.
Locations are selected on the basis of demographic data,
traffic patterns and shopping habits. All 26 retail stores
are Company-operated.
In fiscal 1999 the Company acquired certain assets of
Cornelius Nurseries, Inc. and two affiliated entities (the
"Cornelius Acquisition"). The Cornelius Acquisition added
three retail stores in the Houston market, a growing
operation near Houston and two wholesale distribution
centers (one in Houston and one near Austin).
In fiscal 2001 the Company adopted a formal plan to
dispose of the wholesale operations, which had been a part
of its wholesale and growing segment. In fiscal 2002 the
Company adopted a formal plan to dispose of its Turkey
Creek Farms ("Turkey") growing operation, and discontinued
the plant material that it produced. In fiscal 2003 the
company adopted a formal plan to dispose of its Miller
Plant Farms ("Miller") growing operations, and
discontinued the plant material that it produced. In
fiscal 2003 the Company sold both Turkey and Miller. See
Note 21 to Consolidated Financial Statements for a
discussion of the discontinued operations.
In fiscal 2002 the Company entered the San Antonio market
by leasing seven former nursery locations. This new market
entry did not constitute a business combination.
The Company focuses on quality and breadth of selection in
bedding plants and nursery stock, complemented by other
related garden products such as soil amendments and
fertilizers. Apart from Christmas, approximately two-
thirds of its retail sales are derived from living plants.
The remaining one-third is made up of products that
primarily relate to their care and nurturing.
All retail stores sell Christmas merchandise. The Houston
market stores have developed a stronger and more
financially beneficial focus on Christmas than have the
Dallas, Fort Worth and San Antonio market stores.
Industry
Texas is the third largest retail market in the United
States for "green industry" sales, which includes (i)
wholesale grower sales, (ii) landscape-related sales, and
(iii) home center and mass merchandiser retail sales and
(iv) retail nursery sales (which includes the Company's
retail stores).
According to the Office of the Comptroller of Public
Accounts, Texas green industry sales increased from
approximately $6.3 billion in 1997 to approximately $8.0
billion in 2001.
-3-
However, retail nursery sales have
declined each year from 1997 - 2001, from approximately
$1.8 billion in 1997 to approximately $1.5 billion in
2002. The most rapid growth for green industry sales over
that period has been in home center and mass merchandiser
retail sales.
The Company has retail stores in the four (4) largest
markets in Texas, the Dallas and Fort Worth markets, the
Houston market and the San Antonio market. Together, these
four markets accounted for approximately 38% of Texas'
retail nursery sales in 2001.
Suppliers
The wholesale market for living plants, related gardening
products and Christmas merchandise is highly competitive.
The Company uses dozens of suppliers for its living
plants, related gardening products and Christmas
merchandise, and there are readily available alternative
sources for substantially all of the products sold by the
Company. The Company has not encountered significant
difficulties in procuring merchandise to sell. The company
considers its relations with suppliers to be good.
Employees
The Company's employees are not covered by collective
bargaining agreements. The Company has not experienced any
work stoppages. The company considers its relations with
employees to be good.
Competition
The retail nursery business is highly competitive. In the
Dallas, Fort Worth, Houston and San Antonio markets, the
Company competes with both:
- Other retail nurseries, and
- Home centers and mass merchandisers.
There are hundreds of retail nurseries in the Dallas, Fort
Worth, Houston and San Antonio markets.
The home centers and mass merchandisers include The Home
Depot, Lowe's and Wal-Mart. These competitors are much
larger than the Company and have many more store locations
in the Dallas, Fort Worth, Houston and San Antonio
markets. Additionally, they attract customers for other
products and have operations which are not as dependent on
the spring planting season to cover year around operating
costs.
In 2003 The Home Depot opened six free-standing nursery
stores known as "Landscape Supply" in the Dallas and Fort
Worth markets, most in close proximity to the Company's
retail stores. The Home Depot has stated that Landscape
Supply will be "focusing on the professional landscapers
and avid do-it-yourself garden enthusiasts." The retail
nature of the Landscape Supply stores and the retail
orientation of its merchandise have added to the
competitive environment in the Dallas and Fort Worth
markets, and the Company does not know whether or not this
chain will enter the other major markets in which the
Company operates.
-4-
The Company has experienced reduced consumer demand for
its living plants and related gardening products in most
of its market areas over the past two years. Such reduced
demand is the result of many factors, including, but not
limited to: economic conditions, weather patterns and
competition in the Dallas, Fort Worth, Houston and San
Antonio markets. Management does not believe that the
Landscape Supply stores, by themselves, had a significant
impact on the Company's results of operations for the year
ended September 30, 2003, but no assurance can be given
with regard to the long range impact of this new chain on
the Company's operations.
Seasonality
The retail nursery business is highly seasonal. About 40%
of sales occur in the third fiscal quarter, which has been
the Company's best quarter.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K Report contains forward-looking statements.
The Company is including this cautionary statement for the
express purpose of providing the Company with 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.
Expected future results, products and service performance
or other non-historical facts are forward-looking and
reflect management's current perspective on 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 its 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, the
ability to finance redemption of mandatorily redeemable
preferred stock, government regulations, market risks
associated with variable-rate debt, and other risks and
uncertainties defined from time to time in the Company's
Securities and Exchange Commission filings.
Therefore, each reader of this report is cautioned to
consider carefully the risk factors listed above, as well
as any specific factors discussed with a forward-looking
statement in this Report and disclosed in the Company's
filings with the Securities and Exchange Commission, as
such risks and factors, in some cases, have affected, and
in the future (together with other factors) could affect,
the Company's ability to implement its business strategy
and may cause actual results to differ materially from
those contemplated by the statements expressed in this
Report.
-5-
Item 2. Properties
The typical retail store is located in a high-traffic
shopping area. All are free standing stores.
Most of the Company's 16 Dallas and Fort Worth markets
retail stores have a similar configuration, consisting of
a building, greenhouse and outdoor nursery yard. The
average Dallas and Fort Worth markets retail store has
about 60,000 square feet of retail space. 11 are leased
and 5 are company-owned.
Each of the 3 Houston market retail stores has a different
configuration. All 3 of them include, at a minimum, a
building and an outdoor nursery yard. All 3 Houston market
retail stores are about the same overall size as the
average Dallas and Fort Worth market retail store. All 3
are company-owned.
Each of the 7 San Antonio market retail stores has a
different configuration. All 7 of them include, at a
minimum, a building and an outdoor nursery yard. The
average San Antonio market retail store has about 40,000
square feet of retail space. All 7 are leased.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-6-
Part II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters
The Company's common stock has been traded on NASDAQ under
the symbol CLWY since the initial public offering on June
26, 1991. Through March 20, 2002 the common stock traded
on the NASDAQ National market. Since March 21, 2002 the
common stock has traded on the NASDAQ SmallCap market. The
symbol has continued to be CLWY.
The following table sets forth the high, low and closing
price information for each quarter of the most recent five
fiscal years:
High Low Close
Fiscal Year 1999
First Quarter $1.375 $1.000 $1.125
Second Quarter 1.500 1.125 1.313
Third Quarter 2.000 1.250 1.375
Fourth Quarter 1.563 1.125 1.125
Fiscal Year 2000
First Quarter 1.438 .938 1.188
Second Quarter 1.500 .969 1.375
Third Quarter 1.500 .813 1.188
Fourth Quarter 1.750 1.125 1.375
Fiscal Year 2001
First Quarter 1.750 1.063 1.250
Second Quarter 1.625 1.141 1.188
Third Quarter 1.600 1.000 1.300
Fourth Quarter 1.390 .850 .940
Fiscal Year 2002
First Quarter 1.210 .680 .950
Second Quarter 1.300 .800 1.130
Third Quarter 1.280 1.000 1.050
Fourth Quarter 1.140 .700 .890
Fiscal Year 2003
First Quarter 1.00 .620 .880
Second Quarter .950 .710 .800
Third Quarter .880 .620 .800
Fourth Quarter $.940 $.500 $.600
The closing price of the common stock on December 11,
2003, as reported by NASDAQ, was $.42. As of November 28,
2003 there were 319 shareholders of record, and
approximately 1,500 beneficial shareholders.
The Company has never paid cash dividends on common stock.
The Company intends to retain earnings for further
development of the business and, therefore, does not
intend to pay cash dividends on common stock in the
foreseeable future.
-7-
On October 24, 2003 NASDAQ notified the Company that it
was not in compliance with NASDAQ's listing requirements
for a minimum bid price of $1.00. NASDAQ has granted the
Company a 90 calendar day grace period, or until January
24, 2004, to regain compliance. If compliance with the
$1.00 minimum bid price cannot be demonstrated by January
24, 2004, NASDAQ will provide written notification that
the Company's common stock will be delisted.
On November 20, 2003 the Company filed an amended Schedule
13E-3 with the Securities and Exchange Commission for an
"Odd-Lot Purchase Offer" wherein the Company will offer to
purchase from record holders of fewer than 100 shares of
the Company's common stock all their shares of Company
common stock, with the intended result of reducing the
number of the Company's shareholders to 300 or less,
permitting the Company to withdraw its registration under
the Securities Exchange Act of 1934 (the "Exchange Act"),
likely resulting in the shares no longer being actively
traded. No assurance can be given that a sufficient number
of shareholders will respond to the Company's offer to
adequately reduce its number of shareholders, but the
Company intends to pursue its efforts to withdraw from
registration under the Exchange act in order to eliminate
costs resulting from that registration.
Item 6. Selected Financial Data
The following table of selected financial data should be
read in conjunction with the Consolidated Financial
Statements included in Item 8 and Management's Discussion
and Analysis of Financial Condition and Results of
Operations included in Item 7. Comparability of the
Statement of Operations data for 2003, 2002, 2001 and 2000
was impacted by the Cornelius Acquisition, which occurred
in September 1999.
SELECTED FINANCIAL DATA
(Amounts in millions, except per share amounts)
2003 2002 2001 2000 1999
Statement of operations data
Net sales $47.3 $43.3 $43.4 $44.5 $30.3
Income (loss) from ($3.5) $0.2 $1.4 $1.8 $0.3
continuing operations
Net income (loss) ($4.8) ($1.0) ($2.1) $1.5 $0.3
Income (loss) per
common share from
continuing
operations:
Basic ($.57) ($.03) $.18 $.30 $.06
Diluted ($.57) ($.03) $.17 $.28 $.06
Net income (loss) per
common share:
Basic ($.77) ($.22) ($.40) $.26 $.07
Diluted ($.77) ($.22) ($.39) $.25 $.07
2003 2002 2001 2000 1999
Balance sheet data
Total assets $18.0 $24.1 $27.3 $31.0 $26.3
Long-term debt, net 6.7 8.2 8.6 9.8 9.0
Redeemable preferred
stock $2.9 $2.5 $2.2 $1.9 $1.9
-8-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
In the fiscal year ended September 30, 2003 ("Fiscal Year
2003") the Company sold all of its growing operations (see
Note 21 to 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
Year Ended September 30, 2003 Compared with Year Ended
September 30, 2002
During the quarter ended September 30, 2002 the Company
entered the San Antonio, Texas market by opening seven (7)
retail stores there (the "San Antonio Market Entry").
Results for Fiscal Year 2003 include twelve months of
revenues and expenses for the San Antonio Market Entry,
while results for the fiscal year ended September 30, 2002
("Fiscal Year 2002") include less than three full months
of revenues and expenses related to the San Antonio Market
Entry.
The Company incurred a Loss from Continuing Operations for
Fiscal Year 2003, which was primarily attributable to (i)
the losses incurred for the San Antonio Market Entry, and
(ii) the establishment of a valuation allowance for
deferred tax assets.
Sales increased 9%, from $43.3 million for Fiscal Year
2002 to $47.3 million for Fiscal Year 2003. The increase
was primarily attributable to the San Antonio Market
Entry.
Same-store sales (sales in the 19 retail stores that had
been open for at least 12 months at the beginning of
Fiscal Year 2003) declined 3%, from $41.7 million for
Fiscal Year 2002 to $40.3 million for Fiscal Year 2003,
indicating reduced demand for the Company's living plants
and related gardening products.
Gross Profit increased 8%, from $20.3 million for Fiscal
Year 2002 to $22.0 million for Fiscal Year 2003. Gross
Profit as a percentage of net sales ("Gross Margin")
declined from 47% for Fiscal Year 2002 to 46% for Fiscal
Year 2003. The decline was primarily attributable to the
San Antonio Market Entry, which operates at a somewhat
lower Gross Margin than the Dallas, Fort Worth or Houston
markets.
Operating expenses increased 20%. The increase was
primarily attributable to the San Antonio Market Entry.
Same-store operating expenses increased 3%. The increase
in same-store operating expenses was primarily
attributable to increased labor costs associated with
increased staffing.
Occupancy expenses increased 18%. The increase was
primarily attributable to the San Antonio Market Entry.
Advertising expenses increased 15%. The increase was
primarily attributable to the San Antonio Market Entry.
-9-
Depreciation and amortization declined 31%. The decrease
was primarily attributable to (i) goodwill no longer being
amortized (See Note 3 to the Consolidated Financial
Statements) and (ii) reduced capital expenditures over the
past several fiscal years, which has resulted in an
increasing number of assets becoming fully-depreciated.
Impairment of goodwill of $631,000 was recorded for Fiscal
Year 2003 compared to $0 for Fiscal Year 2002. (See Note 2
to Consolidated Financial Statements.)
Interest expense declined 3%. 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.
Income tax expense was not comparable due to the valuation
allowance established at September 30, 2003.
Year Ended September 30, 2002 Compared with Year Ended
September 30, 2001
Income from Continuing Operations before Income Taxes for
Fiscal Year 2002 was lower than it was for the fiscal year
ended September 30, 2001 ("Fiscal Year 2001"), primarily
due to reduced gross profit.
Sales declined 0.3% from Fiscal Year 2001, indicating a
small reduction in consumer demand for Christmas
merchandise, living plants and related gardening products.
While aggressive price discounting at Christmas and late
in the 2002 spring season had a positive effect on sales,
it was not enough to offset a weaker start to the
Christmas season and the 2002 spring season.
Same-store sales (sales in the 19 retail stores that had
been open for at least 12 months at the beginning of
Fiscal Year 2002) declined 2%. The opening of 7 new retail
stores in the San Antonio market in the fourth quarter did
not provide enough additional sales to offset the decline
that was experienced during the first three quarters.
Gross profit declined 4% from Fiscal Year 2001. The
decline was primarily attributable to (i) the decline in
sales, and (ii) a corresponding decline in gross margin
(gross profit as a percentage of sales). Gross margin
declined to 47% in Fiscal Year 2002 from 49% for Fiscal
Year 2001. When same-store sales declined 2%, the Company
was left with unsold plants at its retail stores and
growing operations, which had to be addressed. The
disposal of those plants was done partially through
promotions at the retail stores, where consumer prices
were sharply reduced.
Operating expenses increased 7%. The increase was
primarily attributable to the San Antonio Market Entry.
Occupancy expenses increased 13%. The increase was
primarily attributable to the San Antonio Market Entry.
Advertising expenses decreased 2%. The decrease was
primarily attributable to reduced use of media other than
newspapers and radio.
Depreciation and amortization decreased 4%. The decrease
was primarily attributable to lower capital expenditures
over the past several fiscal years, which resulted in an
increased amount of assets becoming fully-depreciated.
-10-
Interest expense decreased 24%. The decrease was primarily
attributable to (i) lower amounts of long-term debt, (ii)
lower seasonal borrowings under the revolving line of
credit, (iii) lower interest rates.
Interest income increased 22%. The increase was primarily
attributable to increased amounts of cash and cash
equivalents.
Discontinued Operations
Year Ended September 30, 2003 Compared with Year Ended
September 30, 2002
Sales declined from $5,911,000 for Fiscal Year 2002 to
$2,026,000 for Fiscal Year 2003. The decline was primarily
attributable to the exit from Turkey Creek Farms
("Turkey"), which was closed in January 2003 and sold in
March 2003 (see Note 21 to Consolidated Financial
Statements).
Gross Profit declined from $77,000 for Fiscal Year 2002 to
$17,000 for Fiscal Year 2003. The decline was primarily
attributable to the decline in sales.
Expenses increased from $1,968,000 for Fiscal Year 2002 to
$2,057,000 for Fiscal Year 2003. The increase was
primarily attributable to costs incurred until March 2003
to maintain Turkey before it was sold, but after it had
ceased production of inventory.
The aforementioned factors caused the Loss before Income
Taxes to increase from $1,891,000 for Fiscal Year 2002 to
$2,040,000 for Fiscal Year 2003.
Year Ended September 30, 2002 Compared with Year Ended
September 30, 2001
Sales declined from $9,467,000 for Fiscal Year 2001 to
$5,911,000 for Fiscal Year 2002. The decline was primarily
attributable to the October 2001 sale of the WLD wholesale
operations to an unrelated third party. The Turkey
operation was a wholesale operation for all of Fiscal Year
2001 and the first quarter of Fiscal Year 2002, and was a
growing operation that sold only to the Company's retail
stores for the last 3 quarters of Fiscal Year 2002. Total
Turkey sales for Fiscal Year 2001 and Fiscal Year 2002
were about the same.
Gross Profit declined from $1,366,000 for Fiscal Year 2001
to $77,000 for Fiscal Year 2002. The decline was primarily
attributable to the decline in sales.
Expenses declined from $2,325,000 for Fiscal Year 2001 to
$1,968,000 for Fiscal Year 2002. The decline was primarily
attributable to the October 2001 sale of the WLD wholesale
operations to an unrelated third party.
Loss before Income Taxes increased from $959,000 for
Fiscal Year 2001 to $1,891,000 for Fiscal Year 2002. The
increased loss was primarily attributable to reduced gross
profit noted above.
-11-
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Cash flows used for operating activities were $260,000 for
Fiscal Year 2003, compared to cash flows provided by
operating activities of $2,832,000 for Fiscal Year 2002.
The primary factors in that change were: (i) $1,809,000
loss from continuing operations before income taxes for
Fiscal Year 2003 compared to $420,000 income from
continuing operations before income taxes for Fiscal Year
2002, (ii) $796,000 increase in inventories for Fiscal
Year 2003 compared to $85,000 increase in inventories for
Fiscal Year 2002, and (iii) $119,000 income tax refund for
Fiscal Year 2003 compared to $1,061,000 income tax refund
for Fiscal Year 2002.
Cash Flows from Investing Activities
Cash flows used for investing activities decreased to
$91,000 for Fiscal Year 2003 from $204,000 for Fiscal Year
2002. The decrease was attributable to the Company's
continued curtailment of capital expenditures.
Cash Flows from Financing Activities
Cash flows used for financing activities were $1,394,000
for Fiscal Year 2003 compared to $1,192,000 for Fiscal
Year 2002. The increase was primarily attributable to
$1,604,000 used to pay off long-term debt for Fiscal Year
2003 compared to $1,361,000 used to pay off both long term
debt and short term borrowings under the revolving line of
credit for Fiscal Year 2002.
Cash Flows from Discontinued Operations were $1,191,000
for Fiscal Year 2003 compared to $760,000 for Fiscal Year
2002. The increase was primarily due to the proceeds of
$2,607,000 for the sale of the Turkey and Miller property
and equipment in Fiscal Year 2003, offset by loss on
continuing operations of $2,040,000 for Fiscal Year 2003.
Line of Credit Arrangement
The Company's business is seasonal, and it relies on a
revolving line of credit arrangement provided by a bank
(the "Line of Credit") to supplement its working capital
during seasons of lower sales volumes.
Typically, the Company borrows from the 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. The amount which may be
borrowed under the line of credit is tied to amounts of
accounts receivable and inventories, with a maximum of
$3.0 million.
The Company owed $-0- under the Line of Credit as of
September 30, 2002 and 2001. The maximum and weighted
average amounts borrowed under the Line of Credit were as
follows (amounts in thousands):
Fiscal Year Ended
September 30,
-----------------------
2003 2002 2001
Maximum amount borrowed $2,985 $1,676 $4,570
Weighted-average amount $379 $147 $1,028
borrowed
-12-
The Line of Credit was renewed on May 29, 2003 for a one
year term expiring May 28, 2004. The Line of Credit is
collateralized by inventory, accounts receivable and
certain real property.
The Line of Credit contains financial covenants requiring
the Company to meet a minimum amount for tangible net
worth, a maximum ratio of liabilities to tangible net
worth, and an annual ratio of earnings before interest and
non-cash charges to current maturities of long-term debt.
At September 30, 2003 the Company was not in compliance
with the financial covenants required by the Line of
Credit. In December 2003 the Company entered into a
forbearance agreement with the bank. The bank agreed to
not enforce the aforementioned financial covenants through
the expiration of the Line of Credit on May 28, 2004. In
return, the Company agreed to (i) a reduced borrowing
amount of $1.5 million, (ii) an increased interest rate of
prime plus 2%, and (iii) certain targets for net sales and
net income. Management believes that continued
availability of the Line of Credit with the aforementioned
provisions will be adequate to support the Company's short
term working capital requirements because: (i) the reduced
borrowing amount will be sufficient, primarily because the
Company has disposed of its unprofitable wholesale and
growing operations and instituted tighter controls over
expenses, inventory and capital expenditures, (ii) the
increased interest rate will cause an insignificant cost
increase because the Company's seasonal borrowing needs
are expected to be substantially lower and of shorter
duration than in previous years, and (iii) it is likely
that the Company will attain the targets for net sales and
net income provided in the forbearance agreement. If the
Company were unable to attain the targets for net sales
and net income, making the Line of Credit unavailable
and/or accelerating the due date, the Company would take
further actions, including the sale and/or refinancing of
property and equipment, to generate sufficient funds. .
However, any such borrowing would reduce access by the
Company to funds, if any, necessary through borrowings
against real property to retire the preferred stock in
September 2004.
Management does not expect to be able to renew the Line of
Credit with the current bank upon its expiration. However,
management expects it will be able to negotiate acceptable
alternatives to support its working capital requirements
for fiscal 2005.
Contractual Obligations and Commitments
As of September 30, 2003 the Company had the following
contractual obligations (amounts in thousands):
Fiscal Year Ending September 30,
-----------------------------------------------------
2004 2005 2006 2007 2008 There- Totals
after
Long-term debt
(including
current
portion) $474 $505 $542 $528 $542 $4,578 $7,169
Future minimum
lease payments
under
noncancellable
operating
leases 2,258 2,039 1,195 1,021 681 2,056 9,250
Preferred stock
with mandatory
redemption
provisions(1) 3,420 -- -- -- -- -- 3,420
Totals $6,152 $2,544 $1,737 $1,549 $1,223 $6,634 $19,839
1. Carrying amount of $2,949 as of September 30, 2003.
-13-
The Company has outstanding $3.4 million of preferred
stock which becomes mandatorily redeemable in September
2004 (see Note 19 to Consolidated Financial Statements).
Management believes that the Company will generate funds
which will contribute to its ability to redeem the
preferred stock because it has disposed of its
unprofitable wholesale and growing operations and
instituted tighter controls over (i) expenses, (ii)
inventory and (iii) capital expenditures. However, there
can be no assurance that these steps will generate
sufficient funds to redeem the preferred stock by
September 2004. In such event, the Company may take
further actions, including the sale and/or refinancing of
property and equipment, to generate sufficient funds.
However, there can be no assurance that these further
actions will generate sufficient funds to redeem the
preferred stock by September 2004.
Near Term Working Capital Requirements
The Company is in a transition from its operation of both
a retail segment and a growing segment. Losses from the
discontinuance and disposition of the growing segment, and
the $3.4 million cost to retire the Company's Acquisition
Preferred Stock have reduced, and will reduce, the
Company's liquidity. In addition, the Company's assets
have been reduced as of September 30, 2003 by: (i) a
charge of $631,000 to record impairment of goodwill, and
(ii) establishment of a $2,672,000 valuation allowance
against all of the Company's deferred tax assets.
Management believes that the Company will be able to meet
its working capital requirements through a combination of
(i) cash generated from operations, (ii) short term
financing, and (iii) additional borrowings on its real
estate. All of these sources will be affected by the
Company's ability to operate profitably, and, therefore,
the Company can give no assurance that these sources will
be available in the amounts necessary to meet the
Company's working capital requirements. Given these
uncertainties, there is substantial doubt about the
Company's ability to continue as a going concern.
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.
-14-
Some assets and liabilities by their nature are subject to
estimates and assumptions. For the Company, those assets
and liabilities include:
- Inventories;
- Deferred income taxes;
- Property and equipment;
- Goodwill;
- 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.
Deferred income taxes - As of September 30, 2003 the
Company has recorded a valuation allowance for all of its
deferred tax assets based on the weight of available
evidence at that balance sheet date. The primary factor in
providing for a valuation allowance is the expectation
that future taxable income and the reversal of temporary
differences will not be sufficient for the Company to
realize the deferred tax assets. Such estimate could
change in the future based on future operating results.
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 September 30, 2003 and 2002
management believes that no impairment has occurred and
that no reduction of the estimated useful lives is
warranted.
Goodwill - As discussed in Note 3 to the Consolidated
Financial Statements, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142") effective October 1,
2002, and no longer amortizes goodwill.
-15-
In connection with the transitional goodwill impairment
evaluation, Statement 142 required the Company to perform
an assessment of whether there was an indication that
goodwill is impaired as of the date of adoption. To
accomplish this, the Company identified its reporting
units and determined 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. That analysis
established that the goodwill was associated with the
reporting unit comprised of the Dallas and Fort Worth
Markets operations. The Company then determined the fair
value of the Dallas and Fort Worth Markets reporting unit
and compared it to that reporting unit's carrying amount.
Based on those tests, there was no indication that any
reporting unit's goodwill was impaired. Accordingly, no
transitional impairment losses were required to be
recognized as the cumulative effect of a change in
accounting principle.
The goodwill impairment evaluation conducted as of
September 30, 2003 indicated that goodwill was impaired.
An impairment charge of $631,000 was recorded for the year
ended September 30, 2003. (See Note 3 to Consolidated
Financial Statements).
There was no amortization expense for the year ended
September 30, 2003. The Company's reported net loss for
the years ended September 30, 2002 and 2001, adjusted for
excluding the effects of goodwill amortization, would have
been $923,000 and $2,028,000, respectively. The effect on
adjusted net loss per share for the years ended September
30, 2002 and 2001 was insignificant.
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.
Recent 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 required the Company to perform
an assessment of whether there was an indication that
goodwill is impaired as of the date of adoption. To
accomplish this, the Company identified its reporting
units and determined 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. That analysis
established that the goodwill was associated with the
reporting unit comprised of the Dallas and Fort Worth
Markets operations. The Company then determined the fair
value of the Dallas and Fort Worth Markets reporting unit
and compared it to that reporting unit's carrying amount.
-16-
Based on those tests, there was no indication that any
reporting unit's goodwill was impaired. Accordingly, no
transitional impairment losses were required to be
recognized as the cumulative effect of a change in
accounting principle.
The goodwill impairment evaluation conducted as of
September 30, 2003 indicated that goodwill was impaired.
An impairment charge of $631,000 was recorded for the year
ended September 30, 2003. (See Note 3 to Consolidated
Financial Statements).
There was no amortization expense for the year ended
September 30, 2003. The Company's reported net loss for
the years ended September 30, 2002 and 2001, adjusted for
excluding the effects of goodwill amortization, would have
been $923,000 and $2,028,000, respectively. The effect on
adjusted net loss per share for the years ended September
30, 2002 and 2001 was insignificant.
Statement 148
In December 2002 the 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):
Fiscal Year Ended
September 30,
---------------------------
2003 2002 2001
Net loss attributable to
common shareholders, as
reported ($5,149) ($1,389) ($2,439)
Total stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related income tax
effects -- 432 156
Pro forma net loss
attributable to common
shareholders ($5,149) ($1,821) ($2,595)
Net loss per share
Basic
As reported ($.77) ($.22) ($.40)
Pro forma ($.77) ($.29) ($.42)
Diluted
As reported ($.77) ($.22) ($.39)
Pro forma ($.77) ($.29) ($.41)
-17-
Statement 150
In May 2003 the FASB issued Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("Statement 150"). Statement
150 establishes standards for how an issuer classifies and
measures certain financial instruments with
characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were
previously classified as equity.
Statement 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003.
The Company adopted Statement 150 on July 1, 2003. At July
1, 2003 the Company had outstanding 34,202 shares of Non-
Voting Acquisition Preferred Stock (the "Preferred
Stock"), $.01 par value, that were issued in 1999 in
connection with an acquisition, with a carrying amount of
$2,846,000. Any unredeemed shares outstanding at September
21, 2004 must be redeemed for $100 per share. Adoption of
Statement 150 caused (i) the Preferred Stock to be
classified as a current liability ($2,949,000) on the
balance sheet at September 30, 2003, and (ii) the related
accretion on the Preferred Stock to be classified as
interest expense ($103,000) for the quarter and fiscal
year ended September 30, 2003.
Item 7.A. Quantitative and Qualitative Disclosures about
market Risk
The Company is exposed to certain market risks, including
fluctuations in interest rates. The Company does not enter
into transactions designed to mitigate such market risks,
nor does the Company enter into any transactions in
derivative securities for trading or speculative purposes.
As of September 30, 2003, the Company had no foreign
exchange contracts or options outstanding.
The Company manages its 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 its 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 September 30, 2003 the Company had variable rate long-
term debt of $1.8 million, out of total long-term debt of
$7.1 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 income before income taxes and cash flows for
next year of approximately $18,000 for the variable-rate
long-term debt.
Item 8. Financial Statements and Supplementary Data
The financial statements required by Item 8 are included
on pages F-1 through F-25 of this Report. The index is
included under Item 14.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
-18-
Item 9A. Control and Procedures
Management, including the Company's Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), has
conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(b), as of the end of the period
covered by this report. Based on that evaluation, the CEO
and CFO concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to
material information required to be disclosed in reports
under the Exchange Act. Management applied its judgment in
assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only
reasonable assurance regarding management's control
objectives. There were no changes in the Company's
internal control over financial reporting that occurred
during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect,
internal control over financial reporting.
While the Company believes that its existing disclosure
controls and procedures have been effective to accomplish
their objectives, the Company intends to continue to
examine, refine and document its disclosure controls and
procedures, and to monitor ongoing developments in this
area.
Part III
Item 10. Directors and Executive Officers of the Registrant
Name Age Position
Dr. Stanley Block 63 Director
John T. Cosby 60 Vice President and Secretary
Director
James C. Estill 56 President and Chief Executive
Officer
Chairman of the Board
Daniel R. Feehan 52 Director
Timothy J. 54 Director
McKibben
John S. Peters 51 Vice President
Director
George J. 87 Vice President
Wechsler Director
Daniel G. 46 Vice President, Chief Financial
Reynolds Officer and Assistant Secretary
Marce E. Ward 36 Vice President
David S. Weger 52 Vice President
Board of Directors
Dr. Stanley Block, 63, a Chartered Financial Analyst, has
been a Professor of Finance at Texas Christian University,
located at 2900 Lubbock Street, Fort Worth, Texas 76109,
since 1967. Texas Dr. Block is also an author, consultant
and lecturer in the area of finance. He has served as a
member of the Board of Directors of the Company since
completion of its initial public offering in June of 1991.
-19-
John T. Cosby, 60, is Vice President, Secretary and a
Director. Mr. Cosby, along with Jim Estill and John
Peters, co-founded the Company in 1986. He develops
Calloway's Nursery retail store locations, including site
selection and development, as well as conducting lease and
acquisition negotiations. Prior to 1986, Mr. Cosby worked
at Sunbelt Nursery Group, serving as Vice President -
Corporate Development and at Pier 1 Imports as Real Estate
Manager. Mr. Cosby received his BBA in Management from
Texas Wesleyan College in 1969 and his MBA in Management
from the University of Dallas in 1983. A Certified
Mediator, Mr. Cosby is Past Chairman of Optical Federal
Credit Union, and Past President of the Dispute Resolution
Services of Tarrant County.
James C. Estill, 56, is Chairman of the Board, President
and Chief Executive Officer. Along with John Cosby and
John Peters, Mr. Estill co-founded the Company in 1986.
Prior to that, Mr. Estill worked with Sunbelt Nursery
Group, as President and Chief Executive Officer. Mr.
Estill received his BBA in Finance from Texas Christian
University in 1969, and his MBA from TCU in 1977. Mr.
Estill is a Texas Master Certified Nursery Professional
("TMCNP").
Daniel R. Feehan, 52, is president and chief executive
officer, and a member of the board of directors of Cash
America International, Inc., whose principal place of
business is located at 1600 West Seventh Street, Fort
Worth, Texas 76102. He joined Cash America in 1988 as
chief financial officer and was named president and chief
operating officer in January 1990. In February 2002 he was
appointed chief executive officer. He is also a member of
the board of directors of AZZ Incorporated and RadioShack
Corporation.
Timothy J. McKibben, 54, is chairman of the board for
Ancor Holdings, Inc., an acquisitions and management
company he co-founded in 1994 that now manages ten
companies in four diverse industries. The principal place
of business of Ancor Holdings, Inc. is located at 201 Main
Street, Fort Worth, Texas 76102. He has more than 27
years experience in the medical supply industry. He is
also a member of the board of directors of Cash America
International, Inc.
John S. Peters, 51, is Vice President and Director of the
Company. Mr. Peters, along with Jim Estill and John Cosby,
co-founded the Company in 1986. He developed the original
staff into a team of industry professionals. He has
primary responsibility for distribution, human resources
and administration. Prior to 1986, Mr. Peters worked with
Sunbelt Nursery Group as Senior Vice President of
Operations, where he was responsible for operations of all
subsidiaries, including more than 100 stores in five
states, and two growing operations. Mr. Peters attended
Texas Christian University. A TMCNP, Mr. Peters is Past
Chairman of the TNLA, and currently serves on the TNLA
Education and Research Foundation.
George J. Wechsler, 87, is Vice President and a Director
of the Company. Mr. Wechsler joined the Company and was
elected to the Board of Directors in 2002. Prior to
joining the Company Mr. Wechsler was self-employed. He is
a Past President of the TNLA, and a past recipient of
their "Outstanding Nurseryman Award". Mr. Wechsler
offices out of the Company's location at 1507 Ruiz Street,
San Antonio, Texas 78230.
Sterling Cornelius served as a Director of the Company
until he passed away on December 13, 2003.
-20-
Non-Director Executive Officers
Daniel G. Reynolds, 46, is Vice President, Chief Financial
Officer and Assistant Secretary. Mr. Reynolds joined the
Company in 1990, where he developed its financial,
operating and merchandising decision-support systems. His
responsibilities include financial and management
reporting, treasury management, credit facilities,
corporate and shareholder records, SEC and stock market
compliance, public, media and investor relations, risk
management and budgeting. Mr. Reynolds also oversees
design, development, implementation and review of all
transactional and decision-support systems. Prior to 1990,
Mr. Reynolds worked with Atmos Energy Corporation as
Financial Systems Manager and KPMG LLP as Supervising
Senior Accountant. Mr. Reynolds received his BBA in
Accounting from the University of Texas at Arlington. A
Certified Public Accountant, Mr. Reynolds is Past
President of the Fort Worth Chapter of Financial
Executives International.
Marce E. Ward, 36, is Vice President, Dallas and Fort
Worth markets. Mr. Ward began with the Company in retail
store management in 1987. He has primary responsibility
for the sixteen retail stores serving the Dallas and Fort
Worth markets. Prior to being named Vice President, Mr.
Ward served as General Manager, Dallas and Fort Worth
markets since 2002, and Merchandise Manager since 1995.
David S. Weger, 52, is Vice President, Merchandising. Mr.
Weger began with the Company in retail store management in
1987 with the opening of the first stores. He has
responsibility for the administration of planning,
procurement and replenishment of merchandise lines. Prior
to 1987, Mr. Weger was Landscape Designer with Odessa
Nursery. He has also been Co-Owner of Lessmon-Weger Garden
Center in Colby, Kansas. Mr. Weger received his BBA in
Political Science and Education from Fort Hays State
University. A TMCNP, Mr. Weger is a Director of the TNLA,
Past President of TNLA, Region 5, and Past Chairman of the
TNLA Education Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors and officers, and persons
who own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of
ownership and reports of changes in ownership of the
Common Stock of the Company. Officers, directors and
greater than ten percent shareholders are required by SEC
regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Company's
knowledge, based solely on review of the copies of such
reports furnished to the Company with respect to the
fiscal year ended September 30, 2003, all Section 16(a)
filing requirements applicable to its officers, directors
and greater than ten percent beneficial owners were filed
on a timely basis.
Code of Ethics
The Company has adopted a code of ethics that applies to
the Company's principal executive officer and principal
accounting and financial officer.
-21-
Audit Committee Financial Expert
The Board of Directors of the Company has determined that
all three members of the Company's Audit Committee, Dr.
Stanley Block and Messrs. Daniel R. Feehan and Timothy J.
McKibben, qualify as audit committee financial experts
("ACFE") as that term is defined in Item 401(h) of
Regulation S-X under the Exchange Act. The Board of
Directors has also determined that all three Audit
Committee members are "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE. The individuals named below (the
"Named Executives") include the Company's chief executive
officer and the four other most highly-compensated executive
officers for the fiscal year ended September 30, 2003.
Information is provided for the fiscal years ending on
September 30, for the three years shown.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------
Name and principal Year Salary Bonus Other (1) All
position ($) ($) annual other
compensa- compensa-
tion($) tion($)
James C. Estill 2003 225,000 -- -- 24,955
Chairman, 2002 225,000 -- -- 24,955
President and Chief 2001 219,234 -- -- 30,204
Executive Officer
John T. Cosby 2003 175,000 -- -- 8,795
Vice President and 2002 175,000 -- -- 8,795
Secretary 2001 169,813 -- -- 8,597
John S. Peters 2003 175,000 -- -- 1,910
Vice President 2002 175,000 -- -- 1,910
2001 175,000 4,975 -- 2,371
Daniel G. Reynolds 2003 125,000 -- -- 2,212
Vice President, 2002 125,000 -- -- 2,212
Chief Financial 2001 123,859 -- -- 4,959
Officer and
Assistant Secretary
David S. Weger 2003 125,000 -- -- 1,736
Vice President 2002 125,000 8,595 -- 1,736
2001 122,314 3,870 -- 6,122
(1) Amounts included under All Other Compensation
represent amounts contributed on behalf of the Named
Executives under the Company's Stock Purchase Plan and
amounts paid for life insurance on the lives of the Named
Executives.
-22-
The following table shows the number of options to
purchase Common Stock held on September 30, 2003 by the
persons named in the Summary Compensation Tables above. No
options to purchase Common Stock were exercised by such
persons during fiscal 2003. None of the unexercised
options were in-the-money as of September 30, 2003.
Total Number of
Name Unexercised
Options Held at
September 30, 2003
----------------
Exerci Unexerci-
sable sable
James C. Estill
Chairman, President and Chief
Executive Officer 390,000 --
John T. Cosby
Vice President and Secretary 225,000 --
John S. Peters
Vice President 140,000 --
Daniel G. Reynolds
Vice President, Chief Financial
Officer and Assistant Secretary 100,000 --
David S. Weger
Vice President 100,000 --
None of the options were in-the-money at the end of fiscal
2003.
-23-
Employment Contracts
The Company's employment agreements with Messrs. Estill,
Cosby and Peters extend through July 2, 2006. Mr. Estill's
agreement provides (i) for a minimum annual base salary of
$225,000, (ii) that the Company will continue to maintain
life insurance for Mr. Estill in the amount of $1,500,000,
the beneficiary of which may be designated by Mr. Estill,
(iii) that the Company will purchase disability insurance
for Mr. Estill sufficient to provide three years'
compensation should he become disabled and (iv) that, if
Mr. Estill's employment is terminated for any reason other
than just cause or is constructively terminated, Mr.
Estill (a) will be entitled to receive, within 15 days
after such termination, a cash payment in an amount equal
to three times the sum of (X) Mr. Estill's then current
annual base salary and (Y) the amount of the bonus, if
any, earned by Mr. Estill in respect of the previous
fiscal year and (b) will be entitled to participate in all
benefit programs of the Company for a period of one year
following such termination. The Company will be deemed to
have terminated the agreement without "just cause" unless
such termination resulted from (i) Mr. Estill's willful
and intentional failure to substantially perform his
duties, (ii) the commission by Mr. Estill of an illegal
act in connection with his employment or (iii) the death
or disability of Mr. Estill. Mr. Estill's employment will
be deemed to have been "constructively terminated" (i) if
his responsibilities or authority have been significantly
reduced, (ii) if Mr. Estill is required to relocate
outside of the Dallas-Fort Worth area or his salary is
reduced in violation of his employment agreement or (iii)
if a change in control of the Company occurs, as defined
in the employment agreement.
Mr. Cosby's employment agreement is identical to Mr.
Estill's except that Mr. Cosby is Vice President-Corporate
Development and his minimum annual base salary is
$175,000.
Mr. Peters' employment agreement is also identical to Mr.
Estill's except that Mr. Peters is Vice President of the
Company, his minimum annual base salary is $175,000 and
his life insurance is in the amount of $500,000.
The Company entered into an employment agreement with Mr.
Cornelius on September 21, 1999 in connection with the
Company's acquisition of the assets now held in Cornelius
Nurseries, Inc., a wholly-owned subsidiary of the Company.
Under his employment agreement, Mr. Cornelius served as
President of Cornelius Nurseries, Inc. for a period of
three years. Mr. Cornelius received a base annual
compensation of $125,000 and an annual bonus that was
equal to 10% of the pre-tax profits of Cornelius
Nurseries, Inc. during the term of that agreement. The
employment agreement is no longer in effect.
Indemnity Agreements
The Company has entered into indemnity agreements with its
directors and executive officers which, to the extent
permitted under applicable law, indemnify such persons
against all expenses, judgments, fines and penalties
incurred in connection with the defense or settlement of
actions brought against them by reason of the fact that
they are or were executive officers or directors of the
Company, or assumed certain responsibilities in their
official capacities.
-24-
In addition, the Company has entered into indemnity
agreements with two officers of the Company that provide
additional indemnification for all liabilities and
expenses in respect of certain lease obligations of the
Company that have been personally guaranteed by such
officers. If the Company fails to indemnify either of the
officers as required in the indemnity agreement or if
either of these officers are terminated for any reason as
an employee of the Company, the Company will provide the
terminated officer with one or more bank letters of credit
to secure payment of an aggregate of $4,000,000 of such
liability; however, the Company shall not be obligated to
provide letters of credit aggregating more than $4,000,000
to these two officers.
Compensation of Directors
Cash Compensation
Employees of the Company receive no additional
compensation for their service as a Director. Directors
who are not employees of the Company (a "Non-employee
Director") are paid a retainer fee (paid quarterly) and
meeting fees (paid for each meeting attended. Through
January 2003 those fees were: (i) Retainer fee - $12,000
per year ($3,000 per quarter), (ii) Meeting fee - $500 per
meeting attended. Effective February 2003 those fees were
increased to: (i) Retainer fee - $16,000 per year ($4,000
per quarter), (ii) Meeting fee - $700 per meeting
attended.
Stock Purchase Plan Matching Contributions
Non-employee Directors could elect to participate in the
Calloway's Nursery, Inc. Stock Purchase Plan (the "Stock
Purchase Plan"), with the option of contributing up to
100% of their cash compensation to purchase Company stock
in the Stock Purchase Plan. The Company would match from
50% to 100% of the amount contributed based upon each Non-
employee Director's years of continuous participation in
the Stock Purchase Plan. The Stock Purchase Plan was
terminated in October 2003 (see Note 13 to Consolidated
Financial Statements).
The following table shows the amounts for (i) Retainer
fees, (ii) Meeting fees, and (iii) Stock Purchase Plan
matching contributions for each Non-employee Director for
fiscal 2003:
Directors Retainer Meeting Stock
fees fees Purchase
Plan
matching
contribut
ions
Dr. Stanley Block $15,000 $12,100 $ 90
Daniel R. Feehan 15,000 12,100 10,500
Timothy J. McKibben 15,000 12,100 18,970
Totals $45,000 $36,300 $29,560
-25-
Stock Options - 1995 Plan
Non-employee Directors participate in the 1995 Stock
Option Plan for Independent Directors (the "1995 Plan").
Under the 1995 Plan a total of 25,000 shares a total of
25,000 shares have been authorized for grants of options
to independent directors. The 1995 Plan provided for
automatic grants to then-current independent directors,
and provides for automatic grants to future independent
directors upon their election to the Board of Directors.
Each option must be granted at a per share exercise price
equal to the fair market value of a share of Common Stock
on the date of grant, and no option may have a term in
excess of ten years. All options are exercisable according
to predetermined vesting schedules (all options vest
within three years of the date of the grant). The 1995
Plan is administered by the Board of Directors. The 1995
Plan expires on May 17, 2005, except with respect to
options then outstanding.
No options were granted under the 1995 Plan during fiscal
2003. None of the outstanding options were in-the-money as
of September 30, 2003.
Stock Options - Independent Director Grants
Under the Independent Director Grants adopted by the Board
of Directors in 1997, 1999 and 2000, 162,000 shares have
been granted to independent directors. Each option was
granted at a per share exercise price equal to the fair
market value of a share of Common Stock on the date of
grant, and no option has a term in excess of ten years.
Each option is subject to vesting requirements established
by the Board of Directors at the time of the grant.
No options were granted under Independent Director Grants
during fiscal 2003. None of the outstanding options were
in-the-money as of September 30, 2003.
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation Committee are:
- Timothy J. McKibben, Chairman
- Dr. Stanley Block
- Daniel R. Feehan
No executive officer of the Company served as a member of
the compensation committee of, or as a director of,
another entity, one of the executive officers of which
served either on the Compensation Committee or the Board
of Directors. No executive officer of the Company served
as a member of the compensation committee of, or as a
director of, another entity, one of the executive officers
of which served either on the Compensation Committee or
the Board of Directors.
-26-
Board Compensation Committee Report on Executive Compensation
The Compensation Committee (the "Compensation Committee")
is made up of Dr. Block, Mr. Feehan and Mr. McKibben, the
three Company Directors who are independent of management.
Scope of Authority
The Compensation Committee is responsible for determining
and administering the compensation to be paid to the
"executive officers" of the Company, as that term is
defined in the rules and regulations under the Securities
Exchange Act of 1934. The Compensation Committee has been
directed to establish annually an incentive plan as part
of the compensation of the executive officers.
Additionally, the Compensation Committee is charged with
responsibility for the formation and administration of any
plan involving the capital stock of the Company regardless
of the level of employees for whose benefit the plan is or
was created.
Objectives
All policies, plans and actions of the Compensation
Committee are formulated or taken with the goal of
maximizing shareholder value by aligning the financial
interests of the executive officers with those of the
Company's shareholders. This is done through a combination
of salary, short-term incentive compensation and long-term
incentive compensation such as the granting of options to
acquire additional equity in the Company.
Compensation of Executive Officers for Fiscal 2003
Salaries
The Compensation Committee has authority over the
compensation for the following executive officers for
fiscal 2003:
- James C. Estill - President and Chief Executive Officer
- John T. Cosby - Vice President, Corporate Development
- John S. Peters - Vice President, Operations
- Sterling Cornelius - President, Cornelius Nurseries, Inc.
- Daniel G. Reynolds - Vice President and
Chief Financial Officer
- Marce E. Ward - Vice President, Dallas-Fort Worth Market
- George J. Wechsler - Vice President, San Antonio Market
- David S. Weger - Vice President, Merchandising
The salaries of each of Messrs. Estill, Cosby and Peters
were established under five year employment agreements
which expire on July 2, 2006. Those employment agreements
were approved by the Compensation Committee in fiscal
2001.
-27-
The salary of Mr. Cornelius was established under the
Cornelius Employment Agreement. That employment agreement
was approved by the Compensation Committee in fiscal 1999,
prior to its becoming effective with the Cornelius
Acquisition. It expired on September 22, 2002.
The salaries called for by those agreements, as well as
the salaries for Messrs. Reynolds, Ward, Wechsler and
Weger, were determined through an evaluation of the
responsibilities of the position held, the experience of
the particular executive, and the performance of that
individual.
Short-term Incentive Compensation
In accordance with the Compensation Committee's policy of
providing a form of short-term incentive compensation tied
to current year performance, the Compensation Committee
approved bonus plans for the fiscal year ended September
30, 2003. The plans provided cash incentives for the
Company's executive officers as follows:
1. For Messrs. Estill, Peters, Cosby, Reynolds and Weger,
the cash incentive was based on consolidated pre tax net
profit for fiscal 2003. No bonus was accrued or paid for
fiscal 2003.
2. For Mr. Cornelius, the cash incentive was based on the
pre tax net profit for the Cornelius Nurseries, Inc.
subsidiary company for fiscal 2003. A bonus of approximately
$4,500 was accrued for fiscal 2003.
3. For Mr. Ward, the cash inventive was based on the pre
tax net profit for the Dallas-Fort Worth Market operations
for fiscal 2003. No bonus was accrued or paid for fiscal
2003.
4. Mr. Wechsler did not participate in an incentive program
for fiscal 2003.
Long-term Incentive Compensation
The executive officers of the Company are provided
incentives to maximize growth and increase productivity
over the long-term through their substantial share
ownership and through their stock options. The
Compensation Committee reviews its stock option policy and
the status of the Company's stock option program annually.
Though stock options have been granted to executive
officers in prior year, no stock options were granted
during fiscal 2003.
The Compensation Committee is of the opinion that the
compensation packages being provided to its chief
executive officer and other executive officers reflect its
goal of offering compensation that is fair to these
officers and the Company's shareholders alike by providing
adequate base salaries together with substantial
opportunity for personal financial growth which will
parallel management's ability to increase shareholder
value. Compensation plans are established to provide
additional compensation for superior performance in terms
of profits earned for the benefit of all shareholders. It
is intended that the total economic advantages and
opportunities provided to the executive officers will be
at least equivalent to that provided by comparable
corporations.
Compensation Committee
Timothy J. McKibben, Chairman
Daniel R. Feehan
Dr. Stanley Block
-28-
Performance Graph
The following graph compares the yearly change during the
Company's last five fiscal years in total shareholders'
return on the Company's Common Stock, with the cumulative
total return on (i) the NASDAQ Stock Market (U.S.) Index
and (ii) the Russell 2000 Index. The comparison assumes
$100.00 was invested at the beginning of the period in the
Company's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends.
Cumulative Total Return
- --------------------------------------------------------------------
9/98 9/99 9/00 9/01 9/02 9/03
CALLOWAY'S NURSERY, INC. 100.00 94.74 115.79 79.16 74.95 50.53
NASDAQ STOCK MARKET (U.S.) 100.00 163.12 217.03 88.74 69.90 106.49
RUSSELL 2000 100.00 119.07 146.92 115.76 104.99 143.32
The above performance graph shall not be deemed
incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent that the
Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under
such Acts.
-29-
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Security Ownership of Management
The following table sets forth certain information as to
the number of shares of Company common stock beneficially
owned as of December 12, 2003, by (i) each executive
officer, (ii) each director, and (iii) all of the
executive officers and directors of the Company as a
group.
Except as otherwise indicated, each of the persons named
below has sole voting and investment power with respect to
the shares of Common Stock beneficially owned by that
person.
Name of Beneficial Owner Number of Percentage
Shares Held of Total
Shares
Outstanding
Dr. Stanley Block (1) 105,891 1.5%
John T. Cosby (2) 574,399 8.0%
James C. Estill (3) 1,307,735 17.8%
Daniel R. Feehan (4) 104,997 1.5%
Timothy J. McKibben (5) 154,311 2.2%
John S. Peters (6) 251,996 3.5%
George J. Wechsler 162,591 2.3%
Daniel G. Reynolds (7) 59,468 0.8%
Marce E. Ward (8) 6,325 0.1%
David S. Weger (9) 224,460 3.2%
All Directors and Executive
Officers as a group (10
persons) 2,952,173 36.4%
1. Includes 1,500 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.00 per
share, 16,000 shares that could be acquired through options
granted on an individual grant basis in fiscal 1997 which are
exercisable at $1.125 per share, 32,000 shares that could be
acquired through options granted on an individual grant basis
in fiscal 1999 which are exercisable at $1.156 per share, and
44,000 shares that could be acquired through options granted
on an individual grant basis in fiscal 2001 which are
exercisable at $1.438 per share.
2. Includes 120,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, and 105,000 shares that could
be acquired through options granted under the 1997 Stock
Option Plan which are exercisable at $1.09 per share.
3. Includes 260,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, and 130,000 shares that could
be acquired through options granted under the 1997 Stock
Option Plan which are exercisable at $1.09 per share.
4. Includes 3,000 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.438 per
share, and 36,000 shares that could be acquired through
options granted on an individual grant basis in Fiscal Year
2002 which are exercisable at $1.438 per share.
-30-
5. Includes 3,000 shares that could be acquired through
options granted under the 1995 Stock Option Plan for
Independent Directors which are exercisable at $1.438 per
share, and 36,000 shares that could be acquired through
options granted on an individual grant basis in Fiscal Year
2002 which are exercisable at $1.438 per share.
6. Includes 45,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 25,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 70,000
shares that could be acquired through options granted under
the 1998 Stock Option Plan which are exercisable at $1.09 per
share.
7. Includes 24,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 10,000 shares that were
granted under the 1991 Stock Option Plan which are
exercisable at $.94 per share, 16,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 50,000
shares that could be acquired through options granted under
the 1999 Stock Option Plan which are exercisable at $1.09 per
share.
8. Includes 6,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 8,000 shares that could be
acquired through options granted under the 1996 Stock Option
Plan which are exercisable at $1.125 per share, and 26,000
shares that could be acquired through options granted under
the 1999 Stock Option Plan which are exercisable at $1.09 per
share.
9. Includes 25,000 shares that could be acquired through
options granted under the 1991 Stock Option Plan which are
exercisable at $1.00 per share, 10,000 shares that could be
acquired through options granted under the 1991 Stock Option
Plan which are exercisable at $.940 per share, 15,000 shares
that could be acquired through options granted under the 1996
Stock Option Plan which are exercisable at $1.125 per share,
and 50,000 shares that could be acquired through options
granted under the 1999 Stock Option Plan which are
exercisable at $1.09 per share.
Item 13. Certain Relationships and Related Transactions
Affiliate Leases
In fiscal 2002 the Company entered the San Antonio market
by leasing seven retail store locations. Three of those
leases were entered into with Mr. George J. Wechsler (the
"Affiliate Leases"), who was elected to the Company's
Board of Directors and was named a Vice President of the
Company at the time of the transaction. The Affiliate
Leases have three year terms. Rental expense under the
Affiliate Leases was $142,000 and $6,000 for the years
ended September 30, 2003 and 2002, respectively. The
Company occupied the premises for less than three months
in fiscal 2002. No rental expense under the Affiliate
Leases was incurred for the year ended September 30, 2001.
-31-
PART IV
Item 14. Principal Accounting Fees and Services
For fiscal 2003 the Company's principal independent
accountant for the audit of its financial statements, KPMG
LLP, billed the Company for the categories of services set
forth below (amounts in thousands):
Year Ended Year Ended
September 30, September 30,
2003 2002
Audit Fees $144 $142
Audit-Related Fees -- 34
Tax Fees 31 31
All Other Fees -- --
$175 $207
The Company's Audit Committee has adopted pre-approval
policies and procedures covering all services provided by
its independent accountants. All audit-related and tax
services were pre-approved by the Audit Committee during
fiscal 2003.
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
Page
(a)(1) Financial Statements
Independent Auditors' Report - KPMG LLP F-1
Consolidated Balance Sheets - September 30, 2003 and
2002 F-2
Consolidated Statements of Operations - Years Ended
September 30, 2003, 2002 and 2001 F-3
Consolidated Statements of Shareholders' Equity -
Years Ended September 30, 2003, 2002 and 2001 F-4
Consolidated Statements of Cash Flows - Years Ended
September 30, 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Schedules
Schedules, for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are omitted because they either are not
required under the related instructions, are inapplicable,
or the required information is shown in the consolidated
financial statements or notes thereto.
-32-
(a)(3) Exhibits
(3)(a) Restated Articles of Incorporation of the
Registrant. (Exhibit (3)(a))1
(3)(b) Form of Bylaws of the Registrant. (Exhibit (3)(b))
1
(3)(c) Amendment to Bylaws Adopted on May 19, 1993.
(Exhibit (3(c)) 1
(4)(a) Specimen Stock Certificate. (Exhibit (4)(a) 1
(10)(a)Form of Employment Agreement dated July 3, 1991
between the Registrant and James C. Estill. (Exhibit
(10)(a)) 1
(10)(b)Form of Employment Agreement dated July 3, 1991
between the Registrant and John T. Cosby. (Exhibit
(10)(b)) 1
(10)(c)Form of Employment Agreement dated July 3, 1991
between the Registrant and John S. Peters. (Exhibit
(10)(c)) 1
(10)(d)Left blank intentionally.
(10)(e)Form of Indemnity Agreement dated July 3, 1991
between the Registrant and each of James C. Estill
and John T. Cosby. (Exhibit (10)(g)) 1
(10)(f)Form of Indemnity Agreement dated July 3, 1991
between the Registrant and John S. Peters. (Exhibit
(10)(h)) 1
(10)(g)Form of Indemnity Agreement dated July 3, 1991
between the Registrant and each of Robert E. Glaze
and Dr. Stanley Block. (Exhibit (10)(i)) 1
(10)(h)Extension of Employment Agreement between the
Registrant and James C. Estill dated July 2, 1996.
(Exhibit (10)(m)) 2
(10)(i)Extension of Employment Agreement between the
Registrant and John T. Cosby dated July 2, 1996.
(Exhibit (10)(n)) 2
(10)(j)Extension of Employment Agreement between the
Registrant and John S. Peters dated July 2, 1996.
(Exhibit (10)(o)) 2
(10)(k)Employment Agreement between the Registrant and C.
Sterling Cornelius dated September 21, 1999. (Exhibit
(10)(k)) 3
(10)(l)Extension of Employment Agreement between the
Registrant and James C. Estill dated May 9, 2001.
(Exhibit (10)(p)) 4
(10)(m)Extension of Employment Agreement between the
Registrant and John T. Cosby dated May 9, 2001.
(Exhibit (10)(q)) 4
(10)(n)Extension of Employment Agreement between the
Registrant and John S. Peters dated May 9, 2001.
(Exhibit (10)[r]) 4
(10)(o)Calloway's Nursery, Inc. Bonus Plan for the Fiscal
Year Ending September 30, 2004. (Exhibit (10.1) 6
(10)(p)Form of Indemnification Agreement dated November
14, 2002 between the Registrant and each of Dr.
Stanley Block, Sterling Cornelius, John T. Cosby,
James C. Estill, Daniel R. Feehan, Timothy J.
McKibben, John S. Peters, Daniel G. Reynolds, George
J. Wechsler and David S. Weger. (Exhibit 10.3) 5
(10)(q)Forbearance Agreement dated December 22, 2003
between the Registrant and Frost National Bank
(Exhibit 10.2) 6
(14) Code of Ethics 6
(21)(a)Subsidiaries of the Registrant. (Exhibit 21) 6
(23)(d)Consent of KPMG LLP. (Exhibit 23) 6
(31)(a)Rule 13a-14(a) Certification of the Chief
Financial Officer of Calloway's Nursery, Inc.
(Exhibit 31(a)) 6
(31)(b)Rule 13a-14(a) Certification of the Chief
Executive Officer of Calloway's Nursery, Inc.(Exhibit
31(b)) 6
-33-
(a)(3) Exhibits (continued)
(32) Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2003.(Exhibit 32) 6
(99)(a)Calloway's Nursery, Inc. Stock Purchase Plan.
(Exhibit (28)) 7
(99)(b)Calloway's Nursery, Inc. 1991 Stock Option
Plan.(Exhibit (10)(d)) 1
(99)(c)Calloway's Nursery, Inc. 1995 Stock Option Plan
for Independent Directors. (Exhibit (99)(c)) 8
(99)(d)Calloway's Nursery, Inc. 1996 Stock Option
Plan.(Exhibit A) 9
(99)(e)Calloway's Nursery, Inc. 1997 Stock Option
Plan.(Exhibit A) 10
(99)(f)Calloway's Nursery, Inc. 1998 Stock Option
Plan.(Exhibit A) 11
(99)(g)Calloway's Nursery, Inc. 1999 Stock Option
Plan.(Exhibit A) 12
(99)(h)Calloway's Nursery, Inc. 2000 Stock Option
Plan.(Exhibit A) 13
(99)(i)Calloway's Nursery, Inc. 2001 Stock Option
Plan.(Exhibit A) 14
(99)(j)Calloway's Nursery, Inc. 2002 Stock Option Plan.
(Exhibit A) 15
1 Incorporated by reference to the Exhibit shown in
parenthesis to Registration Statement No. 33-40473 on Form S-
1, and amendments thereto, filed by the Company with the
securities and Exchange Commission, and effective June 26,
1991.
2 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-Q for the quarter ended
June 30, 1996.
3 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 1999.
4 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 2001.
5 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 2002.
6 Filed herewith.
7 Incorporated by reference to the Exhibit shown in
parenthesis to Registration Statement No. 33-46170 on Form S-
8, and amendments thereto, filed by the Company with the
Securities and Exchange Commission, and effective March 3,
1992.
8 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K for the fiscal year
ended September 30, 1995.
9 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders.
10 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1998
Annual Meeting of Shareholders.
11 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders.
12 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2000
Annual Meeting of Shareholders.
13 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2001
Annual Meeting of Shareholders.
14 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2002
Annual Meeting of Shareholders.
15 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2003
Annual Meeting of Shareholders.
-34-
(b) Reports on Form 8-K
On October 24, 2003 the Company filed a Form 8-K
disclosing its receipt, on October 22, 2003, of a letter
from NASDAQ indicating that the Company had not regained
compliance in accordance with marketplace Rule
4310(c)(8)(D). However, since the Company met the initial
listing requirements for the NASDAQ SmallCap market under
marketplace Rule 4310(c)(2)(A), the Company was granted an
additional 90 calendar day grace period, or until January
24, 2004, to demonstrate compliance.
If compliance with the aforementioned rule cannot be
demonstrated by January 24, 2004, NASDAQ will provide
written notification that the Company's common stock will
be delisted. At that time, the Company may appeal such
determination to a Listing Qualifications Panel.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CALLOWAY'S NURSERY, INC.
By:
/s/ James C. Estill
James C. Estill, President
and
Chief Executive Officer
/s/ Daniel G. Reynolds
Daniel G. Reynolds, Vice
President and Chief
Financial Officer
Dated: December 29, 2003
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
on behalf of the registrant and in the capacities and on the
dates indicated.
Name Title Date
/s/ Dr. Stanley Block Director December 29, 2003
Dr. Stanley Block
/s/ John T. Cosby Director December 29, 2003
John T. Cosby
/s/ James C. Estill Director December 29, 2003
James C. Estill
/s/ Daniel R. Feehan Director December 29, 2003
Daniel R. Feehan
/s/ Timothy J. McKibben Director December 29, 2003
Timothy J. McKibben
/s/ John S. Peters Director December 29, 2003
John S. Peters
/s/ George J. Wechsler Director December 29, 2003
George J. Wechsler
-36-
Independent Auditors' Report
The Board of Directors and Shareholders
Calloway's Nursery, Inc.:
We have audited the accompanying consolidated balance sheets
of Calloway's Nursery, Inc. and subsidiaries as September 30,
2003 and 2002 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of
the years in the three-year period ended September 30, 2003.
These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Calloway's Nursery, Inc. and
subsidiaries as of September 30, 2003 and 2002, and the
results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 2003,
in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 3 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets, effective October 1, 2002. Also, as discussed in
Note 3 to the consolidated financial statements, the Company
early adopted Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived
Assets, effective October 1, 2001.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring
losses, has $3.4 million of preferred stock which becomes
mandatorily redeemable in September 2004, and has a line of
credit that may not be available if certain financial targets
are not met, and that management does not expect to be able
to renew with the current bank upon its expiration on May 28,
2004. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of these uncertainties.
KPMG LLP
Fort Worth, Texas
December 29, 2003
-F-1-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
ASSETS
September 30, September 30,
2003 2002
------- -------
Cash and cash equivalents $ 1,921 $ 2,475
Accounts receivable 232 356
Inventories 4,802 4,006
Prepaids and other assets 19 59
Deferred income taxes, current -- 263
Income taxes receivable -- 119
Current assets of discontinued
operations -- 3,095
------- -------
Total current assets 6,974 10,373
Property and equipment, net 10,841 11,342
Goodwill, net -- 631
Deferred income taxes -- 1,568
Other assets 182 211
------- -------
Total assets $17,997 $24,125
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,919 $ 2,694
Accrued expenses 2,368 2,017
Current portion of long-term debt 474 501
Non-voting preferred stock, with 2,949 --
mandatory redemption provisions
Current liabilities of discontinued
operations -- 544
------- -------
Total current liabilities 8,710 5,756
Deferred rent payable 641 805
Long-term debt, net of current portion 6,695 8,246
------- -------
Total liabilities 16,046 14,807
Commitments and contingencies
Non-voting preferred stock, with
mandatory redemption provisions;
redemption value $3,420; par value
$.01 per share; 40,000 shares
authorized; 40,000 shares issued and
34,202 shares outstanding -- 2,538
Shareholders' equity:
Voting convertible preferred stock;
par value $.626 per share; 3,200,000
shares authorized; no shares issued
or outstanding -- --
Preferred stock; par value $.01 per
share; 9,960,000 shares authorized;
no shares issued or outstanding -- --
Common stock; par value $.01 per
share; 30,000,000 shares authorized;
7,175,593 and 6,772,890 shares
issued, respectively; 6,925,593 and
6,522,890 shares outstanding,
respectively 72 68
------- -------
Additional paid-in capital 10,201 9,885
Accumulated deficit (6,926) (1,777)
3,347 8,176
Less: Treasury stock, at cost (1,396) (1,396)
------- -------
Total shareholders' equity 1,951 6,780
------- -------
Total liabilities and shareholders'
equity $17,997 $24,125
------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
-F-2-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2003 2002 2001
------- ------- -------
Net sales $47,346 $43,251 $43,385
Cost of goods sold 25,361 22,918 22,286
------- ------- -------
Gross profit 21,985 20,333 21,099
Operating expenses 16,628 13,865 12,913
Occupancy expenses 3,348 2,830 2,513
Advertising expenses 1,782 1,548 1,583
Depreciation and amortization 592 856 891
Impairment of goodwill 631 -- --
Interest expense 834 858 1,123
Interest income (21) (44) (36)
------- ------- -------
Total expenses 23,794 19,913 18,987
Income (loss) from
continuing operations (1,809) 420 2,112
before income taxes
Income tax expense 1,672 259 719
------- ------- -------
Income (loss) from
continuing operations (3,481) 161 1,393
Discontinued operations:
Loss from discontinued
operations, net of tax
benefits of $--, $699, and
$323 (2,040) (1,192) (636)
Gain (loss) on disposal of
discontinued operations,
net of tax benefits of $--,
$--, and $1,515 680 -- (2,893)
------- ------- -------
Loss from discontinued
operations (1,360) (1,192) (3,529)
------- ------- -------
Net loss (4,841) (1,031) (2,136)
Accretion of preferred (308) (358) (303)
stock
------- ------- -------
Net loss attributable to
common shareholders ($5,149) ($1,389) ($2,439)
------- ------- -------
Weighted average number of common shares outstanding
Basic 6,714 6,382 6,107
Diluted 6,714 6,382 6,290
Basic net income (loss) per common share
Income (loss) from
continuing operations ($.57) ($.03) $.18
Loss from discontinued
operations (.20) (.19) (.58)
------- ------- -------
Net loss ($.77) ($.22) ($.40)
------- ------- -------
Diluted net income (loss) per common share
Income (loss) from
continuing operations ($.57) ($.03) $.17
Loss from discontinued
operations (.20) (.19) (.56)
------- ------- -------
Net loss ($.77) ($.22) ($.39)
------- ------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
-F-3-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
Common Addit Retained Treasury
Stock ional Earnings Stock
---------- Paid-in (Accumu
Shares Amount Capital lated
Deficit) Total
------ ------ ------- -------- ------- -------
Balance as of
September 30, 2000 6,238 $62 $9,288 $2,051 ($1,396) $10,005
Issuance of common
stock 260 3 322 -- -- 325
Net loss -- -- -- (2,136) -- (2,136)
Accretion of
preferred stock -- -- 9,610 (388) (1,396) 7,891
------ ------ ------- -------- ------- -------
Balance as of
September 30, 2001
2001 6,498 65 9,610 (388) (1,396) 7,891
Issuance of common 275 3 275 -- -- 278
stock
Net loss -- -- -- (1,031) -- (1,031)
Accretion of
preferred stock -- -- -- (358) -- (358)
------ ------ ------- -------- ------- -------
Balance as of
September 30, 2002 6,773 68 9,885 (1,777) (1,396) 6,780
Issuance of common 403 4 316 -- -- 320
stock
Net loss -- -- -- (4,841) -- (4,841)
Accretion of
preferred stock -- -- -- (308) -- (308)
------ ------ ------- -------- ------- -------
Balance as of
September 30, 2003 7,176 $72 $10,201 ($6,926) ($1,396) $1,951
------ ------ ------- -------- ------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
-F-4-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
-------- ------- -------
Cash flows from operating activities:
Net loss ($4,841) ($1,031) ($2,136)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Loss from discontinued operations
(net of tax) 2,040 1,192 636
(Gain) loss on disposal of
discontinued operations (net of tax) (680) -- 2,893
Depreciation and amortization 592 856 891
Deferred income taxes 1,831 (662) 61
Stock compensation 136 109 140
Accretion of preferred stock 103 -- --
Impairment of goodwill 631 -- --
Changes in:
Accounts receivable 124 77 (183)
Inventories (796) (85) 836
Income taxes receivable 119 1,061 (1,180)
Prepaid expenses and other assets 69 226 7
Accounts payable 225 727 (1,155)
Accrued expenses 351 486 (122)
Income taxes payable -- -- (1,518)
Deferred rent payable (164) (124) (127)
-------- ------- -------
Net cash flows provided by (used
for) operating activities (260) 2,832 (957)
-------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (91) (204) (248)
-------- ------- -------
Net cash flows used for investing
activities (91) (204) (248)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common
stock 184 169 185
Proceeds from issuance of long-term 26 -- 3,769
debt
Net borrowings (repayments) under -- (730) 675
revolving line of credit
Repayments of long-term debt (1,604) (631) (4,716)
Lease payments under capital lease -- -- (100)
-------- ------- -------
Net cash flows used for financing
activities (1,394) (1,192) (187)
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents from continuing
operations (1,745) 1,436 (1,392)
Net increase in cash and cash
equivalents from discontinued
operations 1,191 760 1,258
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents (554) 2,196 (134)
Cash and cash equivalents at
beginning of year 2,475 279 413
-------- ------- -------
Cash and cash equivalents at end of
year $1,921 $2,475 $ 279
-------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $701 $859 $1,124
Income taxes $47 $251 $1,518
In 2003 and 2002 the carrying amount of the Preferred Stock
was accreted by $411 and $358, respectively, to a carrying
amount of $2,949 and $2,538 at September 30, 2003 and 2002,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
-F-5-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Liquidity and Going Concern
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a
going concern. The Company has incurred a net loss for
each of the fiscal years ended September 30, 2003, 2002
and 2001. As described in Note 19 the Company has $3.4
million of preferred stock which becomes mandatorily
redeemable in September 2004.
Management believes that the Company will generate funds
which will contribute to its ability to redeem the
preferred stock because it has disposed of its
unprofitable wholesale and growing operations and
instituted tighter controls over (i) expenses, (ii)
inventory and (iii) capital expenditures. However, there
can be no assurance that these steps will generate
sufficient funds to redeem the preferred stock by
September 2004. In such event, the Company may take
further actions, including the sale and/or refinancing of
property and equipment, to generate sufficient funds.
However, there can be no assurance that these further
actions will generate sufficient funds to redeem the
preferred stock by September 2004.
Furthermore, as described in Note 8, the Company's line of
credit has been modified as a result of noncompliance with
certain financial covenants at September 30, 2003. This
line of credit expires on May 28, 2004. Management does
not expect to be able to renew the line of credit with the
current bank upon its expiration. Also, if certain
financial targets are not met, the line of credit would be
unavailable and/or the due date of any outstanding balance
would be accelerated. Management's plans in regard to the
line of credit are described further in Note 8. There can
be no assurance that management's plans will be achieved.
Given these uncertainties, there is substantial doubt
about the Company's ability to continue as a going
concern. The accompanying consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of assets and
liabilities that might result from the outcome of this
uncertainty.
Note 2 - Organization and Nature of the Company
Calloway's Nursery, Inc. and Subsidiaries (the "Company")
has been engaged in the retail, and wholesale and growing
segments of the nursery business. The Company opened its
first four retail stores in 1987.
The Company derives the majority of its revenues from
sales to consumers of living plants and related products.
No single product or customer accounts for a material
portion of its revenues.
In fiscal 1999 the Company acquired certain assets of
Cornelius Nurseries, Inc. and two affiliated entities
("the Cornelius Acquisition"). The Cornelius Acquisition
added three retail stores in the Houston market, a growing
operation near Houston and two wholesale distribution
centers (one in Houston and one near Austin).
In fiscal 2001 the Company adopted a formal plan to
dispose of the wholesale operations, which had been a part
of its wholesale and growing segment. In fiscal 2002 the
Company adopted a formal plan to dispose of its Turkey
Creek Farms ("Turkey") growing operation, and discontinued
the plant material that it produced. In fiscal 2003 the
Company adopted a formal plan to dispose of its Miller
Plant Farms ("Miller") growing operation, and discontinued
the plant material that it produced. In fiscal 2003 the
Company sold both Turkey and Miller. See Note 21 for a
discussion of discontinued operations.
-F-6-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2002 the Company entered the San Antonio market
by leasing seven former nursery locations. This new market
entry did not constitute a business combination.
The Company has two wholly owned subsidiaries:
Calloway's Nursery of Texas, Inc. - is the Company's
Calloway's retail stores in the Dallas and Fort Worth
markets.
Cornelius Nurseries, Inc. - is three Cornelius retail
stores in the Houston market.
Economic, weather and other circumstances that may exist
from time-to-time in these areas can have a significant
impact on the Company's results of operations.
All significant intercompany accounts and transactions
have been eliminated.
Note 3 - Summary of Significant Accounting Policies
The following is a summary of significant accounting
policies followed in the preparation of these consolidated
financial statements.
Revenue recognition - The Company recognizes revenue when
the customer takes possession of the merchandise.
Advertising expenses - The majority of the Company's
advertising consists of printed newspaper advertisements
and radio announcements. Occasionally the Company will use
direct mail and other media. The company expenses all
advertising costs as they are incurred.
Cash equivalents - For purposes of the consolidated
statements of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Accounts receivable - The Company's accounts receivable
are primarily related to credit card transactions. The
Company's retail stores accept MasterCard, VISA, American
Express and Discover. No allowance for doubtful accounts
is considered necessary since substantially all amounts
are collected within five business days.
Inventories - Inventories are stated at the lower of cost
or market, with cost being determined principally on a
first-in, first-out basis.
Property and equipment - Property and equipment are
capitalized at cost and depreciated using the straight-
line method over the estimated useful lives of the various
classes of assets. Leasehold improvements are amortized on
a straight-line basis over the lease term. Expenditures
for normal maintenance and repairs are expensed as
incurred. The cost of property and equipment sold or
otherwise retired, and the related accumulated
depreciation and amortization, are removed from the
accounts and any resultant gain or loss is included in
operating results. The useful lives for purposes of
calculating depreciation and amortization are as follows:
Leasehold improvements Term of lease
Land improvements 15 years
Buildings 33 years
Furniture and fixtures 5 years
Vehicles 3 years
-F-7-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company early adopted Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets effective
October 1, 2001.
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 the estimated undiscounted
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. Management believes that no
impairment has occurred and that no reduction of the
estimated useful lives is warranted.
Net income (loss) per share - Basic net income (loss) per
share is computed by dividing income (loss) attributable
to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted net
income (loss) per share reflects the potential dilution
that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then
shared in the earnings or loss of the entity. When the
effects of common stock would be antidilutive due to a net
loss attributable to common shareholders, basic loss per
share and diluted loss per share are reported as the same
number.
Income taxes - Income taxes are accounted for under the
asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in operations in
the period that includes the enactment date.
Intangibles - Through September 30, 2002 Goodwill was
amortized on a straight-line basis over 20 years. The
Company assessed the recoverability of this goodwill by
determining whether the amortization of the goodwill
balance over its remaining life could be recovered through
undiscounted future operating cash flows. The amount of
goodwill impairment, if any, was measured based on
projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of
funds.
As further discussed below, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, effective October 1, 2002, and no
longer amortizes goodwill.
Stock Based Compensation - The Company sponsors a stock-
based compensation plan for its employees and directors.
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be
recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price.
See Note 12 for pro forma disclosures that show the effect
on the Company's net income (loss) and net income (loss)
per share as if the Company had adopted the cost
recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123").
-F-8-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates - The preparation of consolidated
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 consolidated financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
As of September 30, 2003 the Company has recorded a
valuation allowance for all of its deferred tax assets
based on the weight of available evidence at that balance
sheet date. The primary factor in providing for a
valuation allowance is the expectation that future taxable
income and the reversal of temporary differences will not
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.
Fair Value of Financial Instruments - The carrying values
of the Company's financial instruments, other than long-
term debt, approximate fair values due to the short
maturities of such instruments. The Company's borrowings,
if recalculated based on current interest rates, would not
differ significantly from the amounts recorded at
September 30, 2003 and 2002.
Reclassifications - Certain amounts for 2001 and 2002 have
been reclassified to conform to the 2003 presentation of
the Discontinued Operations.
Recent 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 required the Company to perform
an assessment of whether there was an indication that
goodwill is impaired as of the date of adoption. To
accomplish this, the Company identified its reporting
units and determined 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. That analysis
established that the goodwill was associated with the
reporting unit comprised of the Dallas and Fort Worth
Markets operations. The Company then determined the fair
value of the Dallas and Fort Worth Markets reporting unit
and compared it to that reporting unit's carrying amount.
Based on those tests, there was no indication that any
reporting unit's goodwill was impaired. Accordingly, no
transitional impairment losses were required to be
recognized as the cumulative effect of a change in
accounting principle.
The goodwill impairment evaluation conducted as of
September 30, 2003 indicated that goodwill was impaired.
An impairment charge of $631,000 was recorded for the year
ended September 30, 2003.
-F-9-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There was no amortization expense for the year ended
September 30, 2003. The Company's reported net loss for
the years ended September 30, 2002 and 2001, adjusted for
excluding the effects of goodwill amortization, would have
been $923,000 and $2,028,000, respectively. The effect on
adjusted net loss per share for the years ended September
30, 2002 and 2001 was insignificant.
Statement 148
In December 2002 the 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.
As permitted by SFAS 123, the Company applies Accounting
Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plans.
Accordingly, no expense has been recognized for its stock
option plans, as the exercise price equals the stock price
on the date of grant. 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):
Year Year Year
Ended Ended Ended
September 30, September 30,September 30,
2003 2002 2001
-------- -------- -------
Net loss attributable to ($5,149) ($1,389) ($2,439)
common shareholders, as
reported
Total stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related income tax
effects -- 432 156
-------- -------- -------
Pro forma net loss
attributable to common
shareholders ($5,149) ($1,821) ($2,595)
-------- -------- -------
Net loss per share
Basic
As reported ($.77) ($.22) ($.40)
Pro forma ($.77) ($.29) ($.42)
Diluted
As reported ($.77) ($.22) ($.39)
Pro forma ($.77) ($.29) ($.41)
-F-10-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. The pro
forma amounts were estimated using the Black Scholes
option-pricing model with the following assumptions:
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
-------- -------- -------
Weighted average
expected life N/A 10 10
(years)
Expected volatility N/A 89.37% 90.75%
Expected dividends N/A None None
Risk free interest N/A 3.375% 5.68%
rate
Weighted average N/A $.9455 $1.2763
fair value of
options granted
Statement 150
In May 2003 the FASB issued Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("Statement 150"). Statement
150 establishes standards for how an issuer classifies and
measures certain financial instruments with
characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were
previously classified as equity.
Statement 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003.
The Company adopted Statement 150 on July 1, 2003. At July
1, 2003 the Company had outstanding 34,202 shares of Non-
Voting Acquisition Preferred Stock (the "Preferred
Stock"), $.01 par value, that were issued in 1999 in
connection with an acquisition, with a carrying amount of
$2,846,000. Any unredeemed shares outstanding at September
21, 2004 must be redeemed for $100 per share. Adoption of
Statement 150 caused (i) the Preferred Stock to be
classified as a current liability ($2,949,000) on the
balance sheet at September 30, 2003, and (ii) the related
accretion on the Preferred Stock to be classified as
interest expense ($103,000) for the quarter and fiscal
year ended September 30, 2003.
Note 4 - Cash and Cash Equivalents
Cash and cash equivalents consist of the following
(amounts in thousands):
September 30, September 30,
2003 2002
------- -------
Money market fund $1,680 $2,190
Demand deposit accounts 212 253
Petty cash 29 32
------- -------
$1,921 $2,475
------- -------
Note 5 - Inventories
Inventories consist of finished goods.
-F-11-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Property and Equipment
Property and equipment consist of the following (amounts
in thousands):
September 30, September 30,
2003 2002
------- -------
Land $ 6,538 $6,543
Land improvements 894 862
Buildings 4,000 4,004
Leasehold improvements 1,111 1,111
Furniture and fixtures
and equipment 2,802 2,778
Vehicles 715 674
Less: accumulated
depreciation and (5,219) (4,630)
amortization
------- -------
$10,841 $11,342
------- -------
Note 7 - Accrued Expenses
Accrued expenses consist of the following (amounts in
thousands):
September 30, September 30,
2003 2002
------- -------
Accrued salaries and
related taxes and
expenses $1,246 $1,207
Accrued bonuses 267 124
Accrued property taxes 592 503
Accrued sales and use
taxes 222 183
Other 41 --
------- -------
$2,368 $2,017
------- -------
-F-12-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Notes Payable and Long-Term Debt
Long-term debt consists of the following (amounts in
thousands):
Monthly
Payment
September 30, Inter (Principal
---------- est Collat and
Description 2003 2002 Matures Rate eral Interest
---- ---- ------- ---- ---- -------
1. Term $ $ December Varia Real $ 7
loan, 241 303 2006 ble estate
financial (5.25%)
institution
2. Term 746 798 August Varia Real 10
loan, 2012 ble estate
financial (9.125%)
institution
3. Term 781 847 June 2012 Varia Real 10
loan, ble estate
financial (5.75%)
institution
4. Term 1,135 1,15 November Fixed Real 12
loan, 7 2020 (10.0%) estate
financial
institution
5. Term 2,298 2,40 December Fixed Real 25
loan, 0 2015 (8.5%) estate
financial
institution
6. Term 887 931 March Fixed Real 10
loan, 2015 (8.5%) estate
financial
institution
7. Term 1,056 1,10 March Fixed Real 12
loan, 8 2015 (8.5%) estate
financial
institution
8. Term -- 201 Paid off N/A N/A N/A
loan, September
financial 2003
institution
9. Term -- 980 Paid off N/A N/A N/A
loan, March
financial 2003
institution
Other 25 22
----- -----
Totals 7,169 8,774
Less: amounts
due within one
year (474) (501)
------ ------
$6,695 $8,246
------ ------
Maturities of long-term debt are as follows (amounts in
thousands):
Year Ending September 30,
2004 $474
2005 505
2006 542
2007 528
2008 542
Thereafter 4,578
------
$7,169
------
-F-13-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into a $3,000,000 revolving line of
credit arrangement (the "Line of Credit") with a bank that
matures on May 28, 2004 and is collateralized by
inventory, accounts receivable and certain real property.
It replaced a $5,000,000 revolving line of credit that had
expired on May 30, 2003. The Line of Credit was
established to supplement sources available to meet the
Company's seasonal working capital needs. At September 30,
2003 and 2002 the outstanding balances were $-0- and $-0-,
respectively, and the unused available credit was
$3,000,000 and $5,000,000, respectively. The interest rate
is variable, tied to the bank's current prime lending
rate. The interest rate was 4.75% at September 30, 2003.
Management does not expect to be able to renew the Line of
Credit with the current bank upon its expiration. However,
management expects it will be able to negotiate acceptable
alternatives to support its working capital requirements
for fiscal 2005.
The Line of Credit contains financial covenants requiring
the Company to meet a minimum amount for tangible net
worth, a maximum ratio of liabilities to tangible net
worth, and an annual ratio of earnings before interest and
non-cash charges to current maturities of long-term debt.
At September 30, 2003 the Company was not in compliance
with the financial covenants required by the Line of
Credit. In December 2003 the Company entered into a
forbearance agreement with the bank. The bank agreed to
not enforce the aforementioned financial covenants through
the expiration of the Line of Credit on May 28, 2004. In
return, the Company agreed to (i) a reduced borrowing
amount of $1.5 million, (ii) an increased interest rate of
prime plus 2%, and (iii) certain targets for net sales and
net income. Management believes that continued
availability of the Line of Credit with the aforementioned
provisions will be adequate to support the Company's short
term working capital requirements because: (i) the reduced
borrowing amount will be sufficient, primarily because the
Company has disposed of its unprofitable wholesale and
growing operations and instituted tighter controls over
expenses, inventory and capital expenditures, (ii) the
increased interest rate will cause an insignificant cost
increase because the Company's seasonal borrowing needs
are expected to be substantially lower and of shorter
duration than in previous years, and (iii) it is likely
that the Company will attain the targets for net sales and
net income provided in the forbearance agreement. If the
Company were unable to attain the targets for net sales
and net income, making the Line of Credit unavailable
and/or accelerating the due date, the Company would take
further actions, including the sale and/or refinancing of
property and equipment, to generate sufficient funds.
-F-14-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes
Total income taxes for the years ended September 30, 2003,
2002 and 2001 were allocated as follows:
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
------ ----- -------
Income (loss) from
continuing operations $1,672 $259 $ 719
Discontinued
operations -- (699) (1,838)
------ ----- -------
Total income tax
expense (benefit) $1,672 ($440) ($1,119)
------ ----- -------
Components of income tax expense (benefit) attributable to
continuing operations consist of the following (amounts in
thousands):
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
------ ----- -------
Current expense
(benefit):
Federal (173) $570 $658
State 14 351 --
------ ----- -------
Total current (159) 921 658
------ ----- -------
Deferred expense
(benefit):
Federal (403) (404) 61
State 65 (258) --
Valuation allowance 2,169 -- --
------ ----- -------
Total deferred 1,831 (662) 61
------ ----- -------
Total expense $1,672 $259 $719
------ ----- -------
The differences between the Company's effective tax rate
and the federal statutory tax rate of 34%, as applied to
income (loss) from continuing operations before income
taxes, for the fiscal years ended September 30, 2003, 2002
and 2001 are as follows (amounts in thousands):
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
------ ----- -------
Income tax expense at
statutory rate ($615) $143 $718
State income tax, net
of federal benefit (54) 61 --
Impairment of goodwill 215 -- --
Accretion of preferred
stock 35 -- --
Amortization of
goodwill -- 37 37
Other, net (78) 18 (36)
Valuation allowance 2,169 -- --
------ ----- -------
Total income tax expense $1,672 $259 $719
------ ----- -------
-F-15-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax
assets and liabilities as of September 30, 2003 and 2002
are as follows (amounts in thousands):
September 30, September 30,
2003 2002
------- -------
Deferred tax assets:
Deferred rent $ 238 $ 299
State net operating loss
carryforward 349 324
Federal net operating loss
carryforward 1,501 --
Inventory capitalization 64 65
Basis difference in property
and equipment 493 832
Loss on disposal of assets -- 199
AMT credit carryforward 27 112
Valuation allowance (2,672) --
------- -------
Total deferred tax assets $ -- $1,831
------- -------
Management has determined that it is more likely than not
that the Company's deferred tax assets will not be
realized; therefore, a valuation allowance was necessary
as of September 30, 2003. In assessing the need for a
valuation allowance, management has considered future
reversals of existing taxable temporary differences and
future taxable income exclusive of such reversing
differences. At September 30, 2003 the Company has net
operating loss carryforwards of approximately $4,415,000
for federal income tax purposes expiring in 2022 and 2023,
and $11,605,000 for state income tax purposes expiring in
2007 to 2009.
Note 10 - Shareholders' Equity
During 2003, 2002 and 2001, the Company issued shares of
common stock to the Calloway's Nursery, Inc. Stock
Purchase Plan (see Note 13) and upon the exercise of stock
options (see Note 12), receiving proceeds as follows
(amounts in thousands):
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
------ ------ ------
Number of shares 403 275 260
issued
Proceeds $184 $169 $185
Compensation 136 109 140
expense
------ ------ ------
$320 $278 $325
------ ------ ------
The Company matched a portion of employee contributions to
the Stock Purchase Plan (see Note 13). Such matching
contribution is recorded as compensation expense when
paid.
-F-16-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Common Stock Purchase Rights
Effective July 1991, the Company adopted a shareholder
rights plan ("Rights Plan") that entitles each registered
shareholder to one common share purchase right ("Right")
per common share held. The Rights attach to all
certificates representing outstanding shares of common
stock; no separate Rights certificates have been
distributed. The terms of the Rights Plan provide that in
the event of an unapproved tender to acquire 20 percent or
more of the Company's common stock, the Right holders,
except as noted below, can purchase common stock at 50% of
the then current market price. The Rights Plan also
provides that all Rights held by parties to the unapproved
tender shall be null and void; thus, such party cannot
participate in the discounted purchase of common stock.
The Rights are redeemable, at the Company's option, at any
time at $.01 per Right.
Note 12 - Stock Option Plans and Stock-Based Compensation
The Company's stock option plans provide for the awarding
of incentive stock options to employees and non-qualified
stock options to employees and independent directors. The
employee plans are administered by the Compensation
Committee of the Board of Directors, which consists
entirely of independent directors. The independent
director stock options are initially granted on a formula
basis. Additional nonqualified stock options are provided
to independent directors on an individual grant basis. All
options are exercisable according to predetermined vesting
schedules (all options vest within three years of the date
of the grant) and remain in effect for ten years from the
date of the grant. An aggregate of 2,913,000 shares of
common stock have been reserved for issuance under the
Company's stock option plans, including 330,000 shares in
connection with the Company's 2002 Stock Option Plan that
was approved in fiscal 2003.
-F-17-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the stock
option plans for the three years ended September 30, 2003:
Weighted
Average
Shares Exercise
Price
September 30, 2000 953,700 $1.0800
Granted 122,000 1.4380
Exercised 3,500 1.0000
Forfeited 4,300 1.1163
Expired -- --
September 30, 2001 1,067,900 1.1221
Granted 757,700 1.0900
Exercised -- --
Forfeited 66,000 1.1212
Expired 7,000 6.1250
September 30, 2002 1,752,600 1.0883
Granted -- --
Exercised -- --
Forfeited 24,300 1.0851
Expired -- --
September 30, 2003 1,728,300 $1.0883
Exercisable options
September 30, 2001 1,027,800 $1.1220
September 30, 2002 1,721,599 1.0850
September 30, 2003 1,728,300 $1.0883
The following table summarizes information regarding stock
options outstanding at September 30, 2003:
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercise Options Exercise
Exercise Outstand Life Prices Exercisa Prices
Prices ing ble
------- ------ ------- ------- -------- --------
$0.875 to
$1.000 598,000 1.7 $0.9972 598,000 $0.9972
$1.001 to
$1.440 1,130,300 7.2 1.1366 1,130,300 1.1366
------ ------- ------- -------- --------
1,728,300 5.3 $1.0883 1,728,300 $1.0883
------ ------- ------- -------- --------
-F-18-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Stock Purchase Plan
In 1992 the Company's Board of Directors and shareholders
adopted a Stock Purchase Plan (the "Stock Purchase Plan").
The Stock Purchase Plan is designed to provide employees
and directors with the opportunity to acquire an ownership
interest in the Company and thereby provide those who will
be responsible for the continued growth of the Company
with a more direct concern about its welfare and a common
interest with the Company's other shareholders. The Stock
Purchase Plan is not subject to the Employee Retirement
Income Security Act of 1974.
All employees who have attained the age of majority in the
state of their residence and have completed 60 days of
full-time employment with the Company, and all independent
members of the Board of Directors, are eligible to
participate in the Stock Purchase Plan. Participants may
elect to have payroll deductions of a maximum of 10% of
their compensation each pay period. The Company matches up
to 100% of such deductions based upon the participant's
years of continuous participation in the Stock Purchase
Plan. Funds deducted from a participant's pay and
contributions made by the Company to the Stock Purchase
Plan on behalf of a participant (all of which is invested
for the benefit of the participant) are taxable to the
participant as wages or compensation for services. The
Company contributions for the years ended September 30,
2003, 2002 and 2001 were $136,000, $109,000 and $140,000,
respectively.
The Stock Purchase Plan was terminated in October 2003.
Note 14 - 401(k) Plan
In 1999 the Company initiated a 401(k) plan for its
employees. The 401(k) plan provides employees with a way
to save and invest for their retirement. The Company does
not provide matching contributions for the 401(k) plan.
Note 15 - Indemnity Agreements
The Company has entered into indemnity agreements with its
directors and executive officers which, to the extent
permitted under applicable law, indemnify such persons
against all expenses, judgments, fines and penalties
incurred in connection with the defense or settlement of
actions brought against them by reason of the fact that
they are or were executive officers or directors of the
Company, or assumed certain responsibilities in their
official capacities.
In addition, the Company has entered into indemnity
agreements with two officers of the Company that provide
additional indemnification for all liabilities and
expenses in respect of certain lease obligations of the
Company that have been personally guaranteed by such
officers. If the Company fails to indemnify either of the
officers as required in the indemnity agreement or if
either of these officers are terminated for any reason as
an employee of the Company, the Company will provide the
terminated officer with one or more bank letters of credit
to secure payment of an aggregate of $4,000,000 of such
liability; however, the Company shall not be obligated to
provide letters of credit aggregating more than $4,000,000
to these two officers.
-F-19-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Commitments and Contingencies
As of September 30, 2003 the Company leased eighteen
retail stores under noncancellable operating leases. The
leases expire in various years through 2013. The leases
generally contain renewal options for periods ranging from
5 to 15 years and require the Company to pay all executory
costs (such as property taxes, maintenance and insurance).
Rental payments include minimum rentals plus contingent
rentals based on sales. The Company has not had to pay
contingent rentals to date and does not expect to in the
future.
Future minimum lease payments under noncancellable
operating leases as of September 30, 2003 are as follows
(amounts in thousands):
Year Ending September 30,
2004 $2,258
2005 2,039
2006 1,195
2007 1,021
2008 681
Thereafter 2,056
------
$9,250
------
Rental expense for operating leases was approximately $2.4
million, $2.1 million and $2.1 million, respectively, for
each of the fiscal years ended September 30, 2003, 2002
and 2001.
Included in the above future minimum lease payments for
the fiscal years ending September 30, 2004 and 2005 are
amounts due of $142,000 and $107,000, respectively to a
board member and vice president of the Company, who is the
landlord for three leased facilities in the San Antonio
market (the "San Antonio Affiliate Leases") that have
three year terms. The San Antonio Affiliate Leases were
entered into in fiscal 2002. Rental expense for the San
Antonio Affiliate Leases was $6,000 for the fiscal year
ended September 30, 2002 and $142,000 for the fiscal year
ended September 30, 2003.
There are various claims and pending actions incident to
the business operations of the Company. In the opinion of
management, the Company's potential liability in all
pending actions and claims, in the aggregate, will not
have a material adverse effect on the Company's
consolidated financial position, results of operations or
liquidity.
-F-20-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Net Loss per Share
The reconciliation between the weighted average shares
outstanding used in the basic and diluted net loss per
share computations is as follows (in thousands, except per
share amounts):
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
-------- -------- --------
Net loss ($4,841) ($1,031) ($2,136)
Accretion of preferred (308) (358) (303)
stock
-------- -------- --------
Net loss attributable
to common shareholders ($5,149) ($1,389) ($2,439)
-------- -------- --------
Weighted average shares
outstanding - basic 6,714 6,382 6,107
Effect of dilutive
securities: Assumed
exercise of stock -- -- 183
options
-------- -------- --------
Weighted average shares
outstanding - diluted 6,714 6,382 6,290
-------- -------- --------
Net loss per share:
Basic ($.77) ($.22) ($.40)
Diluted ($.77) ($.22) ($.39)
Note 18 - Selected Quarterly Data (Unaudited)
Amounts (except share data) are expressed in thousands:
First Second Third Fourth
Quarter Quarter Quarter Quarter
2003 2002 2003 2002 2003 2002 2003 2002
------- ------- ------ ------ ------- ------- ------ ------
Net sales $10,848 $10,219 $9,236 $6,984 $20,090 $19,518 $7,172 $6,530
Gross Profit $4,393 $4,387 $4,499 $3,366 $10,056 $9,672 $3,037 $2,908
Income (loss)
from continuing
operations ($913) ($314) ($772) ($750) $2,253 $2,713 ($4,049)($1,485)
Net income
(loss) ($1,303) ($400) ($542) ($742) $1,665 $2,495 ($4,661)($2,384)
Income (loss)per share:
Basic
Continuing
operations ($.15) ($.06) ($.13) ($.13) $.32 $.40 ($.59) ($.24)
Discontinued
operations (.06) (.02) .03 -- (.09) (.03) (.09) (.14)
------- ------- ------ ------ ------- ------- ------ ------
($.21) ($.08) ($.10) ($.13) $.23 $.37 ($.68) ($.39)
------- ------- ------ ------ ------- ------- ------ ------
Diluted
Continuing
operations ($.15) ($.06) ($.13) ($.13) $.32 $.40 ($.59) ($.24)
Discontinued
operations (.06) (.02) .03 -- (.09) (.03) (.09) (.14)
------- ------- ------ ------ ------- ------- ------ ------
($.21) ($.08) ($.10) ($.13) $.23 $.37 ($.68) ($.39)
------- ------- ------ ------ ------- ------- ------ ------
-F-21-
Note 19 - Preferred Stock with Mandatory Redemption Provisions
In fiscal 1999 the Company issued 40,000 shares of Non-
Voting Acquisition Preferred Stock (the "Preferred
Stock"), $.01 par value, in connection with an
acquisition. The Preferred Stock has a liquidation
preference of $100 per share and no voting rights, except
as otherwise required by law. The Company may, at any time
prior to September 21, 2004, redeem any portion or all of
the outstanding shares of Preferred Stock for $100 per
share. Any unredeemed shares outstanding at September 21,
2004 must be redeemed for $100 per share.
The Preferred Stock was recorded at its estimated fair
value of approximately $1,890,000. Through June 30, 2003
the carrying amount of the Preferred Stock was accreted at
each balance sheet date to its redemption amount using the
interest method. The resulting increase in the carrying
amount of the Preferred Stock reduced net income
attributable to common shareholders or increased net loss
attributable to common shareholders.
In fiscal 2000 the Company redeemed 5,798 shares of
Preferred Stock for a cash payment of $158,500. The
redeemed Preferred Stock had a redemption value of
$579,800 and a carrying amount of $274,000.
At September 30, 2003 and 2002 the redemption amount of
the Preferred Stock was $3,420,200.
The Company adopted Statement 150 on July 1, 2003. At July
1, 2003 the Company had outstanding 34,202 the Preferred
Stock with a carrying amount of $2,846,000. Any unredeemed
shares outstanding at September 21, 2004 must be redeemed
for $100 per share. Adoption of Statement 150 caused (i)
the Preferred Stock to be classified as a current
liability ($2,949,000) on the balance sheet at September
30, 2003, and (ii) the related accretion on the Preferred
Stock to be classified as interest expense ($103,000) for
the quarter and fiscal year ended September 30, 2003.
Note 20 - Segment Information
The Company has only one reportable segment: retail.
The Company aggregates its individual retail stores
because they are all managed in a similar way, they serve
a similar type of customer, they use similar methods to
distribute their products and services, they carry similar
product lines, and they use similar marketing approaches.
For example, the retail stores sell plants, garden
supplies and other merchandise, primarily to individuals,
on a cash-and-carry basis, at each retail store.
The reporting segment follows the same accounting policies
used for the Company's consolidated financial statements
and described in the summary of significant accounting
policies (see Note 3).
-F-22-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 - 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, 2002.
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 wholesale operations included the
wholesale growing operations of Turkey as well as the
wholesale landscape distribution centers ("WLD") in Austin
and Houston. The adopted disposal plan included: (i) the
sale of the Turkey wholesale inventories to unaffiliated
customers, and (ii) the sale of the WLD operations as an
ongoing business to an unaffiliated third party.
The Company incurred operating losses and negative cash
flows in the wholesale operations for the fiscal years
ended September 30, 2001 and 2000. The continued pressure
from lower cost wholesalers impacted the profitability and
competitive position of these operations. The Company
concluded that market conditions then and for the
foreseeable future were such that these operations were
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 $2.9 million (net of income
taxes) in fiscal 2001 to cover the expected cash and non-
cash costs of the discontinued operations. The loss
included 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 was completed.
Prior to the decision to discontinue the wholesale
operations, the Company produced plants at Turkey that
were primarily for sale to external customers, while a
smaller portion of Turkey production was plants for sale
to the Company's own retail stores. Subsequent to that
decision, the Company began production at Turkey of plants
that were exclusively for sale at the Company's own retail
stores.
The sale of the WLD operations was completed in October
2001 and indebtedness related to the WLD real property was
paid off. The Turkey wholesale inventory was completely
sold or otherwise disposed of by December 31, 2001.
The results of operations for the fiscal year ended
September 30, 2001 have been reclassified as discontinued
operations in the accompanying consolidated financial
statements.
Exit from and Disposal of Turkey
In September 2002 the Company decided to sell Turkey and
discontinue the merchandise that it produced. The Company
incurred operating losses and negative cash flows on
Turkey in fiscal 2002 and concluded that market conditions
then and for the foreseeable future were such that Turkey
was likely to remain uncompetitive.
Turkey was sold in March 2003. A pre-tax gain of $680,000
was recorded.
-F-23-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets, liabilities and results of operations for
Turkey have been reclassified as discontinued operations
in the accompanying consolidated financial statements in
accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("Statement 144"). (See Note
3 - "Reclassifications")
Exit from and Disposal of Miller
In April 2003 the Company decided to sell Miller and
discontinue the merchandise it produced. The strategic
move will allow the Company to dedicate its resources
toward the growth of its retail operations. The assets,
liabilities and results of operations for Miller have been
reclassified as discontinued operations in the
accompanying consolidated financial statements in
accordance with Statement 144. (See Note 3 -
"Reclassifications").
Miller was sold in September 2003. There was no gain or
loss on the sale.
Assets and Liabilities of Turkey and Miller
Following is a summary of the assets and liabilities of
the Turkey and Miller discontinued operations as of the
applicable years (amounts in thousands):
September 30, September 30,
2003 2002
----- -------
Cash $-- $ 15
Accounts receivable -- 1
Inventories -- 1,152
Property and equipment held for
sale -- 1,927
----- -------
Current assets of discontinued
operations $-- $3,095
----- -------
Noncurrent assets of
discontinued operations -
property and equipment $-- $ --
Accounts payable $-- $ 531
Accrued expenses -- 13
Current portion of long-term
debt -- --
----- -------
Current liabilities of
discontinued operations $-- $ 544
----- -------
The property and equipment of both the discontinued Turkey
and Miller operations were classified as current assets at
September 30, 2002 since they were sold in fiscal 2003.
-F-24-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Results for all Discontinued Operations, including
Turkey and Miller
Following is a summary of the operating results of the
discontinued operations for the applicable years (amounts
in thousands):
Year Year Year
Ended Ended Ended
September 30, September 30, September 30,
2003 2002 2001
------ ------ ------
Sales $2,026 $5,911 $9,467
Cost of goods sold 2,009 5,834 8,101
Gross profit (loss) 17 77 1,366
Expenses 2,057 1,968 2,325
------ ------ ------
Loss from discontinued
operations before
income taxes (2,040) (1,891) (959)
Income tax expense -- (699) (323)
(benefit)
------ ------ ------
Loss from discontinued
operations ($2,040) ($1,192) ($636)
------ ------ ------
The Company recorded a loss on disposal of discontinued
operations (net of income tax) of $2,893,000 for the
fiscal year ended September 30, 2001. The loss included
the expected loss on the disposal of the Turkey wholesale
inventory, partially offset by expected gains on the sale
of property and equipment and other assets, and estimated
income tax benefits of $1,515,000.
The Company sold Turkey in March 2003, recording a pre-tax
gain of $680,000. The Company sold Miller in September
2003, with no gain or loss recorded on the sale.
Prior to fiscal 2002 Turkey functioned solely as a
wholesale operation and its operations are included in the
discontinued operations of fiscal 2001. For fiscal 2002,
Turkey functioned as a growing operation and its
operations are also reflected as discontinued operations
for fiscal 2002. For fiscal 2001, 2002 and 2003 Miller
functioned as a growing operation and its operations are
also reflected as discontinued operations for fiscal 2001,
2002 and 2003.
-F-25-
CALLOWAY'S NURSERY, INC.
Annual Report on Form 10-K
Fiscal Year Ended September 30, 2003
Index to Exhibits
Sequentially
Numbered
Page
(3)(a) Restated Articles of Incorporation of the
Registrant. (Exhibit (3)(a))1
(3)(b) Form of Bylaws of the Registrant. (Exhibit (3)(b))1
(3)(c) Amendment to Bylaws Adopted on May 19, 1993.
(Exhibit (3(c)) 1
(4)(a) Specimen Stock Certificate. (Exhibit (4)(a) 1
(10)(a) Form of Employment Agreement dated July 3, 1991
between the Registrant and James C. Estill. (Exhibit
(10)(a)) 1
(10)(b) Form of Employment Agreement dated July 3, 1991
between the Registrant and John T. Cosby. (Exhibit
(10)(b)) 1
(10)(c) Form of Employment Agreement dated July 3, 1991
between the Registrant and John S. Peters. (Exhibit
(10)(c)) 1
(10)(d) Left blank intentionally.
(10)(e) Form of Indemnity Agreement dated July 3, 1991
between the Registrant and each of James C. Estill
and John T. Cosby. (Exhibit (10)(g)) 1
(10)(f) Form of Indemnity Agreement dated July 3, 1991
between the Registrant and John S. Peters. (Exhibit
(10)(h)) 1
(10)(g) Form of Indemnity Agreement dated July 3, 1991
between the Registrant and each of Robert E. Glaze
and Dr. Stanley Block. (Exhibit (10)(i)) 1
(10)(h) Extension of Employment Agreement between the
Registrant and James C. Estill dated July 2, 1996.
(Exhibit (10)(m)) 2
(10)(i) Extension of Employment Agreement between the
Registrant and John T. Cosby dated July 2, 1996.
(Exhibit (10)(n)) 2
(10)(j) Extension of Employment Agreement between the
Registrant and John S. Peters dated July 2, 1996.
(Exhibit (10)(o)) 2
(10)(k) Employment Agreement between the Registrant and C.
Sterling Cornelius dated September 21, 1999. (Exhibit
(10)(k)) 3
(10)(l) Extension of Employment Agreement between the
Registrant and James C. Estill dated May 9, 2001.
(Exhibit (10)(p)) 4
(10)(m) Extension of Employment Agreement between the
Registrant and John T. Cosby dated May 9, 2001.
(Exhibit (10)(q)) 4
(10)(n) Extension of Employment Agreement between the
Registrant and John S. Peters dated May 9, 2001.
(Exhibit (10)(r)) 4
(10)(o) Calloway's Nursery, Inc. Bonus Plan for the Fiscal
Year Ending September 30, 2004. (Exhibit (10.1) 6
(10)(p) Form of Indemnification Agreement dated November
14, 2002 between the Registrant and each of Dr.
Stanley Block, Sterling Cornelius, John T. Cosby,
James C. Estill, Daniel R. Feehan, Timothy J.
McKibben, John S. Peters, Daniel G. Reynolds, George
J. Wechsler and David S. Weger. (Exhibit 10.3) 5
(10)(q) Forbearance Agreement dated December 22, 2003
between the Registrant and Frost National Bank
(Exhibit 10.2) 6
(14) Code of Ethics 6
(21)(a) Subsidiaries of the Registrant. (Exhibit 21) 6
(a)(3) Exhibits (continued)
(23)(d) Consent of KPMG LLP. (Exhibit 23) 6
(31)(a) Rule 13a-14(a) Certification of the Chief
Financial Officer of Calloway's Nursery, Inc.
(Exhibit 31(a)) 6
(31)(b) Rule 13a-14(a) Certification of the Chief Executive
Officer of Calloway's Nursery, Inc.
(Exhibit 31(b)) 6
(32) Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2003. (Exhibit 32) 6
(99)(a) Calloway's Nursery, Inc. Stock Purchase
Plan.(Exhibit (28)) 7
(99)(b) Calloway's Nursery, Inc. 1991 Stock Option
Plan.(Exhibit (10)(d)) 1
(99)(c) Calloway's Nursery, Inc. 1995 Stock Option Plan
for Independent Directors. (Exhibit (99)(c)) 8
(99)(d) Calloway's Nursery, Inc. 1996 Stock Option
Plan.(Exhibit A) 9
(99)(e) Calloway's Nursery, Inc. 1997 Stock Option
Plan.(Exhibit A) 10
(99)(f) Calloway's Nursery, Inc. 1998 Stock Option
Plan.(Exhibit A) 11
(99)(g) Calloway's Nursery, Inc. 1999 Stock Option
Plan.(Exhibit A) 12
(99)(h) Calloway's Nursery, Inc. 2000 Stock Option
Plan.(Exhibit A) 13
(99)(i) Calloway's Nursery, Inc. 2001 Stock Option
Plan.(Exhibit A) 14
(99)(j) Calloway's Nursery, Inc. 2002 Stock Option
Plan.(Exhibit A) 15
1 Incorporated by reference to the Exhibit shown in
parenthesis to Registration Statement No. 33-40473 on Form S-
1, and amendments thereto, filed by the Company with the
securities and Exchange Commission, and effective June 26,
1991.
2 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-Q for the quarter ended
June 30, 1996.
3 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 1999.
4 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 2001.
5 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K Report for the fiscal
year ended September 30, 2002.
6 Filed herewith.
7 Incorporated by reference to the Exhibit shown in
parenthesis to Registration Statement No. 33-46170 on Form S-
8, and amendments thereto, filed by the Company with the
Securities and Exchange Commission, and effective March 3,
1992.
8 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Form 10-K for the fiscal year
ended September 30, 1995.
9 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders.
10 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1998
Annual Meeting of Shareholders.
11 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders.
12 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2000
Annual Meeting of Shareholders.
13 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2001
Annual Meeting of Shareholders.
14 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2002
Annual Meeting of Shareholders.
15 Incorporated by reference to the Exhibit shown in
parenthesis to the Company's Proxy Statement for its 2003
Annual Meeting of Shareholders.
Exhibit 10.1
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
I. PURPOSE
The purpose of this INCENTIVE BONUS PLAN is to provide an
incentive to management to maximize the performance of their
profit centers. Bonuses will be paid on Pre Tax Net, as
defined below.
II. BONUS POOLS
The Bonus Pools in this INCENTIVE BONUS PLAN, and the basis
upon which each of them is computed, are as follows:
Bonus Pool Basis Pre Tax Net % of
Profit is Prof
After Bonuses it
Paid To
Store Bonus Pool Pre Tax Net N/A 5%
Profit for each
particular
Retail Store
DFW Regional Pre Tax Net DFW Retail 5%
Management Bonus Profit for the Stores
Pool DFW Market
San Antonio Pre Tax Net San Antonio 5%
Market Bonus Profit for the Retail
Pool San Antonio Stores
Market
DFW Market Bonus Pre Tax Net DFW Retail 5%
Pool Profit for the Stores and
DFW Market DFW Regional
Management
Bonus Pool
Houston Market Pre Tax Net Houston 5%
Bonus Pool Profit for the Retail
Houston Market Stores
Calloway's Pre Tax Net All of the 5%
Nursery, Inc. Profit for above
Bonus Pool Calloway's
Nurseries, Inc.
III. PARTICIPANTS
The Participants in this INCENTIVE BONUS PLAN, and the Bonus
Pool in which each of them participates, are as follows:
Position Title Pool Share
of
Pool
Store Manager Store Bonus Pool 80%
Assistant Store Manager Store Bonus Pool 20%
DFW East Regional Manager DFW Regional Management 60%
Bonus Pool
DFW Buyer (2) DFW Regional Management 40%1
Bonus Pool
San Antonio General San Antonio Market 100%
Manager Bonus Pool
Vice President, DFW DFW Market Bonus Pool 100%
Market
Houston General Manager Houston Market Bonus 100%
Pool
President & Chief Calloway's Nursery, Inc 2
Executive Officer Bonus Pool
Vice President, Corporate Calloway's Nursery, Inc 2
Development Bonus Pool
Vice President, Calloway's Nursery, Inc 2
Operations Bonus Pool
Vice President & Chief Calloway's Nursery, Inc 2
Financial Officer Bonus Pool
-1-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
IV. DEFINITIONS
Cost of Goods Sold - the amount of Cost of Goods Sold
recorded, including results of all physical inventory counts
taken during the fiscal year.
DFW Market - the group of Retail Stores and Warehouse
serving the Dallas-Fort Worth market area.
Fiscal 2004 - the fiscal period starting on October 1, 2003
and ending on September 30, 2004.
Houston Market - the group of Retail Stores, Warehouse and
Landscape Department serving the Houston market.
Period Completion - occurs upon issuance of the Press
Release announcing the Financial Results of Calloway's
Nursery, Inc. as of and for Fiscal 2004.
Pre Tax Net Profit - the amount remaining after subtracting
Cost of Goods Sold and Total Expenses from Sales. If Pre Tax
Net Profit is less than or equal to -0-, then there is no
Bonus Pool for the profit center being measured.
Retail Store - each one of the Company's retail stores
serving the DFW Market, Houston Market or San Antonio
Market.
Sales - the amount of Sales recorded by a profit center,
excluding intercompany and/or internal sales (for example,
sales from a warehouse to a store are not counted as Sales).
San Antonio Market - the group of Retail Stores, Warehouse
and Trucking Department serving the San Antonio market.
Total Expenses - all expenses incurred by or charged to a
profit center, except for Bonus Expense under this INCENTIVE
BONUS PLAN for the profit center for which Total Expenses
are being computed.
-2-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
V. STORE BONUS POOL(S)
A. There will be a Store Bonus Pool if a particular Retail
Store earns a Pre Tax Net Profit for Fiscal 2004.
B. Each Retail Store that earns a Pre Tax Net Profit will
have its own Store Bonus Pool.
C. The Store Bonus Pool(s) will be equal to 5% of the
Fiscal 2004 Pre Tax Net for each Retail Store.
D. The Store Manager's Share will be 80% of the Store
Bonus Pool and the Assistant Manager's Share will be 20% of the
Store Bonus Pool.
E. Example:
Example
Sales $1,734,200
Cost of Goods Sold 906,400
Gross Profit 827,800
Total Expenses 731,300
Pre Tax Net Profit 96,500
Store Bonus Pool (5%) 4,825
Manager's Share (80%) 3,860
Assistant Manager's Share (20%) 965
VI. DFW REGIONAL MANAGEMENT BONUS POOL
A. There will be a DFW Regional Management Bonus Pool if the
DFW Market earns a Pre Tax Net Profit for Fiscal 2004.
B. The DFW Regional Management Bonus Pool will be equal to 5%
of the Fiscal 2004 Pre Tax Net for the DFW Market.
C. The DFW East Regional Manager's Share will be 60% of the DFW
Regional Management Bonus Pool, and there will be two (2) DFW
Buyer's Shares of 20% each (for a total of 40%) of the DFW
Regional Management Bonus Pool.
D. Example:
Example
Sales $28,500,700
Cost of Goods Sold 14,912,000
Gross Profit 13,588,700
Total Expenses3 12,877,200
Pre Tax Net Profit 711,500
DFW Regional Management Bonus Pool(5%) 35,575
DFW East Regional Manager's Share (60%) 21,345
DFW Buyer's Share (20%) 7,115
DFW Buyer's Share (20%) 7,115
-3-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
VII. SAN ANTONIO MARKET BONUS POOL
A. There will be a San Antonio Market Bonus Pool if the San
Antonio Market earns a Pre Tax Net Profit for Fiscal 2004.
B. The San Antonio Market Bonus Pool will be equal to 5% of the
Fiscal 2004 Pre Tax Net for the San Antonio Market.
C. The San Antonio General Manager's share will be 100% of the
San Antonio Market Bonus Pool.
D. Example:
Example
Sales $9,332,900
Cost of Goods Sold 5,273,800
Gross Profit 4,059,100
Total Expenses4 3,758,400
Pre Tax Net Profit 300,700
San Antonio Market Bonus Pool (5%) 15,035
San Antonio General Manager's Share (100%) 15,035
VIII. DFW MARKET BONUS POOL
A. There will be a DFW Market Bonus Pool if the DFW Market
earns a Pre Tax Net Profit for fiscal 2004.
B. The DFW Market Bonus Pool will be equal to 5% of the Fiscal
2004 Pre Tax Net for the DFW Market.
C. The Vice President, Dallas/Fort Worth Market's share will be
100% of the DFW Market Bonus Pool.
D. Example:
Example
Sales $28,500,700
Cost of Goods Sold 14,912,000
Gross Profit 13,588,700
Total Expenses5 12,912,775
Pre Tax Net Profit 675,925
Dallas/Fort Worth Market Bonus Pool 33,796
(5%)
Vice President, Dallas/Fort Worth 33,796
Market Share (100%)
-4-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
IX. HOUSTON MARKET BONUS POOL
A. There will be a Houston Market Bonus Pool if the Houston
Market earns a Pre Tax Net Profit for Fiscal 2004.
B. The Houston Market Bonus Pool will be equal to 5% of the
Fiscal 2004 Pre Tax Net for the Houston Market.
C. The Houston General Manager share will be 100% of the
Houston Market Bonus Pool.
D. Example:
Example
Sales $12,009,911
Cost of Goods Sold 6,177,300
Gross Profit 5,832,600
Total Expenses6 5,282,600
Pre Tax Net Profit 550,000
Houston Market. Bonus Pool (5%) 27,500
Houston General Manager Share (100%) 27,500
X. CALLOWAY'S NURSERY, INC. BONUS POOL
A. There will be a Calloway's Nursery, Inc. Bonus Pool if
Calloway's Nursery, Inc. earns greater than or equal to
$2,500,000 in Pre Tax Net Profit for Fiscal 2004.
B. The Calloway's Nursery, Inc. Bonus Pool will be equal to 5%
of the Fiscal 2004 Pre Tax Net for Calloway's Nursery, Inc.
C. The Calloway's Nursery, Inc. Bonus Pool will be allocated to
each Participant on the basis of a fraction multiplied by the
amount of the Bonus Pool. The numerator of the fraction is the
salary of the Participant in effect on the last day of Fiscal
2004 and the denominator of the fraction is the total of the
annual salaries of all Participants in effect on the last day of
Fiscal 2004.
D. Example:
Example
Sales $49,843,500
Cost of Goods Sold 25,686,700
Gross Profit 24,156,800
Total Expenses 22,974,700
Pre Tax Net Profit $1,182,100
Floor before any Bonus Pool is
established 2,500,000
Calloway's, Inc. Bonus Pool (5%) --
-5-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
XI. ALLOCATION OF SHARES WHEN MORE THAN ONE PERSON HOLDS A PARTICPANT
POSITION IN A BONUS POOL DURING THE FISCAL YEAR
Store Bonus Pools, DFW Regional Management Bonus Pool, San
Antonio Market Bonus Pool, DFW Market Bonus Pool, Houston
Market Bonus Pool
A. In the event that more than one person holds a Participant
position in a Bonus Pool during Fiscal 2004, each person's share
will be allocated to each person who held that Participant
position during fiscal 2004 on the basis of a fraction multiplied
by the amount of that Participant position's share of the Bonus
Pool. The numerator of the fraction is the number of days that an
individual served as a in the Participant position during Fiscal
2004, and the denominator of the fraction is the greater of (i)
the total number of days that all people served in that
Participant position during Fiscal 2004 or (ii) 366.
B. Example (more than one Store Manager during Fiscal 2004):
Store Manager's Share $3,860.00
Store Manager "A" worked from Oct 1 31 days
through Oct 31
Store Manager "B" worked from Nov 1 274 days
through Jul 31
Store Manager "C" worked from Jul 15
through Sep 30 (there were two Store
Managers from Jul 15 through Jul 31) 77 days
Total number of days worked by all 382 days
Store Managers during the Fiscal
Year
Store Manager "A" allocation of Store 8.094%
Manager's Share
Store Manager "B" allocation of Store 71.540%
Manager's Share
Store Manager "C" allocation of Store 20.3660%
Manager's Share
Store Manager "A" Bonus $312.43
Store Manager "B" Bonus $2,761.46
Store Manager "C" Bonus $786.11
Calloway's Nursery, Inc. Bonus Pool:
C. In the event a Participant serves less than a complete
Fiscal 2004:
- A Participant in the Plan who does not start Fiscal 2004,
and therefore serves less than the full Fiscal 2004, will receive
a bonus for the portion of the Fiscal 2004 the participant does
serve.
- For example, a participant who starts on September 1st will
receive 30/366 of the bonus attributable to his/her fraction of
the Bonus Pool.
- The remaining 336/366 will be allocated to the other
Participants on a pro rata basis in accordance with their
respective shares in the Bonus Pool.
-6-
CALLOWAY'S NURSERY, INC.
INCENTIVE BONUS PLAN
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
GENERAL PROVISIONS
A. No bonus accrues for any reason on any Pre Tax Net Profit
less than "0", or breakeven.
B. All bonuses are payable after the end of the fiscal year,
upon Period Completion. No bonus will be paid in the event of
termination of employment on or prior to the completion of Fiscal
2004, whether termination is voluntary or involuntary, with cause
or without cause.
C. For purposes of all calculations under the plan, the amounts
shall be taken from the Company's audited financial statements.
D. In the event of any need for clarification as to any issues
related to the calculation and/or payment of any amounts relative
to this INCENTIVE BONUS PLAN, the judgment of Compensation
Committee of the Board of Directors shall prevail.
_______________________________
1 DFW Buyer's shares to be split evenly based upon the number of
DFW Buyers.
2 Calloway's Nursery, Inc. Bonus Pool to be split based on annual
salary of all Participants in that Pool as of September 30, 2004.
3 Includes bonuses paid from the Store Bonus Pools for all of the
DFW Market Retail Stores.
4 Includes bonuses paid from the Store Bonus Pools for all of the
San Antonio Market Retail Stores.
5 Includes bonuses paid from the Store Bonus Pools for all of the
DFW Market Retail Stores and bonuses paid from the DFW Regional
Management Bonus Pool.
6 Includes bonuses paid from the Store Bonus Pools for all of the
Houston Market Retail Stores.
-7-
Exhibit 10.2
FORBEARANCE AND RATIFICATION AGREEMENT
THE STATE OF TEXAS
COUNTY OF TARRANT
THIS FORBEARANCE AND RATIFICATION AGREEMENT ("Agreement") is
entered into this 22nd day of December, 2003, by and between
The Frost National Bank, a national banking association
("Lender"), Calloway's Nursery, Inc., a Texas corporation
("Borrower") and Cornelius Nurseries, Inc., a Texas corporation
("Cornelius"). Borrower and Cornelius are collectively referred
to herein as "Ratifying Parties".
RECITALS:
A. Lender is the sole owner and holder of that one certain
Revolving Promissory Note in the original principal amount of
$3,000,000.00 dated May 29, 2003 executed by Borrower ("Note").
B. In connection with the Note, Borrower and Cornelius executed
and delivered to and for the benefit of Lender that certain
Loan Agreement dated September 21, 1999, which was amended by
that certain First Amendment to Loan Agreement dated June 1,
2002, which was amended by that certain Second Amendment to
Loan Agreement dated May 31, 2001, which was amended by that
certain Third Amendment to Loan Agreement dated March 31,
2002, which was amended by that certain Fourth Amendment to
Loan Agreement dated May 30, 2002, which was amended by that
certain Fifth Amendment to Loan Agreement dated May 29, 2003
(the original Loan Agreement and all amendments thereto are
collectively referred to herein as the "Loan Agreement"). To
secure payment of the Note, Borrower executed and delivered to
and for the benefit of Lender that certain Deed of Trust,
Security Agreement and Financing Statement dated September 21,
1999 which creates a first priority lien upon certain real
property of Borrower as more fully described in the Deed of
Trust ("Real Property Collateral") which was modified and
extended by that certain Modification to Deed of Trust and
Extension of Lien Agreement dated May 29, 2003 (both
collectively referred to herein as the "Deed of Trust"). To
secure payment of the Note, Borrower executed and delivered to
and for the benefit of Lender that certain Security Agreement
dated May 30, 2002 ("Borrower Security Agreement") which
creates a first priority lien upon certain personal property of
Borrower as more fully described in the Borrower Security
Agreement ("Borrower Collateral"). To secure payment of the
Note, Cornelius executed and delivered to and for the benefit
of Lender that certain Security Agreement dated May 30, 2002
("Cornelius Security Agreement") which creates a first priority
lien upon certain personal property of Cornelius as more fully
described in the Cornelius Security Agreement ("Cornelius
Collateral"). The Borrower Security Agreement and Cornelius
Security Agreement are sometimes collectively referred to
herein as the "Security Agreements". The Borrower Collateral
and Cornelius Collateral, as more fully described in the
Security Agreements, is collectively referred to herein as the
"Personal Property Collateral". To evidence Lender's security
interests as set forth in the Security Agreements, one or more
Uniform Commercial Code Financing Statement(s), Amendments to
Financing Statement(s), and/or Continuations of Financing
Statement(s) were filed with the Secretary of State of Texas
(collectively referred to herein as "Financing Statements").
C. All of the loan documents, agreements and instruments
defined and/or referred to above together with all other
documents, agreements and instruments evidencing, securing,
governing, guaranteeing, pertaining to and/or executed in
connection with the loans described above and all
modifications, amendments, renewals and extensions thereof are
collectively referred to herein as "Loan Documents".
-1-
D. Ratifying Parties have defaulted under the terms of Section
9 of the Loan Agreement entitled Financial Covenants
("Financial Covenant Defaults"). As a result of the Financial
Covenant Defaults, Ratifying Parties have requested that Lender
forbear from exercising the remedies available to it under the
terms of the Loan Documents (except as set forth in this
Agreement). Lender has agreed to such forbearance requests of
Ratifying Parties, subject to the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, for and in consideration of the Recitals above,
the mutual promises and agreements contained and referred to
herein, Ten and no/100 Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which
are hereby acknowledged and agreed, Lender and Ratifying
Parties hereby agree as follows:
1. The foregoing Recitals are true, correct and complete in all
respects and are incorporated herein by this reference.
2. Ratifying Parties each hereby: (i) ratify, affirm, reaffirm,
acknowledge, confirm and agree that the Loan Documents
represent valid and enforceable obligations of Ratifying
Parties as respectively set forth in or indicated in the Loan
Documents and that the Loan Documents are, and shall remain, in
full force and effect, in full accordance with their terms,
conditions and provisions; (ii) ratify, affirm, reaffirm,
acknowledge and confirm to Lender each of the representations,
warranties, covenants and agreements set forth in the Loan
Documents; and (iii) ratify, affirm, reaffirm, acknowledge,
confirm and agree that there are no existing claims or
defenses, personal or otherwise, or rights of setoff whatsoever
with respect to or against the enforceability of the Note and
Loan Documents.
3. Ratifying Parties each hereby ratify, affirm, reaffirm,
acknowledge, confirm and agree that there is no outstanding
principal balance due and owing on the Note as of the date
hereof.
4. Ratifying Parties each hereby ratify, affirm, reaffirm,
acknowledge, confirm and agree that Ratifying Parties have
committed the Financial Covenant Defaults and are in default
under the terms of the Note and Loan Documents.
5. Ratifying Parties each hereby warrant, represent and agree
that: (i) during the Forbearance Period (defined below), the
Revolving Line of Credit amount (as defined in the Note) shall
not at any time exceed the lesser of (a) $1,500,000.00 or (b)
an amount equal to the Borrowing Base (as defined in the Loan
Agreement); (ii) during the Forbearance Period, the outstanding
and unpaid principal balance of the Note shall accrue interest
at the per annum rate equal to the lesser of (a) a rate equal
to the Prime Rate of Lender (as defined in the Note) plus two
percent (2%) per annum, with said rate to be adjusted to
reflect any change in said Prime Rate at the time of any such
change, or (b) the highest rate permitted by applicable law,
but in no event shall interest contracted for, charged or
received under the Note plus any other charges in connection
therewith which constitute interest exceed the maximum interest
permitted by applicable law; (iii) at all times during the
Forbearance Period, Ratifying Parties' actual sales and/or
revenues shall be at least seventy five percent (75%) of the
budgeted sales and/or revenues as shown, set forth and
contained in the budget attached hereto as Exhibit "A" and
incorporated herein ("Budget"); and (iv) at all times during
the Forbearance Period, Ratifying Parties' actual pretax income
shall be at least seventy five percent (75%) of the budgeted
pretax income as shown, set forth and contained in the Budget.
6. Ratifying Parties each hereby ratify, affirm, reaffirm,
acknowledge, confirm and agree that: (i) the security interests
granted to Lender in the Deed of Trust constitutes a valid
perfected first priority lien and security interest (_Real
Property Lien_) in and upon the Real Property Collateral in
favor of Lender; (ii) the security interests granted to Lender
in the Security Agreements constitute valid perfected first
priority liens and security interests (_Personal Property
Liens_) in and upon the Personal Property Collateral in favor
of Lender; (iii) the Real Property Collateral and Personal
Property Collateral are and shall remain subject to and
encumbered by the respective Real Property Lien and Personal
Property Liens, charges and encumbrances of the Deed of Trust
-2-
and Security Agreements, and nothing herein contained shall
affect or be construed to affect the Real Property Lien or
Personal Property Liens, charges or encumbrances of the Deed of
Trust and Security Agreements or the priority thereof over any
other liens, charges or encumbrances in or upon the Real
Property Collateral and/or Personal Property Collateral; (iv)
the Real Property Lien and Personal Property Liens shall secure
all indebtedness due and owing to Lender under the terms of the
Loan Documents and the performance of all other obligations
under the terms of the Loan Documents; and (v) this Agreement
does not constitute a novation. To the extent, if any, that the
Real Property Collateral is not subject to and encumbered by
the Real Property Lien in favor of Lender granted in the Deed
of Trust, for and in the considerations set forth above in this
Agreement, Borrower hereby pledges and grants to Lender a Deed
of Trust Lien and security interest in the Real Property
Collateral. To the extent, if any, that the Personal Property
Collateral is not subject to and encumbered by the Personal
Property Liens in favor of Lender granted in the Security
Agreements, for and in the considerations set forth above in
this Agreement, Ratifying Parties hereby pledge and grant to
Lender a security interest in the Personal Property Collateral.
Ratifying Parties each hereby consent to and agree that Lender
shall have the right and authority to: (i) execute on behalf of
all of the Ratifying Parties, and without requiring the
execution by any of the Ratifying Parties, additional Uniform
Commercial Code Financing Statements specifically describing
and including the Personal Property Collateral; and (ii) file
such additional Uniform Commercial Code Financing Statements
with the Secretary of State of Texas and any other appropriate
place for filing as determined by Lender.
7. Until the indebtedness represented by the Note and all other
obligations and liabilities of Ratifying Parties under this
Agreement and the Loan Documents are fully paid and satisfied
and all of the Loan Documents are terminated and no longer in
force or effect, Ratifying Parties shall not, without the prior
written consent of Lender: (i) liquidate, merge or consolidate
with or into any other entity; (ii) liquidate, sell, transfer
or otherwise dispose of any of Ratifying Parties' assets or
properties, other than in the ordinary course of Ratifying
Parties' pre-existing and established business; (iii) create or
incur any lien or encumbrance on any of Ratifying Parties'
assets, other than liens and security interests securing
indebtedness owing to Lender and liens for taxes, assessments
or similar charges that are not yet due; (iv) pay with cash or
property all or any portion of any indebtedness on any borrowed
money, note, debenture, bond or any other evidences of
indebtedness to any Investor (defined below); provided however,
during the Forbearance Period, Ratifying Parties may pay their
regularly scheduled payments, as they become due, on
indebtedness which is secured by real property owned by
Ratifying Parties. The term "Investor" shall mean and refer to
any person or entity that has or may hereafter loan or advance
money or property ("Investment") to, on behalf of, or for the
benefit of any of the Ratifying Parties, including, without
limiting such type of loans or advances, any capital
contribution, equity investment, loan, bond, debenture,
security, investment, cash advance, overdraft, contribution or
advance of services or property, financing arrangement,
guaranty, and/or other similar accommodation; (v) permit the
sale, pledge or other transfer of any of the ownership
interests in Ratifying Parties; (vi) make any loans to any
person or entity; (vii) enter into any transaction, including,
without limitation, the purchase, sale or exchange of property
or the rendering of any service, with any Affiliate (defined
below) or Investor of Ratifying Parties, except in the ordinary
course of the pre-existing and established business of
Ratifying Parties and such Affiliate and pursuant to the
reasonable requirements of Ratifying Parties' business and upon
fair and reasonable terms no less favorable to Ratifying
Parties than would be obtained in a comparable arm's-length
transaction with a person or entity not an Affiliate of
Ratifying Parties; provided, however that in no event shall any
-3-
of the Ratifying Parties make any payments or exchange of
property with any Affiliate on account of any existing debt or
obligation of any of the Ratifying Parties. The term
"Affiliate" shall mean any individual or entity directly or
indirectly controlling, controlled by, or under common control
with, another individual or entity; (viii) declare or pay any
dividends on any shares of Ratifying Parties' capital stock,
make any other distributions with respect to any payment on
account of the purchase, redemption, or other acquisition or
retirement of any shares of Ratifying Parties' capital stock,
or make any other distribution, sale, transfer or lease of any
of Ratifying Parties' assets other than the sale of inventory
in the ordinary course of business, unless any such amounts are
directly utilized for the payment of the indebtedness and
obligations owing from time to time by Ratifying Parties to
Lender; (ix) pay, deliver or make any payment or distribution
of money, property or assets of any kind to any Investor on
account of or in return for any Investment; and (x) pay,
deliver or make any payment or distribution of money, property
or assets of any kind to any general partner, limited partner,
stockholder or owner of Ratifying Parties.
8. Lender and Ratifying Parties hereby represent, confirm and
agree that in no event shall interest contracted for, charged
or received hereunder, under the Note or under the Loan
Documents, plus any other charges in connection herewith, in
connection with the Note or in connection with the Loan
Documents which constitute interest, exceed the maximum
interest permitted by applicable law. The amounts of such
interest or other charges previously paid to the holder of the
Note in excess of the amounts permitted by applicable law shall
be applied by the holder of the Note to reduce the principal of
the indebtedness evidenced by the Note, or, at the option of
the holder of the Note, be refunded. To the extent permitted by
applicable law, determination of the legal maximum amount of
interest shall at all times be made by amortizing, prorating,
allocating and spreading in equal parts during the period of
the full stated term of the loan and indebtedness, all interest
at any time contracted for, charged or received from the
Borrower in connection with the Note and indebtedness evidenced
thereby, so that the actual rate of interest on account of such
indebtedness is uniform throughout the term of the Note.
9. Subject to the terms, provisions and conditions contained in
this Agreement and provided that Ratifying Parties: (i) perform
all of their obligations under this Agreement; (ii) do not
default with respect to any of the terms, provisions or
conditions of this Agreement; and (iii) do not default with
respect to any other terms, provisions and conditions of the
Loan Documents, Lender hereby agrees to forbear from the
exercise of its remedies available to it under the terms of the
Loan Documents (except as set forth in this Agreement), as a
result of Ratifying Parties' Financial Covenant Defaults, until
May 28, 2004 ("Forbearance Period"). Ratifying Parties each
hereby ratify, affirm, reaffirm, acknowledge, confirm and agree
that if any of the Ratifying Parties: (i) fail to perform any
of their obligations under this Agreement; (ii) default with
respect to any of the terms, provisions or conditions of this
Agreement; (iii) default with respect to any other terms,
provisions and conditions of the Loan Documents; (iv) file, or
have filed against them, a bankruptcy proceeding under the
United States Bankruptcy Code or any other insolvency
proceeding; (v) takes any action that jeopardizes any of the
Real Property Collateral or Personal Property Collateral or the
value of any of the Real Property Collateral or Personal
Property Collateral; or (vi) disposes or otherwise attempts to
dispose of any of the Real Property Collateral or Personal
Property Collateral outside the ordinary course of Ratifying
Parties' business, then all of Lender's agreements and
obligations contained in this Agreement shall immediately and
automatically terminate and be null and void and of no further
force and/or effect and Lender shall be immediately and
automatically released from performing and complying with any
and all of its agreements and obligations under this Agreement
and Lender shall be entitled to exercise any and all remedies
available to Lender pursuant to the terms, provisions and
conditions of this Agreement, the Loan Documents or as
otherwise provided by law. No express or implied consent to any
further periods of forbearance and/or modifications involving
any of the matters set forth in this Agreement or otherwise,
shall be inferred or implied from Lender's execution of this
Agreement. Lender's execution of this Agreement shall not
constitute a waiver (either express or implied) of the
requirement that any further periods of forbearance and/or
modifications of the Loan Documents shall require the express
written approval of Lender, no such approval (either express or
implied) having been given as of the date hereof.
10. For and in the consideration set forth above in this
Agreement, Ratifying Parties each hereby RELEASE, RELINQUISH
and forever DISCHARGE Lender, as well as its predecessors,
successors, assigns, agents, officers, directors, employees and
representatives, of and from any and all claims, demands,
actions and causes of action of any and every kind or
character, past or present, which Ratifying Parties may have
against Lender and its predecessors, successors, assigns,
agents, officers, directors, employees and representatives
arising out of or with respect to (a) any right or power to
bring any claim against Lender for usury or to pursue any cause
of action against Lender based on any claim of usury, and (b)
any and all transactions relating to the Loan Documents
-4-
occurring prior to the date hereof, including any loss, cost or
damage, of any kind or character, arising out of or in any way
connected with or in any way resulting from the acts, actions
or omissions of Lender, and its predecessors, successors,
assigns, agents, officers, directors, employees and
representatives, including any breach of fiduciary duty, breach
of any duty of fair dealing, breach of confidence, breach of
funding commitment, undue influence, duress, economic coercion,
conflict of interest, negligence, bad faith, malpractice,
intentional or negligent infliction of mental distress,
tortious interference with contractual relations, tortious
interference with corporate governance or prospective business
advantage, breach of contract, deceptive trade practices,
libel, slander or conspiracy, but in each case only to the
extent permitted by applicable law.
11. Ratifying Parties each hereby ratify, affirm, reaffirm,
acknowledge, confirm and agree that Ratifying Parties shall
permit Lender and its representatives, agents, and/or employees
to have reasonable access to, and Ratifying Parties shall make
available to Lender, Ratifying Parties_ business premises and
books and records for review, appraisal, and inspection of the
Real Property Collateral and Personal Property Collateral and
Ratifying Parties shall cooperate in all respects with Lender,
its representatives, agents, and/or employees with respect to
such reviews, appraisals and inspections.
12. Ratifying Parties each hereby ratify, affirm, reaffirm,
acknowledge, confirm and agree: (i) that the terms, conditions
and provisions of all of the Loan Documents shall remain and
continue in full force and effect as of the date thereof, and
Ratifying Parties acknowledge and reaffirm their liability to
Lender thereunder; (ii) to pay all costs and expenses incurred
by Lender in connection with the execution and administration
of this Agreement including, but not limited to, all appraisal
costs, title insurance costs, legal fees incurred by Lender and
filing fees; (iii) that Lender does not, by its execution of
this Agreement, waive any rights it may have against any person
not a party to this Agreement; (iv) that in case any of the
provisions of this Agreement shall for any reason be held to be
invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect any other provision
hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been
contained herein; (v) that this Agreement and the Loan
Documents shall be governed and construed according to the laws
of the State of Texas (without regard to any conflict of laws
principles) and the applicable laws of the United States; (vi)
that this Agreement shall be binding upon and inure to the
benefit of Lender and Ratifying Parties and their respective
successors, assigns and legal representatives; (vii) that they
have entered into this Agreement of their own free will and
accord and in accordance with their own judgment after advice
of their own legal counsel, and state that they have not been
induced to enter into this Agreement by any statement, act or
representation of any kind or character on the part of the
parties hereto, except as expressly set forth in this
Agreement; and (viii) that they have authority to execute this
Agreement and that the undersigned has the authority to execute
this Agreement on behalf of each of the respective Ratifying
Parties pursuant to each undersigned's capacity set forth in
the signatures below; and (ix) that this Agreement may be
executed in multiple counterparts, each of which shall
constitute an original instrument, but all of which shall
constitute one and the same agreement.
13. For and in the consideration set forth above in this
Agreement, Ratifying Parties each hereby ratify, affirm,
reaffirm, acknowledge, confirm and agree that in the event that
any of the Ratifying Parties file, or have filed against them,
any bankruptcy proceeding under the United States Bankruptcy
Code or any other insolvency proceeding: (i) Lender shall be
deemed to have immediate and automatic relief from the
automatic stay under Section 362 of the United States
Bankruptcy Code ("Automatic Stay"), or in the alternative if
Lender requests relief from the Automatic Stay, Ratifying
Parties shall not object to or oppose and shall consent and
agree to Lender having immediate relief from the Automatic
Stay; and (ii) if, during the pendency of any such bankruptcy
proceeding under the United States Bankruptcy Code, it is
determined that any of the security interests, Deed of Trust
Lien or Personal Property Liens, charges and/or encumbrances
-5-
granted to Lender hereunder or by the Loan Documents are
unperfected, then all of such security interests, Deed of Trust
Lien or Personal Property Liens, charges and/or encumbrances
shall be deemed perfected without the necessity of the filing
of any documents (including any Financing Statements) or
commencement of any proceedings that would otherwise be
required in order to obtain perfection of such security
interests, Deed of Trust Lien or Personal Property Liens,
charges and/or encumbrances. Ratifying Parties each hereby
ratify, affirm, reaffirm, acknowledge, confirm and agree that,
to the fullest extent permitted by law, the terms and
conditions of this Paragraph shall be binding upon any
subsequently appointed bankruptcy trustee in any bankruptcy
proceeding and upon all other creditors of Ratifying Parties
who have extended or who may hereafter extend secured or
unsecured credit to any of the Ratifying Parties.
14. RATIFYING PARTIES EACH HEREBY RATIFY, AFFIRM, REAFFIRM,
ACKNOWLEDGE, CONFIRM AND AGREE THAT THE LOAN DOCUMENTS AS
MODIFIED BY THIS AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
ORAL AGREEMENTS OF THE PARTIES, WHETHER MADE BEFORE, ON, OR
AFTER THE DATE OF THIS NOTICE AND AGREEMENT. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the day and year first above written.
RATIFYING PARTIES:
CALLOWAY'S NURSERY, INC., CORNELIUS NURSERIES, INC.,
A Texas corporation A Texas corporation
By: /s/ James C. Estill By: /s/ James C. Estill
James C. Estill James C. Estill
Title: President Title: Chairman of the Board of
Directors
LENDER:
THE FROST NATIONAL BANK,
A National Banking association
By: /s/ Jennifer A. Crabtree
Jennifer A. Crabtree
Title: Senior Vice President
-6-
THE STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on the 29th day of
December, 2003, by Jennifer A.
Crabtree, Senior Vice President of THE FROST NATIONAL BANK, a
national banking association, for and on behalf of said banking
association.
___________________________________
Notary Public in and for the State of Texas
THE STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on the 26th day of
December, 2003, by James C. Estill in his capacity as President
of Calloway's Nursery, Inc., a Texas corporation, for and on
behalf of said corporation.
___________________________________
Notary Public in and for the State of Texas
THE STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on the 26th day of
December, 2003, by James C. Estill in his capacity as Chairman
of the Board of Directors of Cornelius Nurseries, Inc., a Texas
corporation, for and on behalf of said corporation.
___________________________________
Notary Public in and for the State of Texas
-7-
Exhibit A
CONSOLIDATED
Dec Jan Feb Mar Apr May
Sales 4,150 1,100 1,900 7,000 9,900 7,000
Gross profit 1,750 510 900 3,400 4,850 3,450
Labor 1,025 855 840 1,100 1,390 1,250
Operating 270 300 290 290 290 290
Credit card 65 65 30 40 110 150
Marketing 175 40 100 280 220 220
Occupancy 300 300 300 300 300 300
Depreciation 50 45 45 45 45 45
Interest 95 95 95 95 95 95
Total expenses 1,980 1,700 1,700 2,150 2,450 2,350
Pre tax net (230)(1,190) (800) 1,250 2,400 1,100
Income tax -- -- -- -- -- --
Net income (230)(1,190) (800) 1,250 2,400 1,100
-8-
Exhibit 14
Code of Ethics
Purpose
Calloway's Nursery, Inc. (the "Company") is committed to
promoting integrity and maintaining the highest standard of
ethical conduct in all of its activities.
Applicability
This Code of Ethics applies to the following officers of the
Company:
1. Principal executive officer (the "Chief Executive Officer");
and
2. Principal financial and accounting officer (the "Chief
Financial Officer").
Standards
The Chief Executive Officer and the Chief Financial Officer
shall:
1. Act with honesty and integrity, avoiding actual or obvious
conflicts of interest between their personal and professional
relationships;
2. Provide full, fair, accurate, timely and understandable
disclosure in reports and documents that the Company files with,
or submits to, the Securities and Exchange Commission and in
other public communications made by the Company.
3. Comply with applicable governmental laws, rules and
regulations; and
4. Promptly report violations of this Code of Ethics to the
Chairman of the Audit Committee.
Administration
The Audit Committee will have exclusive jurisdiction over this
Code of Ethics.
1. This Code of Ethics shall be administered and monitored by
the Audit Committee.
2. Questions regarding this Code of Ethics should be directed
to the Chairman of the Audit Committee.
3. Violations of this Code of Ethics should be promptly
reported to the Chairman of the Audit Committee.
4. The provisions of this Code of Ethics will be distributed to
the Chief Executive Officer and the Chief Financial Officer
following its adoption.
5. The Chief Executive Officer and the Chief Financial Officer
will be required to sign a receipt form for this Code of Ethics
indicating they have read this Code of Ethics and agreed to
comply with its provisions.
Accountability
This Code of Ethics shall be followed at all times. Failure to
comply with is provisions is grounds for disciplinary action, up
to an including termination of employment with the Company.
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following are wholly-owned subsidiaries of the Registrant:
Name Trade name(s) State of
incorporation
Calloway's Nursery of Calloway's Nursery Delaware
Texas, Inc.
Cornelius Nurseries, Cornelius Nurseries Texas
Inc.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Calloway's Nursery, Inc.:
We consent to the incorporation by reference in the
registration statements on Forms S-8 (File Nos. 33-46170, 33-
82192, 332-63291 and 333-92454) of Calloway's Nursery, Inc. of
our report dated December 29, 2003, with respect to the
consolidated balance sheets of Calloway's Nursery, Inc. and
subsidiaries as of September 30, 2003 and 2002, and the
related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year
period ended September 30, 2003, which report appears in the
September 30, 2003 Annual Report on Form 10-K of Calloway's
Nursery, Inc.
Our report refers to the Company's adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective October 1, 2002, and to the
Company's adoption of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, effective October 1, 2001.
Our report also contains an explanatory paragraph that states
that the Company has suffered recurring losses, has $3.4
million of preferred stock which becomes mandatorily
redeemable in September 2004, and has a line of credit that
may not be available if certain financial targets are not met
and that management does not expect to be able to renew with
the current bank upon its expiration on May 28, 2004. These
factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial
statements do not include any adjustments that might result
from the outcome of these uncertainties.
KPMG LLP
Fort Worth, Texas
December 29, 2003
Exhibit 31(a)
CERTIFICATIONS
I, Daniel G. Reynolds, certify that:
1. I have reviewed this annual report on Form 10-K of
Calloway's Nursery, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 29, 2003
/s/ Daniel G. Reynolds
Daniel G. Reynolds
Vice President and Chief Financial Officer
Exhibit 31(b)
CERTIFICATIONS
I, James C. Estill, certify that:
1. I have reviewed this annual report on Form 10-K of
Calloway's Nursery, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 29, 2003
/s/James C. Estill
James C. Estill
President and Chief Executive Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Calloway's Nursery, Inc.
(the "Company") on Form 10-K for the period ended September 30,
2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned hereby certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the consolidated financial condition and
results of operations of the Company.
Dated: December 29, 2003
CALLOWAY'S NURSERY, INC.
/s/ James C. Estill
James C. Estill
Chief Executive Officer
/s/ Daniel G. Reynolds
Daniel G. Reynolds
Chief Financial Officer