<PAGE>
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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 MARCH 30, 1997
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 ARE 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 preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 14, 1997 the Registrant had 8,500,000 common shares, $.01 par value,
outstanding.
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<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 and Nine Months
Ended March 30, 1997 and March 31, 1996................................ 3
Consolidated Balance Sheet as of March 30, 1997 and
June 30, 1996........................................................... 4
Consolidated Statement of Cash Flows for the Nine Months
Ended March 30, 1997 and March 31, 1996................................. 5
Notes to Consolidated Financial Statements................................. 6
Management's Discussion and Analysis of Results of
Operations and Financial Condition...................................... 10
Part II. Other Information
- ---------------------------
Legal Proceedings.......................................................... 13
Exhibits................................................................... 14
Signatures................................................................. 18
</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 Nine Months Ended
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 22,433 $ 27,333 $ 64,088 $ 79,613
Cost of goods sold 12,153 15,996 36,809 49,215
-------- -------- -------- --------
Gross profit 10,280 11,337 27,279 30,398
General, administrative and
selling expense 11,073 12,482 31,828 36,964
Depreciation and amortization 589 868 1,880 2,688
Impairment of goodwill and long-lived assets -- 20,537 -- 20,537
Interest / other income (29) (54) (789) (97)
Interest expense 256 329 795 1,087
-------- -------- -------- --------
Loss before provision for income taxes (1,609) (22,825) (6,435) (30,781)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss ($ 1,609) ($22,825) ($ 6,435) ($30,781)
======== ======== ======== ========
Net loss per share ($ 0.19) ($ 2.69) ($ 0.76) ($ 3.62)
======== ======== ======== ========
Average common shares outstanding 8,500 8,500 8,500 8,500
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
SUNBELT NURSERY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(unaudited, in thousands)
<TABLE>
<CAPTION>
March 30, June 30,
1997 1996
--------- --------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 4,918 $ 2,058
Cash - restricted 2,092 1,352
Accounts and notes receivable, net 490 577
Inventories 17,116 18,847
Other current assets 376 281
-------- --------
Total current assets 24,992 23,115
-------- --------
Property and equipment, at cost 23,757 27,189
Less accumulated depreciation 15,913 16,481
-------- --------
Net property and equipment 7,844 10,708
Other assets 93 175
-------- --------
Total assets $ 32,929 $ 33,998
======== ========
Liabilities and Shareholders' Equity (Deficit)
- ----------------------------------------------
Current liabilities:
Accounts payable $ 16,862 $ 11,699
Accrued compensation 1,915 1,846
Current portion of long-term debt and capital leases 7,516 6,863
Other current liabilities 6,283 5,637
-------- --------
Total current liabilities 32,576 26,045
Long-term debt and capital leases 2,246 3,037
Other long-term liabilities 1,341 1,740
-------- --------
Total liabilities 36,163 30,822
-------- --------
Shareholders' equity (deficit):
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 (48,445) (42,010)
Subscriptions receivable from officer (25) (50)
-------- --------
Total shareholders' equity (deficit) (3,234) 3,176
-------- --------
Total liabilities and shareholders' equity (deficit) $ 32,929 $ 33,998
======== ========
</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>
Nine Months Ended
March 30, March 31,
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($ 6,435) ($30,781)
Adjustments to reconcile net loss to cash
provided by (used for) operating activities:
Depreciation and amortization 1,880 2,688
Gain on sale of fixed assets (119) (5)
Payment of store closing costs included in
provision for store closings (102) (384)
Impairment of goodwill and long-lived assets -- 20,537
Changes in operating assets and liabilities:
Inventories 1,222 (585)
Accounts receivable and other assets 58 (390)
Accounts payable 5,163 5,836
Accrued compensation 69 (210)
Other liabilities 348 1,227
-------- --------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 2,084 (2,067)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (195) (272)
Sale of property and equipment 1,471 48
-------- --------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,276 (224)
-------- --------
FINANCING ACTIVITIES:
Additions to line of credit 67,605 89,387
Principal payments of line of credit and
capital lease obligations (67,390) (85,711)
Restricted cash for outstanding letters of credit (740) (350)
Repayment of subscription receivable 25 --
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (500) 3,326
-------- --------
Increase (decrease) in cash and cash equivalents 2,860 1,035
Cash and cash equivalents at beginning of period 2,058 3,388
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,918 $ 4,423
======== ========
</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 70 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 and Form 10-K\A-1 for
the year ended January 28, 1996. On August 1, 1996, the Board of Directors of
the Company approved a change in the Company's fiscal year end from the Sunday
nearest to January 31 to the Sunday nearest to June 30. As a result, the
Company filed a transition report on Form 10-Q for the five months ended June
30, 1996. All adjustments are, in the opinion of management, necessary to
present fairly the Company's financial position as of March 30, 1997 and March
31, 1996, and its results of operations and cash flow for the periods then
ended. All such adjustments are of a normal recurring nature. The results of
operations for the interim periods ended March 30, 1997 and March 31, 1996 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. LIQUIDITY, CONTINGENCIES AND OPERATING LOSSES
- ------------------------------------------------------
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.
In October, the Company will either extend the Loan Agreement or seek the most
appropriate alternative financing sources based upon the Company's financial
results, financial condition, and the lending environment; however, there can be
no assurance that the Company will be able to extend the Loan Agreement or
obtain alternative financing. Accordingly, the amount outstanding under the Loan
Agreement is classified as a current liability at March 30, 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 $9.0 million. The
interest rate on the outstanding loans is currently 9.75%. The borrowing base
and amounts borrowed pursuant to the Loan Agreement amounted to $7.8 million and
$6.9 million, respectively, at March 30, 1997.
On October 24, 1996, the Bank issued waivers of certain defaults of provisions
in the Loan Agreement and amended the debt service coverage covenant; eliminated
the earnings before interest expense, income taxes and depreciation and
amortization covenant (EBITDA) and established a gross margin dollar covenant.
These waivers of the specified default conditions were necessary because as of
July 28, 1996, the Company was in default of the provisions of the Loan
Agreement relating to (i) EBITDA, and (ii) the debt service coverage ratio, both
of which were below the requirements established by the Loan Agreement. As of
March 30, 1997, the Company is in compliance with all current covenants of the
Loan Agreement.
Effective July 31, 1995, the Company restructured thirteen subleases and other
guarantees of leases with Pier 1 Imports (the "Agreement of Settlement") which
provides six-month lease terms renewable at Pier 1 Import's ("Pier 1") option
through June 30, 1998, after which the Company must consent to any further
extensions. The initial term ended December 31, 1995 and Pier 1 has since
renewed options through June 30, 1997. Rent is calculated as a percentage of
gross sales, subject to minimum levels. Pier 1 is actively marketing the
facilities for sale and the Company has no purchase obligation. The Company may
make an offer to purchase any of these properties, but Pier 1 is not obligated
to accept the offer. As of March 30, 1997, seven of the properties had been
sold to third parties and the Company has negotiated new lease agreements on
three of these locations, and has vacated the
6
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
other four properties. The Company closed two of the properties and recorded an
estimated liability of $601,000 in non-cancelable future minimum lease payments,
of which $397,000 is remaining as of March 30, 1997, on these stores pursuant to
the Agreement of Settlement. The subleases have been accounted for as operating
leases subsequent to July 31, 1995.
The Agreement of Settlement also fixes a $14.7 million claim against the
Company in favor of Pier 1. The claim is secured up to $6.0 million by
substantially all of the Company's assets, subordinate to the rights of the
Bank, and comprised of (i) a promissory note for $8.0 million (the "Earn-out
Claim") and (ii) the remaining portion of the claim (the "Residual Claim")
which is a non-interest bearing claim payable only in the event of non-
performance under the Agreement of Settlement. The Earn-out Claim is payable in
annual installments ("Cash Flow Payments"), subject to certain minimum financial
requirements pursuant to the Agreement of Settlement and the Loan Agreement, or
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
will be fully discharged by the satisfaction of the Earn-out Claim and the
termination, without additional liability to Pier 1, of the eight subleases and
other leases guaranteed by Pier 1.
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, the $2.0 million present value of the Earn-out Claim was initially
recorded as a long-term liability in the accompanying consolidated balance
sheet.
On January 31, 1997 the Company modified the terms of the Agreement of
Settlement (the "Note Modification Agreement") with Pier 1 which provides the
Company with the opportunity to modify the terms of the existing $8.0 million
Earn-out Claim for total consideration of $2.0 million, which is comprised of
$200,000 in cash and $1.8 million in notes. On January 31, 1997, the Company
recorded a $2.0 million liability in relation to this $8.0 million Earn-out
Claim. Pursuant to the Note Modification Agreement, on March 3, 1997, the
Company placed in escrow $200,000 in cash and a promissory note payable to Pier
1 in the amount of $800,000. This note bears interest at 6% per annum with
interest only paid monthly until May 1, 1998, at which time, the first of four
annual principal installments of $200,000 will be due. The Company may elect to
defer any or all of the annual principal payments with any deferred principal
due in full on May 1, 2001. In the event of such a deferral, however, the
interest rate on any deferred principal amount shall be increased to 10% per
annum until retirement. The remaining $1.0 million will be settled by Mr. Duoos,
Chairman of the Board, on behalf of the Company upon the registration and sale
of a certain portion of his personal shares of common stock in the Company,
which is currently restricted. The number of shares to be sold by Mr. Duoos will
be determined as the quotient of $1.0 million divided by the closing price of
the Company's common stock on the last trading day immediately preceding the
date on which a registration statement becomes effective (the "Delivery Date").
Proceeds from the sale of such shares will inure to the benefit of Pier 1. The
Company filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to this stock on March 17, 1997, however, the
SEC is still reviewing this filing. Pier 1 has the unilateral right to terminate
this Note Modification Agreement if the Delivery Date does not occur (i) by May
30, 1997 or (ii) if the closing price of the Company's common stock on the day
immediately preceding the Delivery Date is less than one dollar per share. In
conjunction with the sale of Mr. Duoos' personal stock, the Company will deliver
a promissory note payable to Mr. Duoos in the amount of $1.0 million. This note
will bear interest at 12% per annum and is for a term of three years. Interest
only will be paid monthly for the initial twelve months, at which time payments
will consist of interest plus principal amortized over the remaining twenty-four
months. At any time prior to full payment of the principal amount, Duoos may
convert the outstanding principal amount to shares of Sunbelt common stock. The
number of shares issued to Duoos on conversion will be determined by dividing
the outstanding principal balance by the closing price, as defined in the Note
Modification Agreement. Upon the sale of the Duoos stock, the parties shall
enter into a Security and Subordination Agreement wherein the Duoos Note will be
secured by a lien on all Sunbelt and Wolfe assets, subordinate only to American
National Bank.
OPERATING LOSSES - In addition to operating losses for each of the three years
ended January 28, 1996, the Company continued to incur losses and declining
sales for its five-month transition period ended June 30, 1996
7
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
and for the nine-month period ended March 30, 1997. In addition, at March 30,
1997, the Company has a net capital deficiency and the Company's revolving line
of credit matures in October 1997. The Bank has not indicated its intention to
extend the maturity date of the revolving line of credit. All of the above raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. During
fiscal 1997, management has addressed these issues as well as others in its
continuing efforts to return the Company to profitability. Management's plans
for fiscal 1997 and 1998 include: improvements in store layout, product display,
product quality, and advertising; reductions in store operating expenses; the
sale or closure of additional underperforming stores; and continued reduction of
corporate overhead and decentralization of operations.
Management has not yet completed its strategic analysis of other
underperforming stores and their respective positions in the Company's and the
overall lawn and garden competitive environment. 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 for such underperforming stores.
Management has taken additional actions that will be applicable to future
periods, including: changes in senior management personnel, enhancements to
associate training programs, implementation of stricter product quality
standards, an inventory control philosophy and implementation of a new
sales/markdown control and analysis system.
These plans are designed 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.
NOTE 3. CASH - RESTRICTED
- --------------------------
As of March 30, 1997, the Company had restricted cash of $2.1 million
established to segregate proceeds from the sale of properties per the Loan
Agreement.
NOTE 4. INCOME TAXES
- ---------------------
No provision for income taxes has been recognized in the accompanying
financial statements, as management does not currently expect the Company to
have taxable income during the applicable tax year.
NOTE 5. LEGAL PROCEEDINGS
- --------------------------
LITIGATION - The Company is a defendant in litigation styled Principal Financial
Securities, Inc. and Loeb Partners Corporation v. Sunbelt Nursery Group, Inc.,
General Host Corporation, Lyndale Garden Center, Inc., and Timothy Duoos which
is pending in the 352nd District Court of Tarrant County, Texas in Cause No.
352-157413-95. This suit was filed on January 26, 1995. In this lawsuit, the
Plaintiffs allege that they are entitled to payment as an assignee of Hamilton
Investments, Inc. ("Hamilton"). According to the Plaintiffs, they are entitled
to payment based upon a contract between Hamilton and the Company. The
Plaintiffs allege that Hamilton was a procuring cause of financing obtained by
the Company in connection with the sale of General Host's shares of the
Company's stock to Mr. Timothy Duoos. The Plaintiffs seek actual damages which
they allege to be in excess of $700,000, plus punitive damages, court costs, and
attorney's fees. The Company denies the allegations of the Plaintiffs. If the
claim cannot be resolved by settlement, on terms favorable to the Company, the
Company has indicated an intention to vigorously contest the case.
There are various claims, lawsuits, investigations and pending actions against
the Company and its subsidiaries incident to the operations of its business.
Liability of the Company and its subsidiaries, if any,
8
<PAGE>
SUNBELT NURSERY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
associated with these matters is not determinable at March 30, 1997. While
settlement of these lawsuits may impact the Company's results of operations and
liquidity 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.
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. One of the two properties was
sold in October 1996.
NOTE 6. GAIN OF SALE OF OPERATING ASSETS
- -----------------------------------------
In August 1996, the Company recorded a gain of $710,000 from the sale of
operating assets. Concurrent with the sale of certain stores during this
period, the Company assigned to the purchaser the leases on two stores and, as a
result, the Company remains secondarily liable as a guarantor. These non-
cancelable leases expire in October 1999 and December 2003 and the remaining
undiscounted non-cancelable minimum lease commitments due as of March 30, 1997
are $621,000.
During the third quarter, the Company recorded a loss of $238,000 relating to
the settlement of future lease payments upon the closure of two stores which is
reflected in general, administrative, and selling expenses in the accompanying
consolidated statement of operations.
NOTE 7. EARNINGS PER SHARE
- ---------------------------
In February 1997, the FASB issued FAS No. 128, Earning per Share ("FAS 128"),
which is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Effective December 15, 1997, the
Company will adopt FAS 128, which establishes standards for computing and
presenting earnings per share ("EPS") and will retroactively restate EPS for the
first quarter of fiscal 1998 at that time. The statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes the effect of
potentially dilutive securities, while diluted EPS reflects the potential
dilution that would have occurred if securities or other contracts to issue
common stock had been exercised, converted into, or resulted in the issuance of
common stock that had then shared in the earnings of the entity. The EPS
calculation under FAS 128 would be the same, due to the fact that the Company
has reported losses for all periods presented.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
With the exception of historical information, the matters discussed herein are
forward-looking statements that involve risks and uncertainties including, but
not limited to, economic conditions, weather conditions in the Company's market
areas, interest rate fluctuations, product demand, competitors' merchandise mix,
service and pricing, availability of merchandise, the regulatory and trade
environment, real estate market fluctuations and other risks indicated in
filing with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
- ---------------------
During the three months ended March 30, 1997, the Company generated a net loss
of $1.6 million compared to a net loss of $22.8 million for the three month
period ended March 31, 1996, a decrease of $21.2 million. The improvement is
primarily attributable to a write-off of goodwill and other impaired long-term
assets during the quarter ended March 31, 1996. The net loss from operations,
exclusive of the asset impairments and write-off of goodwill, during the quarter
was reduced by $679,000, as a result of decreased sales, offset by increased
gross margins and lower operating expenses.
Net sales decreased by $4.9 million or 17.9%, and $15.5 million or 19.5% for
the three and nine month periods, respectively. Comparable store sales also
decreased by 5.9% and 9.2% for these periods. The decline in comparable store
sales is attributed to wet and cool weather during January and February and
competitive markets. Management has continued to focus on sales increases as a
primary goal while continuing to maintain acceptable margins.
Gross margins improved from 41.5% to 45.8% during the third quarter and from
38.2 % to 42.6% for the nine months ended March 30, 1997. The improvement is
consistent with previous quarters and is substantially attributed to lower than
normal gross margins in the previous year and the Company's focused efforts to
return margins to previous levels. The specific actions which substantially
contributed to the increase included: elimination of underperforming stores,
increased prices, reduced advertising markdowns, strict inventory controls to
reduce inventory excesses and the associated markdowns, and implementation of an
inventory/markdown system for daily review and management of markdowns.
General, administrative and selling expenses during the third quarter were
down 11.3% or $1.4 million and 13.9% or $5.1 million for the three and nine
month periods ended March 30, 1997, respectively, primarily resulting from the
reduction in the number of stores operated by the Company as well as the ongoing
efforts focused on achieving reductions in store operating and general and
administrative expenses. These reductions were offset by the settlement of
future lease payments upon closure of two stores during the third quarter which
resulted in the recording of a $238,000 loss. The Company will continue to
streamline corporate operations and decentralize operating activities to the
district level. The sale of operating assets during the first quarter resulted
in the recording of a $710,000 gain, which was a significant factor in the
increase reflected in other income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the nine months ended March 30, 1997, $2.1 million cash was provided by
operations. Investing activities provided $1.3 million in cash and the Company
borrowed a net of $.2 million on an asset based revolving loan from a bank.
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.
In October, the Company will either extend the Loan Agreement or seek the most
appropriate alternative financing sources based upon the Company's financial
results, financial condition, and the lending environment; however, there can be
no assurance that the Company will be able to extend the Loan Agreement or
obtain alternative financing. Accordingly, the amount outstanding under the Loan
Agreement is classified as a current liability at March 30, 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 $9.0 million. The
interest rate on the outstanding loans is currently 9.75%. The borrowing base
and amounts borrowed pursuant to the Loan Agreement amounted to $7.8 million and
$6.9 million, respectively, at March 30, 1997.
10
<PAGE>
On October 24, 1996, the Bank issued waivers of certain defaults of provisions
in the Loan Agreement and amended the debt service coverage covenant; eliminated
the earnings before interest expense, income taxes and depreciation and
amortization covenant (EBITDA) and established a gross margin dollar covenant.
These waivers of the specified default conditions were necessary because as of
July 28, 1996, the Company was in default of the provisions of the Loan
Agreement relating to (i) EBITDA, and (ii) the debt service coverage ratio, both
of which were below the requirements established by the Loan Agreement. As of
March 30, 1997, the Company is in compliance with all current covenants of the
Loan Agreement.
Effective July 31, 1995, the Company restructured thirteen subleases and other
guarantees of leases with Pier 1 Imports (the "Agreement of Settlement") which
provides six-month lease terms renewable at Pier 1 Import's ("Pier 1") option
through June 30, 1998, after which the Company must consent to any further
extensions. The initial term ended December 31, 1995 and Pier 1 has since
renewed options through June 30, 1997. Rent is calculated as a percentage of
gross sales, subject to minimum levels. Pier 1 is actively marketing the
facilities for sale and the Company has no purchase obligation. The Company may
make an offer to purchase any of these properties, but Pier 1 is not obligated
to accept the offer. As of March 30, 1997, seven of the properties had been
sold to third parties and the Company has negotiated new lease agreements on
three of these locations, and has vacated the other four properties. The
Company closed two of the properties and recorded an estimated liability of
$601,000 in non-cancelable future minimum lease payments, of which $397,000 is
remaining as of March 30, 1997, on these stores pursuant to the Agreement of
Settlement. The subleases have been accounted for as operating leases subsequent
to July 31, 1995.
The Agreement of Settlement also fixes a $14.7 million claim against the
Company in favor of Pier 1. The claim is secured up to $6.0 million by
substantially all of the Company's assets, subordinate to the rights of the
Bank, and comprised of (i) a promissory note for $8.0 million (the "Earn-out
Claim") and (ii) the remaining portion of the claim (the "Residual Claim")
which is a non-interest bearing claim payable only in the event of non-
performance under the Agreement of Settlement. The Earn-out Claim is payable in
annual installments ("Cash Flow Payments"), subject to certain minimum financial
requirements pursuant to the Agreement of Settlement and the Loan Agreement, or
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
will be fully discharged by the satisfaction of the Earn-out Claim and the
termination, without additional liability to Pier 1, of the eight subleases and
other leases guaranteed by Pier 1.
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, the $2.0 million present value of the Earn-out Claim was initially
recorded as a long-term liability in the accompanying consolidated balance
sheet.
On January 31, 1997 the Company modified the terms of the Agreement of
Settlement (the "Note Modification Agreement") with Pier 1 which provides the
Company with the opportunity to modify the terms of the existing $8.0 million
Earn-out Claim for total consideration of $2.0 million, which is comprised of
$200,000 in cash and $1.8 million in notes. On January 31, 1997, the Company
recorded a $2.0 million liability in relation to this $8.0 million Earn-out
Claim. Pursuant to the Note Modification Agreement, on March 3, 1997, the
Company placed in escrow $200,000 in cash and a promissory note payable to Pier
1 in the amount of $800,000. This note bears interest at 6% per annum with
interest only paid monthly until May 1, 1998, at which time, the first of four
annual principal installments of $200,000 will be due. The Company may elect to
defer any or all of the annual principal payments with any deferred principal
due in full on May 1, 2001. In the event of such a deferral, however, the
interest rate on any deferred principal amount shall be increased to 10% per
annum until retirement. The remaining $1.0 million will be settled by Mr. Duoos,
Chairman of the Board, on behalf of the Company upon the registration and sale
of a certain portion of his personal shares of common stock in the Company,
which is currently restricted. The number of shares to be sold by Mr. Duoos will
be determined as the quotient of $1.0 million divided by the closing price of
the Company's common stock on the last trading day immediately preceding the
date on which a registration statement becomes effective (the "Delivery Date").
Proceeds from the sale of such shares will inure to the benefit of Pier 1. The
Company filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to this stock on March 17, 1997, however, the
SEC is still reviewing this filing. Pier 1 has the unilateral right to terminate
this Note Modification Agreement if the Delivery Date does not occur (i) by May
30, 1997 or (ii) if the closing price of the Company's
11
<PAGE>
common stock on the day immediately preceding the Delivery Date is less than one
dollar per share. In conjunction with the sale of Mr. Duoos' personal stock, the
Company will deliver a promissory note payable to Mr. Duoos in the amount of
$1.0 million. This note will bear interest at 12% per annum and is for a term of
three years. Interest only will be paid monthly for the initial twelve months,
at which time payments will consist of interest plus principal amortized over
the remaining twenty-four months. At any time prior to full payment of the
principal amount, Duoos may convert the outstanding principal amount to shares
of Sunbelt common stock. The number of shares issued to Duoos on conversion will
be determined by dividing the outstanding principal balance by the closing
price, as defined in the Note Modification Agreement. Upon the sale of the Duoos
stock, the parties shall enter into a Security and Subordination Agreement
wherein the Duoos Note will be secured by a lien on all Sunbelt and Wolfe
assets, subordinate only to American National Bank.
OPERATING LOSSES - In addition to operating losses for each of the three years
ended January 28, 1996, the Company continued to incur losses and declining
sales for its five-month transition period ended June 30, 1996 and for the nine-
month period ended March 30,1997. In addition, at March 30, 1997, the Company
has a net capital deficiency and the Company's revolving line of credit matures
in October 1997. The Bank has not indicated its intention to extend the
maturity date of the revolving line of credit. All of the above raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. During
fiscal 1997, management has addressed these issues as well as others in its
continuing efforts to return the Company to profitability. Management's plans
for fiscal 1997 and 1998 include: improvements in store layout, product display,
product quality, and advertising; reductions in store operating expenses;
the sale or closure of additional underperforming stores; and continued
reduction of corporate overhead and decentralization of operations.
Management has not yet completed its strategic analysis of other
underperforming stores and their respective positions in the Company's and the
overall lawn and garden competitive environment. 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 for such underperforming stores.
Management has taken additional actions that will be applicable to future
periods, including: changes in senior management personnel, enhancements to
associate training programs, implementation of stricter product quality
standards, an inventory control philosophy and implementation of a new
sales/markdown control and analysis system.
These plans are designed 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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In February 1997, the FASB issued FAS No. 128, Earning per Share ("FAS 128"),
which is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Effective December 15, 1997, the
Company will adopt FAS 128, which establishes standards for computing and
presenting earnings per share ("EPS") and will retroactively restate EPS for the
first quarter of fiscal 1996 at that time. The statement requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes the effect of
potentially dilutive securities, while diluted EPS reflects the potential
dilution that would have occurred if securities or other contracts to issue
common stock had been exercised, converted into, or resulted in the issuance of
common stock that had then shared in the earnings of the entity. The EPS
calculation under FAS 128 would be the same, due to the fact that the Company
has reported losses for all periods presented.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Note 5 to the Consolidated Financial Statements.
13
<PAGE>
ITEM 6. EXHIBITS
--------
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1 Restated Certificate of Incorporated by reference to Exhibit 3.1 to
Incorporation 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 Incorporated by reference to Exhibit 10.3
Consulting Agreement with of the Company's Registration Statement
executive officers
10.2 Form of Indemnity Incorporated by reference to Exhibit 10.4
Agreement with directors to the Company's Registration Statement
and executive officers
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 Company's
Registration Statement, filed September 25,
1991 (the "Amended Registration Statement")
10.5 Executive Officers' Incorporated by reference to Exhibit 10.10
Medical Plan to the Company's Registration Statement
10.6 Executive Officers' Incorporated by reference to Exhibit 10.11
Financial Planning Plan to the Company's Registration Statement
10.7 Credit Facilities Incorporated by reference to Exhibit 10.12
Agreement between the to the Company's Registration Statement
Company and Pier 1 Imports
10.8 Extension Agreement dated Incorporated by reference to Exhibit 10.14
April 25, 1994 between the to the Company's Report on Form 8-K, filed
Company and Pier-SNG, Inc. April 28, 1994
relating to the Credit
Facility Agreement between
the Company and Pier 1
Imports
10.9 Waiver Agreement dated May Incorporated by reference to Exhibit 10.15
13, 1994 between the to the Company's Annual Report on Form 10-K
Company and Pier 1 Imports for the fiscal year ended January 31, 1994
and Pier-SNG, Inc.
relating to the Credit
Facility Agreement between
the Company and Pier 1
Imports
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.10 Loan and Security Incorporated by reference to Exhibit 10.19
Agreement dated October to the Company's Report on Form 10-Q for
14, 1994, among Wolfe the nine months ended October 31, 1994
Nursery, Inc., Tip Top
Nurseries, Inc.,
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 Incorporated by reference to Exhibit 10.11
Agreement dated October to the Company's Report on Form 10-K for
18, 1994 with an Executive the fiscal year ended January 31, 1995,
Officer filed May 15, 1995
10.12 Amended and Restated Incorporated by reference to Exhibit 10.11
Credit Facilities to the Company's Report on Form 10-K for
Agreement dated October the fiscal year ended January 31, 1995,
14, 1994 between the filed May 15, 1995
Company and Pier 1
Imports, Inc.
10.13 Nonqualified Stock Option Incorporated by reference to Exhibit 10.13
Agreement dated March 6, to the Company's Report on Form 10-K for
1995 with non-employee the fiscal year ended January 31, 1995,
Directors filed May 15, 1995
10.14 First Amendment and Waiver Incorporated by reference to Exhibit 10.14
dated April 7, 1995 to the to the Company's Report on Form 10-K for
Loan and Security Agreement the fiscal year ended January 31, 1995,
filed May 15, 1995
10.15 Agreement of Settlement Incorporated by reference to Exhibit 10.15
dated July 31, 1995 to the Company's Report on Form 10K/A-2 for
between Pier Lease, Pier 1 the fiscal year ended January 31, 1995,
Imports and Sunbelt filed August 11, 1995
Nursery Group, and Timothy
R. Duoos
10.16 Security Agreement dated Incorporated by reference to Exhibit 10.16
July 31, 1995, by Sunbelt to the Company's Report on Form 10-K/A-2
Nursery Group, Inc. and for the fiscal year ended January 31, 1995,
Wolfe Nursery, Inc. for filed August 11, 1995
the benefit of Pier 1
Imports, Inc., identified
as Exhibit A to the
Agreement of Settlement
10.17 Lease Guaranty Incorporated by reference to Exhibit 10.17
Indemnification Agreement to the Company's Report on Form 10-K/A-2
dated July 31, 1995, by for the fiscal year ended January 31, 1995,
Sunbelt Nursery Group, filed August 11, 1995
Inc. and Wolfe Nursery,
Inc. for the benefit of
Pier 1 Imports, Inc.,
identified as Exhibit C to
the Agreement of Settlement
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.18 Environmental Indemnity Incorporated by reference to Exhibit 10.18
dated July 31, 1995 by to the Company's Report on Form 10-K/A-2
Sunbelt Nursery Group, for the fiscal year ended January 31, 1995,
Inc. and Wolfe Nursery, filed August 11, 1995
Inc. for the benefit of
Pier 1 Imports, Inc.,
identified as Exhibit D to
the Agreement of Settlement
10.19 Duoos Indemnification Incorporated by reference to Exhibit 10.19
Agreement dated July 31, to the Company's Report on Form 10-K/A-2
1995 by Timothy R. Duoos for the fiscal year ended January 31, 1995,
for the benefit of Pier 1 filed August 11, 1995
Imports, Inc., identified
as Exhibit E to the
Agreement of Settlement
10.20 Sublease Guaranty dated Incorporated by reference to Exhibit 10.20
July 31, 1995, between to the Company's Report on Form 10-K/A-2
Sunbelt Nursery Group, for the fiscal year ended January 31, 1995,
Inc. and Pier Lease, Inc. filed August 11, 1995
identified as Exhibit G to
the Agreement of Settlement
10.21 Promissory Note dated July Incorporated by reference to Exhibit 10.21
31, 1995, in the principal to the Company's Report on Form 10-K/A-2
amount of $8,000,000 by for the fiscal year ended January 31, 1995,
Sunbelt Nursery Group, filed August 11, 1995
Inc. for the benefit of
Pier 1 Imports, Inc.
identified as Exhibit H to
the Agreement of Settlement
10.22 Note Guaranty dated July Incorporated by reference to Exhibit 10.22
31, 1995, by Wolfe to the Company's Report on Form 10-K/A-2
Nursery, Inc. for the for the fiscal year ended January 31, 1995,
benefit of Pier 1 Imports, filed August 11, 1995
Inc., identified as
Exhibit I to the Agreement
of Settlement
10.23 Second Amendment, Waiver Incorporated by reference to Exhibit 10.23
and Consent dated July 31, to the Company's Report on Form 10-K/A-2
1995 to the Loan and for the fiscal year ended January 31, 1995,
Security Agreement filed August 11, 1995
10.24 Third Amendment dated Incorporated by reference to Exhibit 10.24
February 14, 1996 to the to the Company's Annual Report on Form
Loan and Security Agreement 10-K, for the fiscal year ended January 28,
1996, filed May 10, 1996
10.25 Fourth Amendment and Incorporated by reference to Exhibit 10.25
Waiver dated May 9, 1996 to the Company's Annual Report on Form
to the Loan and Security 10-K, for the fiscal year ended January 28,
Agreement 1996, filed May 10, 1996
10.26 Fifth Amendment and Waiver Incorporated by reference to Exhibit 10.26
dated October 24, 1996 to to the Company's Report on Form 10-Q for
the Loan and Security the three months ended September 29, 1996
Agreement
10.27 Note Modification Incorporated by reference to Exhibit 10.27
Agreement dated January to the Company's Report of Form 10-Q for
31, 1997 among Pier 1 the six months ended December 29, 1996
Imports, Inc., Sunbelt
Nursery Group, Inc., Wolfe
Nursery, Inc., and Timothy
R. Duoos
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
10.28 Sixth Amendment and Incorporated by reference to Exhibit 10.28
Waiver dated February to the Company's Report of Form 10-Q for
11, 1997 to the Loan and the six months ended December 29, 1996
Security Agreement
21 Subsidiaries of the Incorporated by reference to Exhibit 22
Company 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>
17
<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: May 14, 1997 /s/Richard R. Dwyer
-----------------------------------------
Richard R. Dwyer
President and Chief Accounting
Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-30-1997
<CASH> 7,010
<SECURITIES> 0
<RECEIVABLES> 490
<ALLOWANCES> 0
<INVENTORY> 17,116
<CURRENT-ASSETS> 24,992
<PP&E> 23,757
<DEPRECIATION> 15,913
<TOTAL-ASSETS> 32,929
<CURRENT-LIABILITIES> 32,576
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> (3,319)
<TOTAL-LIABILITY-AND-EQUITY> 32,929
<SALES> 64,088
<TOTAL-REVENUES> 64,088
<CGS> 36,809
<TOTAL-COSTS> 70,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 795
<INCOME-PRETAX> (6,435)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,435)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,435)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
