UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, including zip code, of principal executive
offices and Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).
YES NO X
6,953,551 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of May 13, 2004.
CALLOWAY'S NURSERY, INC.
FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS OR INFORMATION 3
PART I - FINANCIAL INFORMATION
Item 1
Index to Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3
Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4
Controls and Procedures 19
PART II - OTHER INFORMATION
Items 1-6 20
-2-
FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-Q Report contains forward-looking statements. The
Company is including this 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.
The Company's expected future results, products and service
performance or other non-historical facts are forward-looking
and reflect management's current perspective of existing
trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such
risks and uncertainties include, among others, the seasonality
of its business, geographic concentration, the impact of
weather and other growing conditions, general economic
conditions, the ability to manage growth, the impact of
competition, the ability to obtain future financing, 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 these factors as well as the specific factors
discussed with each forward-looking statement in this report
and disclosed in the Company's filings with the Securities and
Exchange Commission as such factors, in some cases, have
affected, and in the future (together with other factors)
could affect, 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.
-3-
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
ASSETS
March 31, September 30, March 31,
2004 2003 2003
------- ------- -------
Cash and cash equivalents $ 2,335 $ 1,921 $ 787
Accounts receivable 726 232 969
Inventories 5,796 4,802 5,921
Prepaids and other assets 137 19 122
Deferred income taxes, current -- -- 1,226
Current assets of discontinued
operations -- -- 2,238
------- ------- -------
Total current assets 8,994 6,974 11,263
Property and equipment, net 10,605 10,841 11,113
Goodwill, net -- -- 631
Deferred income taxes -- -- 1,568
Other assets 167 182 197
------- ------- -------
Total assets $19,766 $17,997 $24,772
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 6,046 $ 2,919 $ 5,231
Accrued expenses 2,035 2,368 3,372
Current portion of long-term debt 472 474 390
Non-voting preferred stock, with
mandatory redemption provisions 3,185 2,949 --
Current liabilities of
discontinued operations -- -- 237
------- ------- -------
Total current liabilities 11,738 8,710 9,230
Deferred rent payable 563 641 720
Long-term debt, net of current
portion 6,488 6,695 7,191
------- ------- -------
Total liabilities 18,789 16,046 17,141
Commitments and contingencies
Non-voting preferred stock, with
mandatory redemption provisions -- -- 2,743
Shareholders' equity:
Common stock 72 72 69
Additional paid-in capital 10,221 10,201 10,043
Accumulated deficit (7,919) (6,926) (3,828)
------- ------- -------
2,374 3,347 6,284
Less: Treasury stock, at cost (1,397) (1,396) (1,396)
------- ------- -------
Total shareholders' equity 977 1,951 4,888
------- ------- -------
Total liabilities and
shareholders' equity $19,766 $17,997 $24,772
======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share amounts)
Six Months Ended Three Months Ended
March 31, March 31,
------------------- ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net sales $21,546 $20,084 $10,597 $9,236
Cost of goods sold 11,329 11,193 5,305 4,737
------- ------- ------- -------
Gross profit 10,217 8,891 5,292 4,499
------- ------- ------- -------
Operating expenses 7,701 8,315 3,806 4,117
Advertising expenses 905 983 332 428
Occupancy expenses 1,720 1,621 937 835
Depreciation and 244 306 117 129
amortization
Interest expense 578 405 292 205
Interest income (4) (7) -- (3)
------- ------- ------- -------
Total expenses 11,144 11,623 5,484 5,711
------- ------- ------- -------
Loss from continuing
operations before income taxes (927) (2,732) (192) (1,212)
Income tax expense (benefit) 66 (1,042) -- (440)
------- ------- ------- -------
Loss from continuing operations (993) (1,690) (192) (772)
------- ------- ------- -------
Discontinued operations:
Loss from discontinued
operations (net of tax) -- (576) -- (190)
Gain on disposal of
discontinued operations
(net of tax) -- 420 -- 420
------- ------- ------- -------
-- (156) -- 230
------- ------- ------- -------
Net loss (993) (1,846) (192) (542)
Accretion of preferred stock -- (205) -- (102)
------- ------- ------- -------
Net loss attributable to
common shareholders ($993) ($2,051) ($192) ($644)
======= ======= ======= =======
Weighted average number of common shares outstanding -
Basic and diluted 6,959 6,615 6,962 6,663
Net loss per common share - basic and diluted
Loss from continuing ($.14) ($.29) ($.03) ($.13)
operations
Income (loss) from
discontinued operations -- (.02) -- .03
------- ------- ------- -------
Net loss ($.14) ($.31) ($.03) ($.10)
======= ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
March 31,
------------------
2004 2003
------- -------
Cash flows from operating activities:
Net loss ($993) ($1,846)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Loss from discontinued operations
(net of tax) -- 156
Depreciation and amortization 244 306
Accretion of preferred stock included
in interest expense 236 --
Net change in operating assets and
liabilities 1,125 385
------- -------
Net cash provided by (used for)
operating activities 612 (999)
------- -------
Cash flows from investing activities:
Additions to property and equipment (8) (77)
------- -------
Net cash used for investing activities (8) (77)
------- -------
Cash flows from financing activities:
Net proceeds from issuance
(repurchases) of common stock 19 159
Repayments of debt (209) (1,166)
------- -------
Net cash used for financing activities (190) (1,007)
------- -------
Net increase (decrease) in cash and cash
cash equivalents from continuing operations 414 (2,083)
Net increase in cash and cash equivalents
from discontinued operations -- 395
------- -------
Net increase (decrease) in cash and
cash equivalents 414 (1,688)
Cash and cash equivalents at beginning
of period 1,921 2,475
------- -------
Cash and cash equivalents at end of period $ 2,335 $ 787
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-6-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Liquidity and Going Concern
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as
a going concern. The Company incurred a net loss for each of
the fiscal years ended September 30, 2003, 2002 and 2001. In
addition, 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. These
steps have already contributed to substantially improved
results for the three-month and six-month periods ended March
31, 2004. 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 funds. However, there can be no
assurance that these further actions will generate sufficient
funds to redeem the preferred stock by September 2004.
Given this uncertainty, there is substantial doubt about the
Company's ability to continue as a going concern. The
accompanying condensed 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.
2. Basis of Presentation
These interim unaudited condensed consolidated financial
statements were prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). In
management's opinion, all adjustments considered necessary for
a fair presentation of the consolidated financial position at
March 31, 2004, the results of operations for the three-month
and six-month periods ended March 31, 2004 and 2003, and the
cash flows for the six-month periods ended March 31, 2004 and
2003 have been made. Such adjustments are of a normal
recurring nature.
Because of seasonal and other factors, the results of
operations the cash flows for the three-month and six-month
periods ended March 31, 2004 are not necessarily indicative of
expected results of operations and cash flows for the fiscal
year ending September 30, 2004.
-7-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted pursuant to the SEC rules and
regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited
financial statements and related notes for the fiscal year
ended September 30, 2003 included in the Form 10-K covering
such period.
3. Reclassifications
Certain amounts for fiscal 2003 have been reclassified to
conform to the fiscal 2004 presentation of discontinued
operations.
4. Inventories
Inventories consist of finished goods.
5. 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.
The reporting segment follows the same accounting policies
used for the Company's condensed consolidated financial
statements.
-8-
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Stock-Based Compensation
Statement 148
-------------
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 FASB Statement No. 123, Accounting
for Stock-Based Compensation to stock-based employee
compensation (amounts in thousands, except per share amounts):
Six- Three-
Month Month
Period Period
Ended Ended
March 31 March 31
---------------- ----------------
2004 2003 2004 2003
------- ------- ------- -------
Net loss, as reported ($993) ($1,846) ($192) ($542)
Total stock-based employee
compensation expense
determined under fair
value based method for all
awards, net of related
income tax effects -- -- -- --
------- ------- ------- -------
Pro forma net loss ($993) ($1,846) ($192) ($542)
======= ======= ======= =======
Net loss per share - basic and diluted
As reported ($.14) ($.31) ($.03) ($.10)
Pro forma ($.14) ($.31) ($.03) ($.10)
7. Commitments and Contingencies
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 San Antonio market entry. The Affiliate leases have three
year terms. Rental expense under the Affiliate Leases was
$71,000 for each of the six-month periods ended March 31, 2004
and 2003 and $35,000 for each of the three-month periods ended
March 31, 2004 and 2003.
8. Advertising Expenses
The substantial 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.
-9-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Executive-Level Overview
------------------------
The Company achieved improved results of operations for its
second fiscal quarter ended March 31, 2004 (the "March 2004
Quarter"). The Company typically incurs losses for its second
fiscal quarter. For the March 2004 Quarter, the Company had a
pre-tax loss from continuing operations of $0.2 million
compared to a pre-tax loss from continuing operations of $1.2
million for the quarter ended March 31, 2003 (the "March 2003
Quarter").
Year-to-date, the Company achieved a similar improvement. For
the six month period ended March 31, 2004 (the "2004 Six Month
Period"), the Company had a pre-tax loss from continuing
operations of $1.0 million compared to a pre-tax loss from
continuing operations of $2.7 million for the six-month period
ended March 31, 2003 (the "2003 Six Month Period").
Furthermore, the company achieved Cash Flows Provided by
Operating Activities of $0.6 for the 2004 Six Month Period
compared to Cash Flows Used by Operating Activities of $1.0
million for the 2003 Six Month Period.
Results of Operations
---------------------
Introduction
As noted above, the Company disposed of all of its growing
operations in fiscal 2003. Accordingly, the following
discussion is presented as (i) continuing operations and (ii)
discontinued operations.
RESULTS OF OPERATIONS
Continuing Operations
---------------------
Three-month Period Ended March 31, 2004 Compared with Three-
month Period Ended March 31, 2003
Pre-tax loss from continuing operations improved 52% for the
March 2004 Quarter compared to the March 2003 Quarter. The
improvement was primarily attributable to (i) increased sales,
(ii) improved gross margin, and (ii) reduced expenses.
-10-
The following table shows the comparative amounts (in
millions) and percentages of sales for gross profit, total
expenses, and loss from continuing operations before income
taxes:
March 2004 March 2003
Quarter Quarter
---------------- ---------------
Amount % of Amount % of
Sales Sales
------- ------- ------- ------
Sales $10.6 $9.2
Gross profit 5.3 50% 4.5 49%
Total expenses 5.5 52% 5.7 62%
Loss from continuing
operations before
income taxes ($0.2) (2%) ($1.2) (13%)
Sales increased from $9.2 million for the March 2003 Quarter
to $10.6 million for the March 2004 Quarter. There was higher
demand for the Company's plants and gardening-related
merchandise.
Same-store sales increased from $9.0 million for the March
2003 Quarter to $10.1 million for the March 2004 Quarter. The
Company opened two new retail stores, and closed one retail
store, during the March 2004 Quarter.
Gross Profit increased 18%, from $4.5 million for the March
2003 Quarter to $5.3 million for the March 2004 Quarter. Gross
margin improved from 49% for the March 2003 Quarter to 50% for
the March 2004 Quarter. The improvement was primarily
attributable to improved buying practices.
Operating expenses declined 8%. The decline was primarily
attributable to tighter controls over labor and other
operating expenses in the retail stores and administrative
offices.
Occupancy expenses increased 12%. The increase was primarily
attributable to higher real property taxes and the costs of
the two new retail stores opened during the March 2004
Quarter.
Advertising expenses declined 22%. The decline was primarily
attributable to the alignment of spending on advertising to
better match seasonal patterns of consumer demand.
Depreciation and amortization declined 29%. Capital
expenditures have been curtailed in recent years. For the
fiscal years ended September 30, 2003, 2002 and 2001, capital
expenditures were $91,000, $204,000 and $248,000,
respectively. Depreciation expense for those same six fiscal
years was $592,000, $748,000 and $783,000, respectively.
Accordingly, many assets are becoming fully depreciated. The
Company intends to continue limiting capital expenditures; it
has no significant capital projects planned for the remainder
of fiscal 2004.
-11-
Interest expense increased 42%. The increase was primarily
attributable to accretion of preferred stock, which was not
recorded as interest expense before July 2003, when the
Company adopted Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity ("Statement
150"). Adoption of Statement of 150 caused (i) the company's
preferred stock to be reclassified as a current liability on
the balance sheets at March 31, 2004 and September 30, 2003,
and (ii) the related accretion on the preferred stock to be
classified as interest expense for the March 2004 Quarter.
Accretion of the preferred stock was a non-cash expense of
$118,000 for the March 2004 Quarter.
There was no income tax expense for the March 2004 Quarter,
compared to income tax benefits of $602,000 for the March 2003
Quarter. The Company recorded a valuation allowance on all of
its deferred tax assets during the fourth quarter of fiscal
2003, and does not currently record income tax expense or
benefits during interim periods, except to the extent that
income taxes are paid and/or income tax benefits are realized.
Six-month Period Ended March 31, 2004 Compared with Six-month
Period Ended March 31, 2003
Pre-tax loss from continuing operations improved 52% for the
2004 Six Month Period compared to the 2003 Six Month Period.
The improvement was primarily attributable to (i) increased
sales, (ii) improved gross margin, and (ii) reduced expenses.
The following table shows the comparative amounts (in
millions) and percentages of sales for gross profit, total
expenses, and loss from continuing operations before income
taxes:
2004 Six Month 2003 Six Month
Period Period
---------------- ---------------
Amount % of Amount % of
Sales Sales
------- ------- ------- ------
Sales $21.5 $20.1
Gross profit 10.2 47% 8.9 44%
Total expenses 11.1 52% 11.6 58%
Loss from continuing
operations before
income taxes ($0.9) (5%) ($2.7) (14%)
Sales increased from $20.1 million for the 2003 Six Month
Period to $21.5 million for the 2004 Six Month Period. There
was higher demand for the Company's plants and gardening-
related merchandise partially offset by lower demand for the
Company's Christmas merchandise. Same-store sales increased
from $19.6 million for the 2003 Six Month Period to $20.8
million for the 2004 Six Month Period.
Gross Profit increased 15%, from $8.9 million for the 2003 Six
Month Period to $10.2 million for the 2004 Six Month Period.
Gross margin improved from 44% for the 2003 Six Month Period
to 47% for the 2004 Six Month Period. The improvement was
primarily attributable to improved buying practices.
Operating expenses declined 7%. The decline was primarily
attributable to tighter controls over labor and other
operating expenses in the retail stores and administrative
offices.
-12-
Occupancy expenses increased 6%. The increase was primarily
attributable to increased real property taxes.
Advertising expenses declined 8%. The decline was primarily
attributable to the alignment of spending on advertising to
better match seasonal patterns of consumer demand.
Depreciation and amortization declined 20%. Capital
expenditures have been curtailed in recent years. For the
fiscal years ended September 30, 2003, 2002 and 2001, capital
expenditures were $91,000, $204,000 and $248,000,
respectively. Depreciation expense for those same six fiscal
years was $592,000, $748,000 and $783,000, respectively.
Accordingly, many assets are becoming fully depreciated. The
Company intends to continue limiting capital expenditures; it
has no significant capital projects planned for the remainder
of fiscal 2004.
Interest expense increased 43%. The increase was primarily
attributable to accretion of preferred stock, which was not
recorded as interest expense before July 2003, when the
Company adopted Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity ("Statement
150"). Adoption of Statement of 150 caused (i) the company's
preferred stock to be reclassified as a current liability on
the balance sheets at March 31, 2004 and September 30, 2003,
and (ii) the related accretion on the preferred stock to be
classified as interest expense for the 2004 Six Month Period.
Accretion of the preferred stock was a non-cash expense of
$236,000 for the 2004 Six Month Period.
Income tax expense was $66,000 for the 2004 Six Month Period
compared to income tax benefits of $1,042,000 for the 2003 Six
Month Period. The Company recorded a valuation allowance on
all of its deferred tax assets during the fourth quarter of
fiscal 2003, and does not currently record income tax expense
or benefits during interim periods, except to the extent that
income taxes are paid and/or income tax benefits are actually
realized. The Company paid $66,000 in state income taxes
during the 2004 Six Month Period.
Discontinued Operations
-----------------------
As noted above, the Company disposed of all of its growing
operations in fiscal 2003. Accordingly, there were no revenues
or expenses from discontinued operations for the March 2004
Quarter or the 2004 Six Month Period. For the March 2003
Quarter and the 2003 Six Month Period, discontinued operations
results were as follows (amounts in thousands):
2003
Six Month March 2003
Period Quarter
-------- ---------
Sales $716 $394
Cost of goods sold 700 394
-------- ---------
Gross profit 16 --
Total expenses 944 290
-------- ---------
Loss before income taxes (928) (290)
Income tax benefit (352) (100)
-------- ---------
Loss from discontinued
operations ($576) ($190)
======== =========
-13-
Financial Condition - Capital Resources and Liquidity
Cash Flows Provided by Operating Activities were $612,000 for
the 2004 Six Month Period Cash Flows Used by Operating
Activities of $999,000 for the 2003 Six Month Period. The
improvement was primarily attributable to the improvement in
income from continuing operations before income taxes.
Cash flows Used for Investing Activities were $8,000 for the
2004 Six Month Period compared to $77,000 for the 2003 Six
Month Period. The decline was primarily attributable to
continued limits on the amount spent on capital expenditures.
The Company has no significant capital projects planned for
the remainder of fiscal 2004.
Cash Flows Used for Financing Activities were $190,000 for the
2004 Six Month Period compared to $1,007,000 for the 2003 Six
Month Period. For the 2003 Six Month Period the Company paid-
off one real estate note payable in addition to its regular
monthly payments of principal and interest on its other long
term debt. For the 2004 Six Month Period the Company only made
its regular monthly payments of principal and interest on its
remaining long term debt.
Cash Flows Used for Discontinued Operations were $-0- for the
2004 Six Month Period compared to Cash Flows Provided by
Discontinued Operations of $0.4 million for the 2003 Six Month
Period. In fiscal 2003 the Company disposed of all of its
growing operations.
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 quarter ending
March 31.
For both fiscal 2004 and 2003 the Company has borrowed from
the Line of Credit during the quarter ending March 31, and
repaid those borrowings during the same quarter. 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 had no amounts outstanding on the line of credit
at March 31, 2004, September 31, 2003, or March 31, 2003, and
does not expect to have any need for borrowings under the line
of credit through its expiration date of May 28, 2004.
The maximum and weighted average amounts borrowed under the
Line of Credit were as follows (amounts in thousands):
Six Three
Month Month
Period Period
Ended Ended
March 31, March 31,
------------- --------------
2004 2003 2004 2003
------ ------ ------ -------
Maximum amount borrowed $1,291 $2,985 $1,291 $2,985
Weighted-average amount
borrowed $244 $772 $487 $1,544
-14-
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 reduction in the
maximum borrowing amount from $3.0 million to $1.5 million,
(ii) an increase in the interest rate from prime to prime plus
2%, and (iii) certain requirements for net sales and net
income. At March 31, 2004 the Company was in compliance with
those requirements for net sales and net income.
The Line of Credit was adequate to support the Company's short
term working capital requirements because: (i) working capital
requirements were lower than in prior years because the
Company disposed of its unprofitable wholesale and growing
operations and instituted tighter controls over expenses,
inventory and capital expenditures, and (ii) seasonal
borrowing needs were substantially lower and of shorter
duration than in previous years. Management believes that it
is likely that the Company will continue to meet the
requirements for net sales and net income provided in the
forbearance agreement.
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. Management does not expect to need to borrow any
funds to support its working capital requirements during the
remainder of the fiscal 2004.
-15-
Contractual Obligations and Commitments
As of March 31, 2004 the Company had the following
contractual obligations (amounts in thousands):
Fiscal Year Ending September 30,
--------------------------------
There-
2004(1) 2005 2006 2007 2008 after Totals
------- ------ ------ ------ ------ ------ -------
Long-term debt
(including current
portion) $ 265 $ 505 $ 542 $ 528 $ 542 $4,578 $ 6,960
Future minimum
lease payments
under noncancellable
operating leases 1,129 2,039 1,195 1,021 681 2,056 8,121
Preferred stock
with mandatory
redemption
provisions(2) 3,420 -- -- -- -- -- 3,420
------ ------ ------ ------ ------ ------ -------
Totals $4,814 $2,544 $1,737 $1,549 $1,223 $6,634 $18,501
====== ====== ====== ====== ====== ====== =======
(1)Amounts for 2004 represent obligations due during the
remainder of fiscal 2004 (six months).
(2)Carrying amount of $3,185 as of March 31, 2004, $2,949 as
of September 30, 2003 and $2,743 as of March 31, 2003.
The Company has outstanding $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 real and
personal property and equipment, to generate funds. However,
there can be no assurance that these further actions will
generate sufficient funds to redeem the preferred stock by
September 2004. Failure to redeem the acquisition preferred
stock at the date such redemption is supposed to be made could
change the status of the holder of the preferred stock. The
change, if any, of that status, on the operations of the
company is not determinable at this time.
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CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
Some assets and liabilities by their nature are subject to
estimates and assumptions. For the Company, those assets and
liabilities include:
- Inventories;
- Deferred income taxes
- Property and equipment;
- 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 March 31, 2004 and September 30,
2003 the Company has recorded a valuation allowance for all of
its deferred tax assets on the weight of available evidence at
those balance sheet dates. 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 future taxable income.
Property and Equipment - The Company reevaluates the propriety
of the carrying amounts of its properties as well as the
amortization periods when events and circumstances indicate
that impairment may have occurred. Recoverability of assets to
be held and used is measured by the comparison of the carrying
amount of an asset to future cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of March 31, 2004 and September
30, 2003 management believes that no impairment has occurred
and that no reduction of the estimated useful lives is
warranted.
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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.
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 (i) other retail nurseries, and
(ii) 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.
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Item 3. 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 risk, nor
does it enter into any transactions in derivative securities
for trading or speculative purposes. As of March 31, 2004, 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 the 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 March 31, 2004 the Company had variable rate debt of $1.8
million, out of total long-term debt of $6.9 million. Holding
other variables, such as debt levels, constant, a one
percentage point increase in interest rates would be expected
to have an estimated impact on pre-tax earnings and cash flows
for next year of $18,000 for the variable-rate debt.
Item 4. Controls 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.
-19-
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K:
A list of the exhibits required by Item 601 of Regulation
S-K and filed as part of this report is set forth in the
Index to Exhibits on page 22, which immediately precedes
such exhibits.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: May 13, 2004
CALLOWAY'S NURSERY, INC.
By /s/ James C. Estill
-------------------
James C. Estill, President and
Chief Executive Officer
By /s/ Daniel G. Reynolds
-------------------
Daniel G. Reynolds, Vice
President and Chief
Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
31(a) [1] Rule 13a-14(a) Certification of the Chief Financial
Officer of Calloway's Nursery, Inc.
31(b) [1] Rule 13a-14(a) Certification of the Chief Executive
Officer of Calloway's Nursery, Inc.
32 [1] Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2003.
[1] Filed with this Report.
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