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, 2002
Commission File No. 0-19305
CALLOWAY'S NURSERY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2092519
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4200 Airport Freeway
Fort Worth, Texas 76117-6200
817.222.1122
(Address, zip code and telephone number of principal executive offices)
----------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [ ] NO [X]
The aggregate market value of the Registrant's Common Stock, $0.01 par value,
held by non-affiliates of the Registrant as of December 6, 2002, was $3,533,000.
For purposes of the foregoing calculation only, all directors, executive
officers and 5% beneficial owners have been deemed affiliates.
6,587,762 shares of the Registrant's Common Stock, $.01 par value, were
outstanding as of December 6, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2003 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 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV
Item 14. Controls and Procedures 21
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 21
2
PART I
ITEM 1. BUSINESS
ABOUT CALLOWAY'S NURSERY, INC.
Calloway's Nursery, Inc. (the "Company") operates retail garden centers in the
three largest metropolitan areas in Texas: Dallas - Fort Worth, San Antonio and
Houston, reaching a combined population of 11.5 million.
The Company's management team consists of professionals that have worked
together for most of the time that the Company has been in operation. This team
strives to enable each area of the Company to continuously improve its products
and services.
OPERATIONS
Founded in 1986, the Company's first four retail stores opened, in Dallas, in
1987. Since that time, the Company has grown to 26 retail stores: 16 Calloway's
Nursery retail stores in the Dallas - Fort Worth market ("Dallas - Fort Worth
Market"), 7 Calloway's Nursery retail stores in the San Antonio market ("San
Antonio Market") and 3 Cornelius Nurseries retail stores in the Houston market
("Houston Market").
The Company added Miller Plant Farms, an established growing operation for the
production of living plants, in fiscal 1997.
In fiscal 1999 the Company acquired Cornelius Nurseries, Inc. (the "Cornelius
Acquisition"), which included Cornelius Nurseries and Turkey Creek Farms, as
well as the Wholesale Landscape Distributors wholesale operations in Houston and
Austin ("WLD").
In fiscal 2001 the Company decided to discontinue the wholesale aspects of its
operations, which had been a part of the wholesale and growing segment. It sold
all of the WLD operations in October 2001, and repositioned Turkey Creek Farms
to produce plant material exclusively for the retail stores, thus discontinuing
wholesale sales to unrelated third parties. The sale of excess inventory at
Turkey Creek Farms was completed by December 31, 2001. In connection with that
decision, the Company incurred a loss from discontinued operations of
$3,687,000, or $.59 per diluted share in fiscal 2001.
In fiscal 2002 the Company decided to sell Turkey Creek Farms and discontinue
the plant material that it produced. In connection with that decision, the
Company incurred a loss from discontinued operations of $1,095,000, or $.17 per
diluted share in fiscal 2002. The Company has entered into a contract to sell
Turkey Creek Farms for an amount in excess of its carrying value that, if
completed, will be recorded in fiscal 2003. There can be no assurance, however,
that such a sale will be completed.
In fiscal 2002 the Company entered the San Antonio Market by leasing seven
former nursery locations. This new market entry did not constitute a business
combination.
3
RETAIL
CALLOWAY'S NURSERY
CORNELIUS NURSERIES
The Company operates twenty-six retail stores:
- 16 Calloway's Nursery stores in the Dallas-Fort Worth Market
- 7 Calloway's Nursery stores in the San Antonio Market
- 3 Cornelius Nurseries stores in the Houston Market
Locations are selected on the basis of demographic data, traffic patterns and
shopping habits. All 26 retail stores are Company-operated.
The Company focuses on quality and breadth of selection in bedding plants and
nursery stock, complemented by other related garden products such as soil
amendments and fertilizers. Apart from Christmas, approximately two-thirds of
its retail sales are derived from living plants. The remaining one-third is made
up of products that primarily relate to their care and nurturing.
All retail stores sell Christmas merchandise. The Houston Market stores have
developed a stronger and more financially beneficial focus on Christmas than
have the Dallas-Fort Worth market stores.
GROWING
MILLER PLANT FARMS
In 1997 the Company acquired an established facility for the production of
living plants - Miller Plant Farms. This growing facility was developed by Mike
Miller, who has continued to manage the facility since it was acquired by the
Company. Miller Plant Farms produces roses, ground covers, caladiums,
perennials, hollies and flowering shrubs.
Miller Plant Farms is dependent upon sales of its products by the Company's
retail stores. Therefore, weaker-than-expected sales by the Company's retail
stores may result in excess inventory at Miller Plant Farms. Such excess
inventory may have to be marked-down, with a resulting negative impact on the
Company's profitability.
INDUSTRY
Texas is the third largest retail market in the United States for "green
industry" sales, which includes (i) wholesale grower sales, (ii)
landscape-related sales, and (iii) home center and mass merchandiser retail
sales and (iv) retail garden center sales (which includes the Company's retail
stores).
According to the Office of the Comptroller of Public Accounts, Texas green
industry sales increased from approximately $6.3 billion in 1997 to
approximately $8.0 billion in 2001. However, retail garden center sales have
declined each year from 1997 - 2001, from approximately $1.8 billion in 1997 to
approximately $1.5 billion in 2001. The most rapid growth for green industry
sales over that period has been in home center and mass merchandiser retail
sales.
The Company has retail stores in the three (3) largest markets in Texas, the
Dallas - Fort Worth Market, the San Antonio Market and the Houston Market.
Together, these three markets account for approximately 38% of Texas' retail
garden center sales.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
Jim Estill, 55, is Chairman of the Board, President and Chief Executive Officer.
Along with John Cosby and John Peters, Mr. Estill co-founded the Company in
1986. Prior to that, Mr. Estill worked with Sunbelt Nursery Group, as President
and Chief Executive Officer. Mr. Estill received his BBA in Finance from Texas
Christian University in 1969, and his MBA from TCU in 1977. A Texas Master
Certified Nursery Professional, Mr. Estill is a Texas Master Certified Nursery
Professional ("TMCNP").
Sterling Cornelius, 80, is President of Cornelius Nurseries, Inc., and a
Director of the Company. Mr. Cornelius has been with Cornelius Nurseries since
his father founded the business in 1937, except for the period 1941-1945, when
he served in the U.S. Navy during World War II. Mr. Cornelius is a recognized
leader in the nursery industry, having been President of the Texas Nursery and
Landscape Association ("TNLA"), President of the Houston Landscape Nurserymen's
Association, Chairman of the Drafting Committee - Texas Certified Nursery
Professional Manual and Examination, Member of the Board of Trustees of the
Texas Agricultural Lifetime Leadership Board, and a member of the Texas
Certified Nurserymen's Professional Committee. He is the only two-time recipient
of the "Outstanding Nurseryman Award" - the highest honor that TNLA can bestow
on one of its members. Mr. Cornelius is also active in many community efforts,
including past membership on the Board of Directors of the Houston Chamber of
Commerce and the President's Council of Houston Baptist University.
John Cosby, 59, is Vice President, Secretary and a Director. Mr. Cosby, along
with Jim Estill and John Peters, co-founded the Company in 1986. He developed
all of Calloway's Nursery retail store locations, including site selection and
development, as well as lease and acquisition negotiations. Prior to 1986, Mr.
Cosby worked at Sunbelt Nursery Group, serving as Vice President -- Corporate
Development and at Pier 1 Imports as Real Estate Manager. Mr. Cosby received his
BBA in Management from Texas Wesleyan College in 1969 and his MBA in Management
from the University of Dallas in 1983. A Certified Mediator, Mr. Cosby is Past
Chairman of Optical Federal Credit Union, and Past President of the Dispute
Resolution Services of Tarrant County.
John Peters, 51, is Vice President and Director of the Company. Mr. Peters,
along with Jim Estill and John Cosby, co-founded the Company in 1986. He
developed the original staff into a team of industry professionals. He has
primary responsibility for distribution, human resources and administration.
Prior to 1986, Mr. Peters worked with Sunbelt Nursery Group as Senior Vice
President of Operations, where he was responsible for operations of all
subsidiaries, including more than 100 stores in five states, and two growing
operations. Mr. Peters attended Texas Christian University. A TMCNP, Mr. Peters
is Past Chairman of the TNLA, and currently serves on the TNLA Education and
Research Foundation.
5
Dan Reynolds, 45, is Vice President, Chief Financial Officer and Assistant
Secretary. Mr. Reynolds joined the Company in 1990, where he developed its
financial, operating and merchandising decision-support systems. His
responsibilities include all financial and management reporting, treasury
management, credit facilities, corporate and shareholder records, SEC and stock
market compliance, public, media and investor relations, risk management and
budgeting. Mr. Reynolds also oversees design, development, implementation and
review of all transactional and decision-support systems. Prior to 1990, Mr.
Reynolds worked with Atmos Energy Corporation as Financial Systems Manager and
KPMG LLP as Supervising Senior Accountant. Mr. Reynolds received his BBA in
Accounting from the University of Texas at Arlington. A Certified Public
Accountant, Mr. Reynolds is Past President of the Fort Worth Chapter of
Financial Executives Institute.
George Wechsler, 86, is Vice President a Director of the Company. Mr. Wechsler
joined the Company and was elected to the Board of Directors in 2002. He is a
Past President of the TNLA, and a past recipient of their "Outstanding
Nurseryman Award".
Sam Weger, 52, is Vice President, Merchandising. Mr. Weger began with the
Company in retail store management in 1987 with the opening of the first stores.
He has primary responsibility for the administration of planning, procurement
and replenishment of all merchandise lines. Prior to 1987, Mr. Weger was
Landscape Designer with Odessa Nursery. He has also been Co-Owner of
Lessmon-Weger Garden Center in Colby, Kansas. Mr. Weger received his BBA in
Political Science and Education from Fort Hays State University. A TMCNP, Mr.
Weger is a Director of the TNLA, Past President of TNLA, Region 5, and Past
Chairman of the TNLA Education Committee.
CHALLENGES
Like any business, the Company faces certain challenges. The biggest challenges
are:
The nursery business is highly competitive. In the Dallas-Fort Worth,
Houston and San Antonio markets, the Company competes with both:
o Other retail garden centers, and
o Home centers and mass merchandisers.
There are hundreds of retail garden centers 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.
The business is seasonal. About 40% of sales occur in the third fiscal
quarter, which is the most profitable quarter.
6
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K Report contains forward-looking statements. The Company is
including this cautionary statement for the express purpose of providing the
Company with the protections of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 with respect to all forward-looking
statements. Several important factors, in addition to the specific factors
discussed in connection with such forward-looking statements individually, could
affect future results and could cause those results to differ materially from
those expressed in the forward-looking statements contained in this Report.
Expected future results, products and service performance or other
non-historical facts are forward-looking and reflect management's current
perspective on existing trends and information. These statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the seasonality of its business, geographic concentration, the impact of weather
and other growing conditions, the ability to manage growth, the impact of
competition, the ability to obtain future financing, government regulations,
market risks associated with variable-rate debt, the costs and benefits of
discontinuing certain operations, and other risks and uncertainties defined from
time to time in the Company's Securities and Exchange Commission filings.
Therefore, each reader of this report is cautioned to consider carefully the
risk factors listed above, as well as any specific factors discussed with a
forward-looking statement in this Report and disclosed in the Company's filings
with the Securities and Exchange Commission, as such risks and factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the Company's ability to implement its business strategy and may cause
actual results to differ materially from those contemplated by the statements
expressed in this Report.
7
ITEM 2. PROPERTIES
The typical retail store is located in a high-traffic shopping area. All are
free standing stores.
Most of the Company's sixteen Dallas - Fort Worth Market retail stores have a
similar configuration, consisting of a building, greenhouse and outdoor nursery
yard. The average Dallas - Fort Worth Market retail store has about 60,000
square feet of retail space.
Each of the three Houston Market retail stores has a different configuration.
All three of them include, at a minimum, a building and an outdoor nursery yard.
All three Houston Market retail stores are about the same overall size as the
average Dallas - Fort Worth Market retail store.
Each of the seven San Antonio Market retail stores has a different
configuration. All seven of them include, at a minimum, a building and an
outdoor nursery yard. The average San Antonio Market retail store has about
40,000 square feet of retail space.
As of September 30, 2002 the Company operated 26 stores:
- 16 Calloway's Nursery retail stores in the Dallas - Fort Worth Market.
11 are leased and 5 are company-owned.
- 7 Calloway's Nursery retail stores in the San Antonio Market. All 7
are leased.
- 3 Cornelius Nurseries retail stores in the Houston Market. All 3 are
company-owned.
The Company owns a nursery growing facility: Miller Plant Farms, near Tyler,
Texas (approximately 80 acres).
The Company leases its corporate office, which is located in an office building
in Fort Worth, Texas. The Company also leases a warehouse/distribution center in
Fort Worth, Texas.
The Company has entered into a contract to sell its Turkey Creek Farms growing
facility (approximately 160 acres) for an amount in excess of its carrying value
that, if completed, will be recorded in fiscal 2003. There can be no assurance,
however, that such a sale will be completed.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on NASDAQ under the symbol CLWY since
the initial public offering on June 26, 1991. Through March 20, 2002 the common
stock traded on the NASDAQ National Market. Since March 21, 2002 the common
stock has traded on the NASDAQ SmallCap Market. The symbol has continued to be
CLWY.
The following table sets forth the high, low and closing price information for
each quarter of the most recent five fiscal years:
High Low Close
---------- ---------- ----------
FISCAL YEAR 1998
First Quarter $ 2.063 $ 1.094 $ 1.375
Second Quarter 2.875 1.313 2.844
Third Quarter 3.125 1.875 2.250
Fourth Quarter 2.313 .938 1.188
---------- ---------- ----------
FISCAL YEAR 1999
First Quarter 1.375 1.000 1.125
Second Quarter 1.500 1.125 1.313
Third Quarter 2.000 1.250 1.375
Fourth Quarter 1.563 1.125 1.125
---------- ---------- ----------
FISCAL YEAR 2000
First Quarter 1.438 .938 1.188
Second Quarter 1.500 .969 1.375
Third Quarter 1.500 .813 1.188
Fourth Quarter 1.750 1.125 1.375
---------- ---------- ----------
FISCAL YEAR 2001
First Quarter 1.750 1.063 1.250
Second Quarter 1.625 1.141 1.188
Third Quarter 1.600 1.000 1.300
Fourth Quarter 1.390 .850 .940
---------- ---------- ----------
FISCAL YEAR 2002
First Quarter 1.210 .680 .950
Second Quarter 1.300 .800 1.130
Third Quarter 1.280 1.000 1.050
Fourth Quarter $ 1.140 .700 $ .890
========== ========== ==========
The closing price of the common stock on December 6, 2002, as reported by
NASDAQ, was $.87. As of December 6, 2002 there were approximately 500
shareholders of record, and approximately 1,800 beneficial shareholders.
The Company has never paid cash dividends on common stock. The Company intends
to retain earnings for further development of the business and, therefore, does
not intend to pay cash dividends on common stock in the foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with the Consolidated Financial Statements included in Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7. Comparability of the Statement of Operations data for 2002,
2001 and 2000, and the Balance Sheet data for 2002, 2001, 2000 and 1999, was
impacted by the Cornelius Acquisition. In addition, the Statement of Operations
data reflects the discontinuance of the wholesale operations and the Turkey
Creek Farms operations.
SELECTED FINANCIAL DATA
(Amounts in millions, except per share amounts)
Statement of operations data 2002 2001 2000 1999 1998
---------------------------- ---------- ---------- ---------- ---------- ----------
Net sales $ 43.3 $ 43.5 $ 44.6 $ 30.4 $ 27.1
Income (loss) from continuing operations
0.1 1.6 2.0 0.4 (0.3)
Net income (loss) $ (1.0) $ (2.1) $ 1.7 $ .4 $ (.3)
Income (loss) per common share from
continuing operations:
Basic $ (.05) $ .20 $ .32 $ .07 $ (.05)
Diluted $ (.05) $ .20 $ .30 $ .07 $ (.05)
Net income (loss) per common share:
Basic $ (.22) $ (.40) $ .26 $ .07 $ (.05)
Diluted $ (.22) $ (.39) $ .25 $ .07 $ (.05)
Balance sheet data 2002 2001 2000 1999 1998
------------------ ---------- ---------- ---------- ---------- ----------
Total assets $ 24.1 $ 27.3 $ 31.0 $ 26.3 $ 14.7
Long-term debt, net 8.2 8.6 9.8 9.0 3.0
Redeemable preferred stock $ 2.5 $ 2.2 $ 1.9 $ 1.9 --
========== ========== ========== ========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale
operations that had been a part of its wholesale and growing segment. In fiscal
2002 the Company decided to sell its Turkey Creek Farms growing operation and
discontinue the merchandise that it produced (see Note 20 to Consolidated
Financial Statements). Accordingly, the following discussion of results of
operations has been separated into (i) Continuing Operations and (ii)
Discontinued Operations.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
YEAR ENDED SEPTEMBER 30, 2002 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2001
Income from Continuing Operations before Income Taxes for 2002 was lower than it
was for 2001, primarily due to reduced gross profit.
10
Sales declined 0.4% from 2001, indicating a small reduction in consumer demand
for Christmas merchandise, living plants and related gardening products. While
aggressive price discounting at Christmas and late in the 2002 spring season had
a positive effect on sales, it was not enough to offset a weaker start to the
Christmas season and the 2002 spring season.
Same-store sales (sales in the 19 retail stores that had been open for at least
12 months at the beginning of fiscal 2002) declined 2%. The opening of 7 new
retail stores in the San Antonio Market in the fourth quarter did not provide
enough additional sales to offset the decline that was experienced during the
first three quarters.
Gross profit declined 6.3% from 2001. The decline was primarily attributable to
(i) the decline in sales, and (ii) a corresponding decline in gross margin
(gross profit as a percentage of sales). Gross margin declined to 46.5% in 2002
from 49.5% for 2001. For fiscal 2002 the Company produced, at its own growing
operations, a substantially higher proportion of the plants to be sold by its
retail stores. When same-store sales declined 2%, the Company was left with
unsold plants at its retail stores and growing operations, which had to be
addressed. The disposal of those plants was done partially through promotions at
the retail stores, where consumer prices were sharply reduced, and by disposing
of some unsold plants at the growing operations.
Operating expenses increased 5.8%. The increase was primarily attributable to
the opening of 7 retail stores in the San Antonio Market.
Occupancy expenses increased 12.1%. The increase was primarily attributable to
the opening of 7 retail stores in the San Antonio Market.
Advertising expenses decreased 2.1%. The decrease was primarily attributable to
reduced use of media other than newspapers and radio.
Depreciation and amortization decreased 3.3%. The decrease was primarily
attributable to lower capital expenditures over the past several fiscal years,
which resulted in an increased amount of assets becoming fully-depreciated.
Interest expense decreased 23.6%. The decrease was primarily attributable to (i)
lower amounts of long-term debt, (ii) lower seasonal borrowings under the
revolving line of credit, (iii) lower interest rates.
Interest income increased 22.2%. The increase was primarily attributable to
increased amounts of cash and cash equivalents.
YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2000
Sales declined 2.5% from 2000. Strong sales during the spring season were not
enough to offset slower sales during the fall and winter seasons, which saw
consumer demand for nursery products reduced due to unfavorable weather for
gardening.
Gross margin (gross profit as a percentage of net sales) declined to 49.5% in
2001 from 51.1% for 2000. The 2000 gross margin was the highest in the Company's
history, a result of strong sales that kept stock loss and markdowns to a
minimum. The 2001 gross margin was more consistent with the 1999 gross margin of
49.3%, which was achieved under similar market conditions.
Operating expenses decreased 4.0%. The decrease was primarily the result of
fewer bonuses paid due to the reduction in income from continuing operations for
2001 compared to 2000.
11
Occupancy expenses decreased by 3.1%. The decrease was primarily due to a
reduction in accrued property taxes. The real properties added in the Cornelius
Acquisition are Company-owned instead of leased. Occupancy expenses do not
include the depreciation and amortization or interest expenses related to the
cost of Company-owned facilities.
Advertising expenses increased 12.7%. The increase was primarily due to
increased newspaper and radio advertising done to stimulate consumer demand
during the 2001 spring season.
Depreciation and amortization was flat, with a 0.4% increase.
Interest expense increased 7.9%, primarily due to increased seasonal borrowings
under the Company's revolving credit lines.
Interest income decreased 55.0%, due to lower levels of cash and cash
equivalents maintained during the year.
DISCONTINUED OPERATIONS
YEAR ENDED SEPTEMBER 30, 2002 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2001
Sales decreased 50%. The decrease was primarily attributable to the October 2001
sale of the WLD wholesale operations to an unrelated third party. The Turkey
Creek Farms operation was a wholesale operation for all of fiscal 2001 and the
first quarter of fiscal 2002, and was a growing operation that sold only to the
Company's retail stores for the last 3 quarters of fiscal 2002. Total Turkey
Creek sales for fiscal 2001 and fiscal 2002 were about the same.
Gross Profit decreased 232%, primarily because substantially more inventory was
grown at the Turkey Creek Farms growing operation in 2002 than was sold to the
Company's retail stores. Approximately $1.2 million of that inventory was
written-off and charged to cost of goods sold when the Company decided to sell
the Turkey Creek Farms growing operation and discontinue the merchandise that it
produced.
Expenses decreased 76%, primarily attributable to the October 2001 sale of the
WLD wholesale operations to an unrelated third party.
Loss before Income Taxes was $1,738,000 for fiscal 2002 compared to $1,210,000
for fiscal 2001. The increased loss was primarily attributable to the
aforementioned inventory write-down at the Turkey Creek Farms growing operation
in 2002.
YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH YEAR ENDED SEPTEMBER 30, 2000
Sales decreased 6%. The decrease in sales was primarily attributed to continued
pressure from lower cost wholesalers.
Gross Margin declined from 32% for fiscal 2000 to 13% for fiscal 2001. The
decline was a result of the substantial decline in sales which caused excessive
quantities of inventory that had to be marked down to lower of cost or market.
Expenses declined 29%. The decline was a result of reduced expenses needed to
support the reduced volume of sales.
The aforementioned factors caused the loss before income taxes to increase from
approximately $0.5 million for fiscal 2000 to approximately $1.2 million for
fiscal 2001.
12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities were $2,937,000 for fiscal 2002,
compared to cash flows used for operating activities of $933,000 for fiscal
2001. The improvement was primarily attributed to (i) an income tax refund of
approximately $1.1 million was received in fiscal 2002, whereas in fiscal 2001
the Company made income tax payments of approximately $1.5 million, (ii) an
increase in accounts payable and accrued expenses of approximately $1.1 million.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used for investing activities decreased to $230,000 for fiscal 2002
from $284,000 for fiscal 2001. The decrease was attributable to the Company's
continued curtailment of capital expenditures.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows used for financing activities were $1,192,000 for fiscal 2002
compared to cash flows used for financing activities of $187,000 for fiscal
2001. The increase was primarily attributable to the net repayment of $730,000
owed under the revolving line of credit arrangement during fiscal 2002.
The Company has improved its liquidity position at September 30, 2002 by (i)
reducing notes payable and long term debt by approximately $2.5 million, and
(ii) increasing cash and cash equivalents by $2.2 million.
The Company's business is seasonal, and it relies on its revolving line of
credit arrangement to provide working capital during seasons of lower sales
volumes. Typically, the Company borrows from the revolving line of credit during
the quarter ending March 31, and repays those borrowings quickly during the
spring selling season included in the quarter ending June 30. Continued
availability of funds from the revolving line of credit depends upon the
Company's continued compliance with its loan covenants. At September 30, 2002
the Company was in compliance with all of its loan covenants. The Company does
not anticipate any problem in meeting its capital requirements or staying within
the requirements of its loan covenants during fiscal 2003.
13
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of September 30, 2002 the Company had the following contractual obligations
(amounts in thousands):
FISCAL YEAR ENDING SEPTEMBER 30
--------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Totals
-------- -------- -------- -------- -------- ---------- --------
Long-term debt (including current portion) $ 501 $ 575 $ 645 $ 720 $ 651 $ 5,655 $ 8,747
Future minimum lease payments under
noncancellable operating leases 2,480 2,408 1,923 1,366 850 1,868 10,895
Preferred stock with mandatory redemption
provisions (1) -- 3,420 -- -- -- -- 3,420
-------- -------- -------- -------- -------- -------- --------
Totals $ 2,981 $ 6,403 $ 2,568 $ 2,086 $ 1,501 $ 7,523 $ 23,062
======== ======== ======== ======== ======== ======== ========
(1) Carrying amount of $2,538 as of September 30, 2002.
14
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Some assets and liabilities by their nature are subject to estimates and
assumptions. For the Company, those assets and liabilities include:
o Inventories;
o Deferred income taxes;
o Property and equipment;
o Goodwill;
o Accrued expenses.
Inventories - The Company values its inventories using the lower of cost or
market on a first-in, first-out basis. The Company conducts physical inventories
three times each year: December, June and September.
The Company's retail inventories turn over several times each year; therefore,
the cost of each inventory item is approximately the same as its current
replacement cost. Merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis. The physical
inventories are taken at retail prices and adjusted to cost using sampling
techniques that determine a markup percentage for each merchandise category in
each market area.
The Company's growing inventories turn over more slowly than the retail
inventories, and items continue to grow and absorb costs until they are sold. At
each physical inventory, the accumulated cost of growing inventories is compared
to published wholesale prices from competing growers on a gallon-equivalent
basis, with allowance for the estimated costs of disposal of such inventories.
The growing inventories are then recorded at the lower of cost or market. In
addition, merchandise that is considered to have declined in quality is
marked-down to estimated net realizable value on a regular basis.
Deferred income taxes - As of September 30, 2002 and 2001 the Company has
recorded a valuation allowance of $0 for its deferred tax assets on the weight
of available evidence at those balance sheet dates. The primary factor in not
providing for a valuation allowance is the expectation that future taxable
income and the reversal of temporary differences will be sufficient for the
Company to realize the deferred tax assets. Such estimate could change in the
future based on the occurrence of one or more future events.
15
Property and Equipment - The Company reevaluates the propriety of the carrying
amounts of its properties as well as the amortization periods when events and
circumstances indicate that impairment may have occurred. Recoverability of
assets to be held and used is measured by the comparison of the carrying amount
of an asset to future cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. As of September 30, 2002 and 2001 management believes
that no impairment has occurred and that no reduction of the estimated useful
lives is warranted.
Goodwill - The Company has assessed the recoverability of its goodwill by
determining whether the amortization of the goodwill balance over its remaining
life could be recovered through undiscounted future operating cash flows. The
amount of goodwill impairment, if any, has been measured based on the projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of
goodwill could be impacted if estimated future operating cash flows are not
achieved. Management believes that no impairment has occurred. As discussed
below, the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets effective October 1, 2002 and will no
longer amortize goodwill.
Accrued expenses - The Company routinely accrues for various costs and expenses
for which it has received goods or services, but for which it has not been
invoiced. Typically, accrued expenses include such items as salaries and related
taxes, bonuses, and sales and use taxes for which amounts are readily
determinable and significant estimates are not necessary. Property taxes are
estimated and accrued based on the amounts paid for such taxes for the previous
year, until a new tax bill is received. Various other expenses are accrued from
time to time before an invoice is rendered based on the estimated costs of those
goods or services.
RECENT ACCOUNTING PRONOUNCEMENTS
Statements 141 and 142
In June 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards Statement No. 141, Business Combinations
("Statement 141") and Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142").
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite lives
no longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which has been superceded by Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, upon adoption.
16
Statement 142 is effective for fiscal years beginning after December 15, 2001.
The Company adopted Statement 142 as of October 1, 2002, and will no longer
amortize goodwill.
Statement 141 will also require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassification in order to conform to the new criteria in Statement 141 for
recognition apart from goodwill.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but not later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statements of operations, effective as of the first quarter of fiscal 2003.
As of October 1, 2002 the Company has unamortized goodwill in the amount of
$631,000 that is subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $109,000, $108,000 and $108,000 for
the fiscal years ended September 30, 2002, 2001 and 2000. Because of the
extensive effort that will be needed to comply with adopting Statements 141 and
142, it is not practicable to reasonably estimate the impact of adopting these
Statements on the Company's consolidated financial statements at the date of
this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
Statement 144
In August 2001 the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.
17
Statement 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Statement 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Statement 144 is effective for fiscal years beginning after December 15, 2001,
with early adoption encouraged. The Company early-adopted Statement 144 as of
October 1, 2001, recording a loss on discontinued operations of $1,095,000 (net
of tax benefits of $643,000) for fiscal 2002. See Note 20 to the Consolidated
Financial Statements for the assets and liabilities of the discontinued
operations.
Statement 145
In April 2002 the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 updates, clarifies, and simplifies existing
accounting pronouncements.
Statement 145 rescinds Statement 4, Reporting Gains and Losses from
Extinguishments of Debt, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under Statement 145 an
enterprise will not be precluded from classifying gains and losses on
extinguishments transactions as an extraordinary item if they meet the criteria
in APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The provisions of Statement 145
related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002.
Statement 145 also amends Statement 13 for transactions occurring after May 15,
2002 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions shall be accounted for in the same manner
as sale-leaseback transactions.
All other provisions of Statement 145 are effective for financial statements
issued on or after May 15, 2002, with early adoption encouraged. Statement 145
had no impact on the Company's Consolidated Financial Statements.
Statement 146
In June 2002 the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("Statement 146"). Statement 146 addresses
financial accounting and reporting for costs associated with (i) an exit
activity that does not involve an entity newly acquired in a business
combination and (ii) disposal activities within the scope of Statement 144.
18
An exit activity includes but is not limited to restructuring costs. Statement
146 nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring. It significantly reduces an entity's ability
to recognize a liability for future expenses related to a restructuring.
The costs within the scope of Statement 146 include (i) certain termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit covered by
other accounting pronouncements, (ii) costs to terminate a contract that is not
a capital lease, and (iii) other associated costs (such as costs to close or
consolidate facilities).
In general, an entity will record and measure a liability for a cost associated
with an exit or disposal activity at its fair value in the period in which the
liability is incurred (that is, when it meets the definition of a liability).
The provisions of Statement 146 are effective for exit or disposal activities
initiated after December 31, 2002. Adoption of Statement 146 is not expected to
have a material impact on the Company's consolidated financial statements.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, including fluctuations in
interest rates. The Company does not enter into transactions designed to
mitigate such market risks, nor does the Company enter into any transactions in
derivative securities for trading or speculative purposes. As of September 30,
2002, the Company had no foreign exchange contracts or options outstanding.
The Company manages its interest rate risk by balancing (a) the amount of
variable-rate long-term debt with (b) the amounts due under long-term leases,
which typically have fixed rental payments that do not fluctuate with interest
rate changes. For its variable-rate debt, interest rate changes generally do not
affect the fair market value of such debt, but do impact future operations and
cash flows, assuming other factors are held constant.
At September 30, 2002 the Company had variable rate long-term debt of $3.1
million, out of total long-term debt of $8.7 million. Holding other variables,
such as debt levels, constant, a one percentage point increase in interest rates
would be expected to have an estimated impact on income before income taxes and
cash flows for next year of approximately $31,000 for the variable-rate
long-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are included in a separate section
of this Report. The index is included under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
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 under the caption "Executive Officers of the
Registrant". The other information required by this item is incorporated by
reference from the Company's Proxy Statement.
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.
20
PART IV
ITEM 14. CONTROLS AND PROCEDURES
On December 18, 2002 (the "Evaluation Date") an evaluation was performed by the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the CEO and CFO concluded that the
Company's disclosure controls and procedures were effective as of the Evaluation
Date. Subsequent to the Evaluation Date there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls and procedures for financial reporting.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report - KPMG LLP F-1
Consolidated Balance Sheets - September 30, 2002 and 2001 F-2
Consolidated Statements of Operations - Years Ended
September 30, 2002, 2001 and 2000 F-3
Consolidated Statements of Shareholders' Equity - Years Ended
September 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows - Years Ended
September 30, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) SCHEDULES
Schedules, for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are omitted because they either are
not required under the related instructions, are inapplicable, or the required
information is shown in the consolidated financial statements or notes thereto.
21
(a)(3) EXHIBITS
(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)
(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)
(h) Extension of Employment Agreement between the Registrant and James C.
Estill dated July 2, 1996. (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and John T.
Cosby dated July 2, 1996. (Exhibit (10)(n))(2)
(j) Extension of Employment Agreement between the Registrant and John S.
Peters dated July 2, 1996. (Exhibit (10)(o))(2)
(k) Employment Agreement between the Registrant and C. Sterling Cornelius
dated September 21, 1999. (Exhibit (10)(k))(3)
(l) Extension of Employment Agreement between the Registrant and James C.
Estill dated May 9, 2001. (Exhibit (10)(p))(4)
(m) Extension of Employment Agreement between the Registrant and John T.
Cosby dated May 9, 2001. (Exhibit (10)(q))(4)
(n) Extension of Employment Agreement between the Registrant and John S.
Peters dated May 9, 2001. (Exhibit (10)(r))(4)
(o) Cornelius Nurseries, Inc. President Profit Bonus Plan for the Fiscal
Year Ending September 30, 2003. (Exhibit (10.1)(5)
(p) Calloway's Nursery, Inc. Management Profit Bonus Plan for the Fiscal
Year Ending September 30, 2003. (Exhibit (10.2)(5)
(q) Form of Indemnification Agreement dated November 14, 2002 between the
Registrant and each of Dr. Stanley Block, Sterling Cornelius, John T.
Cosby, James C. Estill, Daniel R. Feehan, Timothy J. McKibben, John S.
Peters, Daniel G. Reynolds, George J. Wechsler and David S. Weger.
(Exhibit 10.3)(5)
(21) (a) Subsidiaries of the Registrant.(Exhibit 21)(5)
(23) (d) Consent of KPMG LLP. (Exhibit 23)(5)
(99) (a) Calloway's Nursery, Inc. Stock Purchase Plan.(Exhibit (28))(6)
(99) (b) Calloway's Nursery, Inc. 1991 Stock Option Plan.(Exhibit (10)(d))(1)
(99) (c) Calloway's Nursery, Inc. 1995 Stock Option Plan for Independent
Directors. (Exhibit (99)(c))(7)
(99) (d) Calloway's Nursery, Inc. 1996 Stock Option Plan. (Exhibit A)(8)
(99) (e) Calloway's Nursery, Inc. 1997 Stock Option Plan. (Exhibit A)(9)
(99) (f) Calloway's Nursery, Inc. 1998 Stock Option Plan. (Exhibit A)(10)
(99) (g) Calloway's Nursery, Inc. 1999 Stock Option Plan. (Exhibit A)(11)
(99) (h) Calloway's Nursery, Inc. 2000 Stock Option Plan. (Exhibit A)(12)
(99) (i) Calloway's Nursery, Inc. 2001 Stock Option Plan. (Exhibit A)(13)
22
(a)(3) EXHIBITS (CONTINUED)
(99) (j) Form of Calloway's Nursery, Inc. 2002 Stock Option Plan (Exhibit
99.1)(5)
(99) (k) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 99.2)(5)
(b) REPORTS ON FORM 8-K
On October 31, 2002 the Company filed a Form 8-K disclosing its receipt of a
letter from NASDAQ indicating that the Company's common stock has closed below
the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4310(c)(4), and that the Company will be provided 180 calendar
days, or until April 22, 2003, to regain compliance. If compliance with the
aforementioned rule cannot be demonstrated by April 22, 2003, the NASDAQ will
determine whether the Company meets the initial listing criteria for the NASDAQ
SmallCap Market under Marketplace Rule 4310(c)(2)(A). If it meets the initial
listing criteria, the Company may be granted an additional 180 calendar day
grace period to demonstrate compliance. The Company believes that it currently
does meet the aforementioned initial listing criteria.
----------
(1) Incorporated by reference to the Exhibit shown in parenthesis to
Registration Statement No. 33-40473 on Form S-1, and amendments
thereto, filed by the Company with the securities and Exchange
Commission, and effective June 26, 1991.
(2) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30,
1999.
(4) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30,
2001.
(5) Filed herewith.
(6) 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.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K for the fiscal year ended September 30, 1995.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
(9) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(10) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
(11) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.
(12) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.
(13) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2002 Annual Meeting of Shareholders.
23
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 20, 2002
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/ Dr. Stanley Block Director December 20, 2002
--------------------------------------
Dr. Stanley Block
/s/ C. Sterling Cornelius Director December 20, 2002
--------------------------------------
C. Sterling Cornelius
/s/ John T. Cosby Director December 20, 2002
--------------------------------------
John T. Cosby
/s/ James C. Estill Director December 20, 2002
--------------------------------------
James C. Estill
/s/ Daniel R. Feehan Director December 20, 2002
--------------------------------------
Daniel R. Feehan
/s/ Timothy J. McKibben Director December 20, 2002
--------------------------------------
Timothy J. McKibben
/s/ John S. Peters Director December 20, 2002
--------------------------------------
John S. Peters
/s/ George J. Wechsler Director December 20, 2002
--------------------------------------
George J. Wechsler
24
CERTIFICATIONS
I, Daniel G. Reynolds, certify that:
2. I have reviewed this annual report on Form 10-K of Calloway's Nursery,
Inc.;
3. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
4. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
5. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the evaluation date.
6. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
7. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 20, 2002
/s/ Daniel G. Reynolds
------------------------------------------
Daniel G. Reynolds
Vice President and Chief Financial Officer
25
CERTIFICATIONS (CONT.)
I, James C. Estill, certify that:
1. I have reviewed this annual report on Form 10-K of Calloway's Nursery,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the evaluation date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or other persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 20, 2002
/s/ James C. Estill
-------------------------------------
James C. Estill
President and Chief Executive Officer
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Calloway's Nursery, Inc.:
We have audited the accompanying consolidated balance sheets of Calloway's
Nursery, Inc. and subsidiaries as of September 30, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Calloway's Nursery,
Inc. and subsidiaries as of September 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
early adopted Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, effective October 1, 2001.
KPMG LLP
Fort Worth, Texas
November 22, 2002
F-1
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share amounts)
ASSETS
September 30, September 30,
2002 2001
------------- -------------
Cash and cash equivalents $ 2,475 $ 279
Accounts receivable 356 433
Inventories 5,017 5,221
Prepaids and other assets 59 230
Deferred income taxes, current 263 55
Income taxes receivable 119 1,180
Current assets of discontinued operations 1,333 3,668
------------ ------------
Total current assets 9,622 11,066
Property and equipment, net 12,093 12,630
Goodwill, net of accumulated amortization
of $1,342 and $1,233, respectively 631 740
Deferred income taxes 1,568 1,301
Other assets 211 266
Noncurrent assets of discontinued operations -- 1,258
------------ ------------
Total assets $ 24,125 $ 27,261
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,749 $ 2,128
Accrued expenses 2,019 1,534
Notes payable, current -- 730
Current portion of long-term debt 501 732
Deferred income taxes, current -- 187
Current liabilities of discontinued operations 487 2,304
------------ ------------
Total current liabilities 5,756 7,615
Deferred rent payable 805 929
Long-term debt, net of current portion 8,246 8,646
------------ ------------
Total liabilities 14,807 17,190
------------ ------------
Commitments and contingencies
Non-Voting Acquisition Preferred Stock with
mandatory redemption provisions; redemption
value $3,420; par value $.01 per share; 40,000
shares authorized; 40,000 shares issued and
34,202 shares outstanding 2,538 2,180
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;
9,960,000 shares authorized; no shares issued
or outstanding -- --
Common stock; par value $.01 per share;
30,000,000 shares authorized; 6,772,890 and
6,498,346 shares issued, respectively;
6,522,890 and 6,248,346 shares outstanding,
respectively 68 65
Additional paid-in capital 9,885 9,610
Accumulated deficit (1,777) (388)
------------ ------------
8,176 9,287
Less: treasury stock, at cost (250,000 common shares) (1,396) (1,396)
------------ ------------
Total shareholders' equity 6,780 7,891
------------ ------------
Total liabilities and shareholders' equity $ 24,125 $ 27,261
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Net sales $ 43,335 $ 43,494 $ 44,619
Cost of goods sold 23,163 21,957 21,839
------------ ------------ ------------
Gross profit 20,172 21,537 22,780
------------ ------------ ------------
Operating expenses 13,708 12,959 13,501
Occupancy expenses 2,957 2,638 2,721
Advertising expenses 1,549 1,583 1,404
Depreciation and amortization 876 906 902
Interest expense 859 1,124 1,042
Interest income (44) (36) (80)
------------ ------------ ------------
Total expenses 19,905 19,174 19,490
------------ ------------ ------------
Income from continuing operations before income
taxes 267 2,363 3,290
Income tax expense 203 812 1,300
------------ ------------ ------------
Income from continuing operations 64 1,551 1,990
------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net of tax
benefits of $643, $416 and $202 (1,095) (794) (323)
Loss on disposal of discontinued operations,
net of tax benefits of $--, $1,515, and $-- -- (2,893) --
------------ ------------ ------------
Loss from discontinued operations (1,095) (3,687) (323)
------------ ------------ ------------
Net income (loss) (1,031) (2,136) 1,667
Accretion of preferred stock (358) (303) (261)
Retirement of preferred stock -- -- 115
------------ ------------ ------------
Net income (loss) attributable to common
shareholders $ (1,389) $ (2,439) $ 1,521
============ ============ ============
Weighted average number of common shares outstanding
Basic 6,382 6,107 5,823
Diluted 6,382 6,290 6,002
Basic net income (loss) per common share
Income (loss) from continuing operations $ (.05) $ .20 $ .32
Loss from discontinued operations (.17) (.60) (.06)
Net income (loss) $ (.22) $ (.40) $ .26
Diluted net income (loss) per common share
Income (loss) from continuing operations $ (.05) $ .20 $ .30
Loss from discontinued operations (.17) (.59) (.05)
Net income (loss) $ (.22) $ (.39) $ .25
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands)
Retained
Common Stock Additional Earnings
------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Treasury Stock Total
---------- ---------- ---------- ------------ -------------- ----------
Balance as of September 30, 1999 5,941 $ 59 $ 8,927 $ 530 $ (1,396) $ 8,120
Issuance of common stock 297 3 361 -- -- 364
Net income -- -- -- 1,667 -- 1,667
Accretion of preferred stock -- -- -- (261) -- (261)
Retirement of preferred stock -- -- -- 115 -- 115
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 2000 6,238 62 9,288 2,051 (1,396) 10,005
Issuance of common stock 260 3 322 -- -- 325
Net loss -- -- -- (2,136) -- (2,136)
Accretion of preferred stock -- -- -- (303) -- (303)
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 2001 6,498 65 9,610 (388) (1,396) 7,891
Issuance of common stock 275 3 275 -- -- 278
Net loss -- -- -- (1,031) -- (1,031)
Accretion of preferred stock -- -- -- (358) -- (358)
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 2002 6,773 $ 68 $ 9,885 $ (1,777) $ (1,396) $ 6,780
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (1,031) $ (2,136) $ 1,667
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Loss from discontinued operations (net of tax) 1,095 794 323
Loss on disposal of discontinued operations (net of
tax) -- 2,893 --
Depreciation and amortization 876 906 902
Deferred income taxes (662) 61 (460)
Stock compensation 109 140 124
(Increase) decrease in:
Accounts receivable 77 (183) (196)
Inventories 204 622 (993)
Income taxes receivable 1,061 (1,180) --
Prepaid expenses and other assets 226 7 (227)
Increase (decrease) in:
Accounts payable 621 (1,074) (75)
Accrued expenses 485 (138) 532
Income taxes payable -- (1,518) 1,439
Deferred rent payable (124) (127) (57)
------------ ------------ ------------
Net cash flows provided by (used for) operating
activities 2,937 (933) 2,979
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (230) (284) (1,714)
------------ ------------ ------------
Net cash flows used for investing activities (230) (284) (1,714)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 169 185 240
Proceeds from issuance of long-term debt -- 3,769 3,138
Net borrowings (repayments) under revolving line of credit (730) 675 (408)
Repayments of long-term debt (631) (4,716) (2,114)
Lease payments under capital lease -- (100) (160)
Payment of debt issuance costs -- -- (70)
Retirement of preferred stock -- -- (159)
------------ ------------ ------------
Net cash flows provided by (used for) financing
activities (1,192) (187) 467
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents from
continuing operations 1,515 (1,404) 1,732
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents from
discontinued operations 681 1,270 (1,381)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,196 (134) 351
------------ ------------ ------------
Cash and cash equivalents at beginning of year 279 413 62
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,475 $ 279 $ 413
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 859 $ 1,124 $ 1,043
Income taxes $ 251 $ 1,518 --
In 2000 the Company redeemed 5,798 shares of Preferred Stock for a cash payment
of $159. The redeemed Preferred Stock had a redemption value of $580 and a
carrying amount of $274. In 2002 and 2001 the carrying amount of the Preferred
Stock was accreted by $358 and $303, respectively, to a carrying amount of
$2,538 and $2,180 at September 30, 2002 and 2001, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
Calloway's Nursery, Inc. and Subsidiaries (the "Company") has been engaged in
the retail, and wholesale and growing segments of the nursery business. The
Company opened its first four retail stores in 1987.
The Company derives the majority of its revenues from sales to consumers of
living plants and related products. No single product or customer accounts for a
material portion of its revenues.
In fiscal 1999 the Company acquired certain assets of Cornelius Nurseries, Inc.
and two affiliated entities ("the Cornelius Acquisition"). The Cornelius
Acquisition added three retail stores in the Houston market, a growing operation
near Houston and two wholesale distribution centers (one in Houston and one near
Austin).
In fiscal 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its wholesale and growing segment. In
fiscal 2002 the Company decided to sell its Turkey Creek Farms growing operation
and discontinue the plant material that it produced. See Note 20 for a
discussion of discontinued operations.
In fiscal 2002 the Company entered the San Antonio Market by leasing seven
former nursery locations. This new market entry did not constitute a business
combination.
The Company has three wholly owned subsidiaries:
Calloway's Nursery of Texas, Inc. -- is the Company's Calloway's retail
stores in the Dallas - Fort Worth Market.
Miller Plant Farms, Inc. - is the Company's growing facility near Tyler,
Texas.
Cornelius Nurseries, Inc. -- is three Cornelius retail stores in the
Houston market.
Economic, weather and other circumstances that may exist from time-to-time in
these areas can have a significant impact on the Company's results of
operations.
All significant intercompany accounts and transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of these consolidated financial statements.
Revenue recognition - The Company recognizes revenue when the customer takes
possession of the merchandise.
Accounts receivable - The Company's accounts receivable are primarily related to
credit card transactions. The Company's retail stores accept MasterCard, VISA,
American Express and Discover. No allowance for doubtful accounts is considered
necessary since substantially all amounts are collected within five business
days.
F-6
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
As discussed below, the Company early adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets effective October 1, 2001.
The Company reevaluates the propriety of the carrying amounts of its properties
as well as the amortization periods when events and circumstances indicate that
impairment may have occurred. Recoverability of assets to be held and used is
measured by the comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Management
believes that no impairment has occurred and that no reduction of the estimated
useful lives is warranted.
Net income (loss) per share - Basic net income (loss) per share is computed by
dividing income (loss) attributable to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted net income
(loss) per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings or loss of the entity. When the effects of common stock would be
antidilutive due to a net loss attributable to common shareholders, basic loss
per share and diluted loss per share are reported as the same number.
Income taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes the
enactment date.
Intangibles - Goodwill has been amortized on a straight-line basis over 20
years. The Company has assessed the recoverability of this goodwill by
determining whether the amortization of the goodwill balance over its remaining
life could be recovered through undiscounted future operating
F-7
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash flows. The amount of goodwill impairment, if any, has been measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill could be impacted if estimated future operating cash
flows are not achieved. Based on this criteria, management believes no
impairment has occurred.
As further discussed below, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective
October 1, 2002, and will no longer amortize goodwill.
Cash equivalents - For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Stock Based Compensation - The Company sponsors a stock-based compensation plan
for its employees and directors. The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. See Note 11 for pro forma
disclosures that show the effect on the Company's net income (loss) and net
income (loss) per share as if the Company had adopted the cost recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123").
Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The amount of the valuation allowance related to deferred tax assets at
September 30, 2002 and 2001 has been estimated based on the weight of available
evidence at September 30, 2002 and 2001. Such estimate could change in the
future based on the occurrence of one or more future events.
Fair Value of Financial Instruments - The carrying values of the Company's
financial instruments, other than long-term debt, approximate fair values due to
the short maturities of such instruments. The Company's borrowings, if
recalculated based on current interest rates, would not differ significantly
from the amounts recorded at September 30, 2002 and 2001.
Reclassifications - Certain amounts for 2000 and 2001 have been reclassified to
conform to the 2002 presentation of the Discontinued Operations.
F-8
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
Statements 141 and 142
In June 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 141, Business Combinations
("Statement 141") and Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142").
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite lives
no longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which has been superceded by Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, upon adoption.
Statement 142 is effective for fiscal years beginning after December 15, 2001.
The Company adopted Statement 142 as of October 1, 2002, and will no longer
amortize goodwill.
Statement 141 will also require, upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassification in order to conform to the new criteria in Statement 141 for
recognition apart from goodwill.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but not later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statements of operations, effective as of the first quarter of fiscal 2003.
F-9
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 1, 2002 the Company has unamortized goodwill in the amount of
$631,000 that is subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $109,000, $108,000 and $108,000 for
the fiscal years ended September 30, 2002, 2001 and 2000. Because of the
extensive effort that will be needed to comply with adopting Statements 141 and
142, it is not practicable to reasonably estimate the impact of adopting these
Statements on the Company's consolidated financial statements at the date of
this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
Statement 144
In August 2001 the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.
Statement 144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Statement 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
Statement 144 is effective for fiscal years beginning after December 15, 2001,
with early adoption encouraged. The Company early-adopted Statement 144 as of
October 1, 2001, recording a loss on discontinued operations of $1,095,000 (net
of tax benefits of $643,000) for fiscal 2002. See Note 20 to the Consolidated
Financial Statements for the assets and liabilities of the discontinued
operations.
Statement 145
In April 2002 the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("Statement 145"). Statement 145 updates, clarifies, and simplifies existing
accounting pronouncements.
Statement 145 rescinds Statement 4, Reporting Gains and Losses from
Extinguishments of Debt, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Under Statement 145 an
enterprise will not be precluded from classifying gains and losses on
extinguishments transactions as an extraordinary item if they meet the criteria
in APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The provisions of Statement 145
related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002.
F-10
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement 145 also amends Statement 13 for transactions occurring after May 15,
2002 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions shall be accounted for in the same manner
as sale-leaseback transactions.
All other provisions of Statement 145 are effective for financial statements
issued on or after May 15, 2002, with early adoption encouraged. Statement 145
had no impact on the Company's Consolidated Financial Statements.
Statement 146
In June 2002 the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("Statement 146"). Statement 146 addresses
financial accounting and reporting for costs associated with (i) an exit
activity that does not involve an entity newly acquired in a business
combination and (ii) disposal activities within the scope of Statement 144.
An exit activity includes but is not limited to restructuring costs. Statement
146 nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring. It significantly reduces an entity's ability
to recognize a liability for future expenses related to a restructuring.
The costs within the scope of Statement 146 include (i) certain termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit covered by
other accounting pronouncements, (ii) costs to terminate a contract that is not
a capital lease, and (iii) other associated costs (such as costs to close or
consolidate facilities).
In general, an entity will record and measure a liability for a cost associated
with an exit or disposal activity at its fair value in the period in which the
liability is incurred (that is, when it meets the definition of a liability).
The provisions of Statement 146 are effective for exit or disposal activities
initiated after December 31, 2002. Adoption of Statement 146 is not expected to
have a material impact on the Company's consolidated financial statements.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Money market fund $ 2,190 $ 2
Demand deposit accounts 253 246
Petty cash 32 31
------------ ------------
$ 2,475 $ 279
============ ============
F-11
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
Inventories consist of the following (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Finished goods $ 4,006 $ 3,921
Work in process 929 1,184
Supplies 82 116
------------ ------------
$ 5,017 $ 5,221
============ ============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Land $ 6,396 $ 6,396
Land improvements 1,010 1,010
Leasehold improvements 1,111 1,138
Buildings 5,116 5,069
Furniture, fixtures and equipment 2,892 2,877
Vehicles 683 575
Less: accumulated depreciation and
amortization (5,115) (4,435)
------------ ------------
$ 12,093 $ 12,630
============ ============
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Accrued salaries and related taxes and
expenses $ 1,209 $ 910
Accrued bonuses 124 20
Accrued property taxes 503 429
Accrued sales and use taxes 183 175
------------ ------------
$ 2,019 $ 1,534
============ ============
F-12
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT
The Company entered into a $5,000,000 revolving line of credit arrangement with
a bank that matures on May 30, 2003 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. At September 30, 2002 and 2001 the outstanding balances were $-0- and
$730,000, respectively, and the unused available credit was $5,000,000 and
$4,270,000, respectively. The interest rate is variable, tied to the bank's
current prime lending rate. The interest rate was 4.75% at September 30, 2002.
Long-term debt consists of the following (amounts in thousands):
Monthly
Payment
September 30, September 30, (Principal
Description 2002 2001 Matures Interest Rate Collateral and Interest)
----------- ------------- ------------- ------------- ----------------- ----------- -------------
1. Term loan, financial
institution $ 303 $ 359 December 2006 Variable (9.50)% Real estate $ 7
2. Term loan, financial
institution 201 241 July 2007 Variable (7.25)% Real estate 7
3. Term loan, financial
institution 847 939 June 2012 Variable (5.75)% Real estate 10
4. Term loan, financial
institution 798 853 August 2012 Variable (9.125)% Real estate 10
5. Term loan, financial
institution 980 1,053 October 2014 Variable (5.75)% Real estate 9
6. Term loan, financial
institution 931 972 March 2015 Fixed (8.5)% Real estate 10
7. Term loan, financial
institution 1,108 1,157 March 2015 Fixed (8.5)% Real estate 12
8. Term loan, financial
institution 2,400 2,492 December 2015 Fixed (8.5)% Real estate 25
9. Term loan, financial
institution 1,157 1,176 November 2020 Fixed (10.0)% Real estate 12
Other 22 136
------------- -------------
Totals 8,747 9,378
Less: amounts due within
one year (501) (732)
------------- -------------
$ 8,246 $ 8,646
============= =============
F-13
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of long-term debt are as follows (amounts in thousands):
Year Ending September 30,
2003 $ 501
2003 575
2004 645
2005 720
2006 651
Thereafter 5,655
-------
$ 8,747
=======
At September 30, 2002 the Company was in compliance with all of its loan
covenants.
NOTE 8 - INCOME TAXES
Total income taxes for the years ended September 30, 2002, 2001 and 2000 were
allocated as follows:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Income from continuing operations $ 203 $ 812 $ 1,300
Discontinued operations (643) (1,931) (202)
------------- ------------- -------------
$ (440) $ (1,119) $ 1,098
============= ============= =============
Components of income tax expense (benefit) attributable to continuing operations
consist of the following (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Current expense
Federal $ 514 $ 751 $ 1,495
State 351 -- 265
------------- ------------- -------------
Total current 865 751 1,760
------------- ------------- -------------
Deferred expense (benefit):
Federal (404) 61 (460)
State (258) -- --
------------- ------------- -------------
Total deferred (662) 61 (460)
------------- ------------- -------------
Total expense $ 203 $ 812 $ 1,300
============= ============= =============
The differences between the Company's effective tax rate and the federal
statutory tax rate of 34%, as applied to income from continuing operations
before income taxes, for the fiscal years ended September 30, 2002, 2001 and
2000 are as follows (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Income tax expense at statutory rate
$ 91 $ 803 $ 1,119
State income tax, net of federal benefit 61 -- 175
Amortization of goodwill 37 37 37
Other, net 14 (28) (31)
------------- ------------- -------------
Total income tax expense $ 203 $ 812 $ 1,300
============= ============= =============
F-14
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets and liabilities as
of September 30, 2002 and 2001 are as follows (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Deferred tax liabilities:
Gain on disposal of assets $ -- $ (187)
------------- -------------
Deferred tax assets:
Deferred rent $ 299 $ 353
State net operating loss carryforward 324 66
Inventory capitalization 65 55
Assets marked to market 203 203
Basis difference in property and equipment 629 679
Loss on disposal of assets 199 --
AMT credit carryforward 112 --
------------- -------------
Total deferred tax assets 1,831 1,356
------------- -------------
Net deferred tax asset $ 1,831 $ 1,169
============= =============
Management has determined that it is more likely than not that the Company's
deferred tax assets will be realized; therefore, no valuation allowance was
necessary as of September 30, 2002, 2001 and 2000. 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 includes the Company's
history of income from continuing operations before income taxes, and the
availability of its existing net operating loss carryforwards. At September 30,
2002 the Company has net operating loss carryforwards of approximately
$7,200,000 for state income tax purposes.
NOTE 9 - SHAREHOLDERS' EQUITY
During 2002, 2001 and 2000, the Company issued shares of common stock to the
Calloway's Nursery, Inc. Stock Purchase Plan (see Note 12) and upon the exercise
of stock options (see Note 11), receiving proceeds as follows (amounts in
thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Number of shares issued 275 260 297
Proceeds $ 169 $ 185 $ 240
Compensation expense 109 140 124
------------- ------------- -------------
$ 278 $ 325 $ 364
============= ============= =============
NOTE 10 - COMMON STOCK PURCHASE RIGHTS
Effective July 1991, the Company adopted a shareholder rights plan ("Rights
Plan") that entitles each registered shareholder to one common share purchase
right ("Right") per common share held. The Rights attach to all certificates
representing outstanding shares of common stock; no separate Rights certificates
have been distributed. The terms of the Rights Plan provide that in the event of
an unapproved tender to acquire 20 percent or more of the Company's common
stock, the Right holders, except as noted below, can purchase common stock at
50% of the then current market price. The Rights Plan also provides that all
Rights held by parties to the unapproved tender shall be null and void; thus,
such party cannot participate in the discounted purchase of common stock. The
Rights are redeemable, at the Company's option, at any time at $.01 per Right.
F-15
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
The Company's stock option plans provide for the awarding of incentive stock
options to employees and non-qualified stock options to employees and
independent directors. The employee plans are administered by the Compensation
Committee of the Board of Directors, which consists entirely of independent
directors. The independent director stock options are initially granted on a
formula basis. Additional nonqualified stock options are provided to independent
directors on an individual grant basis. All options are exercisable according to
predetermined vesting schedules (all options vest within three years of the date
of the grant) and remain in effect for ten years from the date of the grant. An
aggregate of 2,583,000 shares of common stock have been reserved for issuance
under the Company's stock option plans, including 316,000 shares in connection
with the Company's 2001 Stock Option Plan that was approved in fiscal 2002.
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. Had compensation
expense been determined for stock options granted based on the "fair value" at
grant dates provided for in SFAS 123, the Company's pro forma net income (loss)
and diluted net income (loss) per share for 2002, 2001 and 2000 would
approximate the amounts below (amounts in thousands, except per share amounts):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Net income (loss) $ (1,463) $ (2,292) $ 1,667
Net income (loss) per share $ (.29) $ (.41) $ .25
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. The pro forma amounts were estimated using the Black Scholes
option-pricing model with the following assumptions:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Weighted average expected life
(years) 10 10 N/A
Expected volatility 89.37% 90.75% --
Expected dividends None None --
Risk free interest rate 3.375% 5.68% --
Weighted average fair value of
options granted $ .9455 $ 1.2763 N/A
F-16
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the stock option plans for the three
years ended September 30, 2002:
Weighted
Average
Shares Exercise Price
----------- --------------
September 30, 1999 985,100 $ 1.0806
Granted -- --
Exercised -- --
Forfeited 31,400 1.0645
Expired -- --
----------- -----------
September 30, 2000 953,700 1.0800
Granted 122,000 1.4380
Exercised 3,500 1.0000
Forfeited 4,300 1.1163
Expired -- --
----------- -----------
September 30, 2001 1,067,900 1.1221
Granted 757,700 1.0900
Exercised -- --
Forfeited 66,000 1.1212
Expired 7,000 6.1250
----------- -----------
September 30, 2002 1,752,600 $ 1.0883
=========== ===========
Exercisable options
September 30, 2000 937,700 $ 1.0800
September 30, 2001 1,027,800 1.1220
September 30, 2002 1,721,599 $ 1.0850
The following table summarizes information regarding stock options outstanding
at September 30, 2002:
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercise Options Exercise
Exercise Prices Outstanding Life Prices Exercisable Prices
--------------- ------------- ------------- ------------- ------------- -------------
$0.875 to $1.000 602,400 2.7 $ 0.9972 602,400 $ 0.9972
$1.001 to $1.440 1,150,200 7.9 1.1360 1,119,199 1.1323
------------- ------------- ------------- ------------- -------------
1,752,600 6.1 $ 1.0883 1,721,599 $ 1.0850
============= ============= ============= ============= =============
F-17
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCK PURCHASE PLAN
In 1992 the Company's Board of Directors and shareholders adopted a Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan is designed
to provide employees and directors with the opportunity to acquire an ownership
interest in the Company and thereby provide those who will be responsible for
the continued growth of the Company with a more direct concern about its welfare
and a common interest with the Company's other shareholders. The Stock Purchase
Plan is not subject to the Employee Retirement Income Security Act of 1974.
All employees who have attained the age of majority in the state of their
residence and have completed 60 days of full-time employment with the Company,
and all independent members of the Board of Directors, are eligible to
participate in the Stock Purchase Plan. Participants may elect to have payroll
deductions of a maximum of 10% of their compensation each pay period. The
Company matches up to 100% of such deductions based upon the participant's years
of continuous participation in the Stock Purchase Plan. Funds deducted from a
participant's pay and contributions made by the Company to the Stock Purchase
Plan on behalf of a participant (all of which is invested for the benefit of the
participant) are taxable to the participant as wages or compensation for
services. The Company contributions for the years ended September 30, 2002, 2001
and 2000 were $109,000, $140,000 and $124,000, respectively.
NOTE 13 - 401(k) PLAN
In 1999 the Company initiated a 401(k) plan for its employees. The 401(k) plan
provides employees with a way to save and invest for their retirement. The
Company does not provide matching contributions for the 401(k) plan.
NOTE 14 - INDEMNITY AGREEMENTS
The Company has entered into indemnity agreements with its directors and
executive officers which, to the extent permitted under applicable law,
indemnify such persons against all expenses, judgments, fines and penalties
incurred in connection with the defense or settlement of actions brought against
them by reason of the fact that they are or were executive officers or directors
of the Company, or assumed certain responsibilities in their official
capacities.
In addition, the Company has entered into indemnity agreements with two officers
of the Company that provide additional indemnification for all liabilities and
expenses in respect of certain lease obligations of the Company that have been
personally guaranteed by such officers. If the Company fails to indemnify either
of the officers as required in the indemnity agreement or if either of these
officers are terminated for any reason as an employee of the Company, the
Company will provide the terminated officer with one or more bank letters of
credit to secure payment of an aggregate of $4,000,000 of such liability;
however, the Company shall not be obligated to provide letters of credit
aggregating more than $4,000,000 to these two officers.
F-18
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES
As of September 30, 2002 the Company leased eighteen retail stores under
noncancellable operating leases. The leases expire in various years through
2013. The leases generally contain renewal options for periods ranging from 5 to
15 years and require the Company to pay all executory costs (such as property
taxes, maintenance and insurance). Rental payments include minimum rentals plus
contingent rentals based on sales. The Company has not had to pay contingent
rentals to date and does not expect to in the future.
Future minimum lease payments under noncancellable operating leases as of
September 30, 2002 are as follows (amounts in thousands):
Year Ending September 30,
2003 $ 2,480
2004 2,408
2005 1,923
2006 1,366
2007 850
Thereafter 1,868
--------
$ 10,895
========
Rental expense for operating leases during the fiscal years ended September 30,
2002, 2001 and 2000 was approximately $2.1 million for each fiscal year.
Included in the above future minimum lease payments for the fiscal years ending
September 30, 2003, 2004 and 2005 are amounts due of $142,000, $142,000, and
$107,000, respectively to a board member and vice president of the Company, who
is the landlord for three leased facilities in the San Antonio market (the "San
Antonio Affiliate Leases") that have three year terms. The San Antonio Affiliate
Leases were entered into in fiscal 2002. Rental expense for the San Antonio
Affiliate Leases was $6,000 for the fiscal year ended September 30, 2002.
There are various claims and pending actions incident to the business operations
of the Company. In the opinion of management, the Company's potential liability
in all pending actions and claims, in the aggregate, will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
F-19
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - NET INCOME (LOSS) PER SHARE
A reconciliation between the weighted average shares outstanding used in the
basic and diluted net income (loss) per share computations is as follows (in
thousands, except per share amounts):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Net income (loss) $ (1,031) $ (2,136) $ 1,667
Accretion of preferred stock (358) (303) (261)
Retirement of preferred stock -- -- 115
------------- ------------- -------------
Net income (loss) attributable to
common shareholders $ (1,389) $ (2,439) $ 1,521
============= ============= =============
Weighted average shares outstanding -
basic 6,382 6,107 5,823
Effect of dilutive securities: Assumed
exercise of stock options
-- 183 179
------------- ------------- -------------
Weighted average shares outstanding -
diluted 6,382 6,290 6,002
============= ============= =============
Net income (loss) per share:
Basic $ (.22) $ (.40) $ .26
Diluted $ (.22) $ (.39) $ .25
F-20
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SELECTED QUARTERLY DATA (UNAUDITED)
Amounts (except share data) are expressed in thousands:
First Quarter Second Quarter
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 10,228 $ 9,912 $ 6,992 $ 7,423
Gross Profit 4,334 4,684 3,429 3,564
Income (loss) from continuing operations (364) (178) (737) (618)
Net income (loss) $ (400) $ (231) (742) $ (605)
Income (loss) per share
Basic
Continuing operations $ (.07) $ (.04) $ (.13) $ (.11)
Discontinued operations (.01) (.01) -- --
(.08) (.05) (.13) (.11)
Diluted
Continuing operations (.07) (.04) (.13) (.11)
Discontinued operations (.01) (.01) -- --
$ (.08) $ (.05) $ (.13) $ (.11)
Third Quarter Fourth Quarter
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ 19,563 $ 20,251 $ 6,552 $ 5,908
Gross Profit 9,768 10,760 2,641 2,529
Income (loss) from continuing operations 2,717 3,319 (1,552) (972)
Net income (loss) $ 2,495 $ (315) $ (2,384) $ (985)
Income (loss) per share
Basic
Continuing operations $ .41 $ .53 $ (.26) $ (.17)
Discontinued operations (.03) (.59) (.13) --
$ .38 (.06) (.39) (.17)
Diluted
Continuing operations .41 .53 (.26) (.17)
Discontinued operations (.03) (.59) (.13) --
$ .38 $ (.06) $ (.39) $ (.17)
In the third quarter of 2001 the Company recorded a loss from discontinued
operations of $3,674,000. In the fourth quarter of 2002 the Company recorded a
loss from discontinued operations of $1,095,000. See Note 20 for a discussion of
discontinued operations.
F-21
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - PREFERRED STOCK WITH MANDATORY REDEMPTION PROVISIONS
In fiscal 1999 the Company issued 40,000 shares of Non-Voting Acquisition
Preferred Stock (the "Preferred Stock"), $.01 par value, in connection with an
acquisition. The Preferred Stock has a liquidation preference of $100 per share
and no voting rights, except as otherwise required by law. The Company may, at
any time prior to September 21, 2004, redeem any portion or all of the
outstanding shares of Preferred Stock for $100 per share. Any unredeemed shares
outstanding at September 21, 2004 must be redeemed for $100 per share.
The Preferred Stock was recorded at its estimated fair value of approximately
$1,890,000. The carrying amount of the Preferred Stock will be accreted at each
balance sheet date to its redemption amount using the interest method. The
resulting increase in the carrying amount of the Preferred Stock will reduce net
income attributable to common shareholders or increase net loss attributable to
common shareholders.
In fiscal 2000 the Company redeemed 5,798 shares of Preferred Stock for a cash
payment of $158,500. The redeemed Preferred Stock had a redemption value of
$579,800 and a carrying amount of $274,000. At September 30, 2002 and 2001 the
redemption amount of the Preferred Stock was $3,420,200.
NOTE 19 - SEGMENT INFORMATION
The Company has two reportable segments as follows: (i) retail, and (ii)
growing.
The Company aggregates its individual retail stores because they are all managed
in a similar way, they serve a similar type of customer, they use similar
methods to distribute their products and services, they carry similar product
lines, and they use similar marketing approaches. For example, the retail stores
sell plants, garden supplies and other merchandise, primarily to individuals, on
a cash-and-carry basis, at each retail store.
The Company had previously aggregated its two growing operations: Miller Plant
Farms and Turkey Creek Farms. These operations are distinguished from the retail
segment, but are similar to each other, in the way they are managed, in the type
of customer they serve, in the methods they use to produce and ship their
products, in the product lines they carry, and in the way they market their
products. For example, the growing segment operations sell plants to the
Company's retail stores, and ship goods via truck to the retail stores.
Since the Company decided to sell its Turkey Creek Farms growing operation in
2002 and discontinue the merchandise that it produced, the results of operations
for Turkey Creek Farms have been reclassified as Discontinued Operations. See
Note 20 for a discussion of discontinued operations. Accordingly, Turkey Creek
Farms has not been included in the growing caption in the following tables.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies (see Note 2). Management evaluates a segment's
performance based upon income or loss before income taxes. Intersegment sales or
transfers are recorded based upon prevailing market prices.
F-22
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a tabulation of business segment information for each of the
past three years. Intersegment elimination information is included to reconcile
segment data to the consolidated financial statements. Amounts are in thousands:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Revenues
From external customers
Retail $ 43,251 $ 43,385 $ 44,523
Growing 84 109 96
------------- ------------- -------------
Totals 43,335 43,494 44,619
------------- ------------- -------------
From other operating segments
Retail -- -- --
Growing 2,087 1,944 1,887
------------- ------------- -------------
Totals 2,087 1,944 1,887
------------- ------------- -------------
Intersegment Eliminations (2,087) (1,944) (1,887)
------------- ------------- -------------
Total consolidated net sales $ 43,335 $ 43,494 $ 44,619
============= ============= =============
Income (loss) from continuing
operations before income taxes
Retail $ 420 $ 2,113 $ 2,984
Growing (153) 250 306
------------- ------------- -------------
Total consolidated income from
continuing operations before
income taxes $ 267 $ 2,363 $ 3,290
============= ============= =============
Total assets
Retail $ 21,715 $ 21,258 $ 22,292
Growing 1,077 1,077 1,141
------------- ------------- -------------
Totals $ 22,792 $ 22,335 $ 23,433
============= ============= =============
Interest income
Retail $ 44 $ 36 $ 80
Growing -- -- --
------------- ------------- -------------
Totals $ 44 $ 36 $ 80
============= ============= =============
Interest expense
Retail $ 858 $ 1,023 $ 992
Growing 1 101 50
------------- ------------- -------------
Totals $ 859 $ 1,124 $ 1,042
============= ============= =============
Depreciation and amortization
expense
Retail $ 855 $ 891 $ 887
Growing 21 15 15
------------- ------------- -------------
Totals $ 876 $ 906 $ 902
============= ============= =============
F-23
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - DISCONTINUED OPERATIONS
DISPOSAL OF WHOLESALE OPERATIONS
In August 2001 the Company adopted a formal plan to dispose of the wholesale
operations, which had been a part of its wholesale and growing segment. The
Company exited its wholesale operations as of December 31, 2001. Specifically,
the Company ceased in an orderly fashion production and marketing of plants and
related products grown or purchased for sale to wholesale customers, including
other nursery retailers and landscape contractors. The wholesale operations
included the wholesale growing operations of Turkey Creek Farms as well as the
wholesale landscape distribution centers ("WLD") in Austin and Houston. The
adopted disposal plan included: (i) the sale of the Turkey Creek Farms wholesale
inventories to unaffiliated customers, and (ii) the sale of the WLD operations
as an ongoing business to an unaffiliated third party.
The Company incurred operating losses and negative cash flows in the wholesale
operations for the fiscal years ended September 30, 2001 and 2000. The continued
pressure from lower cost wholesalers impacted the profitability and competitive
position of these operations. The Company concluded that market conditions then
and for the foreseeable future were such that these operations were likely to
remain uncompetitive. Additionally, incremental future investments would not
generate sufficient income to recover the cost of such investments.
The Company recorded a loss on disposal of discontinued operations of
approximately $2.9 million (net of income taxes) in fiscal 2001 to cover the
expected cash and non-cash costs of the discontinued operations. The loss
included the write down to estimated net realizable value of the investment in
facilities and equipment, inventory, and accounts receivable, as well as the
accrual of anticipated operating losses during the period after the date the
disposal plan was adopted, through the date the disposition was completed.
Prior to the decision to discontinue the wholesale operations, the Company
produced plants at Turkey Creek Farms that were primarily for sale to external
customers, while a smaller portion of Turkey Creek Farms production was plants
for sale to the Company's own retail stores. Subsequent to that decision, the
Company began production at Turkey Creek Farms of plants that were exclusively
for sale at the Company's own retail stores.
The sale of the WLD operations was completed in October 2001 and indebtedness
related to the WLD real property was paid off. The Turkey Creek Farms wholesale
inventory was completely sold or otherwise disposed of by December 31, 2001.
F-24
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXIT FROM TURKEY CREEK FARMS
In September 2002 the Company decided to sell its Turkey Creek Farms growing
operation and discontinue the merchandise that it produced. The Company incurred
operating losses and negative cash flows on Turkey Creek Farms in fiscal 2002
and concluded that market conditions then and for the foreseeable future were
such that Turkey Creek Farms was likely to remain uncompetitive.
The Company recorded an inventory write-down of approximately $1.2 million in
fiscal 2002. The assets, liabilities and results of operations for Turkey Creek
Farms have been reclassified as Discontinued Operations in the accompanying
consolidated financial statements in accordance with Statement 144 (see Note 2).
Following is a summary of the assets and liabilities of the discontinued
operations as of the applicable years (amounts in thousands):
September 30, September 30,
2002 2001
------------- -------------
Cash $ 15 $ 41
Accounts receivable 1 717
Inventories $ 141 2,279
Property and equipment held for sale 1,176 631
------------- -------------
Current assets of discontinued operations $ 1,333 $ 3,668
============= =============
Noncurrent assets of discontinued operations -
property and equipment $ -- $ 1,258
============= =============
Accounts payable $ 476 $ 693
Accrued expenses 11 495
Current portion of long-term debt -- 1,116
------------- -------------
Current liabilities of discontinued operations $ 487 $ 2,304
============= =============
The property and equipment of the discontinued Turkey Creek Farms operation was
classified as a current asset at September 30, 2002 since it is expected to be
sold in fiscal 2003. The Company has entered into a contract to sell the
property and equipment for an amount in excess of its carrying value that, if
completed, would be recorded in fiscal 2003.
Likewise, the property and equipment of the discontinued wholesale operations
was classified as a current asset at September 30, 2001 since it was sold in
October 2001. In addition, the debt related to such property was also classified
as current at September 30, 2001 since it was paid off in October 2001 with the
proceeds from the sale.
F-25
CALLOWAY'S NURSERY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the operating results of the discontinued operations
for the applicable years (amounts in thousands):
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------------- ------------- -------------
Sales $ 3,740 $ 7,414 $ 7,886
Cost of goods sold 4,962 6,485 5,395
------------- ------------- -------------
Gross profit (loss) (1,222) 929 2,491
Expenses 516 2,139 3,016
------------- ------------- -------------
Loss from discontinued operations
before income taxes (1,738) (1,210) (525)
Income tax benefit (643) (416) (202)
------------- ------------- -------------
Loss from discontinued operations $ (1,095) $ (794) $ (323)
============= ============= =============
The Company recorded a loss on disposal of discontinued operations (net of
income tax) of $2,893,000 for the fiscal year ended September 30, 2001. The loss
included the expected loss on the disposal of the Turkey Creek Farms wholesale
inventory, partially offset by expected gains on the sale of property and
equipment and other assets, and estimated income tax benefits of $1,515,000.
Prior to fiscal 2002 Turkey Creek Farms functioned solely as a wholesale
operation and its operations are included in the discontinued operations of
fiscal 2002 and fiscal 2000. For fiscal 2002, Turkey Creek Farms functioned as a
growing operation and its operations are also reflected as discontinued
operations for fiscal 2002.
CALLOWAY'S NURSERY, INC.
Annual Report on Form 10-K
Fiscal Year Ended September 30, 2002
Index to 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)
(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)
(h) Extension of Employment Agreement between the Registrant and James C.
Estill dated July 2, 1996. (Exhibit (10)(m))(2)
(i) Extension of Employment Agreement between the Registrant and John T.
Cosby dated July 2, 1996. (Exhibit (10)(n))(2)
(j) Extension of Employment Agreement between the Registrant and John S.
Peters dated July 2, 1996. (Exhibit (10)(o))(2)
(k) Employment Agreement between the Registrant and C. Sterling Cornelius
dated September 21, 1999. (Exhibit (10)(k))(3)
(l) Extension of Employment Agreement between the Registrant and James C.
Estill dated May 9, 2001. (Exhibit (10)(p))(4)
(m) Extension of Employment Agreement between the Registrant and John T.
Cosby dated May 9, 2001. (Exhibit (10)(q))(4)
(n) Extension of Employment Agreement between the Registrant and John S.
Peters dated May 9, 2001. (Exhibit (10)(r))(4)
(o) Cornelius Nurseries, Inc. President Profit Bonus Plan for the Fiscal
Year Ending September 30, 2003. (Exhibit (10.1)(5)
(p) Calloway's Nursery, Inc. Management Profit Bonus Plan for the Fiscal
Year Ending September 30, 2003. (Exhibit (10.2)(5)
(q) Form of Indemnification Agreement dated November 14, 2002 between the
Registrant and each of Dr. Stanley Block, Sterling Cornelius, John T.
Cosby, James C. Estill, Daniel R. Feehan, Timothy J. McKibben, John S.
Peters, Daniel G. Reynolds, George J. Wechsler and David S. Weger.
(Exhibit 10.3)(5)
Exhibit No. Description
----------- -----------
(21)(a) Subsidiaries of the Registrant.(Exhibit 21)(5)
(23)(d) Consent of KPMG LLP. (Exhibit 23)(5)
(99)(a) Calloway's Nursery, Inc. Stock Purchase Plan.(Exhibit (28))(6)
(99)(b) Calloway's Nursery, Inc. 1991 Stock Option Plan.(Exhibit (10)(d))(1)
(99)(c) Calloway's Nursery, Inc. 1995 Stock Option Plan for Independent
Directors. (Exhibit (99)(c))(7)
(99)(d) Calloway's Nursery, Inc. 1996 Stock Option Plan.(Exhibit A)(8)
(99)(e) Calloway's Nursery, Inc. 1997 Stock Option Plan. (Exhibit A)(8)
(99)(f) Calloway's Nursery, Inc. 1998 Stock Option Plan. (Exhibit A)(10)
(99)(g) Calloway's Nursery, Inc. 1999 Stock Option Plan. (Exhibit A)(11)
(99)(h) Calloway's Nursery, Inc. 2000 Stock Option Plan.(Exhibit A)(12)
(99)(i) Calloway's Nursery, Inc. 2001 Stock Option Plan.(Exhibit A)(13)
(99)(j) Form of Calloway's Nursery, Inc. 2002 Stock Option Plan (Exhibit
99.1)(5)
(99)(k) Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit 99.2)(5)
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(1) Incorporated by reference to the Exhibit shown in parenthesis to
Registration Statement No. 33-40473 on Form S-1, and amendments thereto,
filed by the Company with the securities and Exchange Commission, and
effective June 26, 1991.
(2) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30, 1999.
(4) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K Report for the fiscal year ended September 30, 2001.
(5) Filed herewith.
(6) 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.
(7) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Form 10-K for the fiscal year ended September 30, 1995.
(8) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
(9) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
(10) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
(11) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders.
(12) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2001 Annual Meeting of Shareholders.
(13) Incorporated by reference to the Exhibit shown in parenthesis to the
Company's Proxy Statement for its 2002 Annual Meeting of Shareholders.