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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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]
As of December 14, 1997, Registrant had outstanding 5,354,555 shares of Common
Stock. The aggregated market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on
December 14, 1997 as reported on the Nasdaq Stock Market, was approximately
$7,900,000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1998 annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
INDEX
Page
Reference
Form 10-K
---------
PART I
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and
Reports on Form 8-K 18
1
PART I
ITEM 1. BUSINESS
GENERAL
Calloway's Nursery, Inc. ("Calloway's" or "Company"), a Texas corporation,
is a leading, specialty retailer of lawn and garden products. The Company
presently operates fifteen retail store locations in the Dallas and Fort Worth
markets.
STRATEGY
Calloway's objective is to provide an unmatched retail level of excellence
in quality and variety of living plants, and related products. We intend to
consistently and dependably provide quality products, information, presentation,
and service, at the least comparable cost.
We offer a wide variety of high quality products in modern, spacious
facilities. Each retail store has a similar floorplan and design providing over
60,000 square feet of selling space, approximately one-third of which is covered
on a year-round basis.
All Calloway's retail store managers and support teams bring a mastery
of the botanical, horticultural and nursery disciplines to the retail
environment that allows us to serve our customers beyond their expectations. We
are committed to observe closely the ways of nature, view the wonders of growing
plants, and experience the excitement of nurturing them, so that our first-hand
knowledge may benefit our customers.
We are equally committed to providing an exciting retail experience
grounded in the application of sound principles of traditional retail, combined
with advanced technology developed and applied to ensure an ever-improving level
of excellence. We want our customers to seek us out because of our demonstrated
ability to dependably provide unequaled enjoyment in their shopping experience.
We believe that gardening is a creative process, that landscaping adds
value to a home, and that gardening provides both pleasant diversion and
environmental benefit.
Calloway's searches for and provides appropriate living plants, and we
inform our customers about the care and nurturing of those plants, and the
proper use of the related products. We always treat our customers with caring
respect, and we guarantee their satisfaction.
We recognize that we must manage our human and financial resources with
great care, so that our Company continues to grow and prosper. Only by operating
in a consistently profitable manner, can we sustain our ability to offer
unmatched excellence to our customers and career opportunities to our employees.
2
Our attitude reflects a real sense of humility, coupled with pride we feel
for having forged our Company in difficult economic times. Daily, we earn our
position as the finest nursery in every market we serve, Daily, the unique
personality of our Company and the spirit of Calloway's people distinguish our
efforts. That spirit guides us into the future.
RETAIL STORE LOCATIONS
We select our retail store locations on the basis of demographic data,
traffic patterns and shopping habits. All of Calloway's retail stores are
Company-operated. Of the fifteen retail stores, twelve were leased and three
were owned as of September 30, 1997.
GROWING FACILITY
In 1997 our commitment to excellence led us to acquire an established
facility for the production of living plants. This growing facility, which we
named Miller Plant Farms, enhances our proven ability to consistently and
dependably provide our customers with the very best selection of top-quality
living plants at the least comparable cost.
MERCHANDISE
Calloway's sells a wide variety of lawn and garden products at each of
its retail stores. Our merchandising programs are designed to promote sales of
products having the greatest appeal during a particular season of the year.
We focus on quality and breadth of selection in bedding plants and
nursery stock complemented by soil amendments, fertilizers and other related
garden products. The exception is that period between Thanksgiving and
Christmas, at which time most sales result from cut and flocked Christmas trees
and poinsettias.
Approximately two-thirds of Calloway's annual sales are derived from living
plants, while the remaining one-third are made up of products that primarily
relate to the care and feeding of living plants.
We believe that the living plants we sell do more than provide our
customers with decoration: it is a spiritual, as well as physical, buffer
against the rush, noise and press of urban life. Living plants are ecologically
sound investments: taming the extremes of temperatures, reducing heat, glare and
chilly winds; cleansing the air, and replenishing the earth's oxygen.
We work to maintain balance with our natural habitat by informing our
customers so they may use our products in harmony with our habitat. The future
will see us leading efforts to encourage the development of our urban
environment in ways that allow all the elements to exist in harmony.
3
SUPPLIERS
We believe that one of Calloway's competitive advantages is its strong
relationships with its suppliers. We purchase most of the living plants we sell,
growing the remainder at our wholly-owned Miller Plant Farms growing facility.
We do not manufacture any of the related products.
The production of plants is a fragmented industry. Plant material may be
purchased from hundreds of different suppliers, most of which are located within
a 150-mile radius of Dallas and Fort Worth allowing us to procure merchandise
with relatively short lead times. We work with our suppliers to attain
consistency of quality, appropriate service and completeness in selection of
plant varieties.
We offer our customers our own private label products that are manufactured
expressly for Calloway's to ensure superior quality.
Our commitment to our suppliers is guided by the Golden Rule. By treating
suppliers fairly and with consideration, we establish trust and develop mutually
advantageous relationships. We expect good, competitive prices, but realize our
suppliers must make a profit to stay in business and progress alongside us.
Through the relationships we establish, we are able to obtain the quality,
variety, timely delivery and reasonable prices that allow us to surprise and
delight our customers.
ADVERTISING AND MERCHANDISING
The coordinated efforts of operations, merchandising and advertising
management create our advertising programs. Sales promotions are developed on a
seasonal basis, and our in-house advertising manager creates and produces
substantially all of our advertising.
Virtually all of Calloway's advertising is done in local newspapers.
Calloway's also supports a popular horticultural program on local radio.
Each Calloway's retail store is arranged to provide maximum exposure to its
selection of merchandise using appropriate traffic patterns and seasonally-
rotated displays. The retail store management team develops a floor plan in
conjunction with our in-store visual marketing department. This plan is designed
to provide a rewarding shopping experience.
Calloway's offers value-added services such as free home delivery.
4
COMPETITION
The retail nursery business is highly competitive. Calloway's competes
for the loyalty of our customers in the same market with Home Depot, Lowe's,
Kmart, Wal-Mart, Wolfe Nursery and a number of grocery store chains that sell
plants, flowers, seeds and other gardening products. Most of these other chains
have longer operating histories and considerably greater financial, marketing
and sales resources than Calloway's. Calloway's also competes with many
independent nurseries.
EMPLOYEES
Management believes that Calloway's employees represent a significant
competitive advantage for the Company. Nearly one-half of Calloway's full-time
employees are either Texas Certified Nursery Professionals or Texas Master
Certified Nursery Professionals. Candidates for each such certification must
pass comprehensive examinations in plant identification, identification and cure
of plant problems, landscaping, as well as retail merchandising and sales. The
Master certification includes a week-long intensive course and examination
conducted at Texas A&M University in College Station. The Company believes that
it employs more of these Texas Master Certified Nursery Professionals than any
other organization in the state of Texas.
At Calloway's, we believe in direct, face-to-face communications. From
store to store, we know one another by name, appreciate the work others perform,
encourage one another to improve and advance, and take an interest in each
other's families. We bring as many involved individuals to the decision-making
process as possible. We believe in the spirit of the team and that team's
ability to transcend the abilities of any one individual.
We are committed to seeking out ways to provide every member of the
team with the support he or she may need to reach their next level of
excellence. Only by encouraging the attainment of higher individual standards
can we hope to collectively enjoy the benefits of ever-higher levels of
excellence achieved by the team - Calloway's.
Ours is a wholesome business, offering a physically active workplace,
fresh air and the challenges of a fast-paced retail environment. We all share
the same fundamental goals, and believe we have a kinship that transcends a
typical workplace. We believe in thrift and self-sufficiency, empowering our
employees to do their best to achieve the team's objectives, and deliver for our
customers at a level unlike any they will find elsewhere.
We have about 200 full-time employees. During our very busy spring and
Christmas seasons, we supplement their efforts with seasonal and part-time
employees. Management considers its relations with employees to be good.
SEASONALITY
See "Seasonality" in Item 7 for a discussion of the seasonality of the
Company's business.
5
INCENTIVE COMPENSATION PROGRAMS
In recognition of their contributions, all of the Company's retail Store
Managers and Assistant Managers, Regional Managers, Merchandise Managers, and
the management of Miller Plant Farms are eligible to receive a significant
portion of their compensation in the form of bonuses based on financial
performance. The annual profit sharing pools are calculated based upon pre-tax
profit as a percentage of sales with emphasis upon increases in profit over the
previous year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company.
Name Age Positions
- ---- --- ---------
James C. Estill 50 Chairman of the Board, President and Chief
Executive Officer, and Director
John T. Cosby 54 Vice President -- Corporate Development,
Secretary and Director
John S. Peters 46 Vice President -- Operations and Director
David S. Weger 47 Vice President Merchandising
Daniel G. Reynolds 40 Vice President Chief Financial Officer
Mr. Estill has been President and a director of the Company since its
inception in March 1986. Mr. Estill is a Texas Master Certified Nursery
Professional.
Mr. Cosby has been Vice President -- Corporate Development of the Company
since its inception in March 1986 and served as a director of the Company from
March 1986 to August 1988, and was elected a director again in July 1991.
Mr. Peters has been Vice President -- Operations of the Company since April
1986 and served as a director of the Company from April 1986 to August 1988, and
was elected a director again in July 1991. Mr. Peters is a Texas Master
Certified Nursery Professional.
6
Mr. Weger has been Vice President -- Merchandising of the Company since
July 1995. He joined the Company in March 1987. Mr. Weger is a Texas Master
Certified Nursery Professional.
Mr. Reynolds has been Vice President -- Chief Financial Officer of the
Company since July 1995. He joined the Company in December 1990. Mr. Reynolds is
a Certified Public Accountant.
ENVIRONMENTAL REGULATION
The Company is subject to certain federal, state and local health, safety
and environmental laws and regulations regarding the storage, care and use of
certain of its products. The Company does not anticipate that future
expenditures for compliance with such environmental laws and regulations will
have a material adverse effect on the Company. No assurances can be given,
however, that such compliance, or compliance with other environmental laws and
regulations that may be enacted in the future, will not have such an effect.
ITEM 2. PROPERTIES
The Company's retail stores are typically located in high-traffic shopping
areas and all but one are free-standing. Each retail store consists of a
building (approximately 10,000 square feet), a greenhouse (approximately 12,000
square feet) and an outdoor nursery yard (approximately 40,000 square feet).
As of September 30, 1997 twelve of the Company's retail stores were leased
from unaffiliated parties. [See Note 13 to Financial Statements] Three retail
stores were owned by the Company.
The Company's executive offices are located in an office building in Fort
Worth, Texas, and are leased from an unaffiliated party. The Company also leases
a warehouse/distribution center in Fort Worth, Texas from an unaffiliated party.
The Company owns a wholesale nursery production facility near Tyler, Texas.
That facility includes approximately 100 greenhouses and approximately 80 acres.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any litigation which management believes
will materially and adversely affect its financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The shares of the Company's common stock have been traded on the Nasdaq
Stock Market under the symbol CLWY since June 26, 1991. The following table sets
forth the closing price information for each quarter of the most recent five
fiscal years:
Fiscal Year 1993 High Low Close
- ---------------- ---- --- -----
First Quarter 7.125 5.500 7.125
Second Quarter 7.250 5.250 5.375
Third Quarter 5.875 3.500 4.375
Fourth Quarter 4.500 1.875 3.125
Fiscal Year 1994
- ----------------
First Quarter 3.625 2.250 3.000
Second Quarter 3.125 2.313 2.750
Third Quarter 3.250 1.750 2.000
Fourth Quarter 2.125 1.000 1.500
Fiscal Year 1995
- ----------------
First Quarter 1.625 .750 1.063
Second Quarter 1.625 .875 1.313
Third Quarter 1.438 .750 1.000
Fourth Quarter 1.625 .813 1.156
Fiscal Year 1996
- ----------------
First Quarter 1.219 .625 .750
Second Quarter 1.188 .719 1.063
Third Quarter 1.125 .719 .875
Fourth Quarter 1.188 .813 .938
Fiscal Year 1997
- ----------------
First Quarter 1.063 .719 .750
Second Quarter .938 .688 .813
Third Quarter 1.094 .688 1.063
Fourth Quarter 1.375 1.000 1.281
The closing price of the Company's common stock on December 14, 1997, as
reported on the Nasdaq Stock Market, was $1.875.
As of December 14, 1997 there were approximately 329 shareholders of
record, and approximately 1,100 beneficial shareholders.
The Company has never paid cash dividends on its common stock. The
Company's Board of Directors currently intends to retain earnings for further
development of the Company's business and, therefore, does not intend to pay
cash dividends on its common stock in the foreseeable future.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in
conjunction with the Company's Financial Statements required by Item 8 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30, September 30,
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $26,245 $23,959 $22,52 $30,595 $28,233
Gross profit 12,426 11,211 10,592 12,376 11,875
Gross profit percentage 47% 47% 47% 40% 42%
Income (loss) before accounting change 1,727 201 156 (4,110) (773)
Net income (loss) $1,727 $201 $156 ($4,110) ($494)
Income (loss) per common share:
Before accounting change $0.33 $0.04 $0.03 ($0.86) ($0.16)
Accounting change (1) -- -- -- -- 0.06
Net income (loss) $0.33 $0.04 $0.03 ($0.86) ($0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, September 30,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital $3,119 $1,473 $3,301 $3,450 $223
Total assets 13,111 8,863 8,417 11,588 18,338
Long-term debt, net of current portion 1,803 -- -- 768 907
Shareholders' equity $7,488 $5,606 $5,258 $4,923 $8,974
Number of common shares outstanding 5,332 5,142 4,954 4,794 4,750
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Accounting change in the year ended September 30, 1993 related to change in
method of accounting for income taxes. See Note 2 to Financial Statements.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The information presented below sets forth, for the periods indicated, the
relative percentages that certain items derived from the statements of
operations bear to net sales of the Company.
PERCENTAGES OF NET SALES
----------------------------------------------------------------------------
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------
Net sales 100% 100% 100%
Cost of goods sold 53 53 53
------------------ ------------------ ------------------
Gross profit 47 47 47
Operating expenses 27 28 28
Occupancy expenses 11 12 13
Advertising expenses 5 5 5
Special credits -- -- (2)
Other, net 1 1 2
------------------ ------------------ ------------------
Total expenses 44 46 46
------------------ ------------------ ------------------
Income before income taxes 3 1 1
Provision for income taxes (benefit) (4) -- --
------------------ ------------------ ------------------
Net income 7% 1% 1%
================== ================== ==================
10
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
The Company recorded net income for fiscal 1997 of $1,727,000, compared to
net income of $201,000 for fiscal 1996. Pre-tax operating income increased from
$228,000 for fiscal 1996 to $767,000 for fiscal 1997. The improvement in pre-tax
operating income resulted from continued sales growth, strong gross margins and
expenses that increased at less than the rate of sales growth.
Net sales increased by just under 10%, from approximately $24.0 million for
fiscal 1996 to approximately $26.2 million for fiscal 1997. Same-store sales
increased by the same amount, since all store locations have been open for more
than one year. The continued growth in sales resulted from:
. A broader and more consistent selection of living plants and
related products, and
. The "10/th/ Anniversary" promotion featuring the introduction
of over 70 new living plant products.
Gross profit increased from approximately $11.2 million for fiscal 1996 to
approximately $12.4 million for fiscal 1997. Gross margin (gross profit as a
percentage of net sales) was 47% for the third consecutive year; therefore, the
increase in gross profit was a direct result of the growth in sales.
Operating expenses increased by 9% to approximately $7.3 million for fiscal
1997 from approximately $6.8 million for fiscal 1996. The increase was primarily
attributable to the costs associated with the enhanced merchandise mix, special
"10/th/ Anniversary" promotion, and continuing to provide outstanding customer
service to a larger number of customers.
Occupancy expenses decreased by 4% to approximately $2.8 million for fiscal
1997 from approximately $2.9 million for fiscal 1996. The decrease was due to
renegotiation of certain retail store leases that resulted in lower rent
payments and a one-time income statement credit of $113,000, and to the
Company's purchase, in December 1996, of one retail store that had previously
been leased.
Advertising expenses increased by 10% to $1,261,000 for fiscal 1997
from $1,149,000 for fiscal 1996. The increase was primarily the result of
increased newspaper advertising rates, and to costs associated with the special
"10th Anniversary" promotion.
Other expenses include depreciation and amortization, gains on sales of
properties, and net interest expense (income). Other expense increased from
$147,000 for fiscal 1996 to $248,000 for fiscal 1997 due to:
. Gains on sales of properties recognized during fiscal 1996 that did not
reoccur in 1997, partially offset by
. An increase in net interest income resulting from higher levels of
available cash during fiscal 1997 compared to fiscal 1996.
11
The Company recorded an income tax benefit of $960,000 for fiscal 1997.
This credit resulted from (1) utilization of net operating loss carryforwards
generated in prior years, and (2) a change in the valuation allowance for
deferred tax assets. [See Note 7 to Financial Statements]
Management has determined that it is more likely than not that the
Company's deferred tax assets will be realized; therefore, no valuation
allowance is necessary as of September 30, 1997. 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. Positive evidence considered include the Company's
history of increasingly profitable operations, and the availability of its
existing Net Operating Loss (NOL) carryforwards which expire in 2009 and 2010.
The adjustment to the deferred tax asset valuation allowance means that
future results of operations will reflect income tax expense or benefits, as
appropriate. Due to the existence of valuation allowances for the deferred tax
assets, results of operations for the fiscal years ending September 30, 1997,
1996 or 1995 did not include such income tax expense or benefits. Therefore,
comparison of future results of operations on an after-tax basis to those of
fiscal 1997, 1996 or 1995 will not be meaningful.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
The Company recorded net income for fiscal 1996 of $201,000, compared to
net income of $156,000 for fiscal 1995. The improvement in operating results was
attributable to improved sales from the Company's merchandising programs and in-
store visual marketing.
Net sales increased by 6% from approximately $22.5 million for fiscal 1995
to approximately $24.0 million for fiscal 1996. Same-store net sales increased
by the same amount, since all sixteen locations have been in operation for more
than one year. The increase was primarily attributable to favorable consumer
response to the Company's new:
. Merchandising programs, which are designed to consistently offer quality
living plants and related products superior to those of its competitors,
and its
. In-store visual marketing programs, designed to improve customer traffic
flow and enhance the presentation of Calloway's products.
Gross profit increased from approximately $10.6 million for fiscal 1995 to
approximately $11.2 million for fiscal 1996. Gross margin (gross profit as a
percentage of net sales), was 47% for both fiscal 1996 and fiscal 1995. The
increase in gross profit was due to the increase in net sales.
Operating expenses increased by 7% to approximately $6.8 million for fiscal
1996 from approximately $6.3 million for fiscal 1995. The increase was
attributable to costs of the new merchandising programs and in-store visual
marketing.
12
Occupancy expenses decreased by 1% to approximately $2.9 million for fiscal
1996 from approximately $3.0 million for fiscal 1995. The decrease was due to
changes in the computation of deferred rent for certain leases.
Advertising expenses increased by 9% to $1,149,000 for fiscal 1996 from
$1,054,000 for fiscal 1995. The increase was primarily the result of increased
newspaper advertising rates, and to costs associated with the in-store visual
marketing programs.
Other expenses include depreciation and amortization, gains on sales or
properties, and net interest expense (income). Other expenses decreased from
$441,000 for fiscal 1995 to $147,000 for fiscal 1996 due to:
. An increase in net interest income resulting from higher levels of
available cash, coupled with the absence of any long-term debt, and
. Gains on sales of properties, and lower depreciation expenses during
1996.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities totaled $1,320,000 for fiscal
1997, an improvement from cash flows provided by operations totaling $575,000
for fiscal 1996. The increase was primarily attributable to the improvement in
pre-tax operating income.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used by investing activities totaled $1,973,000 for fiscal 1997,
compared to cash flows provided by investing activities of $667,000 for fiscal
1996. During fiscal 1997, the Company purchased one retail store that had
previously been leased, purchased a wholesale nursery production facility, and
purchased computer hardware and software for its next-generation merchandising
information system. These investments were partially financed by financial
institutions. [See "Cash Flows from Financing Activities"]
The Company has one new prototype retail store under construction in Fort
Worth, Texas. Based, in part, on the results of that new prototype retail store,
the Company intends to open additional new retail stores. Also, the Company may,
over the next several years, relocate some retail stores as their leases expire.
13
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows provided by financing activities totaled $1,983,000 for fiscal
1997, as compared to $70,000 for fiscal 1996. The Company raised $83,000 by
issuance of common stock to the Calloway's Nursery, Inc. Stock Purchase Plan
("Stock Purchase Plan"). [See Note 11 to Financial Statements] In addition, the
Company received approximately $1.9 million from long-term financing from
financial institutions to (1) acquire one retail store that had previously been
leased, (2) acquire a wholesale nursery production facility, and (3) provide
funds for other asset acquisitions, including the new prototype retail store
currently under construction. [See "Cash Flows from Investing Activities"]
Management believes that the cash flows from operations and existing lines
of credit are sufficient to meet the Company's working capital needs.
The Company has a credit facility from a financial institution in place for
completion of its new prototype retail store under construction in Fort Worth,
Texas, and a commitment from that same financial institution to provide
permanent financing for that retail store.
SEASONALITY
The Company's business is seasonal. Sales and net income are typically
highest during the third fiscal quarter, which includes the spring selling
season the period during which most gardening is done in the Dallas-Fort Worth
area. Gardening activity in the Dallas-Fort Worth area usually declines after
July 1, and sales remain relatively low throughout the summer season. Sales are
typically lowest during the fourth fiscal quarter, which includes the summer
season. The Company typically incurs higher net losses during the first fiscal
quarter, since profit margins on Christmas merchandise are lower than on the
Company's other merchandise. The second fiscal quarter is somewhat dependent on
weather patterns in a particular year, with an earlier start to warmer spring
weather tending to increase sales and net income.
14
The following table sets forth the Company's unaudited selected financial
data (amounts in thousands, except for percentages):
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended (unaudited)
- -----------------------------------------------------------------------------------------------------------------------
December 31 March 31 June 30 September 30
--------------------- ---------------- ---------------- --------------------
- -----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1997:
- --------------------------------------
Net sales
Amount for each quarter $ 4,261 $5,303 $13,108 $3,573
Quarter as a percentage of the entire
year 16% 20% 50% 14%
Net income (loss)
Amount for each quarter ($1,083) ($108) $ 2,689 $ 229
FISCAL YEAR ENDED SEPTEMBER 30, 1996:
- --------------------------------------
Net sales
Amount for each quarter $ 4,164 $4,223 $12,347 $3,225
Quarter as a percentage of the entire
year 17% 18% 52% 13%
Net income (loss)
Amount for each quarter ($915) ($752) $ 2,686 ($818)
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997 the FASB issued Statement of Financial Accounting
Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS 128 simplifies the
standards for computing earnings per share ("EPS") previously found in APB
Opinion No. 15, Earnings Per Share, ("APB 15"), and make them comparable to
international EPS standards. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB 15. SFAS 128 also
requires presentation of both basic and diluted EPS on the face of the income
statement for entities with complex capital structures and a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. SFAS 128 requires restatement of
all prior-period EPS data presented. The Company is currently evaluating SFAS
128; however, management does not believe that SFAS 128 will have a material
impact on the financial statements of the Company.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report: Page
- -------------------------------------------------------- ----
FINANCIAL STATEMENTS:
Report of Independent Accountants - Coopers & Lybrand L.L.P. F-1
Consolidated Balance Sheets - September 30, 1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended September 30, 1997,
1996 and 1995 F-3
Consolidated Statements of Cash Flows - Years Ended September 30, 1997,
1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
September 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES
Schedule
--------
2 Valuation and Qualifying Accounts S-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with regard to executive officers is
included in Part I of this Report. The other information required by this item
is incorporated by reference from the Company's definitive Proxy Statement for
1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's Proxy Statement.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report: Page
----
(1) Financial Statements:
Report of Independent Accountants - Coopers & Lybrand L.L.P. F-1
Consolidated Balance Sheets - September 30, 1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended September 30,
1997, 1996 and 1995 F-3
Consolidated Statements of Cash Flows - Years Ended September 30,
1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
September 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules:
Schedule
--------
2 Valuation and Qualifying Accounts S-1
(3) Exhibits:
Exhibit No. Description
- ----------- -----------
(3) (a) Restated Articles of Incorporation of the Registrant. (Exhibit
(3)(a))/1/
(b) Form of Bylaws of the Registrant. (Exhibit (3(b))/1/
(c) Amendment to Bylaws Adopted on May 19, 1993. (Exhibit (3(c))/1/
(4) (a) Specimen Stock Certificate. (Exhibit (4)(a)/1/
(b) Form of Shareholder Rights Plan. (Exhibit (4)(b)/1/
(10) (a) Form of Employment Agreement dated July 3, 1991 between the
Registrant and James C. Estill. (Exhibit (10)(a))/1/
(b) Form of Employment Agreement dated July 3, 1991 between the
Registrant and John T. Cosby. (Exhibit (10)(b))/1/
(c) Form of Employment Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(c))/1/
(d) (Left blank intentionally.)
(e) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of James C. Estill and John T. Cosby.
(Exhibit (10)(g))/1/
18
Exhibit No. Description
- ----------- -----------
(10) (f) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(h))/1/
(g) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of Robert E. Glaze and Dr. Stanley Block.
(Exhibit (10)(i))/1/
(j) Management Profit Sharing Bonus Plan for Fiscal Year Ending
September 30, 1998./6/
(k) Mid-Management Profit Sharing Bonus Plan for Fiscal Year Ending
September 30, 1998./6/
(l) Store Management Compensation Plan for Fiscal Year Ending
September 30, 1998./6/
(m) Extension of Employment Agreement between the Registrant and
James C. Estill dated July 2, 1996 (Exhibit (10)(m))/4/
(n) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n))/4/
(o) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o))/4/
(23) (d) Consent of Coopers & Lybrand L.L.P./5/
(27) (a) Financial Data Schedule./5/
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan (Exhibit (28))/2/
(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 (28))/3/
(99) (d) Calloway's Nursery, Inc. 1996 Stock Option Plan (Exhibit A)/5/
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
- --------------------------------------------------------------------------------
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
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.
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, 1995.
4 Incorporated by reference to Amendment No. 1 to the Exhibit shown
in parenthesis to the Company's Form 10-Q Report for the quarter
ended June 30, 1996.
5 Incorporate by reference to the Exhibit shown in parenthesis to
the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders.
6 Filed herewith.
- --------------------------------------------------------------------------------
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALLOWAY'S NURSERY, INC.
By:
/s/ James C. Estill
-------------------
James C. Estill, President and
Chief Executive Officer
/s/ Daniel G. Reynolds
----------------------
Daniel G. Reynolds, Vice President and
Chief Financial Officer
Dated: December 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following on behalf of the company and in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ James C. Estill Director December 18, 1997
- -------------------
James C. Estill
/s/ John T. Cosby Director December 18, 1997
- -----------------
John T. Cosby
/s/ John S. Peters Director December 18, 1997
- ------------------
John S. Peters
/s/ Robert E. Glaze Director December 18, 1997
- -------------------
Robert E. Glaze
/s/ Dr. Stanley Block Director December 18, 1997
- ---------------------
Dr. Stanley Block
20
Report of Independent Accountants
The Board of Directors and Stockholders
Calloway's Nursery, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Calloway's Nursery, Inc. listed in Item 14(a) of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Calloway's
Nursery, Inc. as of September 30, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand, L.L.P.
Fort Worth, Texas
November 10, 1997
F-1
CALLOWAY'S NURSERY, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, September 30,
1997 1996
------------------ ------------------
ASSETS
Cash and cash equivalents $ 3,688 $2,358
Accounts receivable 132 132
Inventories 1,533 985
Deferred income taxes 428 --
Prepaids and other assets 60 86
------- -------
Total current assets 5,841 3,561
Property and equipment, net 5,466 3,947
Goodwill, net of accumulated amortization of
$1,017,000 and $908,000, respectively 1,173 1,282
Deferred income taxes 581 34
Other assets 50 39
------- -------
Total assets $13,111 $ 8,863
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,745 $ 1,454
Accrued expenses 880 634
Current portion of long-term debt 97 --
------- -------
Total current liabilities 2,722 2,088
Deferred rent payable 1,098 1,169
Long-term debt, net of current portion 1,803 --
------- -------
Total liabilities 5,623 3,257
------- -------
Commitments
Shareholders' equity:
Voting convertible preferred stock; par value
$.625 per share; 3,200,000 shares authorized;
no shares issued or outstanding -- --
Preferred stock; par value $.01 per share;
10,000,000 shares authorized; no shares issued or
outstanding -- --
Common stock; par value $.01 per share;
30,000,000 shares authorized; 5,582,364 and
5,392,474 shares issued, respectively; 5,332,364
and 5,142,474 shares outstanding, respectively 55 54
Additional paid-in capital 8,406 8,252
Retained earnings (accumulated deficit) 423 (1,304)
------- --------
8,884 7,002
Less: treasury stock, at cost (250,000 shares) (1,396) (1,396)
------- --------
Total shareholders' equity 7,488 5,606
------- --------
Total liabilities and shareholders' equity $13,111 $ 8,863
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1996 1995
-------------- --------------- ---------------
Net sales $26,245 $23,959 $22,527
Cost of goods sold 13,819 12,748 11,935
------- ------- -------
Gross profit 12,426 11,211 10,592
Operating expenses 7,334 6,750 6,301
Occupancy expenses 2,816 2,937 2,978
Advertising expenses 1,261 1,149 1,054
Special credits -- -- (366)
Other 248 147 441
------- ------- -------
Total expenses 11,659 10,983 10,408
------- ------- -------
Income before income taxes 767 228 184
Provision for income taxes (benefit) (960) 27 28
------- ------- -------
Net income $ 1,727 $ 201 $ 156
======= ======= =======
Weighted average number of common
shares 5,244 5,047 4,870
------- ------- -------
Net income per common share $ 0.33 $ 0.04 $ 0.03
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1996 1995
--------------- --------------- ---------------
Cash flows from operating activities:
Net income $ 1,727 $ 201 $ 156
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation and amortization 381 421 485
Special credits -- -- (366)
Gains on property sales (1) (167) --
Deferred income taxes (975) 27 --
Stock compensation 72 77 74
(Increase) decrease(net of affects from
acquisition) in:
Accounts receivable -- (77) (15)
Inventories (365) 11 582
Prepaid expenses and other assets 15 (7) 269
Increase (decrease) in:
Accounts payable 291 85 (1,941)
Accrued expenses 246 (34) (176)
Deferred rent payable (71) 38 120
------- ------ -------
Net cash flows provided by (used for) operating
activities 1,320 575 (812)
------- ------ -------
Cash flows from investing activities:
Additions to property and equipment (1,216) (221) (17)
Purchase of wholesale nursery production facility (758) -- --
Proceeds from property sales 1 888 1,164
Other -- -- 1
------- ------ -------
Net cash flows provided by (used for) investing
activities (1,973) 667 1,148
------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock 83 70 105
Payable to bank -- -- (279)
Proceeds from issuance of long-term debt 1,933 -- --
Repayments of long-term debt (33) -- (864)
------- ------ -------
Net cash flows provided by (used for)
financing activities 1,983 70 (1,038)
------- ------ -------
Net increase (decrease) in cash and cash equivalents 1,330 1,312 (702)
Cash and cash equivalents at beginning of period 2,358 1,046 1,748
------- ------ -------
Cash and cash equivalents at end of period $ 3,688 $2,358 $ 1,046
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest 61 3 53
Income taxes -- -- (290)
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CALLOWAY'S NURSERY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Additional Retained
Common Stock Paid-in Capital Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
------------------- ---------------- ----------- ---------- ---------
Balance as of September 30, 1994 5,044 $50 $7,930 $(1,661) $(1,396) $4,923
Issuance of common stock 160 2 177 -- -- 179
Net income -- -- -- 156 -- 156
------- --- ------ ------- ------- ------
Balance as of September 30, 1995 5,204 52 8,107 (1,505) (1,396) 5,258
Issuance of common stock 188 2 145 -- 147
Net income -- -- -- 201 -- 201
------- --- ------ ------- ------- ------
Balance as of September 30, 1996 5,392 54 8,252 (1,304) (1,396) 5,606
Issuance of common stock 190 1 154 -- -- 155
Net income -- -- -- 1,727 -- 1,727
------- --- ------ ------- ------- ------
Balance as of September 30, 1997 5,582 $55 $8,406 $ 423 $(1,396) $7,488
======= === ====== ======= ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CALLOWAY'S NURSERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
Calloway's Nursery, Inc. (the "Company") is engaged in the retail nursery
business. The Company opened its first three retail stores in April 1987.
The Company derives 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. As of September 30, 1997, all fifteen of its retail
stores were located in the Dallas-Fort Worth area; thus, economic, weather and
other circumstances that may exist from time-to-time in the Dallas-Fort Worth
area can have a significant impact on the Company's results of operations.
During 1997, the Company formed two wholly-owned subsidiaries, Miller Plant
Farms, Inc. and Reynolds Land, Inc. Miller Plant Farms is the Company's
wholesale nursery production facility, and Reynolds Land, Inc. holds certain
real estate assets and related indebtedness. All significant intercompany
accounts and transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue recognition - The Company recognizes revenue when the customer
takes possession of the merchandise.
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
Pre-opening expenses - Pre-opening expenses, which consist primarily of
labor, supplies and occupancy costs incurred prior to each new retail store's
opening and promotional costs incurred during the grand opening period, are
expensed as incurred.
F-6
Earnings per share - Net income (loss) per common share is based upon
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.
Income taxes - In February 1992, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 mandates the liability
method of computing deferred income taxes. One of the principal differences from
the deferred method is that changes in tax rates and laws are reflected in
income from continuing operations in the period such changes are enacted; under
the deferred method such changes were reflected over time, if at all.
Intangibles - Effective August 1988, the Company recorded goodwill in
the amount of $2,471,000 as a result of "push-down" accounting used to record a
significant change in ownership as of that date. Goodwill has been reduced by
the tax benefit of $281,000 related to the utilization of preacquisition net
operating loss carryforwards for the year ended January 27, 1991. No retroactive
restatement of the Company's financial statements related to adjustment of
goodwill amortization is reflected in the accompanying financial statements
since the effect of such adjustments would not be material to the financial
statements of the Company. Goodwill is being amortized on a straight-line basis
over 20 years. At each balance sheet date, management assesses whether there has
been a permanent impairment in the value of goodwill based on undiscounted
future cash flows. Management believes no impairment has occurred.
Cash equivalents - For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Stock Based Compensation - The Company sponsors a stock-based compensation
plan for its employees and directors. In 1995, the FASB issued SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully adopted
by the Company, would have changed the method the Company applies in recognizing
the cost of its stock-based compensation. Adoption of the cost recognition
provisions of SFAS 123 is optional, and the Company has elected the pro forma
disclosure provisions for its financial statements. These pro forma disclosures
show the effect on the Company's earnings and earnings per share as if the
Company adopted the cost recognition provisions of SFAS 123. [See Note 10]
F-7
Recent Accounting Pronouncements - In February 1997 the FASB issued Statement of
Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion No. 15, Earnings Per Share, ("APB 15"), and make them
comparable to international EPS standards. SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB 15. SFAS
128 also requires presentation of both basic and diluted EPS on the face of the
income statement for entities with complex capital structures and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. SFAS 128
requires restatement of all prior-period EPS data presented. The Company is
currently evaluating SFAS 128; however, management does not believe that SFAS
128 will have a material impact on the financial statements of the Company.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The amount of the valuation allowance related to deferred tax assets
at September 30, 1997 has been estimated based on the weight of available
evidence at September 30, 1997. Such estimate could change in the future based
on the occurrence of one or more future events.
Reclassification - Certain prior year data has been reclassified to conform
to the current presentation. The reclassification had no effect on previously
reported net income or net cash flows.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in
thousands):
September 30, September 30,
1997 1996
-------------------- --------------------
Money market fund with an annualized
yield of 5.40% as of September 30, 1997 $3,546 $2,138
Demand deposit accounts 121 203
Petty cash 21 17
------ ------
$3,688 $2,358
====== ======
F-8
NOTE 5 - INVENTORIES
Inventories consist of the following (amounts in thousands):
September 30, September 30,
1997 1996
-------------------- --------------------
Finished goods $1,197 $ 985
Work in process 294 --
Supplies 42 --
------ -----
$1,533 $ 985
====== =====
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
September 30, September 30,
1997 1996
-------------------- --------------------
Land $ 2,183 $ 1,746
Land improvements 368 369
Leasehold improvements 667 658
Buildings 2,132 1,369
Furniture, fixtures and equipment 1,972 1,444
Vehicles 377 334
Less: accumulated depreciation and amortization (2,233) (1,973)
------- -------
$ 5,466 $ 3,947
======= =======
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
September 30, September 30,
1997 1996
-------------------- --------------------
Accrued salaries and related taxes $ 138 $ 101
Accrued bonuses 238 59
Accrued property taxes 313 318
Accrued sales and use taxes 94 93
Other 97 63
----- -----
$ 880 $ 634
===== =====
F-9
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
September 30, September 30,
1997 1996
-------------------- --------------------
Revolving line of credit (a) $ -- $ --
Notes payable - financial institutions (b), (c), (d)
$1,874 --
Other 26 --
------ -----
1,900 --
Less: amounts due within one year (97) --
$1,803 $ --
====== =====
(a) In September 1995 the Company entered into a revolving line of credit
arrangement with a bank which matures on April 1, 1998, and is
collateralized by inventory, accounts receivable and certain real
property. The line of credit was established to supplement sources
available to meet the Company's seasonal working capital needs. No
amounts were outstanding under the line of credit at September 30, 1997
or 1996. The interest rate is variable (9.5% at September 30, 1997).
(b) In December 1996 the Company entered into a note payable to a financial
institution. At September 30, 1997 the outstanding balance was
$536,000. The note is collateralized by certain real estate and
requires payments of approximately $86,000 annually for a term of ten
years. The interest rate is variable (9.25% at September 30, 1997).
(c) In July 1997 a wholly-owned subsidiary of the Company entered into a
note payable to a financial institution. At September 30, 1997 the
outstanding balance was $997,000. The note is collateralized by certain
real estate and requires payments of approximately $120,000 annually
for a term of fifteen years. The interest rate is variable (9.125% at
September 30, 1997).
(d) In July 1997 the Company entered into a note payable to a financial
institution. At September 30, 1997 the outstanding balance was
$341,000. The note is collateralized by certain real estate and
requires payments of approximately $52,000 annually for a term of ten
years. The interest rate is variable (9.2% at September 30, 1997).
F-10
Maturities of long-term debt are as follows (amounts in thousands):
September 30,
1997
--------------------
1998 $ 97
1999 108
2000 118
2001 126
2002 141
Thereafter 1,310
------
$1,900
======
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At September
30, 1997, the Company has net operating loss carryforwards of approximately
$1,038,000 for income tax purposes, which will expire in 2009 and 2010 if not
used.
Components of the provision for income taxes before extraordinary item
consist of the following (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1996 September 30, 1995
-------------------- -------------------- --------------------
Current (benefit) expense:
Federal $ 15 $ -- $28
State -- -- --
Total current 15 -- 28
----- ---- ---
Deferred (benefit) expense:
Federal (879) 27 --
State (96) -- --
Total deferred (975) 27 --
----- ---- ---
----- ---- ---
Total provision $(960) $ 27 $28
====== ==== ===
F-11
The differences between the Company's effective tax rate and the federal
statutory tax rate of 34% for the fiscal years ended September 30, 1997, 1996
and 1995 relate primarily to goodwill amortization, which is not deductible for
tax purposes, and to changes in the valuation allowance. The following is an
analysis of such differences (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1996 September 30, 1995
-------------------- -------------------- --------------------
Income tax expense (benefit) at statutory rate
$ 261 $ 78 $ 53
State income tax, net of federal benefit 26 -- 8
Amortization of goodwill 37 37 37
Tax-exempt interest income -- -- (10)
Other, net 31 26 3
Valuation allowance (1,315) (114) (63)
------- ----- ----
Total income tax expense (benefit) $ (960) $ 27 $ 28
======= ===== ====
Effective tax rate (125%) 12% 15%
Significant components of the Company's deferred tax assets and
liabilities as of September 30, 1997 and 1996 are as follows (amounts in
thousands):
September 30, September 30,
1997 1996
------------- -------------
Deferred tax liabilities:
Depreciation $ (18) $ (9)
------ -------
Total deferred tax liabilities (18) (9)
------ -------
Deferred tax assets:
Deferred rent 397 432
Inventory costs capitalized for tax purposes 25 24
Net operating loss carryforward 383 659
AMT credit carryforward 19 27
Assets marked to market 203 203
Other -- 13
------ -------
Total deferred tax assets 1,027 1,358
------ -------
Less: valuation allowance -- (1,315)
------ -------
Net deferred tax asset $1,009 $ 34
====== =======
F-12
Management has determined that it is more likely than not that the
Company's deferred tax assets will be realized; therefore, no valuation
allowance is necessary as of September 30, 1997. 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. Positive evidence considered include the Company's
history of increasingly profitable operations, and the availability of its
existing Net Operating Loss (NOL) carryforwards which expire in 2009 and 2010.
The adjustment to the deferred tax asset valuation allowance means that
future results of operations will reflect income tax expense or benefits, as
appropriate. Due to the existence of valuation allowances for the deferred tax
assets, results of operations for the fiscal years ending September 30, 1997,
1996 or 1995 did not include such income tax expense or benefits. Therefore,
comparison of future results of operations on an after-tax basis to those of
fiscal 1997, 1996 or 1995 will not be meaningful.
NOTE 8 - SHAREHOLDERS' EQUITY
During 1996 and 1997, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 11), receiving proceeds
as follows:
Year Ended Year Ended
September 30, September 30,
1997 1996
------------- -------------
Number of shares issued 189,890 188,018
Proceeds $155,000 $147,000
NOTE 9 - 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 can not participate in the discounted purchase of common stock. The
Rights are redeemable at any time at $.01 per Right.
F-13
NOTE 10 - 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 957,000 shares of common stock have been reserved for issuance
under the Company's stock option plans.
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. No options were
granted during the fiscal year ended September 30, 1996. Had compensation
expense been determined for stock options granted in 1997 based on the "fair
value" at grant dates provided for in SFAS 123, the Company's pro forma net
income and earnings per share for 1997 and 1996 would approximate the amounts
below (amounts in thousands, except per share amounts):
Year Ended Year Ended
September 30, September 30,
1997 1996
------------- -------------
Net income $1,474 $201
Earnings per share $ .28 $.04
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 for stock
options granted in 1997:
Year Ended
September 30,
1997
-------------
Weighted average expected life (years) 10
Expected volatility 80.73%
Expected dividends $ --
Risk free interest rate 6.58%
Weighted average fair value of options
granted $ .922
F-14
The following tables summarizes activity in the stock option plans for the
three years ended September 30, 1997:
Weighted
Average
Shares Exercise Price
------------ ----------------
October 1, 1994 648,800 5.769
Granted 652,800 1.001
Exercised -- --
Forfeited 642,800 5.765
Expired -- --
------- -----
September 30, 1995 658,800 1.055
Granted -- --
Exercised -- --
Forfeited 36,300 1.000
Expired -- --
------- -----
September 30, 1996 622,500 1.059
Granted 326,000 1.107
Exercised -- --
Forfeited 7,000 1.094
Expired -- --
------- -----
September 30, 1997 941,500 1.075
======= =====
Exercisable, September 30, 1997 877,800 1.073
======= =====
Exercisable, September 30, 1996 616,750 1.059
======= =====
The following tables summarizes information regarding stock options
outstanding at September 30, 1997:
Weighted Weighted
Average Weighted Average
Range of Options Remaining Average Options Exercise
Exercise Prices Outstanding Life Exercise Prices Exercisable Prices
- ------------------------------------- --------------- ----------------- ------------------ ---------------
$0.875 to $1.188 934,500 9 $1.037 870,800 $1.032
$1.189 to $6.125 7,000 4 $6.125 7,000 $6.125
------- ------- ------ ------- ------
941,500 9 $1.075 877,800 $1.073
======= ======= ====== ======= ======
F-15
NOTE 11 - STOCK PURCHASE PLAN
In February 1992, the Company's Board of Directors and shareholders adopted
a Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is
designed to provide employees and directors with the opportunity to acquire
ownership interest in the Company and thereby provide those who will be
responsible for the continued growth of the Company with a more direct concern
about its welfare and a common interest with the Company's other stockholders.
The Stock Purchase Plan is not subject to the Employee Retirement Income
Security Act of 1974.
All employees who have attained the age of majority in the state of their
residence and have completed 60 days of full-time employment with the Company,
and all members of the Board of Directors, are eligible to participate in the
Stock Purchase Plan. Participants may elect to have payroll deductions of a
maximum of 10% of their compensation each pay period. The Company matches up to
100% of such deductions based upon the participant's years of continuous
participation in the Stock Purchase Plan. Funds deducted from a participant's
pay and contributions made by the Company to the Stock Purchase Plan on behalf
of a participant (all of which is invested for the benefit of the participant)
are taxable to the participant as wages or compensation for services.
NOTE 12 - INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with members of the Board
which, to the extent permitted under applicable law, indemnify such persons
against all expenses, judgments, fines and penalties incurred in connection with
the defense or settlement of actions brought against them by reason of the fact
that they are or were directors or officers of the Company or assumed certain
responsibilities while directing the Company.
In addition, the indemnity agreements between two officers of the Company
and the Company provide additional indemnification for all liabilities and
expenses in respect of certain lease obligations of the Company that have been
personally guaranteed by such officers. If the Company fails to indemnify either
of the officers as required in the indemnity agreement or if either of these
officers are terminated for any reason as an employee of the Company, the
Company will provide the terminated officer with one or more bank letters of
credit to cover an aggregate of $4,000,000 of such liability; however, the
Company shall not be obligated to provide letters of credit aggregating more
than $4,000,000 to these two officers.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
As of September 30, 1997 the Company had twelve retail store locations
under noncancellable operating leases. The leases expire in various years
through 2012. 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.
F-16
Future minimum lease payments under noncancellable operating leases as of
September 30, 1997 are as follows (amounts in thousands):
Fiscal Year Ending
------------------
1998 $ 2,074
1999 1,800
2000 1,836
2001 1,886
2002 1,765
Thereafter 6,413
-------
$15,774
=======
Rental expense for operating leases during the fiscal years ended
September 30, 1997, 1996 and 1995 were approximately $2.3 million, $2.3 million,
and $2.1 million, respectively.
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the Company's potential
liability in all pending actions and claims, in the aggregate, is not material.
NOTE 14 - SPECIAL CREDITS
During the fourth quarter of fiscal 1995, the Company settled
substantially all of its obligations related to a closed store location. A
credit of $366,000 was recorded, reflecting the reversal of certain accruals
which were no longer required. Such credit is reflected as a special credit in
the accompanying statements of operations for 1995.
NOTE 15 - WHOLESALE NURSERY PRODUCTION FACILITY
In July 1997 the Company acquired an established wholesale nursery
production facility near Tyler, Texas. The facility will be used primarily to
produce living plants to the Company's exacting specifications for sale at its
retail store locations, to supplement the procurement of merchandise from its
existing group of suppliers. The purchase was financed, in part, by a mortgage
loan from a financial institution. [See Note 6]
F-17
NOTE 16 - SELECTED QUARTERLY DATA (UNAUDITED)
Amounts (except share data) are expressed in thousands:
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- ---------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- ------- ------- ------- ------- ------- ------ -------
Net sales $ 4,261 $4,164 $5,303 $4,223 $13,108 $12,347 $3,573 $3,225
Gross profit 1,773 1,878 2,661 1,932 6,254 6,069 1,738 1,332
Net income (loss) $(1,083) $ (915) $ (108) $ (752) $ 2,689 $ 2,686 $ 229 $ (818)
Net income (loss) per share $ (.21) $ (.18) $ (.02) $ (.15) $ .51 $ .53 $ .04 $ (.16)
NOTE 17- SIGNIFICANT FOURTH QUARTER TRANSACTIONS
In the fourth quarter of 1997 the Company eliminated the deferred tax asset
valuation allowance resulting in a deferred tax benefit of $975,000.
NOTE 18 - SUBSEQUENT EVENT
In October 1997 the Company purchased land and began construction of its
sixteenth retail store location. The purchase was financed with an interim
construction loan with a financial institution. That interim construction loan
will also provide funds to complete construction of the new retail store. The
Company has obtained a commitment from the financial institution to provide
permanent financing with a long-term note payable.
F-18
CALLOWAY'S NURSERY, INC.
SCHEDULE 2
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
Column A Column B Column C Column D Column E
----------- ---------- ---------- ---------- ---------
Balance at Additions Balance
Beginning Charged to at End
Description of Period Expense Deductions of Period
----------- ---------- ---------- ---------- ---------
Fiscal year ended September 30, 1995:
Valuation allowance - deferred tax $1,492 $ -0- $ 63 $1,429
asset
Fiscal year ended September 30, 1996:
Valuation allowance - deferred tax $1,429 $ -0- $ 114 $1,315
asset
Fiscal year ended September 30, 1997:
Valuation allowance - deferred tax $1,315 $ -0- $1,315 $ 0
asset
S-1
CALLOWAY'S NURSERY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Index to Exhibits
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ------------
(3) (a) Restated Articles of Incorporation of the Registrant.
(Exhibit (3)(a)) /1/
(b) Form of Bylaws of the Registrant. (Exhibit (3(b)) /1/
(c) Amendment to Bylaws Adopted on May 19, 1993.
(Exhibit (3(c)) /1/
(a) Specimen Stock Certificate. (Exhibit (4)(a) /1/
(b) Form of Shareholder Rights Plan. (Exhibit (4)(b) /1/
(10) (a) Form of Employment Agreement dated July 3, 1991 between
the Registrant and James C. Estill. (Exhibit (10)(a)) /1/
(b) Form of Employment Agreement dated July 3, 1991 between the
Registrant and John T. Cosby. (Exhibit (10)(b)) /1/
(c) Form of Employment Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(c)) /1/
(d) (Left blank intentionally.)
(e) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of James C. Estill and John T. Cosby.
(Exhibit (10)(g)) /1/
(f) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and John S. Peters. (Exhibit (10)(h)) /1/
(g) Form of Indemnity Agreement dated July 3, 1991 between the
Registrant and each of Robert E. Glaze and Dr. Stanley Block.
(Exhibit (10)(i)) /1/
(j) Management Profit Sharing Bonus Plan for Fiscal Year Ending
September 30, 1998. /6/
(k) Product Line Management Profit Sharing Bonus Plan for Fiscal
Year Ending September 30, 1998. /6/
(l) Store Management Compensation Plan for Fiscal Year Ending
September 30, 1998. /6/
(m) Extension of Employment Agreement between the Registrant and
James C. Estill dated July 2, 1996 (Exhibit (10)(m)) /4/
(n) Extension of Employment Agreement between the Registrant and
John T. Cosby dated July 2, 1996 (Exhibit (10)(n)) /4/
(o) Extension of Employment Agreement between the Registrant and
John S. Peters dated July 2, 1996 (Exhibit (10)(o)) /4/
CALLOWAY'S NURSERY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Index to Exhibits
Sequentially
Numbered
Exhibit No. Description Page
- ----------- ----------- ------------
(23) (d) Consent of Coopers & Lybrand L.L.P. /5/
(27) (a) Financial Data Schedule. /5/
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan
(Exhibit (28)) /2/
(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 (28)) /3/
(99) (d) Calloway's Nursery, Inc. 1996 Stock Option Plan
(Exhibit (10)(p)) /5/
- --------------------------------------------------------------------------------
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
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.
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, 1995.
4 Incorporated by reference to Amendment No. 1 to the Exhibit shown in
parenthesis to the Company's Form 10-Q Report for the quarter ended June
30, 1996.
5 Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
6 Filed herewith.
- --------------------------------------------------------------------------------