-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Il6JANeHRq78zTGoAqg7riONTai8L5t2C4xN79vFCb+oPhiiOhN6GLGGINdq1HmE VS14arI2zwh2qGaqFt73vw== 0000930661-97-002372.txt : 19971014 0000930661-97-002372.hdr.sgml : 19971014 ACCESSION NUMBER: 0000930661-97-002372 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19971010 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBELT NURSERY GROUP INC CENTRAL INDEX KEY: 0000783319 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-BUILDING MATERIALS, HARDWARE, GARDEN SUPPLY [5200] IRS NUMBER: 751932993 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09031 FILM NUMBER: 97693478 BUSINESS ADDRESS: STREET 1: 500 TERMINAL ROAD STREET 2: 6500 W FREEWAY CITY: FT WORTH STATE: TX ZIP: 76106 BUSINESS PHONE: 8176247253 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 29, 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 AREA CODE: 817/624-7253 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $0.01 PAR VALUE AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Based on the closing sales price on September 26, 1997, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $8,500,000. The number of shares of the registrant's Common Stock, $0.01 par value per share, outstanding as of September 26, 1997, was 8,500,000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ ] ================================================================================ PART I ITEM 1. BUSINESS. -------- FORMATION OF THE COMPANY The Company was incorporated in Delaware in 1983 as a holding company of the nursery retailing businesses of Pier 1 Imports, Inc. ("Pier 1 Imports"). In 1985, all shares of common stock of the Company were distributed as a dividend to the shareholders of Pier 1 Imports, and the Company operated as a public company from 1985 until 1990. In September 1990, Pier 1 Imports purchased 50.4% of the then outstanding common stock of the Company in a private transaction and commenced a public tender offer for the remaining shares. In November 1990, Pier 1 Imports completed the tender offer and subsequent merger of the Company with a subsidiary so that the Company became a wholly owned subsidiary of Pier 1 Imports. In October 1991, the Company sold 3,680,000 shares in an initial public offering that left Pier 1 Imports holding 56.6% of the outstanding common stock. In February 1992, Pier 1 Imports sold 600,000 shares of common stock which reduced Pier 1 Imports' ownership interest in the Company to 49.5%. In April 1993, Pier 1 Imports sold its remaining 4,200,000 shares of common stock to General Host Corporation ("General Host") for consideration of 1,940,000 shares of General Host common stock. In October 1994, General Host sold its 4,200,000 shares of common stock to Timothy R. Duoos ("Mr. Duoos"). In June 1997, Mr. Duoos sold 1,000,000 shares of common stock to a director of the Company, reducing his ownership interest in the Company to 37.7%. The Company's executive offices are located at 500 Terminal Road, Fort Worth, Texas 76106, telephone number (817) 624-7253. Unless the context indicates otherwise, the Company and its subsidiaries are herein referred to collectively as the "Company" or "Sunbelt", and the activities of the Company or its subsidiaries are referred to as the activities of the Company or Sunbelt. DESCRIPTION OF THE BUSINESS The Company is a specialty retailer of nursery and garden products, operating stores primarily in the six major metropolitan areas of Dallas-Fort Worth, Houston, San Antonio-Austin, Phoenix, San Diego and Los Angeles. The Company conducts its business through three retail nursery subsidiaries, each of which has operated under its own geographically recognized trade name for a quarter of a century or more: Wolfe Nursery in Texas, Nurseryland Garden Centers in California and Tip Top Nurseries in Arizona. The Company retains the established identity of each of its businesses in their respective geographic markets. Each store may tailor certain of its merchandise mixes and operations to its immediate neighborhood as well as to its geographic area. However, all stores are operated under certain established operating philosophies. The Company's stores offer nursery plants and products tailored to the local growing conditions and seasonal timing in each of the markets served by the Company. Differences in temperature, rainfall and soil consistency cause plant stock and soil amendments to vary from market to market. Because each store strives to cater to the special needs of customers that live nearby, product selection may also differ slightly from store to store within a market. Typical stores operated by the Company are located in suburban areas of major metropolitan markets. Most of the Company's older stores are free standing buildings of approximately 4,000 to 6,000 square feet of interior selling space, adjoined by 20,000 to 35,000 square feet of covered and open outdoor area. 2 The Company's newer stores consist of 10,000 to 12,000 square feet of interior selling space, adjoined by 15,000 to 20,000 square feet of greenhouses and 20,000 square feet of open outdoor area. The Company's stores offer a wide variety of garden and nursery products, including indoor and outdoor plants, shrubs and trees, which account for approximately 51% of its sales, as well as seed, fertilizer, chemicals, garden implements and decorative planters, which account for approximately 38% of its sales. The stores also offer various seasonal items, including Christmas trees, lights and ornaments, which represent the balance of the Company's total sales. Sunbelt operates its stores under the names of "Wolfe Nursery", "Tip Top Nurseries" and "Nurseryland Garden Centers" and sells certain products under its private label brand "Perma-Gro". The Company's store names and its private label brand name have become important to the Company's business as a result of its advertising and promotional activities. The store names and accompanying logos have been registered as trademarks or service marks in the states in which the name is used and with the U.S. Patent and Trademark Office. The name "Perma-Gro" has also been registered as a trademark with the U.S. Patent and Trademark Office. While the retail locations sell some chemicals related to lawn care, the Company believes there is no material adverse effect on earnings or capital expenditures from compliance with federal, state and local provisions regulating the discharge of materials into the environment. The following table sets forth information as of June 29, 1997 with respect to the number of stores, and their locations, operated under each of the Company's retail nursery trade names:
Trade Name Number of Stores Location ---------- ---------------- -------- Wolfe Nursery 41 Texas Nurseryland Garden Centers 14 California Tip Top Nurseries 10 Arizona -- Total 65 ==
In addition, at June 29, 1997, Wolfe Nursery operated a distribution center and a growing facility located in Fort Worth, Texas, and Nurseryland operated a shrub and tree growing facility located in San Juan Capistrano, California. The Company purchases about 90% of its merchandise from approximately 160 suppliers and is not dependent upon any single source of supply for a significant amount of its products. EMPLOYEES The Company employed approximately 1,360 persons at June 29, 1997, consisting of 630 full-time and 730 part-time employees. Of the Company's employees, approximately 880 were employed by Wolfe Nursery, 250 by Nurseryland Garden Centers, 180 by Tip Top Nurseries and the remainder were employed at the Company's corporate headquarters. The number of persons employed part-time at Company stores varies significantly according to the season, and the Company believes that area labor markets are adequate to meet its employment needs. The Company is not a party to any collective bargaining agreements and believes its employee relations are good. COMPETITION The retail nursery and garden business is highly competitive. While no national nursery retail chain competes with the Company in its present markets, the Company experiences significant competition. The Company faces competition principally from three types of businesses: nursery departments of major 3 home improvement and discount store chains such as Home Depot and Wal-Mart that compete on the basis of price and have more financial resources and strength than the Company; regional retail nursery chains such as Armstrong Garden Centers in Los Angeles and Calloway's Nursery in Dallas-Fort Worth; and independent single unit garden centers. The Company's stores generally compete with the home improvement and discount store chains using an everyday value price approach. Sunbelt also concentrates its marketing efforts on attracting the more quality-conscious lawn and garden customer by providing a broader range of merchandise, higher quality plants and a greater level of service. Many customers come to Sunbelt stores seeking expertise in gardening and landscaping matters. Sunbelt provides this higher level of service through trained, courteous employees, the availability of certified nursery professionals, and free information sheets on horticultural tips and solutions to gardening problems. Sunbelt believes that it gains a competitive advantage over many independent local nurseries through regional name recognition and by providing a greater variety of merchandise and trained nursery professionals. SEASONALITY Sales in the nursery/garden center industry are highly seasonal and subject to significant impact from weather variations. The spring months provide the greatest sales volume. Each geographic market enjoys its own extended growing season, which stretches from February to October in Houston, San Antonio and Austin; from March to September in Dallas-Fort Worth; and virtually year-round in Phoenix, San Diego and Los Angeles. If unusual weather patterns continue through the spring and early summer, the sales lost during that time generally cannot be made up. ITEM 2. PROPERTIES. ---------- Company stores are typically free-standing buildings consisting of approximately 4,000 to 6,000 square feet of interior selling space, adjoined by 20,000 to 35,000 square feet of covered and open outdoor area. New stores are larger, with 10,000 to 12,000 square feet of interior space and 15,000 to 20,000 square feet of greenhouses and 20,000 square feet of open outdoor area. The Company owns one store in Texas, which is located on leased land. The Company leases the remaining stores under leases containing various terms and options. The leases typically provide for renewal options and for payments of monthly rental plus taxes, utilities, insurance and in some cases a specified percentage of sales. During fiscal years 1998 through 2000, leases on 33 stores will expire and renewal options are available on 17 leases. As current leases expire, the Company expects to obtain either renewal leases, if desired, or new leases for equivalent or better locations. The Company owns, free of encumbrances, two buildings covering a total of 51,700 square feet situated on 13 acres in Fort Worth, Texas. A portion of one building serves as administrative offices and the other includes a greenhouse used to grow plants to supply stores in Texas. In addition, the Company owns approximately 4.2 acres of land in Texas, adjacent to three different leased properties. The Company leases 35 acres in San Juan Capistrano, California where it operates a shrub and tree growing facility to supply plants to its California and Arizona stores and to sell wholesale to independent landscapers. The lease will expire May 31, 1999, with an option to renew. 4 ITEM 3. LEGAL PROCEEDINGS. ----------------- The Company has no knowledge of any legal proceedings contemplated by governmental authorities against the Company or any of its properties. The Company, the Company's Chief Executive Officer, a company owned by the Chief Executive Officer 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 an alleged 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. During fiscal 1996 the Company settled the suit relating to post-employment consulting agreements filed by two (2) former officers of the Company. The settlement had no material impact on results of operations, liquidity or financial position. 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 June 29, 1997. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- On October 17, 1996, the Company conducted its Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, each of the following persons were elected as directors of the Company, to serve until the 1997 Annual Meeting of Stockholders: Rudy Boschwitz, Rodney P. Burwell, Timothy R. Duoos, Richard R. Dwyer, and Kenneth A. Macke. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. --------------------------------------------------------------------- The Company's Common Stock is traded on the American Stock Exchange under the symbol SBN. The high and low sales prices for the Company's Common Stock for the fiscal and transition periods ended are set forth below:
FISCAL 1997 HIGH LOW 1st Quarter 2 1/8 1 3/8 2nd Quarter 2 1 1/16 3rd Quarter 1 15/16 1 5/16 4th Quarter 1 1/2 1 FIVE MONTHS ENDED JUNE 30, 1996 HIGH LOW 1st Quarter 2 3/8 1 5/8 Two months ended June 2 1/8 1 3/8 FISCAL 1996 HIGH LOW 1st Quarter 2 15/16 1 5/8 2nd Quarter 2 1/2 1 9/16 3rd Quarter 3 1/2 2 5/16 4th Quarter 3 1/8 2 5/16
As of June 29, 1997, the Company had approximately 2,800 beneficial shareholders of record. The Company has not paid cash dividends on its Common Stock in the three most recent fiscal years. The Company currently intends to follow a policy of retaining earnings, if any, to provide funds for the operation and expansion of its business. The Company's existing loan agreements prohibit the payment of cash dividends as well as the issuance of additional shares of any class of capital stock. Future dividends, if any, will be determined by the Board of Directors in light of the Company's earnings, financial condition and other relevant considerations. See Notes 3 and 6 to Consolidated Financial Statements. 6 ITEM 6. SELECTED FINANCIAL DATA. ------------------------ The selected financial data shown below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere herein and the Consolidated Financial Statements in Item 8 hereof and the related notes thereto. SUNBELT NURSERY GROUP, INC. (in thousands, except per share data)
Twelve Five Five months months months Year ended ended ended ended Year ended Year ended Year ended Year ended June 29, June 30, June 30, July 2, January 28, January 29, January 30, January 31, 1997 1996 1996 1995 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Summary of Operations Net sales $95,773 $125,176 $69,660 $74,142 $129,658 $138,565 $146,034 $138,601 Gross profit 41,454 48,683 29,210 32,321 51,794 59,997 63,420 61,149 Income (loss)before provision for income taxes and cumulative effect of change in accounting principle (a) (5,603) (28,735) 3,140 6,696 (25,178) (5,031) (8,159) (7,972) Income (loss) before cumulative effect of change in accounting principle (a) (5,603) (28,735) 3,140 6,696 (25,178) (5,031) (8,372) (7,242) Net income (loss) (5,603) (28,735) 3,140 6,696 (25,178) (5,031) (8,738) (7,242) Net income (loss) per share before cumulative effect of change in accounting principle (a) (0.66) (3.38) 0.37 0.79 (2.96) (0.59) (0.99) (0.85) Net income (loss) per share (0.66) (3.38) 0.37 0.79 (2.96) (0.59) (1.03) (0.85) Financial Position Inventories 14,088 18,847 18,847 27,628 25,595 27,020 29,295 28,686 Net property and equipment 4,579 10,708 10,708 35,171 11,731 36,199 38,715 22,364 Total assets 21,597 33,998 33,998 88,560 40,675 87,357 95,229 77,253 Long-term debt and capital lease obligations 1,366 3,037 3,037 24,191 11,473 32,857 7,135 1,168 Shareholders' equity (deficit) (2,402) 3,176 3,176 31,913 36 25,214 30,262 39,000 Other Information Depreciation and amortization 2,406 3,358 1,188 1,715 3,885 4,595 4,459 4,010 Capital expenditures $ 259 $ 341 $ 187 $ 215 $ 369 $ 798 $ 3,382 $ 11,333 Weighted average shares outstanding 8,500 8,500 8,500 8,500 8,500 8,496 8,480 8,480 Number of retail stores 65 80 80 90 88 92 93 102
(a) The adjustment to adopt FAS 109, "Accounting for Income Taxes" aggregated a charge of $366,000 which was reflected in fiscal year 1994 income as a cumulative effect of change in accounting principle. The cumulative effect primarily represents the effect of providing a valuation allowance for all net tax assets. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------ OF OPERATIONS - ------------- 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 filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS - ----------------------------------------------------------------------------- COMPARISON OF FISCAL 1997 WITH THE TWELVE MONTHS ENDED JUNE 30, 1996 - ----------------------------------------------------------------------------- During fiscal 1997 the Company sustained a net loss of $5.6 million, or $0.66 per share. This compares to a $28.7 million loss, or $3.38 per share for the twelve months ended June 30, 1996. The loss in fiscal 1997 is comprised of a loss from operations of $4.3 million, exclusive of the gain on revaluing the Pier 1 Earn-out Claim, as discussed in "Liquidity and Capital Resources", and of writedown of assets in compliance with FAS 121, as compared to an operating loss of $8.2 million, also exclusive of asset impairments and the write-off of goodwill, for the twelve months ended June 30, 1996. The reduction in net loss from operations from $8.2 million for the twelve months ended June 30, 1996 to $4.3 million for fiscal 1997 is attributed to improved gross profit margins and reduced corporate overhead. These improvements have been offset by sales declines due to a competitive market place and wet spring weather in Texas. Net sales in fiscal 1997 declined by 23.5% from the twelve months ended June 30, 1996 attributable to store closings. Comparative store sales decreased by 12.2%. The Company endured inclement weather throughout Texas, most prominently in Houston, and competitors with substantially more financial resources continue to expand in the Company's market areas. Gross profit as a percentage of sales increased by 4.4% to 43.3% for fiscal 1997 compared to 38.9% for the twelve months ended June 30, 1996. The Company focused on controlling product markdowns and throwaways, has introduced new product strategies that improved the Company's gross profit margins and controlled inventories during the off-season thus avoiding additional product markdowns to move inventory. The Company adopted FAS 121 for the year ended January 28, 1996 ("Fiscal 1996"), which requires that long-lived assets held and used by an entity, including goodwill, be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. The Company booked a pre-tax impairment of $2.4 million during fiscal 1997 for its property and equipment, compared to $1.3 million for the twelve months ended June 30, 1996. In addition, the Company determined that the future recoverability of its goodwill was in doubt and recognized an impairment of approximately $19.2 million for the twelve months ended June 30, 1996. General, administrative and selling expenses decreased by 20% to $41.8 million during fiscal 1997 as compared to $52.3 million in the twelve months ended June 30, 1996. The Company attributes the reduction primarily to reduced costs due to store closures along with reductions to store labor and corporate overhead during the period, partially offset by an increase in minimum wage rates. The increase in minimum wage rates is primarily the reason general, administrative and selling expenses as a percentage of sales increased from 41.7% for the twelve months ended June 30, 1996 to 43.7% for fiscal 1997. The Company continues to identify potential cost reductions in all areas, as discussed in "Liquidity and Capital Resources". Depreciation and amortization decreased by $1.0 million and interest expense decreased by $0.4 million for fiscal 1997. These reductions primarily relate to effects of store closings and the restructuring of the thirteen subleases with Pier 1 Imports. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) No provision for income taxes has been recognized for fiscal 1997. The Company's tax loss carryforward includes approximately $17.7 million and $14.0 million of regular tax losses and alternative minimum tax losses, respectively, available for carryforward which will expire from fiscal 2008 through fiscal 2012 if not utilized. The Internal Revenue Code imposes certain restrictions on the utilization of net operating loss carryforwards following a change in control of the Company. "Change of control" is defined by complex regulations. There may be restrictions on the future utilization of the Company's net operating loss carryforwards. - -------------------------------------------------------------------------------- COMPARISON OF FIVE MONTHS ENDED JUNE 30, 1996 WITH FIVE MONTHS ENDED JULY 2, 1995 - -------------------------------------------------------------------------------- During the five months ended June 30, 1996 ("Transition Period"), the Company generated net income of $3.1 million compared to net income of $6.7 million for the five months ended July 2, 1995, a decrease of $3.6 million. The decrease is primarily attributable to lower sales and gross margins during the five month period. Sales during this period were down 6.0% which accounted for approximately $2.0 million of the net income decrease. Decrease in gross profit during the period accounted for an additional $1.2 million in net income decrease. Reductions in depreciation and interest expense of $1.6 million were offset by an increase of $2.0 million in general, administrative and selling expenses. Net sales decreased by 6.0% to $70.0 million for the five months ended June 30, 1996, from $74.1 million for the same period in the prior year. The decrease is attributable to increased competition and the Company's operating changes, including reductions in inventory and staff, at the store level. Gross profit, as a percentage of sales, decreased from 43.6% to 41.9% for the five months ended July 2, 1995 and June 30, 1996, respectively. The reduction is substantially due to the recording of physical inventory losses at the growing operations and a lower of cost or market adjustment on current live product. The lower of cost or market writedown was primarily due to rationalization of inventory due to store closures and implementation of new inventory procedures to reduce inventory in the off-season. General, administrative and selling expenses for the Transition Period increased by 8.7% to $24.4 million compared to $22.4 million for the five months ended July 2, 1995. The increases are substantially due to the recording of $1.5 million for non-cancelable future lease payments and other related store closing costs associated with ten stores closed during the period. - -------------------------------------------------------------------------------- COMPARISON OF FISCAL 1996 WITH 1995 - -------------------------------------------------------------------------------- During fiscal 1996, the Company sustained a net loss of $25.2 million, or $2.96 per share. The loss is comprised of a loss from operations of $4.6 million, exclusive of a writedown of assets related to the adoption of FAS No. 121 of approximately $1.3 million and the write-off of goodwill of approximately $19.2 million. The Company attributes the loss from operations, exclusive of the asset impairments, of $4.6 million to a reduction in sales due to inclement weather during spring as well as hot weather in late summer. The decrease in sales and margins was partially offset by savings in general, administrative and selling expenses resulting from controlled reductions in cash outlays. Net sales in fiscal 1996 declined by 6.4% from fiscal 1995 levels. Comparable store sales decreased by 6.1%. Inclement spring weather with rain promoted current plant growth rather than the replacement growth that the customers would purchase from the Company. Hot weather during the summer months discouraged yard activities, except for minimal maintenance, in most of the Company's markets. The decline in spring sales was not recoverable in later months, which is typical in the nursery and garden industry. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Gross profit as a percentage of sales declined by 3.4% to 39.9% for fiscal 1996 compared to 43.3% for fiscal 1995. During fiscal 1996 the Company lowered prices on certain core products to remain competitive in the market. In addition, prices were lowered in late summer and fall in an effort to reduce inventories that were higher than budgeted due to the decline in sales experienced during spring and early summer. The Company periodically reviews goodwill to assess recoverability. The Company continues to experience intense competition and operating losses (see Note 3 for a further discussion of these factors). In addition, the Company's sales for the first quarter of fiscal 1997 were below budget. As a result, during the fourth quarter of fiscal 1996 the Company reviewed the valuation of goodwill and concluded that its future recoverability was in doubt and recognized an impairment of the remaining balance of goodwill of approximately $19.2 million, which is reflected as Impairment of Goodwill and Long-Lived Assets in the accompanying consolidated statement of operations. In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which is effective for fiscal years beginning after December 15, 1995, although early adoption is allowed. As such, the Company elected to adopt FAS 121 for the year ended January 28, 1996, which requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. Upon adoption, the Company reviewed its long-lived assets on a store-by-store basis, which represents the Company's lowest level of identifiable cash flows, and recorded an initial pre-tax impairment loss of approximately $1.3 million to conform with this statement. The Company will review its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. General, administrative and selling expenses decreased by 12.3% to $50.5 million during fiscal 1996 as compared to $57.6 million during fiscal 1995. The Company attributes the reduction primarily to a reduction in store and corporate labor, vendor participation in advertising, and reductions in store and corporate expenses. Management continues to identify areas of cost savings, however, further reductions in SG&A will prove more difficult to achieve as the Company strives to balance cost savings and still deliver quality service to its guests. Depreciation and amortization decreased by $0.7 million and interest expense declined by $0.6 million. These reductions primarily relate to the restructuring of the thirteen subleases with Pier 1 Imports. No provision for income taxes was recognized for fiscal 1996. The Company's tax loss carryforward includes approximately $19.4 million and $15.9 million of regular tax losses and alternative minimum tax losses, respectively, available for carryforward which will expire from fiscal 2008 through fiscal 2011 if not utilized. The Internal Revenue Code imposes certain restrictions on the utilization of net operating loss carryforwards following a change in control of the Company. "Change of control" is defined by complex regulations. There may be restrictions on the future utilization of the Company's net operating loss carryforwards. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) - -------------------------------------------------------------------------------- SEASONALITY AND QUARTERLY INFORMATION - -------------------------------------------------------------------------------- The Company experiences a substantial part of its sales volume during the fourth quarter of each fiscal year, similar to the seasonal pattern experienced by most lawn and garden product retailers. The fourth quarter accounted for approximately 33.1% of the Company's annual revenues for fiscal 1997. All of the Company's operating profits, if any, are realized in the Christmas selling season and the last six months of the fiscal year. The following tables present selected unaudited quarterly financial information for the fiscal year ended June 29, 1997, the first quarter of the Transition Period and the fiscal year ended January 28, 1996 (in thousands, except per share amounts): FISCAL 1997 -----------
SEPTEMBER 29, DECEMBER 29, MARCH 30, JUNE 29, 1996 1996 1997 1997 ---- ---- ---- ---- Net sales $18,243 $23,412 $22,433 $31,685 Gross profit 7,146 9,853 10,280 14,175 Net income (loss) (2,760) (2,066) (1,609) 832 Net income (loss) per share $ (0.32) $ (0.24) $ (0.19) $ 0.10 Weighted average shares outstanding 8,500 8,500 8,500 8,500
The fourth quarter of fiscal 1997 includes a $1.0 million gain on the revaluation of the Pier 1 Earn-out Claim as discussed in "Liquidity and Capital Resources" offset by impairment expenses of $2.4 million related to the impairment of long-lived assets and a $603,000 increase in the reserve for store closings.
TRANSITION PERIOD ----------------- APRIL 28, 1996 ---- Net sales $43,879 Gross profit 19,686 Net income 4,491 Net income per share $ 0.53 Weighted average shares outstanding 8,500
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FISCAL 1996 ----------- APRIL 30, JULY 30, OCTOBER 29, JANUARY 28, 1995 1995 1995 1996 ---- ---- ---- ---- Net sales $46,634 $34,921 $23,374 $ 24,729 Gross profit 21,146 13,902 8,687 8,059 Net income (loss) 5,428 (129) (4,017) (26,460) Net income (loss) per share $ 0.64 $ (0.02) $ (0.47) $ (3.11) Weighted average shares outstanding 8,500 8,500 8,500 8,500
During the fourth quarter of fiscal 1996 the Company recognized impairment expense of $19.2 million associated with the charge-off of goodwill and $1.3 million related to long-lived assets to reflect the adoption of FAS No. 121, and the writedown of inventories of $0.4 million related to certain products at the growing grounds. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- During fiscal 1997, $1.5 million cash was provided by operations. The cash provided by operations was due primarily to a decrease in inventories of $4.3 million, which offset the operating loss (net of depreciation, amortization and impairment expenses). Investing activities, consisting primarily of the sale of property and equipment, provided $1.2 million in cash. Approximately $3.0 million was used for financing activities during fiscal 1997 primarily for the purpose of paying down $4.2 million on an asset based revolving loan from a bank and the payment of capital lease obligations. This was partially offset by the establishment of letters of credit of $1.2 million for insurance purposes and the purchase of seasonal merchandise. The Company's minimum lease commitments at June 29, 1997, through the expiration of their existing terms, are $24.6 million. These commitments are expected to be funded from cash flow from operations. 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 matures October 14, 1997 and the Bank has not indicated its intention to extend the maturity date. As of June 29, 1997, indebtedness owed pursuant to this revolving credit facility approximated $2.7 million. As such, the outstanding balance at June 29, 1997 has been classified as current in the accompanying June 29, 1997 consolidated balance sheet. Management is seeking the most appropriate alternative financing source based upon the Company's financial results, financial condition and the lending environment; however, there can be no assurance that the Company's efforts will be successful. If the Company is unable to obtain an alternative source of financing and the Bank does not extend the maturity date of the outstanding debt, the Company would take whatever actions necessary to preserve shareholders' capital. Management expects to finance capital expenditures during the upcoming year, which are limited to $1.2 million by debt covenants under its current revolving line of credit agreement, with cash provided by operations, lease financing, and cash on hand. As mentioned previously, management is seeking to obtain alternative financing; however, there are no assurances that management's efforts will be successful. In addition, it is not known what limitations would be placed on the Company's capital expenditures by alternative financing, if any. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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 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 June 29, 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 June 29, 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 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. 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"), if any, 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 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 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. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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 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 June 29, 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 June 29, 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 June 29, 1997. In addition a $1.0 million gain on the revaluation of the Pier 1 Earn-out Claim is recognized in the fiscal 1997 consolidated statement of operations. OPERATING LOSSES The Company has operating losses for the fiscal years ended June 29, 1997, January 28, 1996 and January 29, 1995. In addition, at June 29, 1997, the Company has a working capital deficit and a net capital deficiency and the Company's revolving line of credit matures October 14, 1997 and 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 the five months ended June 30, 1996 and fiscal 1997, management has addressed these issues as well as others in an attempt to return the Company to profitability. These actions included the following: . Accelerating the closing of underperforming stores; . Continuing emphasis on improving gross margins; . 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 and pricing, and use and timing of advertising mediums; . Implementing reductions in store operating expenses, including payroll, by reorganizing store management and by modification of the Company's bonus program; . Identifying further reductions of general and administrative expenses; and, 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) . Seeking 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 obtain alternative financing. 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 previously had been assigned to inventory in the off-seasons; . Review of all advertising items to eliminate unnecessary or non-impact price reductions; . Elimination of corporate staff resulting from decentralization of key functions such as merchandising and advertising; and, . Continued review of underperforming stores and analysis of potential new store locations, if new funding sources can be successfully identified. 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 and preserve capital. NEW ACCOUNTING STANDARDS In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which is effective for fiscal years beginning after December 15, 1995. Effective January 29, 1996, the Company adopted FAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. The pronouncement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock option compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees: ("APB 25"). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in FAS 123 had been applied. The Company continues to account for stock-based employee compensation plans under the intrinsic method pursuant to APB 25. The pro forma effect of applying the 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) fair value based method of accounting for stock-based compensation as described in FAS 123 on the net income (loss) and net income (loss) per share for fiscal 1997, the five months ended June 30, 1996 and fiscal 1996, as applicable, has been disclosed. In February 1997, the Financial Accounting Standards Board issued FAS 128, "Earnings Per Share". This statement requires interim and annual presentation of "basic" and "diluted" earnings per share (EPS) by all entities that have issued common stock or potential common stock if those securities trade in a public market. The objective of basic EPS is to measure the performance of an entity over the reporting period. The objective of diluted EPS is to measure the performance of an entity over the reporting period while giving effect to all dilutive potential common shares that were outstanding during the period. This statement also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The Company will adopt this statement in the second quarter ending December 31, 1997 at which time all prior period EPS data presented will be restated to conform with the provisions of this statement. Such adoption will have no impact on the Company's presentation of earnings per share as basic and diluted EPS computed pursuant to FAS 128 will not differ from the net income (loss) per share as presented. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- Sunbelt Nursery Group, Inc. Index to Consolidated Financial Statements and Schedules Page ---- Report of Independent Accountants.......................................... 18 Consolidated Balance Sheets at June 29, 1997, June 30, 1996, and January 28, 1996........................................................... 19 Consolidated Statements of Operations for the Year ended June 29, 1997, the Five Months ended June 30, 1996, and the Years ended January 28, 1996 and January 29, 1995...................................... 20 Consolidated Statements of Changes in Shareholders' Equity for the Year ended June 29, 1997, the Five Months ended June 30, 1996, and the Years ended January 28, 1996 and January 29, 1995............ 21 Consolidated Statements of Cash Flows for the Year ended June 29, 1997, the Five Months ended June 30, 1996, and the Years ended January 28, 1996 and January 29, 1995...................................... 22 Notes to Consolidated Financial Statements................................. 23 Financial Statement Schedules: All Schedules have been omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Sunbelt Nursery Group, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sunbelt Nursery Group, Inc. and its subsidiaries (the "Company") at June 29, 1997, June 30, 1996 and January 28, 1996 and the results of their operations and their cash flows for the year ended June 29, 1997, the five months ended June 30, 1996 and the years ended January 28, 1996 and January 29, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring operating losses, has a working capital deficit and net capital deficiency at June 29, 1997, the Company's revolving line of credit matures on October 14, 1997 and the bank has not indicated its intention to extend the maturity date of the revolving line of credit, all of which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 2 to the consolidated financial statements, the Company adopted FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1996. PRICE WATERHOUSE LLP Fort Worth, Texas October 3, 1997 18 SUNBELT NURSERY GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
JUNE 29, June 30, January 28, 1997 1996 1996 ---------------- --------------- --------------- ASSETS - ------ Current assets: Cash and cash equivalents $ 1,838 $ 2,058 $ 1,140 Cash - restricted 154 1,352 1,006 Accounts receivable, net 261 577 310 Inventories 14,088 18,847 25,595 Other current assets 611 281 672 --------------- -------------- -------------- Total current assets 16,952 23,115 28,723 --------------- -------------- -------------- Property and equipment, at cost 22,426 27,189 27,951 Less accumulated depreciation 17,847 16,481 16,220 --------------- -------------- -------------- Net property and equipment 4,579 10,708 11,731 Other assets 66 175 221 --------------- -------------- -------------- Total assets $21,597 $33,998 $40,675 =============== ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) - ---------------------------------------------- Current liabilities: Accounts payable $11,098 $11,699 $21,676 Accrued compensation 1,473 1,846 1,669 Current portion of long-term debt and capital leases 3,190 6,863 658 Other current liabilities 5,063 5,637 4,194 --------------- -------------- -------------- Total current liabilities 20,824 26,045 28,197 Long-term debt and capital leases 1,366 3,037 11,473 Reserve for store closings 543 102 336 Other long-term liabilities 1,266 1,638 633 --------------- -------------- -------------- Total liabilities 23,999 30,822 40,639 --------------- -------------- -------------- Shareholders' equity (deficit): Common stock, $.01 par value, 25,000,000 shares authorized, 8,500,000 issued and outstanding 85 85 85 Additional paid-in capital 45,151 45,151 45,151 Accumulated deficit (47,613) (42,010) (45,150) Subscriptions receivable from officer (25) (50) (50) --------------- -------------- -------------- Total shareholders' equity (deficit) (2,402) 3,176 36 Commitments and contingencies (Notes 3, 6, 7 and 13) --------------- -------------- -------------- Total liabilities and shareholders' equity (deficit) $21,597 $33,998 $40,675 =============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 19 SUNBELT NURSERY GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Five-Month YEAR ENDED Period Ended Year Ended Year Ended JUNE 29, June 30, January 28, January 29, 1997 1996 1996 1995 --------------- ---------------- ---------------- --------------- Net sales $95,773 $69,660 $129,658 $138,565 Cost of goods sold 54,319 40,450 77,864 78,568 -------------- --------------- --------------- -------------- Gross profit 41,454 29,210 51,794 59,997 General, administrative and selling expense 41,847 24,411 50,522 57,591 Depreciation and amortization 2,406 1,188 3,885 4,595 Impairment of goodwill and long-lived assets 2,351 - 20,537 - Gain on revaluation of Pier 1 Earn-out Claim (1,000) - - - Interest and other income (98) (25) (173) (189) Interest expense 948 496 2,394 3,031 Provision for store closings 603 - (193) - -------------- --------------- --------------- -------------- Income (loss) before provision for income taxes (5,603) 3,140 (25,178) (5,031) Provision for income taxes - - - - -------------- --------------- --------------- -------------- Net income (loss) $(5,603) $ 3,140 $(25,178) $ (5,031) ============== =============== =============== ============== Net income (loss) per share $ (0.66) $ 0.37 $ (2.96) $ (0.59) ============== =============== =============== ==============
The accompanying notes are an integral part of these consolidated finacial statements. 20 SUNBELT NURSERY GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
ADDITIONAL COMMON TREASURY PAID-IN ACCUMULATED SUBSCRIPTIONS STOCK STOCK CAPITAL DEFICIT RECEIVABLE ------------ -------------- -------------- ---------------- -------------- BALANCE AT JANUARY 30, 1994 $85 $ - $45,118 $(14,941) $ - Issuance of stock - 20,000 shares - - 55 - - Treasury stock purchases - 38,000 shares - (96) - - - Exercise of employee stock options - 38,000 shares - 96 (22) - (50) Net loss - - - (5,031) - ----------- ------------- ------------- --------------- ------------- BALANCE AT JANUARY 29, 1995 85 - 45,151 (19,972) (50) Net loss - - - (25,178) - ----------- ------------- ------------- --------------- ------------- BALANCE AT JANUARY 28, 1996 85 - 45,151 (45,150) (50) Net income - - - 3,140 - ----------- ------------- ------------- --------------- ------------- BALANCE AT JUNE 30, 1996 85 - 45,151 (42,010) (50) Net loss - - - (5,603) Reduction of subscription receivable - - - - 25 ----------- ------------- ------------- --------------- ------------- BALANCE AT JUNE 29, 1997 $85 $ - $45,151 $(47,613) $ (25) =========== ============= ============= =============== =============
The accompanying notes are an integral part of these consolidated financial statements. 21 SUNBELT NURSERY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Five-Month YEAR ENDED Period Ended Year Ended Year Ended JUNE 29, June 30, January 28, January 29, 1997 1996 1996 1995 -------------- -------------- -------------- -------------- OPERATING ACTIVITIES: Net income(loss) $(5,603) $3,140 $(25,178) $(5,031) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 2,406 1,188 3,885 4,595 (Gain) loss on sale of fixed assets 315 (153) (156) (51) Gain on revaluation of Pier 1 Earn-out Claim (1,000) - - - Provisions for (reversal of) store closing reserve 603 - (193) - Payment of store closing costs included in provision for store closings (222) (234) (785) (763) Impairment of goodwill and long-lived assets 2,351 - 20,537 - Changes in operating assets and liabilities: Inventories 4,250 6,748 1,425 2,240 Accounts receivable and other assets 279 28 (349) 416 Accounts payable (601) (9,977) 2,247 1,630 Accrued compensation (373) 177 (815) (220) Other liabilities (879) 2,476 (326) (651) ------------- ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,526 3,393 292 2,165 ------------- ------------- ------------- ------------- INVESTING ACTIVITIES: Purchase of property and equipment (259) (187) (369) (798) Proceeds from sale of property and equipment 1,481 378 1,252 13 ------------- ------------- ------------- ------------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,222 191 883 (785) ------------- ------------- ------------- ------------- FINANCING ACTIVITIES: Borrowings under revolving credit facility 102,305 72,704 - 100 Repayments on revolving credit facility (105,921) (74,728) - (2,000) Repayments of notes payable - - - (9,600) Additions to long-term debt and capital leases - - 140,655 41,513 Principal payments on long-term debt, including notes payable and capital lease obligations (575) (296) (141,682) (33,668) Purchase of treasury stock - - - (96) Exercise of employee stock options - - - 24 Reduction in subscription receivable 25 - - - Restricted cash for outstanding letters of credit 1,198 (346) (295) (711) Debt issuance costs - - - (329) ------------- ------------- ------------- ------------- NET CASH USED FOR FINANCING ACTIVITIES (2,968) (2,666) (1,322) (4,767) ------------- ------------- ------------- ------------- Increase (decrease) in cash and cash equivalents (220) 918 (147) (3,387) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,058 1,140 1,287 4,674 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,838 $2,058 $ 1,140 $ 1,287 ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 22 SUNBELT NURSERY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION - ----------------------------------------------- Sunbelt Nursery Group, Inc. ("Sunbelt" or the "Company") is a specialty retailer of nursery and garden products 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. Prior to October 1, 1990, Intermark, Inc. ("Intermark") owned a 50.4% interest in the Company and also owned a controlling interest in Pier 1 Imports, Inc. ("Pier 1 Imports"). Intermark subsequently disposed of its entire interest in Pier 1 Imports. Effective October 1, 1990, Pier 1 Imports acquired Intermark's interest in the Company and commenced a tender offer for the remaining shares, which was consummated effective November 30, 1990, at which time Pier 1 Imports became the sole shareholder of the Company. In October 1991, the Company completed the sale of 3,680,000 shares of newly issued common stock in a public offering. Subsequent to the sale, Pier 1 Imports' ownership approximated 56.6%. Net proceeds of the offering approximated $28.1 million, of which $18.1 million was utilized to pay a dividend to Pier 1 Imports. In February 1992, Pier 1 Imports sold 600,000 shares of common stock which reduced Pier 1 Imports' ownership in the Company to 49.5%. Effective April 28, 1993, Pier 1 Imports sold its remaining 4,200,000 shares of common stock to General Host Corporation ("General Host") in exchange for 1,940,000 shares of General Host common stock. On October 19, 1994, General Host sold its 4,200,000 shares of Sunbelt's common stock to Timothy R. Duoos ("Mr. Duoos") giving Mr. Duoos a 49.4% ownership interest in Sunbelt. On June 20, 1997, Mr. Duoos sold 1,000,000 shares of common stock to a director of the Company, which reduced his ownership interest to 37.7%. NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES - ---------------------------------------- BASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the consolidated financial statements have been reclassified to conform to the current year's presentation. REVENUE RECOGNITION - The Company recognizes revenue when the customer takes possession of merchandise. CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES - Inventories are comprised primarily of finished merchandise and are stated at the lower of average cost or market, average cost being determined on the retail inventory method. PROPERTY AND EQUIPMENT - Property and equipment, including renewals and improvements which extend the life of existing properties, are capitalized at cost and depreciated using the straight-line 23 method over estimated useful lives or lease terms, if shorter. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of property and equipment sold or otherwise retired and the related accumulated depreciation and amortization are removed from the accounts and any resultant gain or loss, after taking into consideration proceeds from sale, is credited or charged to income. INCOME TAXES - The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. ADVERTISING - The Company expenses all advertising costs in the period in which the costs are incurred. Total advertising expenditures approximated $3,647,000, $2,291,000, $4,526,000 and $6,007,000 for fiscal 1997, the five months ended June 30, 1996 and fiscal 1996 and 1995, respectively. EARNINGS (LOSS) PER SHARE - Earnings (loss) per share are computed on the weighted average number of shares plus common stock equivalents outstanding during the period if dilutive. For all periods the average number of shares outstanding approximated 8,500,000. In February 1997, the Financial Accounting Standards Board issued FAS 128, "Earnings Per Share". This statement requires interim and annual presentation of "basic" and "diluted" earnings per share (EPS) by all entities that have issued common stock or potential common stock if those securities trade in a public market. The objective of basic EPS is to measure the performance of an entity over the reporting period. The objective of diluted EPS is to measure the performance of an entity over the reporting period while giving effect to all dilutive potential common shares that were outstanding during the period. This statement also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The Company will adopt this statement in the second quarter ending December 31, 1997 at which time all prior period EPS data presented will be restated to conform with the provisions of this statement. Such adoption will have no impact on the Company's presentation of earning per share as basic and diluted EPS computed pursuant to FAS 128 will not differ from the net income (loss) per share as presented. FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values due primarily to the short-term nature of their maturities. GOODWILL - Goodwill represents the excess purchase cost over the fair value of the net assets of businesses acquired. The Company periodically reviews goodwill to assess recoverability. The Company continues to experience intense competition and operating losses (see Note 3 for a further discussion of these factors). As a result, during the fourth quarter of fiscal 1996 the Company reviewed the valuation of goodwill and concluded that its future recoverability was in doubt and recognized an impairment of the remaining balance of goodwill of approximately $19.2 million, which is reflected as Impairment of Goodwill and Long-Lived Assets in the accompanying consolidated statements of operations. IMPAIRMENT OF ASSETS - In March 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which is effective for fiscal years beginning after December 15, 1995, although early adoption is allowed. As such, the Company elected to adopt FAS 121 for the year ended January 28, 1996, which requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in 24 circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. The amount of the impairment loss is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. Fair value of the related assets is determined as the present value of the expected future cash flows discounted using a rate commensurate with the risks. The Company reviewed its long-lived assets on a store-by-store basis, which represents the Company's lowest level of identifiable cash flows, and recorded a pre-tax impairment loss of approximately $2.4 million and $1.3 million in fiscal 1997 and 1996, respectively, to conform with this statement. The circumstances indicating that the carrying amount of the Company's assets may not be recoverable included the Company's historical trend of operating losses for the fiscal years ended June 29, 1997, January 28, 1996 and January 29, 1995. The Company will review its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of a long- lived asset may not be recoverable. STOCK BASED COMPENSATION - In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which is effective for fiscal years beginning after December 15, 1995. Effective January 29, 1996, the Company adopted FAS 123 which establishes financial accounting and reporting standards for stock-based employee compensation plans. The pronouncement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock option compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees: ("APB 25"). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in FAS 123 had been applied. The Company continues to account for stock-based employee compensation plans under the intrinsic method pursuant to APB 25. The pro forma effect of applying the fair value based method of accounting for stock-based compensation as described in FAS 123 on the net income (loss) and net income (loss) per share for fiscal 1997, the five months ended June 30, 1996 and fiscal 1996, as applicable, has been disclosed. PERVASIVENESS OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Actual results could differ from those estimates. NOTE 3 -- 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 matures October 14, 1997 and the Bank has not indicated its intention to extend the maturity date. As of June 29, 1997, indebtedness owed pursuant to this revolving credit facility approximated $2.7 million. As such, the outstanding balance at June 29, 1997 has been classified as current in the accompanying June 29, 1997 consolidated balance sheet. Management is seeking to obtain alternative financing, however, there can be no assurance that the Company's efforts will be successful. If the Company is unable to obtain an alternative source of financing and the Bank does not extend the 25 maturity date of the outstanding debt, the Company would take whatever actions necessary to preserve shareholders' capital. 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 June 29, 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 June 29, 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 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. 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. 26 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 June 29, 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 June 29, 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 June 29, 1997. In addition, a $1.0 million gain on the revaluation of the Pier 1 Earn-out Claim is recognized in the fiscal 1997 consolidated statement of operations. OPERATING LOSSES The Company has operating losses for the fiscal years ended June 29, 1997, January 28, 1996 and January 29, 1995. In addition, at June 29, 1997, the Company has a working capital deficit and a net capital deficiency and the Company's revolving line of credit matures October 14, 1997 and 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 the five months ended June 30, 1996 and fiscal 1997, management has addressed these issues as well as others in an attempt to return the Company to profitability. These actions included the following: . Accelerating the closing of underperforming stores; . Continuing emphasis on improving gross margins; . 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 and pricing, and use and timing of advertising mediums; . Implementing reductions in store operating expenses, including payroll, by reorganizing store management and by modification of the Company's bonus program; . Identifying further reductions of general and administrative expenses; and, 27 . Seeking 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 obtain alternative financing. 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 previously had been assigned to inventory in the off-seasons; . Review of all advertising items to eliminate unnecessary or non-impact price reductions; . Elimination of corporate staff resulting from decentralization of key functions such as merchandising and advertising; and, . Continued review of underperforming stores and analysis of potential new store locations, if new funding sources can be successfully identified. Management expects these plans to improve cash flow and improve the Company's operating performance. However, there can be no assurance that such operational improvements 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 and preserve capital. 28 NOTE 4 -- STORE CLOSINGS AND RELOCATIONS - ---------------------------------------- During the fourth quarter of fiscal 1993, the Company decided to convert or relocate certain stores. As a result of this decision, the Company recognized a restructuring charge of $2,300,000 in the fourth quarter of fiscal 1993 which represented the estimated costs of this program. During fiscal 1997, the Company added $603,000 to the reserve primarily for six underperforming stores identified for closure. Charges to the store closing reserve consist of cash payments primarily for rent and taxes on closed stores. The reserve at June 29, 1997 of $906,000 (of which $363,000 is reported as current and $543,000 is reported as non-current in the accompanying consolidated balance sheet) is primarily related to noncancelable lease obligations of closed stores. The following table sets forth the activity in the restructuring accrual (in thousands):
Balance at January 30, 1994 $ 2,730 Charges during fiscal 1995 (1,135) ------- Balance at January 29, 1995 1,595 Charges during fiscal 1996 (785) Reversal of reserve (201) ------- Balance at January 28, 1996 609 Charges during transition period (228) ------- Balance at June 30, 1996 381 Charges during fiscal 1997 (78) Additional provision 603 ------- Balance at June 29, 1997 $ 906 =======
29 NOTE 5 -- PROPERTY AND EQUIPMENT - -------------------------------- Property and equipment, stated at cost, including capital leases, consisted of the following:
June 29, June 30, January 28, 1997 1996 1996 ------- ------- ------- (in thousands) Buildings $ 2,910 $ 3,640 $ 3,640 Equipment, furniture and fixtures 10,438 11,952 12,014 Leasehold interest and improvements 8,407 10,804 11,504 Land 671 793 793 ------- ------- ------- 22,426 27,189 27,951 Less accumulated depreciation 17,847 16,481 16,220 ------- ------- ------- $ 4,579 $10,708 $11,731 ======= ======= =======
Pursuant to the adoption of FAS No. 121, (see Note 2) the Company recorded an adjustment that resulted in a decrease in the carrying value of property and equipment of $2.4 million and $1.3 million at June 29, 1997 and January 28, 1996, respectively, primarily relating to the stores' buildings, leasehold improvements and equipment. These adjustments are reflected as impairment of long-lived assets in the accompanying consolidated statements of operations. NOTE 6 -- NOTES PAYABLE AND OTHER INDEBTEDNESS - ---------------------------------------------- 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. As of June 29, 1997, indebtedness owed pursuant to this revolving credit facility approximated $2.7 million. The revolving credit facilities' maturity date is October 14, 1997, and the Bank has not indicated its intention to extend the maturity date. As such, the outstanding balance at June 29, 1997 has been classified as current in the accompanying consolidated balance sheet. Management is seeking to obtain alternative financing; however, there can be no assurance that the Company's efforts will be successful. If the Company is unable to obtain an alternate source of financing and the Bank does not extend the maturity date of the outstanding debt, the Company would take whatever actions necessary to preserve shareholders' capital. 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 $6.0 million. The maximum facility was decreased to $6.0 million from $12.0 million in amendments dated October 24, 1996, February 11, 1997 and May 12, 1997. The borrowing base and amounts borrowed pursuant to the Loan Agreement amounted to $4.1 million and $2.7 million, respectively, at June 29, 1997. Outstanding letters of credit issued primarily to meet insurance requirements amounted to approximately $359,000 at June 29, 1997. The revolving credit facility bears interest at a rate equal to the Bank's prime or base rate plus 1.5% per annum. The interest rate at June 29, 1997 was 10%. Facility fees equal to .5% per annum of the total $6.0 million borrowing facility and 2% per annum of the outstanding face amount of letters of credit are payable under the Loan Agreement. The Loan Agreement contains covenants limiting the Company's ability to incur indebtedness, issue stock, create liens on its property, merge or consummate acquisitions, dispose of its property, incur capital expenditures greater than $1.2 million annually and pay any dividends. The Loan 30 Agreement also requires the Company to maintain certain financial ratios such as debt service coverage. The Loan Agreement also provides that any event of default under the agreement with Pier 1 Imports is deemed an event of default under the Loan Agreement. The Loan Agreement is secured by a first lien on substantially all of the Company's assets as well as the personal guarantee of Mr. Timothy Duoos and the common stock of the Company owned by Mr. Duoos and the President of the Company. The Loan Agreement provided that Mr. Duoos and the President of the Company pledge at least 50.1% of the Company's outstanding common stock to the Bank. To enable this condition to be satisfied, the Board of Directors granted options, immediately exercisable based on the closing sales price on the day of grant, to the President for 50,000 shares of Common Stock, of which he subsequently exercised 38,000 options. 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 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. 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"), if any, 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 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 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 31 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 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 June 29, 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 June 29, 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 June 29, 1997. In addition, a $1.0 million gain on the revaluation of the Pier 1 Earn-out Claim is recognized in the fiscal 1997 consolidated statement of operations. Notes payable and other long-term debt consisted of the following:
June 29, June 30, January 28, 1997 1996 1996 -------- -------- ----------- (in thousands) Notes payable under credit agreements with a bank due at or before maturity on October 14, 1997 $2,650 $6,266 $ 8,290 Earn-out Claim payable to Pier 1 Imports from cash flow 1,000 2,000 2,000 Capital lease obligations 906 1,634 1,841 ------ ------ ------- 4,556 9,900 12,131 Less portion due within one year 3,190 6,863 658 ------ ------ ------- $1,366 $3,037 $11,473 ====== ====== =======
Notes payable and other long-term debt outstanding at June 29, 1997 mature as follows:
Fiscal year (in thousands) ----------- 1998 $3,190 1999 200 2000 37 2001 29 2002 23 Thereafter 1,077 ------ Total $4,556 ======
32 NOTE 7 -- LEASE OBLIGATIONS - --------------------------- The Company leases certain property, consisting principally of retail stores, under leases expiring through the year 2010. Certain of the leases contain renewal options, rent escalation clauses and provisions requiring additional rental payments based on sales in excess of specified levels. Capital leases are recorded in the Company's balance sheet as assets along with the related lease obligation. All other lease obligations are operating leases, and payments are reflected in the Company's consolidated statement of operations as rental expense. Assets recorded under capital leases are included in property and equipment as follows:
June 29, June 30, January 28, 1997 1996 1996 ------- ------- ---------- (In thousands) Buildings $ 294 $ 425 $ 686 Equipment, furniture and fixtures 2,465 2,852 2,766 ------ ------- ------ 2,759 3,277 3,452 Less accumulated amortization 2,106 1,895 1,913 ------ ------- ------ $ 653 $ 1,382 $1,539 ====== ======= ======
At June 29, 1997, the Company had the following minimum lease commitments:
Fiscal Capital Operating Year leases leases ------ -------- -------- (In thousands) 1998 $ 618 $ 4,998 1999 232 3,972 2000 44 3,046 2001 51 2,401 2002 33 1,858 Thereafter 101 8,369 ------ ------- Total lease commitments 1,079 $24,644 ======= Less imputed interest 173 ------ Present value of total capital lease obligations, including current portion of $540,067 $ 906 ======
Rental expense approximated $7,197,000, $5,814,000, $8,094,000 and $7,537,000, including approximately $126,000, $253,000, $190,000, and $323,000 of contingent rentals based upon a specified percentage of sales for fiscal 1997, the five months ended June 30, 1996 and fiscal 1996 and 1995, respectively. Sublease rentals were immaterial for each period. NOTE 8 -- STOCK OPTION PLANS - ---------------------------- On August 14, 1991, the Company's Board of Directors and the then sole shareholder approved the Company's 1991 Stock Option Plan (the "Plan"), which provides for the issuance of stock options to the Company's officers, directors and key employees. Options covering an aggregate of 500,000 shares of common stock may be granted under the Plan. Shares subject to any option that expire, terminates or is forfeited will again be available for options subsequently granted. Currently, there are 13 33 participants in the Plan. The vesting period of options is determined at the discretion of the plan administrative committee. Options become exercisable at the rate of 20% per year on a cumulative basis beginning one year after the date of grant. All options granted have been priced at market value at date of grant. All options outstanding at January 29, 1995 are exercisable in light of the change in control, as defined in the 1991 Stock Option Plan, occurring in fiscal 1995. The then recently appointed President of the Company received options for 50,000 shares in October 1994, exercisable immediately at the market price at the date of grant, in order to fulfill a covenant of the Loan and Security Agreement with a commercial bank. On March 6, 1995, the Board of Directors approved, and on November 9, 1995, the stockholders ratified, an amendment to the 1991 Stock Option Plan suspending the provisions of the 1991 Stock Option Plan applicable to non-employee directors, and the grant of certain non-qualified stock options to the then- current non-employee directors. As a result, each of the Company's non-employee directors received 50,000 shares of the Company's Common Stock at an exercise price equal to the fair market value of the Common Stock on the date each was elected to the board of directors. Accordingly, options to purchase 150,000 shares were issued during fiscal 1996. For each director, the options will become 50% vested on their first anniversary date, and the remaining 50% vests on the second anniversary date assuming continuous service as a member of the Board of Directors. Once vested, the options may be exercised at any time during their period of service and for a period of three years following their resignation from the Board. The options expire ten years from the March 6, 1995 and April 11, 1995 grant dates. The exercise price at the date of grant approximated fair market value. 34 All stock options currently outstanding are non-qualified. Shares available for grant amounted to 246,500, 221,500, 180,500, and 267,000 at June 29, 1997, June 30, 1006, January 28, 1996, and January 29, 1995, respectively. The following is a summary of the outstanding stock options issued by the Company for the year ended June 29, 1997, the five months ended June 30, 1996 and the years ended January 28, 1996 and January 29, 1995:
Employee stock Non-employee director options stock options - --------------------------------------------------------------------- Number Weighted Number Weighted of Average of Average shares Exercise Price shares Exercise Price ------- -------------- ------- -------------- Outstanding at January 31, 1994 302,000 $6.20 - $ - Granted 123,000 2.53 - - Exercised 38,000 1.94 - - Canceled 192,000 6.00 - - ------- ----- ------- ----- Outstanding at January 29, 1995 195,000 4.91 - - Granted - - 150,000 1.90 Canceled 63,500 5.51 - - ------- ----- ------- ----- Outstanding at January 28, 1996 131,500 4.62 150,000 1.90 Granted - - - - Canceled 71,000 4.84 - - ------- ----- ------- ----- Outstanding at June 30, 1996 60,500 4.35 150,000 1.90 Granted 60,000 2.50 - - Canceled 30,000 2.50 25,000 1.81 ------- ----- ------- ----- Outstanding at June 29, 1997 90,500 $3.74 125,000 $1.91 ======= ===== ======= ===== Exercisable at June 29, 1997 60,500 $4.35 125,000 $1.91 ======= ===== ======= =====
35 The following table summarizes stock options outstanding and exercisable at June 29, 1997:
Outstanding Exercisable ---------------------------------------- ---------------------- Exercise Weighted Weighted Weighted Price Average Average Average Range Shares Remaining Life Exercise Price Shares Exercise Price ---------- ------- -------------- -------------- ------- -------------- $1.81-2.94 179,000 7.7 $2.08 149,000 $1.99 4.65-5.93 31,500 4.6 5.30 31,500 5.30 7.25-8.50 5,000 4.4 7.75 5,000 7.75 ------- ------- 215,500 7.2 $2.68 185,500 $2.71 ======= =======
The Company applies APB Opinion 25, "Accounting for Stock Issued To Employees", and related interpretations in accounting for options granted under the Plan. Accordingly, no compensation cost has been recognized at the grant date for options issued at fair market value. Had compensation cost for the Company's stock option plan been determined based on the fair value at grant date for awards in fiscal 1997 and 1996 in accordance with the provisions of FAS 123, "Accounting for Stock-Based Compensation", the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amount):
Five months ended Fiscal 1997 June 30, 1996 Fiscal 1996 ----------- ------------- ----------- Net income (loss), as reported $(5,603) $3,140 $(25,178) Net income (loss), pro forma (5,645) 3,121 (25,220) Net income (loss) per share, as reported (0.66) 0.37 (2.96) Net income (loss) per share, pro forma (0.66) 0.37 (2.97)
The fair value of each option grant is calculated on the date of grant using the Black-Scholes option-pricing model based upon the following assumptions: expected volatility of 34%; risk-free interest rate ranging from 6.07% to 7.83%; expected lives of 5 years and no expected dividend payments. The weighted average fair value of options granted during fiscal 1997 and fiscal 1996 was $1.03 and $0.82, respectively. NOTE 9 -- INCOME TAXES - ---------------------- The components of the income tax provision for fiscal 1997, the five months ended June 30, 1996, fiscal 1996 and 1995 are as follows:
Five months 1997 ended June 30, 1996 1996 1995 ---- ------------------- ---- ---- (In thousands) Federal: Current - - - - Deferred - - - - ---- ---- ---- ---- - - - - ==== ==== ==== ====
36 Differences between the provision for income taxes and income taxes based on statutory federal income tax rates for fiscal 1997, the five months ended June 30, 1996, fiscal 1996 and 1995 are as follows:
Five months 1997 ended June 30, 1996 1996 1995 ----- -------------------- ----- ----- Federal tax provision (benefit) computed at statutory rate (35)% 35% (35)% (34)% Impairment expense of intangible asset - - 26 - Amortization of intangible - - - 4 Increase (decrease) in valuation allowance for tax benefits 38 (32) 10 30 Other (3) (3) (1) - ---- ---- ---- ---- 0% 0% 0% 0% ==== ==== ==== ====
Deferred tax assets and liabilities were comprised of the following:
June 29, June 30, January 28, 1997 1996 1996 -------- -------- ----------- (In thousands) Loss carryforwards $ 6,207 $ 4,396 $ 6,594 Reserve for store closings 317 184 258 Lease obligations 317 572 626 Depreciation 2,419 2,071 1,582 Insurance reserves 518 500 176 Pier 1 Imports Earn-out Claim 340 680 680 Other 2,049 1,638 1,124 -------- -------- -------- 12,167 10,041 11,040 Valuation allowance (12,167) (10,041) (11,040) -------- -------- -------- Total deferred tax assets $ 0 $ 0 $ 0 ======== ======== ========
At June 29, 1997, the Company has net operating loss carryforwards of approximately $17.7 million and $14.0 million for regular tax purposes and for alternative minimum tax purposes, respectively, which will expire commencing in fiscal 2008 through fiscal 2012. The Internal Revenue Code imposes certain restrictions on the utilization of net operating loss carryforwards following a change in control of the Company. "Change of control" is defined by complex regulations. There may be restrictions on the future utilization of the Company's net operating loss carryforwards. NOTE 10 -- EMPLOYEE BENEFIT PLANS - --------------------------------- On August 14, 1991, the Board of Directors of the Company authorized the Company's Stock Purchase Plan, under which Common Stock is purchased on behalf of participants at market prices through regular payroll deductions. Generally, the Company makes matching contributions ranging from 10% to 50% (up to a maximum of 10% of annual compensation) with the amount of the Company's contribution depending upon the years of continuous participation by the employees in the Stock Purchase Plan. The Company contribution is currently suspended pending improvement in the Company's operating results. Contributions by outside Directors are limited to the amount of their monthly Directors' fees. The Company did not make a contribution to the Stock Purchase Plan in fiscal 1997, 1996 or during the five 37 months ended June 30, 1996. Company contributions to the Stock Purchase Plan for fiscal 1995 were $159,000. The Company has a defined contribution retirement and savings plan that is intended to qualify under Section 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Employees of the Company and its subsidiaries who are at least 21 years of age and have worked 1,000 hours in a 12-month period are eligible to participate. Participants may contribute from 1% to 15% of annual earnings, subject to statutory limitations. The Company made matching contributions ranging from 1% up to a maximum of 3% depending on the level of the participant's contributions. In addition, the Company may make discretionary contributions out of net profits. The Company's contribution is currently suspended pending improvement in the Company's operating results. The Company did not make a contribution to the plan in fiscal 1997, 1996 or during the five months ended June 30, 1996. Company contributions under this plan for fiscal 1995 were $232,000. As of June 29, 1997, approximately 549 employees were eligible to participate, of which 217 were participating in this plan. NOTE 11 -- OTHER RELATED PARTY TRANSACTIONS - ------------------------------------------- LOAN COMMITMENTS - On October 14, 1994, the Company entered into a new loan agreement with a bank. During the fiscal years 1997, 1996 and 1995, and the five months ended June 30, 1996 the Company paid a guarantee fee of $60,000 and $25,000, respectively, to Mr. Duoos, who personally guaranteed the Company's Loan Agreement (see Note 6). COMMITMENTS - The Company leases three stores, an office and warehouse from an employee of the Company. The rental payments were $156,000, $79,000, $152,000, and $171,000 for the fiscal year ended June 29, 1997, the five months ended June 30, 1996 and the fiscal years ended January 28, 1996 and January 29, 1995, respectively. Future lease commitments are $195,000. In April 1993, General Host obtained a 49.5% ownership interest in the Company. The Company paid General Host $51,000 for in-house legal services during fiscal 1995. During fiscal year 1995, the Company purchased inventory totaling $300,000 from Frank's Nursery and Crafts, Inc., the principal operating subsidiary of General Host. During fiscal 1997, the five months ended June 30, 1996 and fiscal 1996, the Company paid $111,000, $37,000 and $93,000, respectively, representing transportation services, to a travel service company of which Mr. Duoos is a partial owner. Lyndale Garden Centers, Inc., ("Lyndale") whose sole shareholder is Mr. Duoos, has a receivable to the Company for $28,000 at June 29, 1997 for travel expenditures and merchandise purchased from the Company. In addition, the Company purchased $48,500 in seasonal merchandise from Lyndale during fiscal 1997. OTHER - The Company held a subscription receivable for $50,000 from the President of the Company for the purchase of Company stock pursuant to the Loan Agreement. The President paid the Company $25,000 during fiscal 1997 for this subscription. The subscription terminates on December 31, 1997 and accrues interest at the bank loan rate. 38 NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION - --------------------------------------------- During fiscal 1997 and the five months ended June 30, 1996, the Company leased computer equipment, software and a voice mail system with a combined value of $101,000, resulting in the recording of a capital lease obligation for this amount. During fiscal 1996, the Company leased computer equipment valued at $236,000 and store equipment valued at $43,000 resulting in the recording of a capital lease obligation for those amounts. The Company also entered into a land and building lease for a relocated store, in which the terms of the lease resulted in a capital lease obligation and a building value of $185,000 was recorded. Also during fiscal 1996, to reflect the Agreement of Settlement with Pier 1 Imports (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. 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 or to account for any increases in the contingent payment obligation. (See Note 6) During fiscal 1995, the Company leased store fixtures and equipment valued at $318,000 resulting in the recording of a capital lease obligation for that same amount. Cash paid for interest and income taxes was as follows:
Five months ended 1997 June 30, 1996 1996 1995 ----- ----------------- ------ ------ (In thousands) Interest $ 977 $510 $2,531 $2,893 Income taxes $ - $ - $ - $ -
39 NOTE 13 -- LITIGATION AND OTHER CONTINGENCIES - --------------------------------------------- LITIGATION: The Company, the Company's Chief Executive Officer, a company owned by the Chief Executive Officer 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 an alleged 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. During fiscal 1996 the Company settled the suit relating to post-employment consulting agreements filed by two (2) former officers of the Company. The settlement had no material impact on results of operations, liquidity or financial position. 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 June 29, 1997. 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. 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 during fiscal 1995. 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. OTHER CONTINGENCIES - In August 1996, the Company recorded a gain of $710,000 for 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 expires in October 1999 and December 2003 and the remaining undiscounted non-cancelable minimum lease commitments due as of June 29, 1997 are approximately $589,000. 40 NOTE 14--CHANGE IN FISCAL YEAR-END - ---------------------------------- In August 1996, the Board of Directors approved a change in the Company's fiscal year end to the Sunday nearest the end of June. Condensed unaudited pro forma financial statements for the five month period ended July 2, 1995 follows (in thousands):
1995 -------- Net sales $74,142 Cost of sales 41,821 ------- Gross profit 32,321 General, administrative and selling expense 22,449 Depreciation 1,715 Interest/other income (82) Interest expense 1,543 ------- Net income $ 6,696 ======= Net income per share $ 0.79 ======= 1995 ------- Cash and cash equivalents $ 4,023 Inventory 27,628 Property and equipment, net 35,171 Goodwill 19,376 Other assets 2,362 ------- $88,560 ======= Liabilities: Current $23,936 Noncurrent 32,711 Equity 31,913 ------- $88,560 =======
41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES. - --------------------- Not applicable. 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. -------------------------------------------------- The information concerning the Directors and Executive Officers of the Registrant is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held during 1997 (the "Proxy Statement") under the headings "Election of Directors" and "Executive Officers of the Company", which information is incorporated herein by reference. The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Proxy Statement under the heading "General - Compliance with Section 16 (a) of the Securities Exchange Act of 1934", which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. ---------------------- The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation", which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Stockholders and Stock Ownership of Management", which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Certain Transactions", which information is incorporated herein by reference. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ---------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Financial Statements See Index to Consolidated Financial Statements and Schedules on Page 17 of this report. (2) Financial Statement Schedules See Index to Consolidated Financial Statements and Schedules on Page 17 of this report. (3) Exhibits See Exhibit Index. (b) Reports on Form 8-K No Reports on Form 8-K were filed by the Registrant for the quarter ended June 29, 1997. (c) Exhibits See Exhibit Index. (d) Not applicable. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 29, 1997 SUNBELT NURSERY GROUP, INC. By /s/ Richard R. Dwyer ------------------------------- Richard R. Dwyer President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Timothy R. Duoos Date: September 29, 1997 ------------------------------- Timothy R. Duoos Chairman of the Board and Chief Executive Officer (principal executive officer) By: /s/ Richard R. Dwyer Date: September 29, 1997 ------------------------------- Richard R. Dwyer President, Principal Financial and Accounting Officer (principal financial officer) By: /s/ Rudy Boschwitz Date: September 29, 1997 ------------------------------- Rudy Boschwitz Director By: /s/ Rodney P. Burwell Date: September 29, 1997 ------------------------------- Rodney P. Burwell Director 45 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 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 Agreement with executive officers Exhibit 10.3 of the Company's Registration Statement 10.2 Form of Indemnity Agreement with Incorporated by reference to directors and executive officers Exhibit 10.4 to 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 Company's 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 Company's Registration Statement 10.6 Executive Officers' Financial Incorporated by reference to Planning Plan Exhibit 10.11 to the Company's Registration Statement 10.7 Credit Facilities Agreement between Incorporated by reference to the Company and Pier 1 Imports Exhibit 10.12 to the Company's Registration Statement 10.8 Extension Agreement dated Incorporated by reference to April 25, 1994 between the Exhibit 10.14 to the Company's Company and Pier-SNG, Inc. Report on Form 8-K, filed relating to the Credit April 28, 1994 Credit Facility Agreement between the Company and Pier 1 Imports 10.9 Waiver Agreement dated May 13, 1994 Incorporated by reference to between the Company and Pier 1 Exhibit 10.15 to the Company's Imports and Pier-SNG, Inc. relating Annual Report on Form 10-K for to the Credit Facility Agreement the fiscal year ended January between the Company and Pier 1 31, 1994 Imports 46 10.10 Loan and Security Agreement dated Incorporated by reference to October 14, 1994, among Wolfe Nursery, Exhibit 10.19 to the Company's Inc., Tip Top Nurseries, Inc., Report on Form 10-Q for the Nurseryland Garden Centers, Inc. as nine months ended October 31, Borrowers, the Registrant, Sunbelt 1994 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 October 18, 1994 with an Executive Exhibit 10.11 to the Company's Officer Report on Form 10-K for the fiscal year ended January 31, 1995, filed May 15, 1995 10.12 Amended and Restated Credit Facilities Incorporated by reference to Agreement dated October 14, 1994 between Exhibit 10.11 to the Company's the Company and Pier 1 Imports, Inc. Report on Form 10-K for the fiscal year ended January 31, 1995, filed May 15, 1995 10.13 Nonqualified Stock Option Agreement Incorporated by reference to dated March 6, 1995 with non-employee Exhibit 10.13 to the Company's Directors Report on Form 10-K for the fiscal year ended January 31, 1995, filed May 15, 1995 10.14 First Amendment and Waiver dated Incorporated by reference to April 7, 1995 to the Loan and Exhibit 10.14 to the Company's Security Agreement Report on Form 10-K for the fiscal year ended January 31, 1995, filed May 15, 1995 10.15 Agreement of Settlement dated July 31, Incorporated by reference to 1995 between Pier Lease, Pier 1 Imports Exhibit 10.15 to the Company's and Sunbelt Nursery Group, and Timothy Report on Form 10K/A-2 for R. Duoos the fiscal year ended January 31, 1995, filed August 11, 1995 10.16 Security Agreement dated July 31, 1995, Incorporated by reference to by Sunbelt Nursery Group, Inc. and Exhibit 10.16 to the Company's Wolfe Nursery, Inc. for the benefit of Report on Form 10-K/A-2 for Pier 1 Imports, Inc., identified as the fiscal year ended January Exhibit A to the Agreement of 31, 1995, filed August 11, Settlement 1995 10.17 Lease Guaranty Indemnification Incorporated by reference to Agreement dated July 31, 1995, by Exhibit 10.17 to the Company's Sunbelt Nursery Group, Inc. and Wolfe Report on Form 10-K/A-2 for Nursery, Inc. for the benefit of Pier the fiscal year ended January 1 Imports, Inc., identified as Exhibit 31, 1995, filed August 11, C to the Agreement of Settlement 1995 47 10.18 Environmental Indemnity dated Incorporated by reference to July 31, 1995 by Sunbelt Nursery Group, Exhibit 10.18 to the Company's Inc. and Wolfe Nursery, Inc. for the Report on Form 10-K/A-2 for benefit of Pier 1 Imports, Inc., the fiscal year ended January identified as Exhibit D to the 31, 1995, filed August 11, Agreement of Settlement 1995 10.19 Duoos Indemnification Agreement dated Incorporated by reference to July 31, 1995 by Timothy R. Duoos for Exhibit 10.19 to the Company's the benefit of Pier 1 Imports, Inc., Report on Form 10-K/A-2 for identified as Exhibit E to the the fiscal year ended January Agreement of Settlement 31, 1995, filed August 11, 1995 10.20 Sublease Guaranty dated July 31, 1995, Incorporated by reference to between Sunbelt Nursery Group, Inc. Exhibit 10.20 to the Company's and Pier Lease, Inc. identified as Report on Form 10-K/A-2 for Exhibit G to the Agreement of the fiscal year ended January of Settlement 31, 1995, filed August 11, 1995 10.21 Promissory Note dated July 31, 1995, Incorporated by reference to in the principal amount of $8,000,000 Exhibit 10.21 to the Company's by Sunbelt Nursery Group, Inc. for Report on Form 10-K/A-2 for the benefit of Pier 1 Imports, Inc. the fiscal year ended January identified as Exhibit H to the 31, 1995, filed August 11, Agreement of Settlement 1995 10.22 Note Guaranty dated July 31, 1995, by Incorporated by reference to Wolfe Nursery, Inc. for the benefit Exhibit 10.22 to the Company's of Pier 1 Imports, Inc., identified as Report on Form 10-K/A-2 for Exhibit I to the Agreement of Settlement the fiscal year ended January 31, 1995, filed August 11, 1995 10.23 Second Amendment, Waiver and Consent Incorporated by reference to dated July 31, 1995 to the Loan and Exhibit 10.23 to the Company's Security Agreement Report on Form 10-K/A-2 for the fiscal year ended January 31, 1995, filed August 11, 1995 10.24 Third Amendment dated February 14, Incorporated by reference to 1996 to the Loan and Security Exhibit 10.24 to the Company's Agreement Annual Report on Form 10-K, for the fiscal year ended January 28, 1996, filed May 10, 1996 10.25 Fourth Amendment and Waiver dated Incorporated by reference to May 9, 1996 to the Loan and Security Exhibit 10.25 to the Company's Agreement Annual Report on Form 10-K, for the fiscal year ended January 28, 1996, filed May 10, 1996 10.26 Fifth Amendment and Waiver dated Incorporated by reference to October 24, 1996 to the Loan and Exhibit 10.26 to the Company's Security Agreement Report on Form 10-Q for the three months ended September 29, 1996, filed November 13, 1996 10.27 Note Modification Agreement dated Incorporated by reference to January 31, 1997 among Pier 1 Imports, Exhibit 10.27 to the Company's Inc., Sunbelt Nursery Group, Inc., Report of Form 10-Q for the Wolfe Nursery, Inc., and Timothy six months ended December 29, R. Duoos 1996, filed February 12, 1997 48 10.28 Sixth Amendment and Waiver dated Incorporated by reference to February 11, 1997 to the Loan and Exhibit 10.28 to the Company's Security Agreement Report of Form 10-Q for the six months ended December 29, 1996, filed February 12, 1997 10.29 Seventh Amendment Filed herewith 10.30 Eighth Amendment Filed herewith 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 49 EX-10.29 2 SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.29 SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Seventh Amendment to Loan and Security Agreement, dated as of May 12, 1997 (this "Amendment"), is by and among Wolfe Nursery, Inc., a Delaware --------- corporation, Tip Top Nurseries, Inc., an Arizona corporation, Nurseryland Garden Centers, Inc., a California corporation, as borrowers (collectively, the "Borrowers"), Sunbelt Nursery Group, Inc., a Delaware corporation, Sunbelt --------- Nursery Holdings, Inc., an Arizona corporation, Sunbelt Management Services, Inc., a Delaware corporation, as guarantors (collectively, the "Guarantors" and, ---------- together with the Borrowers, the "Loan Parties"), and American National Bank and ------------ Trust Company of Chicago, a national banking association, as lender (the "Lender"). Capitalized terms used in this Amendment and not otherwise defined ------ have the meanings assigned to such terms in the Loan Agreement (as defined below). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Loan Parties and the Lender are parties to the Loan and Security Agreement dated as of October 14, 1994 (as such agreement has been or may be amended, modified, restated or supplemented from time to time, the "Loan ---- Agreement") under which the Lender provided the Borrowers with a $12,000,000 - --------- revolving credit facility; WHEREAS, the Borrowers have requested the Lender apply the proceeds of a certificate of deposit maintained by the Loan Parties with, and pledged to, the Lender to the Borrowers' obligations under the Loan Agreement; and WHEREAS, the Loan Parties and the Lender desire to amend the Loan Agreement to, among other things, (i) decrease the maximum facility under the Loan Agreement to $7,000,000 until May 30, 1997, at which time the maximum facility will reduce to $6,000,000, (ii) establish a $2,000,000 reserve against the Borrowing Base and (iii) modify the payment terms of the Facility Fee, all on the terms and subject to the conditions of this Amendment; NOW, THEREFORE, in consideration of the foregoing recitals, the actions contemplated therein and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties to this Amendment agree as follows: SECTION 1. AMENDMENTS TO LOAN AGREEMENT ---------------------------- On the date this Amendment becomes effective, after completion by the Loan Parties of the conditions set forth in Section 4 of this Amendment (the "Closing --------- ------- Date"), the Loan Agreement is amended as follows: - ---- 1.1 Section 1.1 of the Loan Agreement is amended by deleting the last ----------- sentence of the definition of "Maximum Revolving Facility" in its entirety and -------------------------- replacing it as follows: The Maximum Revolving Facility shall be $7,000,000 through May 30, 1997. Commencing May 31, 1997, the Maximum Revolving Facility shall be $6,000,000. 1.2 Section 1.1 of the Loan Agreement is further amended by deleting the ----------- definition of "Total Facility" in its entirety and replacing it as follows: -------------- "Total Facility" shall mean the amount of $7,000,000 through May -------------- 30, 1997. Commencing May 31, 1997, the Total Facility shall mean the amount of $6,000,000. 1.3 Section 2.1(A) of the Loan Agreement is amended by deleting the -------------- first sentence of such section in its entirety and replacing it as follows: Subject to the provisions of Section 4 below, after execution of the --------- Financing Agreements, Lender shall advance to each Borrower, on a revolving credit basis, Revolving Loans ("Revolving Loans") in such --------------- aggregate amounts as such Borrower may from time to time request but not exceeding at any one time outstanding an amount equal to (i) the Borrowing Base of such Borrower minus an amount for all Borrowers ----- equal to $2,000,000 minus (ii) the aggregate stated amount of all ----- outstanding Letters of Credit; provided, however, that Lender shall -------- ------- not be obligated to make any such advance to any Borrower if, after such advance, the aggregate amount of all Revolving Loans made to all Borrowers would exceed the Maximum Revolving Facility minus the ----- aggregate stated amount of all Letters of Credit for all Borrowers. 1.4 Section 2.5(E) of the Loan Agreement is amended by deleting such -------------- section in its entirety and replacing it as follows: (E) Borrowers shall pay to Lender in arrears on the last day of each calendar month a facility fee equal to one-half of one percent (0.50%) per annum upon the Total Facility (the "Facility Fee"); provided, however, that ------------ -------- ------- the Facility Fee for the month of May, 1997, will be calculated as if the Total Facility was $7,000,000 commencing on the first day of such month. -2- SECTION 2. AUTHORIZATION ------------- The Loan Parties authorize the Lender to apply the proceeds of certificate of deposit number 1941370 maintained with, and pledged to, the Lender to the Borrowers' Liabilities. SECTION 3. REPRESENTATIONS AND WARRANTIES ------------------------------ To induce the Lender to enter into this Amendment and to extend further credit under the Loan Agreement, as amended by this Amendment, each Loan Party severally represents and warrants to the Lender that: 3.1 Due Authorization, Etc. The execution, delivery and performance by ---------------------- such Loan Party of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental, regulatory or other approvals (if any are required), and do not and will not contravene or conflict with any provision of (i) any law, (ii) any judgment, decree or order, or (iii) such Loan Party's Certificate of Incorporation or By-Laws, and do not and will not contravene or conflict with, or cause any lien to arise under any provision of any agreement or instrument binding upon such Loan Party or upon any of its property. This Amendment and the Loan Agreement, as amended by this Amendment, are the legal, valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with their respective terms. 3.2 No Default, Etc. As of the Closing Date, (i) no Event of Default or --------------- Default under the Loan Agreement, as amended by this Amendment, has occurred and is continuing or will result from the amendments set forth in this Amendment and (ii) the representations and warranties of such Loan Party contained in the Loan Agreement are true and correct. 3.3 Litigation. As of the Closing Date, except as previously disclosed ---------- by such Loan Party to the Lender in writing, no claims, litigation (including, without limitation, derivative actions), arbitration proceedings, governmental investigations or proceedings or regulatory proceedings are pending, or to the knowledge of such Loan Party, threatened against it, nor does such Loan Party know of any basis for the foregoing. In addition, there are no inquiries, formal or informal, which might give rise to such actions, proceedings or investigations. 3.4 Pier 1 Agreements. As of the Closing Date, no default exists under ----------------- any of the Pier 1 Agreements. SECTION 4. CONDITIONS TO EFFECTIVENESS --------------------------- The obligation of the Lender to make the amendments contemplated by this Amendment and the effectiveness thereof, are subject to the following: -3- 4.1 Representations and Warranties. The representations and warranties ------------------------------ of the Loan Parties contained in this Amendment are true and correct as of the Closing Date. 4.2 Application of Certificate of Deposit Proceeds. The Lender has ---------------------------------------------- applied to the Borrowers' Liabilities the proceeds of certificate of deposit number 1941370 maintained with, and pledged to, the Lender. 4.3 Payment of May Facility Fee. The Lender has received the Facility --------------------------- Fee for May, 1997. 4.4 Documents. The Lender has received all of the following, each duly --------- executed and dated as of the Closing Date (or such other date as is satisfactory to the Lender) in form and substance satisfactory to the Lender: (A) Seventh Amendment. This Amendment; --------------- (B) Resolutions. Resolutions of the Board of Directors of each Loan ----------- Party authorizing or ratifying the execution, delivery and performance of this Amendment; (C) Consents, Etc. Certified copies of all documents evidencing any necessary corporate action, consents and governmental approvals, if any, with respect to this Amendment or any other document provided for under this Amendment; and (D) Other. Such other documents as the Lender may reasonably request. ----- SECTION 5. MISCELLANEOUS ------------- 5.1 Captions. The recitals to this Amendment (except for definitions) -------- and the section captions used in this Amendment are for convenience only, and do not affect the construction of this Amendment. 5.2 Governing Law; Severability. THIS AMENDMENT IS A CONTRACT MADE UNDER --------------------------- AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. Wherever possible, each provision of this Amendment must be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is prohibited by or invalid under such law, such provision is only ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. 5.3 Counterparts. This Amendment may be executed in any number of ------------ counterparts and by the different parties on separate counterparts, and each such counterpart is deemed to be -4- an original, but all such counterparts together constitute but one and the same Amendment. 5.4 Successors and Assigns. This Amendment is binding upon each Loan ----------------------- Party and the Lender and their respective successors and assigns, and inures to the sole benefit of each Loan Party and the Lender and their successors and assigns. The Loan Parties have no right to assign their respective rights or delegate their respective duties under this Amendment. 5.5 References. From and after the Closing Date, each reference in the ---------- Loan Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, and each reference in any Financing Agreement to the Loan Agreement or to any term, condition or provision contained "thereunder," "thereof," "therein," or words of like import, mean and are a reference to the Loan Agreement (or such term, condition or provision, as applicable) as amended, supplemented or otherwise modified by this Amendment. 5.6 Continued Effectiveness. Notwithstanding anything contained in this ------------------------ Amendment, the terms of this Amendment are not intended to and do not serve to effect a novation as to the Loan Agreement. The parties to this Amendment expressly do not intend to extinguish the Loan Agreement. Instead, it is the express intention of the parties to this Amendment to reaffirm the indebtedness created by and secured under the Loan Agreement. The Loan Agreement, as amended by this Amendment, remains in full force and effect. 5.7 Costs, Expenses and Taxes. Each Loan Party affirms and acknowledges -------------------------- that Section 10.2 and Section 10.3 of the Loan Agreement applies to this Amendment and the transactions and agreements and documents contemplated under this Amendment. 5.8 Guarantors Reaffirmation. Each of the Guarantors acknowledges that it has read this Amendment and consents to this Amendment and agrees that its Guaranty of the Guaranteed Obligations (as defined in such Guaranty) continues in full force and effect, is valid and enforceable and is not impaired or otherwise affected by the execution of this Amendment or any other document or instrument delivered in connection with this Amendment. * * * * * -5- Delivered at Chicago, Illinois, as of the day and year first above written. WOLFE NURSERY, INC., as a Borrower By:/s/Richard R. Dwyer ----------------------- Name: Richard R. Dwyer Title: President TIP TOP NURSERIES, INC., as a Borrower By:/s/Richard R. Dwyer ----------------------- Name: Richard R. Dwyer Title: President NURSERYLAND GARDEN CENTERS, INC., as a Borrower By:/s/Richard R. Dwyer ----------------------- Name: Richard R. Dwyer Title: President SUNBELT NURSERY GROUP, INC., as a Guarantor By:/s/Richard R. Dwyer ----------------------- Name: Richard R. Dwyer Title: President SUNBELT NURSERY HOLDINGS, INC., as a Guarantor By:/s/Richard R. Dwyer ----------------------- Name: Richard R. Dwyer Title: President -6- SUNBELT MANAGEMENT SERVICES, INC., as a Guarantor By:/s/Timothy R. Duoos ------------------------------- Name: Timothy R. Duoos Title: Chief Executive Officer AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By:/s/Elizabeth J. Limpert -------------------------------- Elizabeth J. Limpert First Vice President Timothy R. Duoos, guarantor under the Guaranty dated as of October 14, 1994 (the "Duoos Guaranty") made in favor of the Lender, acknowledges that he -------------- has read this Amendment referenced herein and consents to this Amendment and agrees that his guarantee of the Guaranteed Obligations (as defined in the Duoos Guaranty) continues in full force and effect, is valid and enforceable and is not impaired or otherwise affected by the execution of this Amendment or any other document or instrument delivered in connection with this Amendment. /s/Timothy R. Duoos ------------------------- Timothy R. Duoos -7- EX-10.30 3 EIGHTH AMENDMENT EXHIBIT 10.30 EIGHTH AMENDMENT, CONSENT AND WAIVER TO LOAN AND SECURITY AGREEMENT This Eighth Amendment, Consent and Waiver to Loan and Security Agreement, dated as of June 23, 1997 (this "Consent"), is by and among Wolfe Nursery, Inc., ------- a Delaware corporation, Tip Top Nurseries, Inc., an Arizona corporation, Nurseryland Garden Centers, Inc., a California corporation, as borrowers (collectively, the "Borrowers"), Sunbelt Nursery Group, Inc., a Delaware --------- corporation ("Sunbelt"), Sunbelt Nursery Holdings, Inc., an Arizona corporation, ------- Sunbelt Management Services, Inc., a Delaware corporation, as guarantors (collectively, the "Guarantors" and, together with the Borrowers, the "Loan ---------- ---- Parties"), and American National Bank and Trust Company of Chicago, a national - ------- banking association (the "Lender"). Capitalized terms used in this Consent and ------ not otherwise defined have the meanings assigned to such terms in the Loan Agreement (as defined below). W I T N E S S E T H: ------------------- WHEREAS, the Loan Parties and the Lender are parties to the Loan and Security Agreement dated as of October 14, 1994 (as such agreement may be amended, modified, restated or supplemented from time to time, the "Loan ---- Agreement"); - --------- WHEREAS, Timothy R. Duoos desires to sell 1,000,000 shares of Sunbelt common stock (the "Transaction") and use the proceeds of such sale to payoff and ----------- terminate the credit facility provided by, among other things, the Credit Agreement dated as of October 14, 1994 (as amended, the "Duoos Credit ------------ Agreement"), between Timothy R. Duoos and the Lender; and WHEREAS, the Loan Parties have requested that the Lender amend the Loan Agreement to provide for the Transaction, consent to the Transaction and waive any event of default that may occur as a result of the Transaction, and the Lender has agreed to such a request; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained in this Consent, the Loan Parties and the Lender agree as follows: SECTION 1. AMENDMENT TO LOAN AGREEMENT --------------------------- On the date of this Consent, the Loan Agreement is amended by deleting Section 9.1(O) in its entirety and replacing it as follows: (O) Timothy R. Duoos does not own at least 3,200,000 shares of the common stock of Sunbelt; SECTION 2. CONSENT AND WAIVER ------------------ On the date of this Consent, the Lender consents to the Transaction and waives any Event of Default under Section 9.1(O) of the Loan Agreement as a result of the Transaction. Nothing in this Consent should in any way be deemed a (i) waiver of any other Event of Default under the Loan Agreement or (ii) an agreement to forbear from exercising any remedies with respect to any such other Event of Default. SECTION 3. CONDITIONS TO EFFECTIVENESS --------------------------- The obligation of the Lender to make the consents and waivers contemplated by this Consent and the effectiveness thereof, are subject to the following: (A) THIS CONSENT. The Lender has received a duly executed and delivered ------------ copy of this Consent. (B) NO DEFAULT. As of the date of this Consent, except as expressly ---------- waived in Section 2 above, no Event of Default or Default under the Loan --------- Agreement has occurred and is continuing or will result from the transactions contemplated by this Consent. (C) PAYOFF OF DUOOS CREDIT AGREEMENT. The Lender has received the -------------------------------- proceeds of the Transaction from Timothy R. Duoos, which proceeds will be applied to the repayment of all principal and interest owing under the Duoos Credit Agreement. SECTION 4. MISCELLANEOUS ------------- (A) CAPTIONS. The recitals to this Consent (except for definitions) and -------- the section captions used in this Consent are for convenience only, and do not affect the construction of this Consent. (B) COUNTERPARTS. This Consent may be executed in any number of ------------ counterparts and by the different parties on separate counterparts, and each such counterpart is deemed to be an original, but all such counterparts together constitute but one and the same Consent. The Loan Parties and the Lender agree to accept facsimile counterparts. (C) COSTS, EXPENSES AND TAXES. Each Loan Party affirms and acknowledges ------------------------- that Section 10.2 and Section 10.3 of the Loan Agreement applies to this Consent and the transactions and agreements and documents contemplated under this Consent. (D) GUARANTORS REAFFIRMATION. Each of the Guarantors acknowledges that it ------------------------ has read this Consent and consents to this Consent and agrees that its Guaranty of the Guaranteed Obligations (as defined in such Guaranty) continues in full force and effect, is valid and enforceable and is not impaired or -2- otherwise affected by the execution of this Consent or any other document or instrument delivered in connection with this Consent. * * * -3- Delivered at Chicago, Illinois, as of the day and year first above written. WOLFE NURSERY, INC., as a Borrower By:/s/Richard R. Dwyer ------------------------------- Name: Richard R. Dwyer Title: President TIP TOP NURSERIES, INC., as a Borrower By:/s/Richard R. Dwyer ------------------------------- Name: Richard R. Dwyer Title: President NURSERYLAND GARDEN CENTERS, INC., as a Borrower By:/s/Richard R. Dwyer ------------------------------- Name: Richard R. Dwyer Title: President SUNBELT NURSERY GROUP, INC., as a Guarantor By:/s/Richard R. Dwyer ------------------------------- Name: Richard R. Dwyer Title: President SUNBELT NURSERY HOLDINGS, INC., as a Guarantor By:/s/Michael P. Martin By:/s/Richard R. Dwyer ------------------------------ ------------------------------ Name: Michael P. Martin Name: Richard R. Dwyer Title: Secretary Title: President -4- SUNBELT MANAGEMENT SERVICES, INC., as a Guarantor By:/s/Timothy R. Duoos ------------------------------- Name: Timothy R. Duoos Title: Chief Executive Officer AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By:/s/Elizabeth J. Limpert ------------------------------- Elizabeth J. Limpert First Vice President Timothy R. Duoos, guarantor under the Guaranty dated as of October 14, 1994 (the "Duoos Guaranty") made in favor of the Lender, acknowledges that he -------------- has read this Consent referenced herein and consents to this Consent and agrees that his guarantee of the Guaranteed Obligations (as defined in the Duoos Guaranty) continues in full force and effect, is valid and enforceable and is not impaired or otherwise affected by the execution of this Consent or any other document or instrument delivered in connection with this Consent. /s/Timothy R. Duoos ------------------------------ Timothy R. Duoos -5- EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-29-1997 JUL-01-1997 JUN-29-1997 1,992 0 261 0 14,088 16,952 22,426 17,847 21,597 20,824 0 0 0 85 (3,317) 21,597 95,773 95,773 54,319 98,572 0 0 948 (6,603) 0 (6,603) 0 0 0 (6,603) (0.78) 0
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