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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 28, 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.)
32382 Del Obispo Street, San Juan Capistrano, California 92675
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 714/248-3811
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 February 16, 1998, the Registrant had 8,500,000 common shares, $.01
par value, outstanding.
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<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 Six Months Ended
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 16,360 $ 23,412 $ 29,094 $ 41,655
Cost of goods sold 9,021 13,559 16,180 24,656
-------------- -------------- -------------- --------------
Gross profit 7,339 9,853 12,914 16,999
General, administrative and
selling expense 8,656 11,055 16,515 20,755
Depreciation and amortization 294 617 672 1,291
Interest / other income 0 (30) (3) (760)
Interest expense 148 277 273 539
-------------- -------------- -------------- --------------
Loss before provision for income taxes (1,759) (2,066) (4,543) (4,826)
Provision for income taxes - - - -
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Net loss ($ 1,759) ($ 2,066) ($ 4,543) ($ 4,826)
============== ============== ============== ==============
FAS 128 "Earnings Per Share"
Net loss per share - Basic ($ 0.21) ($ 0.24) ($ 0.53) ($ 0.57)
============== ============== ============== ==============
Average common shares outstanding 8,500 8,500 8,500 8,500
============== ============== ============== ==============
Net loss per share - Diluted ($ 0.21) ($ 0.24) ($ 0.53) ($ 0.57)
============== ============== ============== ==============
Average common shares outstanding 8,500 8,500 8,500 8,500
Series A Preferred Stock - - - -
Subordinated Lender Warrants - - - -
-------------- -------------- -------------- --------------
Total potential common shares outstanding 8,500 8,500 8,500 8,500
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Sunbelt Nursery Group, Inc.
Consolidated Balance Sheet
(unaudited, in thousands)
<TABLE>
<CAPTION>
December 28, June 29,
1997 1997
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<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $190 $1,838
Cash - restricted 153 154
Accounts receivable, net 372 261
Inventories 11,729 14,088
Other current assets 565 611
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Total current assets 13,009 16,952
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Property and equipment, at cost 21,949 22,426
Less accumulated depreciation 18,280 17,847
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Net property and equipment 3,669 4,579
Other assets 25 66
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Total assets $16,703 $ 21,597
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Liabilities and Shareholders' Deficit
- -------------------------------------
Current liabilities:
Notes payable $0 $0
Accounts payable 9,699 11,098
Accrued compensation 1,915 1,473
Current portion of long-term debt and capital leases 4,681 3,190
Other current liabilities 4,433 5,063
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Total current liabilities 20,728 20,824
Long-term debt and capital leases 1,192 1,366
Reserve for store closings 437 543
Other long-term liabilities 1,266 1,266
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Total liabilities 23,623 23,999
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Shareholders' 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 (52,156) (47,613)
Subscriptions receivable from officer 0 (25)
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Total shareholders' deficit (6,920) (2,402)
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Total liabilities and shareholders' deficit $16,703 $ 21,597
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Sunbelt Nursery Group, Inc.
Consolidated Statement of Cash Flows
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 28, December 29,
1997 1996
--------------- ---------------
<S> <C> <C>
Operating activities:
Net loss ($4,543) ($4,826)
Adjustments to reconcile net loss to cash
used for operating activities:
Depreciation and amortization 672 1,291
Gain on sale of fixed assets (1) (626)
Payment of store closing costs included in
provision for store closings (106) (86)
Changes in operating assets and liabilities:
Inventories 2,359 4,232
Accounts receivable and other assets (238) 265
Accounts payable (1,399) 154
Accrued compensation 442 (195)
Other liabilities (597) 1,082
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Net cash used for operating activities (3,411) 1,291
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Investing activities:
Net sale of property and equipment 478 1,302
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Net cash provided by investing activities 478 1,302
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Financing activities:
Additions to line of credit 33,634 44,180
Principal payments on line of credit and
capital lease obligations (32,350) (46,710)
Restricted cash for outstanding letters of credit 1 (712)
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Net cash provided by (used for) financing activities 1,285 (3,242)
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Decrease in cash and cash equivalents (1,648) (649)
Cash and cash equivalents at beginning of period 1,838 2,058
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Cash and cash equivalents at end of period $190 $1,409
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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Sunbelt Nursery Group, Inc.
Notes To Consolidated Financial Statements
(unaudited)
Note 1. Basis of Financial Statements
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Sunbelt Nursery Group, Inc. (the "Company") is a specialty retailer of
nursery and garden products with 60 stores operating under three prominent
retail trade names: Wolfe Nursery in Texas, Nurseryland Garden Centers in
California, and Tip Top Nurseries in Arizona. No single customer accounts for
more than 10% of sales.
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
June 29, 1997. These statements include adjustments which, in the opinion of
management, are necessary to present fairly the Company's financial position as
of December 28, 1997 and December 29, 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
December 28, 1997 and December 29, 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 and Operating Losses
- ---------------------------------------
The Company entered into a Loan and Security Agreement for a $12.0 million
revolving credit facility with a bank (the "Bank") on October 14, 1994. The
proceeds of this credit facility, along with cash on hand, were used to retire
the indebtedness approximating $11.6 million owed pursuant to that certain
credit facilities agreement dated April 28, 1993 between the Company and Pier 1
Imports. This revolving credit facility matured on October 14, 1997 and was
extended by agreement of the parties on a week-by-week basis thereafter while
the Company attempted to arrange refinancing. As of December 28, 1997,
indebtedness owed pursuant to this revolving credit facility approximated $4.2
million. As such, the outstanding balance at December 28, 1997 has been
classified as current in the accompanying December 28, 1997 consolidated balance
sheet.
On January 7, 1998, the Company announced that it had completed
agreements to refinance the Company's outstanding credit facility and to provide
the Company with an additional cash infusion of $2 million, consisting of
$700,000 in subordinated debt and $1,300,000 of convertible preferred stock.
Paragon Capital LLC ("Paragon") of Boston Massachusetts has agreed to
loan to the Company's operating subsidiaries (Wolfe Nursery, Inc., Tip Top
Nurseries, Inc., and Nurseryland Garden Centers, Inc.) a total of $5,000,000
under a revolving credit facility secured by a first priority lien on the assets
of the Company and its operating subsidiaries. A portion of the loan proceeds,
approximately $4,200,000 was immediately used to pay off the Company's existing
revolving credit facility with the Bank which facility matured on October 14,
1997 and had been extended by the Bank on a week-by-week basis thereafter.
The Paragon Revolving Credit Facility has an aggregate credit limit
amount of $5,000,000 subject to a seasonal overline which may increase the
aggregate credit limit to $6,500,000. The unpaid principal balance of the
Revolving Credit Facility shall bear interest, until repaid (calculated based
upon a 360-day year and actual days elapsed), at the aggregate of the base rate,
announced from time to time by Norwest Bank Minnesota National Association or
its successor ("Base"), plus one (1%) percent per annum up to $5 million in
borrowings and two (2%) percent per annum over Base for borrowings in excess of
$5 million, but in no event less than eight (8%) percent per annum or in excess
of the maximum rate permitted by applicable law. The revolving credit facility
is intended to be, a continuing agreement and shall remain in full force and
effect for an initial term ending on November 30, 2002, and thereafter for
successive twelve-month periods ("renewal term") provided, however, that either
party may terminate such revolving credit facility agreement as of the end of
the initial term or any
<PAGE>
renewal term by giving the other party notice to terminate in writing at least
sixty (60) days prior to the ended of any such period.
Timothy Duoos - Chairman of the Board, President and Chief Executive
Officer of the Company, Healthy American Products, Inc. (an affiliate of Rodney
Burwell, also a member of the Company's Board of Directors), and John Tastad,
(collectively, the "Purchasers") purchased a total of 1,300,000 shares of Series
A Cumulative Convertible Preferred Stock, $.01 par value, (the "Series A
Preferred Stock") for an aggregate purchase price of $1,300,000 in cash. The
holders of the Series A Preferred Stock are entitled to receive a seven percent
(7%) annual cash dividend thereon, which dividend is cumulative, if unpaid. The
Series A Preferred Stock may be converted to shares of Common Stock at the
Market Price defined in the Certificate of Designations (being the average daily
sales price of the Common Stock for the ten (10) trading days following the
closing of the Series A Preferred Stock, but in no event shall the Common Stock
be valued at greater than $1.00 per share ("Series A Preferred Conversion
Ratio"). Holders of the Series A Preferred Stock are entitled to a liquidation
preference over holders of the Company's Common Stock and are also entitled to
the same voting rights as the holders of the Common Stock, being one vote per
share on all matters submitted to holders of the Common Stock.
Contemporaneous with the purchase and sale of the Series A Preferred
Stock, Mr. Tastad and Healthy American Products, Inc. (collectively, the
"Subordinated Lenders") loaned to the Company a total of $700,000, secured by
liens against the Company's assets in Arizona and California subordinate to the
liens of Paragon (the "Subordinated Notes"). Pursuant to the Subordinated Notes,
the Company agreed to pay to the Subordinated Lenders interest in the amount of
twelve percent (12%) per annum, payable monthly for a period of sixty (60)
months, at which time the entire principal balance of the Subordinated Notes
shall become due. Additionally, the Company has agreed to issue to the
Subordinated Lenders warrants (the "Warrants") to purchase up to 231,000 shares
of the Company's Common Stock at a purchase price equal to $1.00 per share. The
Warrants expire on November 30, 2002. The Warrants may be exercised at any time
prior to their expiration by the holder of the Subordinated Notes. The holders
of the Warrants are entitled to piggy-back registration rights in the event the
Company should file a registration statement under the Securities Act of 1933
covering its Common Stock. Mr. Tastad has the right to demand the Company to
prepay the $500,000 principal balance due Mr. Tastad under his Subordinated
Note, provided that Paragon consents to such prepayment and advances the funds
to the Company. Paragon has indicated in writing its consent to such prepayment
in the future, provided that Mr. Tastad personally guarantees the amount of the
prepayment and provides collateral acceptable to Paragon securing his guaranty.
The Subordinated Notes and Warrant Agreements between the Company and the
Subordinated Lenders are incorporated herein.
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 provided for six-month lease terms
that initially ended on December 31, 1995. The leases were renewable at Pier 1
Imports' option in six-month intervals through June 30, 1998, after which the
Company would have to consent to any further extensions. Under the Agreement of
Settlement, the Company was released from any obligation to purchase any of the
Pier 1 properties. As of September 28, 1997, the Company was no longer obligated
to Pier 1 Imports under these subleases as the properties had been sold to third
parties, closed or Pier 1 Imports did not exercise their option to renew the
lease term for an additional six months and thus the Company vacated the
properties. As Pier 1 Imports did not exercise their option to renew the lease
term on certain of these subleases the Company has no future minimum lease
obligations associated with these properties as of December 28, 1997.
The Agreement of Settlement fixed 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
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Sunbelt Nursery Group, Inc.
Notes To Consolidated Financial Statements
(continued)
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 Paragon. Debt service obligations with respect to the Earn-
out Claim are determined by a formula indexed to and contingent upon future
operating cash flows of the Company, as described below. To the extent the
formula requires debt service payments, they are to be made in 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. The obligation to make debt service payments that are measured based
on cash flow are also 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. However, such payments remain subject to
certain maximum and minimum limitations, as discussed above. The Earn-out Claim
could have been 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 Earn-out Claim
bears interest only in the event a formula-based required debt service payment
becomes delinquent. During any such interest-bearing period, interest shall
accrue as follows: (i) 18% per annum on the amount of Cash Flow Payment not
otherwise paid and (ii) 10% per annum on the aggregate amount of unpaid Earn-out
Claim less the aggregate unpaid 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,
representing previously capitalized leases with a net book value of $20.5
million was removed from the Company's consolidated balance sheet; (ii) the
related capitalized lease obligation of $22.8 million due Pier 1 Imports was
removed from the consolidated balance sheet and; (iii) the fair value of the
indexed Earn-out Claim for the settlement obligation to Pier 1 Imports of $2.0
million, representing the optional payment the Company initially believed it had
the ability and intention to make on May 1, 1996 to satisfy the Earn-out Claim
in full was recognized during fiscal 1996. The resulting difference of $213,000
was reported as a deferred gain which will be recognized once all obligations to
Pier 1 have been settled or transferred to the recorded Earn-out Claim
obligation to account for any increases in the contingent payment obligation.
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 estimated $2.0 million present
value of the Earn-out Claim was recorded as a long-term liability in the
accompanying consolidated balance sheets.
On January 31, 1997, the Company and Pier 1 agreed to proposed
modifications to the terms of the Agreement of Settlement (the "Note
Modification Agreement") which provided 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 was comprised of $200,000 in cash payable
on March 3, 1997 and $1.8 million in notes. Certain terms of the Note
Modification Agreement were not fulfilled and as a result the Earn-out Claim and
Agreement of Settlement remain unmodified and in full force and effect.
As of December 28, 1997, the Company remains unable to meet certain minimum
financial requirements pursuant to the Agreement of Settlement and the Loan
Agreement. In addition, the Company estimates that it will not be able to meet
these requirements in the near future. As such, the Company reviewed its
assumptions used in estimating the present value of future cash flow payments to
Pier 1 to satisfy the Earn-out Claim and determined that the estimated present
value at December 28, 1997 approximates $1.0 million. Thus, the estimated $1.0
million present value of the Earn-out Claim is recorded as a long-term liability
in the accompanying consolidated balance sheet at December 28, 1997. In
addition, a $1.0 million gain on the revaluation of the Pier 1 Earn-out Claim
was recognized in the fiscal 1997 consolidated statement of operations.
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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
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During the quarter and six months ended December 28, 1997, the Company lost
$1.7 million and $4.5 million, respectively, which is comparable to the same
period in the prior year. While sales for the six months were down from those
achieved last year, approximately $4.4 million of this sales decline was
attributed to the stores the Company closed or sold during fiscal 1997. The
companies improvement in operating results is primarily due to improved gross
margins and reduced operating expenses.
Gross margins improved from 42.1% to 44.9% and 40.8% to 44.4% during the
second quarter and six months ended December 28, 1997. This improvement is
substantially due to the Company's operational improvements at the store level
as well as the elimination of the less profitable stores included in the
comparative period in fiscal 1997. Same store sales for the first six months of
fiscal 1998 decreased by 15.1% compared to the same period in fiscal 1996
reflecting unseasonable weather in all markets and increased competitive
pressures in certain markets.
General, administrative and selling expenses for the three and six month
periods ended December 28, 1997 were down 21.7% or $2.4 million and 20.4% or
$4.2 million, respectively, primarily resulting from the reduction in the number
of stores operated by the company as well as the ongoing efforts of the
Company's reductions in general and administrative expenses. The Company's
decentralization of management has begun to have the desired effect of reducing
administrative expenditures and enhancing store operations.
Other significant improvements realized during the first and second quarter
include a 48% reduction in depreciation and amortization due to the numerous
store closings, and a 49% reduction in the Company's interest expense when
compared to the same period last year. Management's efforts to reduce its
inventory investment and the related costs to carry this investment, when
combined with the reduction in the number of stores, accounts for the majority
of the reduction in interest expense.
Liquidity and Capital Resources
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During the six months, $3.4 million cash was used for operations. Investing
activities provided $0.5 million in cash and the Company borrowed a net of $1.3
million on an asset based revolving loan from a bank.
LIQUIDITY - See Note 2 of the Consolidated Financial Statement.
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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.
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(Registrant)
Date: February 20, 1998 /s/Thomas R. Hoekstra
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Thomas R. Hoekstra
Chief Financial Officer
