<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 28, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9031
SUNBELT NURSERY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1932993
(State of incorporation) (I.R.S. Employer Identification No.)
500 TERMINAL ROAD, FORT WORTH, TEXAS 76106
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 817 / 624-7253
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 preceeding
12 months and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
------- _______
As of June 12, 1996, the Registrant had 8,500,000 common shares, $.01
par value outstanding.
================================================================================
<PAGE>
SUNBELT NURSERY GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
Part I. Financial Information Page
- ------------------------------ ----
<S> <C>
Consolidated Statement of Operations for the Three Months
Ended April 28, 1996 and April 30, 1995..................................... 3
Consolidated Balance Sheet as of April 28, 1996 and
January 28, 1996............................................................ 4
Consolidated Statement of Cash Flows for the Three Months
Ended April 28, 1996 and April 30, 1995..................................... 5
Notes to Consolidated Financial Statements.................................. 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition..........................................12
Part II. Other Information
- ---------------------------
Legal Proceedings...........................................................16
Exhibits....................................................................17
Signatures..................................................................21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUNBELT NURSERY GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 28, APRIL 30,
1996 1995
---------- ---------
<S> <C> <C>
Net sales $43,879 $46,634
Cost of goods sold 24,193 25,488
---------- ---------
Gross profit 19,686 21,146
General, administrative and
selling expense 14,147 13,984
Depreciation and amortization 715 1,028
Interest income (11) (19)
Interest expense 344 935
Provision for store closings 0 (210)
---------- ---------
Net income 4,491 5,428
========== =========
Earnings per share:
Net income per share $0.53 $0.64
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SUNBELT NURSERY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
APRIL 28, January 28,
1996 1996
(unaudited)
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,420 $1,140
Cash - restricted 770 1006
Accounts receivable, net 1,069 310
Inventories 25,199 25,595
Other current assets 1,096 672
--------------- ----------------
Total current assets 32,554 28,723
--------------- ----------------
Property and equipment, at cost 28,149 27,951
Less accumulated depreciation 16,935 16,220
--------------- ----------------
Net property and equipment 11,214 11,731
Other assets 187 221
--------------- ----------------
Total assets $43,955 $40,675
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $19,459 $21,676
Accrued compensation 2,154 1,669
Current portion of long-term debt and capital leases 625 658
Other current liabilities 6,072 4,194
--------------- ----------------
Total current liabilities 28,310 28,197
Long-term debt and capital leases 10,103 11,473
Reserve for store closings 239 336
Other long-term liabilities 776 633
--------------- ----------------
Total liabilities 39,428 40,639
--------------- ----------------
Shareholders' equity:
Common stock, $.01 par value, 25 million shares
authorized, 8,500,000 issued and outstanding 85 85
Additional paid-in capital 45,151 45,151
Retained deficit (40,659) (45,150)
Subscriptions receivable from officer (50) (50)
--------------- ----------------
Total shareholders' equity 4,527 36
--------------- ----------------
Total liabilities and shareholders' equity $43,955 $40,675
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SUNBELT NURSERY GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 28, APRIL 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $4,491 $5,428
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 715 1,028
Reversal of store closing reserve - 210
Gain on sale of fixed assets - (207)
Payment of store closing costs included in
provision for store closings (97) (379)
Changes in operating assets and liabilities:
Inventories 396 (4,563)
Accounts receivable and other assets (1,149) (448)
Accounts payable (2,217) 1,296
Accrued compensation 485 182
Other liabilities 2,021 1,086
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,645 3,213
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (115) (128)
Sale of property and equipment - 1,058
------------ ------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (115) 930
------------ ------------
FINANCING ACTIVITIES:
Additions to long-term debt 43,319 46,765
Principal payments of long-term debt, including
capital lease obligations (44,805) (47,137)
Restricted cash for outstanding letters of credit 236 (594)
------------ ------------
NET CASH USED FOR FINANCING ACTIVITIES (1,250) (966)
------------ ------------
Increase in cash and cash equivalents 3,280 3,177
Cash and cash equivalents at beginning of period 1,140 1,287
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,420 $4,464
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF FINANCIAL STATEMENTS
- --------------------------------------
Sunbelt Nursery Group, Inc. (the "Company") is a specialty retailer of
nursery and garden products with 88 stores operating under three prominent
retail trade names: Wolfe Nursery in Texas and Oklahoma, Nurseryland Garden
Centers in California, and Tip Top Nurseries in Arizona.
The accompanying unaudited consolidated financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the year ended
January 28, 1996. All adjustments that are, in the opinion of management,
necessary to present fairly the Company's financial position as of April 28,
1996, and its results of operations and cash flow for the interim periods have
been made. All such adjustments are of a normal recurring nature. The results
of operations for the three months ended April 28, 1996 and April 30, 1995 are
not indicative of the results to be expected for the fiscal year due to the
highly seasonal nature of the nursery industry.
NOTE 2. CONTINGENCIES AND LIQUIDITY
- ------------------------------------
As of October 19, 1994, the Company and its subsidiaries entered into a
Loan and Security Agreement with a commercial bank ("Bank") providing a line of
revolving credit (the "Loan Agreement") which matures in October 1997. The
amount that may be borrowed under the Loan Agreement is dependent upon an
inventory borrowing base for each operating subsidiary determined on a monthly
basis, and the aggregate principal amount outstanding may not exceed $12.0
million. The borrowing base and amounts borrowed pursuant to the Loan Agreement
amounted to $11.7 million and $7.0 million, respectively, at April 28, 1996.
Effective as of July 31, 1995, the Company restructured thirteen subleases
and other guarantees of leases with Pier 1 Imports (the "Agreement of
Settlement"). The Agreement of Settlement provides for six-month lease terms
initially ending on December 31, 1995. The leases are renewable at Pier 1
Imports' option in six-month intervals through June 30, 1998, after which the
Company must consent to any further extensions. Pier 1 Imports granted the first
six month option ending on June 30, 1996. Rent calculated as 6.5% of gross sales
will be payable during the initial two terms and will vary from 6.5% to 5.0% of
gross sales during subsequent terms. The gross sales amounts from which rent
payable shall be calculated are subject to specified minimum levels. Pier 1
Imports is actively marketing the facilities for sale. The Company is obligated
to vacate any facility at the end of the then-current six-month lease term
should Pier 1 Imports locate a buyer for such property. However, the Company is
free to negotiate a new lease agreement with the purchaser of such property.
Under the Agreement of Settlement, the Company is released from any obligation
to purchase any of the Pier 1 properties. The Company may make an offer to
purchase any of these properties, but there is no obligation for Pier 1 Imports
to accept the Company's offer. As of April 28, 1996, one of the thirteen
properties had been sold to a third party and Sunbelt had negotiated a new lease
agreement with the purchaser. Concerning future purchases, should the Company be
6
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
unable to negotiate new lease terms with the eventual purchasers, it currently
would attempt to find alternative locations in the same area for each of the
twelve remaining properties. Sales and gross profit for these twelve locations
aggregated approximately $20.8 million and $8.2 million for fiscal 1996, and
$7.8 million and $8.0 million and $3.6 million and $3.6 million for the first
quarter of fiscal 1997 and 1996, respectively.
The Agreement of Settlement fixes a claim against the Company in favor of
Pier 1 Imports in the amount of $14.7 million comprised of two components -- an
earn-out claim for $8.0 million (the "Earn-out Claim") and the remaining portion
of the claim (the "Residual Claim"). The Earn-out Claim is evidenced by a
promissory note. The Residual Claim is a contingent, non-interest bearing claim
payable only in the event of non-performance under the Agreement of Settlement.
Both the Earn-out Claim and the Residual Claim are secured up to a $6.0 million
maximum by substantially all of the Company's assets, subordinate to the rights
of the Bank. The Earn-out Claim is payable in consecutive annual installments,
beginning May 10, 1996. Each annual payment ("Cash Flow Payment") will be in an
amount equal to the sum of 10% of the first $2.0 million of the Company's
operating cash flow and 40% of the Company's operating cash flow in excess of
$2.0 million. Operating cash flow is based upon the Company's prior fiscal year
results and is calculated in accordance with the Agreement of Settlement. Cash
Flow Payments are subject to certain maximum and minimum limitations on debt
service coverage, EBITDA, availability of borrowings pursuant to revolving
credit facilities, accounts payable levels and accrued liability levels. Any
Cash Flow Payment not payable due to the limitations listed above accrues and
becomes payable the following May 10th. The Earn-out Claim may be fully
satisfied by aggregate payments of $2.0 million by May 1, 1996, $4.0 million by
May 1, 1997, or $6.0 million by May 1, 1998. The Residual Claim does not bear
interest, and the Earn-out Claim bears interest only when a Cash Flow Payment is
deferred, and such deferral is not due to EBITDA, loan availability or debt
service coverage limitations. During any such period of Cash Flow Payment
deferral, interest shall accrue as follows: (i) 18% per annum on the amount of
Cash Flow Payment deferred and (ii) 10% per annum on the aggregate amount of
unpaid Earn-out Claim less the aggregate deferred Cash Flow Payments. Any
accrued interest is payable out of subsequent Cash Flow Payments. The Residual
Claim will be fully discharged by the satisfaction of the Earn-out Claim and the
termination, without liability to Pier 1 Imports, of the subleases and other
leases guaranteed by Pier 1 Imports.
To reflect the Agreement of Settlement, (i) property and equipment with a
net book value of $20.5 million was removed from the Company's consolidated
balance sheet; (ii) the obligation of $22.8 million due Pier 1 Imports was
removed from the consolidated balance sheet and; (iii) a current payable to Pier
1 Imports of $2.0 million was recorded representing the single payment the
Company initially intended to make on May 1, 1996 to satisfy the Earn-out Claim
in full. The Company also recorded a deferred gain of $213,000 in conjunction
with the Agreement of Settlement. This gain will be recognized once the Earn-out
Claim is satisfied. Reflective of the terms of the Agreement of Settlement, the
remaining subleases have been accounted for as operating leases subsequent to
July 31, 1995.
7
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company was unable to meet certain minimum financial requirements
pursuant to the Agreement of Settlement and the Loan Agreement. Due to covenants
in the Loan Agreement, the Company was prohibited from satisfying the Earn-out
Claim with a prepayment of $2.0 million on May 1, 1996. As a result of the
Company's inability to make this prepayment, the $2.0 million present value of
the entire $8.0 million in deferred Cash Flow Payments has been recorded as
Long-Term Debt in the accompanying consolidated balance sheet. The present value
of future Cash Flow Payments to Pier 1 to satisfy the Earn-out Claim have been
estimated based upon the following assumptions:
. Pursuant to the Agreement of Settlement, the Company's future Cash
Flow Payments to Pier 1 are based upon 10% of the first $2.0 million
of the Company's operating cash flow and 40% of the Company's
operating cash flow in excess of $2.0 million,
. Expected future Cash Flow Payments are discounted at 10%,
. Annual sales are increased at 1% per year,
. Overall gross margins are estimated to be 41.5%,
. The Company estimates that payments to Pier 1 will commence in
fiscal 2009 and the Earn-out Claim will be fully satisfied
in the year 2016. The delay of the commencement of payments to
Pier 1 results from the Company's estimate that certain financial
requirements will not be met until fiscal 2009.
The Company estimates the fair value of this liability to be $0.9 million,
which is calculated by discounting the expected future cash flow payments at a
rate of 16%.
OPERATING lOSSES - The Company continues to experience annual operating losses
due to declining sales and margins attributable to increased competition in its
market areas, inclement weather during its traditional spring selling season,
high operating expenses and less than optimal product mix and pricing. During
1996 and throughout the first quarter of fiscal 1997, Management has addressed
these issues as well as others in an attempt to return the Company to
profitability. These actions include:
. Entertaining negotiations with numerous landlords to achieve lower
store occupancy costs,
. Introducing changes in product mix, new philosophies on product set
and display, improving product quality, product pricing and use and
timing of advertising mediums, and increasing vendor participation for
advertising expenditures,
. Implementing reductions in store operating expenses, including
payroll, by reorganizing store management and by modification of the
Company's bonus program, and
8
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
. Identifying further reductions of general and administrative expenses.
Management believes that the implementation of the above issues has
improved, and should continue to improve, the Company's operations and
ultimately the Company's profitability and liquidity. Management has taken
certain additional actions that will be applicable to future periods in an
effort to increase sales, improve the Company's liquidity and return the Company
to profitability. These actions include, but are not limited to, the following:
. Negotiations to further reduce or redefine lease and long-term debt
agreements,
. Comprehensive training programs, designed to promote consistent
execution at the store level and specifically to ensure that excellent
guest service is achieved by all associates, through video taped
instructions, store and district manager training sessions, and
cashier and key personnel training,
. Enhanced vigilance to maintain product quality standards with a heavy
emphasis on rejecting inferior products at the loading dock,
. Implementing an inventory control philosophy of maintaining
increasingly lower inventory levels for stock replenishment as the
spring season ends, which will: (a) decrease the use of markdowns and
increase margins, and (b) make funds available which had previously
been assigned to inventory in the off-seasons,
. Review of all advertising items to eliminate unnecessary or non-impact
price reductions, and
. Implement an aggressive plan to eliminate non-performing stores and
open stores in new locations.
Management has not yet completed its review of underperforming stores. Upon
completion, identified underperforming stores may require the accrual of closure
expenses for severance, rent buyouts and/or other costs associated with store
closing. These expenses will be accrued in the period in which management adopts
a formal plan of store closure.
Management expects these plans to improve cash flow and return the Company
to profitability. However, there can be no assurance that such profitability
will be achieved, and, if not, the Company may be required to close additional
stores, liquidate inventories, sell certain assets or take other measures to
meet working capital needs.
9
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. CASH - RESTRICTED
- --------------------------
As of April 28, 1996, the Company had restricted cash of $0.8 million to
fund an agreement with a bank for letters of credit established for services and
to segregate proceeds from the sale of a property per a bank agreement.
NOTE 4. RESERVE FOR STORE CLOSINGS
- -----------------------------------
Charges to the store closing reserve amounted to $97,000 during the quarter
ended April 28, 1996. The charges related to scheduled rent payments for closed
stores. The reserve at April 28, 1996 of $512,000 (of which $273,000 is
reported as current and $239,000 is reported as non-current in the accompanying
Consolidated Balance Sheet) relates to noncancelable lease obligations of closed
stores.
NOTE 5. INCOME TAXES
- ---------------------
No provision for income taxes has been recognized for the first quarter of
fiscal 1997 as management does not currently expect the Company to have taxable
income for the year.
NOTE 6. LEGAL PROCEEDINGS
- --------------------------
LITIGATION: The Company, the Company's Chief Executive Officer (the
"CEO"), a company owned by the CEO, and General Host Corporation (a former 49.5%
shareholder of the Company) are defendants in a suit filed by a brokerage firm
(the "Plaintiffs") with regard to breach of contract of an agreement the
Plaintiffs had with the Company to raise financing. The Plaintiffs allege that
they are due payment under the agreement. They also allege that the Company's
CEO and/or the company owned by the CEO along with defendant General Host
Corporation intentionally interfered with the agreement between the Plaintiffs
and the Company. The Plaintiffs seek $700,000 in actual damages against the
Company under the agreement and an unspecified amount for quantum meruit as well
as attorney's fees. The Company believes that it proceeded properly under the
agreement and accordingly denies that any payments are due to the Plaintiffs.
The Company intends to vigorously defend itself against any claims by the
Plaintiffs.
There are various claims, lawsuits, investigations and pending actions
against the Company and its subsidiaries incident to the operations of its
business. Liability, if any, associated with these matters is not determinable
at April 28, 1996. While settlement of these lawsuits may impact the Company's
results of operations in the year of settlement or resolution, it is the opinion
of management that the ultimate resolution of such litigation will not have a
material adverse effect on the Company's financial position.
10
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ENVIRONMENTAL CONTINGENCIES - In connection with a possible sale-leaseback
transaction, which was not completed, the Company authorized a third party to
undertake environmental assessments of two owned, non-retail properties. The
results indicated potential contamination at the two sites. The extent and
nature of the contamination is not clear. It is also not clear whether the
Company has an obligation to remediate whatever contamination is ultimately
found to exist. If an obligation does exist, it is not presently possible to
estimate the potential range of costs involved.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
During the first quarter of fiscal 1997, the Company produced a net income
of $4.5 million compared to net income of $5.4 million during the first quarter
of the previous year. The decrease was substantially attributable to a decline
in sales of $2.7 million, which reduced gross profit by $1.5 million.
First quarter sales decreased by 5.9% to $43.9 million in fiscal 1997 from
$46.6 million in fiscal 1996. Comparable store sales declined by 4.4%. The
sales decline is attributable to record cold temperatures in Texas in March and
early April of 1996 and underperforming stores in Phoenix and California. The
Company has taken actions to improve store operations in Phoenix and California.
Gross profit as a percentage of sales decreased by 0.4% to 44.9% for the
first quarter of fiscal 1997 compared to 45.3% in fiscal 1996. The decrease is
attributed to the completion of price reductions on certain core products in
order to remain competitive. The Company's margin for the quarter was higher
than budget and the Company anticipates a rebound in the margins compared to
previous years - particularly in the third and fourth quarters. The Company's
margins in the third and fourth quarter of fiscal 1996 were adversely affected
by excessive product carrythrough that necessitated significant markdowns
primarily in the third quarter. The Company has initiated an inventory control
program that has significantly reduced inventory levels and management does not
anticipate the same degree of discounting in the third and fourth quarters of
fiscal 1997.
General, administrative and selling expense remained relatively unchanged
at $14.1 million in fiscal 1997 from $14.0 million in fiscal 1996. While the
Company continues to zealously review and control expenses, the ability to
implement further reduction is very limited at this time.
During the first quarter of fiscal 1997, the Company has not recognized an
income tax provision as the Company does not expect to have taxable income for
the year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the quarter ended April 28, 1996, $4.6 million cash was provided by
operations. Investing activities consumed $0.1 million in cash and the Company
repaid a net of $1.3 on an asset based revolving loan from a bank.
As of October 19, 1994, the Company and its subsidiaries entered into a
Loan and Security Agreement with a commercial bank ("Bank") providing a line of
revolving credit (the "Loan Agreement") which matures in October 1997. The
amount that may be borrowed under the Loan Agreement is dependent upon an
inventory borrowing base for each operating subsidiary determined on a monthly
basis, and the aggregate principal amount outstanding may not exceed $12.0
million. The borrowing base and amounts borrowed pursuant to the Loan Agreement
amounted to $11.7 million and $7.0 million, respectively, at April 28, 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
Effective as of July 31, 1995, the Company restructured thirteen subleases
and other guarantees of leases with Pier 1 Imports (the "Agreement of
Settlement"). The Agreement of Settlement provides for six-month lease terms
initially ending on December 31, 1995. The leases are renewable at Pier 1
Imports' option in six-month intervals through June 30, 1998, after which the
Company must consent to any further extensions. Pier 1 Imports granted the first
six month option ending on June 30, 1996. Rent calculated as 6.5% of gross sales
will be payable during the initial two terms and will vary from 6.5% to 5.0% of
gross sales during subsequent terms. The gross sales amounts from which rent
payable shall be calculated are subject to specified minimum levels. Pier 1
Imports is actively marketing the facilities for sale. The Company is obligated
to vacate any facility at the end of the then-current six-month lease term
should Pier 1 Imports locate a buyer for such property. However, the Company is
free to negotiate a new lease agreement with the purchaser of such property.
Under the Agreement of Settlement, the Company is released from any obligation
to purchase any of the Pier 1 properties. The Company may make an offer to
purchase any of these properties, but there is no obligation for Pier 1 Imports
to accept the Company's offer. As of April 28, 1996, one of the thirteen
properties had been sold to a third party and Sunbelt had negotiated a new lease
agreement with the purchaser. Concerning future purchases, should the Company be
unable to negotiate new lease terms with the eventual purchasers, it currently
would attempt to find alternative locations in the same area for each of the
twelve remaining properties. Sales and gross profit for these twelve locations
aggregated approximately $20.8 million and $8.2 million for fiscal 1996, and
$7.8 million and $8.0 million and $3.6 million and $3.6 million for the first
quarter of fiscal 1997 and 1996, respectively.
The Agreement of Settlement fixes a claim against the Company in favor of
Pier 1 Imports in the amount of $14.7 million comprised of two components -- an
earn-out claim for $8.0 million (the "Earn-out Claim") and the remaining portion
of the claim (the "Residual Claim"). The Earn-out Claim is evidenced by a
promissory note. The Residual Claim is a contingent, non-interest bearing claim
payable only in the event of non-performance under the Agreement of Settlement.
Both the Earn-out Claim and the Residual Claim are secured up to a $6.0 million
maximum by substantially all of the Company's assets, subordinate to the rights
of the Bank. The Earn-out Claim is payable in consecutive annual installments,
beginning May 10, 1996. Each annual payment ("Cash Flow Payment") will be in an
amount equal to the sum of 10% of the first $2.0 million of the Company's
operating cash flow and 40% of the Company's operating cash flow in excess of
$2.0 million. Operating cash flow is based upon the Company's prior fiscal year
results and is calculated in accordance with the Agreement of Settlement. Cash
Flow Payments are subject to certain maximum and minimum limitations on debt
service coverage, EBITDA, availability of borrowings pursuant to revolving
credit facilities, accounts payable levels and accrued liability levels. Any
Cash Flow Payment not payable due to the limitations listed above accrues and
becomes payable the following May 10th. The Earn-out Claim may be fully
satisfied by aggregate payments of $2.0 million by May 1, 1996, $4.0 million by
May 1, 1997, or $6.0 million by May 1, 1998. The Residual Claim does not bear
interest, and the Earn-out Claim bears interest only when a Cash Flow Payment is
deferred, and such deferral is not due to EBITDA, loan availability or debt
service coverage limitations. During any such period of Cash Flow
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
Payment deferral, interest shall accrue as follows: (i) 18% per annum on the
amount of Cash Flow Payment deferred and (ii) 10% per annum on the aggregate
amount of unpaid Earn-out Claim less the aggregate deferred Cash Flow Payments.
Any accrued interest is payable out of subsequent Cash Flow Payments. The
Residual Claim will be fully discharged by the satisfaction of the Earn-out
Claim and the termination, without liability to Pier 1 Imports, of the subleases
and other leases guaranteed by Pier 1 Imports.
To reflect the Agreement of Settlement, the financial statements of the
Company were adjusted as follows during the quarter ended July 30, 1995: (i)
property and equipment with a net book value of $20.5 million was removed from
the Company's consolidated balance sheet; (ii) the obligation of $22.8 million
due Pier 1 Imports was removed from the consolidated balance sheet and; (iii) a
current payable to Pier 1 Imports of $2.0 million was recorded representing the
single payment the Company initially intended to make on May 1, 1996 to satisfy
the Earn-out Claim in full. The Company also recorded a deferred gain of
$213,000 in conjunction with the Agreement of Settlement. This gain will be
recognized once the Earn-out Claim is satisfied. Reflective of the terms of the
Agreement of Settlement, the remaining twelve subleases have been accounted for
as operating leases subsequent to July 31, 1995.
The Company was unable to meet certain minimum financial requirements
pursuant to the Agreement of Settlement and the Loan Agreement. Due to covenants
in the Loan Agreement, the Company was prohibited from satisfying the Earn-out
Claim with a prepayment of $2.0 million on May 1, 1996. As a result of the
Company's inability to make this prepayment, the $2.0 million present value of
the entire $8.0 million in deferred Cash Flow Payments has been recorded to as
Long-Term Debt in the accompanying consolidated balance sheet. The present value
of future Cash Flow Payments to Pier 1 to satisfy the Earn-out Claim have been
estimated based upon the following assumptions:
. Pursuant to the Agreement of Settlement,the Company's future Cash Flow
Payments to Pier 1 are based upon 10% of the first $2.0 million of the
Company's operating cash flow and 40% of the Company's operating cash
flow in excess of $2.0 million,
. Expected future Cash Flow Payments are discounted at 10%,
. Annual sales are increased at 1% per year,
. Overall gross margins are estimated to be 41.5%,
. The Company estimates that payments to Pier 1 will commence in fiscal
2009 and the Earn-out Claim will be fully satisfied in the year 2016.
The delay of the commencement of payments to Pier 1 results from the
Companys estimate that certain financial requirements will not be met
until fiscal 2009.
The Company estimates the fair value of this liability to be $0.9 million,
which is calculated by discounting the expected future cash flow payments at a
rate of 16%.
OPERATING LOSSES - The Company continues to experience annual operating losses
due to declining sales and margins attributable to increased competition in its
market areas, inclement
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
weather during its traditional spring selling season, high operating expenses
and less than optimal product mix and pricing. During 1996 and throughout the
first quarter of fiscal 1997, Management has addressed these issues as well as
others in an attempt to return the Company to profitability. These actions
include:
. Entertaining negotiations with numerous landlords to achieve lower
store occupancy costs,
. Introducing changes in product mix, new philosophies on product set
and display, improving product quality, product pricing and use and
timing of advertising mediums, and increasing vendor participation for
advertising expenditures,
. Implementing reductions in store operating expenses, including
payroll, by reorganizing store management and by modification of the
Company's bonus program, and
. Identifying further reductions of general and administrative expenses.
Management believes that the implementation of the above issues has
improved, and should continue to improve, the Company's operations and
ultimately the Company's profitability and liquidity. Management has taken
certain additional actions that will be applicable to future periods in an
effort to increase sales, improve the Company's liquidity and return the Company
to profitability. These actions include, but are not limited to, the following:
. Negotiations to further reduce or redefine lease and long-term debt
agreements,
. Comprehensive training programs, designed to promote consistent
execution at the store level and specifically to ensure that excellent
guest service is achieved by all associates, through video taped
instructions, store and district manager training sessions, and
cashier and key personnel training,
. Enhanced vigilance to maintain product quality standards with a heavy
emphasis on rejecting inferior products at the loading dock,
. Implementing an inventory control philosophy of maintaining
increasingly lower inventory levels for stock replenishment as the
spring season ends, which will: (a) decrease the use of markdowns and
write-offs of products in the summer and increase margins, and (b)
make funds available which had previously been assigned to inventory
in the off-seasons,
. Review of all advertising items to eliminate unnecessary or non-impact
price reductions, and
. Implement an aggressive plan to eliminate non-performing stores and
open stores in new locations.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
Management has not yet completed its review of underperforming stores. Upon
completion, identified underperforming stores may require the accrual of closure
expenses for severance, rent buyouts and/or other costs associated with store
closing. These expenses will be accrued in the period in which management adopts
a formal plan of store closure.
Management expects these plans to improve cash flow and return the
Company to profitability. However, there can be no assurance that such
profitability will be achieved, and, if not, the Company may be required to
close additional stores, liquidate inventories, sell certain assets or take
other measures to meet working capital needs.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 6 to the Consolidated Financial Statements.
16
<PAGE>
ITEM 6. EXHIBITS
--------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form
S-1 (Reg. No. 33-42292)(the "Registration
Statement"), filed August 16, 1991
3.2 By-Laws Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement
10.1 Form of Post-Employment Consulting Incorporated by reference to Exhibit 10.3 of
Agreement with executive officers the Company's Registration Statement
10.2 Form of Indemnity Agreement with Incorporated by reference to Exhibit 10.4 to
directors and executive officers the Company's Registration Statement
10.3 Management Bonus Plan Incorporated by reference to Exhibit 10.5 to
the Company's Annual Report on Form 10-K, for
the fiscal year ended January 31, 1993
10.4 1991 Stock Option Plan Incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to the Companys Registration
Statement, filed September 25, 1991 (the
"Amended Registration Statement")
10.5 Executive Officers' Medical Plan Incorporated by reference to Exhibit 10.10
to the Companys Registration Statement
10.6 Executive Officers' Financial Planning Incorporated by reference to Exhibit 10.11
Plan to the Company's Registration Statement
10.7 Credit Facilities Agreement between the Incorporated by reference to Exhibit 10.12
Company and Pier 1 Imports to the Companys Registration Statement
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.8 Extension Agreement dated April 25, Incorporated by reference to Exhibit
1994 between the Company and Pier- 10.14 to the Company"s Report on Form 8-K,
SNG, Inc. relating to the Credit Facility filed April 28, 1994
Agreement between the Company and Pier 1 Imports
10.9 Waiver Agreement dated May 13, 1994 Incorporated by reference to Exhibit
between the Company and Pier 1 Imports 10.15 to the Company's Annual Report on
and Pier-SNG, Inc. relating to the Credit Form 10-K for the fiscal year ended
Facility Agreement between the Company and January 31, 1994
Pier 1 Imports
10.10 Loan and Security Agreement dated Incorporated by reference to Exhibit
October 14, 1994, among Wolfe Nursery, 10.19 to the Company's Report on Form 10-Q
Inc., Tip Top Nurseries, Inc., for the nine months ended October 31, 1994
Nurseryland Garden Centers, Inc. as
Borrowers, the Registrant, Sunbelt
Nursery Holdings, Inc. and Sunbelt
Management Services, Inc., as
Guarantors, and American National Bank
and Trust Company of Chicago (the
"Loan and Security Agreement")
10.11 Qualified Stock Option Agreement dated Incorporated by reference to Exhibit
October 18, 1994 with an Executive 10.11 to the Company's Report on Form 10-K
Officer for the fiscal year ended January 31,
1995, filed May 15, 1995
10.12 Amended and Restated Credit Facilities Incorporated by reference to Exhibit
Agreement dated October 14, 1994 10.11 to the Company's Report on Form 10-K
between the Company and Pier 1 for the fiscal year ended January 31,
Imports, Inc. 1995, filed May 15, 1995
10.13 Nonqualified Stock Option Agreement Incorporated by reference to Exhibit
dated March 6, 1995 with non-employee 10.13 to the Company's Report on Form 10-K
Directors for the fiscal year ended January 31,
1995, filed May 15, 1995
10.14 First Amendment and Waiver dated April Incorporated by reference to Exhibit
7, 1995 to the Loan and Security 10.14 to the Company's Report on Form 10-K
Agreement for the fiscal year ended January 31,
1995, filed May 15, 1995
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.15 Agreement of Settlement dated July 31, Incorporated by reference to Exhibit
1995 between Pier Lease, Pier 1 Imports 10.15 to the Company's Report on Form
and Sunbelt Nursery Group, and Timothy 10K/A-2 for the fiscal year ended January
R. Duoos 31, 1995, filed August 11, 1995
10.16 Security Agreement dated July 31, 1995, Incorporated by reference to Exhibit
by Sunbelt Nursery Group, Inc. and 10.16 to the Company's Report on Form
Wolfe Nursery, Inc. for the benefit of 10-K/A-2 for the fiscal year ended
Pier 1 Imports, Inc., identified as January 31, 1995, filed August 11, 1995
Exhibit A to the Agreement of Settlement
10.17 Lease Guaranty Indemnification Incorporated by reference to Exhibit
Agreement dated July 31, 1995, by 10.17 to the Company's Report on Form
Sunbelt Nursery Group, Inc. and Wolfe 10-K/A-2 for the fiscal year ended
Nursery, Inc. for the benefit of Pier 1 January 31, 1995, filed August 11, 1995
Imports, Inc., identified as Exhibit C to
the Agreement of Settlement
10.18 Environmental Indemnity dated July 31, Incorporated by reference to Exhibit
1995 by Sunbelt Nursery Group, Inc. and 10.18 to the Company's Report on Form
Wolfe Nursery, Inc. for the benefit of 10-K/A-2 for the fiscal year ended
Pier 1 Imports, Inc., identified as Exhibit January 31, 1995, filed August 11, 1995
D to the Agreement of Settlement
10.19 Duoos Indemnification Agreement dated Incorported by reference to Exhibit 10.19 to
July 31, 1995 by Timothy R. Duoos for the Company's Report on Form 10-K/A-2 for
the benefit of Pier 1 Imports, Inc., the fiscal year ended January 31, 1995, filed
identified as Exhibit E to the Agreement August 11, 1995
of Settlement
10.20 Sublease Guaranty dated July 31, 1995, Incorporated by reference to Exhibit
between Sunbelt Nursery Group, Inc. and 10.20 to the Company's Report on Form
Pier Lease, Inc. identified as Exhibit G to 10-K/A-2 for the fiscal year ended
the Agreement of Settlement January 31, 1995, filed August 11, 1995
10.21 Promissory Note dated July 31, 1995, in Incorporated by reference to Exhibit
the principal amount of $8,000,000 by 10.21 to the Company's Report on Form
Sunbelt Nursery Group, Inc. for the 10-K/A-2 for the fiscal year ended
benefit of Pier 1 Imports, Inc. January 31, 1995, filed August 11, 1995
identified as Exhibit H to the
Agreement of Settlement
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.22 Note Guaranty dated July 31, 1995, by Incorporated by reference to Exhibit 10.22 to
Wolfe Nursery, Inc. for the benefit of the Company's Report on Form 10-K/A-2 for
Pier 1 Imports, Inc., identified as Exhibit the fiscal year ended January 31, 1995,
I to the Agreement of Settlement filed August 11, 1995
10.23 Second Amendment, Waiver and Consent Incorporated by reference to Exhibit 10.23 to
dated July 31, 1995 to the Loan and the Company's Report on Form 10-K/A-2
Security Agreement for the fiscal year ended January 31, 1995,
filed August 11, 1995
10.24 Third Amendment dated February 14, Incorporated by reference to Exhibit 10.24 to
1996 to the Loan and Security the Company's Annual Report on Form 10-K,
Agreement for the fiscal year ended January 28, 1996,
filed May 10, 1996
10.25 Fourth Amendment and Waiver dated Incorporated by reference to Exhibit 10.25 to
May 9, 1996 to the Loan and Security the Company's Annual Report on Form 10-K,
Agreement for the fiscal year ended January 28,
1996, filed May 10, 1996
21 Subsidiaries of the Company Incorporated by reference to Exhibit 22 to the
Company's Annual Report on Form 10-K, for
the fiscal year ended January 31, 1993
27 Financial Data Schedule Filed herewith
</TABLE>
20
<PAGE>
SUNBELT NURSERY GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sunbelt Nursery Group, Inc.
---------------------------
(Registrant)
Date: June 12, 1996 /s/Richard R. Dwyer
-------------------------------
Richard R. Dwyer
President and Chief Accounting
Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> JAN-29-1996
<PERIOD-END> APR-28-1996
<CASH> 5,190
<SECURITIES> 0
<RECEIVABLES> 1,069
<ALLOWANCES> 0
<INVENTORY> 25,199
<CURRENT-ASSETS> 32,554
<PP&E> 28,149
<DEPRECIATION> 16,935
<TOTAL-ASSETS> 43,955
<CURRENT-LIABILITIES> 28,310
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 4,442
<TOTAL-LIABILITY-AND-EQUITY> 4,527
<SALES> 43,879
<TOTAL-REVENUES> 43,879
<CGS> 24,193
<TOTAL-COSTS> 39,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> 4,491
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,491
<EPS-PRIMARY> .53
<EPS-DILUTED> 0
</TABLE>
