UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, 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
6,961,890 shares of the Registrant's Common Stock, $.01 par
value, were outstanding as of February 13, 2004.
CALLOWAY'S NURSERY, INC.
FORM 10-Q
DECEMBER 31, 2003
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 17
Market Risk
Item 4
Controls and Procedures 17
PART II - OTHER INFORMATION
Items 1-6 18
-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
December 31, September 30, December 31,
2003 2003 2002
------ ------ ------
Cash and cash equivalents $1,881 $1,921 $2,186
Accounts receivable 90 232 92
Inventories 3,300 4,802 2,695
Prepaids and other assets 78 19 169
Deferred income taxes, current -- -- 1,117
Income taxes receivable -- -- 119
Current assets of discontinued
operations -- -- 3,361
------ ------ ------
Total current assets 5,349 6,974 9,739
------ ------ ------
Property and equipment, net 10,715 10,841 11,183
Goodwill, net -- -- 631
Deferred income taxes -- -- 1,568
Other assets 175 182 204
------ ------ ------
Total assets $16,239 $17,997 $23,325
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $2,784 $2,919 $3,522
Accrued expenses 1,552 2,368 1,968
Current portion of long-term debt 472 474 509
Non-voting preferred stock, with
mandatory redemption provisions 3,067 2,949 --
Current liabilities of
discontinued operations -- -- 329
------ ------ ------
Total current liabilities 7,875 8,710 6,328
------ ------ ------
Deferred rent payable 602 641 753
Long-term debt, net of current
portion 6,593 6,695 8,148
------ ------ ------
Total liabilities 15,070 16,046 15,229
------ ------ ------
Commitments and contingencies
Non-voting preferred stock, with
mandatory redemption provisions 2,641 -- --
Shareholders' equity:
Common stock 72 72 69
Additional paid-in capital 10,220 10,201 9,966
Accumulated deficit (7,727) (6,926) (3,184)
------ ------ ------
2,565 3,347 6,851
Less: Treasury stock, at cost (1,396) (1,396) (1,396)
------ ------ ------
Total shareholders' equity 1,169 1,951 5,455
------ ------ ------
Total liabilities and
shareholders' equity $16,239 $17,997 $23,325
======= ======= =======
-4-
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share amounts)
Three Months Ended
December 31,
2003 2002
------ ------
Net sales $10,949 $10,848
Cost of goods sold 6,024 6,456
------ ------
Gross profit 4,925 4,392
------ ------
Operating expenses 3,895 4,198
Occupancy expenses 783 786
Advertising expenses 574 555
Depreciation and amortization 126 177
Interest expense 286 200
Interest income (4) (4)
------ ------
Total expenses 5,660 5,912
------ ------
Loss from continuing operations before (735) (1,520)
income taxes
Income tax expense (benefit) 66 (602)
------ ------
Loss from continuing operations (801) (918)
Loss from discontinued operations -- (386)
------ ------
Net loss (801) (1,304)
Accretion of preferred stock -- (103)
------ ------
Net loss attributable to common
shareholders ($801) ($1,407)
======= =======
Weighted average number of common
shares outstanding - basic and diluted 6,956 6,569
Net loss per common share - basic and diluted
Loss from continuing operations ($.12) ($.15)
Loss from discontinued operations -- ($.06)
------ ------
Net loss ($.12) ($.21)
------ ------
-5-
CALLOWAY'S NURSERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
December 31,
2003 2002
------ ------
Cash flows from operating activities:
Net loss ($801) ($1,304)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Loss from discontinued operations (net
of tax) -- 386
Depreciation and amortization 126 177
Accretion of preferred stock included
in interest expense 118 --
Net change in operating assets and
liabilities 602 1,345
------ ------
Net cash provided by operating activities 45 604
------ ------
Cash flows from investing activities:
Additions to property and equipment -- (18)
------ ------
Net cash used for investing activities -- (18)
------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock 19 82
Repayments of debt (104) (90)
------ ------
Net cash used for financing activities (85) (8)
------ ------
Net increase (decrease) in cash and
cash equivalents from continuing
operations (40) 578
Net decrease in cash and cash
equivalents from discontinued
operations -- (867)
------ ------
Net decrease in cash and cash
equivalents (40) (289)
Cash and cash equivalents at beginning
of period 1,921 2,475
------ ------
Cash and cash equivalents at end of
period $1,881 $2,186
======= =======
-6-
CALLOWAY'S NURSERY, INC.
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.
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.
Furthermore, the Company's line of credit has been modified as
a result of noncompliance with certain financial covenants at
September 30, 2003. This line of credit expires on May 28,
2004. Management does not expect to be able to renew the line
of credit with the current bank upon its expiration. Also, if
certain financial targets are not met, the line of credit
would be unavailable and/or the due date of any outstanding
balance would be accelerated.
Given these uncertainties, 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
December 31, 2003, and the results of operations and cash
flows for the three-month periods ended December 31, 2003 and
2002 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 period ended
December 31, 2003 is not necessarily indicative of expected
results of operations and cash flows for the fiscal year
ending September 30, 2004.
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.
-7-
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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):
Three- Three-
Month Month
Period Period
Ended Ended
December 31, December 31,
2003 2002
------ ------
Net loss, as reported ($801) ($1,304)
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 ($801) ($1,304)
======= =======
Net loss per share - basic and
diluted
As reported ($.12) ($.21)
Pro forma ($.12) ($.21)
-8-
CALLOWAY'S NURSERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
$36,000 for each of the three-month periods ended December 31,
2003 and 2002.
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
first fiscal quarter ended December 31, 2003 (the "December
2003 Quarter"). The Company typically incurs losses for its
first fiscal quarter. For the December 2003 Quarter, the
Company had a pre-tax loss from continuing operations of $0.7
million compared to a pre-tax loss from continuing operations
of $1.5 million for the quarter ended December 31, 2002 (the
"December 2002 Quarter"). Furthermore, because the Company
sold all of its discontinued growing operations in fiscal
2003, there was no loss from discontinued operations for the
December 2003 Quarter compared to a pre-tax loss of $0.6
million for the December 2002 Quarter.
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 December 31, 2003 Compared with Three-
month Period Ended December 31, 2002
Pre-tax loss from continuing operations improved 52% for the
December 2003 Quarter compared to the December 2002 Quarter.
The improvement was primarily attributable to (i) an
improvement in gross margin, and (ii) a 4% reduction in
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:
December 2003 December 2002
Quarter Quarter
Amount % of Sales Amount % of Sales
----- ---------- ------ ----------
Sales $10.9 $10.8
Gross profit 4.9 45.0% 4.4 40.5%
Total expenses 5.7 51.7% 5.9 54.5%
----- ---------- ------ ----------
Loss from continuing
operations before income taxes ($0.7) (6.7%) ($1.5) (14.0%)
----- ---------- ------ ----------
-10-
Sales increased from $10.8 million for the December 2002
Quarter to $10.9 million for the December 2003 Quarter. 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 results were the
same, since the Company operated twenty-six retail stores for
both periods.
Gross Profit increased 12%, from $4.4 million for the December
2002 Quarter to $4.9 million for the December 2003 Quarter.
Gross margin improved from 40.5% for the December 2002 Quarter
to 45.0% for the December 2003 Quarter. The improvement was
primarily attributable to improved buying practices for
Christmas merchandise.
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.
Occupancy expenses were substantially unchanged, since no new
stores were added and no existing stores were closed during
either period.
Advertising expenses increased 3%. The increase was primarily
attributable to the increase in sales. Management planned to,
and did, spend approximately 5% of sales on advertising for
both the December 2002 Quarter and the December 2003 quarter.
Depreciation and amortization declined 28%. 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 three 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 41%. 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 December 31, 2003 and September 30,
2003, and (ii) the related accretion on the preferred stock to
be classified as interest expense for the December 2003
Quarter. Accretion of the preferred stock was a non-cash
expense of $118,000 for the December 2003 Quarter.
Income tax expense was $66,000 for the December 2003 Quarter
compared to income tax benefits of $602,000 for the December
2002 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 actually
realized. The Company paid $66,000 in state income taxes
during the December 2003 Quarter.
-11-
Discontinued Operations
Three-month Period Ended December 31, 2003 Compared with Three-
month Period Ended December 31, 2002
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 December 2003
Quarter. For the December 2002 Quarter, discontinued
operations results were as follows (amounts in thousands):
Sales $322
Cost of goods sold 305
----
Gross profit 17
Expenses 655
----
Loss before income taxes (638)
Income tax benefit (252)
----
Loss from discontinued operations ($386)
====
Financial Condition - Capital Resources and Liquidity
Cash Flows Provided by Operating Activities were $45,000 for
the December 2003 Quarter compared to $604,000 for the
December 2002 Quarter. The decline was primarily attributable
to reduced accounts payable and accrued expenses. Accounts
payable and accrued expenses totaled $4.3 million at December
31, 2003 compared to $5.5 million at December 31, 2002. That
reduction more than offset the improvement in pre tax net loss
from continuing operations for the December 2003 Quarter
compared to the December 2002 Quarter.
Cash flows Used for Investing Activities were $-0- for the
December 2003 Quarter compared to $18,000 for the December
2002 Quarter. The decline was primarily attributable to a
difference in the timing of certain replacements of furniture,
fixtures and vehicles. The Company continues to limit the
amount spent on capital expenditures during each fiscal year,
and has no significant capital projects planned for the
remainder of fiscal 2004.
Cash Flows Used for Financing Activities were $85,000 for the
December 2003 Quarter compared to $8,000 for the December 2002
Quarter. The increase was primarily attributable to the
October 2003 termination of the Company's stock purchase plan,
which allowed employees to purchase the Company's common
stock. Cash flows in from employee purchases of stock through
the stock purchase plan declined from $82,000 for the December
2002 Quarter to $18,000 for the December 2003 Quarter.
Cash Flows Used for Discontinued Operations were $-0- for the
December 2003 Period compared to $0.9 million for the December
2002 Period. In fiscal 2003 the Company disposed of all of its
growing operations.
-12-
Line of Credit Arrangement
The Company's business is seasonal, and it relies on a
revolving line of credit arrangement provided by a bank (the
"Line of Credit") to supplement its working capital during
seasons of lower sales volumes.
Typically, the Company borrows from the Line of Credit during
the quarter ending March 31, and repays those borrowings
during the spring selling season included in the quarter
ending June 30. The amount which may be borrowed under the
line of credit is tied to amounts of accounts receivable and
inventories, with a maximum of $3.0 million.
The Company owed $-0- under the Line of Credit as of December
31, 2003 and 2002 and September 30, 2003. The maximum and
weighted average amounts borrowed under the Line of Credit
were as follows (amounts in thousands):
Three Three
Month Month
Period Period
Ended Ended
December 31 December 31
2003 2002
-------- --------
Maximum amount borrowed $-- $--
Weighted-average amount borrowed $-- $--
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 December 31, 2003 the Company was in compliance
with those requirements for net sales and net income.
Management believes that the Line of Credit, assuming its
continued availability, will be adequate to support the
Company's short term working capital requirements because: (i)
working capital requirements will be lower than in prior years
because the Company has disposed of its unprofitable wholesale
and growing operations and instituted tighter controls over
expenses, inventory and capital expenditures, and (ii)
seasonal borrowing needs are expected to be substantially
lower and of shorter duration than in previous years.
Management believes that it is likely that the Company will
attain the requirements for net sales and net income provided
in the forbearance agreement.
-13-
If the Company were unable to attain the targets for net sales
and net income, making the Line of Credit unavailable and
accelerating the due date, the Company would take further
actions, including the sale and/or refinancing of real and
personal property and equipment, to generate funds. However,
any such borrowing would reduce access by the Company to
funds, if any, necessary through the same sources to retire
the preferred stock in September 2004.
Management does not expect to be able to renew the Line of
Credit with the current bank upon its expiration. However,
management expects it will be able to negotiate acceptable
alternatives to support its working capital requirements for
fiscal 2005.
Contractual Obligations and Commitments
As of December 31, 2003 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) $370 $505 $542 $528 $542 $4,578 $7,065
Future minimum
lease payments
under noncancellable
operating leases 1,694 2,039 1,195 1,021 681 2,056 8,686
Preferred stock with
mandatory redemption
provisions(2) 3,420 -- -- -- -- -- 3,420
------ ------ ------ ------ ------ ------ ------
Totals $5,484 $2,544 $1,737 $1,549 $1,223 $6,634 $19,171
------ ------ ------ ------ ------ ------ ------
(1)Amounts for 2004 represent obligations due during the remainder
of fiscal 2004 (nine months).
(2)Carrying amount of $3,067 as of December 31, 2003, $2,949
as of September 30, 2003 and $2,641 as of December 31, 2002.
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.
-14-
Near Term Working Capital Requirements
The Company is in a transition from its operation of both a
retail segment and a growing segment. Losses from the
discontinuance and disposition of the growing segment, and the
$3.4 million cost to retire the Company's Acquisition
Preferred Stock have reduced, and will reduce, the Company's
liquidity. In addition, the Company's assets were reduced as
of September 30, 2003 by: (i) a charge of $631,000 for the
fourth quarter of fiscal 2003 to record impairment of
goodwill, and (ii) establishment in the fourth quarter of
fiscal 2003 of a $2,672,000 valuation allowance against all of
the Company's deferred tax assets. Management believes that
the Company will be able to meet its working capital
requirements through a combination of (i) cash generated from
operations, (ii) short term financing, and (iii) additional
borrowings on its real estate. All of these sources will be
affected by the Company's ability to operate profitably, and,
therefore, the Company can give no assurance that these
sources will be available in the amounts necessary to meet the
Company's working capital requirements. Given these
uncertainties, there is substantial doubt about the Company's
ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
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.
-15-
Deferred income taxes - As of December 31, 2003 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 December 31, 2003 and
September 30, 2003 management believes that no impairment has
occurred and that no reduction of the estimated useful lives
is warranted.
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.
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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.
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 December 31, 2003,
the Company had no foreign exchange contracts or options
outstanding.
The Company manages its interest rate risk by balancing (a)
the amount of variable-rate long-term debt with (b) the
amounts due under long-term leases, which typically have fixed
rental payments that do not fluctuate with interest rate
changes. For 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 December 31, 2003 the Company had variable rate debt of
$1.8 million, out of total long-term debt of $7.1 million.
Holding other variables, such as debt levels, constant, a one
percentage point increase in interest rates would be expected
to have an estimated impact on 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.
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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 20, which immediately precedes
such exhibits.
(b) Reports on Form 8-K:
(1) On October 24, 2003 the Company filed a Form 8-K
disclosing that it had received a letter from NASDAQ
indicating that the Company had not regained compliance
with the NASDAQ minimum bid price requirements in
accordance with Marketplace Rule 4310(c)(8)(D).
However, since the Company met the initial listing
requirements for the NASDAQ SmallCap Market under
Marketplace Rule 4310(c)(2)(A), the Company was granted
an additional 90 calendar day grace period, or until
January 21, 2004, to demonstrate compliance. If
compliance with the aforementioned rule was not
demonstrated by January 21, 2004, NASDAQ would provide
written notification that the Company's common stock
would be delisted.
(2) On January 23, 2004 the Company filed a Form 8-K
disclosing that it had issued a press release
announcing that the Company had received a letter from
NASDAQ providing written notification that the
Company's common stock would be delisted on January 30,
2004.
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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: February 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.