<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION NO. 333-37335
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
COLOR SPOT NURSERIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5193 68-0363266
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
</TABLE>
3478 BUSKIRK AVENUE
PLEASANT HILL, CA 94523
(510) 934-4443
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
MICHAEL F. VUKELICH
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
3478 BUSKIRK AVENUE
PLEASANT HILL, CA 94523
(510) 934-4443
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
STEVEN S. SIEGEL RANDALL C. BASSETT
BROWNSTEIN HYATT FARBER & STRICKLAND, LATHAM & WATKINS
P.C. 633 WEST FIFTH STREET, SUITE 4000
410 SEVENTEENTH STREET, 22ND FLOOR LOS ANGELES, CALIFORNIA 90071
DENVER, COLORADO 80202 TELEPHONE: (213) 485-1234
TELEPHONE: (303) 534-6335 FACSIMILE: (213) 891-8763
FACSIMILE: (303) 623-1956
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PER NOTE OR UNIT OR AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C> <C> <C>
% Notes................................... $85,000,000 $1,000 $85,000,000 $25,758
Units
Series A Preferred Stock................... 40,000 $1,000 $40,000,000 $12,121
Warrants...................................
Common Stock, par value $.001 per share (3).. 825,000 $.01 $8,250 $3
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended.
(2) Previously paid.
(3) Represents shares of Common Stock issuable upon exercise of the Warrants.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an underwritten public offering of % Senior Subordinated
Notes due 2007 (the "Note Prospectus") and one to be used in a concurrent
underwritten public offering of Units (the "Unit Prospectus"). The Note
Prospectus and the Unit Prospectus are identical except for the front and back
cover pages, the stabilization legend on page 2, and the sections entitled
"Prospectus Summary," "Risk Factors," "Underwriting," "Legal Matters" and
"Additional Information" and the addition of a section "Certain Federal Income
Tax Considerations" in the Unit Prospectus. The form of the Note Prospectus is
included herein and is followed by the alternate pages to be used in the Unit
Prospectus. The alternate pages for the Unit Prospectus included herein are
labeled "Alternate Page for Unit Prospectus." Final forms of each prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b)
under the Securities Act of 1933, as amended.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
DECEMBER 1, 1997
$85,000,000
[LOGO]
% SENIOR SUBORDINATED NOTES DUE 2007
---------
Color Spot Nurseries, Inc. ("Color Spot" or the "Company") is offering
$85,000,000 aggregate principal amount of its % Senior Subordinated Notes due
2007 (the "Notes") to the public (the "Notes Offering"). Concurrently with the
Notes Offering, the Company is offering 40,000 units (the "Units"), to the
public (the "Units Offering" and, together with the Notes Offering, the
"Offerings"), each Unit consisting of one share of % Series A Cumulative
Preferred Stock (the "Series A Preferred Stock") and warrants (the "Warrants")
representing the right to purchase 20.625 shares of common stock, par value
$.001 per share (the "Common Stock"), of the Company. The Notes Offering is
contingent upon the consummation of the Units Offering and the Units Offering is
contingent upon the consummation of the Notes Offering. See "Prospectus
Summary--Concurrent Offering."
Interest on the Notes will be payable semiannually on and of each
year, commencing on , 1998. The Notes will be redeemable, in whole
or in part, at the option of the Company, at any time on and after ,
2002, at the respective redemption prices set forth herein plus accrued and
unpaid interest, if any, to the date of redemption. In addition, on or prior to
, 2000, the Company may, at its option, use the net cash proceeds of
one or more Public Equity Offerings (as defined) to redeem up to an aggregate of
35% of the Notes originally issued, at the redemption price set forth herein.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
Upon a Change of Control (as defined), each holder of Notes will have the right
to require the Company to repurchase such holder's Notes at a price equal to
101% of their principal amount plus accrued and unpaid interest to the date of
repurchase. See "Description of Notes."
The Notes will be senior subordinated unsecured obligations of the Company
and will be subordinated in right of payment to all Senior Debt (as defined) of
the Company, including indebtedness under the New Loan Agreement (as defined).
At September 25, 1997, after giving effect to the Offerings, the aggregate
outstanding amount of Senior Debt of the Company would have been approximately
$3.4 million, which amount excludes any amounts available to be borrowed under
the New Loan Agreement. The Notes will be effectively subordinated to all
obligations of the Company's subsidiaries. See "Risk Factors," "Capitalization"
and "Description of Notes--Subordination."
The Company does not intend to apply for listing of the Notes on any
national securities exchange. See "Underwriting."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE NOTES.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Note............................................... % % %
Total.................................................. $ $ $
</TABLE>
(1) Plus accrued interest, if any, from date of original issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined) against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) Before deducting expenses of the offering payable by the Company, estimated
at $ .
----------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by counsel. It is expected that delivery of the Notes will
be made at the office of BT Alex. Brown Incorporated, 130 Liberty Street, New
York, New York, on or about , 1997.
----------------
BT ALEX. BROWN DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS" WITHIN
THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (2)
BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
PENSION AND PROFIT SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH,
TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER
COMMON CONTROL, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST
RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED,
BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN
$14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3) ANY CORPORATION, PARTNERSHIP
OR ORGANIZATION (OTHER THAN A CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED
FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO
PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY,
OR (4) ANY NATURAL PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF
$250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME
FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE
SECURITIES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT
COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR
OTHERWISE TRANSFER ANY OF SUCH SECURITIES TO A CALIFORNIA RESIDENT UNLESS THE
TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL
ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL
BE DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
<PAGE>
[PHOTOS OF PRODUCTS AND FACILITIES AND
MAP SHOWING LOCATION OF PRODUCTION FACILITIES]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. REFERENCES TO THE COMPANY OR COLOR SPOT REFER TO COLOR SPOT
NURSERIES, INC. AND ITS CONSOLIDATED SUBSIDIARIES AND ITS PREDECESSORS. SEE
"COMPANY HISTORY." UNLESS OTHERWISE INDICATED, ALL STATEMENTS MADE IN THIS
PROSPECTUS REFLECT (I) THE MERGER OF CSN, INC. (THE PARENT COMPANY OF COLOR SPOT
NURSERIES, INC.) INTO COLOR SPOT NURSERIES, INC. WHICH WILL OCCUR SIMULTANEOUSLY
WITH THE CONSUMMATION OF THE OFFERINGS AND (II) A 0.69-FOR-ONE REVERSE STOCK
SPLIT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH
UNDER THE CAPTION "RISK FACTORS." AS USED IN THIS PROSPECTUS, "FISCAL 1996"
REFERS TO THE FISCAL YEAR COMMENCING SEPTEMBER 8, 1995 AND ENDING JUNE 30, 1996,
"FISCAL 1997" REFERS TO THE FISCAL YEAR ENDED JUNE 30, 1997 AND "FISCAL 1998"
REFERS TO THE FISCAL YEAR ENDING JUNE 30, 1998.
THE COMPANY
Color Spot is the largest wholesale nursery in the United States, based on
revenue and greenhouse square footage. The Company provides a wide assortment of
high quality plants as well as extensive merchandising services primarily to
leading home centers and mass merchants, such as Home Depot, Home Base, Wal-Mart
and Kmart. The Company distributes products to over 850 retail and commercial
customers, representing over 8,000 locations, primarily in the western and
southwestern regions of the United States. Since June 30, 1996, the Company has
completed 13 acquisitions, making it a leading consolidator in the wholesale
nursery industry, based on acquisitions completed by major competitors. On a pro
forma basis, the Company generated approximately $183.1 million in net sales and
$22.7 million in EBITDA (as defined) in fiscal 1997.
The Company believes it is one of the few wholesale nurseries that has the
scale and distribution capabilities necessary to provide large volumes of high
quality product to its retail customers on a multi-regional basis. The Company
produces over 2,000 varieties of live plants, including bedding plants, shrubs,
potted flowering plants, ground cover and fresh cut Christmas trees. Through its
200 person salesforce, Color Spot also provides its retail customers with a
broad array of value-added services, such as in-store merchandising, product
display and maintenance, promotional planning and product reordering. The
Company believes that providing these services differentiates it from its
competitors and helps to establish Color Spot as a preferred supplier in the
industry. Color Spot operates 19 production facilities located in California,
Arizona, Texas, Oregon and Washington.
Gardening is one of the most popular leisure activities in the United
States. According to the 1996-1997 National Gardening Survey, 64% of the
approximately 101 million households in the U.S. participated in some form of
gardening in 1996. Retail sales of live plants totaled approximately $18 billion
in the U.S. in 1996. The live plant retail distribution channel has undergone
significant consolidation over the past ten years, as sales have shifted from
local independent nurseries to major national retailers. Despite this retail
consolidation, the wholesale nursery industry is still highly fragmented with
over 10,000 participants in the U.S. In 1996, the ten largest wholesale
nurseries accounted for approximately 8% of total wholesale production according
to Nursery Business Magazine.
The Company believes that it is well positioned to capitalize on
consolidation and growth opportunities in the highly fragmented wholesale
nursery industry. Color Spot's growth strategy is to continue to enter new
geographic markets through acquisitions, expand its presence in existing markets
and add new product lines. An important aspect of the Company's growth strategy
is to increase its penetration in targeted markets, which will enable the
Company to better serve its retail customers, enhance its brand name recognition
and increase operating efficiencies. Since June 30, 1996, both through
acquisitions and internal development, the Company has expanded its product line
into new areas of the wholesale nursery industry, including shrubs, potted
flowering plants and ground cover. In addition, the Company's recent entry into
the fresh cut Christmas tree business enables it to utilize available sales and
distribution capacity during the winter months.
3
<PAGE>
Color Spot America, Inc., a predecessor to the Company, was founded in 1983
by Michael F. Vukelich, the Company's current Chief Executive Officer. Following
a change of control in 1991, Mr. Vukelich left the Company and new management
was installed. Between 1992 and 1995, net sales and profitability of the
business declined. In September 1995, an investor group including Mr. Vukelich
formed the Company and acquired the business. Mr. Vukelich's management team
implemented a number of strategic and operational initiatives designed to
improve the Company's customer relationships and financial results. These
initiatives included revamping the Company's merchandising programs,
decentralizing its operations, revising its pricing strategies, renewing its
focus on operating efficiencies and restructuring its sales organization. As a
result of these strategies, the Company has experienced significant improvements
in net sales and operating results. With the improvement of its financial
results, Color Spot embarked on an aggressive acquisition strategy and has
completed 13 acquisitions since June 30, 1996. Color Spot believes it is now
well positioned to continue its growth and further consolidate the wholesale
nursery industry.
The Company's executive offices are located at 3478 Buskirk Avenue, Suite
260, Pleasant Hill, CA 94523, and its telephone number is (510) 934-4443. The
Company was incorporated in August 1995.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ $85,000,000 principal amount of % Senior Subordinated
Notes due 2007.
Maturity Date..................... , 2007.
Interest Payment Dates............ and of each year commencing , 1998.
Optional Redemption............... On or after , 2002, the Notes will be
redeemable, in whole or in part, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to , 2000,
the Company may use the net cash proceeds of one or more
Public Equity Offerings (as defined) to redeem the Notes
at a redemption price equal to % of the aggregate
principal amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of redemption;
provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding
immediately after any such redemption. See "Description
of Notes--Redemption."
Change of Control................. Upon the occurrence of a Change of Control (as defined),
each holder of Notes will have the right to require the
Company to repurchase such holder's Notes at a purchase
price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to
the date of repurchase. In the event of a Change of
Control, there can be no assurance that the Company will
have sufficient cash to fulfill such repurchase
obligation.
Ranking........................... The Notes will be unsecured, subordinated in right of
payment to all existing and future Senior Debt of the
Company and effectively subordinated to all obligations
of the Company's subsidiaries. The Notes will rank PARI
PASSU with any future senior subordinated indebtedness
of the Company and will rank senior to all other
subordinated debt of the Company. The
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Indenture permits the Company to incur additional
indebtedness, including up to $150.0 million of Senior
Debt available under the Company's credit facilities,
subject to certain limitations. As of September 25,
1997, after giving effect to the Offerings, the
aggregate amount of the Company's outstanding Senior
Debt would have been approximately $3.4 million
(excluding unused commitments), the Company would have
had $8.4 million of PARI PASSU indebtedness outstanding,
and the Company's subsidiaries would have had total
liabilities of approximately $12.5 million. See "Risk
Factors--Subordination" and "Capitalization."
Certain Covenants................. The indenture under which the Notes will be offered (the
"Indenture") will contain covenants that will, subject
to certain exceptions, limit, among other things, the
ability of the Company and its subsidiaries to (i) pay
dividends or make certain other restricted payments or
investments; (ii) incur additional Indebtedness and
issue disqualified stock and preferred stock; (iii)
create liens on assets; (iv) merge, consolidate, or sell
all or substantially all of their assets; (v) enter into
certain transactions with affiliates; (vi) create
restrictions on dividends or other payments by
subsidiaries to the Company; and (vii) create guar-
antees of indebtedness by subsidiaries. See "Description
of Notes."
Use of Proceeds................... The Company will use the proceeds from the Notes
Offering, together with approximately $40.0 million of
gross proceeds from the Units Offering, to repay
outstanding borrowings under the Company's existing
credit facility, to pay fees and expenses and for
general corporate purposes. See "Use of Proceeds."
Conditions........................ The closing of the Notes Offering is conditioned upon
consummation of the Units Offering.
</TABLE>
The Company does not intend to apply for a listing of the Notes on any
national securities exchange. See "Underwriting."
CONCURRENT OFFERING
Concurrently with the Notes Offering, Color Spot is offering 40,000 Units to
the public. The Notes Offering is contingent upon the consummation of the Units
Offering, and the Units Offering is contingent upon the consummation of the
Notes Offering.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company commenced operations on September 8, 1995 through the purchase
of certain assets of Color Spot, Inc. in a transaction accounted for under the
purchase method of accounting. Color Spot, Inc. commenced operations on March 1,
1993 through the purchase of certain assets of Color Spot America, Inc., in a
transaction accounted for under the purchase method of accounting. On December
31, 1996, an affiliate of Kohlberg & Company, LLC acquired control of the
Company through a series of stock transactions accounted for as a
recapitalization. As a result of these transactions and the Company's ongoing
acquisition program, the financial information presented below is not comparable
in certain respects.
The financial information of the Company presented below as of June 30, 1997
and for the fiscal year ended June 30, 1997 and for the period from September 8,
1995 through June 30, 1996 is derived from the audited financial statements of
the Company appearing elsewhere in this Prospectus. The financial information of
Color Spot, Inc. for the period from January 1, 1995 through September 8, 1995
and the year ended December 31, 1994 is derived from the audited financial
statements of Color Spot, Inc. The financial information of the Company as of
September 25, 1997 and for the periods from July 1, 1996 through September 26,
1996 and July 1, 1997 through September 25, 1997 is derived from the unaudited
interim financial statements of the Company, which, in the opinion of
management, contain all adjustments (including those of a normal recurring
nature) necessary to present fairly the financial position and results of
operations of the Company as of and for the periods presented.
The pro forma information presented below gives effect to the 13
acquisitions completed by the Company since June 30, 1996. See "Unaudited Pro
Forma Consolidated Statement of Operations."
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
-------------------------- ------------------------------------------------------
1/1/95 9/8/95 FISCAL YEAR
YEAR ENDED THROUGH THROUGH ENDED PRO FORMA
12/31/94 9/8/95 6/30/96(1) 6/30/97(2) FISCAL YEAR
------------- ----------- ----------- ----------- ENDED
6/30/97
-------------
(UNAUDITED)
7/1/96
THROUGH
9/26/96
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 39,411 $ 28,991 $ 51,995 $ 113,400 $183,074 $13,437
Gross profit....................... 14,995 11,491 24,310 49,374 75,171 4,579
Operating expenses................. 17,869 14,438 18,475 39,458 59,997 6,048
Income (loss) from operations...... (2,874 ) (2,947 ) 5,835 9,916 15,174 (1,469 )
Interest expense................... 3,170 2,576 687 4,179 10,378 133
Income tax provision (benefit)..... 2,269 2,830 2,269 (760 )
Income (loss) before extraordinary
loss............................. (5,947 ) (5,485 ) 2,788 3,055 2,784 (4) (820 )
Extraordinary loss................. 215
Net income (loss).................. (5,947 ) (5,485 ) 2,788 2,840 2,784 (820 )
OPERATING DATA:
EBITDA(5).......................... $(1,619 ) $(2,022 ) $6,433 $13,357 $22,662 $(1,170 )
Cash flows from operating
activities....................... (2,720 ) (5,220 ) (3,485 ) (4,093 ) 847
Cash flows from investing
activities....................... (609 ) (260 ) (9,660 ) (58,234 ) (1,184 )
Cash flows from financing
activities....................... 3,715 5,587 13,846 64,388 557
Depreciation and amortization...... 1,255 925 598 3,441 7,488 299
Capital expenditures............... 668 260 1,529 6,181 10,450 1,263
Ratio of earnings to fixed
charges(4)(6).................... 4.68 2.10 1.42
Number of production
facilities(7).................... 6 6 6 13 19 7
<CAPTION>
7/1/97
THROUGH
9/25/97(3)
-------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $25,482
Gross profit....................... 7,464
Operating expenses................. 11,682
Income (loss) from operations...... (4,218 )
Interest expense................... 2,392
Income tax provision (benefit)..... (3,021 )
Income (loss) before extraordinary
loss............................. (3,691 )
Extraordinary loss.................
Net income (loss).................. (3,691 )
OPERATING DATA:
EBITDA(5).......................... $(2,898 )
Cash flows from operating
activities....................... 2,043
Cash flows from investing
activities....................... (43,569 )
Cash flows from financing
activities....................... 40,445
Depreciation and amortization...... 1,320
Capital expenditures............... 3,030
Ratio of earnings to fixed
charges(4)(6)....................
Number of production
facilities(7).................... 19
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 25, 1997
------------------------
AS
ACTUAL ADJUSTED(8)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $585 $20,453
Total assets............................................................................. 183,743 183,525
Long-term debt, excluding current portion................................................ 111,335 96,178
Stockholders' equity..................................................................... 5,897 10,627
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
FISCAL YEAR 7/1/96 7/1/97 LTM PERIOD
ENDED THROUGH THROUGH ENDED
6/30/97 9/26/96 9/25/97 9/25/97
----------- ------------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 183,074 $ 25,217 $ 27,345 $ 185,202
Gross profit.............................................. 75,171 7,487 7,796 75,480
Operating expenses........................................ 59,997 11,275 12,808 61,530
Income (loss) from operations............................. 15,174 (3,788) (5,012) 13,950
Interest expense.......................................... 10,378 2,138 2,798 11,038
Income tax provision (benefit)............................ 2,269 (2,640) (3,557) 1,352
Net income (loss)......................................... 2,784 (3,234) (4,344) 1,674
OPERATING DATA:
EBITDA(5)................................................. $22,662 $ (1,544) $ (3,424) $20,782
Depreciation and amortization............................. 7,488 2,244 1,588 6,832
Capital expenditures...................................... 10,450 2,245 3,169 11,374
Ratio of earnings to fixed charges(4)(6).................. 1.42 1.24
Number of production facilities(7)........................ 19 19 19 19
</TABLE>
(FOOTNOTES FOR THIS AND PRECEDING PAGE)
- ------------------------
(1) Includes the financial results of Barcelo's Plant Growers from March 1996.
(2) Includes the financial results of NAB Nursery and B&C Growers from October
1996, Sunrise Growers from November 1996, Sunnyside Plants from January
1997, Lone Star Growers Co. from February 1997, Signature Trees from March
1997 and Hi-C Nursery from April 1997.
(3) Includes the financial results of Plants, Inc., Peters' Wholesale
Greenhouses, Inc. and Wolfe Greenhouses, LLC from July 1997, Cracon, Inc.
and Summersun Greenhouse Co. from August 1997 and Oda Nursery, Inc. from
September 1997.
(4) If the recapitalization of the Company, all of the acquisitions which
occurred during fiscal 1997 and fiscal 1998 to date and the Offerings
described in this Prospectus occurred on July 1, 1996, interest expense
would have decreased by $374,000 and net income would have increased to
$3,047,000 for the year ended June 30, 1997, and interest expense would have
decreased by $427,000 and net loss would have decreased to $(4,109,000) for
the period from July 1, 1997 through September 25, 1997. On such basis, the
ratio of earnings to fixed charges would have been 1.47 for the year ended
June 30, 1997, and earnings would have been insufficient to cover fixed
charges by $7,474,000 for the period from July 1, 1997 through September 25,
1997. In addition, Series A Preferred Stock dividends would have been
$5,200,000 and $1,300,000 for the year ended June 30, 1997 and the period
from July 1, 1997 through September 25, 1997, respectively. Earnings would
have been insufficient to cover fixed charges (including dividends on the
Series A Preferred Stock and accretion to liquidation value of the
redeemable Series A Preferred Stock and redeemable Common Stock) by
$5,028,000 and $10,087,000 for the year ended June 30, 1997 and the period
from July 1, 1997 through September 25, 1997, respectively. See "Certain
Transactions--Recapitalization."
(5) EBITDA represents income before interest expense, depreciation and
amortization expense, the provision for income taxes, other (income) expense
and extraordinary items. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. Other companies may define EBITDA differently, and as a
result, those measures may not be comparable to the Company's EBITDA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(6) For purposes of computing a ratio of earnings to fixed charges, "earnings"
consist of income (loss) before provision for income taxes plus fixed
charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt financing costs and one-third of rental
expense (the portion deemed representative of the interest factor). Earnings
were insufficient to cover fixed charges by $5,947,000, $5,485,000,
$1,580,000, $6,712,000, $5,874,000 and $7,901,000 for the year ended
December 31, 1994, the period from January 1, 1995 through September 8,
1995, the period from July 1, 1996 through September 26, 1996, the period
from July 1, 1997 through September 25, 1997 and on a pro forma basis for
the period from July 1, 1996 through September 26, 1996 and July 1, 1997
through September 25, 1997, respectively.
(7) Facilities include owned and leased properties as of the end of each period,
excluding Christmas tree fields.
(8) Adjusted to give effect to (i) $40 million gross proceeds from the sale of
Units offered in the Units Offering, (ii) the sale of $85 million aggregate
principal amount of the Notes offered in the Notes Offering at an assumed
interest rate of 10% per annum, (iii) issuance of Warrants, (iv) the
after-tax effects of nonrecurring charges as described below and (v) the
application of the net proceeds from the Offerings. See "Use of Proceeds."
------------------------
In addition, during the fiscal quarter in which the Offerings are completed,
the Company will incur (i) a $4.4 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees and (ii) a $2.0 million
pre-tax charge related to the termination of an annual management fee.
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE NOTES
OFFERED BY THIS PROSPECTUS, WHICH FACTORS THE COMPANY BELIEVES SUMMARIZE ALL
MATERIAL RISKS KNOWN TO IT AS OF THE DATE OF THIS PROSPECTUS. THE STATEMENTS
CONTAINED IN THIS PROSPECTUS WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR IMPLIED BY
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. WHEN USED IN THIS PROSPECTUS, THE WORDS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT")
REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S
FUTURE PLANS, BUSINESS STRATEGY, RESULTS OF OPERATIONS AND FINANCIAL POSITION.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS; HOWEVER, THE SAFE
HARBOR PROVISIONS OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT DO NOT APPLY TO INITIAL PUBLIC OFFERINGS SUCH AS THE OFFERINGS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DESCRIBED BELOW, UNDER THE HEADING "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN
THIS PROSPECTUS.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE. The Company will continue to be
significantly leveraged after the Offerings. See "Capitalization." As of
September 25, 1997, after giving effect to the Offerings, the Company would have
had approximately $96.2 million of consolidated long-term indebtedness and
approximately $10.6 million of common stockholders' equity. Upon consummation of
the Offerings, the Company expects to have $150.0 million available to be
borrowed under the New Loan Agreement. The Company and its subsidiaries may
incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its indebtedness and capital stock.
Accordingly, the Company will have significant debt service obligations.
The Company's debt service obligations will have important consequences to
holders of the Notes, the Series A Preferred Stock and the Warrants including
the following: (i) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for
operations, acquisitions, future business opportunities and other purposes and
increasing the Company's vulnerability to adverse general economic and industry
conditions; (ii) the Company's leveraged position may increase its vulnerability
to competitive pressures; (iii) the financial covenants and other restrictions
contained in the New Loan Agreement, the Indenture and the Certificate of
Designation (as defined) will require the Company to meet certain financial
tests and will restrict its ability to borrow additional funds, to dispose of
assets or to pay cash dividends on, or repurchase, preferred or common stock;
and (iv) funds available for working capital, capital expenditures, acquisitions
and general corporate purposes may be limited.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) and to
pay dividends and make redemption payments on the Series A Preferred Stock
depends on its future performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. Based
upon the current level of operations and anticipated growth, the Company
believes that future cash flow from operations, together with available
borrowings under the New Loan Agreement, will be adequate to meet the Company's
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the next 12 months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate sufficient cash
flow from operations in the
8
<PAGE>
future to service its debt, pay dividends, and make redemption payments and
necessary capital expenditures. If unable to do so, the Company may be required
to refinance all or a portion of its existing debt, including the Notes, to sell
assets or to obtain additional financing. There can be no assurance that any
such refinancing or that any such sale of assets or additional financing would
be possible on terms reasonably favorable to the Company, or at all. In
addition, unforeseen problems, delays, expenses and difficulties as well as
changes in economic and regulatory or competitive conditions may lead to cost
increases that would make the Company's current cash flow and borrowings under
the New Loan Agreement insufficient to meet the Company's capital needs. See
"--Future Capital Needs; Uncertainty of Additional Financing."
SUBORDINATION. The Company's obligations under the Notes will be
subordinate and junior in right of payment to all existing and future Senior
Debt of the Company and to all obligations of the Company's subsidiaries. As of
September 25, 1997, after giving effect to the Offerings, the aggregate amount
of the Company's outstanding Senior Debt would have been approximately $3.4
million (excluding unused commitments) and the aggregate obligations of the
Company's subsidiaries would have been approximately $12.5 million. Additional
Senior Debt may be incurred by the Company from time to time, subject to certain
restrictions. By reason of such subordination, in the event of an insolvency,
liquidation, or other reorganization of the Company, the lenders under the New
Loan Agreement and other creditors who are holders of Senior Debt or are
creditors of the Company's subsidiaries must be paid in full before the holders
of Notes may be paid; accordingly, there may be insufficient assets remaining
after payment of prior claims to pay amounts due on the Notes. In addition,
under certain circumstances, no payments may be made with respect to the Notes
if a Default exists with respect to Senior Debt. See "Description of
Notes--Subordination."
DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH. The Company aggressively
pursues the acquisition of other companies. See "Business--Growth Strategy."
Acquisitions involve a number of risks, including effects on the Company's
reported operating results, the diversion of management's attention, the
dependence on hiring, training and retaining key personnel and risks associated
with unanticipated problems or legal liabilities, some or all of which could
have a material adverse effect on the Company. Historically, the Company has
financed acquisitions through the incurrence of additional debt and the issuance
of Company stock. See "--Substantial Leverage and Debt Service." The Company
completed one acquisition in fiscal 1996, seven acquisitions in fiscal 1997 and
six acquisitions to date in fiscal 1998. There can be no assurance that the
Company will be able to integrate its acquisitions or successfully implement its
business model in a timely manner without substantial costs, delays or other
problems. Once integrated and operating according to the Company's business
model, these acquisitions may not achieve sales, profitability and productivity
commensurate with the Company's historical operating results. In addition, there
can be no assurance that the Company's management and financial controls,
personnel, computer systems and other corporate support systems will be adequate
to manage the increase in the size and scope of the Company's operations as a
result of its acquisitions. Additionally, there can be no assurances that the
acquired businesses will enhance the Company's business or financial
performance.
The Company anticipates that one or more potential acquisition
opportunities, including those that would be material, may become available in
the near future. No assurances can be given that any acquisition by the Company
will occur, that if an acquisition does occur that it will not have a material
adverse effect on the Company, that any such acquisition will be successful in
enhancing the Company's business or that any such acquisition can be
successfully integrated into the Company's business. See
"--Future Capital Needs; Uncertainty of Additional Financing."
EFFECT OF GROWTH ON COMPANY RESOURCES. The recent growth and expansion of
the Company's business have placed, and are expected to continue to place, a
significant strain on the Company's management, operational and financial
resources. Continued growth will require an increase in Company personnel who
possess the training and experience necessary to operate the Company's
facilities. There
9
<PAGE>
can be no assurance that the Company will be able to continue to attract,
develop and retain the personnel necessary to pursue its growth strategy.
Moreover, as the Company continues to grow, it will need to expand its
production, warehouse and distribution facilities and may require additional
facilities to support such growth. In addition, the Company's rapid growth may
place significant pressure on its financial controls and inventory management
systems. Any failure by the Company to manage its growth effectively could have
a material adverse effect on the Company.
SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT. Color Spot America, Inc.
(together with its subsidiaries, "Color Spot America"), a California corporation
and a predecessor to the Company, which was managed by certain of the Company's
current management, was incorporated and commenced operations in 1983. The
current management of the Company operated Color Spot America until January 1991
when a subsidiary of PacifiCorp, a public utility (together with its
subsidiaries, "PacifiCorp"), obtained control and installed a new management
team that operated Color Spot America and its successor, Color Spot, Inc., an
Oregon corporation ("Color Spot Oregon"), from 1991 through September 1995.
During the period of PacifiCorp's control, the Company's predecessors
experienced declining net sales and profitability. In September 1995, the
Company commenced operations by purchasing Color Spot Oregon's assets from
PacifiCorp. See "Company History." Accordingly, the Company, under its current
management team, has only a limited operating history upon which investors may
evaluate its performance. There can be no assurances that the Company will be
able to continue to achieve or sustain revenue growth or profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified employees, and
successfully manage and execute its expansion strategies. There can be no
assurances that the Company will be successful in these efforts.
CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT. The Company is highly
dependent on the purchases of its top eight retail customers, which together
accounted for 75% and 82% of the Company's net sales in fiscal 1997 and fiscal
1996, respectively. The Company's largest customer, Home Depot, accounted for
approximately 39% and 41% of the Company's net sales in fiscal 1997 and fiscal
1996, respectively. The Company expects that a small number of customers will
continue to account for a substantial portion of its net sales for the
foreseeable future. The Company does not have long-term contracts with any of
its retail customers, and there can be no assurance that they will continue to
purchase the Company's products. The loss of, or a significant adverse change
in, the relationship between the Company and Home Depot or any other major
customer could have a material adverse effect on the Company. The loss of, or
reduction in orders from, any significant retail customers, losses arising from
retail customers' disputes regarding shipments, fees, merchandise condition or
related matters, or the Company's inability to collect accounts receivable from
any major retail customer could have a material adverse effect on the Company.
In addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
period. See "Business--Customers."
SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES. The
Company's business is highly seasonal. In fiscal 1997, approximately 77% of net
sales and 125% of operating income occurred in the first half of the calendar
year. The Company has historically reported operating losses in its first and
second fiscal quarters, and the Company believes it will continue to report
operating losses during the first half of its fiscal year. The Company has
experienced and expects to continue to experience variability in net sales,
operating income and net income on a quarterly basis. Factors that may
contribute to this variability include: (i) weather conditions during peak
growing and gardening seasons; (ii) shifts in demand for live plant products;
(iii) changes in product mix, service levels and pricing by the Company and its
competitors; (iv) the effect of acquisitions; (v) the economic stability of the
Company's retail customers; and (vi) the Company's relationship with each of its
retail customers. See "--Weather; General Agricultural Risks" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Results."
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<PAGE>
In addition, during the fiscal quarter in which the Offerings are completed,
the Company will incur (i) a $4.4 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees and (ii) a $2.0 million
pre-tax charge related to the termination of an annual management fee.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and investors,
the trading price of the Common Stock would likely be materially and adversely
affected.
RESTRICTIONS IMPOSED BY NEW LOAN AGREEMENT. Simultaneously with the
completion of the Offerings, the Company will enter into a new senior credit
facility (the "New Loan Agreement") with a number of banking institutions, led
by Credit Agricole Indosuez, which will restrict, among other things, the
Company's ability to incur additional indebtedness, incur liens, pay or declare
dividends, enter into any transaction not in its usual course of business,
guarantee or otherwise become in any way liable with respect to the obligations
of another party or entity, merge or consolidate with another person or sell or
transfer any collateral (except for the sale of inventory in the ordinary course
of the Company's business). A breach of any of these covenants could result in a
default under the New Loan Agreement. Upon the occurrence of an Event of Default
(as defined in the New Loan Agreement), the lenders could elect to declare all
amounts outstanding under the New Loan Agreement, together with accrued
interest, to be immediately due and payable. If the Company were unable to pay
those amounts, the lenders could proceed against the collateral granted to them
to secure that indebtedness. If the New Loan Agreement indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay the indebtedness in full and other indebtedness of the
Company. Substantially all of the assets of the Company have been pledged as
security under the New Loan Agreement. The restrictions described above, in
combination with the leveraged nature of the Company, may limit the Company's
ability to obtain financing in the future or may otherwise restrict corporate
activities. See "Description of Certain Indebtedness."
ENCUMBRANCES ON ASSETS TO SECURE THE NEW LOAN AGREEMENT. In addition to
being subordinated to all existing and future Senior Debt of the Company, the
Notes will not be secured by any of the Company's assets. The Company's
obligations under the New Loan Agreement will be secured by substantially all of
the assets of the Company. If the Company becomes insolvent or is liquidated, or
if payment under the New Loan Agreement is accelerated, the lenders under the
New Loan Agreement will be entitled to exercise the remedies available to a
secured lender under applicable law. See "Description of Certain
Indebtedness--New Loan Agreement."
CHANGE OF CONTROL. The Indenture and the Certificate of Designation will
provide that, upon the occurrence of a Change of Control, the Company must make
an offer to purchase all or any part of the Notes at a price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase and all or any part of the Series A Preferred
Stock at a price in cash equal to 101% of the aggregate liquidation preference
thereof plus accrued and unpaid dividends to the date of purchase. The New Loan
Agreement prohibits the Company from repurchasing any Notes or Series A
Preferred Stock, except with certain proceeds of one or more Public Equity
Offerings. The New Loan Agreement also provides that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing the Notes or Series A Preferred Stock, or if the Company is
required to make an Asset Sale Offer (as defined) pursuant to the terms of the
Notes, the Company could seek the consent of its lenders to purchase the Notes
or Series A Preferred Stock or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or
refinance such borrowings, the Company would remain prohibited from purchasing
the Notes or Series A Preferred Stock. In such case, the Company's failure to
11
<PAGE>
purchase tendered Notes would constitute an Event of Default (as defined) under
the Indenture. If, as a result thereof, a default occurs with respect to any
Senior Debt, the subordination provisions in the Indenture would likely restrict
payments to the holders of the Notes. The Indenture will provide that the
Company may not offer to repurchase any Series A Preferred Stock upon the
occurrence of a Change of Control until the Company has completed its offer to
purchase the Notes. There can be no assurance that the Company will have
sufficient funds to repurchase the Notes or the Series A Preferred Stock after a
Change of Control. The provisions relating to a Change of Control included in
the Indenture and the Certificate of Designation may increase the difficulty of
a potential acquiror obtaining control of the Company. See "Description of
Notes--Change of Control" and "Description of Series A Preferred Stock--Change
of Control."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. There can be no
assurance that the net proceeds of the Offerings or borrowings under the New
Loan Agreement and funds from operations will be sufficient to meet the
Company's anticipated working capital, capital expenditure and acquisition
financing requirements. The Company may need to raise additional funds through
the issuance of public or private debt or equity securities in order to take
advantage of unanticipated opportunities, including acquisitions of
complementary businesses, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available, or not available on acceptable terms, the Company may not be able to
take advantage of unanticipated opportunities or otherwise respond to
unanticipated competitive pressures. Such inability could have a material
adverse effect on the Company. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Certain Indebtedness."
WEATHER; GENERAL AGRICULTURAL RISKS. Inclement weather or production
difficulties occurring at a time of peak production or sales (in the second half
of the Company's fiscal year), particularly on weekends during the peak
gardening season, could cause declines in net sales and operating income that
could have a material adverse effect on the Company. In the event of severe
weather conditions, the Company does not have sufficient facilities to preserve
and protect all of its products. Meteorologists are currently predicting that a
severe weather phenomenon known as "El Nino" will continue to impact the United
States in late 1997 and early 1998, which may result in unusually cool and wet
weather conditions in many of the Company's markets. Such weather conditions
could delay the upcoming peak growing and gardening season and reduce the demand
for the Company's products. The Company intends to expand into new markets that
typically have greater weather variability than the Company's historic markets.
Failure by the Company to adequately manage this variability could have a
material adverse effect on the Company. The Company's operations also may be
materially affected by disease, pests or other natural hazards. Agricultural
production is highly dependent upon the availability of water. The Company has
not installed, and is not required to install, water reclamation systems at the
majority of its production facilities. The loss of access to water at any of the
Company's facilities would have a material adverse effect on the Company. See
"--Governmental Regulations; Minimum Wage." Given the perishable nature of the
Company's products, if sales do not materialize as expected, the Company could
experience a significant decline in profitability.
DEPENDENCE ON LEASED FACILITIES. The majority of the Company's production
facilities are leased. These leases expire at varying times in the next two to
15 years. Although the Company believes that it can extend most of its leases on
acceptable terms, failure to do so would require the Company to establish new
production facilities. No assurance can be given that any such leases can be
extended on acceptable terms or, if not so extended, that suitable replacement
production facilities can be established. Failure to extend the terms of any of
these leases could have a material adverse effect on the Company. See
"Business-- Properties and Facilities."
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SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS. The Company and
its competitors are vulnerable to price increases for raw materials. For fiscal
1997, raw material costs accounted for approximately 27.1% of the Company's net
sales. The Company does not have long-term contracts with the majority of its
raw material suppliers. Increases in the cost of raw materials essential to the
operations of the Company, including seed, plastic, chemicals and fertilizer,
would increase the Company's costs of production. Significant increases in the
price of petrochemicals or a scarcity of raw materials essential to plant
propagation could have a material adverse effect on the Company. There can be no
assurance that any such price increases can be passed on to the Company's
customers in the form of higher prices for the Company's products.
COMPETITION. The wholesale nursery industry is highly competitive.
Competition is based principally on product quality, breadth of product
offerings, customer service and price. The wholesale nursery industry is highly
fragmented with over 10,000 small and regional nurseries nationwide. In 1996,
the ten largest and 100 largest wholesale nurseries in the United States
accounted for approximately 8% and 22%, respectively, of total wholesale
production. The Company currently competes directly with a large number of
western and southwestern wholesale nursery companies. On a multi-regional basis,
the Company competes with Hines Nurseries primarily in bedding plants and shrubs
and Monrovia Nursery Company primarily in shrubs. The fresh cut Christmas tree
market is also highly fragmented and, on a regional basis, the Company competes
in this market with Holiday Tree Farms and The Kirk Company.
GOVERNMENTAL REGULATIONS; MINIMUM WAGE. The Company is subject to certain
federal, state and local health, safety and environmental laws and regulations
regarding the production, storage and transportation of certain of its products
and the disposal of its waste. Certain of the Company's operations and
activities, such as water runoff from its production facilities and the use of
certain pesticides, are subject to regulation by the United States Environmental
Protection Agency (the "EPA") and similar state and local agencies. These
agencies may regulate or prohibit the use of such products, procedures or
operations, thereby affecting the Company's operations and profitability. In
addition, the Company must comply with a broad range of environmental laws and
regulations. Additional or more stringent environmental laws and regulations may
be enacted in the future and such changes could have a material adverse effect
on the Company. The Company uses reclamation water as one of the sources of
water supply for a few of its production facilities. The use and pricing of
reclamation water, including availability of subsidized water rates, is governed
by federal reclamation laws and regulations. Changes in the law could have a
material adverse effect on the Company.
In addition, the Company is subject to the Fair Labor Standards Act as well
as various federal, state and local regulations that govern such matters as
minimum wage requirements, overtime and working conditions. A large number of
the Company's employees are paid at or just above the federal minimum wage level
and, accordingly, changes in laws, regulations or ordinances could have a
material adverse effect on the Company by increasing the Company's costs. See
"Business--Government Regulation."
CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT. KCSN Acquisition
Company, L.P. ("KCSN"), an affiliate of Kohlberg & Company, LLC, a New York
merchant banking firm ("Kohlberg"), owns approximately 69.2% of the outstanding
Common Stock (approximately 61.8% assuming exercise in full of the Warrants). In
addition, officers and directors own approximately 17.5% of the outstanding
Common Stock (approximately 15.6% assuming exercise in full of the Warrants).
Heller Equity Capital Corporation ("Heller") is the holder of an 8.0%
Subordinated Convertible Note (the "Heller Note"), which is convertible into
approximately 5.0% of the outstanding Common Stock (approximately 4.5% assuming
exercise in full of the Warrants). Heller also owns 2.6% of the outstanding
Common Stock (approximately 2.3% assuming exercise in full of the Warrants).
KCSN, Heller and the management stockholders are parties to a Stockholders
Agreement, which provides that the parties to the Stockholders Agreement shall
(i) consent to any merger, consolidation or sale of all or substantially all of
the Company's assets involving an independent third party and approved by a
majority of KCSN's shares and (ii) vote their shares to elect
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Michael F. Vukelich, Jerry L. Halamuda, five KCSN designees and two independent
designees reasonably acceptable to KCSN as directors of the Company. Subject to
the terms of the Stockholders Agreement and the Certificate of Designation, KCSN
is able to elect all of the Company's directors and can determine the outcome of
corporate actions requiring stockholder approval, including adopting amendments
to the Company's Certificate of Incorporation (as defined) and approving or
disapproving mergers or sales of all or substantially all of the Company's
assets. In addition, KCSN and certain of the management stockholders are parties
to a put/call option agreement to effect the repurchase by the Company of shares
of Common Stock held by the management stockholders. Under the put/call option
agreement, KCSN retains an irrevocable proxy to vote the shares of Common Stock
not yet repurchased by the Company. As of September 25, 1997, KCSN had a proxy
to vote 20,211 shares of Common Stock held by the management stockholders. See
"Certain Transactions--Relationship with Kohlberg--Control by KCSN,"
"--Recapitalization," "Principal Stockholders" and "Description of Capital
Stock."
LACK OF PRIOR MARKET FOR THE NOTES. There is currently no public market for
the Notes and the Company has no present plan to list the Notes on a national
securities exchange or to include the Notes for quotation through an interdealer
quotation system. There can be no assurance that such a market will develop or,
if such a market develops, as to the liquidity of such market. The Company has
been advised by the Underwriters that the Underwriters intend to make a market
in the Notes after consummation of the Notes Offering, as permitted by
applicable laws and regulations; however, the Underwriters are not obligated to
do so and any such market making activities may be discontinued at any time
without notice. See "Underwriting."
14
<PAGE>
COMPANY HISTORY
Color Spot America was founded in 1983 by Michael F. Vukelich, the Company's
current Chief Executive Officer, and it grew to become one of the largest
bedding plant producers in California. In February 1989, Color Spot America,
through a wholly owned subsidiary, acquired one of its largest competitors for
which PacifiCorp provided the acquisition financing. Immediately upon closing of
this financing, Color Spot America was in default of certain financial covenants
under the PacifiCorp financing. Other than the imposition of a default rate of
interest, PacifiCorp did not take any action with respect to these financial
covenant defaults until January 1991. At that time, Mr. Vukelich left Color Spot
America and PacifiCorp installed new management. In 1993, Color Spot America
sold substantially all of its assets and liabilities to Color Spot Oregon, a
corporation controlled by PacifiCorp. Net sales and profitability of Color Spot
America and Color Spot Oregon declined between 1992 and 1995.
In September 1995, the Company was formed to acquire the assets of Color
Spot Oregon from PacifiCorp by Heller, Mr. Vukelich and Jerry L. Halamuda, who
had previously worked with Mr. Vukelich at Color Spot America. With Mr. Vukelich
as Chief Executive Officer and Mr. Halamuda as President, management implemented
a number of strategic and operational programs designed to improve the Company's
customer relationships and financial results. These initiatives included
revamping the Company's merchandising programs, decentralizing its operations,
revising its pricing strategies, renewing its focus on operating efficiencies
and restructuring its sales organization. As a result of these strategies, the
Company has experienced significant improvements in net sales and operating
results. With the improvement of its financial results, Color Spot embarked on
an aggressive acquisition strategy and has completed 13 acquisitions since June
30, 1996. Color Spot believes it is now well positioned to continue its growth
and further consolidate the wholesale nursery industry.
In December 1996, the Company completed a recapitalization in which KCSN, an
affiliate of Kohlberg, acquired newly issued shares constituting a majority
interest in the Company and in which the Company repurchased the shares of
Common Stock held by Heller and a portion of the Common Stock held by management
(the "Recapitalization"). See "Certain Transactions."
RECENT ACQUISITIONS
Since June 30, 1996, the Company has completed 13 acquisitions. The
following table describes these acquisitions:
<TABLE>
<CAPTION>
COMPANY PRIMARY LOCATION DATE PRODUCT LINE
- -------------------------- ------------------ -------------- ------------------------------- REVENUES(1)
---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
NAB Nurseries Arizona October 1996 Bedding Plants and Foliage $ 4.8
Southern
B&C Growers California October 1996 Bedding Plants and Ground Cover 2.3
Southern
Sunrise Growers California November 1996 Bedding Plants 3.0
Northern
Sunnyside Plants California January 1997 Flowering Potted Plants 6.4
Lone Star Growers Co. Texas February 1997 Shrubs and Bedding Plants 22.2
Signature Trees Oregon March 1997 Christmas Trees 6.9
Northern
Hi-C Nursery California April 1997 Bedding Plants 4.5
Plants, Inc. Texas July 1997 Bedding Plants 7.9
Peters' Wholesale
Greenhouses, Inc. Texas July 1997 Bedding Plants 6.9
Wolfe Greenhouses, LLC Texas July 1997 Flowering Potted Plants 9.1
Cracon, Inc. Michigan August 1997 Christmas Trees 3.4
Summersun Greenhouse Co. Washington August 1997 Bedding Plants 8.3
Southern
Oda Nursery, Inc. California September 1997 Shrubs 11.7
</TABLE>
- ------------------------------
(1) Revenues for the 12 month period prior to acquisition by the Company.
15
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the Notes Offering, before deducting
underwriting discounts and estimated offering expenses, are estimated to be
approximately $85.0 million. The gross proceeds to the Company from the Units
Offering are estimated to be $40.0 million. The Company currently plans to repay
in full the outstanding borrowings under the Company's existing senior credit
facility, which totaled approximately $117.1 million at September 25, 1997, from
the net proceeds of the Offerings. The remaining net proceeds are expected to be
used for general corporate purposes. Pending such uses, the net proceeds of the
Offerings will be invested in short-term, interest bearing, investment grade
securities.
Loans under the Company's existing credit facility had interest rates
ranging from 8.4% to 10.3% per annum at September 25, 1997. The proceeds of
loans under the Loan Agreement during fiscal 1997 and the Company's fiscal
quarter ended September 25, 1997, were used principally to consummate the
Recapitalization, to finance acquisitions and for working capital.
Simultaneously with the completion of the Offerings, the Company will enter into
the New Loan Agreement which will provide three facilities, including (i) a
$75.0 million acquisition term loan facility, (ii) a $40.0 million revolving
credit facility and (iii) a $35.0 million supplemental facility. At the option
of the Company part of the supplemental facility can be designated as an
acquisition term loan facility or a revolving credit facility. The New Loan
Agreement will provide the Company with a source of funds for working capital
and future acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Certain Indebtedness."
The following table illustrates the sources and uses of funds from the
Offerings as if they occurred on September 25, 1997. The actual amounts of
sources and uses of funds may differ from amounts set forth below.
<TABLE>
<CAPTION>
AMOUNTS
-----------
<S> <C>
(IN
MILLIONS)
SOURCES OF FUNDS
Notes Offering....................................................... $85.0
Units Offering....................................................... 40.0
-----------
Total Sources of Funds............................................. $125.0
-----------
-----------
USES OF FUNDS
Repay debt under existing bank credit facility....................... $117.1
General corporate purposes........................................... 2.9
Estimated fees and expenses.......................................... 5.0
-----------
Total Uses of Funds................................................ $125.0
-----------
-----------
</TABLE>
DIVIDEND POLICY
The Company plans to retain earnings to finance future growth and has no
current plans to pay cash dividends to holders of any class of capital stock
following the Offerings, including the Series A Preferred Stock. During the
first five years after issuance of the Series A Preferred Stock, dividends on
the Series A Preferred Stock are expected to be paid in additional shares of
Series A Preferred Stock. The payment of any future cash dividends will be at
the sole discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, capital requirements, the general financial
condition of the Company and general business conditions. In addition, the
Company's New Loan Agreement, the Indenture and the Certificate of Designation
restrict the payment of dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Certain Indebtedness," "Description of Notes" and "Description
of Series A Preferred Stock."
16
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 25, 1997, and (ii) the capitalization of the Company as adjusted to
reflect the sale of the shares of Units in the Units Offering and the sale of
the Notes in the Notes Offering (after deducting underwriting discounts and
commissions and estimated expenses of the Offerings), and the application of the
estimated net proceeds therefrom. The table should be read in conjunction with
the Consolidated Financial Statements of the Company and related Notes thereto
included elsewhere in this Prospectus. See "Selected Consolidated Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 25, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term debt........................................................................ $19,632(1) $971
---------- -----------
---------- -----------
Long-term debt:
Bank credit facility(2).............................................................. $ 100,157 $0
Other debt(3)........................................................................ 11,178 11,178
Senior Subordinated Notes............................................................ 85,000
---------- -----------
Total long-term debt............................................................... 111,335 96,178
Series A Preferred Stock, $0.01 par value, 100,000 shares authorized, no shares issued
and outstanding; 40,000 shares outstanding as adjusted (mandatory redemption on the
eleventh anniversary of the date of issuance at $40,000,000)......................... 29,750
Redeemable common stock................................................................ 2,026 2,026
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, no shares issued and
outstanding........................................................................
Common stock, $0.01 par value, 20,000,000 shares authorized, 5,773,518
outstanding(4)..................................................................... 170 170
Additional paid-in capital........................................................... 50,798 50,798
Treasury stock, 6,200,228 shares as of September 25, 1997............................ (45,488) (45,488 )
Warrants, 825,000 exercisable at $0.01 per share..................................... 8,250
Retained earnings.................................................................... 417 (3,103 )(5)
---------- -----------
Total stockholders' equity......................................................... 5,897 10,627
---------- -----------
Total capitalization............................................................. $119,258 $138,581
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Includes cash overdraft of $1.7 million.
(2) The bank credit facility will be repaid in full in connection with the
Offerings.
(3) Other debt consists primarily of the Heller Note and payments to be paid
pursuant to noncompete agreements.
(4) Excludes 1,583,878 shares of Common Stock issuable upon exercise of stock
options outstanding at September 25, 1997 under the Company's stock option
plans and 367,602 shares issuable upon the conversion of the Heller Note.
See "Description of Certain Indebtedness--Heller Note."
(5) Reflects (i) a $4.4 million non-cash pre-tax extraordinary charge related to
the write-off of deferred financing fees and (ii) a $2.0 million pre-tax
charge related to the termination of an annual management fee, in each case
net of income taxes using an effective income tax rate of 45%, which the
Company will incur in the fiscal quarter in which the Offerings are
completed.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company commenced operations on September 8, 1995 through the purchase
of certain assets of its predecessor, Color Spot Oregon, in a transaction
accounted for under the purchase method of accounting. Color Spot Oregon
commenced operations on March 1, 1993 through the purchase of certain assets of
Color Spot America in a transaction accounted for under the purchase method of
accounting. On December 31, 1996, KCSN acquired control of the Company through a
series of stock transactions accounted for as a recapitalization. As a result of
these transactions and the Company's ongoing acquisition program, the financial
information presented below is not comparable in certain respects.
The financial information of the Company presented below as of June 30, 1997
and 1996 and for the fiscal year ended June 30, 1997 and for the period from
September 8, 1995 through June 30, 1996 is derived from the audited financial
statements of the Company appearing elsewhere in this Prospectus. The financial
information of the Company as of September 26, 1996 and September 25, 1997 and
for the periods from July 1, 1996 through September 26, 1996 and July 1, 1997
through September 25, 1997 is derived from the unaudited interim financial
statements of the Company, which, in the opinion of management, contain all
adjustments (including those of a normal recurring nature) necessary to present
fairly the financial position and results of operations of the Company as of and
for the periods presented. The financial information of Color Spot Oregon as of
September 8, 1995 and December 31, 1994 and for the period from January 1, 1995
through September 8, 1995 and the year ended December 31, 1994, is derived from
the audited financial statements of Color Spot Oregon. The financial information
as of December 31, 1993, February 28, 1993 and December 31, 1992 and for the
period from February 28, 1993 through December 31, 1993, the period from January
1, 1993 through February 28, 1993 and the year ended December 31, 1992 is
derived from the underlying records of Color Spot Oregon and Color Spot America,
which in the opinion of management, contains all adjustments (including those of
a normal recurring nature) necessary to present fairly the financial position
and results of operations of Color Spot Oregon and Color Spot America as of and
for the periods presented.
<TABLE>
<CAPTION>
THE PREDECESSORS
---------------------------------------------------------------------
COLOR SPOT OREGON THE COMPANY
--------------------------------------- ------------------------
COLOR SPOT AMERICA YEAR 1/1/95 9/8/95 YEAR
---------------------------- ENDED THROUGH THROUGH ENDED
1/1/93 02/28/93 12/31/94 9/8/95 6/30/96(1) 6/30/97(2)
THROUGH THROUGH ----------- ----------- ----------- -----------
02/28/93 12/31/93
------------- -------------
(UNAUDITED) (UNAUDITED)
YEAR
ENDED
12/31/92
-------------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $43,662 $3,015 $38,650 $39,411 $28,991 $51,995 $113,400
Gross profit........... 14,461 690 12,863 14,995 11,491 24,310 49,374
Sales, marketing and
delivery expenses.... 11,728 2,101 11,879 13,459 10,488 15,495 31,168
General and
administrative
expenses............. 4,164 88 3,370 3,986 3,659 2,886 7,300
Amortization of
intangible assets.... 12 17 423 424 291 94 990
Income (loss) from
operations........... (1,443 ) (1,516 ) (2,809 ) (2,874 ) (2,947 ) 5,835 9,916
Interest expense....... 3,728 725 2,182 3,170 2,576 687 4,179
Other expense (income),
net.................. 214 (55 ) (83 ) (97 ) (38 ) 91 (148)
Income tax provision
(benefit)............ (1,061 ) 2,269 2,830
Income before
extraordinary gain
(loss)............... (4,324 ) (2,186 ) (4,908 ) (5,947 ) (5,485 ) 2,788 3,055
Extraordinary gain
(loss)............... 149 (483 ) (215)
------------- ------------- ------------- ----------- ----------- ----------- -----------
Net income (loss)...... $(4,175 ) $(2,669 ) $(4,908 ) $(5,947 ) $(5,485 ) $2,788 $2,840
------------- ------------- ------------- ----------- ----------- ----------- -----------
------------- ------------- ------------- ----------- ----------- ----------- -----------
OPERATING DATA:
EBITDA(4).............. $(242 ) $(1,317 ) $(1,853 ) $(1,619 ) $(2,022 ) $6,433 $13,357
Cash flows from
operating
activities........... (2,720 ) (5,220 ) (3,485 ) (4,093)
Cash flows from
investing
activities........... (609 ) (260 ) (9,660 ) (58,234)
Cash flows from
financing
activities........... 3,715 5,587 13,846 64,388
Depreciation and
amortization......... 1,201 199 956 1,255 925 598 3,441
Capital expenditures... 683 93 1,148 668 260 1,529 6,181
Ratio of earnings to
fixed charges(5)..... 4.68 2.10
Number of production
facilities(6)........ 7 7 6 6 6 6 13
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $(13,807 ) $(11,230 ) $4,022 $(21,435 ) $(29,722 ) $6,136 $14,161
Total assets........... 27,163 25,276 25,874 24,554 22,695 33,219 133,417
Long-term debt,
excluding current
portion.............. 6,124 10,991 5,785 4,249 1,430 6,785 83,408
Stockholders' equity
(deficit)............ (8,864 ) (11,533 ) (4,658 ) (10,605 ) (16,090 ) 12,535 4,075
<CAPTION>
7/1/96 7/1/97
THROUGH THROUGH
9/26/96 9/25/97(3)
------------- -------------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C>
Net sales.............. $13,437 $25,482
Gross profit........... 4,579 7,464
Sales, marketing and
delivery expenses.... 4,763 8,388
General and
administrative
expenses............. 1,204 2,682
Amortization of
intangible assets.... 81 612
Income (loss) from
operations........... (1,469 ) (4,218 )
Interest expense....... 133 2,392
Other expense (income),
net.................. (22 ) 102
Income tax provision
(benefit)............ (760 ) (3,021 )
Income before
extraordinary gain
(loss)............... (820 ) (3,691 )
Extraordinary gain
(loss)...............
------------- -------------
Net income (loss)...... $(820 ) $(3,691 )
------------- -------------
------------- -------------
OPERATING DATA:
EBITDA(4).............. $(1,170 ) $(2,898 )
Cash flows from
operating
activities........... 847 2,043
Cash flows from
investing
activities........... (1,184 ) (43,569 )
Cash flows from
financing
activities........... 557 40,445
Depreciation and
amortization......... 299 1,320
Capital expenditures... 1,263 3,030
Ratio of earnings to
fixed charges(5).....
Number of production
facilities(6)........ 7 19
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $2,251 $585
Total assets........... 28,944 183,743
Long-term debt,
excluding current
portion.............. 2,829 111,335
Stockholders' equity
(deficit)............ 11,765 5,897
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
18
<PAGE>
(FOOTNOTES FOR PRECEDING PAGE)
- ------------------------------
(1) Includes the financial results of Barcelo's Plant Growers from March 1996.
(2) Includes the financial results of NAB Nursery and B&C Growers from October
1996, Sunrise Growers from November 1996, Sunnyside Plants from January
1997, Lone Star Growers Co. from February 1997, Signature Trees from March
1997 and Hi-C Nursery from April 1997.
(3) Includes the financial results of Plants, Inc., Peters' Wholesale
Greenhouses, Inc. and Wolfe Greenhouses, LLC from July 1997, Cracon, Inc.
and Summersun Greenhouse Co. from August 1997 and Oda Nursery, Inc. from
September 1997.
(4) EBITDA represents income before interest expense, depreciation and
amortization expense, the provision for income taxes, other expense (income)
and extraordinary items. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performances or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. Other companies may define EBITDA differently, and as a
result, those measures may not be comparable to the Company's EBITDA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(5) For purposes of computing a ratio of earnings to fixed charges, "earnings"
consist of income (loss) before provision for income taxes plus fixed
charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt financing costs and one-third of rental
expense (the portion deemed representative of the interest factor) Earnings
were insufficient to cover fixed charges by $5,385,000, $2,186,000,
$4,908,000, $5,947,000, $5,485,000, $1,580,000 and $6,712,000 for the year
ended December 31, 1992, the period from January 1, 1993 through February
28, 1993, the period from February 28, 1993 through December 31, 1993, the
year ended December 31, 1994, the period from January 1, 1995 through
September 8, 1995, the period from July 1, 1996 through September 26, 1996
and the period from July 1, 1997 through September 25, 1997, respectively.
(6) Facilities include owned and leased properties as of the end of each period,
excluding Christmas tree fields.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The pro forma consolidated statement of operations for fiscal 1997 gives
effect to the 13 acquisitions completed by the Company since June 30, 1996. See
"Recent Acquisitions" for the names of the companies acquired and the dates of
acquisition. Each acquisition was accounted for using the purchase method of
accounting. The information presented under "Year Ended June 30, 1997" presents
the actual results of the Company, including the results of the seven entities
acquired in fiscal 1997 subsequent to their acquisition. The information
presented under "Acquisitions Before Year End" presents the pre-acquisition
results of these seven acquisitions from July 1, 1996 through the date of such
acquisition. The information presented under "Acquisitions After Year End"
presents the results of the six acquisitions completed by the Company after June
30, 1997 as if those acquisitions had been completed on July 1, 1996. The pro
forma consolidated statement of operations for the period from July 1, 1997
through September 25, 1997 gives effect to the six acquisitions completed by the
Company since June 30, 1997. The information presented under "Acquisitions from
July 1, 1997 through September 26, 1997" gives effect to these six acquisitions
as if they had been completed on July 1, 1997. The pro forma consolidated
statements of operations and the related pro forma adjustments are presented to
comply with the rules and regulations of the Securities and Exchange Commission
and are not necessarily indicative of the historical results of operations of
the combined companies as if they were operated on a combined basis for the
period from July 1, 1996 through June 30, 1997. The pro forma adjustments do not
include certain additional cost savings which have been achieved or the Company
anticipates may be achieved in the future. The Company borrowed $52.5 million to
finance the Company's seven acquisitions during fiscal 1997. An additional $37.3
million was borrowed to finance the six acquisitions completed by the Company
after June 30, 1997.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------
ACQUISITIONS ACQUISITIONS PRO FORMA
YEAR ENDED BEFORE AFTER OTHER YEAR ENDED
JUNE 30, 1997 YEAR END(A) YEAR END(B) ADJUSTMENTS(C) JUNE 30, 1997
------------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $113,400 $22,097 $47,577 $183,074
Cost of sales............................ 64,026 14,102 28,446 $1,329 (d) 107,903
------------- ------------- ------------- ------- -------------
Gross profit........................... 49,374 7,995 19,131 (1,329 ) 75,171
Operating expenses....................... 39,458 7,783 12,387 369 (e) 59,997
------------- ------------- ------------- ------- -------------
Income (loss) from operations.......... 9,916 212 6,744 (1,698 ) 15,174
Interest expense......................... 4,179 751 1,398 4,050 (f) 10,378
Other (income) expense, net.............. (148 ) (95 ) 44 (58 (g) (257 )
------------- ------------- ------------- ------- -------------
Income (loss) before income tax
provision (benefit).................. 5,885 (444 ) 5,302 (5,690 ) 5,053
Income tax provision (benefit)(h)........ 2,830 (200 ) 2,386 (2,747 ) 2,269
------------- ------------- ------------- ------- -------------
Net income (loss)...................... $3,055 $(244 ) $2,916 $(2,943 ) $2,784
------------- ------------- ------------- ------- -------------
------------- ------------- ------------- ------- -------------
OPERATING DATA:
EBITDA (i)............................... $13,357 $961 $8,036 $308 $22,662
Depreciation and amortization............ 3,441 749 1,292 2,006 7,488
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------- PRO FORMA
7/1/97 ACQUISITIONS 7/1/97
THROUGH FROM 7/1/97 OTHER THROUGH
9/25/97 THROUGH 9/26/97 ADJUSTMENTS(C) 9/25/97
---------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................. $25,482 $1,863 $27,345
Cost of sales.............................................. 18,018 1,500 $31(d) 19,549
---------- --------------- -------------- ----------
Gross profit............................................. 7,464 363 (31) 7,796
Operating expenses......................................... 11,682 1,081 45(e) 12,808
---------- --------------- -------------- ----------
Loss from operations..................................... (4,218) (718) (76) (5,012)
Interest expense........................................... 2,392 116 290(f) 2,798
Other expense (income), net................................ 102 (38) 27(g) 91
---------- --------------- -------------- ----------
Loss before income tax benefit........................... (6,712) (796) (393) (7,901)
Income tax benefit(h)...................................... (3,021) (358) (178) (3,557)
---------- --------------- -------------- ----------
Net loss................................................. $(3,691) $(438) $(215 ) $(4,344 )
---------- --------------- -------------- ----------
---------- --------------- -------------- ----------
OPERATING DATA:
EBITDA (i)................................................. $(2,898 ) $(584 ) $58 $(3,424 )
Depreciation and amortization.............................. 1,320 134 134 1,588
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
20
<PAGE>
(FOOTNOTES FROM PRECEDING PAGE)
(a) The results of operations of the entities acquired prior to June 30, 1997
prior to their acquisition in 1997 are summarized as follows:
<TABLE>
<CAPTION>
NAB B&C SUNRISE SUNNYSIDE LONE STAR SIGNATURE HI-C
NURSERIES GROWERS GROWERS PLANTS GROWERS CO. TREES NURSERY TOTAL
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $300 $569 $640 $2,499 $8,617 $6,855 $2,617 $22,097
Cost of sales................... 218 336 356 1,835 4,681 4,542 2,134 14,102
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
Gross profit.................. 82 233 284 664 3,936 2,313 483 7,995
Operating expenses.............. 120 208 527 706 3,459 1,283 1,480 7,783
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
Income (loss) from
operations.................. (38) 25 (243) (42) 477 1,030 (997) 212
Interest expense................ 19 29 14 591 26 72 751
Other (income) expense, net..... (2) 19 (67) (38) (5) (2) (95)
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
Income (loss) before income
tax provision (benefit)..... (55) (23) (190) (42) (76) 1,009 (1,067) (444)
Income tax provision
(benefit)..................... (25) (11) (86) (19) (34) 454 (479) (200)
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
Net income (loss)............. $(30) $(12 ) $(104 ) $(23 ) $(42 ) $555 $(588 ) $(244)
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------
</TABLE>
(b) The results of operations of the entities acquired after June 30, 1997 for
the year ended prior to their acquisition are summarized as follows:
<TABLE>
<CAPTION>
PETERS'
WHOLESALE
PLANTS, GREENHOUSES, WOLFE CRACON, SUMMERSUN ODA NURSERY,
INC. INC. GREENHOUSES, LLC INC. GREENHOUSE CO. INC. TOTAL
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......... $8,061 $6,800 $9,036 $3,419 $8,552 $11,709 $47,577
Cost of sales...... 5,246 4,680 6,324 2,704 4,168 5,324 28,446
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
Gross profit..... 2,815 2,120 2,712 715 4,384 6,385 19,131
Operating
expenses......... 2,636 1,254 1,368 294 3,454 3,381 12,387
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
Income (loss)
from
operations..... 179 866 1,344 421 930 3,004 6,744
Interest expense... 258 123 202 94 424 297 1,398
Other (income)
expense, net (30) (121) (508) (14) (31) 748 44
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
Income (loss)
before income
tax provision
(benefit)...... (49) 864 1,650 341 537 1,959 5,302
Income tax
provision
(benefit)........ (22) 390 742 153 242 881 2,386
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
Net income
(loss)......... $(27) $474 $908 $188 $295 $1,078 $2,916
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
----------- ---------------- ----------------- ----------- -------------- ------------ ---------
</TABLE>
(c) Adjustments are based on historical results of operations of the businesses,
the allocation of purchase price to the net assets acquired, interest on
borrowings to effect the acquisitions and other contractual arrangements.
Depreciation and amortization have been reflected in accordance with the
Company's accounting policy for the related item and the preliminary results
of fixed asset appraisals.
(d) Reflects a net increase in expense as a result of lease payments for certain
facilities that were owned by the acquired companies and not purchased by
the Company ($771,000 and $14,000 for June 30, 1997 and September 25, 1997,
respectively) and an increase in depreciation expense relating to the
write-up of production equipment ($608,000 and $17,000 for June 30, 1997 and
September 25, 1997, respectively), partially offset by the elimination of
nonrecurring overhead costs ($50,000 for June 30, 1997). Production
equipment acquired in connection with the acquisitions completed by June 30,
1997 and after June 30, 1997 is approximately $19,247,000 and $14,476,000,
respectively.
(e) Reflects additional amortization of intangible assets ($1,330,000 and
$113,000 for June 30, 1997 and September 25, 1997, respectively), increased
management fees ($304,000 and $3,000 for June 30, 1997 and September 25,
1997, respectively) and staff and consulting costs ($3,000 and $1,000 for
June 30,
21
<PAGE>
1997 and September 25, 1997, respectively), partially offset by reductions
in operating expenses due to personnel reductions ($1,268,000 and $72,000
for June 30, 1997 and September 25, 1997, respectively).
(f) Reflects additional interest on borrowings used to finance the acquisitions
at the current interest rate of 9%.
(g) Reflects the elimination of a write-down of land not acquired in an
acquisition ($748,000 for June 30, 1997) offset by the elimination of income
on a joint venture that was not acquired ($383,000 and $11,000 for June 30,
1997 and September 25, 1997, respectively), a nonrecurring insurance
settlement ($185,000 and $11,000 for June 30, 1997 and September 25, 1997,
respectively) and rental income on assets not acquired ($122,000 and $5,000
for June 30, 1997 and September 25, 1997, respectively).
(h) Reflects the reduction in income tax provision associated with the decrease
in income before taxes. The income tax provisions for the acquisitions and
the Pro Forma Year Ended June 30, 1997 and the pro forma period ended
September 25, 1997 results have been calculated assuming a pro forma
effective tax rate of 45%. The Company did not pay cash income taxes in
fiscal 1997 or in the period ended September 25, 1997.
(i) EBITDA represents income before interest expense, depreciation and
amortization expense, the provision for income taxes, other (income) expense
and extraordinary items. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performances or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure and working capital
requirements. Other companies may define EBITDA differently, and as a
result, those measures may not be comparable to the Company's EBITDA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
-------------------
In addition, during the fiscal quarter in which the Offerings are completed,
the Company will incur (i) a $4.4 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees and (ii) a $2.0 million
pre-tax charge related to the termination of an annual management fee.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANY OF THE STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD-LOOKING IN NATURE AND,
ACCORDINGLY, WHETHER THEY PROVE TO BE ACCURATE IS SUBJECT TO MANY RISKS AND
UNCERTAINTIES. THE ACTUAL RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS IN THIS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SEE "RISK
FACTORS."
OVERVIEW
The Company is the largest wholesale nursery in the United States, based on
revenue and greenhouse square footage. As a result of both acquisitions and
internal expansion, the Company has grown rapidly, generating net sales of
$113.4 million in fiscal 1997, as compared to its predecessor's net sales of
$39.4 million in calendar 1994. Bedding plants accounted for approximately 67%
of the Company's pro forma fiscal 1997 net sales, and shrubs, potted flowering
plants, ground cover and Christmas trees accounted for the remaining 33%.
The Company was originally founded as Color Spot America in 1983 by Michael
F. Vukelich, the Company's current Chief Executive Officer. The current
management of the Company operated Color Spot America until January 1991 when
PacifiCorp obtained control and installed a new management team that operated
Color Spot America and its successor, Color Spot Oregon, from January 1991
through September 8, 1995. Sales and profitability of Color Spot America and
Color Spot Oregon declined and the Company became unprofitable between 1992 and
September 1995. In September 1995, the assets of Color Spot Oregon were sold to
the Company which had been formed by Heller, Mr. Vukelich and Jerry L. Halamuda,
who had previously worked with Mr. Vukelich at Color Spot America. With Mr.
Vukelich as Chief Executive Officer and Mr. Halamuda as President, management of
the Company implemented a number of strategic and operational programs designed
to improve the Company's customer relationships and financial results. These
initiatives included revamping the Company's merchandising programs,
decentralizing its operations, revising its pricing strategies, renewing its
focus on operating efficiencies and restructuring its sales organization.
After these strategic initiatives began to positively impact the Company's
operating results, Color Spot embarked on an aggressive acquisition strategy.
Since June 30, 1996, the Company has completed 13 acquisitions, seven of which
occurred in fiscal 1997. These acquisitions resulted in the Company's expansion
into several states, including Texas, Washington, Oregon and Michigan. The
Company seeks to increase the sales and profitability of acquired companies by
implementing Color Spot's sales and marketing programs and by improving the
operating efficiencies of the acquired business. The Company has historically
financed acquisitions through a combination of cash, promissory notes and
Company stock.
The Company is highly dependent on the purchases of its top eight retail
customers, which together accounted for 75% and 82% of the Company's net sales
in fiscal 1997 and fiscal 1996, respectively. The Company's largest customer,
Home Depot, accounted for approximately 39% and 41% of the Company's net sales
in fiscal 1997 and fiscal 1996, respectively. The Company expects that a small
number of customers will continue to account for a substantial portion of its
net sales for the foreseeable future. See "Risk Factors--Customer Concentration;
Dependence on Home Depot."
Color Spot's designation as an agricultural company provides it with
favorable tax treatment. While the Company's financial statements include tax
expense, the Company has historically not paid cash income taxes. Agricultural
companies are permitted to calculate taxable income on a cash basis. As a result
of the Company's growth, this treatment has enabled the Company to generate
significant net operating losses since its inception and accumulate a large net
operating loss carryforward. The Company expects that it will continue to
benefit from these regulations in the future. In addition, the Company's
effective tax rate has been significantly higher than the U.S. statutory rate of
34%. For instance, the Company's effective tax rate for fiscal 1997 was 48.0%.
The difference between the Company's effective tax rate and
23
<PAGE>
the U.S. statutory rate was due to state tax provisions and other California tax
limitations on the use of net operating loss carryforwards. As of June 30, 1997,
the Company had a net operating loss carryforward of approximately $29.7 million
for federal income tax purposes and $14.1 million for state income tax purposes.
In addition, during the fiscal quarter in which the Offerings are completed,
the Company will incur (i) a $4.4 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees and (ii) a $2.0 million
pre-tax charge related to the termination of an annual management fee.
The Company's business is highly seasonal and the Company has historically
reported operating losses in its first and second fiscal quarters, and the
Company believes it will continue to report operating losses during the first
half of its fiscal year. Inclement weather or production difficulties occurring
at a time of peak production or sales, particularly on weekends during the peak
gardening season, could cause declines in net sales and operating income that
could have a material adverse effect on the Company. The Company has recently
sought to reduce the effects of seasonality with sales that are counter-seasonal
to its historic products with the acquisition of Christmas tree operations.
There can be no assurance that the Company will be successful in its efforts to
reduce the effects of seasonality on its operating results. See "Risk
Factors--Seasonality; Variability of Quarterly Results and Certain Charges" and
"--Weather; General Agricultural Risks."
The Company commenced operations on September 8, 1995 through the purchase
of certain assets of Color Spot Oregon in a transaction accounted for under the
purchase method of accounting. Color Spot Oregon commenced operations on March
1, 1993 through the purchase of certain assets of Color Spot America in a
transaction accounted for under the purchase method of accounting. The Company's
predecessors had fiscal years which ended on December 31 of each year. On
December 31, 1996, KCSN acquired control of the Company through a series of
stock transactions accounted for as a recapitalization. In connection with the
recapitalization, the Company borrowed $37.3 million, purchased 6,164,034 shares
of its common stock for $37.1 million in cash and a $7.1 million, 8.0%
subordinated convertible note, sold 3,566,173 shares of stock to KCSN and
certain members of management for $22.3 million and repaid $14.1 million of its
prior indebtedness. In addition, transaction and financing fees of $3.9 million
were paid, a dividend of $1.5 million was declared and a prepayment penalty of
$415,000 was incurred in connection with the early extinguishment of debt. As a
result of these changes in ownership, the differing fiscal periods, and the
seasonality of the business, the results of operations presented herein are not
comparable in certain respects.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
consolidated income statement items as a percentage of net sales:
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
------------------------ --------------------------
1/1/95 9/8/95 PRO FORMA
YEAR ENDED THROUGH THROUGH FISCAL YEAR FISCAL YEAR
12/31/94 9/8/95 6/30/96 ENDED 6/30/97 ENDED 6/30/97
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 62.0 60.4 53.2 56.5 58.9
----- ----- ----- ----- -----
Gross profit....................................... 38.0 39.6 46.8 43.5 41.1
Sales, marketing and delivery expenses............... 34.2 36.2 29.8 27.5 23.2
General and administrative expenses.................. 10.1 12.6 5.6 6.4 8.3
Amortization of intangible assets.................... 1.1 1.0 0.2 0.9 1.3
----- ----- ----- ----- -----
Income (loss) from operations...................... (7.3) (10.2) 11.2 8.7 8.3
Interest expense..................................... 8.0 8.9 1.3 3.7 5.7
Other expense (income), net.......................... (0.2) (0.1) 0.2 (0.1) (0.1)
----- ----- ----- ----- -----
Income (loss) before income tax provision and
extraordinary loss............................... (15.1) (18.9) 9.7 5.2 2.7
Income tax provision................................. 0.0 0.0 4.4 2.5 1.3
----- ----- ----- ----- -----
Income (loss) before extraordinary loss............ (15.1) (18.9) 5.3 2.7 1.4
Extraordinary loss................................... 0.0 0.0 0.0 0.2 0.1
----- ----- ----- ----- -----
Net income (loss).................................. (15.1)% (18.9 )% 5.3% 2.5% 1.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
88 DAYS 87 DAYS 87 DAYS
ENDED ENDED ENDED
9/26/96 9/25/97 9/25/97
------------- ------------- -------------
<S> <C> <C> <C>
Net sales.......................................................... 100.0% 100.0% 100.0%
Cost of sales...................................................... 65.9 70.7 71.5
----- ----- -----
Gross profit..................................................... 34.1 29.3 28.5
Sales, marketing and delivery expenses............................. 35.4 32.9 32.5
General and administrative expenses................................ 9.0 10.5 11.7
Amortization of intangible assets.................................. 0.6 2.4 2.7
----- ----- -----
Income (loss) from operations.................................... (10.9) (16.6) (18.3)
Interest expense................................................... 1.0 9.4 10.2
Other expense (income), net........................................ (0.2) 0.4 0.3
----- ----- -----
Income (loss) before taxes....................................... (11.8) (26.3) (28.9)
Income tax provision............................................... 5.7 11.9 13.0
----- ----- -----
Net income (loss)................................................ (6.1)% (14.5 )% (15.9 )%
----- ----- -----
----- ----- -----
</TABLE>
FOR THE 87 DAYS ENDED SEPTEMBER 25, 1997 ("FIRST QUARTER FISCAL 1998") AS
COMPARED TO THE 88 DAYS ENDED SEPTEMBER 26, 1996 ("FIRST QUARTER FISCAL 1997")
AND THE PRO FORMA RESULTS OF OPERATIONS FOR THE 87 DAYS ENDED SEPTEMBER 25,
1997 ("PRO FORMA FIRST QUARTER FISCAL 1998") AS COMPARED TO THE FIRST QUARTER
FISCAL 1998
The financial information for Pro Forma First Quarter Fiscal 1998 gives
effect to the six acquisitions completed by the Company since June 30, 1997 as
if those acquisitions had been completed on July 1, 1997. Such acquisitions
account for a substantial portion of the pro forma increases in net sales, gross
profit, operating expenses and taxes.
25
<PAGE>
NET SALES. Net sales increased $12.0 million, or 89.6%, to $25.5 million
for the First Quarter Fiscal 1998 from $13.4 million in the First Quarter Fiscal
1997. This increase is primarily the result of the acquisition of seven
companies during the second through fourth quarters of fiscal 1997 and the
acquisition of six companies during the First Quarter Fiscal 1998. Net sales for
Pro Forma First Quarter Fiscal 1998 totaled $27.3 million, representing an
increase of $1.8 million or 7.3% over the First Quarter Fiscal 1998.
GROSS PROFIT. Gross profit increased $2.9 million, or 63.0%, to $7.5
million for the First Quarter Fiscal 1998 from $4.6 million in the First Quarter
Fiscal 1997. Gross profit as a percentage of net sales decreased to 29.3% for
the First Quarter Fiscal 1998 from 34.1% for the First Quarter Fiscal 1997. The
reduction in gross profit percentage was primarily the result of higher
production labor costs as a result of a statutory increase in the minimum wage
and higher shrinkage and return rates due to warmer weather in the Company's
Western division. Gross profit for Pro Forma First Quarter Fiscal 1998 totaled
$7.8 million representing an increase of $0.3 million, or 4.4%, over First
Quarter Fiscal 1998. Gross profit as a percentage of net sales decreased to
28.5% for Pro Forma First Quarter Fiscal 1998.
OPERATING EXPENSES. Operating expenses includes sales, marketing and
delivery expenses, general and administrative expenses and amortization of
intangible assets. Sales, marketing and delivery expenses increased $3.6
million, or 76.1%, to $8.4 million for the First Quarter Fiscal 1998 from $4.8
million in the First Quarter Fiscal 1997. As a percentage of net sales, sales,
marketing and delivery expenses decreased to 32.9% for the First Quarter Fiscal
1998 from 35.5% for the First Quarter Fiscal 1997. This decrease as a percentage
of net sales was the result of the expansion of the Company's Southwest division
which generally experiences lower delivery expenses as a percentage of net sales
because the mix of products sold by the Southwest division generally has a
higher per unit sales price. Sales, marketing and delivery expenses for Pro
Forma First Quarter Fiscal 1998 totaled $8.9 million, an increase of $0.5
million, or 6.0%, over First Quarter Fiscal 1998. As a percentage of net sales,
sales, marketing and delivery expenses decreased to 32.5%. General and
administrative expenses increased $1.5 million, or 122.8%, to $2.7 million for
the First Quarter Fiscal 1998 from $1.2 million in the First Quarter Fiscal
1997. As a percentage of net sales, general and administrative expenses
increased to 10.5% for the First Quarter Fiscal 1998 from 9.0% for the First
Quarter Fiscal 1997. This increase as a percentage of net sales is primarily the
result of the addition of operations of the Company's Southwest division which
incurred slightly higher general and administrative expenses as a percentage of
net sales resulting from the smaller proportion of the Southwest division's
sales occurring in the first fiscal quarter than the Company's Western division
and fewer economies of scale due to the relatively smaller size of the Southwest
division as compared to the Company's historic operations. General and
administrative expenses for Pro Forma First Quarter Fiscal 1998 totaled $3.2
million, an increase of $0.5 million, or 18.9%, over First Quarter Fiscal 1998.
As a percentage of net sales, general and administrative expenses increased to
11.7%. Amortization of intangible assets increased $0.5 million to $0.6 million
for the First Quarter Fiscal 1998 from $0.1 million in First Quarter Fiscal 1997
as a result of the acquisition of 13 companies after the First Quarter Fiscal
1997. Amortization of intangible assets for Pro Forma First Quarter Fiscal 1998
increased $0.1 million to $0.7 million.
INTEREST EXPENSE. Interest expense increased $2.3 million to $2.4 million
for the First Quarter Fiscal 1998 from $0.1 million in First Quarter Fiscal 1997
as a result of significantly higher levels of borrowings required to fund
acquisitions and the Company's growing working capital requirements. Interest
expense for Pro Forma First Quarter Fiscal 1998 increased $0.4 million to $2.8
million.
TAXES. The Company's effective tax rate decreased to 45.0% for the First
Quarter Fiscal 1998 and Pro Forma First Quarter Fiscal 1998 from 48.1% for the
First Quarter Fiscal 1997, primarily as a result of the Company conducting more
business outside of the State of California, where the Company has state tax
limitations on the use of its net operating loss carryforwards.
26
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 ("FISCAL 1997") AS COMPARED TO THE PERIOD FROM
SEPTEMBER 8, 1995 THROUGH JUNE 30, 1996 ("FISCAL 1996") AND THE PRO FORMA
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 ("PRO FORMA
FISCAL 1997") AS COMPARED TO FISCAL 1997
The financial information for Pro Forma Fiscal 1997 gives effect to the
seven acquisitions completed by the Company in fiscal 1997 and the six
acquisitions completed by the Company since June 30, 1997 as if those
acquisitions had been completed on July 1, 1996. Such acquisitions account for a
substantial portion of the pro forma increases in net sales, gross profit,
operating expenses and taxes.
NET SALES. Net sales increased $61.4 million, or 118.1%, to $113.4 million
in fiscal 1997 from $52.0 million in fiscal 1996. This increase was primarily
attributable to increased sales volume with existing customers, sales to new
retailers, new product introductions, the acquisition of seven companies in
fiscal 1997 and the fact that fiscal 1997 was 70 days longer than fiscal 1996.
Net sales increased $56.7 million, or 100.0%, in fiscal 1997 over net sales for
the 12 months ended June 30, 1996 for the Company and its predecessor. Net sales
for Pro Forma Fiscal 1997 totaled $183.1 million representing an increase of
$69.7 million, or 61.5%, over Fiscal 1997.
GROSS PROFIT. Gross profit increased $25.1 million, or 103.1%, to $49.4
million in fiscal 1997 from $24.3 million in fiscal 1996. Gross profit as a
percentage of net sales decreased to 43.5% in fiscal 1997 from 46.8% in fiscal
1996. This decrease reflects the fact that fiscal 1997 was 70 days longer than
fiscal 1996. The 70 days not included in fiscal 1996 include the months of July
and August in which the Company has historically generated lower net sales and
gross margins. The Company believes that gross margins for fiscal 1997 were
comparable to the gross margins for the 12 month period ended June 30, 1996.
Gross profit for Pro Forma Fiscal 1997 totaled $75.2 million representing an
increase of $25.8 million, or 52.2%, over fiscal 1997. Gross profit as a
percentage of net sales for Pro Forma Fiscal 1997 decreased to 41.1% from 43.5%
for fiscal 1997. This decrease is attributable to the results of operations for
all acquisitions included in Pro Forma Fiscal 1997 for the entire year rather
than the portion of the year which generates the highest gross profits.
OPERATING EXPENSES. Sales, marketing and delivery expenses increased $15.7
million, or 101.1%, to $31.2 million in fiscal 1997 from $15.5 million in fiscal
1996. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 27.5% in fiscal 1997 from 29.8% in fiscal 1996. This decrease as a
percentage of net sales was primarily due to lower per unit distribution costs
associated with newly acquired product lines. Sales, marketing and delivery
expenses for Pro Forma Fiscal 1997 totaled $42.5 million, an increase of $11.3
million, or 36.2%, over fiscal 1997. As a percentage of net sales, marketing and
delivery expenses decreased to 23.2% for Pro Forma Fiscal 1997 due to the
expansion of the Company's Southwest division which generally sells products for
a higher per unit sales price. General and administrative expenses increased
$4.4 million, or 152.9%, to $7.3 million in fiscal 1997 from $2.9 million in
fiscal 1996. As a percentage of net sales, general and administrative expenses
increased to 6.4% in fiscal 1997 from 5.6% in fiscal 1996. This increase is
primarily attributable to the fact that fiscal 1997 was 70 days longer than
fiscal 1996 and to increased costs relating to supporting the Company's growth,
including an increase in corporate personnel. General and administrative
expenses for Pro Forma Fiscal 1997 totaled $15.2 million, an increase of $7.9
million over fiscal 1997. As a percentage of net sales, general and
administrative expenses for Pro Forma Fiscal 1997 increased to 8.3%. This
increase is attributable to including the results of operations for all
acquisitions for the entire year, including the periods prior to acquisition
which are characterized by higher general and administrative expenses as a
percentage of net sales due to the seasonality of the businesses acquired.
Amortization of intangible assets increased $0.9 million to $1.0 million in
fiscal 1997 from $0.1 million in fiscal 1996 primarily as a result of the
Company's acquisitions in fiscal 1997. Amortization of intangible assets for Pro
Forma Fiscal 1997 increased $1.3 million to $2.3 million.
INTEREST EXPENSE. Interest expense increased $3.5 million to $4.2 million
in fiscal 1997 from $0.7 million in fiscal 1996. This increase resulted
primarily from increased borrowings made to fund acquisitions
27
<PAGE>
and to effect the Recapitalization on December 31, 1996. Interest expense for
Pro Forma Fiscal 1997 increased $6.2 million to $10.4 million.
TAXES. The effective tax rate increased to 48.0% in fiscal 1997 from 44.8%
in fiscal 1996, primarily as a result of a greater impact of the state tax
limitations on the use of net operating loss carryforwards. The effective tax
rate for Pro Forma Fiscal 1997 decreased to 45.0% primarily as a result of the
Company conducting, on a pro forma basis, more business in the State of Texas,
which assesses minimal income tax on profits.
FISCAL 1996 AS COMPARED TO THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 8,
1995 ("FISCAL 1995")
(All material effects resulting from the change in accounting basis are
separately identified.)
NET SALES. Net sales increased $23.0 million, or 79.3%, to $52.0 million in
fiscal 1996 from $29.0 million in fiscal 1995. This increase was primarily a
result of fiscal 1996 being 45 days longer than fiscal 1995, increased sales
from acquired operations and increased sales to the Company's existing
customers.
GROSS PROFIT. Gross profit increased $12.8 million, or 111.6%, to $24.3
million in fiscal 1996 from $11.5 million in fiscal 1995. As a percentage of net
sales, gross profit increased to 46.8% in fiscal 1996 from 39.6% in fiscal 1995.
This increase resulted primarily from the implementation of certain strategic
management initiatives by the Company's current management, including price
increases, production efficiencies, new product packaging and improved raw
material costs.
OPERATING EXPENSES. Sales, marketing and delivery expenses increased $5.0
million, or 47.7%, to $15.5 million in fiscal 1996 from $10.5 million in fiscal
1995. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 29.8% in fiscal 1996 from 36.2% in fiscal 1995. This decrease
resulted primarily from a restructuring of the Company's sales organization,
including the elimination of certain management positions and a shift to an
incentive-based compensation structure. General and administrative expenses
decreased $0.8 million, or 21.1%, to $2.9 million in fiscal 1996 from $3.7
million in fiscal 1995. As a percentage of net sales, general and administrative
expenses declined to 5.6% in fiscal 1995 from 12.6% primarily due to leveraging
these expenses over higher sales and cost reduction initiatives, including
reductions in corporate personnel. Amortization of intangible assets decreased
$0.2 million to $0.1 million in fiscal 1996 from $0.3 million in fiscal 1995 as
a result of the effect of the elimination of certain intangible assets in
connection with the purchase of the assets of Color Spot Oregon offset by
amortization of goodwill relating to the acquisition of Color Spot Oregon.
INTEREST EXPENSE. Interest expense decreased $1.9 million to $0.7 million
in fiscal 1996 from $2.6 million in fiscal 1995. This decrease resulted from the
reduction in borrowings resulting from the issuance of Common Stock to finance
the purchase by the Company of the assets of its predecessor.
TAXES. The effective tax rate for fiscal 1996 was 44.8%. No tax benefit was
recognized in fiscal 1995 as a result of the uncertainty of the Company's
predecessor to achieve sufficient taxable income to realize deferred tax assets.
FISCAL 1995 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 ("FISCAL 1994")
NET SALES. Net sales decreased $10.4 million, or 26.4%, to $29.0 million in
fiscal 1995 from $39.4 million in fiscal 1994. This decrease is primarily due to
the fact that fiscal 1995 was 114 days shorter than fiscal 1994 and decreased
sales to the Company's existing customers.
GROSS PROFIT. Gross profit decreased $3.5 million, or 23.4%, to $11.5
million in fiscal 1995 from $15.0 million in fiscal 1994. As a percentage of net
sales, gross profit increased to 39.6% in fiscal 1995 from 38.0% in fiscal 1994.
This increase as a percentage of net sales is largely due to the seasonality of
the periods presented.
OPERATING EXPENSES. Sales, marketing and delivery expenses decreased 22.1%
to $10.5 million in fiscal 1995 from $13.5 million in fiscal 1994. As a
percentage of net sales, sales, marketing and delivery
28
<PAGE>
expenses increased to 36.2% in fiscal 1995 from 34.2% in fiscal 1994. This
increase resulted primarily from changes in packaging, decreased sales to the
Company's existing customers and less efficient use of the Company's
distribution fleet. General and administrative expenses decreased $0.3 million,
or 8.2%, to $3.7 million in fiscal 1995 from $4.0 million in fiscal 1994. As a
percentage of net sales, general and administrative expenses increased to 12.6%
in fiscal 1995 from 10.1% in fiscal 1994. This increase resulted primarily from
severance payments made in September 1995 in connection with the purchase by the
Company of the assets of its predecessor and an increase in the number of
corporate personnel. Amortization of intangible assets decreased $0.1 million,
or 31.4%, to $0.3 million in fiscal 1995 from $0.4 million in fiscal 1994.
INTEREST EXPENSE. Interest expense decreased $0.6 million to $2.6 million
in fiscal 1995 from $3.2 million in fiscal 1994. This decrease resulted
primarily from the fewer number of days in fiscal 1995.
TAXES. No tax benefit was recognized in fiscal 1995 or fiscal 1994 as a
result of the uncertainty of the Company's predecessor's ability to achieve
sufficient taxable income to realize deferred tax benefits.
SEASONALITY AND QUARTERLY RESULTS
Color Spot's business is highly seasonal, and the Company has historically
reported operating losses in its first and second fiscal quarters. The Company
believes that it will continue to report operating losses in the first half of
its fiscal year for the foreseeable future. In addition, during the fiscal
quarter in which the Offerings are completed, the Company will incur (i) a $4.4
million non-cash pre-tax extraordinary charge related to the write-off of
deferred financing fees and (ii) a $2.0 million pre-tax charge related to the
termination of an annual management fee. See "Risk Factors--Seasonality;
Variability of Quarterly Results and Certain Charges."
The following tables set forth the unaudited results for each of the four
fiscal quarters in fiscal 1997, the three full fiscal quarters of fiscal 1996,
the period from the inception of the Company to September 28, 1995, and the
period from July 1, 1995 to September 8, 1995 for the Company's predecessor. The
data for the Company's predecessor and the twelve-month period totals are
presented for informational purposes only and are not comparable in certain
respects. In the opinion of the Company's management, this information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this Prospectus, and include all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary to
fairly present such information. In addition to the seasonal nature of the
Company's business, the Company's quarterly results have historically been
subject to significant fluctuations stemming from changes in ownership and
business strategy and the effects of acquisitions.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
SEPTEMBER 26, DECEMBER 26, MARCH 27, JUNE 30,
1996 1996 1997 1997 TOTAL
------------- ------------ ----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................................... $ 13,437 $ 13,165 $ 31,049 $ 55,749 $ 113,400
Gross profit............................................ 4,579 4,920 13,716 26,159 49,374
Income (loss) from operations........................... (1,469) (1,059) 3,871 8,573 9,916
Net income (loss)....................................... (820) (740) 932 3,468 2,840
</TABLE>
<TABLE>
<CAPTION>
THE
PREDECESSOR THE COMPANY
-------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QUARTER ENDED
70 DAYS ENDED 21 DAYS ENDED ------------------------------------
SEPTEMBER 8, SEPTEMBER 28, DECEMBER 28, MARCH 28, JUNE 30,
1995 1995 1995 1996 1996 TOTAL
-------------- --------------- ------------ ----------- --------- ---------
(IN THOUSANDS)
Net sales................................. $4,716 $ 1,798 $6,852 $ 12,834 $ 30,511 $ 56,711
Gross profit.............................. 529 120 1,982 8,279 13,929 24,839
Income (loss) from operations............. (3,444) (767) (1,708) 3,272 5,038 2,391
Net income (loss)......................... (4,119) (485) (1,099) 1,789 2,583 (1,331)
</TABLE>
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily to fund seasonal working capital,
capital expenditures and acquisitions. Since September 8, 1995, the Company's
primary sources of capital have been a revolving line of credit, various term
and acquisition loans and the issuance of Company stock.
During fiscal 1997 and fiscal 1996, net cash used in operations was $4.1
million and $3.5 million, respectively. Net cash used in investing activities
during fiscal 1997 and fiscal 1996 was $58.2 million and $9.7 million,
respectively. These amounts related primarily to one acquisition in fiscal 1996
and seven acquisitions completed by the Company in fiscal 1997. The Company
spent $6.2 million and $1.5 million on capital expenditures in fiscal 1997 and
fiscal 1996, respectively. The Company anticipates it will spend $11.4 million
in fiscal 1998, of which approximately $8.0 million will be expansion capital
expenditures and $3.4 million will be maintenance capital expenditures.
Expansion capital expenditures typically include grading of new land, purchasing
and building new greenhouses and related improvements, such as the installation
of ventilation and irrigation systems.
In connection with the Recapitalization, the Company entered into a loan
agreement (the "Loan Agreement") with Credit Agricole Indosuez and a syndicate
of banks. Borrowings under the Loan Agreement are secured by substantially all
of the Company's assets. On September 25, 1997, the Company had an aggregate of
$103.8 million in term loans outstanding under the Loan Agreement and $13.3
million in revolving credit loans. At September 25, 1997, borrowings under the
Loan Agreement bore interest at rates ranging from 8.4% to 10.3% per annum. At
September 25, 1997, the Company had $13.6 million of additional revolving credit
availability under the Loan Agreement. Borrowings under the Company's revolving
credit facility are subject to certain borrowing base limitations generally
based on a percentage of eligible inventory and eligible accounts receivable.
Additionally, revolving credit borrowings must be reduced annually below $10.0
million for a 30-day period.
In connection with the Recapitalization, the Company borrowed $37.3 million
under the Loan Agreement and purchased approximately 6.1 million shares of
Common Stock for $37.1 million in cash and the Heller Note in the original
principal amount of $7.1 million. In addition, the Company sold approximately
3.6 million shares of newly issued Common Stock for an aggregate purchase price
of $22.3 million and repaid $14.1 million of indebtedness. The Company also
declared a dividend of approximately $1.5 million to its stockholders
immediately prior to the Recapitalization. Following the Recapitalization and
during fiscal 1997, the Company sold an additional 1.7 million shares of Common
Stock for an aggregate purchase price of $12.1 million. During fiscal 1996, the
Company sold 6.7 million shares of Common Stock for an aggregate purchase price
of $9.7 million.
Upon completion of the Offerings, the Company will enter into the New Loan
Agreement which will provide an acquisition term loan facility of $75.0 million,
a revolving credit facility of $40.0 million, and a supplemental line of $35.0
million which may be used either for acquisitions or working capital. See
"Description of Certain Indebtedness--New Loan Agreement."
The Company believes that the net proceeds from the Offerings, together with
available cash, cash generated from operations and available borrowings under
the New Loan Agreement, will be sufficient to finance working capital, capital
expenditures and acquisitions for at least the next 12 months. However, there
can be no assurance that such resources will be sufficient to meet the Company's
anticipated working capital, capital expenditure and acquisition financing
requirements or that the Company will not require additional financing within
this time frame. The Company's forecast of the period of time through which its
financial resources will be adequate to support its operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Financing."
30
<PAGE>
BUSINESS
OVERVIEW
Color Spot is the largest wholesale nursery in the United States, based on
revenue and greenhouse square footage. The Company provides a wide assortment of
high quality plants as well as extensive merchandising services primarily to
leading home centers and mass merchants, such as Home Depot, Home Base, Wal-Mart
and Kmart. The Company distributes products to over 850 retail and commercial
customers, representing over 8,000 locations, primarily in the western and
southwestern regions of the United States. Since June 30, 1996, the Company has
completed 13 acquisitions, making it a leading consolidator in the wholesale
nursery industry. On a pro forma basis, the Company generated approximately
$183.1 million in net sales and $22.7 million in EBITDA in fiscal 1997.
The Company believes it is one of the few wholesale nurseries that has the
scale and distribution capabilities necessary to provide large volumes of high
quality product to its retail customers on a multi-regional basis. The Company
produces over 2,000 varieties of live plants, including bedding plants, shrubs,
potted flowering plants, ground cover and fresh cut Christmas trees. Through its
200 person sales force, Color Spot also provides its retail customers with a
broad array of value-added services, such as in-store merchandising, product
display and maintenance, promotional planning and product reordering. The
Company believes that providing these services differentiates it from its
competitors and helps to establish Color Spot as a preferred supplier in the
industry. Color Spot operates 19 production facilities located in California,
Arizona, Texas, Oregon and Washington.
HISTORY
Color Spot America was founded in 1983 by Michael F. Vukelich, the Company's
current Chief Executive Officer, and it grew to become one of the largest
bedding plant producers in California. In January 1991, Mr. Vukelich left Color
Spot America, ceding operational control to PacifiCorp, which installed new
management. In 1993, Color Spot America sold substantially all of its assets and
liabilities to Color Spot Oregon, a corporation controlled by PacifiCorp. Net
sales and profitability of Color Spot America and Color Spot Oregon declined
between 1992 and 1995.
In September 1995, the Company was formed by Mr. Vukelich, Jerry L.
Halamuda, who had previously worked with Mr. Vukelich at Color Spot America, and
Heller to acquire the assets of Color Spot Oregon from PacifiCorp. With Mr.
Vukelich as Chief Executive Officer and Mr. Halamuda as President, management
implemented a number of strategic and operational programs designed to improve
the Company's customer relationships and financial results. These initiatives
included revamping the Company's merchandising programs, decentralizing its
operations, revising its pricing strategies, renewing its focus on operating
efficiencies and restructuring its sales organization. As a result of these
strategies, the Company has experienced significant improvements in net sales
and operating results. With the improvement of its financial results, Color Spot
embarked on an aggressive acquisition strategy and has completed 13 acquisitions
since June 30, 1996. Color Spot believes it is well positioned to continue its
growth and further consolidate the wholesale nursery industry.
In December 1996, an affiliate of Kohlberg acquired a majority interest in
the Company in the Recapitalization pursuant to which the Company repurchased
the shares of Common Stock held by Heller and a portion of the Common Stock held
by management. See "Certain Transactions."
INDUSTRY
Gardening is one of the most popular leisure activities in the United
States. According to the 1996-1997 National Gardening Survey conducted by the
Gallup Organization, Inc., 64% of the approximately 101 million U.S. households
participated in some form of gardening in 1996. The Company believes that the
popularity of gardening is likely to increase in coming years. According to the
National Gardening
31
<PAGE>
Survey, the demographic group that spends the most money per capita on gardening
is individuals age 50 and older. This group will be the fastest growing
demographic group through the year 2010, according to the U.S. Census.
Nationwide, retail sales of live plants totaled approximately $18 billion in
1996. In recent years, the live plant market has demonstrated consistent growth,
increasing at a compound annual growth rate of approximately 6.3% since 1993.
The Company also competes in the fresh cut Christmas tree market which generated
wholesale revenues nationwide of approximately $330 million in 1996. The
Company's sales have historically been derived largely from the sale of bedding
plants. The following table provides a breakdown of live plant retail sales in
1996:
<TABLE>
<CAPTION>
RETAIL % OF
CATEGORY TYPICAL PRODUCTS SALES(1) RETAIL SALES
- --------------------------- ---------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
(IN BILLIONS)
Evergreens and Shrubs Pines and junipers $7.1 39.9%
Trees Outdoor fruit and nut trees and shade trees 4.5 25.3
Bedding Plants Outdoor flowers and vegetables 2.9 16.3
Flowering Potted Plants Indoor flowering plants, such as chrysanthemums, 2.0 11.2
poinsettias and African violets
Foliage Indoor house plants 0.8 4.5
Bulbs Flower bulbs 0.5 2.8
----- -----
$ 17.8 100.0%
----- -----
----- -----
</TABLE>
- ------------------------------
(1) Source: February/March 1997 Nursery Retailer Magazine.
The live plant retail distribution channel has consolidated significantly
over the last ten years, with sales shifting from local independent nurseries to
large home centers and mass merchants, such as Home Depot, Home Base, Target,
Wal-Mart and Kmart. Live plants are attractive product offerings for these
retailers, as each dollar of live plant sales typically generates four dollars
of gardening equipment and other complimentary product sales, according to the
National Gardening Survey. Moreover, the relatively low price point of most live
plants encourages impulse buying by consumers and makes these products
relatively resistant to economic downturns. Retail consolidation has altered the
nature of the wholesale demand for live plants. Given the sophistication, size
and geographic diversity of the national chains, retail customers prefer
suppliers that can meet demanding delivery schedules, fulfill large volume
requirements and provide a variety of value-added services.
Despite this retail consolidation, the wholesale nursery industry is still
highly fragmented, and is characterized by local, independent nurseries. In
1996, the ten largest and 100 largest of the over 10,000 wholesale nurseries in
the United States accounted for approximately 8% and 22%, respectively, of total
wholesale production, according to Nursery Business Magazine. Due to the
fragmented nature of the wholesale nursery industry, the Company believes that
there is a significant opportunity for a branded, well capitalized and
professionally managed company to lead the consolidation of this industry.
BUSINESS STRATEGY
The Company's goals are to enhance its leadership position in the wholesale
nursery industry in its established markets and to become the market share
leader in targeted new regions nationwide. The
32
<PAGE>
Company's business strategy is designed to meet the increasing demands of retail
customers and consumers, both of which are critical to the Company's success.
The Company's business strategy includes the following key elements:
OFFER BROAD SELECTION OF HIGH QUALITY PRODUCTS
Color Spot provides retail customers and consumers with a broad selection of
high quality live plants. Through frequent deliveries, careful pre-delivery
screening and regular plant maintenance, Color Spot is able to provide
consistently fresh and attractive products. The Company offers over 2,000
varieties of live plants, including bedding plants, shrubs, potted flowering
plants, ground cover and fresh cut Christmas trees. In addition, the Company
continually seeks to develop new products through exclusive flower color mixes,
proprietary retail product lines and creative, easy-to-use packaging. Color Spot
believes it is one of the few wholesale nurseries that can consistently provide
the large volumes of high quality products desired by home centers and mass
merchants.
PROVIDE SUPERIOR CUSTOMER SERVICE
The Company believes that its value-added services differentiate it from its
competitors and allows Color Spot to establish itself as a preferred supplier to
its retail customers. The Company services its retail customers through a
salesforce of over 200 sales merchandisers, which the Company believes is the
largest salesforce in the wholesale nursery industry. The Company's service
philosophy encourages each of its sales merchandisers to effectively function as
a garden center employee, working closely with retail store personnel to
anticipate changing customer demands and to react to local growing conditions.
Color Spot services include in-store merchandising, product display, plant
maintenance, promotional planning and product reordering. The Company believes
that due to the perishable nature of its products, these services are critical
to maintaining attractive and fresh product displays which help to drive retail
sales.
CAPITALIZE ON LARGE-SCALE AND MULTI-REGIONAL CAPABILITIES
Color Spot believes that home centers and mass merchants prefer to buy from
large wholesale nurseries that can consistently deliver high quality products to
a broad geographic area. Color Spot is the largest wholesale nursery in the
United States and one of the few nurseries that has the scale and distribution
capabilities to support home centers and mass merchants on a multi-regional
basis. The Company's production facilities are located in diverse geographic
regions to increase distribution efficiency, to better serve customers and to
minimize the effects of adverse weather conditions.
CONTINUE TO STRENGTHEN RELATIONSHIPS WITH LARGE RETAIL CUSTOMERS
The Company has long-standing relationships with many leading home centers
and mass merchants in the United States. The Company believes it is the largest
supplier of live plants for Home Depot, Home Base, Target, Wal-Mart and Kmart in
the western United States. The Company is involved in its retail customers'
sales and inventory planning processes, allowing Color Spot to plan its
production capacity more effectively to meet its retail customers' demands. In
addition, the Company works with a number of its retail customers to develop
proprietary products, new packaging and sales and promotional programs.
ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL
The Company believes that attracting and retaining highly qualified
personnel is critical to the success of its operations due to the constant
interaction among Color Spot employees, retail customer personnel and consumers.
The Company has instituted a number of sales and other performance-based
incentives which are designed to foster loyalty to the Company and reduce
employee turnover. As a result, the Company believes that it has the most
experienced salesforce in the wholesale nursery industry. The Company also
provides extensive training and promotion opportunities for its sales
merchandisers and management personnel. The Company's decentralized management
approach encourages employees at each of its production facilities to actively
participate in strategic planning for that facility. The Company believes that
these programs and opportunities make it an attractive employment opportunity
for the
33
<PAGE>
employees of companies which it acquires, and enables the Company to retain the
most qualified employees of acquired companies.
GROWTH STRATEGY
The Company's goal is to enhance its leadership position in the wholesale
nursery industry. Color Spot's growth strategy is to continue to enter new
geographic markets through acquisitions and to expand its presence in its
existing markets. An important aspect of the Company's growth strategy is to
increase its penetration in targeted markets thereby enabling the Company to
better serve its retail customers, enhancing its brand name recognition and
increasing operating efficiencies. The key elements of the Company's growth
strategy include:
EXISTING AND NEW CUSTOMER GROWTH
The Company plans to increase sales by growing with its existing retail
customers and seeking new relationships with other high volume retailers. The
Company strives to increase the number of stores it serves for its existing
retail customers both through serving (i) a larger percentage of its retail
customers' stores and (ii) its retail customers' new stores as those retailers
expand. For instance, since June 30, 1996, the Company has added 490 new stores
operated by its existing retail customers without giving effect to stores added
through acquisitions. The Company also seeks to increase same store sales by
gaining shelf space and improving sales productivity through merchandising
programs and improved product offerings. In addition, Color Spot actively seeks
relationships with new retail customers, and since June 30, 1996 has added three
new retail customers representing over 100 new stores.
ACQUISITIONS
The Company intends to pursue acquisitions in the future which either allow
the Company to establish a platform in a new geographic area or "fill-in" the
Company's product line and production capacity in the Company's existing
markets. Since June 30, 1996, Color Spot has completed 13 acquisitions, adding
13 production facilities, over 1,800 growing acres of production capacity and
over 8.4 million square feet of greenhouse space. The Company's acquisition
strategy is designed to (i) increase its penetration of its existing markets,
(ii) expand into targeted new geographical areas and (iii) add new product
lines. The Company's strategy in entering new geographic areas is to make a
strategic acquisition that can be used as a platform for future expansion in
these new areas. Recently, the Company has made platform acquisitions in the
Texas and Washington markets, and believes that it has significant opportunities
to further "fill-in" these markets. The Company seeks to increase the sales and
profitability of acquired companies by implementing Color Spot's sales and
merchandising programs and by improving the operating efficiencies of the
acquired business.
PRODUCT LINE EXPANSION
The Company actively seeks new product opportunities, through both
acquisitions and internal development. By offering a greater variety of
products, the Company believes its retail customers are able to reduce their
number of live plant suppliers. While the Company's sales have been derived
largely from the sales of bedding plants, the Company believes that there is
significant opportunity to expand into other areas of the wholesale nursery
industry. Since June 30, 1996, the Company has expanded its product line into
new areas of the wholesale nursery industry, including shrubs, potted flowering
plants and ground cover. The Company has also expanded into the fresh cut
Christmas tree business which enables it to utilize available sales and
distribution capacity during the winter months.
PRODUCTS
The Company is committed to providing its retail customers and consumers
with a broad selection of high quality live plant products. The Company's
products include over 2,000 varieties of plants, including a wide selection of
bedding plants, shrubs, potted flowering plants, ground cover and fresh cut
Christmas
34
<PAGE>
trees. The Company's products have retail prices generally ranging from $0.62 to
$17.95. Most of the Company's products are sold under the Color Spot brand name,
and include easy-to-read labels containing growing instructions and a color
picture of a mature plant. The Company's products are sold in various containers
and sizes, ranging from flats and paks containing numerous small plants to
single containers containing one plant. The following is a summary of the
Company's product lines:
<TABLE>
<CAPTION>
% OF PRO FORMA TYPICAL
PRODUCT FISCAL 1997 NET SALES GROWING TIME
- -------------------------------------------------------------- ------------------------ ------------------
<S> <C> <C>
Bedding Plants................................................ 67% 8 to 14 weeks
Shrubs........................................................ 13 10 to 16 months
Flowering Potted Plants....................................... 12 6 to 9 weeks
Ground Cover.................................................. 2 10 to 14 weeks
Christmas Trees............................................... 6 8 to 9 years
</TABLE>
Color Spot constantly strives for product innovations, such as exclusive
flower color mixes, new packaging and "premium" potted flowers. In addition,
Color Spot works closely with its large retail customers to develop proprietary
branded products.
CUSTOMERS
The Company sells its products to over 850 retail customers representing
more than 8,000 locations in the United States as well as to over 400 commercial
customers. The majority of the Company's products are sold to large national
retailers, and the Company has long-standing relationships with many of these
retail customers. Color Spot's retail customer base includes home centers, mass
merchants, drug and grocery stores and independent nursery chains. Sales to
national retail chains have increased significantly as these retail customers
continue to gain market share. The following table sets forth a selected list of
customers for each major category of retail customers:
<TABLE>
<CAPTION>
HOME CENTERS MASS MERCHANTS DRUG AND GROCERY CHAINS INDEPENDENT NURSERIES
- ----------------------------- --------------- ------------------------ ----------------------------
<S> <C> <C> <C>
Home Depot Fred Meyer Albertson's Cornelius Nurseries
Home Base Kmart H.E.B. Jenco Wholesale Nursery
Builders Square Target Kroger Navlets Nursery
Orchard Supply Hardware Wal-Mart Rite-Aid Drug Stores Star Nursery
Safeway
</TABLE>
The Company believes that its ability to consistently provide high quality
products and value-added services on a multi-regional basis provides significant
competitive advantages in serving the retail channel. Color Spot products
typically account for over half of the live plant sales in stores supplied by
the Company. In each region, the Company's goal is to serve every store operated
by each of its retail customers. In fiscal 1997, the Company's top eight retail
customers accounted for approximately 75% of its total net sales. See "Risk
Factors--Customer Concentration; Dependence on Home Depot."
The Company also serves commercial customers, such as landscapers, golf
courses, office parks and hotels. Approximately 4.9% of the Company's fiscal
1997 net sales were derived from sales to commercial customers.
SALES AND SERVICES
The Company offers a broad range of value-added services to help its retail
customers maximize live plant sales and profitability. Color Spot believes that
a well maintained product display increases sales volume and encourages impulse
buying by consumers. The average shelf life for most of the Company's products
is two to three weeks following delivery. Live plant products, like fresh
produce in a supermarket, are unlikely to sell if they are not fresh and
merchandised correctly. Due to the perishable nature of its products, the
Company believes that the services it provides to its retail customers are
critical to maintaining attractive and fresh product displays.
35
<PAGE>
The Company services its retail customers through a salesforce of over 200
merchandisers. Each sales merchandiser covers an average of ten to 12 stores,
although sales merchandisers covering large volume stores may be assigned as few
as one to three locations. Each sales merchandiser typically provides
merchandising services to each of his/her stores four to seven times per week,
which may include:
- design and layout of garden shop area
- design and construct display tables and end caps
- create and install point of purchase signage
- implement Color Spot promotional and marketing programs
- clean and maintain fresh product displays
- reorder, receive delivery of and restock merchandise
- secure and maintain prominent floor space
- assist consumers with product and planting information
The Company believes that its sales merchandisers can provide many of these
services more effectively than the retail customers themselves because these
sales merchandisers have extensive knowledge of, and focus exclusively on, live
plants. Furthermore, the Company's sales merchandisers receive ongoing training
and are compensated on a commission basis as a percentage of net sales.
Consumers often view Color Spot employees as employees of the retailer, and rely
on Color Spot sales merchandisers to answer questions and give advice about
selecting and planting live plants. Because Color Spot's sales merchandisers
spend most of their time in the retail stores, they can adjust inventory in
response to local weather conditions on a store-by-store basis, develop product
displays tailored to the local consumers' demands and cultivate a favorable
relationship with in-store personnel.
In addition to providing merchandising services at the store level, Color
Spot plays an important role in assisting retail customers with their sales and
inventory planning. Typically, a Color Spot senior sales executive will meet
periodically with its retail customer's senior representative to plan sales of
the Company's products based on that retail customer's anticipated store growth
and general product needs. In addition, Color Spot sales executives meet
frequently with retail customers' regional and corporate buyers to more
specifically plan seasonal product needs and sales forecasts and to incorporate
Color Spot's promotional events and pricing strategies into their plans. At the
store level, local Color Spot sales merchandisers work with in-store personnel
to execute sales plans and continually monitor sales and inventory.
OPERATIONS
The Company operates on a decentralized basis, with production, hiring and
purchasing decisions made on a facility-by-facility basis.
PRODUCTION. The first production step of the plant growing process is
propagation. Approximately 80% of Color Spot's plants are produced from seeds,
and the remaining 20% are produced from plant cuttings. Color Spot realizes a
yield from propagation greater than 70%, which the Company believes is
consistent with the industry average. The second production step is the transfer
of the resulting seedlings into plastic growing containers. The plants are then
moved from greenhouses to outdoor growing areas, as appropriate, to finish the
growing cycle.
The Company experiences a certain level of "shrink" in its production
process. Color Spot divides shrink into two main classifications: cultural
shrink, defined as plants that do not mature due to disease, insects, soil
problems or other factors; and sales shrink, defined as plants ready for sale to
retail customers but not sold because supply exceeds demand. A certain amount of
shrink is necessary to ensure adequate
36
<PAGE>
product supply. Color Spot experiences approximately 16% shrink, of which
one-third is cultural shrink and two-thirds is sales shrink. The Company
believes that this shrink rate is consistent with the industry average.
DISTRIBUTION. The Company distributes its products directly from its
production facilities to its retail customers. The Company operates a fleet of
472 tractor trailers, 372 of which are owned and the balance of which are
leased. During peak periods, Color Spot's fleet is supplemented with common
carriers. The Company believes that common carriers are readily available to
accommodate seasonal delivery peaks. Typically, each of the Company's facilities
delivers products to stores within a 175-mile radius, and deliveries are
generally made within 48 hours of the order being placed.
SUPPLIERS. The cost of raw materials accounts for approximately 27.1% of
net sales and is composed of three primary components: soil mix, seeds and plant
cuttings and plastic flats and growing containers. Color Spot's primary
suppliers include Rapid Industrial Plastic Company, Ball Seed Company, Premier
Peat Moss, Norcal Perlite Company, J.M. McConkey and Romeo Fertilizers. Due to
its large sales volume, the Company receives purchasing discounts from many of
its suppliers, and the Company believes that alternative sources of supply are
readily available.
ACQUISITION STRUCTURE AND INTEGRATION
The Company intends to pursue acquisitions in the future which either allow
the Company to establish a platform in a new geographic area or "fill-in" the
Company's product line and production capacity in the Company's existing
markets. In 1997, the Company completed two platform acquisitions, one in Texas
and one in Washington. Following the Texas acquisition, the Company consummated
three fill-in acquisitions in Texas. The Company also completed three fill-in
acquisitions in California during this period. In addition, the Company entered
into the fresh cut Christmas tree business through the acquisition of two
Christmas tree companies in 1997.
The Company typically finances acquisitions through a combination of cash,
promissory notes and, in certain cases, Company stock. The Company normally
obtains noncompete and confidentiality agreements from selling owners and may
enter into employment or consulting agreements with key personnel of the seller.
The majority of the Company's recent acquisitions have been consummated in less
than 90 days from the date a letter of intent is executed. There can be no
assurance, however, that the Company will be able to identify and acquire
desirable nursery businesses on terms favorable to the Company or in a timely
manner in the future. See "Risk Factors--Dependence on Acquisitions for Future
Growth" and "--Ability to Manage Growth."
The Company seeks to increase the sales and profitability of acquired
companies by implementing Color Spot's sales and merchandising programs and by
improving operating efficiencies of the acquired business. Consistent with the
Company's decentralized management approach, integration of a platform
acquisition involves creating a new division to be managed by employees of the
acquired company. The Company centralizes many of the acquired Company's
functions, including purchasing, insurance and benefits, and sales and marketing
programs. Integration of a fill-in acquisition generally involves a fundamental
change in the operations of the acquired company. The Company may consolidate
distribution and production operations to maximize operating efficiencies. Where
market conditions dictate, an acquired company may use both its historical name
and the Company's name during a transition period in order to minimize customer
disruption.
Prior to consummating an acquisition, the Company conducts extensive due
diligence on the targeted company, including legal, environmental, business and
accounting reviews by senior management, the Company's independent auditors, and
outside legal counsel and consultants.
37
<PAGE>
COMPETITION
The wholesale nursery industry is highly competitive. Competition is based
principally on product quality, breadth of product offerings, customer service
and price. The Company believes it has differentiated itself from its
competitors through the breadth of its product offerings, multi-regional
capabilities and the value-added services it provides to retail customers. The
wholesale nursery industry is highly fragmented with over 10,000 small and
regional nurseries nationwide. In 1996, the ten largest and 100 largest
wholesale nurseries in the United States accounted for approximately 8% and 22%,
respectively, of total wholesale production. The Company currently competes
directly with a large number of western and southwestern producers. On a
multi-regional basis, the Company also competes with both Hines Nurseries
primarily in bedding plants and shrubs and Monrovia Nursery Company primarily in
shrubs. The fresh cut Christmas tree market is also highly fragmented and, on a
regional basis, the Company competes in this market with Holiday Tree Farms and
The Kirk Company.
PROPERTIES AND FACILITIES
Color Spot operates 19 production facilities in five states. Each production
facility consists primarily of growing fields, greenhouses, warehouse space and
distribution areas. Production facilities are operated on a decentralized basis,
with each facility responsible for producing, marketing and distributing the
Company's products to retail customers within a designated geographic region.
The Company leases the majority of its facilities and believes that most of its
leases can be extended on acceptable terms. The profile of the Company's
production facilities is as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL GREENHOUSE
LOCATION ACREAGE SQUARE FOOTAGE OWNED/LEASED
- ----------------------------------------------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
WESTERN:
Carson, CA........................................... 68 450,000 Leased
Chino, CA............................................ 41 395,000 Leased
El Cajon, CA(1)...................................... 43 410,000 Owned/Leased
Fallbrook, CA(2)..................................... 247 1,660,000 Owned/Leased
Lodi, CA(3).......................................... 102 1,073,000 Owned/Leased
Richmond, CA(4)...................................... 98 988,000 Leased
Salinas, CA.......................................... 160 1,600,000 Leased
San Juan Capistrano, CA.............................. 243 908,000 Leased
Sunol, CA............................................ 57 480,000 Leased
Watsonville, CA(5)................................... 53 392,000 Leased
Phoenix, AZ(6)....................................... 56 670,000 Owned/Leased
Mt. Vernon, WA....................................... 42 425,000 Leased
Aurora, OR........................................... 32 278,000 Leased
----- ----------------
Western Subtotal................................... 1,242 9,729,000
SOUTHWESTERN:
Harlingen, TX........................................ 172 210,000 Owned
Huntsville, TX....................................... 52 442,000 Leased
San Antonio, TX...................................... 587 1,771,000 Owned
Waco, TX............................................. 99 675,000 Owned
Waller, TX........................................... 60 160,000 Leased
Walnut Springs, TX................................... 195 693,000 Owned
----- ----------------
Southwestern Subtotal.............................. 1,165 3,951,000
----- ----------------
TOTAL................................................ 2,407 13,680,000
----- ----------------
----- ----------------
</TABLE>
- ------------------------------
(1) The El Cajon facility is comprised of four parcels, one of which is owned
and three of which are leased.
(2) The Fallbrook facility is comprised of five parcels, one of which is owned
and four of which are leased.
(3) The Lodi facility is comprised of three parcels, one of which is owned and
two of which are leased.
(4) The Richmond facility is comprised of five leased parcels.
(5) The Watsonville facility is comprised of three leased parcels.
(6) The Phoenix facility is comprised of two parcels, one of which is owned and
one of which is leased.
38
<PAGE>
In addition to its production facilities, the Company also leases 44 growing
fields for Christmas trees in Oregon (1,120 acres), Michigan (724 acres) and
North Carolina (47 acres).
The Company's executive offices are located in Pleasant Hill, California.
EMPLOYEES
As of September 25, 1997, the Company had approximately 2,911 full-time
employees. During the peak growing season, which runs from February through
June, Color Spot employs a substantial number of seasonal employees, and total
employment generally will grow to over 3,500 employees between February and
June. All of the Company's seasonal employees are paid on an hourly basis. None
of the Company's employees is covered by a collective bargaining agreement. The
Company believes its relationship with its employees is good.
GOVERNMENT REGULATION
Color Spot is subject to certain federal, state and local health, safety and
environmental laws and regulations regarding the production, storage and
transportation of certain of its products and the disposal of its waste. Certain
of the Company's operations and activities, such as water runoff from its
production facilities and the use of certain pesticides are subject to
regulation by the EPA and similar state and local agencies. These agencies may
regulate or prohibit the use of such products, procedures or operations, thereby
affecting the Company's operations and profitability. In addition, the Company
must comply with a broad range of environmental laws and regulations. Additional
or more stringent environmental laws and regulations may be enacted in the
future and such changes could have a material adverse effect on the Company. The
Company uses reclamation water as one of the sources of water supply for a few
of its production facilities. The use and pricing of reclamation water,
including availability of subsidized water rates, is governed by federal
reclamation laws and regulations. Changes in the law could have a material
adverse effect on the Company.
In addition, the Company is subject to the Fair Labor Standards Act as well
as various federal, state and local regulations which govern such matters as
minimum wage requirements, overtime and other working conditions. A large number
of the Company's personnel are paid at or just above the federal minimum wage
level and, accordingly, changes in such laws, regulations or ordinances may
adversely affect the Company. Federal legislation raising the minimum wage in
the future would increase the Company's employee costs and could also have a
material adverse effect on the Company.
TRADEMARKS AND TRADE NAMES
A majority of the Company's products are sold under the "Color Spot"
trademark. The Company does not have any other registered trademarks.
LITIGATION
The Company is from time to time involved in litigation arising in the
ordinary course of its business. None of the pending litigation, in the opinion
of the Company, is likely to have a material adverse effect on the Company.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Michael F. Vukelich...................... 47 Chairman of the Board and Chief Executive Officer
Jerry L. Halamuda........................ 47 President and Director
Robert F. Strange........................ 43 Executive Vice President and Chief Operating Officer
Paul D. Yeager........................... 59 Executive Vice President and Chief Financial Officer
Karla D. Vukelich........................ 35 Executive Vice President of Administration and Secretary
Ranjit S. Bhonsle(1)..................... 28 Director
George T. Brophy......................... 62 Director
Samuel P. Frieder(1)(2).................. 33 Director
Richard E. George(2)..................... 58 Director
James A. Kohlberg........................ 39 Director
Gary E. Mariani(1)....................... 53 Director
Geoffrey A. Thompson(2).................. 57 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
MR. VUKELICH has been the Company's Chairman of the Board and Chief
Executive Officer since September 1995. From 1992 through August 1995, Mr.
Vukelich was President and Chief Executive Officer of M.F. Vukelich Co. He is
the founder of Color Spot America, a predecessor of the Company, and was
President and Chief Executive Officer of Color Spot America from its inception
in 1983 to 1991. Mr. Vukelich has 27 years of experience in the nursery
business.
MR. HALAMUDA has been the Company's President since September 1995. Prior to
that time, Mr. Halamuda was Vice President of Color King Nursery from 1992
through August 1995. Mr. Halamuda has 26 years experience in the nursery
industry, including six years as an executive of Color Spot America from 1984
through 1990.
MR. STRANGE was appointed Executive Vice President and Chief Operating
Officer in July 1997. From January 1997 through June 1997, Mr. Strange was
President of the Company's western division. From September 1995 through
December 1996, Mr. Strange was the Company's Vice President of Operations. Prior
to that time, Mr. Strange was Director of Operations of Color Spot Oregon. Mr.
Strange has 22 years experience in the nursery industry.
MR. YEAGER joined the Company in February 1997 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Yeager was
Executive Vice President and Chief Financial Officer of the Scotts Company which
he joined in 1974. Mr. Yeager has 23 years experience in the lawn and garden
industry.
MS. VUKELICH was appointed Executive Vice President and Secretary of the
Company in May 1997. Prior to that time, Ms. Vukelich was Vice President of
Administration, a position which she held since September 1995. Prior to that
time, Ms. Vukelich was Secretary and Vice President of Administration of M.F.
Vukelich & Co.
MR. BHONSLE joined Kohlberg in 1993 as an Associate. From 1991 through 1993,
Mr. Bhonsle was a Financial Analyst at Kidder, Peabody & Company, Inc.
MR. BROPHY has been Chairman, President and Chief Executive Officer of ABT
Building Products Corporation ("ABTCo") since October 1992. From 1983 to 1988,
Mr. Brophy was President, Chief Executive Officer and a Director of Morgan
Products, Ltd., a building products company, and was a
40
<PAGE>
private business consultant from 1988 to 1992. Mr. Brophy is also a Director of
Banta Corporation, a printing company.
MR. FRIEDER joined Kohlberg in 1989 and was named a Principal in 1995. Mr.
Frieder is also a Director of ABTCo.
MR. GEORGE is the President of R.G. Trends, an independent consulting firm.
From 1995 through 1996. Mr. George was President and Chief Executive Officer of
Handy Andy Home Improvement Centers, Inc. From 1989 through 1995, Mr. George was
Chairman and Chief Executive Officer of Ulta(3) Cosmetics & Salon Inc., a
company which he founded.
MR. KOHLBERG has been a Principal of Kohlberg since 1987. Mr. Kohlberg is
also a Director of ABTCo and Northwestern Steel and Wire Company.
MR. MARIANI has been Chief Executive Officer of Winndevon Art Group, Inc.,
an art publisher, since 1994. From 1992 through 1993, Mr. Mariani was Chief
Executive Officer of The Garden Counsel, a national nursery association. Prior
to that time, Mr. Mariani was the President of the Nursery Product Division of
Weyerhaeuser Company.
MR. THOMPSON joined Kohlberg as a Principal in 1996. Prior to that time, Mr.
Thompson was Managing Partner of Norman Broadbent International, Inc. and
President of Nordeman Grimm, both executive recruiting firms. From 1981 to 1991,
Mr. Thompson served in various capacities at Marine Midland Bank, including
President and Chief Executive Officer.
Michael F. Vukelich and Karla D. Vukelich are married.
Upon completing the Offerings, the Company's Board of Directors will be
divided into three classes. Directors of each class will be elected at the
Annual Meeting of Stockholders of the Company (the "Annual Meeting of
Stockholders") held in the year in which the term of such class expires and will
serve thereafter for a term of three years. Messrs. George, Mariani and Brophy
will serve as Class I Directors with their terms expiring at the 1998 Annual
Meeting of Stockholders; Messrs. Vukelich, Halamuda and Bhonsle will serve as
Class II Directors with their terms expiring at the 1999 Annual Meeting of
Stockholders; and Messrs. Kohlberg, Frieder and Thompson will serve as Class III
Directors with their terms expiring at the 2000 Annual Meeting of Stockholders.
See "Description of Capital Stock--Classified Board; Board Vacancies" and
"--Stockholders Agreement."
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Board of Directors has established an Audit Committee and a Compensation
Committee. The function of the Audit Committee is to recommend annually to the
Board of Directors the appointment of independent public accountants of the
Company, discuss and review the scope and the fees of the prospective annual
audit and review the results thereof with the independent public accountants,
review and approve non-audit services of the independent public accountants,
review compliance with existing major accounting and financial policies of the
Company, review the adequacy of the financial organization of the Company and
review management's procedures and policies relative to the adequacy of the
Company's internal accounting controls. Messrs. Bhonsle, Frieder and Mariani are
the current members of the Audit Committee.
The function of the Compensation Committee is to, among other things, review
and approve annual salaries and bonuses for all executive officers and review,
approve and recommend to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto and administer the Company's options
plans. Messrs. George, Frieder and Thompson are the current members of the
Compensation Committee.
Directors are reimbursed for certain reasonable expenses incurred in
connection with attending Board or committee meetings.
41
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1997, there was no Compensation Committee of the Board of
Directors. Michael F. Vukelich, the Chairman of the Board and Chief Executive
Officer, and Jerry L. Halamuda, the President, are Directors and participated in
deliberations of the Board of Directors concerning executive officer
compensation. Following completion of the Offerings, the Board of Directors will
have a Compensation Committee consisting of Messrs. Frieder, George and
Thompson.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that each person who is or was a director or officer of
the Company shall be indemnified and held harmless by the Company against all
expense, liability and loss to the fullest extent allowable under the Delaware
General Corporation Law (the "DGCL"). In addition, the Certificate provides, to
the fullest extent allowable under the DGCL, that no director shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. Under the DGCL, liability of a director
may not be limited (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases or (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision in the Certificate is to
eliminate the rights of the Company and its stockholders, either directly or
through a stockholders' derivative suit brought on behalf of the Company, to
recover monetary damages from a director for breach of the fiduciary duty of
care as a director except in those instances described under the DGCL.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth a summary of certain
information regarding compensation paid or accrued by the Company during fiscal
1997 to the Company's Chief Executive Officer and each of the three other most
highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 during such fiscal year (collectively, the "Named
Executives"). See "--Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------ --------- --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich .......... $ 170,192 $ 181,250 $ 5,850(1) 602,609 $ 573,346(2)
Chairman of the Board and
Chief Executive Officer
Jerry L. Halamuda ............ 161,538 160,000 5,850(1) 413,382 299,104(2)
President
Robert F. Strange ............ 91,538 54,638 5,850(1) 53,361
Chief Operating Officer
Paul D. Yeager(3) ............ 51,923 69,000
Executive Vice President and
Chief Financial Officer
</TABLE>
- --------------------------
(1) Represents car allowance.
(2) Represents deferred compensation which will be paid upon the earlier to
occur of (i) the consummation of the Company's initial public offering of
Common Stock and (ii) the acquisition of a majority of the outstanding
Common Stock by any person or group of related persons (other than KCSN) at
a purchase price in excess of $1.45 per share.
(3) Mr. Yeager joined the Company in February 1997. His annual base salary was
$150,000 at June 30, 1997.
42
<PAGE>
OPTION GRANTS DURING FISCAL 1997. The following table summarizes the
options granted during fiscal 1997 to the Named Executives. Except as otherwise
indicated, all of these options were granted under the Company's 1997 Stock
Option Plan described below. No stock appreciation rights were granted to the
Named Executives during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PER SHARE OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED 1997 PRICE(1) DATE 5% 10%
- ------------------------------------ ----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich................. 395,609(3) 18.4% $ 1.45 9/7/05 $894,525 $ 1,366,679
207,000 9.6 7.17 1/1/07 2,417,589 3,849,607
Jerry L. Halamuda................... 395,609(3) 18.4 1.45 9/7/05 894,525 1,366,679
207,000 9.6 7.17 1/1/07 2,417,589 3,849,607
Robert F. Strange................... 39,561(4) 1.8 1.45 9/7/05 89,453 136,668
13,800 0.6 7.19 1/1/07 161,622 257,356
Paul D. Yeager...................... 69,000 3.2 7.19 1/1/07 802,418 1,269,475
</TABLE>
- --------------------------
(1) The exercise price of each option was the estimated fair value of the Common
Stock on the date of grant.
(2) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective
annual rates of stock appreciation shown. Potential gains are net of the
exercise price but before taxes and other expenses associated with the
exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future price of the Common Stock. Actual gains, if any, on stock option
exercises are dependent on the future financial performance of the Company,
the future performance of the Company's Common Stock and overall market
conditions. The actual value realized may be greater or less than the
potential realizable value set forth in the table.
(3) Represents options for Mr. Vukelich and Mr. Halamuda which have continued in
effect under their respective employment agreements. See "--Employment
Agreements."
(4) Issued under the Company's 1996 Stock Incentive Plan. See "--Stock Option
Plans."
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION VALUES. The
following table sets forth certain information regarding options exercised and
the number and value of unexercised options held by the Named Executives at June
30, 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1997 JUNE 30, 1997(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich....... 395,609 207,000 $ 3,382,457 $ 585,810
Jerry L. Halamuda......... 189,227 $ 1,083,357 206,382 207,000 1,764,566 585,810
Robert F. Strange......... 39,561 226,494 13,800 39,054
Paul D. Yeager............ 69,000 195,270
</TABLE>
- --------------------------
(1) Represents the value of the shares of Common Stock subject to outstanding
options, based on a fair market value of $10.00 per share, less the
aggregate option exercise price.
EMPLOYMENT AGREEMENTS
As part of the Recapitalization, the Company entered into an employment
agreement with Michael F. Vukelich, the Company's Chief Executive Officer and
Chairman of the Board. The agreement has a term of three years and will be
automatically renewed for successive one-year periods unless Mr. Vukelich or the
Company gives 90 days notice of non-renewal. As of July 1, 1997, Mr. Vukelich is
paid an annual base salary of $200,000, which is increased annually based on
increases in the consumer price index, and is
43
<PAGE>
eligible to receive an annual bonus of up to 150% of his base salary based on
the achievement of certain performance targets. The employment agreement
continues in effect an option to purchase 395,609 shares of the Company's Common
Stock for $1.45 per share and provides that the Company grant Mr. Vukelich an
option to purchase 207,000 shares of the Company's Common Stock at $7.17 per
share. The agreement also entitles Mr. Vukelich to deferred compensation in the
amount of $573,346 upon the earlier to occur of (i) the consummation of the
Company's initial public offering of Common Stock and (ii) the acquisition of a
majority of the outstanding Common Stock by any person or group of related
persons (other than KCSN) at a purchase price in excess of $1.45 per share. The
agreement terminates upon the earlier to occur of (i) non-renewal by the Company
or Mr. Vukelich, (ii) death or disability, (iii) termination for Cause (as
defined in the agreement) or (iv) termination without Cause. In the event that
the employment agreement is not renewed by the Company, the Company is obligated
to continue to pay Mr. Vukelich his base salary through June 30, 2000. In the
event that the employment agreement is terminated without Cause, the Company is
obligated to pay Mr. Vukelich his base salary through the remaining term of the
employment agreement plus his pro rata portion of the bonus paid to Mr. Vukelich
in the year prior to termination. In the event of Mr. Vukelich's death or
disability, the Company is obligated to continue to pay to Mr. Vukelich or his
estate his base salary for one year following his termination. The employment
agreement entitles Mr. Vukelich to be nominated to a seat on the Company's board
of directors so long as he owns 10% of the Common Stock.
As part of the employment agreement, Mr. Vukelich has agreed not to compete
with the Company in certain specified counties and states for the longer of one
year following termination or one year following the receipt of any severance
from the Company; provided that Mr. Vukelich may elect to waive the payment of
severance, in which event the noncompetition covenant expires one year following
termination.
As part of the Recapitalization, the Company entered into an employment
agreement with Jerry L. Halamuda, the Company's President. The agreement has a
term of three years and will be automatically renewed for successive one-year
periods unless Mr. Halamuda or the Company gives 90 days notice of non-renewal.
As of July 1, 1997, Mr. Halamuda is paid an annual base salary of $200,000,
which is increased annually based on increases in the consumer price index, and
is eligible to receive an annual bonus of up to 150% of his base salary based on
the achievement of certain performance targets. The employment agreement
continues in effect an option to purchase 206,382 shares of the Company's Common
Stock at $1.45 per share and provides that the Company grant Mr. Halamuda an
option to purchase 207,000 shares of the Company's Common Stock at $7.17 per
share. The Agreement also entitles Mr. Halamuda to deferred compensation in the
amount of $299,104 upon the earlier to occur of (i) the consummation of the
Company's initial public offering of Common Stock and (ii) the acquisition of a
majority of the outstanding Common Stock by any person or group of related
persons (other than KCSN) at a purchase price in excess of $1.45 per share. The
agreement terminates upon the earlier to occur of (i) non-renewal by the Company
or Mr. Halamuda, (ii) death or disability, (iii) termination for Cause (as
defined in the agreement) or (iv) termination without Cause. In the event that
the employment agreement is not renewed by the Company, the Company is obligated
to continue to pay Mr. Halamuda his base salary through June 30, 2000. In the
event that the employment agreement is terminated without Cause, the Company is
obligated to pay Mr. Halamuda his base salary through the remaining term of the
employment agreement plus his pro rata portion of the bonus paid to Mr. Halamuda
in the year prior to termination. In the event of Mr. Halamuda's death or
disability, the Company is obligated to continue to pay to Mr. Halamuda or his
estate his base salary for one year following his termination.
As part of the employment agreement, Mr. Halamuda has agreed not to compete
with the Company in certain specified counties and states for the longer of one
year following termination or one year following the receipt of any severance
from the Company; provided that Mr. Halamuda may elect to waive the payment of
severance, in which event the noncompetition covenant expires one year following
termination.
44
<PAGE>
STOCK OPTION PLANS
1996 STOCK INCENTIVE PLAN. In July 1996, the Board of Directors authorized,
and the stockholders of the Company approved, a stock option plan, effective
September 7, 1995, for directors, officers, employees and consultants of the
Company and its subsidiaries (the "1996 Option Plan"). Options to purchase a
total of 1,171,419 shares of Common Stock at $1.45 per share were granted under
the 1996 Option Plan. As of September 25, 1997, options to purchase 569,417 of
these shares had been exercised, and 602,002 nonqualified stock options ("NQOs")
are outstanding under the 1996 Option Plan. No further options will be granted
under the 1996 Stock Option Plan.
1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the "1997
Stock Option Plan") was adopted by the Board of Directors and approved by the
stockholders on December 31, 1996 to attract, retain and provide incentive to
executives and key employees of the Company. Options granted under the 1997
Stock Option Plan may be either incentive stock options ("ISOs") as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, or NQOs. A total
of 1,242,000 shares of Common Stock have been reserved for issuance under the
1997 Stock Option Plan.
The 1997 Stock Option Plan is administered by the Compensation Committee of
the Board of Directors which has the authority to determine the terms of the
options granted. Each option has a term specified in its option agreement;
provided, however, that no term can exceed ten years from the date of grant.
Each option is exercisable upon the fulfillment of certain conditions, including
agreement by the optionee to be bound by the Stockholders Agreement. In the case
of an ISO granted to an optionee who, at the time the option is granted, owns
stock representing more than 10% of the voting power of all outstanding classes
of stock of the Company (a "10% Optionee"), the term of the option cannot exceed
five years from the date of grant. No option granted under the 1997 Stock Option
Plan may be transferred by the optionee other than by will or the laws of
descent and distribution and each option may be exercised, during the lifetime
of the optionee, only by such optionee. In the event that an optionee's
employment terminates for any reason other than for cause, any options held
which have not yet vested will expire and become unexercisable. All of the
optionee's options which have vested shall expire and become unexercisable on
the earlier of the expiration date stated in the option agreement or the date 90
days after the termination of the optionee's employment. If an optionee is
terminated for cause prior to the later of January 1, 2000 or the third
anniversary of the date the optionee commences employment with the Company, all
options held by the optionee (whether or not vested) shall expire on the date of
termination. The number of shares under each option and the price of any shares
under such option may be adjusted in a manner consistent with any capital
adjustment resulting from a stock dividend, stock split, recapitalization,
reorganization or a combination or other change in the shares of Common Stock.
The exercise price for all ISOs granted under the 1997 Stock Option Plan
must be no less than 100% of the fair value per share on the date of grant. With
respect to a 10% Optionee, the exercise price of any option granted must be no
less than 110% of the fair market value on the date of grant. Each option is
designated in the written option agreement as either an ISO or NQO. However, to
the extent that the aggregate fair market value of shares subject to an
optionee's ISO, which become exercisable for the first time during any year,
exceeds $100,000, the excess options shall be treated as NQOs.
As of September 25, 1997, under the 1997 Stock Option Plan, there were
414,000 stock options outstanding with an exercise price of $7.17 per share and
428,493 stock options outstanding with an exercise price of $7.19 per share. The
1997 Stock Option Plan will expire in 2007 unless terminated at an earlier date
by the Board of Directors.
SPECIAL STOCK OPTION PLAN. In February 1997, the Board of Directors
authorized, and the stockholders of the Company approved, a stock option plan
for employees of Lone Star Growers, L.P., a wholly owned subsidiary of the
Company (the "Special Option Plan"). A total of 139,383 shares of Common Stock
have been reserved for issuance under the Special Option Plan. The purpose of
the Special Option Plan was to provide incentives to employees of Lone Star
Growers, L.P. in connection with the acquisition
45
<PAGE>
of Lone Star Growers Co., the predecessor to Lone Star Growers, L.P., by the
Company. Options for all of the available shares under the Special Option Plan
were granted to employees of Lone Star Growers, L.P. at the time of the
acquisition at an exercise price of $1.43 per share. No further awards will be
made under the Special Option Plan. The Special Option Plan is otherwise
identical to the 1997 Stock Option Plan.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH KOHLBERG
CONTROL BY KCSN. KCSN, an affiliate of Kohlberg, owns 4,797,716 shares of
Common Stock or 69.2% of the outstanding Common Stock as of September 25, 1997
(approximately 61.8% assuming exercise in full of the Warrants).
Due to KCSN's stock ownership in the Company, KCSN is able to control the
Company, to elect its Board of Directors and to approve any action requiring
stockholder approval, including adopting amendments to the Company's certificate
of incorporation and approving or disapproving mergers or sales of all or
substantially all of the assets of the Company. As a result of such control,
KCSN is able to effectively control all of the Company's policy decisions. See
"Risk Factors--Control by Significant Stockholders and Management" and
"Description of Capital Stock--Stockholders Agreement." As long as the
Stockholders Agreement is in effect, third parties may not be able to obtain
control of the Company through purchases of Common Stock not owned by parties to
the Stockholders Agreement.
KOHLBERG FEE AGREEMENT. The Company pays Kohlberg an annual management fee
plus expenses pursuant to a fee agreement (the "Fee Agreement") for certain
management and advisory services. Under the Fee Agreement, the annual management
fee equals the greater of $300,000 or 3% of the Company's earnings before
interest, taxes, depreciation and amortization subject to a maximum annual
payment of $750,000. The management fee is payable quarterly in advance in
installments of $75,000, with the balance payable at the end of each fiscal
year. The Fee Agreement terminates on the earlier of December 31, 2006 or the
end of the fiscal year in which Kohlberg and its affiliates hold less then 20%
of the outstanding Common Stock. In addition, Kohlberg was paid a fee of $1.5
million for services provided in connection with the Recapitalization under the
Fee Agreement. For fiscal 1997, Kohlberg was paid an aggregate of $1.67 million
under the Fee Agreement. In connection with the Offerings, the Company will pay
to Kohlberg a fee of $2.0 million to terminate its annual management fee
obligations under the Fee Agreement.
RECAPITALIZATION
As part of the Recapitalization on December 31, 1996, the Company
repurchased for cash 603,750 shares of the Company's Common Stock from M.F.
Vukelich Co., which is wholly owned by Michael F. Vukelich, at $7.17 per share
for an aggregate purchase price of approximately $4.3 million. In addition,
certain directors and employees of the Company, pursuant to a put/call option
agreement entered into at the time of the Recapitalization, have the right to
require the Company to purchase, and the Company has a corresponding right to
require the sale of, an aggregate of 786,688 shares of Common Stock at $7.17 at
varying times during 1997. As of September 25, 1997, the Company had repurchased
for cash 766,478 shares of Common Stock for an aggregate purchase price of
approximately $5.5 million from certain directors and employees as follows:
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Steven Bookspan.................................................................... 19,413
Gary Crook......................................................................... 13,190
Richard E. George.................................................................. 36,194
Dave Grimshaw...................................................................... 13,190
Jerry L. Halamuda.................................................................. 292,727
Gene Malcolm....................................................................... 27,140
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C>
Gary E. Mariani.................................................................... 67,161
Michael T. Neenan.................................................................. 20,211
John Negrete....................................................................... 9,060
Jim Tsurudome...................................................................... 13,939
Michael F. Vukelich................................................................ 254,253
</TABLE>
In addition, at the time of the Recapitalization, the Company entered into a
Stockholders Agreement and a Stockholder Repurchase Agreement granting to
certain employees and the Company rights to repurchase Common Stock upon the
occurrence of certain events. See "Description of Capital Stock-- Stockholders
Agreement" and "--Stockholder Repurchase Agreement."
MISCELLANEOUS
The Company leases a portion of its Richmond, California facility from M.F.
Vukelich Co., which is wholly owned by Michael F. Vukelich. The lease expires on
August 31, 2005. The aggregate annual rental payment under this lease for 1997
is $259,560. Under the term of the lease, rent is increased annually by 3%. The
Company believes that this rent is at fair market value for the property.
The Company also leases a building from the daughter of Michael F. Vukelich.
The aggregate annual rental payment on this lease is $14,400. The Company
believes that this rent is at fair market value for the building.
Jerry L. Halamuda is a 20% partner of Signature Trees, a California general
partnership. As part of the acquisition of the assets of Signature Trees by the
Company, Mr. Halamuda received $600,000.
All future transactions among the Company and its officers, directors and
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information regarding beneficial
ownership of Common Stock as of September 25, 1997 by (i) each person or entity
who owns of record or beneficially five percent or more of the Common Stock,
(ii) each executive officer and each director of the Company and (iii) all
executive officers and directors of the Company as a group. To the knowledge of
the Company, each of such stockholders has sole voting and investment power as
to the shares shown unless otherwise noted.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY OWNED
BENEFICIALLY ----------------------------------------
NAME OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------------------------------------------ ----------------- ------------------- -------------------
<S> <C> <C> <C>
KCSN Acquisition Company, L.P.(3)........................... 4,817,926 69.3% 61.9%
Heller Equity Capital Corporation(4)........................ 545,984 7.5 6.7
Michael F. Vukelich(5)...................................... 1,263,554 17.0 15.3
Jerry L. Halamuda(6)........................................ 368,440 5.1 4.5
Robert F. Strange(7)........................................ 51,636 * *
Paul D. Yeager(8)........................................... 224,250 3.2 2.9
Karla D. Vukelich(9)........................................ 12,938 * *
Ranjit S. Bhonsle(10).......................................
Samuel P. Frieder(10).......................................
James A. Kohlberg(10).......................................
Geoffrey A. Thompson(10)....................................
George T. Brophy(11)........................................ 25,161 * *
Richard E. George(12)....................................... 74,955 1.1 1.0
Gary E. Mariani(12)......................................... 78,975 1.1 1.0
All directors and executive officers as a group (12
persons).................................................. 2,099,909 26.8 24.3
</TABLE>
- ------------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares, subject to applicable community
property laws. Shares of Common Stock subject to options or warrants
currently exercisable within 60 days of the date hereof are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person.
(2) Assuming exercise in full of the Warrants.
(3) Includes 20,211 shares which were subject to an irrevocable proxy as of
September 25, 1997 granted to KCSN by certain members of management under a
Put/Call Option Agreement dated as of December 31, 1996. See "Certain
Transactions-- Recapitalization."
(4) Includes 367,602 shares issuable upon conversion of the Heller Note. The
address of Heller Equity Capital Corporation is 500 West Monroe Street,
Chicago, IL 60661.
(5) Includes 476,063 options to purchase Common Stock exercisable within 60 days
of the completion of the Offerings. Excludes shares held by Karla D.
Vukelich and Mark Vukelich. Mark Vukelich is Michael F. Vukelich's brother.
The address of Mr. Vukelich is 3478 Buskirk Avenue, Suite 260, Pleasant
Hill, CA 94523.
(6) Includes 355,836 stock options to purchase Common Stock exercisable within
60 days of the completion of the Offerings. Mr. Halamuda's address is 3478
Buskirk Avenue, Suite 260, Pleasant Hill, CA 94523.
(7) Includes 3,450 stock options to purchase Common Stock exercisable within 60
days of the completion of the Offerings.
(8) Includes 17,250 stock options to purchase Common Stock exercisable within 60
days of the completion of the Offerings.
(9) Includes 2,588 stock options to purchase Common Stock exercisable within 60
days of the completion of the Offerings. Excludes shares held by Michael F.
Vukelich and Mark Vukelich.
(10) Excludes 4,797,715 shares held by KCSN and 20,211 shares subject to an
irrevocable proxy in favor of KCSN. Such person disclaims beneficial
ownership of such shares. The address of KCSN is 111 Radio Circle, Mt.
Kisco, NY 10549. KCSN is an affiliate of Kohlberg. The ultimate general
partner of KCSN is a corporation owned 100% by James A. Kohlberg.
(11) Includes 25,161 stock options to purchase Common Stock exercisable within
60 days of the completion of the Offerings.
(12) Includes 2,588 stock options to purchase Common Stock exercisable within 60
days of the completion of the Offerings.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offerings, the Company will have authorized capital
of 50,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000
shares of Preferred Stock, par value $.01 per share. As of September 25, 1997,
6,937,068 shares of Common Stock were outstanding, and, upon completion of the
Offerings, 40,000 shares of Series A Preferred Stock will be outstanding.
COMMON STOCK. All shares of Common Stock currently outstanding are fully
paid and nonassessable, not subject to redemption and without preemptive (except
as provided in the Stockholders Agreement), conversion or subscription rights.
Holders of Common Stock are entitled to one vote per share on all actions
submitted to a vote of stockholders. Cumulative voting is not permitted. Holders
of Common Stock are entitled to receive cash dividends equally on a per share
basis as and when such dividends are declared by the Board of Directors from
funds legally available therefor, subject to preferential rights with respect to
any outstanding Preferred Stock. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share with each other on a ratable basis
as a single class in the remaining assets of the Company available for
distribution after payment of liabilities and satisfaction of any preferential
rights of holders of Preferred Stock. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.
WARRANTS. Upon completion of the Offerings, 825,000 Warrants will be
outstanding. Each Warrant will entitle the holder thereof to receive one fully
paid and non-assessable share of Common Stock at an exercise price of $.01 per
share, subject to certain adjustments. The Warrants will entitle the holders
thereof to purchase in the aggregate 825,000 shares of Common Stock, or
approximately 8.5% of the Common Stock, on a fully-diluted basis, as of the
completion of the Offerings. The Warrants will be exercisable prior to 5:00
p.m., New York City time, on , 2002. The exercise and transfer
of the Warrants will be subject to applicable federal and state securities laws.
PREFERRED STOCK. The authorized number of shares of Preferred Stock may be
increased or decreased by the affirmative vote of a majority of the capital
stock of the Company entitled to vote without the separate vote of holders of
Preferred Stock as a class. The Board of Directors has authority, without any
further vote or action by the stockholders, to provide for the issuance of the
shares of Preferred Stock in one or more series, to establish from time to time
the relative, participating, optional or other special rights, qualifications or
restrictions of the shares of each such series and to determine the voting
powers, if any, of such shares. The issuance of Preferred Stock could adversely
affect, among other things, the rights of current stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock. In addition, any such issuance could
have the effect of delaying, deferring or preventing a change in control of the
Company and could make the removal of the present management of the Company more
difficult. The Board of Directors has designated 100,000 shares of Preferred
Stock as Series A Preferred Stock. "See Description of Series A Preferred
Stock."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS. The Certificate and
Bylaws contain a number of provisions relating to corporate governance and to
the rights of stockholders. Certain of these provisions may be deemed to have a
potential "anti-takeover" effect in that such provisions may delay, defer or
prevent a change of control of the Company. These provisions include the
following:
CLASSIFIED BOARD; BOARD VACANCIES. The Certificate provides that the
Company's Board of Directors will be divided into three classes, with each
class, after a transitional period, serving for three years and one class being
elected each year at the annual meeting of stockholders. The Certificate and the
Bylaws provide that members of the Board of Directors may be removed only for
cause by the affirmative vote of the holders of at least a majority of the
voting power of all outstanding shares of capital stock entitled to vote
49
<PAGE>
generally in the election of directors, voting together as a single class. A
majority of the remaining directors then in office, though less than a quorum,
or the sole remaining director, will be empowered to fill any vacancy on the
Board of Directors. A majority vote of the stockholders will be required to
alter, amend or repeal the foregoing provisions. The classification of the Board
of Directors may discourage a third party from making a tender offer or
otherwise attempting to gain control of the Company and may maintain the
incumbency of the Board of Directors. See "--Stockholders Agreement" and
"Management."
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws provide that stockholders seeking to bring business
before or to nominate directors at any meeting of stockholders must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company not less than 50 days nor more than 75 days prior to such meeting, or,
if less than 60 days' notice was given for the meeting, within 10 days following
the date on which such notice was given. The Bylaws also specify certain
requirements for the proper written form of a stockholder's notice. These
provisions may preclude some stockholders from bringing matters before the
stockholders or from making nominations for directors.
CERTIFICATE AND BYLAW AMENDMENTS. The Certificate may be altered, amended
or repealed in whole or in part in accordance with Delaware law, except that
provisions in the Certificate regarding (i) election of directors, (ii) a
classified Board of Directors, (iii) removal of directors and director vacancies
and (iv) bylaw amendments may only be altered, amended or repealed upon the
affirmative vote of at least 66 2/3% of the shares of capital stock of the
Company entitled to vote generally in an election of directors. The Certificate
provides that the Bylaws may be altered, amended or repealed by the Board of
Directors or by the stockholders, except that the Bylaw provisions concerning
advance notice requirements for stockholder proposals and director nominations
may not be altered, amended or repealed and no inconsistent provision may be
adopted without the affirmative vote of 66 2/3% of the shares of capital stock
of the Company entitled to vote generally in the election of directors.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. Upon the closing of
the Offerings, the Company will be subject to Section 203 of the DGCL which
imposes restrictions on business combinations (as defined therein) with
interested stockholders (being any person who acquired 15% or more of the
Company's outstanding voting stock). In general, the Company is prohibited from
engaging in business combinations with an interested stockholder, unless (i)
before such person became an interested stockholder, the Board of Directors of
the Company approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding for purposes of determining the number of shares outstanding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or subsequent to the date on which such person became an
interested stockholder, the business combination is approved by the Board of
Directors of the Company and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the Company not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the earlier of the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of the Company's Directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who are directors prior to any person
becoming an interested stockholder during the previous three years or who were
recommended for election or elected to succeed such directors by a majority of
such directors. By restricting the ability of the Company to engage in business
combinations with an interested person, the application of Section 203 to the
Company may provide a barrier to hostile or unwanted takeovers.
50
<PAGE>
STOCKHOLDERS AGREEMENT
KCSN, Heller and all of the management stockholders (the "Stockholders") are
parties to the Stockholders Agreement which includes certain transfer
restrictions, voting agreements and registration rights which survive the
completion of the Offerings until December 31, 2006. Assuming conversion of the
Heller Note and the exercise of outstanding options by management stockholders,
the number of shares of Common Stock subject to the terms of the Stockholders
Agreement as of September 25, 1997 was 8,172,341. See "Risk Factors--Control by
Significant Stockholders and Management."
REPURCHASE RIGHTS Under the Stockholders Agreement, the Company has the
right to repurchase Common Stock and vested stock options to purchase Common
Stock held by Stockholders who are members of the Company's management
("Management Stockholders") upon the termination of such Management
Stockholder's employment with the Company. The purchase price is equal to the
fair market value (as defined in the Stockholders Agreement) of the Common
Stock, less in the case of vested options the exercise price. Subject to the
terms of the Company's debt agreements (including the Indenture) and the
Certificate of Designation, in the event a Management Stockholder's employment
is terminated as a result of death or disability, the Management Stockholder (or
his estate) may require the Company to repurchase all of the Common Stock held
by such Management Stockholder at fair market value. In the case of such a
repurchase, the Company may pay the purchase price in four equal installments on
the date of such repurchase and on the three succeeding anniversaries of such
date.
FIRST REFUSAL; PARTICIPATION RIGHTS. Subject to certain specified
exceptions, KCSN and each other Management Stockholder has a right of first
refusal over the transfer of any Common Stock held by any Management
Stockholder. Each Management Stockholder also has the right to participate on a
pro rata basis in any sales of Common Stock by KCSN or its affiliates.
VOTING AGREEMENT. The Stockholders have agreed to (i) consent to any
merger, consolidation or sales of all or substantially all of the Company's
assets involving an independent third party and approved by a majority of the
shares of Common Stock held by KSCN and (ii) vote their shares of Common Stock
to elect two members of management (which shall be Michael F. Vukelich and Jerry
L. Halamuda so long as they are employed as executive officers of the Company),
five KCSN designees and two independent designees reasonably acceptable to KCSN
as directors of the Company. Consequently, the Stockholders (assuming the
conversion of the Heller Note) will continue to have significant influence over
the policies and affairs of the Company and may be in a position to determine
the outcome of corporate actions requiring stockholder approval, including
adopting amendments to the Certificate, electing directors and approving or
disapproving mergers or sales of all or substantially all of the Company's
assets.
In addition to the voting agreement under the Stockholders Agreement, KCSN
and certain members of management are parties to a put/call option agreement to
effect the repurchase by the Company of shares of Common Stock held by such
management stockholders. Under the put/call option agreement, KCSN retained an
irrevocable proxy to vote the shares of Common Stock not yet purchased by the
Company. As of September 25, 1997, KCSN had an irrevocable proxy to vote 20,211
shares of Common Stock held by the management stockholders. The Company believes
that no shares of Common Stock will be subject to the put/call option agreement
as of January 1, 1998.
REGISTRATION RIGHTS AGREEMENT. The Stockholders are entitled to certain
rights with respect to the registration of their shares under the Securities
Act. If the Company proposes to register any Common Stock in connection with a
public offering (other than a demand registration) (a "Company Registration"),
the Stockholders are entitled to notice of such registration and are entitled to
include shares of Common Stock in such registration. Any shares proposed to be
sold by the Company in a Company Registration have priority over the
Stockholders' shares if the managing underwriter advises the Company that the
number of shares requested for inclusion exceeds the number of shares that can
be sold in an offering. In addition to Company Registrations, KCSN and Heller
(assuming conversion of the Heller Note) are
51
<PAGE>
entitled to certain demand registration rights pursuant to which they may
require the Company to file a registration statement under the Securities Act at
the Company's expense with respect to their shares of Common Stock (a "Demand
Registration"). KCSN is entitled to up to four Demand Registrations and Heller
is entitled to one Demand Registration. Subject to certain market limitations,
the management stockholders are entitled to participate in a Demand
Registration, provided that shares being sold by KCSN and Heller take priority
over the shares requested for inclusion by the management stockholders. Demand
Registrations may be requested at any time. See "Description of
Warrants--Registration" for a description of registration rights of holders of
the Warrants.
TERMINATION. Other than the provisions described above under "Voting
Agreement" and "Registration Rights Agreement," the provisions of the
Stockholders Agreement automatically terminate upon the consummation of the
Company's initial registered public offering of Common Stock under the
Securities Act. The Stockholders Agreement terminates in its entirety on
December 31, 2006.
EMPLOYEE STOCKHOLDERS AGREEMENT
Certain stockholders that are employees of the Company are party to an
Employee Stockholders Agreement dated as of January 1, 1997 (the "Employee
Stockholders Agreement") which contains certain transfer restrictions and voting
agreements which survive the completion of the Offerings. As of September 25,
1997, 440,066 shares of Common Stock were subject to the Employee Stockholders
Agreement.
REPURCHASE RIGHTS. Under the Employee Stockholders Agreement, the Company
has the right to repurchase Common Stock and vested stock options to purchase
Common Stock held by stockholders who are employees of the Company ("Employee
Stockholders") upon the termination of such Employee Stockholder's employment
with the Company. The purchase price is equal the fair market value (as defined
in the Employee Stockholders Agreement) of the Common Stock, less in the case of
vested options the exercise price; provided that in the event of termination for
cause (as defined in the Employee Stockholders Agreement) or voluntary
termination, the purchase price is equal to the lesser of fair market value and
original cost.
FIRST REFUSAL. Subject to certain specified exceptions, the Company has a
right of first refusal over the transfer of any Common Stock held by any
Employee Stockholder.
VOTING AGREEMENT. The Employee Stockholders have agreed to consent to any
merger, consolidation or sale of all or substantially all of the Company's
assets involving an independent third party and approved by a majority of the
shares of Common Stock held by KCSN.
STOCKHOLDER REPURCHASE AGREEMENT
The Company, Michael F. Vukelich and Jerry Halamuda are parties to a
Stockholder Repurchase Agreement pursuant to which the Company is required to
repurchase the Common Stock, and in certain circumstances, options to purchase
Common Stock and Common Stock acquired upon the exercise of options, held by
either Mr. Vukelich or Mr. Halamuda. For each of Mr. Vukelich and Mr. Halamuda,
such a repurchase is required in the event Mr. Vukelich's or Mr. Halamuda's
employment with the Company is terminated without cause (as defined in their
respective employment agreements) or as a result of death or disability. The
purchase price to be paid by the Company is equal to the fair market value (as
defined in the agreement) and is payable 20% in cash and the remainder in the
form of a promissory note bearing interest at the then current rate payable on a
10 year United States Treasury Note, with interest payable quarterly in arrears
and principal payable on a 10 year amortization schedule payable quarterly
commencing on the six month anniversary of the issuance of such promissory note.
Accrued and unpaid interest and principal on such promissory note is payable in
full on the fifth anniversary of issuance. Subject to the terms of the Company's
debt agreements (including the Indenture) and the Certificate of Designation,
the maturity of such promissory note will accelerate upon the consummation of
the Company's initial public
52
<PAGE>
offering of Common Stock or the disposition by the Company of all or
substantially all of its assets. In the event that the Company is prohibited by
the terms of any of the Company's debt agreements or the Certificate of
Designation from repurchasing any Common Stock, the Company has agreed to use
its reasonable commercial efforts to remove any such restrictions, and is
obligated to repurchase the maximum amount of the Common Stock which is
permitted to be repurchased. This agreement terminates automatically upon the
consummation of the Company's initial registered public offering of Common Stock
under the Securities Act.
53
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW LOAN AGREEMENT
Simultaneously with the completion of the Offerings, the Company will enter
into the New Loan Agreement. The New Loan Agreement will provide for three
separate facilities: (i) an acquisition term loan facility entitling the Company
to borrow up to $75.0 million from time to time for acquisitions until two years
following the completion of the Offerings, (ii) a revolving credit facility
entitling the Company to borrow up to $40.0 million from time to time until five
years following the completion of the Offerings, and (iii) a supplemental line
of credit entitling the Company to borrow up to $35.0 million.
The acquisition term loan facility will begin to amortize five years
following the completion of the Offerings with a final maturity seven years
following completion of the Offerings. The revolving credit facility may be used
from time to time for working capital in an amount equal to the lesser of (i)
$40.0 million and (ii) an amount equal to 85% of eligible accounts receivable
and 55% of eligible inventory. During any consecutive 30 day period falling
within the 90 day period commencing on July 1 and ending on September 30 of each
year, the Company may not have borrowings in excess of $15.0 million outstanding
under the revolving credit facility. The revolving credit facility will
terminate five years following completion of the Offerings.
The supplemental line of credit may be used by the Company for working
capital or for acquisitions; however, it may only be used for working capital if
the Company is fully drawn on the revolving credit facility and for acquisitions
after the Company has fully utilized the acquisition term loan facility.
Interest on the loans under the New Loan Agreement will bear interest, at
the Company's option, at floating rates of interest based on the prime rate or
the London interbank offer rate ("LIBOR"), plus a margin which will range from
0% to 1.25% for prime rate loans and 1% to 2.75% for LIBOR loans depending on
certain financial performance targets.
The New Loan Agreement will contain various covenants, including covenants
prohibiting or limiting the incurrence of additional indebtedness, the granting
of liens, sales of assets, capital expenditures, as well as financial covenants
and information reporting covenants and certain restrictions on the ability to
use the acquisition term loan facility.
The New Loan Agreement will contain various events of default, the
occurrence and continuance of which would entitle the lenders under the New Loan
Agreement to accelerate the maturity of all loans under the New Loan Agreement
and terminate their acquisition term loan, revolving credit and supplemental
line of credit commitments, including (i) failure to pay any principal,
interest, fees or other amounts under the New Loan Agreement, (ii) breaches of
representations and warranties, (iii) violations of covenants, (iv) bankruptcy
or insolvency, (v) unsatisfied judgments in excess of certain thresholds, (vi)
certain events giving rise to liability under the Employee Retirement Income
Security Act, and (vii) failure of Credit Agricole Indosuez, as collateral
agent, to have a first perfected priority security interest in the collateral
for the loans.
Events of default will also give the lenders the right to possess and sell
the collateral security under the New Loan Agreement to obtain funds to satisfy
outstanding obligations to the lenders.
HELLER NOTE
In connection with the Recapitalization, the Company issued to Heller an
8.0% Subordinated Convertible Note with a principal amount of $7.1 million. The
Heller Note accrues interest daily at the rate of 8.0% per annum and is payable
on December 31, 2004. Interest is payable semi-annually in cash or, at the
option of the Company, interest may be capitalized and added to the principal
amount of the note. To date, the Company has elected to capitalize interest
accruing under the Heller Note. The Heller Note is subject to mandatory
redemption prior to December 31, 2004 upon (i) a sale or issuance of capital
stock of
54
<PAGE>
the Company which results in any person or group of affiliated persons (other
than KCSN and its affiliates) possessing the voting power to elect a majority of
the Board of Directors and (ii) a sale or transfer of more than 50% of the
Company's consolidated assets or a merger or consolidation in which the holders
of the capital stock of the Company prior to such merger or consolidation do not
have the power to elect a majority of the board of directors of the surviving
entity following such merger or consolidation. Amounts owing under the Heller
Note are also subject to acceleration in the event of (a) failure to pay
principal or interest, (b) certain unremedied covenant breaches, (c) bankruptcy
or insolvency of the Company, (d) an individual final judgment in excess of
$250,000 or in the aggregate, judgments in excess of $1.0 million, (e) the
acceleration of other indebtedness of $1.0 million individually or $2.5 million
in the aggregate prior to its stated maturity, or (f) failure by the Company to
make a mandatory redemption of the Heller Note.
The Heller Note is redeemable in whole or in part by the Company upon 45
days notice to Heller. Prior to any such redemption, Heller may convert the
Heller Note into that number of shares of Common Stock computed by dividing the
principal amount to be converted, plus capitalized interest accrued on such
principal amount, by the conversion price then in effect. Upon the completion of
the Offerings, the conversion price will be $20.09.
ODA NOTE
In connection with its acquisition of Oda Nursery, Inc., the Company issued
to the stockholders of Oda Nursery, Inc. a 9% Subordinated Promissory Note (the
"Oda Note") with a principal amount of $1,000,000. The Oda Note accrues interest
daily at the rate of 9% per annum and is payable on August 31, 2004. Interest is
payable monthly in arrears. The Oda Note is subject to mandatory redemption
prior to August 31, 2004 on the nine month anniversary of the date on which the
Company completes an initial registered public offering of any class of common
stock. The Oda Note is prepayable by the Company at any time without premium or
penalty.
DESCRIPTION OF NOTES
The Notes will be issued under an indenture (the "Indenture"), to be dated
as of , 1997 by and between the Company and U.S. Trust Company of
California, N.A., as Trustee (the "Trustee"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture (a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), including the definitions of certain terms
therein and those terms made a part of the Indenture by reference to the TIA as
in effect on the date of the Indenture. The definitions of certain capitalized
terms used in the following summary are set forth below under "Certain
Definitions." For purposes of this section, references to the "Company" include
only the Company and not its Subsidiaries.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for transfer at the offices of the Registrar, which initially will be the
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of the Notes (the "Holders"). The Company
will pay principal (and premium, if any) on the Notes at the Trustee's corporate
office in New York, New York. At the Company's option, interest may be paid at
the Trustee's corporate trust office or by check mailed to the registered
address of Holders.
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PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $85,000,000 and will
mature on , 2007. Interest on the Notes will accrue at the rate of
% per annum and will be payable semiannually in cash on each and
commencing on , 1998, to the persons who are registered
Holders at the close of business on the and immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
REDEMPTION
MANDATORY REDEMPTION. The Notes will not be entitled to the benefit of any
mandatory sinking fund.
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after ,
2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. %
2003.............................................................................. %
2004.............................................................................. %
2005 and thereafter............................................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to , 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem the Notes at a redemption price equal to % of the principal amount
thereof plus accrued and unpaid interest thereon, if any, to the date of
redemption; PROVIDED that at least 65% of the principal amount originally issued
of Notes remains outstanding immediately after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity Offering,
the Company shall make such redemption not more than 120 days after the
consummation of any such Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as
is practicable (subject to the Depositary's (as defined) procedures), unless
such method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
had deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
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SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or
distribution of any kind or character is made on account of any Obligations on
the Notes, or for the acquisition of any of the Notes for cash or property or
otherwise. If any default occurs and is continuing in the payment when due,
whether at maturity, upon any redemption, by declaration or otherwise, of any
principal of, interest on, unpaid drawings for letters of credit issued in
respect of, or regularly accruing fees with respect to, any Senior Debt, no
payment of any kind or character shall be made by or on behalf of the Company or
any other Person on its or their behalf with respect to any Obligations on the
Notes or to acquire any of the Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any other Person on its behalf shall (x) make any payment of any kind or
character with respect to any Obligations on the Notes or (y) acquire any of the
Notes for cash or property or otherwise. Notwithstanding anything herein to the
contrary, in no event will a Blockage Period extend beyond 180 days from the
date the payment on the Notes was due and only one such Blockage Period may be
commenced within any 360 consecutive days. No event of default which existed or
was continuing on the date of the commencement of any Blockage Period with
respect to the Designated Senior Debt shall be, or be made, the basis for
commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
After giving effect to the Offerings and the application of the proceeds
therefrom, at September 25, 1997, the aggregate amount of Senior Debt would have
been approximately $3.4 million, the aggregate amount of PARI PASSU debt would
have been approximately $8.4 million and the Company's Subsidiaries would have
had total liabilities of approximately $12.5 million.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the
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offer described below (the "Change of Control Offer"), at a purchase price equal
to 101% of the principal amount thereof plus accrued interest to the date of
purchase.
The Indenture will provide that, prior to the mailing of the notice referred
to below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
Credit Agreement and all other Senior Debt to permit the repurchase of the Notes
as provided below. The Company shall first comply with the covenant in the
immediately preceding sentence before it shall be required to repurchase Notes
pursuant to the provisions described below.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
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CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the Incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes or (d) make any Investment (other than
Permitted Investments) (each of the foregoing actions set forth in clauses (a),
(b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of
such Restricted Payment or immediately after giving effect thereto, (i) a
Default of an Event of Default shall have occurred and be continuing or (ii) the
Company is not able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted
Payments (including such proposed Restricted Payment) made subsequent to the
Issue Date (the amount expended for such purposes, if other than in cash, being
the fair market value of such property as determined reasonably and in good
faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50%
of the cumulative Consolidated Net Income (or if cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company (excluding net cash proceeds
received from the sale of Capital Stock to employees of the Company and any of
its Subsidiaries after the Issue Date to the extent such amounts have been
applied in accordance with clause (4) of the following paragraph); plus (y)
without duplication of any amounts included in clause (iii) (x) above, 100% of
the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock (excluding, in the case of
clauses (iii) (x) and (y), any net cash proceeds from a Public Equity Offering
to the extent used to redeem the Notes); plus (z) aggregate net cash proceeds
received by the Company or any of its Subsidiaries as a distribution or
repayment with respect to, or from the sale of, Investments (other than
Permitted Investments) made after the Issue Date up to the original amount of
such Investments.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the
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application of net proceeds of a substantially concurrent sale for cash (other
than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or (B) Refinancing Indebtedness; and (4) so long as no
Default or Event of Default shall have occurred and be continuing, repurchases
by the Company of Capital Stock of the Company from employees of the Company or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees or pursuant to a
written contract or plan or pursuant to a put/call arrangement covering 20,211
shares of Common Stock in existence on the Issue Date, in an aggregate amount
not to exceed $1,000,000 in any calendar year plus an aggregate amount of net
cash proceeds received by the Company subsequent to the Issue Date from the sale
of Capital Stock to employees of the Company and any of its Subsidiaries to the
extent such proceeds have not been included in making the calculation in clause
(iii) of the immediately preceding paragraph. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph; (5) so long as no
Default or Event of Default shall have occurred and be continuing, the payment
of cash dividends on the Series A Preferred Stock commencing with the first
payment due after , 2002; and (6) so long as no Default or Event of
Default shall have occurred and be continuing, the repurchase of Series A
Preferred Stock after a Change of Control; PROVIDED that the Company has
completed the Change of Control Offer. In determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date in accordance with cause
(iii) of the immediately preceding paragraph, amounts expended pursuant to
clauses (1), (2), (4) and (5) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 70% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either (A) to prepay any Senior Debt and, in the case of any Senior Debt under
any revolving credit facility, effect a permanent reduction in the availability
under such revolving credit facility, (B) to make an investment in a similar
business or properties or assets that replace the business, properties or assets
that were the subject of such Asset Sale or in properties and assets that will
be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 366th day after
an Asset Sale or such earlier date, if any, as the Board of Directors of the
Company or of such Restricted Subsidiary determines not to apply the Net Cash
Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Proceeds Offer Trigger Date as permitted in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on a
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PRO RATA basis, that amount of Notes equal to the Net Proceeds Offer Amount at a
price equal to 100% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest thereon, if any, to the date of purchase; PROVIDED,
HOWEVER, that if at any time any non-cash consideration received by the Company
or any Restricted Subsidiary of the Company, as the case may be, in connection
with any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash consideration),
then such conversion or disposition shall be deemed to constitute an Asset Sale
hereunder and the Net Cash Proceeds thereof shall be applied in accordance with
this covenant. The Company may defer the Net Proceeds Offer until there is an
aggregate unutilized Net Proceeds Offer Amount equal to or in excess of
$5,000,000 resulting from one or more Asset Sales (at which time, the entire
unutilized Net Proceeds Offer Amount, and not just the amount in excess of
$5,000,000, shall be applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 70% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED, that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person
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or the properties or assets of the Person so acquired; (5) agreements existing
on the Issue Date to the extent and in the manner such agreements are in effect
on the Issue Date; (6) an agreement governing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement referred
to in clause (2), (4) or (5) above; PROVIDED, HOWEVER, that the provisions
relating to such encumbrance or restriction contained in any such Indebtedness
are no less favorable to the Company in any material respect as determined by
the Board of Directors of the Company in their reasonable and good faith
judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5); (7)
Indebtedness or other contractual requirements of a Receivables Subsidiary in
connection with a Qualified Receivables Transaction, provided that such
restrictions apply only to such Receivables Subsidiary; or (8) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above on the property so
acquired.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
Lien on such property, assets or proceeds that is senior in priority to such
Liens and (ii) in all other cases, the Notes are equally and ratably secured,
except for (A) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date; (B) Liens securing Senior
Debt; (C) Liens securing the Notes; (D) Liens of the Company or a Wholly Owned
Restricted Subsidiary of the Company on assets of any Subsidiary of the Company;
(E) Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
PROVIDED, HOWEVER, that such Liens (A) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (B) do not extend to
or cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so Refinanced; and (F) Permitted
Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will not
incur or suffer to exist Indebtedness that is senior in right of payment to the
Notes and subordinate in right of payment to any other Indebtedness of the
Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company shall be the surviving
or continuing corporation or (2) the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall
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expressly assume, by supplemental indenture (in form and substance satisfactory
to the Trustee), executed and delivered to the Trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on all of the
Notes and the performance of every covenant of the Notes and the Indenture on
the part of the Company to be performed or observed; (ii) immediately after
giving effect to such transaction and the assumption contemplated by clause
(i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the case
may be, (1) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(2) shall be able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "--Limitation on Incurrence of
Additional Indebtedness" covenant; (iii) immediately before and immediately
after giving effect to such transaction and the assumption contemplated by
clause (i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
and any Lien granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred or be continuing; and (iv) the
Company or the Surviving Entity shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such consolidation,
merger, sale, assignment, transfer, lease, conveyance or other disposition and,
if a supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with the applicable provisions of the
Indenture and that all conditions precedent in the Indenture relating to such
transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation or merger or any
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, in which the Company is not the continuing corporation, the
successor Person formed by such consolidation or into which the Company is
merged or to which such conveyance, lease or transfer is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under the Indenture and the Notes with the same effect as if such surviving
entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate Transactions
which are similar or part of a common plan) involving aggregate payments or
other property with a fair market value in excess of $1,000,000 shall be
approved by the Board of Directors of the Company or such Restricted Subsidiary,
as the case may be, such approval to be evidenced by a Board Resolution stating
that such Board of Directors has determined that such transaction complies with
the foregoing provisions. If the Company or any Restricted Subsidiary of the
Company enters into an Affiliate Transaction (or a series of related Affiliate
Transactions related to a common plan) that involves an aggregate fair market
value of more than $5,000,000, the Company or such Restricted Subsidiary, as the
case may be, shall, prior to the consummation thereof, obtain a favorable
opinion as to the fairness of such transaction or series of related transactions
to the Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
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(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company (including customary provisions contained in
employment agreements with executive officers of the Company) as determined in
good faith by the Company's Board of Directors or senior management; (ii)
transactions exclusively between or among the Company and any of its Wholly
Owned Restricted Subsidiaries or exclusively between or among such Wholly Owned
Restricted Subsidiaries, provided such transactions are not otherwise prohibited
by the Indenture; (iii) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including pursuant to
any amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the Holders in
any material respect than the original agreement as in effect on the Issue Date;
(iv) Restricted Payments permitted by the Indenture; (v) the payments by the
Company under that certain lease of its Richmond, California facility between
the Company and M. F. Vukelich Co. dated as of December 1, 1995, as amended on
December 13, 1995; and (vi) the payments by the Company under that certain
residential lease rental agreement and deposit receipt between the Company and
Michael F. Vukelich, as guardian of Trisha Vukelich, dated as of December 13,
1995.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not
permit any of its Restricted Subsidiaries, directly or indirectly, by way of the
pledge of any intercompany note or otherwise, to assume, guarantee or in any
other manner become liable with respect to any Indebtedness of the Company or
any other Restricted Subsidiary of the Company (other than (A) Indebtedness and
other obligations under the Credit Agreement, (B) Permitted Indebtedness of a
Restricted Subsidiary of the Company, (C) Indebtedness under Currency Agreements
in reliance on clause (v) of the definition of Permitted Indebtedness, or (D)
Interest Swap Obligations incurred in reliance on clause (iv) of the definition
of Permitted Indebtedness), unless, in any such case (a) such Restricted
Subsidiary executes and delivers a supplemental indenture to the Indenture,
providing a guarantee of payment of the Notes by such Restricted Subsidiary (the
"Guarantee") and (b) (x) if any such assumption, guarantee or other liability of
such Restricted Subsidiary is provided in respect of Senior Debt, the guarantee
or other instrument provided by such Restricted Subsidiary in respect of such
Senior Debt may be superior to the Guarantee pursuant to subordination
provisions no less favorable to the Holders of the Notes than those contained in
the Indenture and (y) if such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Indebtedness that is expressly
subordinated to the Notes, the guarantee or other instrument provided by such
Restricted Subsidiary in respect of such subordinated Indebtedness shall be
subordinated to the Guarantee pursuant to subordination provisions no less
favorable to the Holders of the Notes than those contained in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon: (i) the unconditional release of
such Restricted Subsidiary from its liability in respect of the Indebtedness in
connection with which such Guarantee was executed and delivered pursuant to the
preceding paragraph; or (ii) any sale or other disposition (by merger or
otherwise) to any Person which is not a Restricted Subsidiary of the Company of
all of the Company's Capital Stock in, or all or substantially all of the assets
of, such Restricted Subsidiary; PROVIDED that (a) such sale or disposition of
such Capital stock or assets is otherwise in compliance with the terms of the
Indenture and (b) such assumption, guarantee or other liability of such
Restricted Subsidiary has been released by the holders of the other Indebtedness
so guaranteed.
CONDUCT OF BUSINESS. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or related to the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the Issue Date.
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REPORTS TO HOLDERS. The Indenture will provide that the Company will
deliver to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA Section
314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer) (whether or not such
payment shall be prohibited by the subordination provisions of the
Indenture);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default with
such notice requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company,
or the acceleration of the final stated maturity of any such Indebtedness if
the Aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$5,000,000 or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5,000,000
(excluding any amounts covered by insurance as to which the insurer has
acknowledged coverage) shall have been rendered against the Company or any
of its Restricted Subsidiaries and such judgments remain undischarged,
unpaid or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or 5 business days after receipt by the
Company and the Representative under the Credit Agreement of such Acceleration
Notice. If an Event of Default specified in clause (vi) above with respect to
the Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued
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and unpaid interest on all of the outstanding Notes shall IPSO FACTO become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an Officers' Certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or its Subsidiaries, as such, shall have any liability for any obligations of
the Company under the Notes, the Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance
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provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the Note.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the
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Trustee for cancellation, for principal of, premium, if any, and interest on the
Notes to the date of deposit together with irrevocable instructions from the
Company directing the Trustee to apply such funds to the payment thereof at
maturity or redemption, as the case may be; (ii) the Company has paid all other
sums payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including to
cure ambiguities, defects or inconsistencies or to comply with requirements of
the Commission in order to maintain the qualification of the Indenture under the
TIA, so long as such change does not, in the opinion of the Trustee, adversely
affect the rights of any of the Holders in any material respect. In formulating
its opinion on such matters, the Trustee will be entitled to rely on such
evidence as it deems appropriate, including, without limitation, solely on an
opinion of counsel. Other modifications and amendments of the Indenture may be
made with the consent of the Holders of a majority in principal amount of the
then outstanding Notes issued under the Indenture, except that, without the
consent of each Holder affected thereby, no amendment may (with respect to any
Notes held by a non-consenting Holder): (i) reduce the amount of Notes whose
Holders must consent to an amendment; (ii) reduce the rate of or change or have
the effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes (other than a payment required by the "Change of
Control" or "Limitation on Asset Sales" covenants); (v) make any change in
provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of Notes to waive Defaults or Events of Default; or
(vi) modify or change any provision of the Indenture or the related definitions
affecting the subordination or ranking of the Notes in a manner which adversely
affects the Holders.
GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be regulated thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
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BOOK-ENTRY; DELIVERY AND FORM
The Notes will be issued in the form of one or more fully registered global
certificates (the "Global Certificates"). The Global Certificates will be
deposited with, or with the Trustee on behalf of, The Depository Trust Company,
New York, New York (the "Depositary") and registered in the name of the
Depositary's nominee. The Depositary will maintain the Notes in denominations of
$1,000 and integral multiples thereof through its book-entry facilities.
Except as set forth below, the Global Certificates may be transferred, in
whole and not in part, only to the Depositary, another nominee of the Depositary
or to a successor of the Depositary or its nominee.
The Depositary has advised the Company and the Underwriters as follows: It
is a limited-purpose trust company organized under the Banking Law of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities for its participating
organizations (the "Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own the Depositary. Access to the
Depositary's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not Participants may beneficially own securities
held by the Depositary only through Participants or indirect participants.
The Depositary has also advised that, pursuant to procedures established by
it, (i) upon the issuance by the Company of the Notes, the Depositary will
credit the accounts of Participants designated by the Underwriters with the
principal amount of the Notes purchased by the Underwriters and (ii) ownership
of beneficial interests in the Global Certificates will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depositary (with respect to Participants' interests), the Participants and
the indirect participants. A beneficial owner is the person who has the right to
sell, transfer or otherwise dispose of an interest in the Notes and the right to
receive the proceeds therefrom, as well as principal, premium (if any) and
interest payable in respect to the Notes. The beneficial owner must rely on the
foregoing arrangements to evidence its interest in the Notes. Beneficial
ownership of the Notes may be transferred only by complying with the procedures
of a beneficial owner's Participant (e.g., a brokerage firm) and the Depositary.
The laws of some states require that certain persons take physical delivery in
definitive form of securities which they own. Consequently, the ability to
transfer beneficial interests in the Global Certificates is limited to such
extent.
So long as a nominee of the Depositary or its nominee is the registered
owner of the Global Certificates, the Depositary or such nominee will be
considered the absolute owner or holder of the Notes for all purposes under the
Indenture and any applicable laws. Except as provided below, owners of
beneficial interests in the Global Certificates will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Notes in definitive form and will not be considered the
owners or holders thereof under the Indenture.
All rights of ownership must be exercised through the Depositary and the
book-entry system, and notices that are to be given to registered owners by the
Company or the Trustee will be given only to the Depositary. It is expected that
the Depositary will forward notices to the Participants who will in turn forward
notices to the beneficial owners. Neither the Company, the Trustee, the paying
agents nor the Notes registrars will have any responsibility or obligation to
assure that any notices are forwarded by the Depositary to any Participant or by
any Participant to the beneficial owners. Nether the Company, the Trustee, the
paying agents nor the Notes registrars will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Global
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Certificates, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Principal and interest payments on the Global Certificates registered in the
name of the Depositary's nominee will be made by the Company, either directly or
through a paying agent, to the Depositary's nominee as the registered owner of
the Global Certificates. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes are registered as the
owners of such Notes for the purpose of receiving payments of principal and
interest on such Notes and for all other purposes whatsoever. Therefore, neither
the Company, the Trustee or any paying agent has any direct responsibility or
liability for the payment of principal or interest on the Notes to owners of
beneficial interests in the Global Certificates. The Depositary has advised the
Company and the Trustee that its present practice upon receipt of any payment of
principal or interest is to credit immediately the accounts of the Participants
with payment in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the Global Certificates as shown on the
records of the Depositary. Payments by Participants and indirect participants to
owners of beneficial interests in the Global Certificates will be governed by
standing instructions and customary practices as is now the case with securities
held for the accounts of customers in bearer form or registered in "street name"
and will be the responsibility of such Participants or indirect participants.
As long as the Notes are represented by the Global Certificates, the
Depositary's nominee will be the holder of the Notes and therefore will be the
only entity that can exercise a right to repayment or repurchase of the Notes.
See "--Change of Control" and "--Certain Covenants--Limitation on Asset Sales."
Notice by Participants or indirect participants or by owners of beneficial
interests in the Global Certificates held through such Participants or indirect
participants of the exercise of the option to elect repayment of beneficial
interest in the Notes represented by the Global Certificates must be transmitted
to the Depositary in accordance with its procedures on a form required by the
Depositary and provided to Participants. In order to ensure that the
Depositary's nominee will timely exercise a right to repayment with respect to a
particular Note, the beneficial owner of such Notes must instruct the broker or
other Participant or indirect participant through which it holds an interest in
such Note to notify the Depositary of its desire to exercise a right to
repayment. Different firms have different deadlines for accepting instructions
from their customers and, accordingly, each beneficial owner should consult the
broker or other Participant or indirect participant through which it holds an
interest in a Note in order to ascertain the deadline by which such an
instruction must be given in order for timely notice to be delivered to the
Depositary. The Company will not be liable for any delay in delivery of notices
of the exercise of the option to elect repayment.
The Company will issue Notes in definitive form in exchange for the Global
Certificates if, and only if, either (i) the Depositary is at any time unwilling
or unable to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, (ii) the Company executes or delivers to the
Trustee and the Notes registrar an Officers' Certificate stating that such
Global Certificate shall be so exchangeable or (iii) an Event of Default has
occurred and is continuing and the applicable Notes registrar has received a
request from the Depositary to issue Notes in definitive form in lieu of all or
a portion of the Global Certificates. In either instance, an owner of a
beneficial interest in the Global Certificate will be entitled to have the
applicable Notes equal in principal amount or principal amount at maturity, as
the case may be, to such beneficial interest registered in its name and will be
entitled to physical delivery of such Notes in definitive form. Notes so issued
in definitive form will be issued in denominations of $1,000 and integral
multiples thereof and will be issued in registered form only, without coupons.
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DESCRIPTION OF UNITS
Each Unit being offered will consist of one share of Series A Preferred
Stock and Warrants to purchase 20.625 shares of Common Stock. The Series A
Preferred Stock and Warrants will be separately transferable. As used in this
Description of Units, the "Description of Series A Preferred Stock" and
"Description of Warrants," the term "Company" refers to Color Spot Nurseries,
Inc., excluding its Subsidiaries.
DESCRIPTION OF SERIES A PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the Series A Preferred Stock.
The terms of the Series A Preferred Stock will be set forth in the Certificate
of Designation, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. This summary is not intended to be
complete and is subject to, and qualified in its entirety by reference to, the
Certificate of Incorporation and the Certificate of Designation, including the
definitions of certain terms therein. The definitions of certain terms used in
the following summary are set forth below under "Certain Definitions."
Pursuant to the Certificate of Designation, 100,000 shares of Series A
Preferred Stock with a liquidation preference of $1,000 per share (the
"Liquidation Preference") will be authorized for issuance. The Series A
Preferred Stock will, when issued, be fully paid and nonassessable, and holders
thereof will have no preemptive rights in connection therewith.
The Liquidation Preference of the Series A Preferred Stock is not
necessarily indicative of the price at which shares of the Series A Preferred
Stock will actually trade at or after the time of their issuance, and the Series
A Preferred Stock may trade at prices below its Liquidation Preference. The
market price of the Series A Preferred Stock can be expected to fluctuate with
changes in the financial markets and economic conditions, the financial
condition and prospects of the Company and other factors that generally
influence the market prices of securities.
The transfer agent for the Series A Preferred Stock will be American Stock
Transfer and Trust Company unless and until a successor is selected by the
Company (the "Transfer Agent").
RANKING
The Series A Preferred Stock will rank senior in right of payment to all
other classes or series of Capital Stock of the Company as to dividends and upon
liquidation, dissolution or winding up of the Company. The Certificate of
Designation will provide that the Company may not, without the consent of the
holders of a majority of the then outstanding shares of Series A Preferred
Stock, authorize, create (by way of reclassification or otherwise) or issue any
class or series of Capital Stock of the Company ranking on a parity with the
Series A Preferred Stock ("Parity Securities") or any obligation or security
convertible or exchangeable into or evidencing a right to purchase, shares of
any class or series of Parity Securities. The Certificate of Designation will
provide that the Company may not, without the consent of the holders of at least
two-thirds of the then outstanding shares of Series A Preferred Stock,
authorize, create (by way of reclassification or otherwise) or issue any class
or series of Capital Stock of the Company ranking senior to the Series A
Preferred Stock ("Senior Securities") or any obligation or security convertible
or exchangeable into or evidencing a right to purchase, shares of any class or
series of Senior Securities.
DIVIDENDS
The holders of shares of the Series A Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Company legally available therefor, cumulative preferential
dividends from the issue date of the Series A Preferred Stock accruing at the
rate of _% of the Liquidation Preference per share per annum (subject to
increase as set forth below under
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"--Increased Dividend Rights"), payable quarterly in arrears on each ,
, and or, if any such date is not a Business Day, on
the next succeeding Business Day (each, a "Dividend Payment Date"), to the
holders of record as of the next preceding , , and
(each, a "Record Date"). On each Dividend Payment Date occurring on or
prior to , 2002, dividends may be paid, at the Company's option, in
cash or by the issuance of additional shares of Series A Preferred Stock
(including fractional shares) having an aggregate Liquidation Preference equal
to the amount of such dividends. The issuance of such additional shares of
Series A Preferred Stock will constitute "payment" of the related dividend for
all purposes of the Certificate of Designation. The first dividend on the Series
A Preferred Stock will be payable on , 1998. Dividends payable on the
Series A Preferred Stock will be computed on the basis of a 360-day year
consisting of twelve 30-day months and will be deemed to accrue on a daily
basis. For a discussion of certain federal income tax considerations relevant to
the payment of dividends on the Series A Preferred Stock, see "Certain Federal
Income Tax Considerations--Distributions on Series A Preferred Stock."
INCREASED DIVIDEND RIGHTS. The Certificate of Designation will provide that
upon (a) the failure of the Company to satisfy any mandatory redemption or
repurchase obligation with respect to the Series A Preferred Stock; (b) the
failure of the Company to make a Series A Change of Control Offer on the terms
and in accordance with the provisions described below under the caption
"--Change of Control;" (c) the failure of the Company to comply with any of the
other covenants or agreements (other than those covenants and agreements
described under "--Voting Rights") set forth in the Certificate of Designation
and the continuance of such failure for 30 consecutive days or more; or (d)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company (or the payment of which is guaranteed by the Company or
any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the Issue Date, which default (i) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
at maturity or prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (ii) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5,000,000 or more (each of the events described in clauses (a), (b), (c) and
(d) being referred to herein as an "Increased Dividend Triggering Event"), then
cumulative preferential dividends of the Series A Preferred Stock will accrue at
a rate of _% of the Liquidation Preference per share per annum from the date of
such Increased Dividend Triggering Event until such Increased Dividend
Triggering Event is cured.
Dividends on the Series A Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that the Company will take all actions required or
permitted under the Delaware General Corporation Law (the "DGCL") to permit the
payment of dividends on the Series A Preferred Stock, including, without
limitation, through the revaluation of its assets in accordance with the DGCL
and to make or keep funds legally available for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Series A
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Series A Preferred Stock. Unless full cumulative dividends on all
outstanding shares of Series A Preferred Stock for all past dividend periods
shall have been declared and paid, or declared and a sufficient sum for the
payment thereof set apart, then: (i) no dividend (other than a dividend payable
solely in shares of any class of stock ranking junior to the Series A Preferred
Stock as to the payment of dividends and as to rights in
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liquidation, dissolution or winding up of the affairs of the Company ("Junior
Securities")) shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any shares of Junior Securities, other than a
distribution consisting solely of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities) by the
Company or any of its Restricted Subsidiaries; and (iv) no monies shall be paid
into or set apart or made available for a sinking or other like fund for the
purchase, redemption or other acquisition or retirement for value of any shares
of Junior Securities by the Company or any of its Restricted Subsidiaries.
Holders of the Series A Preferred Stock will not be entitled to any dividends,
whether payable in cash, property or stock, in excess of the full cumulative
dividends as herein described.
The Indenture and the Credit Agreement contain, and any future credit
agreements or other agreements relating to Indebtedness to which the Company
becomes a party may contain, restrictions on the ability of the Company to pay
dividends on the Series A Preferred Stock.
VOTING RIGHTS
Holders of record of shares of the Series A Preferred Stock will have no
voting rights, except as required by law and as provided in the Certificate of
Designation. The Certificate of Designation will provide that upon the
accumulation of accrued and unpaid dividends on the outstanding Series A
Preferred Stock in an amount equal to six full quarterly dividends (whether or
not consecutive) (the events described above being referred to herein as a
"Voting Rights Triggering Event"), then the number of members of the Company's
Board of Directors will be immediately and automatically increased by one unless
there is a vacancy on the Company's Board of Directors, and the holders of a
majority of the outstanding shares of Series A Preferred Stock, voting as a
separate class, will be entitled to elect one member to the Board of Directors
of the Company. Voting rights arising as a result of a Voting Rights Triggering
Event will continue until such time as all dividends in arrears on the Series A
Preferred Stock are paid in full, at which time the term of office of any such
directors so elected shall terminate and such director shall be deemed to have
resigned.
In addition, as provided above under "--Ranking," the Company may not
authorize, create (by way of reclassification or otherwise) or issue (i) any
Parity Securities, or any obligation or security convertible into or evidencing
the right to purchase any Parity Securities, without the affirmative vote or
consent of the holders of a majority of the then outstanding shares of Series A
Preferred Stock and (ii) any Senior Securities, or any obligation or security
convertible into or evidencing the right to purchase Senior Securities, without
the affirmative vote or consent of the holders of at least two-thirds of the
then outstanding shares of Series A Preferred Stock, in each case voting as one
class.
REDEMPTION
MANDATORY REDEMPTION. On , 2008 (the "Mandatory Redemption
Date"), the Company will be required to redeem (subject to the legal
availability of funds therefor) all outstanding shares of Series A Preferred
Stock at a price in cash equal to the Liquidation Preference thereof, plus
accrued and unpaid dividends, if any, to the date of redemption. The Company
will not be required to make sinking fund payments with respect to the Series A
Preferred Stock. The Certificate of Designation will provide that the Company
will take all actions required or permitted under Delaware law to permit such
redemption.
OPTIONAL REDEMPTION. The Series A Preferred Stock may not be redeemed at
the option of the Company prior to , 2002, except as set forth below.
The Series A Preferred Stock may be redeemed, in whole or in part, at the option
of the Company on or after , 2002, at the redemption prices specified
below (expressed as percentages of the Liquidation Preference thereof), in
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each case, together with accrued and unpaid dividends, if any, to the date of
redemption, upon not less than 30 nor more than 60 days' prior written notice,
if redeemed during the 12-month period commencing on of each of the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR RATE
- --------------------------------------------------------------------------------- ------------
<S> <C>
2002............................................................................. %
2003............................................................................. %
2004............................................................................. %
2005............................................................................. %
2006 and thereafter.............................................................. 100.00%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERING. At any time, or from time
to time, on or prior to , 2002, the Company may, at its option, use
the net cash proceeds of the first Public Equity Offering to redeem the Series A
Preferred Stock at a redemption price equal to _% of the Liquidation Preference
together with accrued and unpaid dividends, if any, to the date of redemption.
In order to effect the foregoing redemption with the proceeds of such Public
Equity Offering, the Company shall make such redemption not more than 120 days
after the consummation of such Public Equity Offering.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company or reduction or decrease in its Capital Stock
resulting in a distribution of assets to the holders of any class or series of
the Company's Capital Stock (a "reduction or decrease in Capital Stock"), each
holder of shares of the Series A Preferred Stock will be entitled to payment out
of the assets of the Company available for distribution of an amount equal to
the Liquidation Preference per share of Series A Preferred Stock held by such
holder, plus accrued and unpaid dividends, if any, to the date fixed for
liquidation, dissolution, winding up or reduction or decrease in Capital Stock,
before any distribution is made on any Junior Securities, including, without
limitation, Common Stock. After payment in full of the Liquidation Preference
and all accrued dividends, if any, to which holders of Series A Preferred Stock
are entitled, such holders will not be entitled to any further participation in
any distribution of assets of the Company. However, neither the voluntary sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Company or reduction or decrease in Capital
Stock, unless such sale, conveyance, exchange or transfer shall be in connection
with a liquidation, dissolution or winding up of the business of the Company or
reduction or decrease in Capital Stock.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Series A
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of the shares of the Series A Preferred Stock.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of shares of Series
A Preferred Stock will have the right to require the Company to repurchase all
or any part (but not, in the case of any holder requiring the Company to
purchase less than all of the shares of Series A Preferred Stock held by such
holder, any fractional shares) of such holder's Series A Preferred Stock
pursuant to the offer described below (the "Series A Change of Control Offer")
at an offer price in cash equal to 101% of the aggregate Liquidation Preference
thereof plus accrued and unpaid dividends, if any, thereon to the date of
purchase (the "Series A Change of Control Payment").
The Certificate of Designation will provide that within 90 days following
any Change of Control, the Company will send, by first class mail, a notice to
each holder describing the transaction or transactions
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that constitute the Change of Control and offering to repurchase all outstanding
shares of Series A Preferred Stock pursuant to the procedures required by the
Certificate of Designation and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Series A
Preferred Stock as a result of a Change of Control.
On the Series A Change of Control Payment Date, the Company will, to the
extent lawful, (1) accept for payment all shares of Series A Preferred Stock or
portions thereof properly tendered pursuant to the Series A Change of Control
Offer, (2) deposit with the Paying Agent an amount equal to the Series A Change
of Control Payment in respect of all shares of Series A Preferred Stock or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Transfer Agent the shares of Series A Preferred Stock so accepted together with
an Officers' Certificate stating the aggregate Liquidation Preference of the
shares of Series A Preferred Stock or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each holder of Series A
Preferred Stock so tendered the Series A Change of Control Payment for such
Series A Preferred Stock, and the Transfer Agent will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a new certificate
representing the shares of Series A Preferred Stock equal in Liquidation
Preference amount to any unpurchased portion of the shares of Series A Preferred
Stock surrendered, if any. The Company will publicly announce the results of the
Series A Change of Control Offer on or as soon as practicable after the Series A
Change of Control Payment Date.
The Indenture and the Credit Agreement prohibit, and any future credit
agreements or other agreements relating to Indebtedness to which the Company
becomes a party may prohibit, the Company from purchasing any Series A Preferred
Stock prior to its maturity. Any future credit agreements or other agreements
relating to Indebtedness to which the Company becomes a party may provide that
certain change of control events with respect to the Company would constitute a
default thereunder. In the event a Change of Control occurs at a time when the
Company is prohibited from purchasing Series A Preferred Stock, the Company
could seek the consent of its lenders to the purchase of Series A Preferred
Stock or could attempt to refinance the borrowings that contain such
prohibition. The Certificate of Designation will provide that, prior to
complying with the provisions of this covenant, but in any event within 90 days
following a Change of Control, the Company will either repay all outstanding
Indebtedness or obtain the requisite consents, if any, under all agreements
governing outstanding Indebtedness to permit the repurchase of Series A
Preferred Stock required by this covenant. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing Series A Preferred Stock. In such case, an Increased Dividend
Triggering Event will occur. The Company will not repurchase or redeem any
Series A Preferred Stock pursuant to the Change of Control provisions prior to
the Company's offer to repurchase the Notes pursuant to the Change of Control
covenants in the Indenture. See "Description of Notes--Change of Control."
The Company will not be required to make a Series A Change of Control Offer
to the holders of Series A Preferred Stock upon a Change of Control if a third
party makes the Series A Change of Control Offer described above in the manner,
at the times and otherwise in compliance with the requirements set forth in the
Certificate of Designation and purchases all shares of Series A Preferred Stock
validly tendered and not withdrawn under such Series A Change of Control Offer.
AMENDMENT
The Certificate of Designation shall not be amended, either directly or
indirectly, or through merger or consolidation with another entity, in any
manner that would alter or change the powers, preferences or special rights of
the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority of the outstanding Series A
Preferred Stock .
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CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Certificate of Designation provides that the
Company and its Restricted Subsidiaries may not, directly or indirectly:
(i) declare or pay any dividend or make any distribution in respect of
any Equity Interests of the Company that are Junior Securities or of any of
its Subsidiaries other than dividends or distributions payable (A) in Junior
Securities of the Company that are not Disqualified Capital Stock or (B) to
the Company or any Subsidiary;
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company that are Junior Securities or of any of its
Subsidiaries or other Affiliates of the Company (other than any such Equity
Interests owned by the Company or any Subsidiary);
(iii) make any Investment (other than Permitted Investments);
each of the foregoing actions set forth in clauses (i), (ii) and (iii) above
being referred to as a "Stock Restricted Payment," unless, at the time of such
Stock Restricted Payment:
(A) no Increased Dividend Triggering Event or Voting Rights
Triggering Event has occurred and is continuing or would occur as a
consequence thereof;
(B) the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "--Incurrence
of Indebtedness and Issuance of Disqualified Capital Stock" covenant; and
(C) such Stock Restricted Payment, together with the aggregate of all
other Stock Restricted Payments made by the Company and its Subsidiaries
after the Issue Date (the amount expended for such purposes if other than
in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company),
is less than the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus
100% of such loss) of the Company earned subsequent to the Issue Date and
on or prior to the date the Stock Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting period);
plus (x) 100% of the aggregate net cash proceeds received by the Company
from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company (excluding net
cash proceeds received from the sale of Capital Stock to employees of the
Company and any of its Subsidiaries after the Issue Date to the extent
such amounts have been applied in accordance with clause (4) of the
following paragraph); plus (y) without duplication of any amounts
included in clause (C) (x) above, 100% of the aggregate net cash proceeds
of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (C) (x) and
(y), any net cash proceeds from a Public Equity Offering to the extent
used to redeem the Notes or the Series A Preferred Stock); plus (z)
aggregate net cash proceeds received by the Company or any of its
Subsidiaries as a distribution or repayment with respect to, or from the
sale of, Investments (other than Permitted Investments) made after the
Issue Date up to the original amount of such Investments.
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Notwithstanding the foregoing, the provisions set forth above in the
immediately preceding paragraph will not prohibit: (1) the payment of any
dividend within 60 days after the date of declaration thereof, if at such date
of declaration such payment would have complied with the provisions of the
Certificate of Designation; (2) so long as no Increased Dividend Triggering
Event or Voting Rights Triggering Event shall have occurred and be continuing,
the acquisition of any Junior Securities of the Company either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital Stock
of the Company; and (3) so long as no Increased Dividend Triggering Event or
Voting Rights Triggering Event shall have occurred and be continuing,
repurchases by the Company of Capital Stock of the Company from employees of the
Company or any of its Subsidiaries or their authorized representatives upon the
death, disability or termination of employment of such employees or pursuant to
a written contract or plan, in an aggregate amount not to exceed $1,000,000 in
any calendar year plus an aggregate amount of net cash proceeds received by the
Company subsequent to the Issue Date from the sale of Capital Stock to employees
of the Company and any of its Subsidiaries to the extent such proceeds have not
been included in making the calculation in clause (C) of the immediately
preceding paragraph. In determining the aggregate amount of Stock Restricted
Payments made subsequent to the Issue Date in accordance with clause (C) of the
immediately preceding paragraph, amounts expended pursuant to clauses (1), (2)
and (3) shall be included in such calculation.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause an Increased Dividend Triggering
Event. For purposes of making such determination, all outstanding Investments by
the Company and its Subsidiaries (except to the extent repaid in cash) in such
Subsidiary so designated will be deemed to be Stock Restricted Payments at the
time of such designation and will reduce the amount available for Stock
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the time
of such designation, (y) the fair market value of such Investments at the time
of such designation and (z) the original fair market value of such Investments
at the time they were made. Such designation will only be permitted if such
Stock Restricted Payment would be permitted at such time.
INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED CAPITAL
STOCK. The Certificate of Designation will provide that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur"), any Indebtedness (other than Permitted
Indebtedness) or issue any Disqualified Capital Stock; PROVIDED, HOWEVER, that
if no Increased Dividend Triggering Event or Voting Rights Triggering Event
shall have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness or the issuance of Disqualified Capital
Stock, the Company may incur Indebtedness (including, without limitation,
Acquired Indebtedness) or issue Disqualified Capital Stock and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if on
the date of the Incurrence of such Indebtedness, or the issuance of Disqualified
Capital Stock, after giving effect to the incurrence or issuance thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to
1.0.
MERGER, CONSOLIDATION OR SALE OF ASSETS. The Certificate of Designation
will provide that the Company may not consolidate or merge with or into (whether
or not the Company is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another corporation, Person or
entity unless (i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) if the Company is not the Surviving Corporation, the Series A
Preferred Stock shall be converted into or exchanged for and shall become shares
of such successor, transferee or resulting Person, having in respect of such
successor, transferee or resulting Person
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the same powers, preferences and relative participating, optional or other
special rights and the qualifications, limitations or restrictions thereon, that
the Series A Preferred Stock had immediately prior to such transaction; (iii)
immediately after such transaction no Increased Dividend Triggering Event or
Voting Rights Triggering Event exists; and (iv) the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Fixed Charge
Coverage Ratio set forth in the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Capital
Stock."
TRANSACTIONS WITH AFFILIATES. The Certificate of Designation will provide
that (a) the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction or series of related transactions (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with, or for the benefit of, any of its Affiliates (each an "Affiliate
Transaction"), other than (x) Affiliate Transactions permitted under paragraph
(b) below and (y) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $1,000,000 shall be approved by the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $5,000,000, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Board of Directors.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company (including customary provisions contained in
employment agreements with executive officers of the Company) as determined in
good faith by the Company's Board of Directors or senior management; (ii)
transactions exclusively between or among the Company and any of its Wholly
Owned Restricted Subsidiaries or exclusively between or among such Wholly Owned
Restricted Subsidiaries, provided such transactions are not otherwise prohibited
by the Certificate of Designation; (iii) any agreement as in effect as of the
Issue Date or any amendment thereto or any transaction contemplated thereby
(including pursuant to any amendment thereto) in any replacement agreement
thereto so long as any such amendment or replacement agreement is not more
disadvantageous to the holders of Series A Preferred Stock in any material
respect than the original agreement as in effect on the Issue Date; (iv) Stock
Restricted Payments permitted by the Certificate of Designation; (v) the
payments by the Company under that certain lease of its Richmond, California
facility between the Company and M. F. Vukelich Co. dated as of December 1,
1995, as amended on December 13, 1995; and (vi) the payments by the Company
under that certain residential lease rental agreement and deposit receipt
between the Company and Michael F. Vukelich, as guardian of Trisha Vukelich,
dated as of December 13, 1995.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Certificate of Designation will provide that the Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or permit to exist or become effective any encumbrance
or restriction on the ability of any Restricted Subsidiary of the Company to (a)
pay dividends or make any
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other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Certificate of Designation; (3) customary
non-assignment provisions of any contract or any lease governing a leasehold
interest of any Restricted Subsidiary of the Company; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or the properties or assets of the Person so acquired; (5) agreements
existing on the Issue Date to the extent and in the manner such agreements are
in effect on the Issue Date; (6) an agreement governing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (2), (4) or (5) above; PROVIDED, HOWEVER, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5); (7)
Indebtedness or other contractual requirements of a Receivables Subsidiary in
connection with a Qualified Receivables Transaction, provided that such
restrictions apply only to such Receivables Subsidiary; or (8) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above on the property so
acquired.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
REPORTS. The Certificate of Designation provides that the Company will mail
to holders of Series A Preferred Stock within 15 days after it files them with
the Commission copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company is not required or shall cease to be
required to file SEC Reports, pursuant to the Exchange Act, the Company will
nevertheless continue to file such reports with the Commission (unless the
Commission will not accept such a filing). In the event the Company is not
required or shall cease to be required to file SEC Reports and the Commission
will not accept the filing of SEC Reports, so long as any Series A Preferred
Stock are outstanding, the Company will furnish copies of such SEC Reports to
the holders of Series A Preferred Stock at the time the Company is required to
make such information available to investors who request it in writing.
BOOK-ENTRY, DELIVERY AND FORM; CERTIFICATED SECURITIES
The Series A Preferred Stock will be issued in the form of one or more fully
registered global certificates (the "Global Certificates"). The Global
Certificates will be deposited with the Depositary and registered in the name of
the Depositary's nominee.
Except as set forth below, the Global Certificates may be transferred, in
whole and not in part, only to the Depositary, another nominee of the Depositary
or to a successor of the Depositary or its nominee.
The Depositary has advised the Company and the Underwriters as follows: It
is a limited-purpose trust company organized under the Banking Law of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary was created to hold securities for its participating
organizations (the "Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and
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dealers (including the Underwriters), banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants"). Persons
who are not Participants may beneficially own securities held by the Depositary
only through Participants or indirect participants.
The Depositary has also advised that, pursuant to procedures established by
it, (i) upon the issuance by the Company of the Series A Preferred Stock, the
Depositary will credit the accounts of Participants designated by the
Underwriters with the amount of the Series A Preferred Stock purchased by the
Underwriters and (ii) ownership of beneficial interests in the Global
Certificates will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary (with respect to
Participants' interests), the Participants and the indirect participants. A
beneficial owner is the person who has the right to sell, transfer or otherwise
dispose of an interest in the Series A Preferred Stock and the right to receive
the proceeds therefrom, as well as dividends and redemption payments in respect
to the Series A Preferred Stock. The beneficial owner must rely on the foregoing
arrangements to evidence its interest in the Series A Preferred Stock.
Beneficial ownership of the Series A Preferred Stock may be transferred only by
complying with the procedures of a beneficial owner's Participant (e.g., a
brokerage firm) and the Depositary. The laws of some states require that certain
persons take physical delivery in definitive form of securities which they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificates is limited to such extent.
So long as a nominee of the Depositary or its nominee is the registered
owner of the Global Certificates, the Depositary or such nominee will be
considered the absolute owner or holder of the Series A Preferred Stock for all
purposes under the Certificate of Designation. Except as provided below, owners
of beneficial interests in the Global Certificates will not be entitled to have
Series A Preferred Stock registered in their names, will not receive or be
entitled to receive physical delivery of Series A Preferred Stock in definitive
form and will not be considered the owners or holders thereof.
All rights of ownership must be exercised through the Depositary and the
book-entry system, and notices that are to be given to registered owners by the
Company or the Transfer Agent will be given only to the Depositary. It is
expected that the Depositary will forward notices to the Participants who will
in turn forward notices to the beneficial owners. Neither the Company, the
Transfer Agent, the paying agents nor the Series A Preferred Stock registrars
will have any responsibility or obligation to assure that any notices are
forwarded by the Depositary to any Participant or by any Participant to the
beneficial owners. Nether the Company, the Transfer Agent, the paying agents nor
the Series A Preferred Stock registrars will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Certificates, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Dividend and redemption payments on the Global Certificates registered in
the name of the Depositary's nominee will be made by the Company, either
directly or through a paying agent, to the Depositary's nominee as the
registered owner of the Global Certificates. The Company and the Transfer Agent
will treat the persons in whose names the Series A Preferred Stock are
registered as the owners of such Series A Preferred Stock for the purpose of
receiving payments of dividends and redemption payments on such Series A
Preferred Stock and for all other purposes whatsoever. Therefore, neither the
Company, the Transfer Agent or any paying agent has any direct responsibility or
liability for the payment of dividends or redemption payments on the Series A
Preferred Stock to owners of beneficial interests in the Global Certificates.
The Depositary has advised the Company and the Transfer Agent that its present
practice upon receipt of any payment of such amounts is to credit immediately
the accounts of the Participants with payment in amounts proportionate to their
respective holdings of beneficial interests in the Global Certificates as shown
on the records of the Depositary. Payments by Participants and indirect
participants to owners of beneficial interests in the Global Certificates will
be governed by standing instructions and customary practices as is now the case
with securities held for the accounts of customers in
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bearer form or registered in "street name" and will be the responsibility of
such Participants or indirect participants.
As long as the Series A Preferred Stock is represented by the Global
Certificates, the Depositary's nominee will be the holder of the Series A
Preferred Stock and therefore will be the only entity that can exercise a right
to repayment or repurchase of the Notes. See "--Change of Control."
Notice by Participants or indirect participants or by owners of beneficial
interests in the Global Certificates held through such Participants or indirect
participants of the exercise of the option to elect repayment of beneficial
interest in the Series A Preferred Stock represented by the Global Certificates
must be transmitted to the Depositary in accordance with its procedures on a
form required by the Depositary and provided to Participants. In order to ensure
that the Depositary's nominee will timely exercise a right to repayment with
respect to particular shares of Series A Preferred Stock, the beneficial owner
of such Series A Preferred Stock must instruct the broker or other Participant
or indirect participant through which it holds an interest in such Series A
Preferred Stock to notify the Depositary of its desire to exercise a right to
repayment. Different firms have different deadlines for accepting instructions
from their customers and, accordingly, each beneficial owner should consult the
broker or other Participant or indirect participant through which it holds an
interest in shares of Series A Preferred Stock in order to ascertain the
deadline by which such an instruction must be given in order for timely notice
to be delivered to the Depositary. The Company will not be liable for any delay
in delivery of notices of the exercise of the option to elect repayment.
CERTIFICATED SECURITIES. Subject to certain conditions, any person having a
beneficial interest in the Global Securities may, upon request to the Transfer
Agent, exchange such beneficial interest for Series A Preferred Stock in the
form of Certificated Securities. Upon any such issuance, the Transfer Agent is
required to register such Certificated Securities in the name of, and cause the
same to be delivered to, such person or persons (or the nominee of any thereof).
In addition, if (i) the Company notifies the Transfer Agent in writing that the
Depositary is no longer willing or able to act as a depositary and the Company
is unable to locate a qualified successor within 90 days or (ii) the Company, at
its option, notifies the Transfer Agent in writing that it elects to cause the
issuance of Series A Preferred Stock in the form of Certificated Securities
under the Certificate of Designation, then, upon surrender by the Global
Security Holder of its Global Securities, Series A Preferred Stock in such form
will be issued to each person that the Global Security Holder and the Depositary
identify as being the Beneficial Owner of the related Series A Preferred Stock.
If the Company elects to pay dividends on the Series A Preferred Stock by
issuing additional Series A Preferred Stock, fractional shares, if any, issued
in connection with any such dividend payment may be issued to holders of Series
A Preferred Stock as Certificated Securities.
DESCRIPTION OF WARRANTS
GENERAL
The Warrants will be issued pursuant to a Warrant Agreement (the "Warrant
Agreement") between the Company and American Stock Transfer and Trust Company,
as Warrant Agent (the "Warrant Agent"). The following summary of certain
provisions of the Warrant Agreement, including the definitions therein of
certain terms used below, does not purport to be complete and is qualified in
its entirety by reference to the Warrant Agreement and the warrant certificate
attached thereto, the forms of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
Each Warrant, when exercised, will entitle the holder thereof to receive one
fully paid and non-assessable share of Common Stock at an exercise price of $.01
per share, subject to adjustment (the "Exercise Price"). The Exercise Price and
the number of Warrant Shares are both subject to adjustment in certain cases
referred to below. The Warrants will entitle the holders thereof to purchase in
the aggregate 825,000 shares of Common Stock, or approximately 8.5% of the
outstanding Common Stock, on a fully diluted basis as of the closing of the
Offerings. Shares of Common Stock issuable upon exercise of the Warrants are
sometimes referred to as "Warrant Shares."
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The Warrants will be exercisable prior to 5:00 p.m., New York City time, on
, 2002 (the "Expiration Date"). The exercise and transfer of the
Warrants will be subject to applicable federal and state securities laws.
The Warrants may be exercised by surrendering to the Company the warrant
certificates evidencing the Warrants to be exercised with the accompanying form
of election to purchase properly completed and executed, together with payment
of the Exercise Price. Payment of the Exercise Price may be made (A) by
tendering Warrants having a fair market value (as defined in the Warrant
Agreement) equal to the Exercise Price, (B) in the form of cash or by certified
or official bank check payable to the order of the Company or (C) by any
combination of Warrants and cash. Upon surrender of the Warrant certificate and
payment of the Exercise Price, the Company will deliver or cause to be
delivered, to or upon the written order of such holder, stock certificates
representing the number of whole shares of Common Stock to which such holder is
entitled. If less than all of the Warrants evidenced by a warrant certificate
are to be exercised, a new warrant certificate will be used for the remaining
number of Warrants.
No fractional shares of Common Stock will be issued upon the exercise of the
Warrants. The Company will pay to the holder of the Warrant at the time of
exercise an amount in cash equal to the current market value of any such
fractional share of Common Stock less a corresponding fraction of the Exercise
Price.
The holders of the Warrants will have no right to vote on matters submitted
to the stockholders of the Company and will have no right to receive dividends.
The holders of the Warrants will not be entitled to share in the assets of the
Company in the event of liquidation, dissolution or winding up of the Company.
In the event a bankruptcy or reorganization is commenced by or against the
Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court, and the holders of the Warrants may, even if sufficient funds
are available, receive nothing or a lesser amount as a result of any such
bankruptcy case than they would be entitled to if they had exercised their
Warrants prior to the commencement of any such case.
In the event of a taxable distribution to holders of Common Stock that
results in an adjustment to the number of shares of Common Stock or other
consideration for which a Warrant may be exercised, the holders of the Warrants
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend. See "Certain United States
Federal Income Tax Considerations."
ADJUSTMENTS
The number of shares of Common Stock purchasable upon exercise of Warrants
and the Exercise Price will be subject to adjustment in certain events,
including: (i) the issuance by the Company of dividends (and other
distributions) on its Common Stock payable in Common Stock, (ii) subdivisions,
combinations and reclassifications of Common Stock, (iii) the issuance to all
holders of Common Stock of rights, options or warrants entitling them to
subscribe for Common Stock or securities convertible into, or exchangeable or
exercisable for, Common Stock within sixty (60) days after the record date for
such issuance of rights, options or warrants at an offering price (or with an
initial conversion, exchange or exercise price plus such offering price) which
is less than the current market price per share (as defined in the Warrant
Agreement) of Common Stock, (iv) the distribution to all holders of Common Stock
of any of the Company's assets (including cash), debt securities, Preferred
Stock or any rights or warrants to purchase any such securities (excluding those
rights and warrants referred to in clause (iii) above) and (v) certain other
events that could have the effect of depriving holders of the Warrants of the
benefit of all or a portion of the purchase rights evidenced by the Warrants.
No adjustment in the number of shares of Common Stock purchasable upon
exercise of Warrants or in the Exercise Price will be required unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the number of shares of Common Stock purchasable upon exercise of Warrants
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or the Exercise Price; PROVIDED, HOWEVER, that any adjustment that is not made
will be carried forward and taken into account in any subsequent adjustment.
In the case of certain consolidations or mergers of the Company, or the sale
of all or substantially all of the assets of the Company to another corporation,
each Warrant will thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants will require the written
consent of the holders of a majority of the then outstanding Warrants (excluding
Warrants held by the Company or any of its Affiliates). The consent of each
holder of the Warrants affected will be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
would be decreased (other than pursuant to adjustments provided in the Warrant
Agreement).
REGISTRATION
The Warrant Agreement will contain certain registration rights relating to
the Warrant Shares. In connection with any public offering of Common Stock, the
holders of Warrants who desire to exercise their Warrants shall be permitted to
include their Warrant Shares in such offering pro rata among the holders of the
Warrant Shares and any other shares of Common Stock to be offered by existing
shareholders to the degree such participation can be accommodated in the
discretion of the underwriters of the offering. After the initial public
offering of the Company's Common Stock, the holders of a majority of the
outstanding Warrant Shares may demand one registration of the Warrant Shares
with such registration statement to be filed within three months of such demand.
In connection with any underwritten public offering of the Company's Common
Stock, the holders of Warrants agree not to sell any of their Warrant Shares
until 90 days after the completion of such offering.
ADDITIONAL INFORMATION
Anyone who receives a copy of this Prospectus may obtain a copy of the
Company's Certificate of Incorporation, the Certificate of Designation and the
Warrant Agreement without charge by writing to Color Spot Nurseries, Inc., 3478
Buskirk Avenue, Suite 260, Pleasant Hill, California 94523, Attention:
Secretary.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture and the Certificate of Designation. Reference is made to the Indenture
or the Certificate of Designation for the full definition of all such terms, as
well as any other terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
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"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary
of the Company, or shall be merged with or into the Company or any Restricted
Subsidiary of the Company, or (b) the acquisition by the Company or any
Restricted Subsidiary of the Company of the assets of any Person (other than a
Restricted Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprises any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; PROVIDED, HOWEVER,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $500,000; (ii) the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of the
Company as permitted under "Merger, Consolidation and Sale of Assets;" (iii)
sales of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" to a Receivables Subsidiary in
connection with a Qualified Receivables Transaction; and (iv) sales of Permitted
Investments.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
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"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia of
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"CERTIFICATE OF DESIGNATION" means the Certificate of Designation,
Preferences, and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions for the Series
A Preferred Stock of the Company.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than the Permitted Holder(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by a vote of at least
a majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in accordance with GAAP
for such period (other than income taxes attributable to extraordinary, unusual
or nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense, (C)
Consolidated Non-cash Charges LESS any non-cash items increasing Consolidated
Net Income for such period, all as determined on a consolidated basis for such
Person and its Restricted Subsidiaries in accordance with GAAP, (D) any expenses
or charges related to the termination of the Fee Agreement and (E) any write-off
of deferred financing costs in connection with
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the refinancing of the Company's credit agreement in existence prior to the
Credit Agreement and any refinancings of the Credit Agreement.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income") attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
the operation of such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries of such period determined
on a consolidated basis in accordance with GAAP, including without limitation,
(a) any
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amortization of debt discount and amortization or write-off of deferred
financing costs (excluding any write-off of deferred financing costs in
connection with the refinancing of the Company's credit agreement in existence
prior to the Credit Agreement or any refinancing of the Credit Agreement), (b)
the net costs under Interest Swap Obligations, (c) all capitalized interest and
(d) the interest portion of any deferred payment obligation; and (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by such Person and its Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP: PROVIDED that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CREDIT AGREEMENT" means the Second Amended and Restated Credit Agreement
dated as of , 1997, between the Company, the lenders party thereto in
their capacities as lenders thereunder and Credit Agricole Indosuez, as agent,
together with the related documents thereto (including, without limitation, any
guarantee agreements and security documents), in each case as such agreements
may be amended (including any amendment and restatement thereof), supplemented
or otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (PROVIDED that such
increase in borrowings is Permitted Indebtedness or is permitted by the
"Limitation on Incurrence of Additional Indebtedness" covenant above) or adding
Restricted Subsidiaries of the Company as additional guarantors thereunder) all
or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
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"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable other than in connection with a change of control,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof on or prior to the final maturity date of the Notes
or the date of the mandatory redemption for the Series A Preferred Stock, as the
case may be.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock or that are measured by the value of Capital
Stock (but excluding any debt security that is convertible into or exchangeable
for Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"FEE AGREEMENT" means that certain fee agreement between the Company and
Kohlberg & Company, LLC dated as of December 31, 1996, as amended.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and excluding long-term, deferred purchase
price obligations for trees, PROVIDED that such obligations are not recorded as
liabilities on such Person's balance sheet in accordance with GAAP), (v) all
Obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (vi) guarantees and other
contingent obligations in respect of Indebtedness referred to in clauses (i)
through (v) above and clause (viii) below, (vii) all Obligations of any other
Person of the type referred to in clauses (i) through (vi) which are secured by
any lien on any property or asset of such Person, the amount of such Obligation
being deemed to be the lesser of the fair market value of such property or asset
or the amount of the Obligation so secured, (viii) all Obligations under
Currency Agreements and Interest Swap Obligations of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
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voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends, if any. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated as an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated as a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; PROVIDED that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, the Company no longer owns, directly or
indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes and the Series
A Preferred Stock.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of
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cash or Cash Equivalents (other than the portion of any such deferred payment
constituting interest) received by the Company or any of its Restricted
Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses
and fees relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees and sales commissions), (b) taxes paid or
payable after taking into account any reduction in consolidated tax liability
due to available tax credits or deductions and any tax sharing arrangements, (c)
repayment of Indebtedness that is required to be repaid in connection with such
Asset Sale and (d) appropriate amounts to be provided by the Company or any of
its Restricted Subsidiaries, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer or the principal accounting officer of
the Company that meets the requirements set forth in the Indenture.
"PERMITTED HOLDER(S)" means KCSN Acquisition Company, L.P. and its
Affiliates, Kohlberg & Company, LLC and its Affiliates, and Michael F. Vukelich
and his Affiliates.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes and the Indenture;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $150.0
million, less the amount of all mandatory principal payments actually made
by the Company in respect of the Term Loan Facility (excluding any such
payments to the extent refinanced at the time of payment under a replaced
Credit Agreement), provided that (1) not more than $110.0 million of
borrowings under the Credit Agreement are used to make Asset Acquisitions
and (2) not more than $90.0 million of borrowings under the Credit Agreement
are used for any other purpose;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnitees and compensation
payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Restricted Subsidiary of the Company for
so long as such Indebtedness is held by
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the Company or a Wholly Owned Restricted Subsidiary of the Company, in each
case subject to no Lien held by a Person other than the Company or a Wholly
Owned Restricted Subsidiary of the Company; PROVIDED that if as of any date
any Person other than the Company or a Wholly Owned Restricted Subsidiary of
the Company owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien;
PROVIDED that (a) any Indebtedness of the Company to any Wholly Owned
Restricted Subsidiary of the Company is unsecured and subordinated, pursuant
to a written agreement, to the Company's obligations under the Indenture and
the Notes and (b) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such Indebtedness or
any Person holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) Indebtedness incurred in a Qualified Receivables Transaction that
is without recourse to the Company or to any Restricted Subsidiary of the
Company or their assets (other than a Receivables Subsidiary and its
assets); and
(xii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $25,000,000 at
any one time outstanding.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company; (ii) Investments in the Company by any
Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Notes and the Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $2,000,000
at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (vi) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers; (vii) Investments
made by the Company or its Restricted Subsidiaries as a result of consideration
received in connection with an Asset Sale made in compliance with the
"Limitation on Asset Sales" covenant; (viii) Investment by the Company or a
Wholly Owned Restricted Subsidiary of the Company in a Receivables Subsidiary or
any Investment by a Receivables Subsidiary in any other Person in connection
with a Qualified Receivables Transaction; (ix) notes received from management as
payment for purchases of Capital Stock; and (x) additional
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Investments by the Company or any Restricted Subsidiary of the Company in an
aggregate amount, based on original cost, not to exceed $1,000,000 at any one
time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(vi) any interest (including UCC filings) or title of a lessor under any
Capitalized Lease Obligation; PROVIDED that such Liens do not extend to any
property or assets which is not leased property subject to such Capitalized
Lease Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; PROVIDED, HOWEVER, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired and
(B) the Lien securing such Indebtedness shall be created within 90 days of
such acquisition.
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptance issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements or the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
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(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that (A) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do
not extend to or cover any property or assets of the Company or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary of the
Company and are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company;
(xiv) Liens on accounts receivable and related assets of the type
described in the definition of "Qualified Receivables Transaction" or on
assets of a Receivables Subsidiary, in either case, incurred in connection
with a Qualified Receivables Transaction; and
(xv) Liens securing Indebtedness in an aggregate amount not to exceed
$5,000,000 at any one time outstanding.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of Qualified
Capital Stock of the Company sold by the Company after the Issue Date pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted Subsidiaries
may sell, convey or otherwise transfer to (i) a Receivables Subsidiary (in the
case of a transfer by the Company or any of its Restricted Subsidiaries) and
(ii) any other Person (in the case of a transfer by a Receivables Subsidiary),
or may grant a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Company or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such accounts receivable, all contracts and all guarantees
or other obligations in respect of such accounts receivable, proceeds of such
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"RECEIVABLES SUBSIDIARY" means a Wholly Owned Restricted Subsidiary of the
Company that engages in no activities other than in connection with the
financing of accounts receivable and that is designated by the Board of
Directors of the Company (as provided below) as a Receivables Subsidiary (a)
which has no Indebtedness or any other Obligations (contingent or otherwise)
which (i) is guaranteed by the Company or any other Restricted Subsidiary of the
Company (excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness) pursuant to representations, warranties, covenants
and indemnities entered into in the ordinary course of business in connection
with a Qualified Receivables Transaction), (ii) is recourse to or obligates the
Company or any other Restricted Subsidiary of the Company in any way other than
pursuant to representations, warranties, covenants and indemnities entered into
in the ordinary course of business in connection with a Qualified Receivables
Transaction or (iii) subjects any property or asset of the Company or any other
Restricted Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
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representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction, (b) with which neither the Company nor any other Restricted
Subsidiary of the Company has any material contract, agreement, arrangement or
understanding other than on terms no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing accounts receivable and (c) with
which neither the Company nor any other Restricted Subsidiary of the Company has
any obligation to maintain or preserve such Restricted Subsidiary's financial
condition or cause such Restricted Subsidiary to achieve certain levels of
operating results. Any such designation by the Board of Directors of the Company
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, pre-pay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (xi) or (xii) of
the definition of Permitted Indebtedness), in each case that does not (1) result
in an increase in the aggregate principal amount of Indebtedness of such Person
as of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; PROVIDED that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which is not an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means one or more revolving credit facilities
under the Credit Agreement.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SENIOR DEBT" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with
94
<PAGE>
respect thereto, whether or not such interest is an allowed claim under
applicable law) on any Indebtedness of the Company, whether outstanding on the
Issue Date or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on, and all other amounts owing in respect
of (x) all monetary obligations of every nature of the Company under the Credit
Agreement, including, without limitation, obligations to pay principal and
interest, reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Restricted Subsidiary of the
Company or any Affiliate of the Company or any of such Affiliate's Subsidiaries,
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director,
officer or employee of the Company or any Restricted Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or other
taxes owed or owing by the Company, (vi) Indebtedness (other than Permitted
Indebtedness) incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of the Company, including, without limitation, the
Company's $7.1 million 8% Subordinated Convertible Note due December 31, 2004
held by Heller Equity Capital Corporation or any transferee and the $1 million
9% Subordinated Promissory Note held by the former stockholders of Oda Nursery,
Inc. or any transferee.
"SERIES A PREFERRED STOCK" means the Series A Preferred Stock of the Company
issued pursuant to the Certificate of Designation.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"SUBSIDIARY," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"TERM LOAN FACILITY" means one or more term loan facilities under the Credit
Agreement.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the
Trustee that the Company's investment in such Unrestricted Subsidiary is a
Permitted Investment or that such designation complies with the "Limitation on
Restricted Payments" covenant and (y) each Subsidiary to be so designated and
each of its Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to any
95
<PAGE>
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of its Restricted Subsidiaries. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary only if (x)
immediately after giving effect to such designation, the Company is able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant and (y) immediately before and immediately after giving
effect to such designation, no Default or Event of Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
96
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among BT Alex. Brown Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation (together, the "Underwriters") and the Company,
the Underwriters have severally agreed to purchase from the Company the entire
principal amount of the Notes offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature of
each Underwriter's obligation is such that each is severally committed to
purchase the aggregate principal amount of Notes set forth opposite its name, if
any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
BT Alex. Brown Incorporated................................................. $
Donaldson, Lufkin & Jenrette Securities Corporation.........................
----------------
Total..................................................................... $ 85,000,000
----------------
----------------
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain dealers
at such price, less a concession not in excess of % of the principal amount of
the Notes. The Underwriters may allow, and such dealers may reallow, a
concession to certain other dealers not in excess of % of the principal amount
of the Notes. After the initial public offering of the Notes, the public
offering price, concession and reallowance and other selling terms may be
changed by the Underwriters.
The Underwriters have informed the Company that they will not confirm sales
to any accounts over which they exercise discretionary authority without prior
written approval of such transactions by the customer.
The Company does not intend to apply for listing of the Notes on a national
securities exchange, but has been advised by each of the Underwriters that it
presently intends to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriters are not obligated, however, to make a market
in the Notes, and any such market making may be discontinued at any time by one
or all of the Underwriters at the sole discretion of such Underwriters. There
can be no assurance that an active public market for the Notes will develop. See
"Risk Factors--Lack of Prior Market for the Notes."
In connection with the Notes Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot the Notes, creating a short
position. The Underwriters may bid for and purchase Notes in the open market to
cover short positions or in stabilizing transactions. These activities may
stabilize or maintain the market price of the Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
97
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Brownstein
Hyatt Farber & Strickland, P.C., Denver, Colorado. Certain legal matters will be
passed upon for the Underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The audited consolidated financial statements and schedule of Color Spot
Nurseries, Inc. and Subsidiaries and Color Spot, Inc., an Oregon corporation,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The audited financial statements of Oda Nursery, Inc., Cracon, Inc.,
Signature Trees, Peters' Wholesale Greenhouses, Inc., Lone Star Growers Co. and
The Wholesale Division of Sunnyside Plants, Inc., included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of The Wholesale Bedding Plant Division of
Summersun Greenhouse Co., included in this Prospectus, have been audited by Moss
Adams LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The audited financial statements of Wolfe Greenhouses, L.L.C., included in
this Prospectus have been audited by Jaynes, Reitmeier, Boyd & Therrell, P.C.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Notes. This Prospectus, which is part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any agreement or other document filed as an
exhibit or schedule to the Registration Statement and each such statement shall
be deemed qualified in its entirety by such reference. For further information
with respect to the Company and the Notes, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, and at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10007 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of prescribed fees. The Commission also
maintains a web site that contains reports, proxy and information statements and
other materials that are filed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System. This web site can be accessed at
http:// www.sec.gov.
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................... F-4
Consolidated Balance Sheets as of June 30, 1997 and 1996............... F-5
Consolidated Statements of Operations for the Year Ended June 30, 1997,
for the Period September 8, 1995 through June 30, 1996, for the
Period January 1, 1995 through September 8, 1995, and for the Year
Ended December 31, 1994.............................................. F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Year Ended June 30, 1997, for the Period September 8, 1995
through June 30, 1996, for the Period January 1, 1995 through
September 8, 1995, and for the Year Ended December 31, 1994.......... F-7
Consolidated Statements of Cash Flows for the Year Ended June 30, 1997,
for the Period September 8, 1995 through June 30, 1996, for the
Period January 1, 1995 through September 8, 1995, and for the Year
Ended December 31, 1994.............................................. F-8
Notes to Consolidated Financial Statements............................. F-9
ODA NURSERY, INC.
Report of Independent Public Accountants............................... F-28
Balance Sheets as of December 31, 1996 and 1995........................ F-29
Statements of Operations for the Years Ended December 31, 1996 and
1995................................................................. F-30
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1996 and 1995........................................... F-31
Statements of Cash Flows for the Years Ended December 31, 1996 and
1995................................................................. F-32
Notes to Financial Statements.......................................... F-33
THE WHOLESALE BEDDING PLANT DIVISION OF
SUMMERSUN GREENHOUSE CO.
Independent Auditors' Report........................................... F-38
Balance Sheets as of May 31, 1997 and 1996............................. F-39
Statements of Operations and Divisional Equity for the Years Ended May
31, 1997 and 1996.................................................... F-40
Statements of Cash Flows for the Years Ended May 31, 1997 and 1996..... F-41
Notes to Financial Statements.......................................... F-42
CRACON, INC.
Report of Independent Public Accountants............................... F-49
Balance Sheet as of December 31, 1996.................................. F-50
Statement of Operations and Retained Earnings for the Year Ended
December 31, 1996.................................................... F-51
Statement of Cash Flows for the Year Ended December 31, 1996........... F-52
Notes to Financial Statements.......................................... F-53
WOLFE GREENHOUSES, L.L.C.
Independent Auditors' Report........................................... F-57
Balance Sheet as of December 27, 1996.................................. F-58
Statement of Operations and Members' Equity for the Year Ended December
27, 1996............................................................. F-59
Statement of Cash Flows for the Year Ended December 27, 1996........... F-60
Notes to Financial Statements.......................................... F-61
SIGNATURE TREES
Report of Independent Public Accountants............................... F-65
Balance Sheet as of December 31, 1996.................................. F-66
Statement of Operations and Partners' Capital for the Year Ended
December 31, 1996.................................................... F-67
Statement of Cash Flows for the Year Ended December 31, 1996........... F-68
Notes to Financial Statements.......................................... F-69
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
PETERS' WHOLESALE GREENHOUSES, INC.
Report of Independent Public Accountants............................... F-73
Balance Sheet as of December 31, 1996.................................. F-74
Statement of Operations for the Year Ended December 31, 1996........... F-75
Statement of Changes in Stockholders' Equity for the Year Ended
December 31, 1996.................................................... F-76
Statement of Cash Flows................................................ F-77
Notes to Financial Statements.......................................... F-78
LONE STAR GROWERS CO.
Report of Independent Public Accountants............................... F-84
Balance Sheets as of June 30, 1996 and 1995............................ F-85
Statements of Operations for the Years Ended June 30, 1996 and 1995.... F-86
Statements of Partnership Capital for the Years Ended June 30, 1996 and
1995................................................................. F-87
Statements of Cash Flows for the Years Ended June 30, 1996 and 1995.... F-88
Notes to Financial Statements.......................................... F-89
THE WHOLESALE DIVISION OF SUNNYSIDE PLANTS, INC.
Report of Independent Public Accountants............................... F-95
Statement of Assets and Liabilities and Divisional Equity as of March
31, 1996............................................................. F-96
Statement of Revenues and Expenses and Divisional Equity for the Year
Ended March 31, 1996................................................. F-97
Statement of Cash Flows for the Year Ended March 31, 1996.............. F-98
Notes to Financial Statements.......................................... F-99
</TABLE>
F-2
<PAGE>
INDEX TO UNAUDITED INTERIM FINANCIAL STATEMENTS
<TABLE>
<S> <C>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of September 25, 1997 and September 26,
1997................................................................. F-103
Consolidated Statements of Operations for the Three Months Ended
September 25, 1997 and September 26, 1996............................ F-104
Consolidated Statement of Changes in Stockholders' Equity as of
September 25, 1997................................................... F-105
Consolidated Statements of Cash Flows for the Three Months Ended
September 25, 1997 and September 26, 1996............................ F-106
Notes to Consolidated Financial Statements............................. F-107
ODA NURSERY, INC.
Balance Sheet as of June 30, 1997...................................... F-111
Statements of Operations for the Six Months Ended June 30, 1997 and
1996................................................................. F-112
Statements of Cash Flows for the Six Months Ended June 30, 1997 and
1996................................................................. F-113
Notes to Financial Statements.......................................... F-114
CRACON, INC.
Balance Sheet as of June 30, 1997...................................... F-118
Statements of Operations and Retained Earnings for the Six Months Ended
June 30, 1997 and 1996............................................... F-119
Statements of Cash Flows for the Six Months Ended June 30, 1997 and
1996................................................................. F-120
Notes to Financial Statements.......................................... F-121
WOLFE GREENHOUSES, L.L.C.
Balance Sheet as of July 11, 1997...................................... F-125
Statements of Operations and Members' Equity for the Seven Four-Week
Reporting Periods Ended July 11, 1997 and July 12, 1996.............. F-126
Statements of Cash Flows for the Seven Four-Week Reporting Periods
Ended July 11, 1997 and July 12, 1996................................ F-127
Selected Notes to Financial Statements................................. F-128
PETERS' WHOLESALE GREENHOUSES, INC.
Balance Sheet as of June 30, 1997...................................... F-131
Statements of Operations for the Six Months Ended June 30, 1997 and
1996................................................................. F-132
Statements of Cash Flows for the Six Months Ended June 30, 1997 and
1996................................................................. F-133
Notes to Financial Statements.......................................... F-134
LONE STAR GROWERS CO.
Balance Sheet as of December 31, 1996.................................. F-140
Statements of Operations for the Six Months Ended December 31, 1996 and
1995................................................................. F-141
Statements of Cash Flows for the Six Months Ended December 31, 1996 and
1995................................................................. F-142
Notes to Financial Statements.......................................... F-143
THE WHOLESALE DIVISION OF SUNNYSIDE PLANTS, INC.
Statement of Assets and Liabilities and Divisional Equity as of
December 31, 1996.................................................... F-148
Statements of Revenues and Expenses and Divisional Equity for the Nine
Months Ended December 31, 1996 and 1995.............................. F-149
Statements of Cash Flows for the Nine Months Ended December 31, 1996
and 1995............................................................. F-150
Notes to Unaudited Financial Statements................................ F-151
</TABLE>
F-3
<PAGE>
After the merger of CSN, Inc. (the parent company of Color Spot Nurseries,
Inc.) into Color Spot Nurseries, Inc. and a 0.69:1 reverse stock split which
will occur simultaneously with the consummation of the Company's senior
subordinated note, Series A Preferred Stock and warrant offerings, we expect to
be in a position to render the following audit report.
ARTHUR ANDERSEN LLP
San Francisco, California
August 15, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Color Spot Nurseries, Inc.:
We have audited the accompanying consolidated balance sheets of Color Spot
Nurseries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1997, and for
the period from inception, September 8, 1995, through June 30, 1996. We have
also audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of the Predecessor (businesses
identified in Note 1) from January 1, 1995, through September 8, 1995, and for
the year ended December 31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Color Spot Nurseries, Inc. and Subsidiaries as of June 30, 1997 and 1996, and
the results of their operations and their cash flows for the year ended June 30,
1997, and for the period from inception, September 8, 1995, through June 30,
1996, and the results of operations of the Predecessor and its cash flows from
January 1, 1995, through September 8, 1995, and for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
San Francisco, California
August 15, 1997
F-4
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 2,762 $ 701
Accounts receivable, net of allowances of $1,661 and $417, respectively.................. 25,524 11,259
Inventories.............................................................................. 28,854 7,637
Prepaid expenses and other............................................................... 893 438
---------- ---------
Total current assets................................................................... 58,033 20,035
TREE INVENTORIES........................................................................... 541 --
PROPERTY, PLANT AND EQUIPMENT, net......................................................... 31,774 9,165
INTANGIBLE ASSETS, net..................................................................... 31,383 1,732
DEFERRED INCOME TAXES...................................................................... 10,120 2,287
NOTES RECEIVABLE AND OTHER ASSETS.......................................................... 1,566 --
---------- ---------
Total assets........................................................................... $ 133,417 $ 33,219
---------- ---------
---------- ---------
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt..................................................... $ 4,595 $ 1,430
Revolving line of credit................................................................. 2,105 --
Accounts payable......................................................................... 9,815 3,934
Accrued liabilities...................................................................... 12,395 3,980
Dividends payable to stockholders........................................................ 906 --
Deferred income taxes.................................................................... 14,056 4,555
---------- ---------
Total current liabilities.............................................................. 43,872 13,899
LONG-TERM DEBT............................................................................. 83,408 6,785
---------- ---------
Total liabilities...................................................................... 127,280 20,684
---------- ---------
REDEEMABLE COMMON STOCK: 1,199,744 shares at June 30, 1997................................. 2,062 --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding............................................................................ -- --
Common stock, $0.01 par value, 20,000,000 shares authorized, 5,021,118 and 6,725,350
issued and outstanding, respectively................................................... 162 97
Additional paid-in capital............................................................... 45,033 9,650
Treasury stock, 6,164,034 shares at June 30, 1997........................................ (45,228) --
Retained earnings........................................................................ 4,108 2,788
---------- ---------
Total stockholders' equity............................................................. 4,075 12,535
---------- ---------
Total liabilities, redeemable common stock and stockholders' equity.................... $ 133,417 $ 33,219
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
The consolidated financial statements of the Company and the Predecessor are
not comparable in certain respects.
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
---------------------------- ----------------------------
SEPTEMBER 8, JANUARY 1, 1995
YEAR ENDED 1995 THROUGH YEAR ENDED
JUNE 30, THROUGH SEPTEMBER 8, DECEMBER
1997 JUNE 30, 1996 1995 31, 1994
----------- --------------- --------------- -----------
NET SALES............................ $ 113,400 $ 51,995 $ 28,991 $ 39,411
<S> <C> <C> <C> <C>
COST OF SALES........................ 64,026 27,685 17,500 24,416
----------- ------- ------- -----------
Gross profit..................... 49,374 24,310 11,491 14,995
SALES, MARKETING AND DELIVERY
EXPENSES........................... 31,168 15,495 10,488 13,459
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 7,300 2,886 3,659 3,986
AMORTIZATION OF INTANGIBLE ASSETS.... 990 94 291 424
----------- ------- ------- -----------
Income (loss) from operations.... 9,916 5,835 (2,947) (2,874)
INTEREST EXPENSE..................... 4,179 687 2,576 3,170
OTHER (INCOME) EXPENSE, net.......... (148) 91 (38) (97)
----------- ------- ------- -----------
Income (loss) before income tax
provision and extraordinary
loss........................... 5,885 5,057 (5,485) (5,947)
INCOME TAX PROVISION................. 2,830 2,269 -- --
----------- ------- ------- -----------
Income (loss) before
extraordinary loss............. 3,055 2,788 (5,485) (5,947)
EXTRAORDINARY LOSS,
net of tax benefit................. 215 -- -- --
----------- ------- ------- -----------
Net income (loss)................ $ 2,840 $ 2,788 $ (5,485) $ (5,947)
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT COMMON SHARES)
The consolidated financial statements of the Company and the Predecessor are
not comparable in certain respects.
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
COMMON COMMON PAID-IN TREASURY (ACCUMULATED EQUITY
SHARES STOCK CAPITAL STOCK DEFICIT) (DEFICIT)
----------- ----------- -------------- ---------- ------------ ------------
THE PREDECESSOR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993................ 1,000 $ -- $ 250 $ -- $ (4,908) $ (4,658)
Net loss.................................. -- -- -- -- (5,947) (5,947)
----------- ----- ------- ---------- ------------ ------------
Balance, December 31, 1994................ 1,000 -- 250 -- (10,855) (10,605)
Net loss.................................. -- -- -- -- (5,485) (5,485)
----------- ----- ------- ---------- ------------ ------------
Balance, September 8, 1995................ 1,000 $ -- $ 250 $ -- $ (16,340) $ (16,090)
----------- ----- ------- ---------- ------------ ------------
----------- ----- ------- ---------- ------------ ------------
<CAPTION>
THE COMPANY
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Elimination of Predecessor................ (1,000) $ -- $ (250) $ -- $ 16,340 $ 16,090
Issuance of common stock.................. 6,725,350 97 9,650 -- -- 9,747
Net income................................ -- -- -- -- 2,788 2,788
----------- ----- ------- ---------- ------------ ------------
Balance, June 30, 1996.................... 6,725,350 $ 97 9,650 -- 2,788 12,535
----------- ----- ------- ---------- ------------ ------------
Recapitalization:
Issuance of common stock................ 3,566,173 52 22,273 -- -- 22,325
Repurchase of common stock.............. (6,164,034) -- -- (45,228) -- (45,228)
Dividends............................... -- -- -- -- (1,520) (1,520)
Transfer to redeemable common stock..... (1,199,744) (17) (2,045) -- -- (2,062)
Issuance of common stock:
Existing shareholders and management.... 1,741,602 25 12,075 -- -- 12,100
Acquisition of businesses............... 351,771 5 2,519 -- -- 2,524
Tax benefit from exercise of stock
options................................. -- -- 561 -- -- 561
Net income................................ -- -- -- -- 2,840 2,840
----------- ----- ------- ---------- ------------ ------------
Balance, June 30, 1997.................... 5,021,118 $ 162 $ 45,033 $ (45,228) $ 4,108 $ 4,075
----------- ----- ------- ---------- ------------ ------------
----------- ----- ------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The consolidated financial statements of the Company and the Predecessor are
not comparable in certain respects.
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
---------------------------------- ----------------------------------
SEPTEMBER 8, 1995 JANUARY 1, 1995 YEAR ENDED
YEAR ENDED THROUGH JUNE 30, THROUGH SEPTEMBER DECEMBER 31,
JUNE 30, 1997 1996 8, 1995 1994
------------- ------------------- ------------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 2,840 $ 2,788 $ (5,485) $ (5,947)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization....................... 3,441 598 925 1,255
Deferred income taxes............................... 2,631 2,268 -- --
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Decrease (increase) in accounts receivable........ (9,435) (8,568) 116 161
Decrease (increase) in inventories................ (4,273) 1,920 866 (82)
Decrease (increase) in prepaid expenses and other
current assets.................................. (260) (407) 350 981
(Increase) in tree inventories.................... (372) -- -- --
(Increase) in other long-term assets.............. (396) -- -- --
Increase (decrease) in accounts payable........... 596 (556) (1,660) 1,852
Increase (decrease) in accrued liabilities........ 1,954 (1,207) 502 (1,499)
Increase (decrease) in other liabilities.......... (819) (321) (834) 559
------------- ------- ------- -------------
Net cash used in operating activities........... (4,093) (3,485) (5,220) (2,720)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less cash
acquired............................................ (52,069) (8,966) -- --
Purchases of fixed assets............................. (6,181) (1,529) (260) (668)
Proceeds from sale of fixed assets.................... 16 835 -- 59
------------- ------- ------- -------------
Net cash used in investing activities........... (58,234) (9,660) (260) (609)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft........................................ 3,520 -- -- --
Issuance of common stock.............................. 34,439 9,746 -- --
Purchase of treasury stock............................ (37,124) -- -- --
Financing and organizational costs.................... (5,584) -- -- --
Dividend paid......................................... (614) -- -- --
Proceeds from borrowings.............................. 98,035 1,936 -- --
Net borrowings under revolving line of credit......... 3,598 3,791 -- --
Repayments of long-term debt.......................... (31,882) (1,627) (1,526) (13,095)
Proceeds from note payable to parent.................. -- -- 7,113 16,810
------------- ------- ------- -------------
Net cash provided by financing activities....... 64,388 13,846 5,587 3,715
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 2,061 701 107 386
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 701 -- 405 19
------------- ------- ------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 2,762 $ 701 $ 512 $ 405
------------- ------- ------- -------------
------------- ------- ------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................ $ 3,876 $ 936 $ 2,447 $ 2,455
------------- ------- ------- -------------
------------- ------- ------- -------------
Income taxes........................................ $ -- $ 2 $ -- $ --
------------- ------- ------- -------------
------------- ------- ------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions......................... $ 2,524 $ -- $ -- $ --
------------- ------- ------- -------------
------------- ------- ------- -------------
Issuance of notes receivable in connection with asset
sale................................................ $ 1,170 $ -- $ -- $ --
------------- ------- ------- -------------
------------- ------- ------- -------------
Issuance of notes payable in connection with treasury
stock purchase...................................... $ 7,100 $ -- $ -- $ --
------------- ------- ------- -------------
------------- ------- ------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The consolidated balance sheets as of June 30, 1997 and 1996, and the
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1997, and the period from inception, September 8, 1995
("Inception Date"), through June 30, 1996, include the accounts of Color Spot
Nurseries, Inc., a Delaware corporation ("Color Spot"), and its wholly owned
subsidiaries (collectively referred to as the "Company") reflecting the merger
of CSN, Inc. ("CSN," the parent company of Color Spot Nurseries, Inc.) which
will occur simultaneously with the consummation of the Company's senior
subordinated note, Series A Preferred Stock and warrant offerings into Color
Spot Nurseries, Inc. The merger was accounted for as a reorganization of
entities under common control; therefore no purchase accounting adjustments were
recorded. On September 8, 1995, certain net assets owned by Color Spot, Inc.
(the "Predecessor") were acquired by CSN for approximately $12 million. CSN was
formed by Heller Equity Capital Corporation ("Heller") and certain members of
CSN senior management on September 8, 1995. This transaction was accounted for
using the purchase method of accounting. At June 30, 1996, the allocation of the
purchase price was based upon preliminary estimates of fair value and was
finalized during 1997 upon resolution of a dispute, resulting in an adjustment
to the purchase price of approximately $400,000. On December 31, 1996, KCSN
Acquisition Corporation, L.P. ("KCSN"), a partnership controlled by Kohlberg &
Company, LLC ("Kohlberg") and unrelated to the Company, acquired control of the
Company through a series of stock transactions accounted for as a
recapitalization. In connection with the recapitalization, CSN borrowed $37.3
million, purchased 6,164,034 shares of its common stock at $7.17 per share,
including all shares owned by Heller, which controlled the Company at the time,
and certain shares owned by management ($37.1 million in cash and a $7.1
million, 8.0% subordinated convertible note), sold 3,566,173 shares of stock to
KCSN and certain members of management for $7.17 per share ($22.3 million) and
repaid $14.1 million of its prior indebtedness. In addition, transaction fees of
$2.9 million were paid and recorded as a reduction of capital, $1 million of
financing fees were paid and recorded as loan fees on the balance sheet, a
dividend of $1.5 million was declared and a prepayment penalty of $415,000 was
incurred in connection with the early extinguishment of debt.
Prior to the Inception Date, the Company was known as Color Spot, Inc., an
Oregon corporation (the "Predecessor"). The consolidated statements of
operations from January 1, 1995, through September 8, 1995, and for the year
ended December 31, 1994, include the accounts of the Predecessor when the
Predecessor was owned by PacifiCorp, a utility company. The acquisition of the
Predecessor by PacifiCorp in 1993 was accounted for using the purchase method of
accounting. The purchase price is reflected in the accounts of the Predecessor.
The Company is a producer and distributor of packaged bedding plants and
flowers, groundcover, and commencing in 1997, Christmas trees. Color Spot's
Christmas tree business is conducted through its wholly owned subsidiary, Color
Spot Christmas Trees, Inc., and its ornamental plants and shrubs business is
conducted through its wholly owned subsidiary, Lone Star Growers L.P. ("Lone
Star"). As of June 30, 1997, the Company has 13 facilities located in
California, Texas, Arizona and Oregon. The Company sells primarily to general
merchandise stores, home improvement stores, retail garden stores and commercial
landscapers, located predominantly in California, Texas and other western
states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Color Spot and
its wholly owned subsidiaries. All material intercompany amounts and
transactions have been eliminated in consolidation.
F-9
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash includes cash and cash equivalents that consist of highly liquid
investments having maturities of three months or less when acquired. Cash and
cash equivalents includes restricted cash of $323,000 which is being held to
satisfy an obligation to purchase common stock from certain stockholders through
December 1997. This repurchase obligation is included in redeemable common stock
on the accompanying consolidated balance sheet.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method. Tree inventories are stated at average cost and
are classified as long-term assets until they are harvested. Inventory costs
include material and labor and production costs directly associated with the
growing process. Shrink is charged to cost of sales as a period expense.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment purchased in acquisitions are recorded at fair
value as prescribed by the purchase method of accounting. Subsequent purchases
of property, plant and equipment are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The following useful lives are used for recognizing
depreciation expense:
<TABLE>
<S> <C>
Land improvements............................................ 40 years
15 to 20
Buildings.................................................... years
Machinery and equipment...................................... 5 to 10 years
Computer equipment........................................... 3 to 5 years
Furniture and fixtures....................................... 5 to 10 years
Leasehold improvements....................................... 5 years
</TABLE>
Major renewals and improvements that extend the useful life of an asset are
capitalized; routine maintenance and repairs are expensed as incurred. Upon sale
or retirement of assets, the asset cost and related depreciation are removed
from the accounts and any related gain or loss is reflected in the company's
operating results.
SOFTWARE
Purchases of software, including internal and external development costs,
are capitalized and amortized over three years using the straight-line method.
F-10
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Amortization is computed on a straight-line basis over the shorter of
estimated useful lives or contract periods. The following useful lives are used
for recognizing amortization expense:
<TABLE>
<S> <C>
Goodwill..................................................... 40 years
Trademarks and patents....................................... 15 years
Organization costs........................................... 7 years
Noncompete agreements........................................ 5 years
Loan fees.................................................... Term of debt
</TABLE>
Goodwill represents the excess of cost over the estimated fair value of the
net assets of acquired businesses. Should events or circumstances occur
subsequent to any business acquisition which bring into question the realizable
value or impairment of any component of goodwill, the Company will evaluate the
remaining useful life and balance of goodwill and make appropriate adjustments.
The Company's principal considerations in determining impairment include the
strategic benefit to the Company of the particular business related to the
questioned component of goodwill as measured by undiscounted current and
expected future operating income levels of that particular business and expected
undiscounted future cash flows.
REDEEMABLE COMMON STOCK
The Company is required to repurchase shares of Common Stock from management
stockholders in the event of their termination due to their death or permanent
disability. Such repurchases are at fair market value as determined by the Board
of Directors. The difference between the carrying amount of the redeemable
Common Stock and its fair value is accreted over the life expectancy of the
management stockholders by charging "retained earnings." As a result of the
redemption feature, redeemable Common Stock is classified outside of
stockholders' equity (irrespective of voting rights of the stock).
FINANCIAL INSTRUMENTS
The carrying amounts for cash, receivables and accounts payable approximate
fair value due to the short-term nature of these instruments. Other fair value
disclosures are in the respective notes.
REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer. Sales
returns and allowances are recorded as a charge against revenue in the period in
which the related sales are recognized.
INCOME TAXES
Income taxes are recognized in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 utilizes the asset and liability method under which deferred income taxes
are recognized for the consequences of temporary differences by applying
currently enacted statutory rates to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
F-11
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSET IMPAIRMENT
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that
long-lived assets, certain identifiable intangible assets and goodwill be
reviewed for impairment when expected future undiscounted cash flows are less
than the carrying value of the asset. No charges were recorded pursuant to this
statement in fiscal 1997.
LEVERAGE AND FINANCING
The Company is substantially leveraged. Due to its leveraged nature, the
Company may be more vulnerable to extended economic downturns and its
flexibility in responding to changing economic and industry conditions may be
limited. The degree to which the Company is leveraged could have important
consequences to the Company, including the impairment of the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions and general corporate purposes. The Company's ability to make
principal and interest payments on its obligations at maturity will be dependent
on a number of factors, many of which are beyond the Company's control, and may
be dependent on the Company's future operating performance, which is itself
dependent on the availability of new borrowings on terms acceptable to the
Company. While management believes that additional financing to meet its
anticipated working capital, capital expenditure and acquisition financing
requirements will be available on acceptable terms (including the filing of an
initial public stock offering which will deleverage the Company), if the Company
is unable to obtain such financing, the Company may not be able to take
advantage of unanticipated opportunities or otherwise respond to unanticipated
competitive pressures. Such inability could have a material adverse effect on
the Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This new standard defines a fair value based method
of accounting for employee stock options and gives companies a choice of
recognizing related compensation expense by adopting the new fair value method
or continuing to measure compensation under Accounting Principles Board Opinion
No. 25 ("APB 25"). If APB 25 is elected, SFAS 123 requires supplemental
disclosure to show the effects of using the SFAS 123 measurement criteria (see
Footnote 14). The Company elected to continue using the approach prescribed by
APB 25, and accordingly, SFAS 123 will not affect the Company's financial
position or results of operations.
COMPREHENSIVE INCOME AND SEGMENTS
In 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards to measure all
changes in equity that result from transactions and other economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other nonowner changes in equity. SFAS 131 introduces a new model for
segment reporting, called the "management approach." The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
F-12
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
replaces the notion of industry and geographic segments. The Company will adopt
SFAS 130 and SFAS 131 in fiscal year 1999. The Company believes adoption of SFAS
130 and SFAS 131 will not significantly affect the Company's financial position,
results of operations or financial statement presentation.
3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company sells
primarily on 30-day terms, performs credit evaluation procedures on its
customers and generally does not require collateral on its accounts receivable
because the majority of its customers are large, established retail customers
with operations throughout the United States. Most of the Company's sales are in
California and Texas. The Company maintains an allowance for potential credit
losses. For the year ended June 30, 1997, the periods ended June 30, 1996, and
September 8, 1995, and the year ended December 31, 1994, sales to the eight
largest customers constituted 75%, 82%, 96% and 80% of net sales, respectively.
Sales to the Company's largest customer constituted 39%, 41%, 37% and 31% of net
sales in these respective periods. The loss of, or reduction in orders from, any
major retail customer could have a material adverse effect on the Company.
4. INVENTORIES
Inventories at June 30, 1997 and 1996, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current:
Outdoor flowers and vegetable plants................................... $ 24,385 $ 6,291
Raw materials and supplies............................................. 3,374 1,346
Tree inventories....................................................... 1,095 --
--------- ---------
Total current inventories............................................ 28,854 7,637
Noncurrent:
Tree inventories....................................................... 541 --
--------- ---------
Total inventories.................................................... $ 29,395 $ 7,637
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1997 and 1996, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and land improvements............................................... $ 8,621 $ 1,656
Greenhouses and buildings................................................ 9,029 3,534
Furniture and fixtures................................................... 2,108 225
Machinery and equipment.................................................. 10,929 3,135
Leasehold improvements................................................... 2,587 582
Assets under capital leases.............................................. 752 539
Construction in progress................................................. 550 --
--------- ---------
34,576 9,671
Less: Accumulated depreciation........................................... (2,802) (506)
--------- ---------
Total property, plant and equipment.................................. $ 31,774 $ 9,165
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the year ended June 30, 1997, the periods ended
June 30, 1996, and September 8, 1995, and the year ended December 31, 1994, was
$2,296,000, $504,000, $634,000 and $832,000 respectively. Greenhouses with an
original cost of $4,961,000 are in service on property leased by the Company
under operating lease agreements.
6. NOTES RECEIVABLE
Notes receivable represent amounts due from third parties relating to land
and investment assets acquired and later sold in connection with the acquisition
of B&C Growers and Sunrise Growers, Inc. The assets were sold at their carrying
value; therefore no gain or loss was recognized on the dispositions. The assets
which were sold did not contribute to the Company's results of operations. The
notes require monthly principal and interest payments ranging from $1,000 to
$13,000 with interest rates ranging from 7.5% to 9.0%. Unpaid principal and
interest are due between December 2001 and March 2007 and are secured by the
underlying assets sold. The carrying amount of the notes receivable approximate
fair value.
7. INTANGIBLE ASSETS
Intangible assets as of June 30, 1997 and 1996, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Goodwill................................................................. $ 23,971 $ 637
Organization costs....................................................... 1,670 295
Financing costs.......................................................... 4,352 --
Noncompete agreements.................................................... 1,731 894
Other.................................................................... 856 --
--------- ---------
32,580 1,826
Less: Accumulated amortization........................................... (1,197) (94)
--------- ---------
Total intangible assets................................................ $ 31,383 $ 1,732
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACQUISITIONS
During the year ended June 30, 1997, and the period from the Inception Date
through June 30, 1996, the Company effected the following acquisitions:
<TABLE>
<CAPTION>
ENTITY DATE OF ACQUISITION
- ---------------------------------------------------------------------- ----------------------
<S> <C>
Barcelo's Plant Growers, Inc.......................................... March 1, 1996
NAB Nursery, Inc...................................................... October 1, 1996
B&C Growers........................................................... October 28, 1996
Sunrise Growers, Inc.................................................. November 18, 1996
Sunnyside Plants, Inc................................................. January 21, 1997
Lone Star Growers Co.................................................. February 20, 1997
Signature Trees....................................................... March 14, 1997
Hi-C Nursery.......................................................... April 4, 1997
</TABLE>
The entities acquired are growers and distributors of live plants, except
for Signature Trees, which grows and distributes Christmas trees. Financial
results of the entities acquired have been included in the results of operations
of the Company subsequent to the date of acquisition.
The purchase price, certain costs related to the acquisitions and the
allocation of the purchase price to the underlying net assets acquired in the
acquisitions of Lone Star Growers Co., Signature Trees and the other
acquisitions as a group as of June 30, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
------------------------------------------------ SEPTEMBER 8, 1995
LONE STAR SIGNATURE OTHER THROUGH
GROWERS CO. TREES ACQUISITIONS TOTAL JUNE 30, 1996
----------- ----------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Purchase price............................... $ 37,305 $ 3,175 $ 11,939 $ 52,419 $ 3,029
Organization and financing costs............. 1,328 108 1,177 2,613 250
----------- ----------- ----------- --------- -------
Total purchase price....................... 38,633 3,283 13,116 55,032 3,279
----------- ----------- ----------- --------- -------
Less: Value assigned to assets and
liabilities
Current assets............................. 14,322 747 7,136 22,205 4,048
Long-term assets........................... 15,616 288 6,650 22,554 4,937
Current liabilities........................ (4,656) (230) (3,465) (8,351) (5,286)
Debt....................................... (5,000) (137) (181) (5,318) (420)
----------- ----------- ----------- --------- -------
20,282 668 10,140 31,090 3,279
----------- ----------- ----------- --------- -------
Goodwill................................. $ 18,351 $ 2,615 $ 2,976 $ 23,942 $ --
----------- ----------- ----------- --------- -------
----------- ----------- ----------- --------- -------
</TABLE>
The Company accounted for all of these acquisitions under the purchase
method of accounting. The allocation of the purchase price to the underlying net
assets acquired is based upon preliminary estimates of the fair value of the net
assets, which may be revised at a later date. It is anticipated that any
purchase price allocation adjustments will be made within one year from the date
of acquisition. Management does not believe that the final allocations of the
purchase prices will have a material effect on the Company's financial position
or results of operations. In connection with the acquisition of Lone Star
Growers Co., Signature Trees and the other acquisitions, the Company issued
278,940, 55,788 and 17,434 shares of
F-15
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACQUISITIONS (CONTINUED)
common stock, respectively, which were valued at $7.17 per share, a price
negotiated between the parties. The president of the Company is a 20% partner of
Signature Trees. In connection with the acquisition of Signature Trees, the
president received $600,000.
Results of operations of the acquired entities subsequent to the purchase
date are included in the consolidated financial statements. Pro forma operating
results of the Company, assuming the acquisitions, occurred on September 8,
1995, are presented below (in thousands, except share data).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 8, 1995
JUNE 30, 1997 THROUGH
------------- JUNE 30, 1996
(UNAUDITED) -----------------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $135,497 $101,374
Income before extraordinary loss............................ 1,072 2,796
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities as of June 30, 1997 and 1996, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Compensation and benefits................................................ $ 4,750 $ 2,722
Cash overdraft........................................................... 3,520 --
Payable due to related party............................................. 164 --
Other.................................................................... 3,961 1,258
--------- ---------
Total accrued liabilities............................................ $ 12,395 $ 3,980
--------- ---------
--------- ---------
</TABLE>
10. DEBT
Debt as of June 30, 1997 and 1996, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revolving line of credit in the amount of $27,500. Advances under the line accrue interest,
at the Company's option, at the prime rate plus 1.25% (9.75% at June 30, 1997), or LIBOR
plus 2.75% (8.47% at June 30, 1997). The line is secured by substantially all of the
Company's assets and expires on June 30, 2002. As of June 30, the line had a provision
whereby the principal balance must be reduced below $5,000 for 30 consecutive days
annually. This requirement was subsequently increased to $10,000 in July 1997 and has been
reflected accordingly in the consolidated balance sheet as of June 30, 1997................ $ 12,105 $ --
Revolving line of credit in the amount of $15,000 at June 30, 1996. Advances under the line
accrue interest at the prime rate plus 2% (10.25% at June 30, 1996). The line was secured
by substantially all of the Company's assets and was terminated on December 31, 1996....... -- 3,791
</TABLE>
F-16
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEBT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Term loan in the amount of $25,000 obtained in conjunction with the recapitalization at
December 31, 1996 (as amended on February 20, 1997). The loan requires quarterly principal
payments ranging from $450 to $1,400 with all unpaid principal and interest due on June 30,
2002. The loan bears interest, at the Company's option, at the prime rate plus 1.25% (9.75%
at June 30, 1997), or LIBOR plus 2.75% (8.47% at June 30, 1997). The loan is secured by
substantially all of the Company's assets.................................................. 23,925 --
Term loan in the amount of $35,000 obtained in conjunction with the recapitalization at
December 31, 1996 (as amended on February 20, 1997). The loan requires quarterly principal
payments ranging from $88 to $5,512 with all unpaid principal and interest due on December
31, 2003. The loan bears interest at the Company's option, at the prime rate plus 1.75%
(10.25% at June 30, 1997), or LIBOR plus 3.25% (8.97% at June 30, 1997). The loan is
secured by substantially all of the Company's assets....................................... 34,825 --
Acquisition loans under a revolving line of $15,000 obtained on February 20, 1997 in
conjunction with the financing of certain acquisitions. The loan requires quarterly
principal payments beginning January 1, 1998 in an amount equal to a percentage, ranging
from 0.25% to 15.91%, of the principal balance on the last day of the calendar quarter,
with all unpaid principal and interest due on December 31, 2003. Advances under the
acquisition loans accrue interest at the Company's option, at the prime rate plus 1.75%
(10.25% at June 30, 1997), or LIBOR plus 3.25% (8.97% at June 30, 1997). The loans are
secured by substantially all of the Company's assets....................................... $ 8,227 $ --
Convertible note payable to the former majority owner of the Company in conjunction with the
recapitalization at December 31, 1996. The holder of the note may convert all or any
portion of the principal and accrued interest into non-voting common stock, provided that
if converted in connection with a public offering, the shares will be converted to voting
common stock. The conversion price is $20.09 per share and is subject to adjustments. If
not converted, the note requires full payment of principal and all accrued and unpaid
interest on December 31, 2004. The note bears interest at 8%. At June 30, 1997, the unpaid
accrued interest amount of $284 was capitalized into the original principal balance of
$7,100..................................................................................... 7,384 --
Amounts due pursuant to noncompete agreements resulting from various acquisitions by the
Company. The individual agreements require monthly payments ranging from $0.1 to $10 with
all unpaid principal due on dates ranging from January 1, 2000 through April 4, 2002....... 1,395 829
</TABLE>
F-17
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEBT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Other debt consists of equipment notes, bank loans and real estate notes. These debts have
varying payment terms (monthly or at maturity). Monthly principal payments range from $0.5
to $8. Two notes are due in full in July 1997 and December 2001, in the amounts of $99 and
$500, respectively. Interest rates on these debts range from 7.9% to 10.75%, with maturity
dates ranging from July 1997 through February 2002......................................... 1,620 3,158
Various capital lease obligations were incurred in conjunction with the rental of equipment.
The leases require monthly principal payments ranging from $0.2 to $13. Interest rates on
the leases range from 6% to 17.9%. Maturity dates range from January 1998 through September
2001....................................................................................... 627 437
--------- ---------
Total debt................................................................................... 90,108 8,215
Less: Current maturities..................................................................... (6,700) (1,430)
--------- ---------
Long-term portion............................................................................ $ 83,408 $ 6,785
--------- ---------
--------- ---------
</TABLE>
The Company has entered into interest rate protection agreements to cap the
interest rate on its term and acquisition loans. The principal protected at June
30, 1997 is $36,875,000, at interest rates ranging from 8.5% to 9.8%. The
interest rate protection agreements were purchased by the Company in order to
decrease its exposure to unfavorable interest rate movements. The Company is
exposed to credit losses in the event of counterparty nonperformance, but does
not currently anticipate any such losses because the counterparties are
established, reputable financial institutions. The agreements expire on March
31, 2000. As of June 30, 1997, the agreements were not in-the-money. The
revolving line of credit and term loan agreements require that the Company meet
certain covenants which, among other things, require maintenance of ratios
related to leverage and cash flow, and limit the level of capital expenditures
and payment of dividends.
Maturities of debt and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL
DEBT LEASES TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
1998........................................................... $ 6,436 $ 264 $ 6,700
1999........................................................... 5,367 203 5,570
2000........................................................... 5,644 158 5,802
2001........................................................... 6,013 2 6,015
2002........................................................... 18,997 -- 18,997
Thereafter..................................................... 47,024 -- 47,024
--------- ----- ---------
$ 89,481 $ 627 $ 90,108
--------- ----- ---------
--------- ----- ---------
</TABLE>
The net book value of the assets held under capital lease obligations was
$649,000 and $500,000 at June 30, 1997 and 1996, respectively.
F-18
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEBT (CONTINUED)
The fair value of long-term debt, including the current portion,
approximates fair value because all significant amounts outstanding at June 30,
1997, were issued in the current year and are representative of the terms and
interest rates that would be available to the Company at June 30, 1997.
11. INCOME TAXES
The provision for income taxes from continuing operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------ --------------------------------
SEPTEMBER 8, JANUARY 1, 1995
1995 THROUGH YEAR ENDED
YEAR ENDED THROUGH SEPTEMBER 8, DECEMBER 31,
JUNE 30, 1997 JUNE 30, 1996 1995 1994
------------- --------------- --------------- ---------------
Current:
<S> <C> <C> <C> <C>
Federal........................ $ -- $ -- $ -- $ --
State and local................ -- 2 -- --
------ ------ ------ ------
-- 2 -- --
Deferred:
Federal........................ 1,611 1,500 (931) (2,236)
State and local................ 1,219 767 (249) (215)
Valuation allowance............ -- -- 1,180 2,451
------ ------ ------ ------
2,830 2,267 -- --
------ ------ ------ ------
$ 2,830 $ 2,269 $ -- $ --
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
F-19
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is as
follows:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
---------------------------------- ------------------------------------
SEPTEMBER 8, 1995 JANUARY 1, 1995
YEAR ENDED THROUGH THROUGH YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 SEPTEMBER 8, 1995 DECEMBER 31, 1994
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Federal statutory income tax
rate........................... 34.0% 34.0% (34.0)% (34.0)%
State income tax rate, net of
federal taxes.................. 4.9% 6.1% (5.0)% (5.0)%
Permanent items:
Limitation on state net
operating losses............. 8.2% 4.5% 2.5% 1.4%
Other.......................... 0.9% 0.2% 0.5% 0.6%
Valuation allowance.............. -- -- 36.0% 37.0%
--- --- ----- -----
48.0% 44.8% 0.0% 0.0%
--- --- ----- -----
--- --- ----- -----
</TABLE>
In accordance with current tax regulations, the Company files its tax
returns on a cash basis in most jurisdictions. As a result, the Company has
accumulated significant net operating losses since inception. In the state of
California, utilization of net operating losses is limited to fifty percent of
the loss generated; hence the effective tax rate associated with the earnings
attributable to California are provided at a rate significantly above the
statutory rate.
Deferred tax assets and liabilities are composed of the following at June
30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Accounts payable....................................................... $ 3,700 $ 1,579
Accrued liabilities.................................................... 3,797 1,585
--------- ---------
Total current deferred tax assets.................................... 7,497 3,164
Noncurrent deferred tax assets:
Net operating loss carryforward........................................ 10,779 2,317
Depreciation and amortization.......................................... 171 51
--------- ---------
Total noncurrent deferred tax assets................................. 10,950 2,368
--------- ---------
Total deferred tax assets............................................ $ 18,447 $ 5,532
--------- ---------
--------- ---------
Current deferred tax liabilities:
Receivables............................................................ $ 10,007 $ 4,519
Inventory.............................................................. 11,272 3,086
Prepaids............................................................... 274 114
--------- ---------
Total current deferred tax liability................................. 21,553 7,719
Total noncurrent deferred tax liability: depreciation................ 830 81
--------- ---------
Total deferred tax liabilities....................................... $ 22,383 $ 7,800
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
At June 30, 1997, the Company has available federal and state net operating
loss carryforwards of $29,684,000 and $14,084,000, respectively. The federal net
operating losses expire beginning on June 30, 2011.
12. STOCKHOLDERS' EQUITY
COMMON STOCK AND REDEEMABLE COMMON STOCK
The Company has three classes of $0.01 par value common stock with
20,000,000 authorized shares of which 15,000,000 shares are designated as Common
Stock (6,073,062 shares outstanding at June 30, 1997), 2,500,000 shares are
designated as Non-Voting Common Stock (147,772 shares outstanding at June 30,
1997) and 2,500,000 shares are designated as Class C Common Stock (no shares
outstanding at June 30, 1997). Each class of stock is identical but for voting
rights and ability to convert into voting stock. The Non-Voting Common Stock and
Class C Common Stock have no voting rights.
KCSN, Heller and all of the management stockholders (the "Stockholders") are
parties to the Stockholders Agreement which includes certain transfer
restrictions, voting agreements and registration rights which survive until
December 31, 2006.
The Stockholders have agreed to (i) consent to any merger, consolidation or
sales of all or substantially all of the Company's assets involving an
independent third party and approved by a majority of the shares of Common Stock
held by KCSN and (ii) vote their shares of Common Stock to elect two members of
management (which shall be Michael F. Vukelich and Jerry L. Halamuda so long as
they are employed as executive officers of the Company), five KCSN designees and
two independent designees reasonably acceptable to KCSN as directors of the
Company. Consequently, the Stockholders (assuming the conversion of the Heller
Note) will continue to have significant influence over the policies and affairs
of the Company and may be in a position to determine the outcome of corporate
actions requiring stockholder approval, including adopting amendments to the
Certificate, electing directors and approving or disapproving mergers or sales
of all or substantially all of the Company's assets.
In addition to the voting agreement under the Stockholders Agreement, KCSN
and certain members of management are parties to a put/call option agreement to
effect the repurchase by the Company of shares of Common Stock held by such
management stockholders. Under the put/call option agreement, KCSN retained an
irrevocable proxy to vote the shares of Common Stock not yet purchased by the
Company. As of September 25, 1997, KCSN had an irrevocable proxy to vote 20,211
shares of Common Stock held by the management stockholders. The Company believes
that no shares of Common Stock will be subject to the put/call option agreement
as of January 1, 1998.
With the consummation of the Company's senior subordinated note, Series A
Preferred Stock and warrant offerings, the Company will effect a 0.69-for-one
reverse stock split. This reverse stock split has been given retroactive effect
in the Company's financial statements.
PREFERRED STOCK
The Company has an authorized class of $0.01 par value undesignated
preferred stock consisting of 1,000,000 shares. The board of directors has
authority, without any further vote or action by stockholders, to provide for
the issuance of preferred stock shares in series, to establish the relative,
participating, optional or other special rights, qualifications or restrictions
of the shares of each such series and to
F-21
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
determine the voting powers, if any, of such shares. No shares are outstanding
at June 30, 1997 and June 30, 1996.
13. STOCK OPTIONS
In July 1996, the Company adopted the 1996 Stock Incentive Plan (the "1996
Plan") under which eligible employees, directors and consultants of the Company
received options to purchase shares of the Company's common stock at a price
generally not less than the fair value of the common stock on the date of the
grant. Under the 1996 Plan, 1,171,419 options were granted at $1.45 per share
(fair value of the stock on the date of grant was $1.45 as determined by the
Board of Directors, such grants occurring coincident with independent third
party transactions). All options under the 1996 Plan fully vested as a result of
the recapitalization of the Company on December 31, 1996, and 569,417 options
were simultaneously exercised. Approximately 602,002 options remain outstanding
under the 1996 Plan.
On January 1, 1997, the Company adopted the 1997 Stock Option Plan (the
"1997 Plan"), under which eligible executives and key employees of the Company
received options to purchase shares of the Company's common stock at a price
generally not less than the fair value of the common stock on the date of grant.
Under the 1997 Plan, 842,493 options were granted at $7.17 or $7.19 per share
(the fair value of the stock on the date of grant as determined by the Board of
Directors, such grants occurring coincident with independent third party
transactions). Options granted under the 1997 Plan are exercisable over a
maximum term of ten years from the date of grant and vest in equal annual
installments over a four-year period. The options immediately vest upon a change
in control of the Company or an initial public offering. No options have been
exercised under the 1997 Plan.
In February 1997, the Company adopted the Special Stock Option Plan (the
"Special Plan"), under which eligible employees of the Company received options
to purchase shares of the Company's common stock at a price below the fair
market value of the common stock on the date of grant. Under the Special Plan,
139,383 options were granted at $1.43 per share. Options granted under the
Special Plan are exercisable over a maximum term of ten years from the date of
grant and vest in equal annual installments over a four-year period. The options
immediately vest upon a change in control of the Company or an initial public
offering. As these options are compensatory, compensation expense is being
recognized ratably over the vesting period of the options for the difference
between the fair market value at the date of grant and the exercise price. In
1997, the Company recognized compensation expense of $67,000 and will recognize
annual compensation expense of $200,000 over the vesting period.
Activity under the three plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Outstanding at July 1, 1996....................................... --
Granted......................................................... 2,153,295 3.70
Exercised....................................................... (569,417) 1.45
---------- -----
Outstanding at June 30, 1997...................................... 1,583,878 $ 4.49
---------- -----
---------- -----
Options exercisable at year-end................................... 602,002 $ 1.45
---------- -----
---------- -----
</TABLE>
F-22
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTIONS (CONTINUED)
There were no forfeitures or expirations during the year ended June 30,
1997.
The following summarizes information about stock options outstanding at June
30, 1997:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE AT JUNE 30, REMAINING FAIR VALUE OF
PRICE 1997 CONTRACTUAL LIFE OPTIONS GRANTED
- --------------- ----------- ---------------- -----------------
<S> <C> <C> <C>
$ 7.17 or 7.19 842,493 9.5 years $ 2.19
1.45 602,002 9.1 years 0.25
1.43 139,383 9.7 years 6.17
- --------------- -----
$ 4.49 $ 1.39
- --------------- -----
- --------------- -----
</TABLE>
The fair value of each option granted since June 30, 1996, was estimated on
the date of the grant using the Black-Scholes option-pricing model assuming an
expected life of six years, a risk-free interest rate of 6.08%, and no expected
dividends.
Had compensation cost for the Company's stock-based compensation plans been
determined based upon the fair value at grant dates for awards under those plans
consistent with the method prescribed by SFAS 123, the Company's net income
would have been reduced to the pro forma amounts indicated below (in thousands,
except share data):
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
Net income.................................................. As reported $ 2,840
Pro forma 1,925
</TABLE>
14. RELATED-PARTY TRANSACTIONS
During the year ended June 30, 1997, and the period from the Inception Date
through June 30, 1996, the Company paid management fees to Heller Investments,
Inc. of $279,000 and $135,000, respectively.
The Company pays Kohlberg a quarterly fee pursuant to a Fee Agreement for
certain management services. Under the Fee Agreement, Kohlberg is paid an annual
management fee equal to the greater of $300,000 or 3% of the Company's earnings
before interest, taxes, depreciation and amortization, subject to a maximum
annual payment of $750,000. The total fees expensed for the period from December
31, 1996 to June 30, 1997 was $440,000. In addition, Kohlberg was paid
$1,520,000 for services rendered in connection with the December 31, 1996
recapitalization. For fiscal year 1997, Kohlberg was paid an aggregate of
$1,670,000 under the Fee Agreement.
The Company's revolving lines of credit, term loans and acquisition line of
credit were provided by Credit Agricole Indosuez (Indosuez), a partner in KCSN.
Indosuez was paid $3,200,000 in loan fees in fiscal 1997 and the Company
incurred interest of $3,882,000 in connection with the amounts outstanding with
Indosuez.
The Company leases certain property that is owned directly or indirectly by
certain members of management. Payments pursuant to these operating leases for
the year ended June 30, 1997, the periods ended June 30, 1996, and September 8,
1995, and the year ended December 31, 1994 were $276,000, $266,000, $266,000,
and $266,000, respectively.
F-23
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED-PARTY TRANSACTIONS (CONTINUED)
As part of the recapitalization transaction (see note 1), the Company
acquired 603,750 shares of common stock from M.F. Vukelich Co., an entity
controlled by the Company's Chairman of the Board and Chief Executive Officer,
for a purchase price of $4.3 million.
In connection with the recapitalization, the Company purchased 730,284
shares from employees during the year at $7.17 per share.
Included in dividends payable on the accompanying consolidated balance
sheets is $872,000 payable to the Chairman of the Board and Chief Executive
Officer and to the President of the Company. The dividend will be paid upon
consummation of the Company's initial public offering of common stock or the
acquisition of the majority of the Company's common stock at a purchase price in
excess of $1.45 per share.
15. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) plan (the Plan) for employees in September
1995. All employees who meet certain service requirements are eligible to
participate. Matching contributions are at the discretion of the Company. The
Company made no contributions to the Plan during the year ended June 30, 1997,
and the period ended June 30, 1996. The Predecessor had a similar 401(k) plan.
All funds under the Predecessor's 401(k) plan were transferred into the Plan.
16. EXTRAORDINARY LOSS
In connection with the recapitalization of the Company on December 31, 1996,
prepayment penalties of $414,000 were paid in connection with the early
extinguishment of debt. The prepayment penalty, net of income taxes of $199,000,
was recorded in the accompanying statements of operations as an extraordinary
loss.
17. COMMITMENTS AND CONTINGENT LIABILITIES
OPERATING LEASES
The Company leases certain nursery facilities consisting of land and
improvements under noncancellable operating leases expiring at various dates
through 2012. The Company also leases transportation equipment under operating
leases expiring in various years through 2002. Some of the leases have five-year
renewal options and some are subject to rental increases based on a change in
the Consumer Price Index.
Total rent expense for the year ended June 30, 1997, the periods ended June
30, 1996, and September 8, 1995, and the year ended December 31, 1994, was
approximately $3,493,000, $2,065,000, $1,161,000 and $1,397,000, respectively.
F-24
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
At June 30, 1997, future minimum rental payments on non-cancellable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 3,481
1999............................................................... 3,525
2000............................................................... 3,366
2001............................................................... 2,650
2002............................................................... 1,825
Thereafter......................................................... 5,617
---------
Total minimum lease payments................................... $ 20,464
---------
---------
</TABLE>
PURCHASE COMMITMENTS
The Company has contracts to purchase Christmas trees from third-party
growers. Certain of these contracts require the Company to maintain the trees
until they are harvested. At June 30, 1997, future minimum purchase commitments
under the contracts are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 3,142
1999................................................................ 232
2000................................................................ 193
2001................................................................ 162
2002................................................................ 52
Thereafter.......................................................... --
---------
Total minimum purchase commitments................................ $ 3,781
---------
---------
</TABLE>
The Company has additional contracts to purchase Christmas trees whereby the
amounts payable are dependent upon the number of trees harvested and the year in
which they are harvested.
CONTINGENCIES
The Company is a party to various legal proceedings, claims and assessments
arising in the normal course of its business activities. Based upon information
presently available and in light of legal and other defenses and insurance
coverage, management does not expect these legal proceedings, claims and
assessments, individually or in the aggregate, to have a material adverse impact
on the Company's consolidated financial position or operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executive officers, with remaining service periods ranging from 1.5 to three
years. The agreements provide for certain payments to each officer upon
termination of employment, other than as a result of death, disability in most
cases or justified cause, as defined. The aggregate estimated commitment under
these agreements was $1,549,000 at June 30, 1997.
F-25
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS
ACQUISITIONS
Subsequent to June 30, 1997, the Company effected the following
acquisitions:
<TABLE>
<CAPTION>
ENTITY DATE OF ACQUISITION
- ----------------------------------------------------------------------- ---------------------
<S> <C>
Plants, Inc............................................................ July 31, 1997
Peters' Wholesale Greenhouses, Inc..................................... July 31, 1997
Wolfe Greenhouses, LLC................................................. July 31, 1997
Cracon, Inc............................................................ August 5, 1997
Summersun Greenhouse Co................................................ August 11, 1997
Oda Nursery, Inc....................................................... September 3, 1997
</TABLE>
The entities acquired are growers and distributors of live plants, except
for Cracon, Inc. which grows and distributes Christmas trees. Financial results
of the entities will be included in the results of operations of the Company
subsequent to the date of acquisition.
The purchase price, certain costs related to the acquisitions and the
allocation of the purchase price to the underlying net assets acquired in these
acquisitions were as follows (in thousands):
<TABLE>
<CAPTION>
SUMMERSUN ODA NURSERIES OTHER
GREENHOUSE CO. INC. ACQUISITIONS TOTAL
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Purchase price........................................... $ 7,546 $ 16,052 $ 17,901 $ 41,499
Organization and financing costs......................... 286 479 1,121 1,886
------- ------------- ----------- ---------
Total purchase price................................. 7,832 16,531 19,022 43,385
Less: Value assigned to assets and liabilities
Current assets......................................... 1,693 7,339 3,783 12,815
Long-term assets....................................... 1,520 3,566 11,367 16,453
Current liabilities.................................... (1,035) (2,875) (3,429) (7,339)
Debt................................................... -- -- (307) (307)
Long-term liabilities.................................. -- (3,480) (1,241) (4,721)
------- ------------- ----------- ---------
2,178 4,550 10,173 16,901
------- ------------- ----------- ---------
Goodwill............................................. $ 5,654 $ 11,981 $ 8,849 $ 26,484
------- ------------- ----------- ---------
------- ------------- ----------- ---------
</TABLE>
The Company accounted for all of these acquisitions under the purchase
method of accounting. The allocation of the purchase price to the underlying net
assets acquired is based upon preliminary estimates of the fair value of the net
assets, which may be revised at a later date. It is anticipated that any
purchase price allocation adjustments will be made within one year from the date
of acquisition. In connection with the acquisitions, the Company issued 39,204
shares of common stock which were valued at $15.94 per share, a price negotiated
between the parties.
FINANCING
To effect the acquisitions subsequent to June 30, 1997, the Company borrowed
$37,300,000. In connection with the borrowings, the Company increased its limit
under the revolving line of credit to
F-26
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (CONTINUED)
$37,500,000, increased its $25,000,000 term loan to a $35,000,000 term loan and
increased its $35,000,000 term loan to a $55,000,000 term loan.
EQUITY
In July 1997, the Company issued 713,127 shares of its common stock for a
total cash consideration of $5,120,000. In addition, 39,204 shares were issued
in connection with certain acquisitions.
19. QUARTERLY FINANCIAL DATA--(UNAUDITED)
Summarized quarterly financial information for the year ended June 30, 1997
and the period from the Inception Date through June 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 26, MARCH 27, JUNE 30,
1996 1996 1997 1997
------------- ------------ ----------- ---------
1997 Q1 Q2 Q3 Q4
- ----------------------------------------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $ 13,437 $ 13,165 $ 31,049 $ 55,749
Gross profit............................. 4,579 4,920 13,716 26,159
Operating income......................... (1,469) (1,059) 3,871 8,573
Extraordinary loss, net of tax........... -- -- 215 --
Net income............................... (820) (740) 932 3,468
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 28, MARCH 28, JUNE 30,
1995 1995 1996 1996
------------- ------------ ----------- ---------
1996 Q1 (21 DAYS) Q2 Q3 Q4
- ----------------------------------------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $ 1,798 $ 6,852 $ 12,834 $ 30,511
Gross profit............................. 120 1,982 8,279 13,929
Operating income......................... (767) (1,708) 3,272 5,038
Net income............................... (485) (1,099) 1,789 2,583
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying balance sheets of Oda Nursery, Inc. (a
California corporation) as of December 31, 1996 and 1995, and the related
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Oda Nursery, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California
August 14, 1997
F-28
<PAGE>
ODA NURSERY, INC.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................. $ 265,597 $ 933,061
Accounts receivable, less allowance for doubtful accounts of $150,000............ 164,279 288,506
Inventories...................................................................... 8,684,547 9,541,209
Prepaid expenses................................................................. 37,437 14,286
Investment in stock.............................................................. 90,140 150,190
Notes receivable from stockholders............................................... 450,000 676,650
------------- -------------
Total current assets........................................................... 9,692,000 11,603,902
PROPERTY, PLANT AND EQUIPMENT, net................................................. 665,928 3,571,833
NET ASSETS HELD FOR DISTRIBUTION................................................... 1,976,588 --
------------- -------------
Total assets................................................................... $ 12,334,516 $ 15,175,735
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......................................... $ 113,624 $ 277,142
Long-term debt, net of current maturities........................................ 212,175 615,302
Loan from stockholder............................................................ 1,400,000 1,400,000
Advances under revolving line of credit.......................................... 750,100 405,350
------------- -------------
Total current liabilities...................................................... 2,475,899 2,697,794
LONG-TERM DEBT, net of current maturities.......................................... 777,567 1,771,835
------------- -------------
Total liabilities.............................................................. 3,253,466 4,469,629
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 5,000 shares authorized, 2,000 shares issued and
outstanding.................................................................... 200,000 200,000
Retained Earnings................................................................ 8,881,050 10,506,106
------------- -------------
Total stockholders' equity..................................................... 9,081,050 10,706,106
------------- -------------
Total liabilities and stockholders' equity..................................... $ 12,334,516 $ 15,175,735
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
ODA NURSERY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
SALES................................................................................ $ 10,613,252 $ 9,841,072
COST OF SALES........................................................................ 5,999,810 5,246,839
------------- ------------
Gross profit..................................................................... 4,613,442 4,594,233
OPERATING EXPENSES:
Delivery........................................................................... 2,023,041 1,460,423
Sales and marketing................................................................ 501,160 627,761
General and administrative......................................................... 478,737 398,592
Depreciation....................................................................... 102,410 160,380
Write down of property, plant and equipment........................................ 770,412 --
Other expenses..................................................................... 61,892 53,692
------------- ------------
Income from operations........................................................... 675,790 1,893,385
INTEREST EXPENSE..................................................................... 337,002 318,182
OTHER INCOME (EXPENSES), net......................................................... 236,156 (1,575)
------------- ------------
Net income....................................................................... $ 574,944 $ 1,573,628
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
ODA NURSERY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.................................... 2,000 $ 200,000 $ 8,932,478 $ 9,132,478
Net income.................................................. -- -- 1,573,628 1,573,628
----- ---------- ------------- -------------
BALANCE, December 31, 1995.................................... 2,000 $ 200,000 $ 10,506,106 $ 10,706,106
Net income.................................................. -- -- 574,944 574,944
Distributions............................................... -- -- (2,200,000) (2,200,000)
----- ---------- ------------- -------------
BALANCE, December 31, 1996.................................... 2,000 $ 200,000 $ 8,881,050 $ 9,081,050
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
ODA NURSERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES AND OTHER NONRECURRING EXPENSES:
Net income........................................................................ $ 574,944 $ 1,573,628
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of property, plant and equipment................................... -- 69,051
Depreciation.................................................................... 179,000 170,000
Write down of land to net realizable value...................................... 770,412 --
Changes in certain assets and liabilities:
(Decrease) increase in receivables............................................ 124,227 (178,725)
(Decrease) increase in inventories............................................ 856,662 (745,650)
(Increase) decrease in prepaid expenses....................................... (23,151) 24,829
Decrease in notes receivable from stockholder................................. 226,650 1,531
Decrease in accounts payable and accrued expenses............................. (163,518) (607,585)
------------- -------------
Net cash provided by operating activities................................... 2,545,226 307,079
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (98,095) (146,000)
------------- -------------
Net cash used in investing activities....................................... (98,095) (146,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit...................................................... 750,100 405,000
Payments on line of credit........................................................ (405,350) (2,000,000)
Proceeds from issuance of long-term obligations................................... -- 1,152,805
Principal payments on long-term obligations....................................... (1,259,345) (1,500,339)
Principal payments on loan from stockholder....................................... -- (100,000)
Distributions to stockholders..................................................... (2,200,000) --
------------- -------------
Net cash used in financing activities....................................... (3,114,595) (2,042,534)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS............................................... (667,464) (1,881,455)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................................... 933,061 2,814,516
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $ 265,597 $ 933,061
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.......................................................................... $ 337,002 $ 355,640
Income taxes...................................................................... 55,000 8,918
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. NATURE OF OPERATIONS:
ORGANIZATION
Oda Nursery, Inc., a California corporation (the "Company"), was formed on
December 10, 1973, by Harunori Oda, Mitsuka Oda and Richard Tanaka. The Company
was formed to acquire, own, operate and manage a nursery business, as well as to
acquire, own, sell, mortgage or lease real and personal property.
DESCRIPTION OF THE BUSINESS
The Company is an agricultural enterprise specializing in the growth and
wholesale of high-quality ornamental plants and shrubs to numerous retailers.
The majority of the plants are grown on the Company's 200 acre complex in San
Juan Capistrano, California.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Company in preparing its financial statements in accordance with generally
accepted accounting principles:
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost or market. Plant inventory cost
includes direct production costs and overhead. Raw material inventory cost is
determined using the most recent purchase price, which approximates average
cost. A portion of the Company's inventory has an average growing period of
approximately 18 months. This inventory is classified as a current asset based
on the Company's normal operating cycle.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
10 - 24
Buildings and improvements.................................... years
Machinery and equipment....................................... 5 - 10 years
Software, furniture and fixtures.............................. 3 - 5 years
</TABLE>
F-33
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Total depreciation expense for the years ended December 31, 1996 and 1995
was $179,000 and $170,000, respectively. All repairs and maintenance costs are
expensed as incurred.
REVENUE RECOGNITION
The Company recognizes revenues when products are shipped. Where
appropriate, the Company establishes a reserve for returns and allowances.
OTHER INCOME (EXPENSES), NET
Other income (expenses), net is primarily interest income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Partnership's financial instruments, including
accounts receivable, accounts payable and debt, approximates fair value.
INCOME TAXES
The Company elected in 1973, under Federal and state tax laws, to be treated
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, income taxes are the obligation of the individual stockholder,
except that the Company is taxed on income for state tax purposes at reduced
rates. The Company has recorded a provision for income taxes of $33,063 and $822
for the years ended December 31, 1996 and December 31, 1995, respectively, which
is included in other expenses.
ASSET IMPAIRMENT
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121").
SFAS 121 requires that long-lived assets be reviewed for impairment and written
down to fair value whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Adoption of SFAS 121 resulted in an
impairment charge included in operating costs of $770,412. The impaired assets
represent land held for sale in Beaumont and Lancaster, California. These sites
were appraised by an independent third-party. As discussed in Note 11, these
properties do not form part of the purchase agreement.
3. CONCENTRATION OF CREDIT RISK:
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral, as the majority of its
customers well-established companies. Two customers accounted for approximately
70 percent and 50 percent of accounts receivable at December 31, 1996 and 1995,
respectively. These same two customers accounted for approximately 38 percent
and 41 percent of sales for the years ended December 31, 1996 and 1995,
respectively.
F-34
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. INVENTORIES:
Inventories consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies........................................ $ 655,000 $ 707,000
Plant inventory................................................... $ 8,029,547 $ 8,834,209
------------ ------------
Total inventory............................................... $ 8,684,547 $ 9,541,209
------------ ------------
------------ ------------
</TABLE>
5. INVESTMENT IN STOCK:
As further discussed in Note 7 the Company is required under the terms of
its credit agreement to maintain an investment in stock of the bank amounting to
6.83 percent of its outstanding indebtedness.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1996 and 1995, consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Land............................................................ $ -- $ 2,825,000
Machinery and equipment......................................... 1,722,000 1,685,000
Buildings and improvements...................................... 466,000 453,000
Software, furniture and fixtures................................ 216,000 184,000
------------- -------------
2,404,000 5,147,000
Less: Accumulated depreciation.................................. (1,738,072) (1,575,167)
------------- -------------
Total property, plant and equipment......................... $ 665,928 $ 3,571,833
------------- -------------
------------- -------------
</TABLE>
As further discussed in Note 10, all of the land held by the Company will be
distributed to the Company's stockholders subsequent to the sale of the Company.
These assets are classified as net assets held for distribution.
7. LINE OF CREDIT
The Company has a $2,000,000 revolving line of credit with a financial
institution under which there was $750,100 and $405,350 outstanding at December
31, 1996 and December 31, 1995, respectively. Advances under the line accrue
interest at the bank's reference rate (9.75% and 8.75% at December 31, 1996 and
December 31, 1995, respectively). Substantially all of the Company's assets are
held as collateral. Borrowings are limited to 75 percent of eligible accounts
receivable and 55 percent of the Company's eligible inventory balance, less
certain borrowings. Availability at December 31, 1996, was approximately
$1,955,000. The line of credit expires on October 6, 1997.
F-35
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Note payable to bank, with monthly interest payments, interest at
the bank's reference rate (9.25 and 9.75 percent at December 31,
1996 and December 31, 1995, respectively); secured by
substantially all of the Company's assets; unpaid principal and
interest due on October 6, 1998.................................. $ 100 $ 1,152,806
Note payable to bank, with monthly principal and interest payments
of $13,084, interest at the bank's reference rate (9.25 and 9.75
percent as of December 31, 1996 and December 31, 1995,
respectively); secured by substantially all of the Company's
assets; unpaid principal and interest due on May 1, 2002......... 648,819 733,686
Mortgage payable to an individual, with monthly principal and
interest payments of $2,400, interest at an annual rate of 6.5
percent as of December 31, 1996; secured by land; unpaid
principal and interest due July 13, 2006......................... 206,090 290,000
Stock obligation to bank, with monthly interest payments made at
9.0 percent at December 31, 1996 and December 31, 1995,
respectively; unpaid interest due May 1, 2002.................... 90,140 150,190
Note Payable under Small Business Loan, with monthly principle and
interest payments of $1,960, interest at 6.0 and 3.0 percent at
December 31, 1996 and December 31, 1995, respectively; unpaid
principle and interest due February 27, 1997..................... 44,593 60,455
----------- ------------
989,742 2,387,137
Less: Current maturities........................................... (212,175) (615,302)
----------- ------------
$ 777,567 $ 1,771,835
----------- ------------
----------- ------------
</TABLE>
The provisions of the debt agreements with the bank generally impose
restrictions relating to, among other matters, incurrence of additional
indebtedness and maintenance of specified amounts of tangible net worth and
working capital. In addition, the bank requires the Company to maintain 6.38
percent of outstanding borrowings as an investment in the bank's stock. The
investment in stock is reduced as the Company makes principal payments on its
other obligations to the bank.
F-36
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. LONG-TERM DEBT (CONTINUED)
The annual amount of principle maturities of long-term debt outstanding at
December 31, 1996, is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 212,175
1998.............................................................. 130,424
1999.............................................................. 143,244
2000.............................................................. 157,342
2001.............................................................. 172,870
Thereafter........................................................ 173,687
---------
$ 989,742
---------
---------
</TABLE>
9. STOCKHOLDERS' NOTES:
The following table summarizes the Company's notes with stockholders
presented in the balance sheet as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Note receivable from stockholder.................................. $ 450,000 $ 676,650
Loan from stockholder............................................. 1,400,000 1,400,000
</TABLE>
The Company advanced cash to a stockholder and one of his related entities
under common ownership in 1992 and 1996 of $675,000 and $450,000, respectively.
The note issued in 1992 was repaid during 1996. The note issued in 1996 was
repaid during 1997 and accrued interest at 10 percent. Interest received on
these notes was $236,000 and $14,000 for the years ended December 31, 1996 and
1995, respectively.
The Company received cash from one of its stockholders in 1993. This loan is
due at the notice of the stockholder and is therefore considered short-term in
nature. Interest is payable monthly, at an annual rate of 8 percent. Interest
paid on this loan was $112,000 and $112,000 for the years ended December 31,
1996 and 1995, respectively.
10. SUBSEQUENT EVENT AND NET ASSETS HELD FOR DISTRIBUTION:
In September 1997, the Company's stockholders sold the Company to Color Spot
Nurseries, Inc. The land held by the Company was not part of the sale
transaction. It is the Company's intention to distribute this land to the
stockholders in connection with the sale. This land was written down during the
year ended December 31, 1996, by $770,412 based on independent appraisals. The
land was not utilized in operations in 1996 and 1995.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Summersun Greenhouse Co.
We have audited the accompanying balance sheet of the Wholesale Bedding
Plant Division of Summersun Greenhouse Co. as of May 31, 1997 and 1996, and the
related statements of operations and division equity and cash flows for the
years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of the Wholesale Bedding Plant
Division of Summersun Greenhouse Co. as of May 31, 1997 and 1996, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the accompanying
divisional financial statements include allocations of assets, liabilities,
revenues and expenses between the divisions comprising the Company. The
financial statements include certain allocations of the Company's accounts, as
described below, because it was not practical in all cases to specifically
identify individual results and balances of the Division. In management's
opinion, the method of allocation is reasonable and is representative of the
results of operations that would have been realized by the Division on a
stand-alone basis, in all material respects. However, because of the assumptions
underlying the numerous allocations, the financial statements may not be
indicative of future operations, and the Division may have been financed and
operated differently as a separate entity.
MOSS ADAMS LLP
Seattle, Washington
June 20, 1997
F-38
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
BALANCE SHEETS
MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable trade, less allowance for doubtful accounts of $5,000 in 1997
and 1996....................................................................... $ 2,934,100 $ 1,350,500
Inventories...................................................................... 3,091,200 2,093,700
Prepaid expenses................................................................. 20,000 --
------------- -------------
Total current assets........................................................... 6,045,300 3,444,200
PROPERTY AND EQUIPMENT, net........................................................ 4,813,800 3,983,300
------------- -------------
$ 10,859,100 $ 7,427,500
------------- -------------
------------- -------------
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES
Notes payable.................................................................... $ 2,934,100 $ 1,350,500
Accounts payable................................................................. 1,493,500 1,187,300
Accrued payroll and payroll taxes................................................ 164,600 69,500
Current portion of long-term debt................................................ 482,100 276,500
------------- -------------
Total current liabilities...................................................... 5,074,300 2,883,800
LONG-TERM DEBT, net of current portion............................................. 3,290,100 2,987,300
DIVISIONAL EQUITY.................................................................. 2,494,700 1,556,400
------------- -------------
$ 10,859,100 $ 7,427,500
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
STATEMENTS OF OPERATIONS AND DIVISIONAL EQUITY
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES......................................................... $ 8,677,300 100.8 % $ 8,030,700 102.1 %
Less sales discounts and allowances......................... 77,300 0.8 163,900 2.1
------------ ----- ------------ -----
NET SALES..................................................... 8,600,000 100.0 7,866,800 100.0
COST OF GOODS SOLD............................................ 4,174,700 48.5 4,187,600 53.2
------------ ----- ------------ -----
Gross profit................................................ 4,425,300 51.5 3,679,200 46.8
OPERATING EXPENSES............................................ 3,827,100 44.5 3,820,700 48.6
------------ ----- ------------ -----
Income from operations...................................... 598,200 7.0 (141,500) (1.8)
------------ ----- ------------ -----
OTHER INCOME (EXPENSE)
Interdivisional rental income............................... 325,000 3.8 111,000 1.4
Interest expense............................................ (428,100) (5.0) (392,100) (5.0)
Other....................................................... 26,200 0.3 (3,400) (0.0)
------------ ----- ------------ -----
(76,900) (0.9) (284,500) (3.6)
------------ ----- ------------ -----
NET INCOME (LOSS)............................................. 521,300 6.1 % (426,000) (5.4)%
----- -----
----- -----
DIVISIONAL EQUITY
Beginning of year........................................... 1,556,400 2,154,700
Interdivisional transfers................................... 417,000 (172,300)
------------ ------------
End of year................................................. $ 2,494,700 $ 1,556,400
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................................. $ 521,300 $ (426,000)
Adjustments to reconcile net income (loss) to cash flows from operating
activities.......................................................................
Depreciation..................................................................... 372,200 348,400
Changes in assets and liabilities
Trade accounts receivable...................................................... (1,583,600) 1,293,100
Inventories.................................................................... (997,500) (26,800)
Prepaid expenses............................................................... (20,000) --
Accounts payable............................................................... 306,200 39,300
Accrued liabilities............................................................ 95,100 (45,400)
------------- ------------
(1,306,300) 1,182,600
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment.............................................. (1,202,700) (187,900)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in notes payable........................................................ 1,583,600 (578,400)
Long-term borrowing................................................................ 798,900 --
Principal payments on long-term debt............................................... (290,500) (244,000)
Net transfer of cash from other divisions.......................................... 417,000 (172,300)
------------- ------------
2,509,000 (994,700)
------------- ------------
CHANGE IN CASH....................................................................... -- --
CASH BALANCE,
Beginning of year.................................................................. -- --
------------- ------------
End of year........................................................................ $ -- $ --
------------- ------------
------------- ------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for interest............................................................. $ 415,600 $ 398,200
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1997 AND 1996
NOTE 1--OPERATIONS AND BASIS OF PRESENTATION
OPERATIONS--The Wholesale Bedding Plant Division (the "Division") is a
division of Summersun Greenhouse Co. (the "Company"). The Company was
incorporated in the State of Washington in 1978. It operates as a horticultural
producer and wholesaler in the Pacific Northwest. The Division's sales,
including interdivisional sales, accounted for approximately 80% of the
Company's overall sales in 1997 and 1996. Other operations of the Company
include the Terra Plug Division ("Terra Plug") which produces a proprietary
product using a patented growing process, a retail nursery operation and a day
care facility for Company employees.
BASIS OF PRESENTATION--The accompanying divisional financial statements are
intended to present the assets, liabilities, revenues, expenses and cash flows
attributable to the Division and do not represent a complete presentation of the
Company's financial position, results of operations and cash flows. The
financial statements include certain allocations of the Company's accounts, as
described below, because it was not practical in all cases to specifically
identify individual results and balances of the Division. In management's
opinion, the method of allocation is reasonable and the results are
representative of the results of operations that would have been realized by the
Division on a stand-alone basis, in all material respects. However, because the
statements reflect numerous allocations, they may not be indicative of future
operations, and the Division may have been financed and operated differently as
a separate entity. The amounts presented in the divisional statements were
determined as described below.
- Accounts Receivable and Accounts Payable--Accounts receivable and accounts
payable consist of amounts specifically identifiable with the sales and
purchasing activity of the Division.
- Inventories--Inventories consist of those items specifically identifiable
with the operations of the Division.
- Prepaid Expenses--Prepaid expenses represent approximately 85% of the
Company's prepaid insurance.
- Property and Equipment--Property and equipment consist of those assets
specifically identifiable with the operations of the Division.
- Notes Payable--Short-term notes payable are recorded at an amount equal to
the balance of trade accounts receivable net of the allowance for doubtful
accounts.
- Long-Term Debt--Long-term debt is allocated based on the relationship of
the cost of the Division's property and equipment to the cost of
Company-wide property and equipment.
- Interdivisional Transfers--No cash is reflected in the accompanying
financial statements. The Company transfers cash as needed in order to
allow the Division to meet its operational cash flow needs. All transfers
of cash or other assets are recorded as changes to divisional equity.
- Sales--Sales include amounts for the sale of wholesale bedding plants.
Included in total sales in 1997 and 1996, respectively, is $217,800 and
$161,600 of sales to the Company's retail operation.
- Cost of Goods Sold--Cost of goods sold consists of the cost of wholesale
bedding plants sold. Included in the determination of cost of goods sold
in 1997 and 1996, respectively, is $48,300 and $286,900 of net purchases
from the Company's Terra Plug Division.
F-42
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 1--OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
- Operating Expenses--Administrative salaries are allocated based on
personnel's estimated time devoted to the Division. All other operating
expenses were charged to the Division based on specific identification of
costs incurred.
- Interdivisional Rent--The Division charges Terra Plug rent for the use of
its greenhouses to grow Terra Plug plants prior to their being
transplanted to the Company's fields. During 1997, the Division charged
Terra Plug rent of $325,000. This amount was based on management's
computation of estimated profits the Division would have realized had the
greenhouse space been used in the production of wholesale bedding plants.
During 1996, the Division charged Terra Plug rent of $111,000. This amount
was based on management's computation of estimated operating costs per
square foot for the space rented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
At May 31, 1997, the Division had significantly greater quantities of living
plants than in prior years. Due to unusually cool and wet weather conditions in
the Pacific Northwest, sales in June 1997 were not significantly greater than in
June 1996. There is a possibility that some loss may occur on disposition of the
aggregate living plant inventory. However, no accurate estimate of the amount of
loss, if any, can be made and thus no provision for such loss has been included
in the accompanying financial statements.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost of
living plant inventory is estimated based on the relationship of direct growing
costs to wholesale sales during the months of March, April and May. Crops on
hand at May 31 are primarily short-term in nature as this time frame is the
fastest growing period of the Company's production cycle. The direct growing
costs during the months of March, April and May are therefore those costs which
directly relate to the crops included in inventories at May 31. As there is a
broad mix of crops on hand at May 31, the Company applies the average cost of
sales percentage to the lowest wholesale value of all crops on hand as of May 31
to derive cost of living plant inventory. The cost of raw materials and supplies
is determined using the first-in, first out (FIFO) method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using straight-line and accelerated methods over the
estimated useful lives of the assets, ranging from 5 to 25 years.
ADVERTISING COSTS--The Division expenses advertising costs as they are
incurred. Advertising expense was $101,900 and $67,100 in 1997 and 1996,
respectively.
INCOME TAXES--The Company, with consent of its stockholders, has elected
under the Internal Revenue Code to be an S corporation. In lieu of corporate
income taxes, the stockholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Accordingly, the
accompanying financial statements include no provision for federal income taxes.
If the Division were taxed as a C Corporation, the provision for income taxes
would have been $208,500 in 1997 and the income tax
F-43
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
benefit would have been $170,400, (assuming an effective income tax rate of
40%). As a result, "Net income (loss)" would have been $312,800 and $(255,600)
in 1997 and 1996, respectively.
NOTE 3--CONDENSED COMPANY FINANCIAL INFORMATION
The following is a condensed balance sheet of the Company as of May 31, 1997
and 1996 showing the Wholesale Bedding Plant Division as it relates to the
Company:
BALANCE SHEET
MAY 31, 1997
<TABLE>
<CAPTION>
WHOLESALE
BEDDING
PLANT OTHER
DIVISION DIVISIONS TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Current assets................................... $ 6,045,300 $ 1,082,200 $ 7,127,500
Property and equipment, net...................... 4,813,800 820,900 5,634,700
Other assets..................................... -- 919,000 919,000
------------- ------------ -------------
$ 10,859,100 $ 2,822,100 $ 13,681,200
------------- ------------ -------------
------------- ------------ -------------
Current liabilities.............................. $ 5,074,300 $ 1,265,500 $ 6,339,800
Long-term debt................................... 3,290,100 580,600 3,870,700
Stockholders' equity............................. 2,494,700 976,000 3,470,700
------------- ------------ -------------
$ 10,859,100 $ 2,822,100 $ 13,681,200
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
MAY 31, 1996
<TABLE>
<S> <C> <C> <C>
Current assets......................... $3,444,200 $1,291,600 $4,735,800
Property and equipment, net............ 3,983,300 1,077,100 5,060,400
Other assets........................... -- 753,400 753,400
---------- --------- ----------
$7,427,500 $3,122,100 $10,549,600
---------- --------- ----------
---------- --------- ----------
Current liabilities.................... $2,883,800 $ 712,100 $3,595,900
Long-term debt......................... 2,987,300 527,200 3,514,500
Stockholders' equity................... 1,556,400 1,882,800 3,439,200
---------- --------- ----------
$7,427,500 $3,122,100 $10,549,600
---------- --------- ----------
---------- --------- ----------
</TABLE>
The Company has recorded certain payments to stockholders as notes
receivable, which are included in other assets in the balance sheets above.
Subsequent to May 31, 1997, the notes receivable were repaid out of proceeds
from the sale of the Wholesale Bedding Plant Division.
F-44
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 3--CONDENSED COMPANY FINANCIAL INFORMATION (CONTINUED)
The following is a condensed statement of operations of the Company for the
years ended May 31, 1997 and 1996 showing the Wholesale Bedding Plant Division
as it relates to the Company:
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
WHOLESALE INTERDIVISIONAL
BEDDING PLANT OTHER SALES AND
DIVISION DIVISIONS PURCHASES TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales, net....................... $ 8,600,000 $ 3,096,900 $ (714,300) $ 10,982,600
Cost of goods sold............... 4,174,700 1,852,800 (714,300) 5,313,200
------------- ------------- ------------- -------------
Gross profit................... 4,425,300 1,244,100 -- 5,669,400
Operating expenses............... 3,827,100 1,230,800 -- 5,057,900
------------- ------------- ------------- -------------
Operating income............... 598,200 13,300 -- 611,500
Other expense.................... (76,900) (503,100) -- (580,000)
------------- ------------- ------------- -------------
Net income (loss)................ $ 521,300 $ (489,800) $ -- $ 31,500
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C> <C> <C> <C>
Sales, net................ $7,866,800 $2,445,200 $(523,400) $9,788,600
Cost of goods sold........ 4,187,600 1,063,500 (523,400) 4,727,700
---------- ---------- ----------- ----------
Gross profit............ 3,679,200 1,381,700 -- 5,060,900
Operating expenses........ 3,820,700 1,110,600 -- 4,931,300
---------- ---------- ----------- ----------
Operating income
(loss)................ (141,500) 271,100 -- 129,600
Other expense............. (284,500) (247,500) -- (532,000)
---------- ---------- ----------- ----------
Net loss.................. $ (426,000) $ 23,600 $ -- $ (402,400)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
NOTE 4--INVENTORIES
At May 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Living plants..................................................... $ 2,414,500 $ 1,388,300
Raw materials and supplies........................................ 676,700 705,400
------------ ------------
$ 3,091,200 $ 2,093,700
------------ ------------
------------ ------------
</TABLE>
F-45
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 5--PROPERTY AND EQUIPMENT
At May 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997
----------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ------------ ------------
<S> <C> <C> <C>
Greenhouses......................................... $ 4,387,300 $ 1,197,900 $ 3,189,400
Operating equipment................................. 2,597,500 1,604,100 993,400
Land, buildings and improvements.................... 691,300 60,300 631,000
------------ ------------ ------------
$ 7,676,100 $ 2,862,300 $ 4,813,800
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
1996
----------------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------------ ------------ ------------
<S> <C> <C> <C>
Greenhouses......................................... $ 3,562,400 $ 1,042,600 $ 2,519,800
Operating equipment................................. 2,407,400 1,422,100 985,300
Land, buildings and improvements.................... 519,100 40,900 478,200
------------ ------------ ------------
$ 6,488,900 $ 2,505,600 $ 3,983,300
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
During 1997 and 1996, depreciation expense totaled $372,200 and $348,400,
respectively.
NOTE 6--NOTES PAYABLE
The Company has a line of credit agreement with a bank providing for
borrowing up to $3,000,000, as limited by accounts receivable and inventories.
The line bears interest at prime plus .375% and is collateralized by accounts
receivable and inventories. The line of credit agreement matures August 31,
1997, and is subject to certain financial covenants.
The Company has a line of credit agreement with another bank providing for
borrowing up to $457,500. The line bears interest at prime plus 2% and is
secured by a mortgage on real property. The line of credit agreement matures
June 15, 1997.
F-46
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 7--LONG-TERM DEBT
At May 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes payable to a cooperative agricultural lender in monthly
installments attributable to the Division totaling $46,500
including interest at variable rates up to 260 basis points over
the lender's discount note rates with future rate change options
available, collateralized by substantially all assets and
guaranteed by stockholders, maturing at various times from
December 1997 to October 2009................................... $ 3,573,400 $ 3,016,500
Note payable to Small Business Administration in monthly
installments attributable to the Division of $4,300 including
interest at 4%, collateralized by deeds of trust on real estate
and guaranteed by stockholders, maturing May 2001............... 191,600 236,500
Note payable to bank in monthly installments attributable to the
Division of $300 including interest at 9%, collateralized by
vehicles, maturing July 15, 1999................................ 7,200 10,800
------------ ------------
3,772,200 3,263,800
Less current portion.............................................. 482,100 276,500
------------ ------------
$ 3,290,100 $ 2,987,300
------------ ------------
------------ ------------
</TABLE>
Future principal payments on long-term debt for years ending May 31 are
summarized as follows:
<TABLE>
<S> <C>
1998............................................................ $ 482,100
1999............................................................ 328,200
2000............................................................ 300,900
2001............................................................ 281,800
2002............................................................ 254,300
Thereafter...................................................... 2,124,900
---------
$3,772,200
---------
---------
</TABLE>
Under the terms of its loan agreements with the cooperative agricultural
lender and the bank, the Company is subject to various covenants, including
requirements to maintain certain financial ratios and minimum levels of tangible
net worth.
F-47
<PAGE>
THE WHOLESALE BEDDING PLANT DIVISION
OF
SUMMERSUN GREENHOUSE CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1997 AND 1996
NOTE 8--RETIREMENT PLAN
The Company sponsors a salary deferral and profit sharing plan meeting the
requirements of Internal Revenue Code 401(k) for qualified plans. The plan
covers substantially all employees with one year of service who have attained
the age of 21 years and work 1,000 hours or more per year. Employees may defer
up to 10% of their annual compensation, not to exceed certain limitations
established by the Internal Revenue Code.
Company contributions to the plan are discretionary and may not exceed 25%
of an employee's compensation or $30,000. During 1997, Company contributions
attributable to the Division totaled $12,000. No contributions were made to the
Plan in 1996.
NOTE 9--MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
MAJOR CUSTOMERS--During 1997, approximately 41% of the Division's sales were
derived from four customers. At May 31, 1997, $1,618,300 was due from these
customers. During 1996, approximately 37% of the Division's sales were derived
from a single customer. At May 31, 1996, $63,000 was due from this customer.
CONCENTRATIONS OF CREDIT RISK--Financial instruments that potentially
subject the Division to concentrations of credit risk consist principally of
accounts receivable. The Division grants credit to customers and generally does
not require collateral or other security. Customers are concentrated in the
agricultural nursery and retail industry throughout the United States and are
concentrated in the States of Washington, Oregon, and Idaho. The Division has
not experienced a history of significant credit-related losses.
NOTE 10--PURCHASE COMMITMENT
During fiscal year 1997, the Company entered into an agreement to purchase
agricultural land for $1,000,000. The purchase is to take place in three phases
over the next three years. As of May 31, 1997, the Company has paid earnest
money of approximately $27,000 in connection with the purchase.
NOTE 11--SUBSEQUENT EVENT
Subsequent to May 31, 1997, management signed a letter of intent to sell
certain assets of the Wholesale Bedding Plant Division. Consummation of the
transaction is dependent upon final agreement of the terms of sale.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying balance sheet of Cracon, Inc. (a Florida
corporation) as of December 31, 1996, and the related statements of operations
and retained earnings and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cracon, Inc. as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 31, 1997
F-49
<PAGE>
CRACON, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 13,993
Accounts receivable:
Trade, net of allowances of $50,000......................................... 2,386,873
Related party............................................................... 392,271
Prepaid expenses.............................................................. 2,145
---------
Total current assets...................................................... 2,795,282
TREE INVENTORIES................................................................ 1,371,226
PROPERTY AND EQUIPMENT, net..................................................... 262,181
---------
Total assets.............................................................. $4,428,689
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other....................................................................... $1,335,076
Related parties............................................................. 475,000
Accounts payable.............................................................. 1,179,820
Accrued liabilities........................................................... 156,938
Current portion of long-term debt............................................. 9,811
---------
Total current liabilities................................................. 3,156,645
LONG-TERM DEBT, net of current portion.......................................... 40,192
---------
Total liabilities......................................................... 3,196,837
---------
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 50 shares authorized, issued and outstanding..... 500
Retained earnings............................................................. 1,231,352
---------
Total stockholders' equity................................................ 1,231,852
---------
Total liabilities and stockholders' equity................................ $4,428,689
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
CRACON, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES....................................................................... $3,419,358
COST OF SALES................................................................... 2,094,801
---------
Gross profit................................................................ 1,324,557
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 873,066
---------
Income from operations...................................................... 451,491
INTEREST EXPENSE, net........................................................... 143,159
---------
Net income.................................................................. 308,332
RETAINED EARNINGS, DECEMBER 31, 1995............................................ 993,020
DIVIDENDS....................................................................... (70,000)
---------
RETAINED EARNINGS, DECEMBER 31, 1996............................................ $1,231,352
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
CRACON, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 308,332
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 17,249
Changes in certain assets and liabilities:
Increase in receivables................................................... (107,921)
Decrease in tree inventories.............................................. 73,107
Decrease in other assets.................................................. 20,000
Decrease in trade payables................................................ (533,513)
Increase in accrued liabilities........................................... 29,671
---------
Net cash used in operating activities................................... (193,075)
---------
CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets.................. (13,001)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable....................................... 775,409
Repayments of notes payable................................................... (435,000)
Dividends paid................................................................ (91,000)
Repayment of other long-term debt............................................. (38,635)
---------
Net cash provided by financing activities............................... 210,774
---------
Net increase in cash.................................................... 4,698
CASH AT BEGINNING OF YEAR....................................................... 9,295
---------
CASH AT END OF YEAR............................................................. $ 13,993
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................ $ 141,192
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Cracon, Inc. (the "Company"), an S corporation, is a grower, broker and
distributor of Christmas trees. The Company sells primarily to general
merchandise chain stores, home improvement chain stores and retail garden
stores.
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash held in banks and deposits with maturities of
three months or less to be cash and cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories consist primarily of Christmas trees and are carried at the
lower of cost or market. Cost is determined using the average cost incurred to
purchase or plant and maintain the inventory. Tree inventories are classified as
long-term until the trees are cut and ready for sale. The Company is dependent
on several vendors for a large portion of its inventory.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated over their
estimated useful lives using accelerated methods as follows:
<TABLE>
<S> <C>
Machinery and equipment............. 7 years
Vehicles............................ 5 years
Leasehold improvements.............. lease term
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
Revenues are recognized when products are shipped and all significant
obligations of the Company have been completed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including
accounts receivable, accounts payable and debt, approximates fair value.
F-53
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code of 1986, as amended, by consent of its stockholders.
Therefore, the Company generally does not pay federal income taxes on its
income. Instead, the stockholders are liable for individual federal income taxes
on their respective share of the Company's taxable income. If the Company had
been taxed as a C Corporation, the provision for income taxes would have been
$123,000 and net income would have been $185,332 assuming an effective tax rate
of 40%.
ASSET IMPAIRMENT
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in fiscal 1996.
2. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company sells
primarily on net 30-day terms, performs credit evaluation procedures, and
generally does not require collateral. The Company maintains allowances for
potential credit losses and does not currently foresee a credit risk associated
with these receivables. Four customers accounted for approximately 76 percent of
accounts receivable as of December 31, 1996. These same four customers accounted
for approximately 72 percent of sales for the year ended December 31, 1996.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Land.............................................................. $ 209,279
Machinery and equipment........................................... 93,634
Vehicles.......................................................... 49,766
Leasehold improvements............................................ 26,350
---------
Total property and equipment.................................. 379,029
Less: Accumulated depreciation.................................... (116,848)
---------
Property and equipment, net....................................... $ 262,181
---------
---------
</TABLE>
Depreciation expense for the year ended December 31, 1996, was $17,249.
4. NOTES PAYABLE:
Notes payable are due at various dates through December 31, 1997. Interest
is payable annually or quarterly at various rates. At December 31, 1996, the
weighted average interest rate was 10.9 percent.
F-54
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. NOTES PAYABLE: (CONTINUED)
Certain of the note holders are employees or relatives of the current
shareholders of the Company. Amounts due to these note holders have been
classified as notes payable--related parties in the accompanying balance sheet.
During 1996, the Company incurred $51,200 in interest on these related party
notes payable.
5. LONG-TERM DEBT:
Long-term debt as of December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Mortgage note payable to individuals; annual principal payments of
$4,633 through February 2003; interest payable annually at 9.5
percent; secured by the underlying property...................... $ 32,434
Mortgage note payable to a bank; monthly principal and interest
payments of $591 through November 1999; interest at 9.5 percent;
secured by the underlying property............................... 17,569
---------
50,003
Less: Current portion.............................................. (9,811)
---------
$ 40,192
---------
---------
</TABLE>
Future maturities of long-term debt as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 14,811
1998............................................................... 14,361
1999............................................................... 12,749
2000............................................................... 6,393
2001............................................................... 5,953
Thereafter......................................................... 10,588
---------
64,855
Less: Amount representing interest................................. 14,582
---------
$ 50,003
---------
---------
</TABLE>
6. COMMITMENTS AND CONTINGENT LIABILITIES:
LEASES
The Company leases certain growing facilities under noncancellable operating
leases expiring at various dates through 2005. Total rent expense for the year
ended December 31, 1996, was $12,115.
F-55
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
As of December 31, 1996, future minimum rental payments required under
noncancellable operating leases are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 7,945
1998............................................................... 7,045
1999............................................................... 6,045
2000............................................................... 6,045
2001............................................................... 2,790
Thereafter......................................................... 1,750
---------
$ 31,520
---------
---------
</TABLE>
PURCHASE COMMITMENTS
The Company has contracts to purchase Christmas trees from third-party
growers. Certain of these contracts require the Company to maintain the trees
until they are harvested. The Company will pay for any trees it harvests at a
price per tree. As of December 31, 1996, the Company has $207,550 in purchase
contracts.
7. RELATED PARTY TRANSACTIONS:
In the normal course of business, the Company sells Christmas trees to an
entity under common ownership. In 1996, sales to this related party were
approximately $713,000 and gross profit was approximately $250,000. Accounts
receivable related to these sales totaled $363,000 at December 31, 1996.
In 1996, the Company repaid a loan on behalf of an entity under common
control. The advance of $29,271 has been included in accounts
receivable--related parties.
8. SUBSEQUENT EVENTS:
In August 1997, substantially all of the Company's assets were purchased by
Color Spot Christmas Trees, Inc., a wholly owned subsidiary of Color Spot
Nurseries, Inc., for cash and stock.
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Wolfe Greenhouses, L.L.C.:
We have audited the accompanying balance sheet of Wolfe Greenhouses, L.L.C.
as of December 27, 1996, and the related statements of operations and members'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
a reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wolfe Greenhouses, L.L.C. at
December 27, 1996 and the results of its operations and its cash flows for the
year ended December 27, 1996 in conformity with generally accepted accounting
principles.
JAYNES, REITMEIER, BOYD & THERRELL,
P.C.
Waco, Texas
June 11, 1997
F-57
<PAGE>
WOLFE GREENHOUSES, L.L.C.
BALANCE SHEET
DECEMBER 27, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash.......................................................................... $ 790,964
Accounts receivable:
Trade, less allowance for doubtful accounts of $30,592 (Note 5)............. 981,703
Other....................................................................... 130,246
Inventories (Notes 2 and 5)................................................... 1,204,758
Prepaid expenses.............................................................. 18,736
---------
Total current assets...................................................... 3,126,407
---------
Investment in joint venture (Note 3)............................................ 25,826
---------
Property, plant and equipment (Notes 4 and 5)................................... 1,647,384
Less accumulated depreciation................................................. (113,773)
---------
1,533,611
---------
$4,685,844
---------
---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current installments of long-term debt (Note 5)............................... $ 103,665
Trade accounts payable........................................................ 1,283,408
Accrued expenses.............................................................. 238,857
Deferred income taxes (Note 8)................................................ 59,159
---------
Total current liabilities................................................. 1,685,089
---------
Long-term debt, excluding current installments (Note 5)......................... 1,552,977
---------
Commitments (Note 11)........................................................... --
Members' equity................................................................. 1,447,778
---------
$4,685,844
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE>
WOLFE GREENHOUSES, L.L.C.
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 27, 1996
<TABLE>
<S> <C>
Net sales....................................................................... $8,634,378
Cost of sales................................................................... 5,918,568
---------
Gross profit................................................................ 2,715,810
Selling, general and administrative expenses.................................... 1,415,939
---------
Income from operations...................................................... 1,299,871
---------
Other income (deductions):
Interest expense (Note 5)..................................................... (198,506)
Equity in loss of joint venture (Note 3)...................................... (10,153)
Gain on warranty settlement (Note 7).......................................... 184,694
Other, net.................................................................... 27,186
---------
3,221
---------
Income before income taxes.................................................. 1,303,092
Income taxes (Note 8)........................................................... 51,625
---------
Net income.................................................................. 1,251,467
Members' equity, beginning of period............................................ 418,638
Members' contributions.......................................................... 7,600
Members' withdrawals............................................................ (229,927)
---------
Members' equity, end of period.................................................. $1,447,778
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
WOLFE GREENHOUSES, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 27, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $1,251,467
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation................................................................ 118,379
Deferred income taxes....................................................... 47,680
Equity in loss of joint venture............................................. 10,153
Gain on warranty settlement................................................. (184,694)
Decrease (increase) in assets:
Accounts receivable....................................................... (97,197)
Inventories............................................................... (42,387)
Prepaid expenses.......................................................... 12,296
Other assets.............................................................. 12,488
Increase (decrease) in liabilities:
Trade accounts payable.................................................... (251,840)
Accrued expenses.......................................................... 111,448
---------
Net cash provided by operating activities............................... 987,793
---------
Cash flows from investing activities (Note 10):
Contributions to joint venture................................................ (18,702)
Proceeds from repayment of other receivables.................................. 7,077
Proceeds from warranty settlement............................................. 391,184
Capital expenditures.......................................................... (203,408)
---------
Net cash provided by investing activities............................... 176,151
---------
Cash flows from financing activities (Note 10):
Principal payments on long-term debt.......................................... (106,987)
Members' contributions........................................................ 7,600
Members' withdrawals.......................................................... (229,927)
---------
Net cash used in financing activities................................... (329,314)
---------
Net increase in cash and cash overdraft......................................... 834,630
Cash overdraft at beginning of period........................................... (43,666)
---------
Cash at end of period........................................................... $ 790,964
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
WOLFE GREENHOUSES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 27, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Wolfe Greenhouses, L.L.C. (the "Company"), organized as a limited liability
company, is an association formed in accordance with the laws of the State of
Texas. Under the terms of its current articles of incorporation, the Company
will cease to exist on July 1, 2025. The Company operates a wholesale greenhouse
facility located in Waco, Texas whose principal customers are grocery chain
stores located in Texas.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
first-in, first-out method.
(c) INVESTMENT IN JOINT VENTURE
Investment in joint venture is accounted for by the equity method.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets.
(e) USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories at December 27, 1996 consisted of the following:
<TABLE>
<S> <C>
Growing crops................................................... $ 986,354
Supplies........................................................ 199,927
Landscape plants and supplies................................... 18,477
---------
$1,204,758
---------
---------
</TABLE>
(3) INVESTMENT IN JOINT VENTURE
Investment in joint venture consists of a fifty percent interest in a joint
venture. Summary financial information of the Company's fifty percent interest
as of December 27, 1996 follows:
<TABLE>
<S> <C>
Real estate....................................................... $ 100,112
Other assets...................................................... 6,839
Long-term debt.................................................... (74,029)
Other liabilities................................................. (7,096)
---------
Venturers' equity............................................... $ 25,826
---------
---------
</TABLE>
F-61
<PAGE>
WOLFE GREENHOUSES, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 27, 1996
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 27, 1996 consisted of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
AMOUNT LIVES
------------ -----------
<S> <C> <C>
Land.............................................................. $ 77,066 --
Buildings and improvements........................................ 1,238,774 3-25 years
Equipment......................................................... 265,411 5-20 years
Construction in progress.......................................... 66,133 --
------------
$ 1,647,384
------------
------------
</TABLE>
(5) DEBT
Long-term debt at December 27, 1996 consists of the following:
<TABLE>
<S> <C>
Mortgage note payable to a financial institution with interest
at 2.5% above the base rate (10.75% at December 27, 1996),
secured by property and buildings, payable in monthly
principal and interest payments of $22,878 through December,
2006.......................................................... $1,632,365
Installment note payable, interest rate at 12.59%, secured by
equipment, due November, 1999................................. 24,277
---------
1,656,642
Less current installments....................................... 103,665
---------
$1,552,977
---------
---------
</TABLE>
The Company also has a line of credit agreement with a bank. Under the
agreement, the line of credit agreement allows the Company to borrow up to a
maximum of $800,000. The agreement is secured by trade accounts receivable and
inventory. There were no outstanding borrowings under this agreement at December
27, 1996.
The Company's debt agreements relating to the above notes contain
restrictive financial covenants. The Company was in compliance with such
covenants under the terms of the agreements.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 27, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 103,665
1998............................................................ 116,057
1999............................................................ 129,102
2000............................................................ 134,774
2001............................................................ 147,497
Thereafter...................................................... 1,025,547
---------
Total........................................................... 1,656,642
</TABLE>
F-62
<PAGE>
WOLFE GREENHOUSES, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 27, 1996
(6) LEASES
The Company has several noncancellable operating leases for transportation
equipment that expire over the next six years. These leases require the Company
to pay certain executory costs, such as insurance, and purchase fuel from the
lessor. Rental payments include minimum rentals plus contingent rentals based on
mileage and inflation rates. Lease expense for operating leases during 1996
consisted of the following:
<TABLE>
<S> <C>
Minimum rentals.................................................... $ 53,568
Contingent rentals................................................. 31,632
---------
Total............................................................ $ 85,200
---------
---------
</TABLE>
Future minimum lease payments under noncancellable operating leases as of
December 27, 1996 are $53,568 annually for 1997 through 2001.
(7) GAIN FROM WARRANTY SETTLEMENT
During 1996, fiberglass roofs on certain greenhouses were determined to be
defective. After settlement with the manufacturer, the Company retired roofs on
the greenhouses which had a carrying value of $206,490 and recognized a gain
from the warranty settlement of $184,694.
(8) INCOME TAXES
The Company is classified as a partnership for federal income tax purposes.
For federal purposes, partnership income is taxed directly to its members;
consequently, no provision is made in the accompanying financial statements for
federal income taxes. L.L.C.'s, however, are subject to the State of Texas
franchise tax--essentially a tax based on income.
Income taxes for year ended December 27, 1996 consisted of $3,945 of current
state income tax and $47,680 of deferred state income tax.
Amounts for deferred tax assets and liabilities at December 27, 1996 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities........................................... $ 61,211
Deferred tax assets................................................ (2,052)
---------
$ 59,159
---------
---------
</TABLE>
Management has determined, based on the reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies, that
the Company will more likely than not be able to fully recognize the deferred
tax assets at December 27, 1996.
Temporary differences giving rise to deferred tax liabilities consist
primarily of differences between fixed asset basis and depreciation for income
tax purposes and financial statement reporting purposes, accrued vacation not
deductible for income tax purposes, growing crop inventory which is expensed as
incurred for income tax, and allowances for doubtful accounts which are not
deductible for income tax purposes.
F-63
<PAGE>
WOLFE GREENHOUSES, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 27, 1996
(8) INCOME TAXES (CONTINUED)
If the Company had been taxed as a C Corporation, the provision for income
tax and net income would have been $521,237 and $781,855, respectively, assuming
an effective tax rate of 40%.
(9) BUSINESS CONCENTRATIONS
Approximately $5,000,000 of revenue representing 60% of net sales were
derived from four customers during the year ended December 27, 1996. These four
customers accounted for $601,553 (or 59%) of trade accounts receivable at
December 27, 1996.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $184,434 for interest and $3,945 for state income tax
during 1996.
(11) COMMITMENTS
The Company has entered into an agreement to construct a new greenhouse at
an estimated cost of $363,364. At December 27, 1996, the Company was committed
for $297,231 of estimated unpaid construction costs.
(12) EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) plan that covers
employees who have completed one year of service and are 21 years old. Company
contributions to the plan are discretionary by the members as determined each
year. For 1996, no company contributions were made.
(13) SUBSEQUENT EVENTS
Subsequent to year-end, the joint venture discussed in Note 3 settled
certain contingent assets and liabilities, and sold certain real estate. The
Company realized approximately $333,900 of income in 1997 related to these
subsequent transactions of the joint venture.
On May 28, 1997, the Members of the Company signed a letter of intent for a
proposed sale of all their existing interest in the Company.
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying balance sheet of Signature Trees (a
California general partnership) as of December 31, 1996, and the related
statements of operations and partners' capital, and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Signature Trees as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
July 7, 1997
F-65
<PAGE>
SIGNATURE TREES
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash.............................................................................................. $ 154,281
Accounts receivable, net of allowance for doubtful accounts of $100,000........................... 4,826,696
Notes receivable.................................................................................. 6,000
------------
Total current assets.......................................................................... 4,986,977
TREE INVENTORY AND DEPOSITS......................................................................... 831,072
PROPERTY AND EQUIPMENT, net......................................................................... 421,158
------------
Total assets.................................................................................. $ 6,239,207
------------
------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 3,245,566
Current portion of long-term debt................................................................. 823,319
------------
Total current liabilities..................................................................... 4,068,885
LONG-TERM DEBT...................................................................................... 551,331
PARTNERS' CAPITAL................................................................................... 1,618,991
------------
Total liabilities and partners' capital....................................................... $ 6,239,207
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
SIGNATURE TREES
STATEMENT OF OPERATIONS AND PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES....................................................................... $6,855,117
COST OF SALES................................................................... 4,564,925
---------
Gross profit................................................................ 2,290,192
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 1,352,046
---------
Income from operations...................................................... 938,146
INTEREST EXPENSE, net........................................................... 37,452
---------
Net income.................................................................. 900,694
PARTNERS' CAPITAL, beginning of year............................................ 718,297
---------
PARTNERS' CAPITAL, end of year.................................................. $1,618,991
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
SIGNATURE TREES
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 900,694
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 2,504
Changes in certain assets and liabilities:
Increase in receivables.................................................... (611,312)
Increase in tree inventories and deposits.................................. (740,974)
Increase in other assets................................................... 0
Increase in accounts payable............................................... 808,637
---------
Net cash provided by operating activities................................ 359,549
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (221,730)
---------
Net cash used in investing activities.................................... (221,730)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................................... 700,000
Repayments of long-term debt................................................... (928,000)
Net borrowings under revolving line of credit.................................. 219,000
---------
Net cash used in financing activities.................................... (9,000)
---------
Net increase in cash..................................................... 128,819
CASH AT BEGINNING OF YEAR........................................................ 25,462
---------
CASH AT END OF YEAR.............................................................. $ 154,281
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................... $ 42,884
---------
---------
Income taxes................................................................. $ 0
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
SIGNATURE TREES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
PARTNERSHIP BACKGROUND AND ORGANIZATION
Signature Trees (the "Partnership"), a California general partnership, is a
grower, broker and distributor of Christmas trees. The Partnership sells
primarily to general merchandise chain stores, home improvement chain stores and
retail garden stores.
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories consist primarily of Christmas trees and are carried at the
lower of cost or market. Cost is determined using the average cost incurred to
purchase or plant and maintain the inventory. Tree inventories are classified as
long-term until the trees are cut and ready for sale. The Partnership is
dependent on several vendors for a large portion of its inventory.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost and are depreciated
over their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
Machines and equipment.......................................... 7 years
Leasehold improvements.......................................... lease term
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
Revenues are recognized when products are shipped and all significant
obligations of the Partnership have been met.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Partnership's financial instruments, including
accounts receivable, debt and accounts payable, approximates fair value.
F-69
<PAGE>
SIGNATURE TREES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Partnership is not subject to federal income taxes; rather, income from
operations is passed directly through to the partners. If the Partnership had
been taxed as a C Corporation, the income tax provision and net income would
have been $360,278 and $540,416, assuming an effective tax rate of 40%.
ASSET IMPAIRMENT
On January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in fiscal 1996.
2. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
concentration of credit risk consist primarily of trade accounts receivable. The
Partnership sells primarily on net 30-day terms, performs credit evaluation
procedures, and generally does not require collateral. The Partnership maintains
allowances for potential credit losses and does not currently foresee a credit
risk associated with these receivables. Sales to the Partnership's ten largest
customers represented approximately 82 percent of sales.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Land.......................................................... $ 317,786
Machines and equipment........................................ 49,416
Leasehold improvements........................................ 56,864
----------
Total property and equipment................................ 424,066
Less: Accumulated depreciation................................ 2,908
----------
Property and equipment, net................................... $ 421,158
----------
----------
</TABLE>
Depreciation expense for the year ended December 31, 1996, was $2,504.
F-70
<PAGE>
SIGNATURE TREES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. DEBT:
Debt consists of the following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Revolving line of credit (1)................................ $ 719,000
Note payable (2)............................................ 240,000
Note payable (3)............................................ 190,000
Note payable (4)............................................ 137,000
Note payable (5)............................................ 88,650
------------
1,374,650
Less: Current portion....................................... (823,319)
------------
$ 551,331
------------
------------
</TABLE>
- ------------------------
(1) $750,000 revolving line of credit with Key Bank. Advances under the line
accrue interest at the bank's base rate plus 1.5 percent (9.75 percent at
December 31, 1996). The line is secured by the Partnership's accounts
receivable, inventory and certain real property. The line expires on May 10,
1997.
(2) Note payable incurred in conjunction with the purchase of certain real
property. The noninterest-bearing note requires $60,000 annual payments and
matures on May 30, 2001.
(3) Note payable bearing interest at 9 percent. The note requires annual
payments of $20,646 with unpaid principal and interest due on March 10,
2006.
(4) Note payable incurred in conjunction with the purchase of certain real
property bearing interest at 3 percent. The note requires payments of
$73,333 in 1997 and a final payment of $63,667 on November 1, 1998. The note
is secured by certain real property.
(5) Note payable bearing interest at 9.75 percent. The note requires $10,340
annual payments with unpaid principal and interest due on May 10, 2005.
Maturities of debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ $ 823,319
1998........................................................ 154,653
1999........................................................ 90,986
2000........................................................ 90,986
2001........................................................ 90,986
Thereafter.................................................. 123,720
------------
$ 1,374,650
------------
------------
</TABLE>
5. COMMITMENTS AND CONTINGENT LIABILITIES:
LEASES
The Partnership leases certain growing facilities under noncancellable
operating leases expiring at various dates through 2012. Total rent expense for
the year ended December 31, 1996, was $10,758. As of
F-71
<PAGE>
SIGNATURE TREES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
December 31, 1996, aggregate annual future minimum rental payments required by
all noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1997.......................................................... $ 16,460
1998.......................................................... 14,960
1999.......................................................... 14,960
2000.......................................................... 14,960
2001.......................................................... 14,960
Thereafter.................................................... 75,120
----------
$ 151,420
----------
----------
</TABLE>
PURCHASE COMMITMENTS
The Partnership has contracts to purchase Christmas trees from third-party
growers. Certain of these contracts require the Partnership to maintain the
trees until they are harvested. Future minimum purchase commitments under the
contracts are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.......................................................... $ 135,842
1998.......................................................... 69,667
1999.......................................................... 31,000
</TABLE>
6. SUBSEQUENT EVENTS:
In March 1997, certain assets (inventory, prepaid assets and equipment with
a net book value of approximately $997,000) of the Partnership were sold to
Color Spot Christmas Trees, Inc., a wholly owned subsidiary of Color Spot
Nurseries, Inc. ("Color Spot") for cash and stock. In addition, Color Spot
Christmas Trees, Inc. ("Trees") assumed the Partnership's $137,000 note payable.
The president of Color Spot has a 20 percent partnership interest in the
Partnership. Certain partners of the Partnership will lease certain of its real
property to Trees to grow trees.
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying balance sheet of Peters' Wholesale
Greenhouses, Inc. (a Texas corporation), as of December 31, 1996, and the
related statements of operations, changes in stockholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peters' Wholesale
Greenhouses, Inc., as of December 31, 1996, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
August 12, 1997
F-73
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
BALANCE SHEET AS OF DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 291
Accounts receivable, less allowance for doubtful accounts of $25.................. 574
Inventories....................................................................... 1,042
Income taxes receivable........................................................... 77
---------
Total current assets............................................................ 1,984
PROPERTY AND EQUIPMENT, net......................................................... 1,642
---------
Total assets.................................................................... $ 3,626
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of debt........................................................ $ 354
Current maturities of stockholder loan............................................ 101
Accounts payable.................................................................. 809
Accrued expenses.................................................................. 121
Deferred income taxes............................................................. 312
---------
Total current liabilities....................................................... 1,697
LONG-TERM DEBT...................................................................... 102
DEFERRED INCOME TAXES............................................................... 38
STOCKHOLDER LOAN.................................................................... 527
---------
Total liabilities............................................................... 2,364
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 250,000 shares authorized and 10,000 shares issued
and outstanding................................................................. 1
Retained earnings................................................................. 1,261
---------
Total stockholders' equity...................................................... 1,262
---------
Total liabilities and stockholders' equity...................................... $ 3,626
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES........................................................................... $ 5,059
COST OF SALES....................................................................... 3,693
---------
Gross profit.................................................................... 1,366
OPERATING EXPENSES:
Selling, general and administrative............................................. 1,264
---------
Income from operations.......................................................... 102
INTEREST EXPENSE, net............................................................... (62)
OTHER INCOME........................................................................ 116
---------
Income before income taxes...................................................... 156
PROVISION FOR INCOME TAXES.......................................................... 53
---------
Net income...................................................................... $ 103
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................................................ 10,000 $ 1 $ 1,158 $ 1,159
Net income.............................................................. -- -- 103 103
--
--------- ----------- ---------
BALANCE, December 31, 1996................................................ 10,000 $ 1 $ 1,261 $ 1,262
--
--
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-76
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 103
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation..................................................................... 150
Changes in certain assets and liabilities:
Decrease in accounts receivable................................................ 331
Increase in inventories........................................................ (161)
Increase in income taxes receivable............................................ (64)
Increase in accounts payable................................................... 102
Decrease in accrued expenses................................................... (14)
Increase in deferred income taxes.............................................. 53
---------
Net cash provided by operating activities.................................... 500
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................................ (909)
Proceeds from sale of fixed assets................................................. 10
---------
Net cash used in investing activities........................................ (899)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........................................................... 641
Repayments of long-term debt....................................................... (223)
Net borrowing under revolving lines of credit...................................... 155
---------
Net cash provided by financing activities.................................... 573
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................ 174
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 117
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................. $ 291
---------
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest......................................................................... $ 30
---------
---------
Income taxes..................................................................... $ 77
---------
---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1996, the Company exchanged property and equipment and a related note
payable with book values of $207 and $157, respectively, to the Stockholders. In
return, the Company received property and equipment and a related note payable of
$144 and $94, respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND DESCRIPTION OF BUSINESS:
The financial statements presented herein include the accounts of Peters'
Wholesale Greenhouses, Inc. (the "Company"). The Company is located in Walnut
Springs, Texas, and is a producer of bedding plants. The Company sells primarily
to general merchandise stores and retail garden stores in Central and East
Texas. The Company's sole stockholders are Tom and Ramona Peters (the
"Stockholders").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Company in preparing its financial statements in accordance with generally
accepted accounting principles.
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories consist primarily of plant inventory and are stated at the lower
of cost or market. Cost is determined using the average cost method and includes
direct production costs and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over their
estimated useful lives on an accelerated basis as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements................................................... 5 to 30 years
Fixtures and equipment....................................................... 3 to 7 years
</TABLE>
Repair and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
The Company recognizes revenues when products are received by the customer
and all significant obligations of the Company have been completed. Where
appropriate, the Company also establishes a concurrent reserve for returns and
allowances.
F-78
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including accounts receivable, accounts
payable and notes payable, the Company's carrying amount approximates fair
value.
INCOME TAXES
Income taxes are recognized in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
utilizes the asset and liability method under which deferred income taxes are
recognized for the consequences of temporary differences by applying currently
enacted statutory rates to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities.
ASSET IMPAIRMENT
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in 1996.
3. CONCENTRATIONS OF RISK:
The Company does not perform credit evaluations of its customers' financial
condition and generally does not require collateral, as the majority of its
customers are large, well established companies. The Company maintains an
allowance for potential credit losses.
For the year ended December 31, 1996, five customers accounted for
approximately 81 percent of the Company's accounts receivable balance and 88
percent of net sales. The Company's two largest customers accounted for
approximately 56 percent and 14 percent of net sales, respectively.
During 1996, one of Peters' top five customers of 1995, H. S. Floral
Distributors, no longer conducted business with the Company due to pricing
conflicts. This business was replaced with Lowe's Corporation, a new customer
obtained in 1996.
The Company purchases inventories and greenhouse building materials from
primarily two vendors. Purchases from these two vendors represent 85 percent of
the accounts payable balance at year-end;
56 percent from B.W.I.-Schulenburg and 29 percent from Ball Seed. Management
believes alternative suppliers could be obtained, if needed.
4. INVENTORIES:
Inventories at December 31, 1996, consist of raw materials, supplies and
plants of approximately $1,042.
F-79
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
5. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Land................................................................................ $ 196
Buildings and improvements.......................................................... 2,211
Fixtures and equipment.............................................................. 694
---------
3,101
Less: Accumulated depreciation...................................................... (1,459)
---------
Net property and equipment.......................................................... $ 1,642
---------
---------
</TABLE>
Depreciation expense for the year ended December 31, 1996, was $150.
6. ACCRUED EXPENSES:
Accrued expenses as of December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Royalties............................................................................. $ 32
Interest and finance charges.......................................................... 47
Utilities............................................................................. 27
Payroll and payroll taxes............................................................. 11
Other................................................................................. 4
---------
Total accrued expenses................................................................ $ 121
---------
---------
</TABLE>
7. DEBT:
Lines of credit and long-term debt at December 31, 1996, consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Revolving line of credit (1).......................................................... $ 150
Revolving line of credit (2).......................................................... 200
Note payable (3)...................................................................... 94
Note payable (4)...................................................................... 12
---------
$ 456
---------
---------
</TABLE>
- ------------------------
(1) $350 revolving line of credit with a financial institution under which $150
was outstanding at December 31, 1996. Advances under the line of credit
accrue interest at 9.25 percent per annum. The line is secured by all
accounts the Company holds with the bank, inventory and accounts receivable.
The line expires on May 31, 1997. Subsequent to year-end, this line of
credit was renewed and the new expiration date is May 31, 1998.
(2) $300 revolving line of credit with a financial institution under which $200
was outstanding at December 31, 1996. Advances under the line of credit
accrue interest at the prime rate plus 1 percent
F-80
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
7. DEBT: (CONTINUED)
per annum (9.25 percent at December 31, 1996). The line is secured by all
accounts the Company holds with the bank and equipment. The line expires on
November 20, 1997.
(3) Note payable was incurred in conjunction with the purchase of land. The note
accrues interest at a variable interest rate per annum (9.75 percent at
December 31, 1996) with interest and an installment of principal due
annually and any unpaid principal due in entirety on April 1, 2016. The note
is collateralized by the acquired land.
(4) Note payable was incurred in conjunction with the purchase of equipment. The
note accrues interest at 7.75 percent per annum with monthly principal and
interest payments of $.4. Unpaid principal and interest is due November 1,
1999. The note is collateralized by the acquired equipment.
The annual amount of principal maturities of lines of credit and long-term
debt outstanding at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.................................................................................. $ 354
1998.................................................................................. 4
1999.................................................................................. 4
2000.................................................................................. --
2001.................................................................................. --
Thereafter............................................................................ 94
---------
$ 456
---------
---------
</TABLE>
As a result of borrowing rates presently available to the Company, the
carrying value of the Company's line of credit and debt approximate fair value.
8. INCOME TAXES:
The provision for income taxes consists of:
<TABLE>
<CAPTION>
<S> <C>
Current--
Federal............................................................................. $ --
State and local..................................................................... --
Deferred--
Federal............................................................................. 53
State and local..................................................................... --
---------
Provision for income taxes............................................................ $ 53
---------
---------
</TABLE>
F-81
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
8. INCOME TAXES: (CONTINUED)
A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34 percent to
income before income taxes is as follows:
<TABLE>
<CAPTION>
<S> <C>
Income before income taxes............................................................ $ 156
---------
---------
Amount of federal income tax based upon the statutory rate............................ $ 53
---------
Provision for income taxes............................................................ $ 53
---------
---------
</TABLE>
The effective tax rate for the Company is equal to the applicable federal
statutory rate.
Deferred tax assets (liabilities) are composed of the following at December
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets--
Allowance for doubtful accounts..................................................... $ 8
Net operating loss carryforward..................................................... 34
---------
Total deferred tax assets........................................................... 42
---------
Deferred tax liabilities--
Inventories......................................................................... (354)
Property and equipment.............................................................. (38)
---------
Total deferred tax liabilities.................................................... (392)
---------
Net deferred tax liability............................................................ $ (350)
---------
---------
</TABLE>
Income taxes receivable relates to tax payments made in 1996 which are
refundable due to the net operating losses experienced by the Company. The
Company has available federal net operating loss carryforwards of $101 which
were generated during the year ended December 31, 1996. The federal net
operating loss will expire in 15 years if not used.
9. RELATED-PARTY TRANSACTIONS:
On May 7, 1996, the Company received a stockholder loan from the
Stockholders. The loan accrues interest at a rate of 8.0 percent per annum and
provides the Company with available credit of $1,500. The note requires payments
of $75 on January 7 and July 7 each year until all outstanding principal and
interest has been repaid. At December 31, 1996, the outstanding balance on the
loan was $628.
From time to time, the Stockholders will finance certain inventory purchases
on their personal credit card. The Company will reimburse them within 30 days or
when the credit card invoice is due, whichever is sooner.
The Company's corporate offices are owned by the Stockholders. On January 1,
1997, the Stockholders began charging the Company rent of $2.5 per month. Prior
to this date, no rent was being charged for these facilities.
F-82
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
9. RELATED-PARTY TRANSACTIONS: (CONTINUED)
During the year ended December 31, 1996, the Company paid management fees to
the Stockholders of approximately $135.
10. OTHER INCOME AND EXPENSE:
Other income primarily relates to rental income earned by the Company,
whereby the Company provides trailer houses for employees to rent on a per week
basis. Total rental income earned in 1996 was $113.
11. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company has various cases pending
involving contractual, employee-related and other matters. In light of the
Company's legal position, insurance coverage and reserves, management does not
believe that these cases will have a material adverse impact on the financial
position or results of operations of the Company.
The Company has no operating leases with original maturities greater than
one year. From time to time, the Company will enter into weekly leases for
transportation equipment. Total rent expense under these leases for the year
ended December 31, 1996, was approximately $77.
The Company is the primary guarantor of debt owed by a related-party
investment company owned by the Shareholders. At December 31, 1996, the
outstanding balance of the guaranteed debt is approximately $125.
The Company pays royalties related to the cutting of certain plants
(primarily poinsettias) to the original licensor. These amounts totaled
approximately $32 for the year ended December 31, 1996.
12. SUBSEQUENT EVENTS:
On July 31, 1997, 100 percent of the outstanding stock of the Company was
purchased by Color Spot Nurseries, Inc., for cash.
F-83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying balance sheets of Lone Star Growers Co. (a
Texas general partnership) as of June 30, 1996 and 1995, and the related
statements of operations, partnership capital and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lone Star Growers Co. as of
June 30, 1996 and 1995, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 31, 1997
F-84
<PAGE>
LONE STAR GROWERS CO.
BALANCE SHEETS--JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................. $ 369,514 $ 332,977
Receivables:
Trade, less allowance for doubtful accounts of $114,865 and $117,374,
respectively................................................................. 3,213,753 2,696,649
Related-party receivables...................................................... 161,903 240,162
Other receivables.............................................................. 3,212,010 0
------------- -------------
Total receivables............................................................ 6,587,666 2,936,811
Inventories...................................................................... 6,980,393 6,579,021
Prepaid expenses................................................................. 42,751 58,987
Notes receivable................................................................. 27,213 18,033
------------- -------------
Total current assets......................................................... 14,007,537 9,925,829
Property and equipment, net...................................................... 5,861,589 5,352,776
------------- -------------
Total assets................................................................. $ 19,869,126 $ 15,278,605
------------- -------------
------------- -------------
LIABILITIES AND PARTNERSHIP CAPITAL
CURRENT LIABILITIES:
Cash overdraft................................................................... $ 334,478 $ 255,554
Payables
Trade.......................................................................... 1,016,567 1,091,813
Related parties................................................................ 438,683 281,917
------------- -------------
Total payables............................................................... 1,455,250 1,373,730
Accrued expenses................................................................. 1,023,018 698,048
Current portion of revolving line of credit...................................... 200,000 2,400,000
Current portion of long-term debt................................................ 916,794 1,000,000
Advances from partner under revolving line of credit............................. 3,000,000 4,800,000
------------- -------------
Total current liabilities.................................................... 6,929,540 10,527,332
LONG-TERM DEBT, net of current portion............................................. 5,278,928 2,900,000
------------- -------------
Total liabilities............................................................ 12,208,468 13,427,332
------------- -------------
PARTNERSHIP CAPITAL:
Partnership capital.............................................................. 2,805,989 2,805,989
Undistributed profits............................................................ 4,854,669 (954,716)
------------- -------------
Total partnership capital.................................................... 7,660,658 1,851,273
------------- -------------
Total liabilities and partnership capital.................................... $ 19,869,126 $ 15,278,605
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE>
LONE STAR GROWERS CO.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
SALES.............................................................................. $ 23,509,596 $ 18,429,903
COST OF SALES...................................................................... 11,687,536 9,484,727
------------- -------------
Gross profit................................................................... 11,822,060 8,945,176
OPERATING EXPENSES:
Delivery......................................................................... 3,258,402 2,703,379
Sales and marketing.............................................................. 2,167,244 1,832,400
General and administrative....................................................... 1,586,383 1,235,824
Other expenses................................................................... 556,345 318,131
Depreciation..................................................................... 126,992 109,992
------------- -------------
Income from operations......................................................... 4,126,694 2,745,450
INTEREST EXPENSE................................................................... 1,122,984 1,036,059
OTHER INCOME, net.................................................................. 3,230,675 13,172
------------- -------------
Net income..................................................................... $ 6,234,385 $ 1,722,563
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-86
<PAGE>
LONE STAR GROWERS CO.
STATEMENTS OF PARTNERSHIP CAPITAL
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<S> <C>
BALANCE, June 30, 1994.......................................................... $ 128,710
Net income.................................................................... 1,722,563
Distributions................................................................. 0
---------
BALANCE, June 30, 1995.......................................................... 1,851,273
Net income.................................................................... 6,234,385
Distributions................................................................. (425,000)
---------
BALANCE, June 30, 1996.......................................................... $7,660,658
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
LONE STAR GROWERS CO.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 6,234,385 $ 1,722,563
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on sale of fixed assets............................................. 2,661 (38,865)
Depreciation and amortization................................................... 827,924 697,202
Changes in certain assets and liabilities:
Increase in receivables....................................................... (3,650,855) (661,018)
Increase in inventories....................................................... (401,372) (1,164,834)
Decrease (increase) in prepaids and other assets.............................. 16,236 (58,987)
Increase in notes receivable.................................................. (9,180) (18,033)
Increase (decrease) in cash overdrafts........................................ 78,924 (278,724)
Increase in payables.......................................................... 81,520 196,047
Increase in accrued expenses.................................................. 324,970 200,214
------------- -------------
Net cash provided by operating activities................................... 3,505,213 595,565
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets......................................................... (1,345,399) (2,465,281)
Proceeds from sale of fixed assets................................................ 6,001 48,863
------------- -------------
Net cash used in investing activities....................................... (1,339,398) (2,416,418)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of long-term debt........................................ 3,320,000 2,050,000
Repayments of long-term debt...................................................... (1,024,278) (1,000,000)
Net borrowings (repayments) under revolving line of credit........................ (2,200,000) 1,500,000
Net repayments to partners........................................................ (1,800,000) (1,000,000)
Distributions to partners......................................................... (425,000) 0
------------- -------------
Net cash provided by (used in) financing activities......................... (2,129,278) 1,550,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 36,537 (270,853)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................................... 332,977 603,830
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $ 369,514 $ 332,977
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................................ $ 1,044,861 $ 1,003,439
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
1. NATURE OF OPERATIONS:
ORGANIZATION
Lone Star Growers Co., a Texas partnership (the "Partnership"), was formed
on January 1, 1985, by Lone Star Growers, Inc. and Joseph Bradberry. The
Partnership was formed to acquire, own, operate and manage a nursery business
located near San Antonio, Texas.
On formation, Lone Star Growers, Inc. (100% owned by TETCO, Inc.) received a
90 percent partnership interest for assets contributed to the Partnership and
Joseph Bradberry received a 10 percent partnership interest. Over the ensuing
three-year period, Mr. Bradberry obtained an additional 30 percent interest of
the Partnership.
DESCRIPTION OF THE BUSINESS
The Partnership is an agricultural enterprise specializing in the growth and
wholesale of ornamental plants and shrubs to numerous retailers. The majority of
the plants are grown on the Partnership's 400-acre complex in southwest Bexar
County, Texas, a 150-acre facility near Atascosa, Texas, and a 170-acre facility
near Harlingen, Texas.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Partnership in preparing its financial statements in accordance with
generally accepted accounting principles:
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
using the average cost method and includes direct production costs and overhead.
A portion of the Partnership's nursery stock has an average growing period of
approximately 18 months. The nursery stock is classified as a current asset
based on the Partnership's normal operating cycle.
F-89
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
10 - 40
Buildings and improvements............................ years
Machinery and equipment............................... 5 - 10 years
Furniture and fixtures................................ 5 - 10 years
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
The Partnership recognizes revenues when products are shipped and all
significant obligations of the Partnership have been completed. Where
appropriate, the Partnership also establishes a concurrent reserve for returns
and allowances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Partnership's financial instruments, including
accounts receivable, accounts payable and debt, approximates fair value.
INCOME TAXES
The Partnership is not subject to federal income taxes; rather, its income
from operations is passed directly through to its partners. If the Partnership
had been taxed as a C Corporation, the income tax provision and net income would
have been $2,493,754 and $3,740,631 in 1996 and $689,025 and $1,033,538 in 1995,
assuming an effective tax rate of 40%.
ASSET IMPAIRMENT
On July 1, 1995, the Partnership adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in fiscal 1996.
3. CONCENTRATION OF CREDIT RISK:
The Partnership performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral, as the majority
of its customers are large, well-established companies. Five customers accounted
for approximately 64 percent and 48 percent of accounts receivable at June 30,
1996 and 1995, respectively. These same five customers accounted for
approximately 47 percent and 50 percent of sales for the years ended June 30,
1996 and 1995, respectively.
F-90
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
4. INVENTORIES:
Inventories consisted of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies........................................ $ 373,365 $ 503,545
Plant inventory................................................... 6,607,028 6,075,476
------------ ------------
Total inventory............................................... $ 6,980,393 $ 6,579,021
------------ ------------
------------ ------------
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 1996 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Land........................................................... $ 892,567 $ 561,002
Machinery and equipment........................................ 7,155,633 6,266,030
Buildings and improvements..................................... 4,645,182 4,593,289
Furniture and fixtures......................................... 721,901 631,443
Construction in progress....................................... 64,549 128,507
------------- -------------
13,479,832 12,180,271
Less: Accumulated depreciation................................. (7,618,243) (6,827,495)
------------- -------------
Total property, plant and equipment........................ $ 5,861,589 $ 5,352,776
------------- -------------
------------- -------------
</TABLE>
6. NOTES PAYABLE:
LINE OF CREDIT
As of June 30, 1996 and 1995, the Partnership had a $5,000,000 revolving
line of credit with a financial institution under which there was $200,000 and
$2,400,000 outstanding, respectively. Advances under the line accrue interest at
Frost National Bank's prime rate of interest and are collateralized by
substantially all of the Partnership's assets. Borrowings are limited to 80
percent of adjusted accounts receivable balances and 50 percent of the
Partnership's total inventory balance as defined in the agreement, less certain
borrowings. The borrowing limit at June 30, 1996, was approximately $2,875,000.
The line of credit expires on October 29, 1997.
F-91
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
6. NOTES PAYABLE: (CONTINUED)
LONG-TERM DEBT
Long-term debt at June 30, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Note payable to bank, with quarterly principal and interest payments of $173,814,
interest at prime plus 0.5 percent (8.75 percent at June 30, 1996); secured by
substantially all of the Partnership's assets and guaranteed by the partners
individually; unpaid principal and interest due on April 29, 2002.................. $ 3,000,000 $ 0
Note payable to bank, with quarterly principal and interest payments of $78,217,
interest at prime plus 0.5 percent (8.75 percent at June 30, 1996); secured by
substantially all of the Partnership's assets and guaranteed by the partners
individually; unpaid principal and interest due on April 29, 2002.................. 1,630,000 2,050,000
Note payable to bank, with quarterly principal and interest payments of $60,835,
interest at prime plus 0.5 percent (8.75 percent at June 30, 1996); secured by
substantially all of the Partnership's assets and guaranteed by the partners
individually; unpaid principal and interest due on April 29, 2002.................. 1,270,000 1,850,000
Note payable to seller, with annual principal and interest payments of $43,478,
interest at 6.0 percent; secured by land; unpaid principal and interest due June
15, 2005........................................................................... 295,722 0
------------ -------------
6,195,722 3,900,000
Less: Current portion................................................................ (916,794) (1,000,000)
------------ -------------
$ 5,278,928 $ 2,900,000
------------ -------------
------------ -------------
</TABLE>
As a result of borrowing rates presently available to the Partnership, the
carrying value of debt approximates the fair value. Subsequent to June 30, 1996,
the Partnership renegotiated its bank obligations to restructure and extend the
maturities of its long-term debt. The descriptions above reflect the effects of
the renegotiation.
The provisions of the debt agreements with the bank generally impose
restrictions relating to, among other matters, cash flows, investments, capital
expenditures, incurrence of additional indebtedness, payment of dividends and
maintenance of specified amounts of tangible net worth and working capital.
F-92
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
6. NOTES PAYABLE: (CONTINUED)
The annual amount of principal maturities of long-term debt outstanding at
June 30, 1996, is as follows:
<TABLE>
<S> <C>
1997.................................................... $ 916,794
1998.................................................... 861,509
1999.................................................... 939,654
2000.................................................... 1,024,298
2001.................................................... 1,117,879
Thereafter.............................................. 1,335,588
---------
$6,195,722
---------
---------
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
In the normal course of business, the Partnership has transactions with its
partners and other entities under common ownership. These transactions include
purchasing insurance on a group basis, participating in a group profit-sharing
plan and renting equipment. The following table summarizes the Partnership's
related-party transactions presented in the balance sheet as of June 30, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Related-party receivables......................................... $ 161,903 $ 240,162
Related-party payables............................................ 438,683 281,917
Advances from partners under revolving line of credit............. 3,000,000 4,800,000
</TABLE>
Advances from partners of $438,683 and $281,917 at June 30, 1996 and 1995,
respectively, represent amounts payable for participation in TETCO, Inc.'s group
insurance plan and the Partnership's contribution payable to the TETCO, Inc.
Employees' Profit-Sharing Plan and Trust, a defined contribution plan. Advances
from partners under the revolving line of credit represent amounts advanced to
the Partnership. Interest accrues under the line of credit at 8.75 percent.
Interest paid to the partners was $398,522 and $548,615 during 1996 and 1995,
respectively.
The Partnership made advances to entities under common ownership of $556,345
and $318,131 during the years ended June 30, 1996 and 1995, respectively,
relating to investments in a mushroom project, a furniture shop and a Mexican
turf grass project. The Partnership determined that these advances were not
recoverable and therefore expensed the advances (as other expenses) in the
related statements of income and expense in the year in which they were made. In
addition, the Partnership had sales to an affiliated company of approximately
$400,000 in 1996 and 1995. These sales generated gross profits of approximately
$200,000 in 1996 and 1995, and outstanding receivables on those sales were
$161,903 and $240,162 at June 30, 1996 and 1995, respectively.
8. SETTLEMENT OF A CLAIM:
In June 1996, the Partnership settled a claim with a vendor relating to the
purchase of defective supplies that caused damage to plant inventory and
negatively impacted the growing process in 1992 and 1993. The settlement
agreement states that the Partnership receive an aggregate payment of
$3,212,010,
F-93
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
8. SETTLEMENT OF A CLAIM: (CONTINUED)
net of related legal fees and other expenses. The Partnership recorded the
settlement as other income in 1996. The Partnership received payment under the
settlement agreement on August 27, 1996.
9. CONTINGENCIES:
In the ordinary course of business, the Partnership has various cases
pending involving contractual, employee-related and other matters. In light of
the Partnership's legal position, insurance coverage and reserves, management
does not believe that these cases will have a material adverse impact on the
Partnership.
10. SUBSEQUENT EVENT:
On February 20, 1997, 100 percent of the outstanding partnership interests
of the Partnership were purchased through a merger by Lone Star Growers, L.P. (a
Delaware limited partnership and indirect subsidiary of Color Spot Nurseries,
Inc.) for cash and stock.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of CSN, Inc.:
We have audited the accompanying statement of assets and liabilities and
divisional equity of The Wholesale Division of Sunnyside Plants, as of March 31,
1996 and the related statements of revenues and expenses and cash flows for the
year then ended. These financial statements are the responsibility of the
Division's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities and divisional equity of
the Wholesale Division of Sunnyside Plants, Inc. as of March 31, 1996 and the
related revenues, expenses and cash flows for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
July 15, 1997
F-95
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENT OF ASSETS AND LIABILITIES
AND DIVISIONAL EQUITY
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful accounts of $75,000........ $ 856,993
Inventories................................................................... 1,854,342
Deferred income taxes......................................................... 104,000
Due from Parent............................................................... 355,000
---------
Total current assets........................................................ 3,170,335
PROPERTY AND EQUIPMENT, net..................................................... 428,671
---------
Total Assets................................................................ $3,599,006
---------
---------
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 707,596
Accrued liabilities........................................................... 70,475
Current portion of capital lease obligation................................... 9,150
---------
Total current liabilities................................................... 787,221
---------
CAPITAL LEASE OBLIGATION, net of current portion................................ 34,676
Total liabilities........................................................... 821,897
---------
Divisional Equity............................................................... 2,777,109
---------
Total Liabilities and Divisional Equity..................................... $3,599,006
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-96
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENT OF REVENUES AND EXPENSES
AND DIVISIONAL EQUITY
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C>
NET SALES....................................................................... $6,555,212
COSTS OF SALES.................................................................. 5,579,664
---------
Gross profit.................................................................. 975,548
---------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................... 1,662,675
---------
Loss from operations.......................................................... (687,127)
INCOME TAX BENEFIT.............................................................. (275,000)
---------
Net loss...................................................................... $(412,127)
DIVISIONAL EQUITY, MARCH 31 1995................................................ 3,189,236
---------
DIVISIONAL EQUITY, MARCH 31, 1996............................................... $2,777,109
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-97
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $(412,127)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation................................................................. 80,375
Changes in assets and liabilities--
Increase in accounts receivable............................................ (408,570)
Decrease in inventories.................................................... 499,383
Decrease in deferred income tax asset...................................... 80,000
Increase in receivable from Parent......................................... 355,000
Increase in accounts payable............................................... 66,173
Increase in accrued liabilities............................................ 36,098
---------
Net cash provided by operating activities................................ 296,332
---------
CASH FLOWS FROM INVESTING ACTIVITIES, purchases of property and equipment........ (3,019)
CASH FLOWS FROM FINANCING ACTIVITIES, transfer to Parent......................... (293,313)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... --
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ --
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement
F-98
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. OPERATIONS AND BASIS OF PRESENTATION:
Sunnyside Plants, Inc. (the Company, a California corporation) was
incorporated in 1995 as a wholly owned subsidiary of Sakata Seed America, Inc.
(the Parent, a California corporation). The Company produces and distributes
potted flowering plants.
Since the Company did not maintain separate accounting records for the
Division, certain estimates were required to segregate the Division's account
balances as of March 31, 1996.
- Identification basis--Account balances relating to assets, liabilities,
revenues and expenses ("account balances") specifically pertaining to the
Division were identified and segregated. Account balances related to
general and administrative expenses incurred by the Company for general
purposes have been included in total as the Division was the significant
portion of the Company's operations for the year.
- Transfer basis--Account balances pertaining to the Company's retail
division or account balances which were not able to be specifically
allocated to either division were identified and excluded from the
Division.
- Allocation basis--The account balance related to cost of sales for the
Division has been estimated based on the estimated purchases of the
Division.
In management's opinion, the method of allocation is reasonable and the
results are representative of the results of operations that would have been
attained by the Division on a stand-alone basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Division in preparing its financial statements in accordance with generally
accepted accounting principles.
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Division considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories are stated at the lower of cost or market. At March 31, 1996,
inventories consisted only of finished goods. Cost is determined using the
average cost method and includes production costs and overhead.
F-99
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over their
estimated useful lives on a straight line basis as follows:
<TABLE>
<S> <C>
Office equipment................................................ 5 years
Machinery and equipment......................................... 5 - 7
years
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
Revenue is recognized upon transfer of title and risk of ownership to the
customer, which generally occurs upon product shipment. In 1996, no single
customer accounted for 10% or more of net sales.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including accounts receivable and payable
and capital lease obligations, the Division's carrying amount approximates fair
value.
INCOME TAXES
Income taxes are recognized in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS
109 utilizes the asset and liability method under which deferred income taxes
are recognized for the consequences of temporary differences by applying
currently enacted statutory rates to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
ASSET IMPAIRMENT
On April 1, 1996, the Division adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets, certain
identifiable intangible assets and goodwill be reviewed for impairment when
expected future undiscounted cash flows are less than the carrying value of the
asset. No charges were recorded pursuant to this statement in 1996.
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Division to concentration
of credit risk consist of trade accounts receivable. The division sells
primarily on 30-day terms, performs credit evaluation procedures on its
customers and generally does not require collateral. The division maintains an
allowance for potential credit losses ($75,000 as of March 31, 1996).
F-100
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
4. PROPERTY AND EQUIPMENT:
Property and equipment of the Division at March 31, 1996 consisted of the
following:
<TABLE>
<S> <C>
Office equipment................................................. $ 202,183
Machinery and equipment.......................................... 373,448
---------
Total property and equipment................................. 575,631
Less: Accumulated depreciation................................... (146,960)
---------
Net property and equipment................................... $ 428,671
---------
---------
</TABLE>
Depreciation expense for the year ended March 31, 1996, was $80,375.
5. CAPITAL LEASE:
The Division leases certain equipment under a capital lease agreement.
Future minimum lease payments to be made are as follows for the years ending
March 31:
<TABLE>
<S> <C>
1997............................................................... $ 12,029
1998............................................................... 12,029
1999............................................................... 12,029
2000............................................................... 12,029
2001............................................................... 3,007
---------
Total minimum lease payments....................................... 51,123
Less: interest.................................................... (7,297)
---------
$ 43,826
---------
---------
</TABLE>
6. INCOME TAXES:
The Company files consolidated Federal and state income tax returns with the
Parent. The Company calculates the provision for income taxes on a separate
company basis.
Receivable from Parent in the accompanying statement of assets and
liabilities represents a tax benefit for the Parent resulting from the
Division's taxable loss in the year ended March 31, 1996.
Deferred income tax assets result from differences in the timing of
recognition of certain expense items for financial statement purposes and income
tax purposes. The principal temporary differences giving rise to deferred income
tax assets are certain inventory reserves, bad debt reserves and accrued
expenses.
F-101
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
6. INCOME TAXES: (CONTINUED)
The tax effects of the significant components of the Division's deferred
income tax asset at March 31, 1996 are as follows:
<TABLE>
<S> <C>
Reserves not deductible for tax purposes.......................... $ 93,760
Accrued expenses.................................................. 10,240
---------
$ 104,000
---------
---------
</TABLE>
The effective income tax rate for the year ended March 31, 1996 differs from
the Federal statutory rate of 34% as follows:
<TABLE>
<S> <C>
Federal statutory tax rate........................................... (34.0)%
State taxes, net..................................................... (6.0)%
---------
(40.0)%
---------
---------
</TABLE>
The Company has been reviewed by the tax authority for the tax year ended
March 31, 1995. The outcome of this review is not certain at this time, but in
the opinion of management the Division does not believe that this review will
materially affect the Division's financial position.
7. EMPLOYEE BENEFIT PLAN:
The Company has an employee profit-sharing and savings plan in which
employees may defer up to 10.5 percent of their salary for retirement purposes.
The Company matches 100 percent of employee contributions up to the first 5
percent of such employees' annual compensation and 50 percent of the next 3
percent of such employee's annual compensation. The Division's contribution
under the plan totaled approximately $65,000 in the year.
8. SUBSEQUENT EVENT:
In January 1997, the Company sold a significant portion of the net assets of
the Wholesale Division to CSN, Inc., the parent company of Color Spot Nurseries,
Inc.
F-102
<PAGE>
COLOR SPOT NURSERIES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 25, ----------
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 1,681 $ 2,762
Accounts receivable, net of allowances of $1,980 and $1,661, respectively............ 16,248 25,524
Inventories.......................................................................... 46,498 28,854
Prepaid expenses and other........................................................... 643 893
------------- ----------
Total current assets............................................................... 65,070 58,033
TREE INVENTORIES....................................................................... 661 541
PROPERTY, PLANT AND EQUIPMENT, net..................................................... 47,835 31,774
INTANGIBLE ASSETS, net................................................................. 60,401 31,383
DEFERRED INCOME TAXES.................................................................. 7,890 10,120
NOTES RECEIVABLE AND OTHER ASSETS...................................................... 1,886 1,566
------------- ----------
Total assets....................................................................... $ 183,743 $ 133,417
------------- ----------
------------- ----------
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................................................. $ 4,563 $ 4,595
Revolving line of credit............................................................. 13,347 2,105
Accounts payable..................................................................... 18,136 9,815
Accrued liabilities.................................................................. 10,770 12,395
Dividends payable to stockholders.................................................... 882 906
Deferred income taxes................................................................ 16,787 14,056
------------- ----------
Total current liabilities.......................................................... 64,485 43,872
LONG-TERM DEBT......................................................................... 111,335 83,408
------------- ----------
Total liabilities.................................................................. 175,820 127,280
------------- ----------
REDEEMABLE COMMON STOCK 1,163,550 and 1,199,744 shares, respectively................... 2,026 2,062
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding........................................................................ -- --
Common stock, $0.01 par value, 20,000,000 shares authorized, 5,773,518 and 5,021,118
issued and outstanding, respectively............................................... 170 162
Additional paid-in capital........................................................... 50,798 45,033
Treasury stock, 6,200,228 and 6,164,034 shares, respectively......................... (45,488) (45,228)
Retained earnings.................................................................... 417 4,108
------------- ----------
Total stockholders' equity......................................................... 5,897 4,075
------------- ----------
Total liabilities, redeemable common stock and stockholders' equity................ $ 183,743 $ 133,417
------------- ----------
------------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-103
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 1, 1997 JULY 1, 1996
THROUGH THROUGH
SEPTEMBER 25, 1997 SEPTEMBER 26, 1996
------------------- -------------------
<S> <C> <C>
NET SALES.............................................................. $ 25,482 $ 13,437
COST OF SALES.......................................................... 18,018 8,858
------- -------
Gross profit......................................................... 7,464 4,579
SALES, MARKETING AND DELIVERY EXPENSES................................. 8,388 4,763
GENERAL AND ADMINISTRATIVE EXPENSES.................................... 2,682 1,204
AMORTIZATION OF INTANGIBLE ASSETS...................................... 612 81
------- -------
Loss from operations................................................. (4,218) (1,469)
INTEREST EXPENSE....................................................... 2,392 133
OTHER (INCOME) EXPENSE, net............................................ 102 (22)
------- -------
Loss before income tax benefit....................................... (6,712) (1,580)
INCOME TAX BENEFIT..................................................... 3,021 760
------- -------
Net loss............................................................. $ (3,691) $ (820)
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-104
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT COMMON SHARES)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL STOCK EARNINGS EQUITY
---------- ----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997............................. 5,021,118 $ 162 $ 45,033 $ (45,228) $ 4,308 $ 4,275
---------- ----- ----------- --------- ----------- -------------
Issuance of common stock:
Existing shareholders and management............. 713,196 7 5,104 -- -- 5,111
Acquisition of businesses........................ 39,204 1 625 -- -- 626
Purchase of redeemable common stock................ -- -- 36 (260) (224)
Net income......................................... -- -- -- -- (3,691) (3,691)
---------- ----- ----------- --------- ----------- -------------
Balance, September 25, 1997 (unaudited)............ 5,773,518 $ 170 $ 50,798 $ (45,488) $ 617 $ 6,097
---------- ----- ----------- --------- ----------- -------------
---------- ----- ----------- --------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-105
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 1, 1997 JULY 1, 1996
THROUGH THROUGH
SEPTEMBER 25, 1997 SEPTEMBER 26, 1996
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (3,691) $ (820)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization......................................... 1,320 299
Deferred income taxes................................................. (2,619) (406)
Changes in operating assets and liabilities, net of effect of acquired
businesses:
Decrease in accounts receivable..................................... 11,306 5,319
(Increase) in inventories........................................... (8,137) (2,072)
Decrease (increase) in prepaid expenses and other current assets.... 341 (141)
(Increase) in tree inventories...................................... (120) (188)
(Increase) in other long-term assets................................ (320) --
Increase in accounts payable........................................ 3,429 10
(Decrease) in accrued liabilities................................... (510) (2,290)
Increase in other liabilities....................................... 1,044 1,136
-------- -------
Net cash provided by operating activities......................... 2,043 847
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less cash acquired.................. (40,539) --
Purchase of fixed assets................................................ (3,030) (1,263)
Proceeds from sale of fixed assets...................................... -- 79
-------- -------
Net cash used in investing activities............................. (43,569) (1,184)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft.......................................................... (1,798) --
Issuance of common stock................................................ 5,111 100
Purchase of treasury stock.............................................. (260) --
Financing and organizational costs...................................... (472) (75)
Dividend paid........................................................... (24) --
Proceeds from borrowings................................................ 36,829 72
Net borrowings under revolving line of credit........................... 1,241 832
Repayments of long-term debt............................................ (182) (372)
-------- -------
Net cash provided by financing activities......................... 40,445 557
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................... (1,081) 220
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 2,762 701
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 1,681 $ 921
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................................. $ 442 $ 93
-------- -------
-------- -------
Income taxes.......................................................... $ -- $ --
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisitions........................................... $ 625 $ --
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-106
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements. Accordingly, the consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and related notes for the fiscal year ended June 30, 1997.
Any capitalized terms used but not defined in these Condensed Notes to
Consolidated Financial Statements have the same meaning given to them in the
June 30, 1997 financial statements referred to above. All references to the
"Company" include Color Spot Nurseries, Inc. and subsidiaries unless otherwise
noted or the context indicates otherwise. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year-end. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
The consolidated financial statements as of September 25, 1997, the period
from July 1, 1997 to September 25, 1997 and the period from July 1, 1996 to
September 26, 1996 included herein are unaudited. However, they include all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of the
Company as of September 25, 1997, the consolidated results of operations for the
period from July 1, 1997 to September 25, 1997 and for the period from July 1,
1996 to September 26, 1996, the consolidated statement of changes in
stockholders' equity from July 1, 1997 to September 25, 1997 and the
consolidated cash flows for the period from July 1, 1997 to September 25, 1997
and for the period from July 1, 1996 to September 26, 1996.
These financial statements have been prepared assuming the merger of CSN,
Inc. into Color Spot Nurseries, Inc. and a reverse 0.69-for-one reverse stock
split, which will occur simultaneously with the consummation of the Company's
senior subordinated note, Series A Preferred Stock and warrant offerings.
2. INVENTORIES
Inventories at September 25, 1997 and June 30, 1997, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 25, ---------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Current:
Outdoor flowers and vegetable plants.............................. $ 39,049 $ 24,385
Raw materials and supplies........................................ 5,749 3,374
Tree inventories.................................................. 1,700 1,095
------------- ---------
Total current inventories....................................... 46,498 28,854
Noncurrent:
Tree inventories.................................................. 661 541
------------- ---------
Total inventories............................................... $ 47,159 $ 29,395
------------- ---------
------------- ---------
</TABLE>
F-107
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 25, 1997 and June 30, 1997,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 25, ---------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Land................................................................ $ 9,177 $ 8,621
Greenhouses and growing structures.................................. 13,954 8,091
Building............................................................ 2,105 938
Furniture and fixtures.............................................. 3,212 2,108
Machinery and equipment............................................. 16,433 10,929
Leasehold improvements.............................................. 3,392 2,587
Assets under capital leases......................................... 1,108 752
Construction in progress............................................ 2,077 550
------------- ---------
51,503 34,576
Less: Accumulated depreciation...................................... (3,668) (2,802)
------------- ---------
Total property, plant and equipment............................... $ 47,835 $ 31,774
------------- ---------
------------- ---------
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets as of September 25, 1997 and June 30, 1997, consisted of
the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 25, ---------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Goodwill............................................................ $ 51,063 $ 23,971
Organization costs.................................................. 3,374 1,670
Financing costs..................................................... 5,057 4,352
Noncomplete agreements.............................................. 1,731 1,731
Other............................................................... 911 856
------------- ---------
62,136 32,580
Less: Accumulated amortization...................................... (1,735) (1,197)
------------- ---------
Total intangible assets........................................... $ 60,401 $ 31,383
------------- ---------
------------- ---------
</TABLE>
F-108
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS
Between July 1, 1997 and September 25, 1997 the Company effected the
following acquisitions:
<TABLE>
<CAPTION>
ENTITY DATE OF ACQUISITION
- ----------------------------------------------------------------------- ---------------------
<S> <C>
Plants, Inc............................................................ July 31, 1997
Peters Wholesale Greenhouses, Inc...................................... July 31, 1997
Wolfe Greenhouses, LLC................................................. July 31, 1997
Cracon, Inc............................................................ August 5, 1997
Summersun Greenhouse Co................................................ August 11, 1997
Oda Nursery, Inc....................................................... September 3, 1997
</TABLE>
The purchase price, certain costs related to the acquisitions and the
allocation of the purchase price to the underlying net assets acquired in these
acquisitions were as follows (in thousands):
<TABLE>
<CAPTION>
SUMMERSUN ODA NURSERIES OTHER
GREENHOUSE CO. INC. ACQUISITIONS TOTAL
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Purchase price........................................... $ 7,546 $ 16,052 $ 17,901 $ 41,499
Organization and financing costs......................... 286 479 1,121 1,886
------- ------------- ----------- ---------
Total purchase price................................. 7,832 16,531 19,022 43,385
Less: Value assigned to assets and liabilities
Current assets......................................... 1,693 7,339 3,783 12,815
Long-term assets....................................... 1,520 3,566 11,367 16,453
Current liabilities.................................... (1,035) (2,875) (3,429) (7,339)
Debt................................................... -- -- (307) (307)
Long-term liabilities.................................. -- (3,480) (1,241) (4,721)
------- ------------- ----------- ---------
2,178 4,550 10,173 16,901
------- ------------- ----------- ---------
Goodwill............................................. $ 5,654 $ 11,981 $ 8,849 $ 26,484
------- ------------- ----------- ---------
------- ------------- ----------- ---------
</TABLE>
The Company accounted for all of these acquisitions using the purchase
method of accounting. The allocation of the purchase price to the underlying net
assets acquired is based upon preliminary estimates of the fair value of the net
assets, which may be revised at a later date. It is anticipated that any
purchase price allocation adjustments will be made within one year from the date
of acquisition. Management does not believe that the final allocations of the
purchase prices will have a material effect on the Company's financial position
or results of operations. In connection with certain acquisitions, the Company
issued 39,204 shares of common stock which were valued at $15.94 per share.
Results of operations of the acquired entities subsequent to the purchase
date are included in the consolidated financial statements. Pro forma operating
results of the Company, assuming the above
F-109
<PAGE>
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
acquisitions, including those acquisitions consummated prior to June 30, 1997
occurred on July 1, 1997 and July 1, 1996 are presented below (in thousands,
except earnings per share).
<TABLE>
<CAPTION>
JULY 1, 1997 JULY 1, 1996
THROUGH SEPTEMBER THROUGH SEPTEMBER
25, 1997 26, 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales............................................. $ 27,345 $ 25,217
Net loss.............................................. (4,344) (3,234)
</TABLE>
6. DEBT
Debt as of September 25, 1997 and June 30, 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
SEPTEMBER 25, ---------
1997
-------------
(UNAUDITED)
<S> <C> <C>
Revolving line of credit............................................ $ 13,346 $ 12,105
Term loans.......................................................... 88,750 58,730
Acquisition loan.................................................... 15,000 8,227
Convertible note and interest accrual............................... 7,384 7,384
Non-compete agreements.............................................. 1,362 1,395
Other............................................................... 3,403 2,247
------------- ---------
Total debt.......................................................... 129,245 90,108
Less: Current maturities............................................ (17,910) (6,700)
------------- ---------
Long-term portion................................................... $ 111,335 $ 83,408
------------- ---------
------------- ---------
</TABLE>
During the period from July 1, 1997 through September 25, 1997, the Company
increased its term loans and acquisition loan by $30,000,000 and $6,773,000,
respectively to fund acquisitions. Additionally, the Company issued a long-term
note in the amount of $1,000,000 in conjunction with the Oda Nursery, Inc.
acquisition.
F-110
<PAGE>
ODA NURSERY, INC.
BALANCE SHEET--JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................................. $ 3,207,719
Receivables (less allowance for doubtful accounts of $150,000)................................... 1,720,443
Inventories...................................................................................... 5,457,455
Prepaid expenses................................................................................. 2,448
Investment in stock.............................................................................. 41,397
Notes receivable from stockholders............................................................... 1,200,273
-------------
Total current assets........................................................................... 11,629,735
PROPERTY, PLANT AND EQUIPMENT, net................................................................. 582,918
NET ASSETS HELD FOR DISTRIBUTION................................................................... 1,976,588
-------------
Total assets................................................................................... $ 14,189,241
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......................................................... $ 44,440
Long-term debt, net of current maturities........................................................ 160,397
Loan from stockholder............................................................................ 1,200,000
-------------
Total current liabilities...................................................................... 1,404,837
LONG-TERM DEBT, net of current maturities.......................................................... 723,459
-------------
Total liabilities.............................................................................. 2,128,296
-------------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 5,000 shares authorized, 2,000 shares issued and outstanding....... 200,000
Retained Earnings................................................................................ 11,860,945
-------------
Total stockholders' equity..................................................................... 12,060,945
-------------
Total liabilities and stockholders' equity..................................................... $ 14,189,241
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-111
<PAGE>
ODA NURSERY, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
SALES................................................................................ $ 10,581,692 $ 9,485,889
COST OF SALES........................................................................ 4,953,039 5,287,126
------------- ------------
Gross profit..................................................................... 5,628,653 4,198,763
OPERATING EXPENSES:
Delivery........................................................................... 1,565,332 1,102,622
Sales and marketing................................................................ 668,430 886,466
General and administrative......................................................... 149,665 92,699
Depreciation....................................................................... 49,875 48,450
Other expenses..................................................................... 77,048 109,014
------------- ------------
Income from operations........................................................... 3,118,303 1,959,512
INTEREST EXPENSE..................................................................... 129,200 170,178
OTHER INCOME (EXPENSES), net......................................................... (9,208) 206,104
------------- ------------
Net income....................................................................... $ 2,979,895 $ 1,995,438
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE>
ODA NURSERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES AND OTHER NONRECURRING EXPENSES:
Net income........................................................................ $ 2,979,895 $ 1,995,438
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of property, plant and equipment................................... (4,490) --
Depreciation.................................................................... 87,500 85,000
Changes in certain assets and liabilities:
Increase in receivables....................................................... (1,556,164) (1,479,520)
Decrease in inventories....................................................... 3,227,092 3,151,273
Decrease in prepaid expenses.................................................. 34,989 10,415
(Increase) decrease in notes receivable from stockholder...................... (750,273) 223,172
Decrease in accounts payable and accrued expenses............................. (69,184) (249,900)
------------- -------------
Net cash provided by operating activities................................... 3,949,365 3,735,878
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... -- (13,205)
------------- -------------
Net cash used in investing activities....................................... -- (13,205)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit...................................................... -- --
Payments on line of credit........................................................ (750,100) (405,350)
Proceeds from issuance of long-term obligations................................... -- --
Principal payments on long-term obligations....................................... (57,143) (1,249,476)
Principal payments on loan from stockholder....................................... (200,000) --
Distributions to stockholders..................................................... -- (2,200,000)
------------- -------------
Net cash used in financing activities....................................... (1,007,243) (3,854,826)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 2,942,122 (132,153)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................................... 265,597 933,061
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $ 3,207,719 $ 800,908
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-113
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
The financial statements presented herein include the accounts of Oda
Nursery, Inc. (the Company) and have been prepared by the Company, without
audit. The Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
results of operations, financial position and cash flows. The financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual financial statements for the year
ended December 31, 1996.
1. NATURE OF OPERATIONS:
ORGANIZATION
Oda Nursery, Inc., a California corporation (the Company), was formed on
December 10, 1973, by Harunori Oda, Mitsuka Oda and Richard Tanaka. The Company
was formed to acquire, own, operate and manage a nursery business, as well as to
acquire, own, sell, mortgage or lease real and personal property.
DESCRIPTION OF THE BUSINESS
The Company is an agricultural enterprise specializing in the growth and
wholesale of high-quality ornamental plants and shrubs to numerous retailers.
The majority of the plants are grown on the Company's 200 acre complex in San
Juan Capistrano, California.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Company in preparing its financial statements in accordance with generally
accepted accounting principals:
USE 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
disclosure of contingent assets and liabilities) at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost or market. Plant inventory cost
includes direct production costs and overhead. Raw material inventory cost is
determined using the most recent purchase price, which approximates average
cost. A portion of the Company's inventory has an average growing period of
approximately 18 months. This inventory is classified as a current asset based
on the Company's normal operating cycle.
F-114
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
10 - 24
Buildings and improvements.................................... years
Machinery and equipment....................................... 5 - 10 years
Software, furniture and fixtures.............................. 3 - 5 years
</TABLE>
Total depreciation expense for the six months ended June 30, 1997 and 1996
was approximately $175,000 and $170,000, respectively. All repairs and
maintenance costs are expensed as incurred.
INCOME TAXES
The Company elected in 1973, under Federal and state tax laws, to be treated
under the provisions of Subchapter S of the Internal Revenue Code. Under these
provisions, income taxes are the obligation of the individual stockholder,
except that the Company is taxed on income for state tax purposes at reduced
rates. The provision for income taxes was $60,000 and $33,000 for the six month
periods ending June 30, 1996 and 1995, respectively, and was recorded in other
expenses.
REVENUE RECOGNITION
The Company recognizes revenues when products are shipped. Where
appropriate, the Company establishes a reserve for returns and allowances.
3. INVESTMENT IN STOCK:
As further discussed in Note 6 the Company is required under the terms of
its credit agreement to maintain an investment in stock of the bank amounting to
6.83 percent of its outstanding indebtedness.
F-115
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
4. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Note payable to bank, with monthly principal and interest payments of $13,084,
interest at the bank's reference rate (9.25 percent as of June 30, 1997);
secured by substantially all of the Company's assets; unpaid principal and
interest due on May 1, 2002.................................................... 611,977
Mortgage payable to seller, with monthly principal and interest payments of
$2,400, interest at 6.5 percent as of June 30, 1997; secured by land; unpaid
principal and interest due July 13, 2006....................................... 197,842
Stock obligation to bank, with monthly interest payments made at stated rate of
9.75 percent at June 30, 1997; unpaid interest due May 1, 2002................. 90,140
Note Payable under Small Business Loan, with monthly principle and interest
payments of $1,960; principal and interest paid February 27, 1997.............. 32,833
-----------
Less: Current maturities......................................................... (209,333)
-----------
$ 723,459
-----------
-----------
</TABLE>
The provisions of the debt agreements with the bank generally impose
restrictions relating to, among other matters, incurrence of additional
indebtedness and maintenance of specified amounts of tangible net worth and
working capital. In addition, the bank requires the Company maintain 6.38
percent of outstanding borrowings as an investment in the bank's stock. The
Company incurs monthly interest on the outstanding stock balance, but will not
repay the stock obligation, nor recover the stock investment balance. Both the
stock obligation and the investment in stock are reduced as the Company makes
principle payments on its other obligations to the bank.
5. STOCKHOLDERS' NOTES:
The following table summarizes the Company's notes with stockholders
presented in the balance sheet as of June 30, 1997:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Note receivable from stockholder................................................ $ 450,000
Loan from stockholder........................................................... 1,200,000
</TABLE>
The Company received cash from one of its stockholders in 1993. This loan is
due at the notice of the stockholder and is therefore considered short-term in
nature. $200,000 was repaid during the six month period from December 31, 1996
to June 30, 1997. Interest is payable monthly, at an annual rate of 8 percent.
Interest paid related to this loan was $54,500 for the six month period ended
June 30, 1997.
F-116
<PAGE>
ODA NURSERY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
5. STOCKHOLDERS' NOTES: (CONTINUED)
The Company issued notes receivable to a stockholder and one of his related
entities under common ownership in 1997 and 1996 of $675,000 and $450,000,
respectively. The note issued in 1992 was repaid during 1996. The note for
$450,000 was repaid in 1997. The note accrues interest at 10 percent.
6. SUBSEQUENT EVENT AND NET ASSETS HELD FOR DISTRIBUTION:
In September 1997, the Company's stockholders sold the Company to Color Spot
Nurseries, Inc. The land held by the Company was not part of the sale
transaction. It is the Company's intention to distribute this land to the
stockholders in connection with the sale. This land was written down during the
year ended December 31, 1996 by $770,412 based on independent appraisals.
F-117
<PAGE>
CRACON, INC.
BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 212,862
Accounts receivable:
Trade, net of allowances of $50,000......................................... 55,182
Related party............................................................... 126,319
Prepaid expenses.............................................................. 2,145
---------
Total current assets...................................................... 396,508
NOTES RECEIVABLE:
Related....................................................................... 200,000
Other......................................................................... 40,000
TREE INVENTORIES................................................................ 1,521,065
PROPERTY AND EQUIPMENT, net..................................................... 262,426
---------
Total assets.............................................................. $2,420,499
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable:
Other....................................................................... $ 915,265
Related parties............................................................. 390,000
Accounts payable.............................................................. 76,988
Accrued interest payable...................................................... 30,570
Other accrued liabilities..................................................... 2,980
Current portion of long-term debt............................................. 9,811
---------
Total current liabilities................................................. 1,425,614
LONG-TERM DEBT, net of current portion.......................................... 33,262
---------
Total liabilities......................................................... 1,458,876
---------
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 50 shares authorized, issued and outstanding..... 500
Retained earnings............................................................. 961,123
---------
Total stockholders' equity................................................ 961,623
---------
Total liabilities and stockholders' equity................................ $2,420,499
---------
---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-118
<PAGE>
CRACON, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
NET SALES.............................................................................. $ -- $ --
COST OF SALES.......................................................................... -- --
------------ -----------
Gross profit......................................................................... -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................................... 165,992 156,962
------------ -----------
Loss from operations................................................................. (165,992) (156,962)
INTEREST EXPENSE, net.................................................................. 62,237 85,600
------------ -----------
Net loss............................................................................. (228,229) (242,562)
RETAINED EARNINGS, BEGINNING........................................................... 1,231,352 993,020
Distributions.......................................................................... (42,000) (49,000)
------------ -----------
Retained Earnings, Ending............................................................ $ 961,123 $ 701,458
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-119
<PAGE>
CRACON, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $ (228,229) $ (242,562)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 9,810 8,239
Changes in certain assets and liabilities:
Decrease in receivables........................................................ 2,597,643 2,548,217
Increase in tree inventories................................................... (149,839) (129,392)
Decrease in other assets....................................................... -- 20,000
Decrease in trade payables..................................................... (1,102,832) (1,681,493)
Decrease in other accrued liabilities.......................................... (63,226) (18,637)
Decrease in accrued interest................................................... (60,342) (38,990)
------------ -------------
Net cash provided by operating activities.................................... 1,231,214 707,944
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets........................................................... (10,375) (954)
Increase in notes receivable....................................................... (240,000) (187,099)
------------ -------------
Net cash used in investing activities........................................ (250,375) (188,053)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable........................................................ (504,811) (435,000)
Proceeds from issuance of notes payable............................................ -- 283,980
Dividends paid..................................................................... (42,000) (49,000)
Repayment of other long-term debt.................................................. (6,930) (38,152)
------------ -------------
Net cash used in financing activities........................................ (553,741) (238,172)
------------ -------------
Net increase in cash......................................................... 198,869 39,157
CASH AT BEGINNING OF YEAR............................................................ 13,993 9,295
------------ -------------
CASH AT END OF YEAR.................................................................. $ 212,862 $ 48,452
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............................................. $ 128,855 $ 127,422
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-120
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
The financial statements presented herein include the accounts of Cracon,
Inc. (the "Company") and have been prepared by the Company, without audit. The
Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, the financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's results of operations,
financial statements and the notes thereto included in the Company's annual
financial statements for the year ended December 31, 1996.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Cracon, Inc. (the "Company"), an S corporation, is a grower, broker and
distributor of Christmas trees. The Company sells primarily to general
merchandise chain stores, home improvement chain stores and retail garden
stores.
USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash held in banks and deposits with maturities of
three months or less to be cash and cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories consist primarily of Christmas trees and are carried at the
lower of cost or market. Cost is determined using the average cost incurred to
purchase or plant and maintain the inventory. Tree inventories are classified as
long-term until the trees are cut and ready for sale. The Company is dependent
on several vendors for a large portion of its inventory.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated over their
estimated useful lives using accelerated methods as follows:
<TABLE>
<S> <C>
Machinery and equipment......................................... 7 years
Vehicles........................................................ 5 years
Leasehold improvements.......................................... lease term
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
F-121
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized when products are shipped and all significant
obligations of the Company have been completed, which occurs in the months of
November and December.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including
accounts receivable, accounts payable and debt, approximates fair value.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code of 1986, as amended, by consent of its stockholders.
Therefore, the Company generally does not pay federal income taxes on its
income. Instead, the stockholders are liable for individual federal income taxes
on their respective share of the Company's taxable income.
ASSET IMPAIRMENT
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in fiscal 1996.
2. NOTES RECEIVABLE
RELATED PARTIES
In 1997, the Company extended a note receivable of $200,000 to an entity
under common ownership. The note bears an interest rate of 9 percent.
THIRD PARTY
In 1997, the Company extended a note receivable of $40,000 to a third party.
The note bears an interest rate of 9 percent.
The Company has earned $6,674 of interest income in 1997.
F-122
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at June 30, 1997:
<TABLE>
<S> <C>
Land.............................................................. $ 209,279
Machinery and equipment........................................... 74,757
Vehicles.......................................................... 30,028
Leasehold improvements............................................ 26,350
---------
Total property and equipment.................................. 340,414
Less: Accumulated depreciation.................................... (77,488)
---------
Property and equipment, net....................................... $ 262,926
---------
---------
</TABLE>
4. NOTES PAYABLE:
Notes payable are due at various dates through December 31, 1997. Interest
is payable annually and quarterly at various rates. At June 30, 1997, the
weighted average interest rate was 10.7 percent.
Certain of the note holders are employees or relatives of the current
shareholders of the Company. Amounts due to these note holders have been
classified as notes payable--related parties in the accompanying balance sheet.
During 1997, the Company incurred $31,969 in interest on these related party
notes payable.
5. LONG-TERM DEBT:
Long-term debt as of June 30, 1997 consists of the following:
<TABLE>
<S> <C>
Mortgage notes payable to individuals; annual principal payments
of $4,633 through February 2003; interest payable annually at
9.5 percent; secured by the underlying property................. $ 27,801
Mortgage note payable to a bank; monthly principal and interest
payments of $591 through November 1999; interest at 9.5 percent;
secured by the underlying property.............................. 15,272
---------
43,073
Less: Current portion............................................. (9,811)
---------
$ 33,262
---------
---------
</TABLE>
6. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company has contracts to purchase Christmas trees from third-party
growers. Certain of these contracts require the Company to maintain the trees
until they are harvested. The Company will pay for any trees it harvests at a
price per tree.
F-123
<PAGE>
CRACON, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS:
In the normal course of business, the Company sells Christmas trees to an
entity under common ownership. Accounts receivable related to these sales
totaled $97,048 at June 30, 1997.
In 1996, the Company repaid a loan on behalf of an entity under common
control. The advance of $29,271 has been included in accounts
receivable--related parties.
8. SUBSEQUENT EVENTS:
In August 1997, substantially all of the Company's assets were purchased by
Color Spot Christmas Trees, Inc., a wholly owned subsidiary of Color Spot
Nurseries, Inc. for cash and stock.
F-124
<PAGE>
WOLFE GREENHOUSES, L.L.C.
BALANCE SHEET
JULY 11, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 970,672
Accounts receivable:
Trade, less allowance for doubtful accounts of $26,581...................... 424,148
Other....................................................................... 3,445
Inventories................................................................... 1,004,696
Prepaid expenses.............................................................. 36,640
---------
Total current assets.................................................... 2,439,601
---------
Investment in joint venture..................................................... 1,501
---------
Property, plant and equipment................................................... 2,029,114
Less accumulated depreciation................................................. 187,851
---------
Net property and equipment.............................................. 1,841,263
---------
$4,282,365
---------
---------
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current installments of long-term debt........................................ $ 106,564
Trade accounts payable........................................................ 546,389
Accrued expenses.............................................................. 134,253
Deferred income taxes......................................................... 62,669
---------
Total current liabilities............................................... 849,875
---------
Long-term debt, excluding current installments.................................. 1,468,385
---------
Members' equity................................................................. 1,964,105
---------
$4,282,365
---------
---------
</TABLE>
See accompanying selected notes to financial statements.
F-125
<PAGE>
WOLFE GREENHOUSES, L.L.C.
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
SEVEN FOUR-WEEK REPORTING PERIODS ENDED
JULY 11, 1997 AND JULY 12, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales......................................... $ 5,199,437 $ 4,907,175
Cost of sales..................................... 3,390,857 3,320,075
------------ ------------
Gross profit.................................. 1,808,580 1,587,100
Selling, general and administrative expenses...... 771,037 754,090
------------ ------------
1,037,543 833,010
------------ ------------
Other income (expense):
Interest expense................................ (96,683) (109,019)
Equity in income (loss) of joint venture........ 323,454 (4,903)
Gain on warranty settlement..................... -- 143,624
Other, net...................................... 35,863 4,611
------------ ------------
262,634 34,313
------------ ------------
Income before income taxes.................... 1,300,177 867,323
Income taxes...................................... 5,600 27,100
------------ ------------
Net income.................................... 1,294,577 840,223
Members' equity, beginning of period.............. 1,447,778 418,638
Members' contributions............................ -- 7,600
Members' withdrawals.............................. (778,250) (100,017)
------------ ------------
Members' equity, end of period.................... $ 1,964,105 $ 1,166,444
------------ ------------
------------ ------------
</TABLE>
See accompanying selected notes to financial statements.
F-126
<PAGE>
WOLFE GREENHOUSES, L.L.C.
STATEMENTS OF CASH FLOWS
SEVEN FOUR-WEEK REPORTING PERIODS ENDED
JULY 11, 1997 AND JULY 12, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 1,294,577 $ 840,223
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation....................................................................... 74,078 63,602
Deferred income taxes.............................................................. 5,600 27,100
Equity in loss (income) of joint venture........................................... (323,454) 4,903
Gain on warranty settlement........................................................ -- (143,624)
Decrease (increase) in assets:
Accounts receivable.............................................................. 557,555 448,841
Inventories...................................................................... 200,062 378,127
Prepaid expenses................................................................. (17,904) (10,523)
Other assets..................................................................... -- 12,488
Increase (decrease) in liabilities:
Trade accounts payable........................................................... (737,109) (914,870)
Accrued expenses................................................................. (106,694) 72,430
------------ -----------
Net cash provided by operating activities...................................... 946,801 778,697
------------ -----------
Cash flows from investing activities:
Distributions from (contributions to) joint venture.................................. 347,779 (17,875)
Proceeds from repayment of other receivables......................................... 126,801 7,522
Proceeds from warranty settlement.................................................... -- 309,897
Capital expenditures................................................................. (381,730) --
------------ -----------
Net cash provided by (used for) investing activities........................... 92,850 299,544
------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt................................................. (81,693) (57,803)
Repayment of cash overdraft.......................................................... -- (43,666)
Members' contributions............................................................... -- 7,600
Members' withdrawals................................................................. (778,250) (100,017)
------------ -----------
Net cash used for financing activities......................................... (859,943) (193,886)
------------ -----------
Net increase in cash................................................................... 179,708 884,355
Cash at beginning of period............................................................ 790,964 --
------------ -----------
Cash at end of period.................................................................. $ 970,672 $ 884,355
------------ -----------
------------ -----------
</TABLE>
See accompanying selected notes to financial statements.
F-127
<PAGE>
WOLFE GREENHOUSES, L.L.C.
SELECTED NOTES TO FINANCIAL STATEMENTS
JULY 11, 1997
(UNAUDITED)
The financial statements presented herein include the accounts of Wolfe
Greenhouses, L.L.C. (the Company) and have been prepared by the Company, without
audit. The Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position, results of operations and cash flows. The financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual financial statements for the year
ended December 27, 1996.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND NATURE OF BUSINESS
Wolfe Greenhouses, L.L.C., organized as a limited liability company, is an
association formed in accordance with the laws of the State of Texas. Under the
terms of its current articles of incorporation, the Company will cease to exist
on July 1, 2025. The Company operates a wholesale greenhouse facility located in
Waco, Texas whose principal customers are grocery chain stores located in Texas.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
first-in, first-out method.
(c) INVESTMENT IN JOINT VENTURE
Investment in joint venture is accounted for by the equity method.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the assets.
(e) USE 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories at July 11, 1997, consisted of the following:
<TABLE>
<S> <C>
Growing crops................................................ $ 689,800
Supplies..................................................... 288,469
Landscape plants and supplies................................ 26,427
---------
$1,004,696
---------
---------
</TABLE>
F-128
<PAGE>
WOLFE GREENHOUSES, L.L.C.
SELECTED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
(UNAUDITED)
(3) INVESTMENT IN JOINT VENTURE
Investment in joint venture consists of a fifty percent interest in a joint
venture. During 1997, the joint venture settled certain contingent assets and
liabilities, and sold certain real estate. The Company realized approximately
$333,900 of income in 1997 related to these transactions of the joint venture.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at July 11, 1997 consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
AMOUNT USEFUL LIVES
------------ -------------
<S> <C> <C>
Land......................................................... $ 77,066 --
Buildings and improvements................................... 1,259,863 3 - 25 years
Equipment.................................................... 300,815 5 - 20 years
Construction in progress..................................... 391,370 --
------------
$ 2,029,114
------------
------------
</TABLE>
(5) DEBT
Long-term debt at July 11, 1997 consists of the following:
<TABLE>
<S> <C>
Mortgage note payable to a financial institution with
interest at 2% above the base rate, secured by property and
buildings, payable in monthly principal and interest
payments of $22,878 through December 2006.................. $1,574,949
Less current installments.................................... 106,564
---------
$1,468,385
---------
---------
</TABLE>
The Company also has a line of credit agreement with a bank. Under the
agreement, the line of credit agreement allows the Company to borrow up to a
maximum of $800,000. The agreement is secured by trade accounts receivable and
inventory. There were no outstanding borrowings under this agreement at July 11,
1997.
The Company's debt agreements relating to the above notes contain
restrictive financial covenants.
(6) LEASES
The Company has several noncancelable operating leases for transportation
equipment that expire over the next six years. These leases require the Company
to pay certain executory costs, such as insurance, and purchase fuel from the
lessor.
F-129
<PAGE>
WOLFE GREENHOUSES, L.L.C.
SELECTED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 11, 1997
(UNAUDITED)
(7) INCOME TAXES
The Company is classified as a partnership for federal income tax purposes.
For federal tax purposes, partnership income is taxed directly to its members;
consequently, no provision is made in the accompanying financial statements for
federal income taxes. The income tax provision consist solely of state income
taxes. If the Company had been taxed as a C Corporation, the provision for
income taxes and net income would have been $520,071 and $780,107 in 1997 and
$346,929 and $520,394 in 1996, assuming an effective tax rate of 40%.
(8) BUSINESS CONCENTRATIONS
Approximately $2,954,000 and $3,021,000 of revenue representing 57% and 62%
of net sales were derived from four customers during the periods ended July 11,
1997 and July 12, 1996, respectively. The same four customers accounted for
$190,180 (or 42%) of trade accounts receivable at July 11, 1997.
(9) SUBSEQUENT EVENT
On July 31, 1997, 100% of the Members' interest in the Company was purchased
by Lone Star Growers, L.P. (a subsidiary of Color Spot Nurseries, Inc.).
F-130
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
BALANCE SHEET AS OF JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................................. $ 252
Accounts receivable (less allowance for doubtful accounts of $25 as of June 30, 1997 and 1996)........ 901
Inventories........................................................................................... 966
Income taxes receivable and other assets.............................................................. --
-----------
Total current assets................................................................................ 2,119
PROPERTY AND EQUIPMENT, net........................................................................... 1,795
-----------
Total assets........................................................................................ $ 3,914
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit....................................................................................... $ 265
Current maturities of long-term debt.................................................................. 9
Current maturities of stockholder loan................................................................ 106
Accounts payable...................................................................................... 406
Accrued expenses...................................................................................... 391
Deferred income taxes................................................................................. 319
-----------
Total current liabilities........................................................................... 1,496
LONG-TERM DEBT.......................................................................................... 125
DEFERRED INCOME TAXES................................................................................... 35
STOCKHOLDER LOAN........................................................................................ 470
-----------
Total liabilities................................................................................... 2,126
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 250,000 shares authorized and 10,000 shares issued and outstanding...... 1
Retained earnings..................................................................................... 1,787
-----------
Total stockholders' equity.......................................................................... 1,788
-----------
Total liabilities and stockholders' equity.......................................................... $ 3,914
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
NET SALES...................................................................................... $ 4,816 $ 3,075
COST OF SALES.................................................................................. 3,168 2,017
--------- ---------
Gross profit................................................................................. 1,648 1,058
OPERATING EXPENSES:
Selling, general and administrative.......................................................... 783 591
--------- ---------
Income from operations....................................................................... 865 467
INTEREST EXPENSE, net.......................................................................... (73) (33)
OTHER INCOME................................................................................... 71 60
--------- ---------
Income before income taxes................................................................... 863 494
PROVISION FOR INCOME TAXES..................................................................... (337) (190)
--------- ---------
Net income................................................................................... $ 526 $ 304
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................................... $ 526 $ 304
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation................................................................................. 157 53
Gain on sale of fixed assets................................................................. (10) --
(Increase) decrease in accounts receivable................................................... (327) 437
Decrease in inventories...................................................................... 76 10
Decrease in income taxes receivable and other assets......................................... 77 10
Decrease in accounts payable................................................................. (403) (633)
Increase in accrued expenses................................................................. 270 7
Increase in deferred income taxes............................................................ 4 26
--------- ---------
Net cash provided by operating activities.................................................. 370 214
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................................ (310) (273)
Proceeds from sale of fixed assets............................................................. 10 1
--------- ---------
Net cash used in investing activities (300) (272)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................................................... 154 724
Repayments of long-term debt................................................................... (178) (316)
Net borrowing under revolving lines of credit.................................................. (85) (95)
--------- ---------
Net cash used in (provided by) financing activities........................................ (109) 313
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................................ (39) 255
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................................... 291 117
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF SIX MONTHS................................................... $ 252 $ 372
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest..................................................................................... $ 102 $ 25
--------- ---------
--------- ---------
Income taxes................................................................................. $ 3 $ 115
--------- ---------
--------- ---------
During the six months ended June 30, 1996, the Company exchanged property and equipment and a
related note payable with book values of $207 and $157, respectively, to the Stockholders.
In return, the Company received property and equipment and a related note payable of $144
and $94, respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND DESCRIPTION OF BUSINESS:
The financial statements presented herein include the accounts of Peters'
Wholesale Greenhouses, Inc. (the Company). The Company is located in Walnut
Springs, Texas, and is a producer of bedding plants. The Company sells primarily
to general merchandise stores and retail garden stores in Central and East
Texas. The Company's sole stockholders are Tom and Ramona Peters (the
Stockholders).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Company in preparing its financial statements in accordance with generally
accepted accounting principles.
USE 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
disclosure of contingent assets and liabilities) at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories consist primarily of plant inventory and are stated at the lower
of cost or market. Cost is determined using the average cost method and include
direct production costs and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the estimated
useful lives on an accelerated basis as follows:
<TABLE>
<S> <C>
5 to 30
Buildings and improvements.................................... years
Fixtures and equipment........................................ 3 to 7 years
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
The Company recognizes revenues when products are received by the customer
and all significant obligations of the Company have been completed. Where
appropriate, the Company also establishes a concurrent reserve for returns and
allowances.
F-134
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including accounts receivable, accounts
payable and notes payable, the Company's carrying amount approximates fair
value.
ASSET IMPAIRMENT
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement during 1996 or in the
six-months ended June 30, 1997.
3. CONCENTRATIONS OF RISK:
The Company does not perform credit evaluations of its customers' financial
condition and generally does not require collateral, as the majority of its
customers are large, well-established customers. The Company maintains an
allowance for potential credit losses.
For the six months ended June 30, 1997 and 1996, five customers accounted
for approximately 99 percent and 96 percent of net sales, respectively. The
Company's two largest customers accounted for approximately 53 percent and 17
percent and 68 percent and 12 percent of net sales, respectively.
The Company purchases inventory and greenhouse building materials from
primarily two vendors. Purchases from these two vendors represent 82 percent and
90 percent of the accounts payable balance at June 30, 1997 and 1996,
respectively; 54 percent and 8 percent from B.W.I.--Schulenburg and 28 percent
and 82 percent from Ball Seed, respectively. Management believes alternative
suppliers could be obtained, if needed.
4. PROPERTY AND EQUIPMENT:
Property and equipment at June 30, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land..................................................................... $ 196 $ 196
Buildings and improvements............................................... 2,318 1,762
Fixtures and equipment................................................... 874 522
--------- ---------
3,388 2,480
Less: Accumulated depreciation........................................... (1,593) (1,368)
--------- ---------
Net property and equipment............................................. $ 1,795 $ 1,112
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the six months ended June 30, 1997 and 1996, was
$157 and $53, respectively.
F-135
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
5. ACCRUED EXPENSES:
Accrued expenses as of June 30, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Interest and finance charges.................................................. $ 10 $ 8
Payroll and payroll taxes..................................................... 55 5
Federal income taxes.......................................................... 277 103
State franchise taxes......................................................... 44 22
Other......................................................................... 5 4
--------- ---------
Total accrued expenses...................................................... $ 391 $ 142
--------- ---------
--------- ---------
</TABLE>
6. DEBT:
Lines of credit and long-term debt at June 30, 1997 and 1996, consist of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revolving line of credit (1).................................................. $ 165 $ 100
Revolving line of credit (2).................................................. 100 --
Note payable (3).............................................................. 89 94
Note payable (4).............................................................. 10 --
Note payable (5).............................................................. 35 --
--------- ---------
$ 399 $ 194
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) $350 revolving line of credit with a financial institution under which $165
and $100 was outstanding at June 30, 1997 and 1996, respectively. Advances
under the line of credit accrue interest at 8.5 percent and 9.25 percent per
annum, respectively. The line is secured by all accounts the Company holds
with the bank, inventory and accounts receivable. The line was refinanced on
June 1, 1997, and expires on May 31, 1998.
(2) $300 revolving line of credit with a financial institution under which $100
was outstanding at June 30, 1997. Advances under the line of credit accrue
interest at the prime rate plus 1 percent per annum (9.5 percent at June 30,
1997). The line is secured by all accounts the Company holds with the bank
and equipment. The line expires on November 20, 1997.
(3) Note payable was incurred in conjunction with the purchase of land. The note
accrues interest at a variable interest rate per annum (7.9 percent and 9.75
percent at June 30, 1997 and 1996, respectively) with interest and an
installment of principal due annually and any unpaid principal due in
entirety on April 1, 2016. The note is collateralized by the acquired land.
(4) Note payable was incurred in conjunction with the purchase of equipment. The
note accrues interest at 7.75 percent per annum with monthly principal and
interest payments of $.4. Unpaid principal and interest is due November 1,
1999. The note is collateralized by the acquired equipment.
F-136
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
6. DEBT: (CONTINUED)
(5) Note payable was incurred in conjunction with fixed asset improvements. The
note requires semiannual principal payments of $5 plus accrued interest
beginning July 15, 1997. Unpaid principal and interest are due July 15,
2000. Interest accrues at 8.25 percent per annum. This note is
collateralized by all accounts the Company holds with the bank, inventory
and accounts receivable.
The annual amounts of principal maturities of long-term debt outstanding at
June 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Less than one year............................................................ $ 274 $ 100
Greater than one year, less than two years.................................... 14 --
Greater than two years, less than three years................................. 12 --
Greater than three years, less than four years................................ 10 --
Greater than four years, less than five years................................. -- --
Thereafter.................................................................... 89 94
--------- ---------
$ 399 $ 194
--------- ---------
--------- ---------
</TABLE>
7. INCOME TAXES:
The provision for income taxes consists of:
<TABLE>
<CAPTION>
JUNE 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Current--
Federal..................................................................... $ 289 $ 142
State and local............................................................. 44 22
Deferred--
Federal..................................................................... 4 26
State and local............................................................. -- --
--------- ---------
Provision for income taxes.................................................... $ 337 $ 190
--------- ---------
--------- ---------
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34 percent to
income before income taxes is as follows:
<TABLE>
<CAPTION>
JUNE 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Income before income taxes.................................................... $ 863 $ 494
--------- ---------
--------- ---------
Amount of federal income tax based upon the statutory rate.................... $ 293 $ 168
State and local income taxes.................................................. 44 22
--------- ---------
Provision for income taxes.................................................... $ 337 $ 190
--------- ---------
--------- ---------
</TABLE>
F-137
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
7. INCOME TAXES: (CONTINUED)
Deferred tax assets (liabilities) are composed of the following at June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets--
Allowance for doubtful accounts............................................ $ 9 $ 9
--------- ---------
Total deferred tax assets................................................ 9 9
--------- ---------
Deferred tax liabilities--
Inventories................................................................ (328) (297)
Property and equipment..................................................... (35) (35)
--------- ---------
Total deferred tax liabilities........................................... (363) (332)
--------- ---------
Net deferred tax liability................................................... $ (354) $ (323)
--------- ---------
--------- ---------
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
On May 7, 1996, the Company received a stockholder loan from the
Stockholders. The loan accrues interest at a rate of 8.0 percent per annum and
provides the Company with available credit of $1,500. The note requires payments
of $75 on January 7 and July 7 each year until all outstanding principal and
interest has been repaid. At June 30, 1997 and 1996, the outstanding balance on
the loan was $576 and $630, respectively.
From time to time, the Stockholders will finance certain inventory purchases
on their personal credit card. The Company will reimburse them within 30 days or
when the credit card invoice is due, whichever is sooner.
The Company's corporate offices are owned by the Stockholders. Beginning
January 1997, the Stockholders charged the corporate headquarters rent of $2.5
per month. Total rent expense for the six months ended June 30, 1997, was $15.
Prior to this date, no rent was charged for the facilities.
During the six months ended June 30, 1997 and 1996, the Company paid
management fees to the Stockholders of approximately $73 and $68, respectively.
9. OTHER INCOME AND EXPENSE:
Other income primarily relates to rental income earned by the Company,
whereby the Company provides trailer houses for employees to rent on a per week
basis. Total rental income earned for the six months ended June 30, 1997 and
1996, was $61 and $60, respectively.
10. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company has various cases pending
involving contractual, employee-related and other matters. In light of the
Company's legal position, insurance coverage and reserves, management does not
believe that these cases will have a material adverse impact on the financial
position or results of operations of the Company.
F-138
<PAGE>
PETERS' WHOLESALE GREENHOUSES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company has no operating leases with original maturities greater than
one year. From time to time, the Company will enter into weekly leases for
transportation equipment. Total rent expense under these leases for the six
months ended June 30, 1997 and 1996, was approximately $108 and $38,
respectively.
At June 30, 1997, the Company is the primary guarantor of debt owed by a
related-party investment company owned by the Shareholders. The outstanding
balance of the guaranteed debt is approximately $115.
11. SUBSEQUENT EVENTS:
On July 31, 1997, 100 percent of the outstanding stock of the Company was
purchased by Color Spot Nurseries, Inc., for cash.
F-139
<PAGE>
LONE STAR GROWERS CO.
BALANCE SHEET--DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................................. $ 151,133
Trade receivables, less allowance for doubtful accounts of $104,649 and $131,955, respectively... 1,056,107
Inventories...................................................................................... 11,002,411
Prepaid Expenses................................................................................. --
Notes receivable................................................................................. 19,943
-------------
Total current assets......................................................................... 12,229,594
PROPERTY AND EQUIPMENT, net........................................................................ 6,498,482
-------------
Total assets................................................................................. $ 18,728,076
-------------
-------------
LIABILITIES AND PARTNERSHIP CAPITAL
CURRENT LIABILITIES:...............................................................................
Cash Overdraft................................................................................... $ --
Payables.........................................................................................
Trade.......................................................................................... 2,112,898
Related parties................................................................................ 9,974
-------------
Total payables............................................................................... 2,122,872
Accrued expenses................................................................................. 793,294
Current portion of revolving line of credit...................................................... --
Current portion of long-term debt................................................................ 3,524,251
Advances from partner under revolving line of credit............................................. 3,000,000
-------------
Total current liabilities.................................................................... 9,440,417
LONG-TERM DEBT, net of current portion............................................................. 4,871,471
-------------
Total liabilities............................................................................ 14,311,888
-------------
PARTNERSHIP CAPITAL:
Partnership capital.............................................................................. 2,805,989
Undistributed profits............................................................................ 1,610,199
-------------
Total partnership capital.................................................................... 4,416,188
-------------
Total liabilities and partnership capital.................................................... $ 18,728,076
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-140
<PAGE>
LONE STAR GROWERS CO.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
SALES................................................................................. $ 6,358,510 $ 5,546,121
COST OF SALES......................................................................... 3,075,270 2,877,772
------------ ------------
Gross profit...................................................................... 3,283,240 2,688,349
OPERATING EXPENSES:
Delivery............................................................................ 958,469 849,807
Sales and marketing................................................................. 904,469 748,842
General and administrative.......................................................... 781,016 708,526
Other expenses...................................................................... 204,523 313,888
Depreciation........................................................................ 74,596 56,496
------------ ------------
Income (loss) from operations..................................................... 359,670 (9,210)
INTEREST EXPENSE...................................................................... 403,378 521,234
OTHER EXPENSE, NET.................................................................... 762 8,907
------------ ------------
Net loss.......................................................................... $ (44,470) $ (539,351)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-141
<PAGE>
LONE STAR GROWERS CO.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (44,470) $ (539,351)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Loss on sale of fixed assets.................................................... 0 2,660
Depreciation and amortization................................................... 465,588 405,547
Changes in certain assets and liabilities:
Decrease in receivables....................................................... 5,531,559 1,180,858
Increase in inventories....................................................... (4,022,018) (3,262,125)
Decrease in prepaids and other assets......................................... 42,751 58,987
Decrease in notes receivable.................................................. 7,270 0
Increase in payables.......................................................... 333,144 1,136,264
Decrease in accrued expenses.................................................. (229,724) (42,237)
------------- -------------
Net cash provided by (used in) operating activities......................... 2,084,100 (1,059,397)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of fixed assets............................................ (1,102,481) (522,050)
Proceeds from sale of fixed assets................................................ 0 6,001
------------- -------------
Net cash used in investing activities....................................... (1,102,481) (516,049)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing of long-term debt......................................... 0 3,000,000
Repayments of long-term debt...................................................... (500,000) (500,000)
Net borrowings under revolving line of credit with bank........................... 2,500,000 300,000
Net repayments to partners........................................................ 0 (1,300,000)
Distributions to partners......................................................... (3,200,000) 0
------------- -------------
Net cash provided by (used in) financing activities......................... (1,200,000) 1,500,000
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................... (218,381) (75,446)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 369,514 332,977
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 151,133 $ 257,531
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......................................... $ 401,799 $ 470,556
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-142
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
The financial statements presented herein include the accounts of Lone Star
Growers Co. (the Partnership) and have been prepared by the Partnership, without
audit. The Partnership believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Partnership's
results of operations, financial position and cash flows. The financial
statements should by read in conjunction with the financial statements and the
notes thereto included in the Partnership's annual financial statements for the
year ended June 30, 1996.
1. NATURE OF OPERATIONS:
ORGANIZATION
The Partnership was formed on January 1, 1985, by Lone Star Growers, Inc.
and Joseph Bradberry. The Partnership was formed to acquire, own, operate and
manage a nursery business located near San Antonio, Texas.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Partnership in preparing its financial statements in accordance with
generally accepted accounting principles:
USE 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
disclosure of contingent assets and liabilities) at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. All overdraft balances
have been reclassified to current liabilities.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
using the average cost method and includes direct production costs and overhead.
A portion of the Partnership's nursery stock has an average growing period of
approximately 18 months. The nursery stock is classified as a current asset
based on the Partnership's normal operating cycle.
F-143
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated over
their estimated useful lives using the straight-line method as follows:
<TABLE>
<S> <C>
10 - 40
Buildings and improvements.................................... years
Machinery and equipment....................................... 5 - 10 years
Furniture and fixtures........................................ 5 - 10 years
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
The Partnership recognizes revenues when products are shipped and all
significant obligations of the Partnership have been completed. Where
appropriate, the Partnership also establishes a concurrent reserve for returns
and allowances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Partnership's financial instruments, including
accounts receivable, accounts payable and debt, approximates fair value.
INCOME TAXES
The Partnership is not subject to federal income taxes; rather, its income
from operations is passed directly through to its partners. If the Partnership
had been taxed as a C Corporation, the income tax benefit and net loss would
have been $17,788 and $(26,882) in 1996 and $215,740 and $(350,293) in 1995,
assuming an effective rate of 40%.
ASSET IMPAIRMENT
On July 1, 1995, the Partnership adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121). SFAS 121 requires that long-lived assets, certain identifiable
intangibles and goodwill be reviewed for impairment when expected future
undiscounted cash flows are less than the carrying value of the asset. No
charges were recorded pursuant to this statement in fiscal 1996.
3. CONCENTRATION OF CREDIT RISK:
The Partnership performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral, as the majority
of the Partnership's customers are large, well-established companies. Five
customers accounted for approximately 41 percent of accounts receivable at
December 31, 1996. These same five customers accounted for approximately 42
percent of plant sales for the six months ended December 31, 1996.
F-144
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
4. INVENTORIES:
Inventories consisted of the following at December 31, 1996.
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Raw materials and supplies..................................................... $ 722,633
Plant inventory................................................................ 10,279,778
-------------
Total inventory................................................................ $ 11,002,411
-------------
-------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31, 1996, consisted of the
following:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Land........................................................................... $ 892,568
Machinery and equipment........................................................ 7,252,105
Buildings and improvements..................................................... 4,649,882
Furniture and fixtures......................................................... 765,238
-------------
13,559,793
Less: Accumulated depreciation................................................. (8,083,831)
-------------
5,475,962
Construction in progress....................................................... 1,022,520
-------------
Total property, plant and equipment.......................................... $ 6,498,482
-------------
-------------
</TABLE>
6. NOTES PAYABLE:
LINE OF CREDIT
As of December 31, 1996, the Partnership had a $5,000,000 revolving line of
credit with a financial institution under which there was $2,700,000 outstanding
at December 31, 1996. Advances under the line accrue interest at Frost National
Bank's prime rate of interest and are collateralized by substantially all of the
Partnership's assets. Borrowings are limited to 80 percent of adjusted accounts
receivable balances and 50 percent of the Partnership's total inventory balance
as defined in the agreement, less certain borrowings. The borrowing limit at
December 31, 1996, was approximately $2,985,000. The line of credit expires on
October 29, 1997.
F-145
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
6. NOTES PAYABLE: (CONTINUED)
LONG-TERM DEBT
Long-term debt at December 31, 1996, consisted of the following:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Note payable to bank, with quarterly principal and interest payments of
$173,814, interest at prime plus 0.5 percent (8.50 percent at December 31,
1996), secured by substantially all of the Partnerships assets, due on April
29, 2002...................................................................... $ 3,000,000
Note payable to bank, with quarterly principal and interest payments of $78,217,
interest at prime plus 0.5 percent (8.50 percent at December 31, 1996),
secured by substantially all of the Partnerships assets, due on April 29,
2002.......................................................................... 1,210,000
Note payable to bank, with quarterly principal and interest payments of $60,835,
interest at prime plus 0.5 percent (8.50 percent at December 31, 1996),
secured by substantially all of the Partnerships assets, due on April 29,
2002.......................................................................... 1,190,000
Note payable to seller, with annual principal and interest payments of $43,478,
interest at 6.0 percent, secured by land, due June 15, 2005................... 295,722
------------
5,695,722
Less: Current portion........................................................... (824,251)
------------
$ 4,871,471
------------
------------
</TABLE>
As a result of borrowing rates presently available to the Partnership, the
carrying value of debt approximates the fair value.
The provisions of the debt agreements with the bank generally impose
restrictions relating to, among other matters, cash flows, investments, capital
expenditures, incurrence of additional indebtedness, payment of dividends, and
maintenance of specified amounts of tangible net worth and working capital.
7. RELATED-PARTY TRANSACTIONS:
In the normal course of business, the Partnership has transactions with its
partners and other related parties. These include purchasing insurance on a
group basis, participating in a group profit-sharing plan and renting equipment.
The following table summarizes the Partnership's related-party transactions
presented in the balance sheet as of December 31, 1996:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Advances to related parties..................................................... $ 0
Advances from related parties................................................... 3,009,974
</TABLE>
Advances from related parties include amounts advanced by TETCO, Inc. (the
sole owner of Lone Star Growers, Inc.) pursuant to a revolving line of credit
agreement under which there was $3,000,000
F-146
<PAGE>
LONE STAR GROWERS CO.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
7. RELATED-PARTY TRANSACTIONS: (CONTINUED)
outstanding at December 31, 1996. Interest paid on the revolving line of credit
was $126,048 and $251,750 during the six months ended December 31, 1996 and
1995, respectively.
The Partnership made advances to entities under common ownership of $204,523
and $313,888 during the six months ended December 31, 1996 and 1995,
respectively, relating to investments in a mushroom project, a furniture
business and a Mexican turf grass project. The Partnership determined that these
advances were not recoverable and therefore expensed the advances (as other
expenses) in the related statements of income and expense in the year in which
they were made. In addition, the Partnership made sales to an affiliated company
of approximately $165,000 during the six months ended December 31, 1996 and
1995.
8. CONTINGENCIES:
In the ordinary course of business, the Partnership has various cases
pending involving contractual, employee-related and other matters. In light of
the Partnership's legal position, insurance coverage and reserves, management
does not believe that these cases will have a material adverse impact on the
Partnership.
9. SUBSEQUENT EVENT:
On February 20, 1997, 100 percent of the outstanding partnership interests
of the Partnership were purchased through a merger by Lone Star Growers, L.P. (a
Delaware limited partnership and indirect subsidiary of Color Spot Nurseries,
Inc.) for cash and stock.
F-147
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENT OF ASSETS AND LIABILITIES
AND DIVISIONAL EQUITY
DECEMBER 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
CURRENT ASSETS:
Accounts receivable............................................................................... $ 445,569
Inventories....................................................................................... 2,165,493
Deferred income taxes............................................................................. --
Due from Parent................................................................................... --
------------
Total current assets............................................................................ 2,611,062
PROPERTY AND EQUIPMENT, net......................................................................... 365,207
------------
Total Assets.................................................................................... $2,976,269
------------
------------
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................................. $ 520,312
Accrued liabilities............................................................................... --
Current portion of capital lease obligation....................................................... 28,498
------------
Total current liabilities....................................................................... 548,810
------------
CAPITAL LEASE OBLIGATION, net of current portion.................................................... 43,482
Total liabilities............................................................................... 592,292
------------
Divisional Equity................................................................................... 2,383,977
------------
Total Liabilities and Divisional Equity......................................................... $2,976,269
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-148
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENTS OF REVENUES AND EXPENSES
AND DIVISIONAL EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET SALES............................................................................. $ 4,273,692 $ 4,522,731
COSTS OF SALES........................................................................ 3,079,790 4,002,510
------------ ------------
Gross profit........................................................................ 1,193,902 520,221
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................................... 1,181,652 1,301,330
------------ ------------
Income (Loss) from operations....................................................... 12,250 (781,109)
INCOME TAX BENEFIT.................................................................... -- (312,000)
------------ ------------
Net Income (Loss)................................................................... 12,250 (469,109)
------------ ------------
DIVISIONAL EQUITY, December 31, 1996 and 1995......................................... $ 2,383,977 $ 2,891,479
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-149
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................................... $ 12,250 $ (469,109)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation........................................................................ 60,281 58,898
Changes in assets and liabilities--
Decrease (Increase) in accounts receivable........................................ 411,424 (468,484)
Decrease (Increase) in inventories................................................ (311,151) 277,476
Decrease in deferred income tax asset............................................. 104,000 101,000
Decrease (Increase) in receivable from Parent..................................... 355,000 (392,000)
Increase (Decrease) in accounts payable........................................... (187,284) 289,915
Increase (Decrease) in accrued liabilities........................................ (70,475) 36,098
----------- -----------
Net cash provided by (used in) operating activities............................. 374,045 (566,206)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES, purchases of property and equipment............... (107,957) (7,918)
CASH FLOWS FROM FINANCING ACTIVITIES, transfer from (to) Parent......................... (266,088) 574,124
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... -- --
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this financial statement
F-150
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
The financial statements presented herein include the accounts of the
Wholesale Division of Sunnyside Plants, Inc. (the Division) and have been
prepared by the Division, without audit. The Division believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, the financial statements reflect all adjustments
necessary for a fair presentation of the Division's results of operations and
financial position. The financial statements should by read in conjunction with
the financial statements and the notes thereto included in the Division's annual
financial statements for the year ended March 31, 1996.
1. OPERATIONS AND BASIS OF PRESENTATION:
Sunnyside Plants, Inc. (the Company, a California corporation) was
incorporated in 1995 as a wholly owned subsidiary of Sakata Seed America, Inc.
(the Parent, a California corporation). The Company produces and distributes
flowering potted plants.
Since the Company did not maintain separate accounting records for the
Division, certain estimates were required in order to segregate the Division's
account balances as of December 31, 1996 and 1995.
- Identification basis--Account balances relating to assets, liabilities,
revenues and expenses ("account balances") specifically pertaining to the
Division were identified and segregated. Account balances related to
general and administrative expenses incurred by the Company for general
purposes have been included in total as the Division was significant
portion of the Company's operations for the periods presented herein.
- Transfer basis--Account balances pertaining to the Company's retail
division or account balances which were not able to be specifically
allocated to either divisions were identified and excluded from the
Division.
- Allocation basis--The account balance related to cost of sales for the
Division has been estimated based on the estimated purchases of the
Division.
In management's opinion, the method of allocation is reasonable and the
results are representative of the results of operations that would have been
realized by the Division on a stand-alone basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Division in preparing its financial statements in accordance with generally
accepted accounting principles.
USE OF ESTIMATES
The preparation of the 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 disclosure of
contingent assets and liabilities at the date of the statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Division considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. All overdraft balances
have been reclassified to current liabilities.
F-151
<PAGE>
THE WHOLESALE DIVISION OF
SUNNYSIDE PLANTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market and consist
substantially of finished goods. Cost is determined using the average cost
method and includes production costs and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over their
estimated useful lives on a straight line basis as follows:
<TABLE>
<S> <C>
Office equipment................................................ 5 years
5 - 7
Machinery and equipment......................................... years
</TABLE>
Repairs and maintenance are charged to operations as incurred, and
expenditures for renewals and betterments are capitalized and depreciated over
the estimated useful lives of the assets.
REVENUE RECOGNITION
Revenue is recognized upon transfer of title and risk of ownership to the
customer, which generally occurs upon product shipment. No single customer
accounted for 10% or more of net sales during the nine months ended December 31,
1996 or 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments, including accounts receivable and payable
and capital lease obligations, the Division's carrying amount approximates fair
value.
INCOME TAXES
Income taxes are recognized in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
utilizes the asset and liability method under which deferred income taxes are
recognized for the consequences of temporary differences by applying currently
enacted statutory rates to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities.
ASSET IMPAIRMENT
On April 1, 1996, the Division adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets, certain
identifiable intangible assets and goodwill be reviewed for impairment when
expected future undiscounted cash flows are less than the carrying value of the
asset. No charges were recorded pursuant to this statement in 1996.
3. SUBSEQUENT EVENT:
In January 1997, the Company sold a significant portion of the net assets of
the Wholesale Division to CSN, Inc., the parent company of Color Spot Nurseries,
Inc.
F-152
<PAGE>
[photos of products]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
ALTERNATE PAGE FOR NOTE PROSPECTUS -------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Company History................................ 15
Recent Acquisitions............................ 15
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Selected Consolidated Financial and Operating
Data......................................... 18
Unaudited Pro Forma Consolidated Statement of
Operations................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 31
Management..................................... 40
Certain Transactions........................... 46
Principal Stockholders......................... 48
Description of Capital Stock................... 49
Description of Certain Indebtedness............ 54
Description of Notes........................... 55
Description of Units........................... 71
Description of Series A Preferred Stock........ 71
Description of Warrants........................ 81
Certain Definitions............................ 83
Underwriting................................... 97
Legal Matters.................................. 98
Experts........................................ 98
Additional Information......................... 98
Index to Consolidated Financial Statements..... F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$85,000,000
[LOGO]
% SENIOR SUBORDINATED
NOTES DUE 2007
------------
PROSPECTUS
------------
BT ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
DECEMBER 1, 1997
$40,000,000
[LOGO]
40,000 UNITS CONSISTING OF
SHARES OF % SERIES A CUMULATIVE PREFERRED STOCK AND
WARRANTS TO PURCHASE COMMON STOCK
---------
Color Spot Nurseries, Inc. ("Color Spot" or the "Company") is offering to
the public (the "Units Offering") 40,000 units (the "Units") each consisting of
one share of % Series A Cumulative Preferred Stock (the "Series A Preferred
Stock") and 20.625 warrants (the "Warrants"), each representing the right to
purchase one share of common stock, par value $.001 per share (the "Common
Stock"), of the Company. The Series A Preferred Stock and the Warrants will be
immediately separately transferable. Concurrently with the Units Offering, the
Company is offering $85,000,000 aggregate principal amount of its % Senior
Subordinated Notes due 2007 (the "Notes") to the public (the "Notes Offering"
and, together with the Units Offering, the "Offerings"). The Units Offering is
contingent on the consummation of the Notes Offering and the Notes Offering is
contingent on the consummation of the Units Offering. See "Prospectus
Summary--Concurrent Offering."
Dividends on the Series A Preferred Stock will accrue at a rate of % per
annum of the liquidation preference of $1,000 per share (subject to increase as
set forth below) and will be payable quarterly in arrears on the ,
, and of each year (each a "Dividend Payment Date"),
commencing on , 1998. Upon an Increased Dividend Triggering Event
(as defined), the dividend on the Series A Preferred Stock will accrue at a rate
of % per annum of the liquidation preference thereof until such Increased
Dividend Triggering Event is cured. Dividends will be payable in cash, except
that on each Dividend Payment Date occurring on or prior to , 2003,
dividends may be paid, at the Company's option, by the issuance of additional
shares of Series A Preferred Stock (including fractional shares) having an
aggregate liquidation preference equal to the amount of such dividends. The
Series A Preferred Stock will be redeemable at the option of the Company, in
whole or in part, at any time on or after , 2002, at the redemption
prices set forth herein, plus accumulated and unpaid dividends to the date of
redemption. In addition, prior to , 2002, the Company may, at its
option, redeem the Series A Preferred Stock from the net proceeds of the first
underwritten public offering of its Common Stock. The Series A Preferred Stock
is subject to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends, on , 2008. Upon a Change of
Control (as defined), the Company may be required to offer to purchase all of
the Series A Preferred Stock at an offer price in cash equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption. The Series A Preferred Stock ranks senior to all outstanding
classes or series of capital stock with respect to dividend rights and rights on
liquidation of the Company. See "Description of Series A Preferred Stock."
Each Warrant will entitle the holder thereof, subject to certain conditions,
to purchase one share of Common Stock at an exercise price of $.01 per share,
subject to adjustment under certain conditions. Upon exercise, the holders of
Warrants will be entitled, in the aggregate, to purchase 825,000 shares of
Common Stock, representing 8.5% of the outstanding Common Stock on a
fully-diluted basis on the date hereof. The Warrants will be immediately
exercisable and, unless exercised, will expire on , 2002. See
"Description of Warrants."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN RISK FACTORS
THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS IN EVALUATING AN INVESTMENT IN
THE UNITS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Unit............................................... $ $ $
Total.................................................. $ $ $
</TABLE>
(1) Before deducting expenses of the offering payable by the Company estimated
at $ .
----------------
The Units are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by it, and subject to the right of the
Underwriter to reject any order in whole or in part. It is expected that
delivery of the Units will be made at the offices of BT Alex. Brown
Incorporated, 130 Liberty Street, New York, New York, on or about ,
1997.
------------------
BT ALEX. BROWN
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS" WITHIN
THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (2)
BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
PENSION AND PROFIT SHARING TRUSTS, CORPORATIONS OR OTHER ENTITIES WHICH,
TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S AFFILIATES WHICH ARE UNDER
COMMON CONTROL, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST
RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED,
BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN
$14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3) ANY CORPORATION, PARTNERSHIP
OR ORGANIZATION (OTHER THAN A CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED
FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO
PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY,
OR (4) ANY NATURAL PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF
$250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME
FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE
SECURITIES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT
COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR
OTHERWISE TRANSFER ANY OF SUCH SECURITIES TO A CALIFORNIA RESIDENT UNLESS THE
TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL
ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL
BE DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, SERIES A
PREFERRED STOCK OR WARRANTS. SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE UNITS, SERIES A
PREFERRED STOCK OR WARRANTS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. REFERENCES TO THE COMPANY OR COLOR SPOT REFER TO COLOR SPOT
NURSERIES, INC. AND ITS CONSOLIDATED SUBSIDIARIES AND ITS PREDECESSORS. SEE
"COMPANY HISTORY." UNLESS OTHERWISE INDICATED, ALL STATEMENTS MADE IN THIS
PROSPECTUS REFLECT (I) THE MERGER OF CSN, INC. (THE PARENT COMPANY OF COLOR SPOT
NURSERIES, INC.) INTO COLOR SPOT NURSERIES, INC. WHICH WILL OCCUR SIMULTANEOUSLY
WITH THE CONSUMMATION OF THE OFFERINGS AND (II) A 0.69-FOR-ONE STOCK SPLIT.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS." AS USED IN THIS PROSPECTUS, "FISCAL 1996" REFERS TO THE
FISCAL YEAR COMMENCING SEPTEMBER 8, 1995 AND ENDING JUNE 30, 1996, "FISCAL 1997"
REFERS TO THE FISCAL YEAR ENDED JUNE 30, 1997 AND "FISCAL 1998" REFERS TO THE
FISCAL YEAR ENDING JUNE 30, 1998.
THE COMPANY
Color Spot is the largest wholesale nursery in the United States, based on
revenue and greenhouse square footage. The Company provides a wide assortment of
high quality plants as well as extensive merchandising services primarily to
leading home centers and mass merchants, such as Home Depot, Home Base, Wal-Mart
and Kmart. The Company distributes products to over 850 retail and commercial
customers, representing over 8,000 locations, primarily in the western and
southwestern regions of the United States. Since June 30, 1996, the Company has
completed 13 acquisitions, making it a leading consolidator in the wholesale
nursery industry, based on acquisitions completed by major competitors. On a pro
forma basis, the Company generated approximately $183.1 million in net sales and
$22.7 million in EBITDA (as defined) in fiscal 1997.
The Company believes it is one of the few wholesale nurseries that has the
scale and distribution capabilities necessary to provide large volumes of high
quality product to its retail customers on a multi-regional basis. The Company
produces over 2,000 varieties of live plants, including bedding plants, shrubs,
potted flowering plants, ground cover and fresh cut Christmas trees. Through its
200 person salesforce, Color Spot also provides its retail customers with a
broad array of value-added services, such as in-store merchandising, product
display and maintenance, promotional planning and product reordering. The
Company believes that providing these services differentiates it from its
competitors and helps to establish Color Spot as a preferred supplier in the
industry. Color Spot operates 19 production facilities located in California,
Arizona, Texas, Oregon and Washington.
Gardening is one of the most popular leisure activities in the United
States. According to the 1996-1997 National Gardening Survey, 64% of the
approximately 101 million households in the U.S. participated in some form of
gardening in 1996. Retail sales of live plants totaled approximately $18 billion
in the U.S. in 1996. The live plant retail distribution channel has undergone
significant consolidation over the past ten years, as sales have shifted from
local independent nurseries to major national retailers. Despite this retail
consolidation, the wholesale nursery industry is still highly fragmented with
over 10,000 participants in the U.S. In 1996, the ten largest wholesale
nurseries accounted for approximately 8% of total wholesale production according
to Nursery Business Magazine.
The Company believes that it is well positioned to capitalize on
consolidation and growth opportunities in the highly fragmented wholesale
nursery industry. Color Spot's growth strategy is to continue to enter new
geographic markets through acquisitions, expand its presence in existing markets
and add new product lines. An important aspect of the Company's growth strategy
is to increase its penetration in targeted markets, which will enable the
Company to better serve its retail customers, enhance its brand name recognition
and increase operating efficiencies. Since June 30, 1996, both through
acquisitions and internal development, the Company has expanded its product line
into new areas of the wholesale nursery industry, including shrubs, potted
flowering plants and ground cover. In addition, the Company's recent entry into
the fresh cut Christmas tree business enables it to utilize available sales and
distribution capacity during the winter months.
Color Spot America, Inc., a predecessor to the Company, was founded in 1983
by Michael F. Vukelich, the Company's current Chief Executive Officer. Following
a change of control in 1991, Mr. Vukelich left the Company and new management
was installed. Between 1992 and 1995, net sales and profitability of the
business declined. In September 1995, an investor group including Mr. Vukelich
formed the Company and acquired the business. Mr. Vukelich's management team
implemented a number of strategic and operational initiatives designed to
improve the Company's customer relationships and financial results. These
initiatives included revamping the Company's merchandising programs,
decentralizing its operations, revising its pricing strategies, renewing its
focus on operating efficiencies and restructuring its sales organization. As a
result of these strategies, the Company has experienced significant improvements
in net sales and operating results. With the improvement of its financial
results, Color Spot embarked on an aggressive acquisition strategy and has
3
<PAGE>
completed 13 acquisitions since June 30, 1996. Color Spot believes it is now
well positioned to continue its growth and further consolidate the wholesale
nursery industry.
Color Spot's designation as an agricultural company provides it with
favorable tax treatment. While the Company's financial statements include tax
expense, the Company has historically not paid cash income taxes. Agricultural
companies are permitted to calculate taxable income on a cash basis. As a result
of the Company's growth, this treatment has enabled the Company to generate
significant net operating losses since its inception and accumulate a net
operating loss carryforward of approximately $29.7 million for federal income
tax purposes as of June 30, 1997.
The Company's executive offices are located at 3478 Buskirk Avenue, Suite
260, Pleasant Hill, CA 94523, and its telephone number is (510) 934-4443. The
Company was incorporated in August 1995.
<TABLE>
<CAPTION>
THE UNITS
<S> <C>
Securities Offered.............. 40,000 Units, with each Unit consisting of one share of Series A
Preferred Stock and 20.625 Warrants, each Warrant representing the
right to purchase one share of Common Stock.
Separability.................... The Series A Preferred Stock and Warrants will be immediately
separately transferable.
Use of Proceeds................. The Company will use the proceeds from the Units Offering, together
with approximately $85,000,000 of gross proceeds from the Notes
Offering, to repay outstanding borrowings under the Company's
existing credit facility and the balance will be used to pay fees
and expenses and for general corporate purposes. See "Use of
Proceeds."
THE SERIES A PREFERRED STOCK
Securities Offered.............. 40,000 shares of % Series A Cumulative Preferred Stock, par value
$.01 per share, plus any additional shares issued from time to time
in lieu of cash dividends.
Liquidation Preference.......... $1,000 per share.
Dividends....................... The Series A Preferred Stock will pay dividends at a rate per annum
of % of the liquidation preference of $1,000 per share (subject
to increase as set forth below) and will be payable quarterly in
arrears each Dividend Payment Date, commencing on ,
1998. Upon an Increased Dividend Triggering Event, the dividends on
the Series A Preferred Stock will accrue at a rate of % per annum
of the liquidation preference thereof until such Increased Dividend
Triggering Event is cured. Dividends will be payable in cash,
except that on each Dividend Payment Date occurring on or prior to
, 2003, dividends may be paid, at the Company's option,
by the issuance of additional shares of Series A Preferred Stock
(including fractional shares) having an aggregate liquidation
preference equal to the amount of such dividends.
Dividend Payment Dates.......... Dividends on the Series A Preferred Stock will accumulate from the
date of issuance and will be payable quarterly on each
, , and commencing
on , 1998.
Ranking......................... The Series A Preferred Stock will rank senior in right of payment
to all other classes or series of Capital Stock (as defined) of the
Company as to dividends and upon liquidation, dissolution or
winding up of the Company.
Mandatory Redemption............ Color Spot is required, subject to certain conditions, to redeem
all of the shares of Series A Preferred Stock outstanding on
, 2008 at a redemption price in cash equal to the
Liquidation Preference thereof, plus accrued and unpaid dividends,
if any, to the date of redemption.
Optional Redemption............. The Series A Preferred Stock may be redeemed, in whole or in part,
at the option of the Company on or after , 2002, at the
redemption prices set forth herein, in each case, together with
accrued and unpaid dividends, if any, to the date of redemption. In
addition, at
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
any time, or from time to time, on or prior to , 2002,
the Company may, at its option, use the net cash proceeds of the
first Public Equity Offering to redeem the Series A Preferred Stock
at a redemption price equal to % of the Liquidation Preference
together with accrued and unpaid dividends, if any, to the date of
redemption; provided that such redemption occurs not more than 120
days after the consummation of such Public Equity Offering.
Change of Control............... In the event of a Change of Control, Color Spot will, subject to
certain conditions, be required to offer to repurchase all or any
part (but not, in the case of any holder requiring the Company to
purchase less than all of the shares of Series A Preferred Stock
held by such holder, any fractional shares) of such holder's Series
A Preferred Stock at an offer price in cash equal to 101% of the
aggregate liquidation preference thereof plus accrued and unpaid
dividends, if any, thereon to the date of purchase. In the event of
a Change of Control there can be no assurance that the Company will
have sufficient cash to fulfill such repurchase obligations.
Voting.......................... The Series A Preferred Stock will be non-voting, except as
otherwise required by law and except in certain circumstances
described herein, including (i) amending certain rights of the
holders of Series A Preferred Stock and (ii) the issuance of any
new class of equity securities that ranks PARI PASSU with or senior
to the Series A Preferred Stock. In addition, if Color Spot fails
to pay dividends in respect of six or more Dividend Payment Dates
(whether or not consecutive) in the aggregate, holders of a
majority of outstanding shares of Series A Preferred Stock, voting
as one class, will be entitled to elect one director to the
Company's Board of Directors.
Certain Restrictive The Certificate of Designation (as defined) will contain certain
Provisions...................... restrictive provisions that, among other things, limit the ability
of Color Spot and its subsidiaries to pay dividends or make certain
other restricted payments, incur additional indebtedness or enter
into certain transactions with affiliates. See "Description of
Series A Preferred Stock."
THE WARRANTS
Total Number of Warrants........ Warrants, which when exercised would entitle the holders thereof to
acquire an aggregate of 825,000 shares of Common Stock
(representing 8.5% of the Common Stock, on a fully diluted basis,
as of the date hereof). See "Description of Warrants." The Warrants
will be issued pursuant to the Warrant Agreement (as defined).
Expiration Date................. , 2002.
Exercise........................ Each Warrant will entitle the holder thereof to purchase one share
of Common Stock at an exercise price of $.01 per share. The number
of shares of Common Stock for which, and the price per share at
which, a Warrant is exercisable are subject to adjustment upon the
occurrence of certain events as provided in the Warrant Agreement.
The Warrants will be immediately exercisable.
Registration Rights............. Holders of the Warrants will have certain registration rights.
</TABLE>
The Common Stock is not traded on any national securities exchange or
Nasdaq. The Company does not intend to apply for a listing of the Series A
Preferred Stock or Warrants on any national securities exchange or Nasdaq. See
"Underwriting."
CONCURRENT OFFERING
Concurrently with the Units Offering, the Company is offering $85.0 million
in aggregate principal amount of its % Senior Subordinated Notes due 2007 to
the public. The Units Offering is contingent upon the consummation of the Notes
Offering, and the Notes Offering is contingent upon the consummation of the
Units Offering.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE NOTES
OFFERED BY THIS PROSPECTUS, WHICH FACTORS THE COMPANY BELIEVES SUMMARIZE ALL
MATERIAL RISKS KNOWN TO IT AS OF THE DATE OF THIS PROSPECTUS. THE STATEMENTS
CONTAINED IN THIS PROSPECTUS WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR IMPLIED BY
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. WHEN USED IN THIS PROSPECTUS, THE WORDS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT")
REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S
FUTURE PLANS, BUSINESS STRATEGY, RESULTS OF OPERATIONS AND FINANCIAL POSITION.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS; HOWEVER, THE SAFE
HARBOR PROVISIONS OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT DO NOT APPLY TO INITIAL PUBLIC OFFERINGS SUCH AS THE OFFERINGS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DESCRIBED BELOW, UNDER THE HEADING "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN
THIS PROSPECTUS.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE. The Company will continue to be
significantly leveraged after the Offerings. See "Capitalization." As of
September 25, 1997, after giving effect to the Offerings, the Company would have
had approximately $96.2 million of consolidated long-term indebtedness and
approximately $10.6 million of common stockholders' equity. Upon consummation of
the Offerings, the Company expects to have $150.0 million available to be
borrowed under the New Loan Agreement. The Company and its subsidiaries may
incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its indebtedness and capital stock.
Accordingly, the Company will have significant debt service obligations.
The Company's debt service obligations will have important consequences to
holders of the Notes, the Preferred Stock and the Warrants including the
following: (i) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for operations,
acquisitions, future business opportunities and other purposes and increasing
the Company's vulnerability to adverse general economic and industry conditions;
(ii) the Company's leveraged position may increase its vulnerability to
competitive pressures; (iii) the financial covenants and other restrictions
contained in the New Loan Agreement, the Indenture and the Certificate of
Designation (as defined) will require the Company to meet certain financial
tests and will restrict its ability to borrow additional funds, to dispose of
assets or to pay cash dividends on, or repurchase, preferred or common stock;
and (iv) funds available for working capital, capital expenditures, acquisitions
and general corporate purposes may be limited.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness (including the Notes) and to
pay dividends and make redemption payments on the Series A Preferred Stock
depends on its future performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. Based
upon the current level of operations and anticipated growth, the Company
believes that future cash flow from operations, together with available
borrowings under the New Loan Agreement, will be adequate to meet the Company's
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the next 12 months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance,
however, that the Company's business will continue to generate sufficient cash
flow from operations in the future to service its debt, pay dividends, make
redemption payments and necessary capital expenditures. If unable to do so, the
Company may be
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required to refinance all or a portion of its existing debt, including the
Notes, to sell assets or to obtain additional financing. There can be no
assurance that any such refinancing or that any such sale of assets or
additional financing would be possible on terms reasonably favorable to the
Company, or at all. In addition, unforeseen problems, delays, expenses and
difficulties as well as changes in economic and regulatory or competitive
conditions may lead to cost increases that would make the Company's current cash
flow and borrowings under the New Loan Agreement insufficient to meet the
Company's capital needs. See
"--Future Capital Needs; Uncertainty of Additional Financing."
RESTRICTIONS ON THE COMPANY'S ABILITY TO PAY CASH DIVIDENDS ON THE SERIES A
PREFERRED STOCK. The ability of the Company to pay cash dividends on the Series
A Preferred Stock and to redeem the Series A Preferred Stock upon maturity is
substantially restricted under the various covenants and conditions contained in
the Indenture and the New Loan Agreement. In addition to these contractual
restrictions, the Company's ability to pay dividends on the Series A Preferred
Stock is further limited by the provisions of Delaware law which restrict the
payment of dividends on capital stock, including the Series A Preferred Stock,
to payments out of surplus, or in the event that the Company has no surplus, out
of net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. As September 25, 1997, the Company had
stockholders' equity of approximately $5.9 million and surplus of approximately
$7.7 million. In order to pay dividends in cash, the Company must have surplus
or net profits equal to the full amount of the cash dividends at the time such
dividends are declared. The Company cannot predict what the value of its assets
or the amount of its liabilities will be in the future and, accordingly, there
can be no assurance that the Company will be able to pay cash dividends on the
Series A Preferred Stock.
RANKING OF SERIES A PREFERRED STOCK. The Series A Preferred Stock will rank
junior in right of payment upon liquidation to all existing and future
indebtedness of Color Spot. The Series A Preferred stock will rank senior in
right of payment upon liquidation to the Common Stock. In the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Company's Subsidiaries, Color Spot will not receive funds available to pay to
the holders of the Series A Preferred Stock until after the payment in full of
the claims of the creditors of Color Spot's subsidiaries, the holders of the
Notes and all indebtedness and other obligations of the Company. See
"Description of Series A Preferred Stock--Ranking."
DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH. The Company aggressively
pursues the acquisition of other companies. See "Business--Growth Strategy."
Acquisitions involve a number of risks, including effects on the Company's
reported operating results, the diversion of management's attention, the
dependence on hiring, training and retaining key personnel and risks associated
with unanticipated problems or legal liabilities, some or all of which could
have a material adverse effect on the Company. Historically, the Company has
financed acquisitions through the incurrence of additional debt and the issuance
of Company stock. See "--Substantial Leverage and Debt Service." The Company
completed one acquisition in fiscal 1996, seven acquisitions in fiscal 1997 and
six acquisitions to date in fiscal 1998. There can be no assurance that the
Company will be able to integrate its acquisitions or successfully implement its
business model in a timely manner without substantial costs, delays or other
problems. Once integrated and operating according to the Company's business
model, these acquisitions may not achieve sales, profitability and productivity
commensurate with the Company's historical operating results. In addition, there
can be no assurance that the Company's management and financial controls,
personnel, computer systems and other corporate support systems will be adequate
to manage the increase in the size and scope of the Company's operations as a
result of its acquisitions. Additionally, there can be no assurances that the
acquired businesses will enhance the Company's business or financial
performance.
The Company anticipates that one or more potential acquisition
opportunities, including those that would be material, may become available in
the near future. No assurances can be given that any acquisition by the Company
will occur, that if an acquisition does occur that it will not have a material
adverse effect on
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the Company, that any such acquisition will be successful in enhancing the
Company's business or that any such acquisition can be successfully integrated
into the Company's business. See
"--Future Capital Needs; Uncertainty of Additional Financing."
EFFECT OF GROWTH ON COMPANY RESOURCES. The recent growth and expansion of
the Company's business have placed, and are expected to continue to place, a
significant strain on the Company's management, operational and financial
resources. Continued growth will require an increase in Company personnel who
possess the training and experience necessary to operate the Company's
facilities. There can be no assurance that the Company will be able to continue
to attract, develop and retain the personnel necessary to pursue its growth
strategy. Moreover, as the Company continues to grow, it will need to expand its
production, warehouse and distribution facilities and may require additional
facilities to support such growth. In addition, the Company's rapid growth may
place significant pressure on its financial controls and inventory management
systems. Any failure by the Company to manage its growth effectively could have
a material adverse effect on the Company.
SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT. Color Spot America, Inc.
(together with its subsidiaries, "Color Spot America"), a California corporation
and a predecessor to the Company, which was managed by certain of the Company's
current management, was incorporated and commenced operations in 1983. The
current management of the Company operated Color Spot America until January 1991
when a subsidiary of PacifiCorp, a public utility (together with its
subsidiaries, "PacifiCorp"), obtained control and installed a new management
team that operated Color Spot America and its successor, Color Spot, Inc., an
Oregon corporation ("Color Spot Oregon"), from 1991 through September 1995.
During the period of PacifiCorp's control, the Company's predecessors
experienced declining net sales and profitability. In September 1995, the
Company commenced operations by purchasing Color Spot Oregon's assets from
PacifiCorp. See "Company History." Accordingly, the Company, under its current
management team, has only a limited operating history upon which investors may
evaluate its performance. There can be no assurances that the Company will be
able to continue to achieve or sustain revenue growth or profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified employees, and
successfully manage and execute its expansion strategies. There can be no
assurances that the Company will be successful in these efforts.
CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT. The Company is highly
dependent on the purchases of its top eight retail customers, which together
accounted for 75% and 82% of the Company's net sales in fiscal 1997 and fiscal
1996, respectively. The Company's largest customer, Home Depot, accounted for
approximately 39% and 41% of the Company's net sales in fiscal 1997 and fiscal
1996, respectively. The Company expects that a small number of customers will
continue to account for a substantial portion of its net sales for the
foreseeable future. The Company does not have long-term contracts with any of
its retail customers, and there can be no assurance that they will continue to
purchase the Company's products. The loss of, or a significant adverse change
in, the relationship between the Company and Home Depot or any other major
customer could have a material adverse effect on the Company. The loss of, or
reduction in orders from, any significant retail customers, losses arising from
retail customers' disputes regarding shipments, fees, merchandise condition or
related matters, or the Company's inability to collect accounts receivable from
any major retail customer could have a material adverse effect on the Company.
In addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
period. See "Business--Customers."
SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES. The
Company's business is highly seasonal. In fiscal 1997, approximately 77% of net
sales and 125% of operating income occurred in the first half of the calendar
year. The Company has historically reported operating losses in its first and
second fiscal quarters, and the Company believes it will continue to report
operating losses during the first half of its fiscal
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year. The Company has experienced and expects to continue to experience
variability in net sales, operating income and net income on a quarterly basis.
Factors that may contribute to this variability include: (i) weather conditions
during peak growing and gardening seasons; (ii) shifts in demand for live plant
products; (iii) changes in product mix, service levels and pricing by the
Company and its competitors; (iv) the effect of acquisitions; (v) the economic
stability of the Company's retail customers; and (vi) the Company's relationship
with each of its retail customers. See "--Weather; General Agricultural Risks"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality and Quarterly Results."
In addition, during the fiscal quarter in which the Offerings are completed,
the Company will incur (i) a $4.4 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees and (ii) a $2.0 million
pre-tax charge related to the termination of an annual management fee.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results cannot be relied upon as indicators of
future performance. In the event that the Company's operating results in any
future period fall below the expectations of securities analysts and investors,
the trading price of the Common Stock would likely be materially and adversely
affected.
RESTRICTIONS IMPOSED BY NEW LOAN AGREEMENT. Simultaneously with the
completion of the Offerings, the Company will enter into a new senior credit
facility (the "New Loan Agreement") with a number of banking institutions, led
by Credit Agricole Indosuez, which will restrict, among other things, the
Company's ability to incur additional indebtedness, incur liens, pay or declare
dividends, enter into any transaction not in its usual course of business,
guarantee or otherwise become in any way liable with respect to the obligations
of another party or entity, merge or consolidate with another person or sell or
transfer any collateral (except for the sale of inventory in the ordinary course
of the Company's business). A breach of any of these covenants could result in a
default under the New Loan Agreement. Upon the occurrence of an Event of Default
(as defined in the New Loan Agreement), the lenders could elect to declare all
amounts outstanding under the New Loan Agreement, together with accrued
interest, to be immediately due and payable. If the Company were unable to pay
those amounts, the lenders could proceed against the collateral granted to them
to secure that indebtedness. If the New Loan Agreement indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay the indebtedness in full and other indebtedness of the
Company. Substantially all of the assets of the Company have been pledged as
security under the New Loan Agreement. The restrictions described above, in
combination with the leveraged nature of the Company, may limit the Company's
ability to obtain financing in the future or may otherwise restrict corporate
activities. See "Description of Certain Indebtedness."
ENCUMBRANCES ON ASSETS TO SECURE THE NEW LOAN AGREEMENT. In addition to
being subordinated to all existing and future Senior Debt of the Company, the
Notes will not be secured by any of the Company's assets. The Company's
obligations under the New Loan Agreement will be secured by substantially all of
the assets of the Company. If the Company becomes insolvent or is liquidated, or
if payment under the New Loan Agreement is accelerated, the lenders under the
New Loan Agreement will be entitled to exercise the remedies available to a
secured lender under applicable law. See "Description of Certain Indebtedness--
New Loan Agreement."
CHANGE OF CONTROL. The Indenture and the Certificate of Designation will
provide that, upon the occurrence of a Change of Control, the Company must make
an offer to purchase all or any part of the Notes at a price in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase and all or any part of the Series A Preferred
Stock at a price in cash equal to 101% of the aggregate liquidation preference
thereof plus accrued and unpaid dividends to the date of purchase. The New Loan
Agreement prohibits the Company from repurchasing any Notes or Series A
Preferred Stock, except with certain proceeds of one or more Public Equity
Offerings. The New Loan Agreement also provides that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the
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Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing the Notes or Series A Preferred Stock, or if the Company is required
to make an Asset Sale Offer (as defined) pursuant to the terms of the Notes, the
Company could seek the consent of its lenders to purchase the Notes or Series A
Preferred Stock or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or refinance such
borrowings, the Company would remain prohibited from purchasing the Notes or
Series A Preferred Stock. In such case, the Company's failure to purchase
tendered Notes would constitute an Event of Default (as defined) under the
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Debt, the subordination provisions in the Indenture would likely restrict
payments to the holders of the Notes. The Indenture will provide that the
Company may not offer to repurchase any Series A Preferred Stock upon the
occurrence of a Change of Control until the Company has completed its offer to
purchase the Notes. There can be no assurance that the Company will have
sufficient funds to repurchase the Notes or the Series A Preferred Stock after a
Change of Control. The provisions relating to a Change of Control included in
the Indenture and the Certificate of Designation may increase the difficulty of
a potential acquiror obtaining control of the Company. See "Description of
Notes--Change of Control" and "Description of Series A Preferred Stock--Change
of Control."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. There can be no
assurance that the net proceeds of the Offerings or borrowings under the New
Loan Agreement and funds from operations will be sufficient to meet the
Company's anticipated working capital, capital expenditure and acquisition
financing requirements. The Company may need to raise additional funds through
the issuance of public or private debt or equity securities in order to take
advantage of unanticipated opportunities, including acquisitions of
complementary businesses, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available, or not available on acceptable terms, the Company may not be able to
take advantage of unanticipated opportunities or otherwise respond to
unanticipated competitive pressures. Such inability could have a material
adverse effect on the Company. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Certain Indebtedness."
WEATHER; GENERAL AGRICULTURAL RISKS. Inclement weather or production
difficulties occurring at a time of peak production or sales (in the second half
of the Company's fiscal year), particularly on weekends during the peak
gardening season, could cause declines in net sales and operating income that
could have a material adverse effect on the Company. In the event of severe
weather conditions, the Company does not have sufficient facilities to preserve
and protect all of its products. Meteorologists are currently predicting that a
severe weather phenomenon known as "El Nino" will continue to impact the United
States in late 1997 and early 1998, which may result in unusually cool and wet
weather conditions in many of the Company's markets. Such weather conditions
could delay the upcoming peak growing and gardening season and reduce the demand
for the Company's products. The Company intends to expand into new markets that
typically have greater weather variability than the Company's historic markets.
Failure by the Company to adequately manage this variability could have a
material adverse effect on the Company. The Company's operations also may be
materially affected by disease, pests or other natural hazards. Agricultural
production is highly dependent upon the availability of water. The Company has
not installed, and is not required to install, water reclamation systems at the
majority of its production facilities. The loss of access to water at any of the
Company's facilities would have a material adverse effect on the Company. See
"--Governmental Regulations; Minimum Wage." Given the perishable nature of the
Company's products, if sales do not materialize as expected, the Company could
experience a significant decline in profitability.
DEPENDENCE ON LEASED FACILITIES. The majority of the Company's production
facilities are leased. These leases expire at varying times in the next two to
15 years. Although the Company believes that it can extend most of its leases on
acceptable terms, failure to do so would require the Company to establish new
production facilities. No assurance can be given that any such leases can be
extended on acceptable terms or,
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if not so extended, that suitable replacement production facilities can be
established. Failure to extend the terms of any of these leases could have a
material adverse effect on the Company. See "Business-- Properties and
Facilities."
SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS. The Company and
its competitors are vulnerable to price increases for raw materials. For fiscal
1997, raw material costs accounted for approximately 27.1% of the Company's net
sales. The Company does not have long-term contracts with the majority of its
raw material suppliers. Increases in the cost of raw materials essential to the
operations of the Company, including seed, plastic, chemicals and fertilizer,
would increase the Company's costs of production. Significant increases in the
price of petrochemicals or a scarcity of raw materials essential to plant
propagation could have a material adverse effect on the Company. There can be no
assurance that any such price increases can be passed on to the Company's
customers in the form of higher prices for the Company's products.
COMPETITION. The wholesale nursery industry is highly competitive.
Competition is based principally on product quality, breadth of product
offerings, customer service and price. The wholesale nursery industry is highly
fragmented with over 10,000 small and regional nurseries nationwide. In 1996,
the ten largest and 100 largest wholesale nurseries in the United States
accounted for approximately 8% and 22%, respectively, of total wholesale
production. The Company currently competes directly with a large number of
western and southwestern wholesale nursery companies. On a multi-regional basis,
the Company competes with Hines Nurseries primarily in bedding plants and shrubs
and Monrovia Nursery Company primarily in shrubs. The fresh cut Christmas tree
market is also highly fragmented and, on a regional basis, the Company competes
in this market with Holiday Tree Farms and The Kirk Company.
GOVERNMENTAL REGULATIONS; MINIMUM WAGE. The Company is subject to certain
federal, state and local health, safety and environmental laws and regulations
regarding the production, storage and transportation of certain of its products
and the disposal of its waste. Certain of the Company's operations and
activities, such as water runoff from its production facilities and the use of
certain pesticides, are subject to regulation by the United States Environmental
Protection Agency (the "EPA") and similar state and local agencies. These
agencies may regulate or prohibit the use of such products, procedures or
operations, thereby affecting the Company's operations and profitability. In
addition, the Company must comply with a broad range of environmental laws and
regulations. Additional or more stringent environmental laws and regulations may
be enacted in the future and such changes could have a material adverse effect
on the Company. The Company uses reclamation water as one of the sources of
water supply for a few of its production facilities. The use and pricing of
reclamation water, including availability of subsidized water rates, is governed
by federal reclamation laws and regulations. Changes in the law could have a
material adverse effect on the Company.
In addition, the Company is subject to the Fair Labor Standards Act as well
as various federal, state and local regulations that govern such matters as
minimum wage requirements, overtime and working conditions. A large number of
the Company's employees are paid at or just above the federal minimum wage level
and, accordingly, changes in laws, regulations or ordinances could have a
material adverse effect on the Company by increasing the Company's costs. See
"Business--Government Regulation."
CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT. KCSN Acquisition
Company, L.P. ("KCSN"), an affiliate of Kohlberg & Company, LLC, a New York
merchant banking firm ("Kohlberg"), owns approximately 69.2% of the outstanding
Common Stock (approximately 61.8% assuming exercise in full of the Warrants). In
addition, officers and directors own approximately 17.5% of the outstanding
Common Stock (approximately 15.6% assuming exercise in full of the Warrants).
Heller Equity Capital Corporation ("Heller") is the holder of an 8.0%
Subordinated Convertible Note (the "Heller Note"), which is convertible into
approximately 5.0% of the outstanding Common Stock (approximately 4.5% assuming
exercise in full of the Warrants). Heller also owns 2.6% of the outstanding
Common Stock (approximately 2.3% assuming exercise in full of the Warrants).
KCSN, Heller and the management stockholders are parties to a Stockholders
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Agreement, which provides that the parties to the Stockholders Agreement shall
(i) consent to any merger, consolidation or sale of all or substantially all of
the Company's assets involving an independent third party and approved by a
majority of KCSN's shares and (ii) vote their shares to elect Michael F.
Vukelich, Jerry L. Halamuda, five KCSN designees and two independent designees
reasonably acceptable to KCSN as directors of the Company. Subject to the terms
of the Stockholders Agreement and the Certificate of Designation, KCSN is able
to elect all of the Company's directors and can determine the outcome of
corporate actions requiring stockholder approval, including adopting amendments
to the Company's Certificate of Incorporation (as defined) and approving or
disapproving mergers or sales of all or substantially all of the Company's
assets. In addition, KCSN and certain of the management stockholders are parties
to a put/call option agreement to effect the repurchase by the Company of shares
of Common Stock held by the management stockholders. Under the put/call option
agreement, KCSN retains an irrevocable proxy to vote the shares of Common Stock
not yet repurchased by the Company. As of September 25, 1997, KCSN had a proxy
to vote 20,211 shares of Common Stock held by the management stockholders. See
"Certain Transactions--Relationship with Kohlberg--Control by KCSN,"
"--Recapitalization," "Principal Stockholders" and "Description of Capital
Stock."
CERTAIN TAX CONSIDERATIONS. For a discussion of certain material federal
income tax considerations which are relevant to the purchase, ownership and
disposition of the Series A Preferred Stock and Warrants, see "Certain Federal
Income Tax Consequences."
LACK OF PRIOR MARKET FOR THE UNITS, SERIES A PREFERRED STOCK AND
WARRANTS. There is currently no public market for the Units, Series A Preferred
Stock or Warrants, and the Company has no present plan to list the Units, Series
A Preferred Stock or Warrants on a national securities exchange or to include
the Units, Series A Preferred Stock or Warrants for quotation through an
interdealer quotation system. The Underwriter does not expect that a market in
the Units, Series A Preferred Stock or Warrants will develop. See
"Underwriting."
RESTRICTIONS UPON EXERCISE OF THE WARRANTS. The Common Stock is not traded
on any national securities exchange or on Nasdaq. The Warrants may only be
exercised if a registration statement covering the underlying Common Stock is
effective or an exemption from registration is available. Holders of the
Warrants will have certain registration rights. See "Description of the
Warrants--Registration."
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the purchase, ownership and disposition of
the Series A Preferred Stock and the Warrants by the holders thereof, but does
not purport to be a complete analysis of the relevant tax issues. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions in effect as of the date hereof, all of
which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of such Series A
Preferred Stock or Warrants. The discussion does not address all of the federal
income tax consequences that may be relevant to a holder in light of such
holder's particular circumstances or to holders subject to special rules, such
as certain financial institutions, insurance companies, dealers in securities,
foreign corporations, nonresident alien individuals and persons holding either
or both of the Series A Preferred Stock and the Warrants as part of the
"straddle," "hedge" or "conversion transaction." Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed. The discussion
deals only with investors who hold Series A Preferred Stock and Warrants as
"capital assets" within the meaning of Section 1221 of the Code.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
ALLOCATION OF ISSUE PRICE BETWEEN SERIES A PREFERRED STOCK AND WARRANTS
Each holder of a Unit will have an aggregate tax basis in the Unit equal to
the amount of cash paid by the holder for such Unit. For federal income tax
purposes, a holder's aggregate tax basis in the Units will be allocated between
the Series A Preferred Stock and the Warrants represented by such Units based on
their relative fair market values at the time of issuance. The Company will
determine and provide holders with its estimate of the fair market values of the
Series A Preferred Stock and Warrant and the holders will allocate the basis of
the Units between the Series A Preferred Stock and Warrant in proportion to
these relative fair market values. There can be no assurance, however, that the
IRS will respect the Company's determination.
DISTRIBUTIONS ON SERIES A PREFERRED STOCK
Distributions on the Series A Preferred Stock, whether paid in cash or in
additional shares of Series A Preferred Stock ("Dividend Shares"), will be
taxable as ordinary dividend income to the extent that the cash amount or fair
market value of the Dividend Shares on the date of distribution does not exceed
the Company's current or accumulated earnings and profits (as determined for
federal income tax purposes). To the extent that the amount of distributions
exceeds the Company's current or accumulated earnings and profits such
distributions will be treated as a return of capital, thus reducing the holder's
adjusted tax basis in such stock. The amount of any such excess distribution
that is greater than the holder's adjusted basis in the stock with respect to
which a distribution is made will be taxed as capital gain and will be long-term
capital gain if the holder's holding period for such stock exceeds one year. For
purposes of the remainder of this discussion, the term "dividend" refers to a
distribution taxed as ordinary income as described above, unless the context
indicates otherwise.
Dividends received by corporate holders will be eligible for the 70%
dividends-received deduction under Section 243 of the Code, subject to
limitations generally applicable to the dividends-received deductions, including
those contained in Sections 246 and 246A of the Code and the corporate
alternative minimum tax. The 70% dividends-received deduction may be reduced if
a holder's shares of Series A Preferred Stock are "debt financed." In addition,
under Section 246(c) of the Code, the 70% dividends-received deduction will not
be available with respect to stock that is held for 45 days or less during the
90
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day period beginning on the date which is 45 days before the date on which such
stock becomes ex-dividend with respect to such dividend (in the case of a
dividend on preferred stock attributable to a period or periods aggregating more
than 366 days, the required holding period would be determined by substituting
90 days for 45 days and a 180 day period for the 90 day period), including the
day of disposition but excluding the day of acquisition. The length of time that
a holder is deemed to have held stock for these purposes is reduced for periods
by reason of the existence of certain options, contracts to sell, short sales or
other similar transactions. Section 246(c) of the Code also denies the 70%
dividends-received deduction to the extent that a corporate holder is under an
obligation, with respect to substantially similar or related property, to make
payments corresponding to the dividend received. Under Section 246(b) of the
Code, the aggregate dividends-received deductions allowed may not exceed 70% of
the taxable income, with certain adjustments, of the corporate shareholder.
In general, under Section 1059 of the Code, the tax basis of stock that has
been held by a corporate shareholder for two years or less (determined as of the
earlier of the date on which the Company declares, announces or agrees to the
payment of an actual or constructive dividend) is reduced (but not below zero)
by the non-taxed portion of an "extraordinary dividend" for which a
dividends-received deduction is allowed. In addition, if the non-taxed portion
of an "extraordinary dividend" exceeds such corporate shareholder's tax basis in
its stock, the excess shall be treated as a gain from the sale or exchange of
such stock for the taxable year in which the "extraordinary dividend" is
received. Generally, an "extraordinary dividend" is a dividend that (i) equals
or exceeds, in the case of preferred stock, 5% of the holder's basis in such
stock or 10% in the case of any other stock (computed by treating all dividends
having ex-dividend dates within an 85-day period as a single dividend) or (ii)
exceeds 20% of the holder's adjusted basis in its stock (treating all dividends
having ex-dividend dates within a 365-day period as a single dividend). If an
election is made by a holder, under certain circumstances in applying these
tests, the fair market value of its stock as of the day before the ex-dividend
date may be substituted for the holder's basis.
An "extraordinary dividend" would also include amounts received in the case
of certain redemptions of the Series A Preferred Stock that are non-pro rata as
to all shareholders, without regard to the period the holder held the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no less
often than annually and (ii) is not in arrears as to dividends when acquired,
provided the actual rate of return as determined under Section 1059(e)(3) of the
Code on such stock does not exceed 15%. A qualified preferred dividend will not
be treated as an extraordinary dividend if the taxpayer holds the stock for more
than five years. In addition, if the taxpayer disposes of the stock before it
has been held for more than five years, the aggregate reduction in basis will
not exceed the excess of the qualified preferred dividends paid on such stock
during the period held by the taxpayer over the qualified preferred dividends
which would have been paid during such period on the basis of the stated rate of
return as determined under Section 1059(e)(3) of the Code. The length of time
that a taxpayer is deemed to have held stock for purposes of the extraordinary
dividend rules is determined under principles similar to those applicable for
purposes of the dividends-received deduction discussed above.
SERIES A PREFERRED STOCK DISCOUNT
The Series A Preferred Stock is subject to mandatory redemption on
, 2008 (the "Mandatory Redemption"). In addition, on or after
, 2002 and subject to certain restrictions, the Series A
Preferred Stock is redeemable at any time at the option of the Company at
specified redemption prices (the "Optional Redemption"). See "Description of
Series A Preferred Stock-- Optional Redemption" and "--Mandatory Redemption."
Pursuant to Section 305(c) of the Code, holders of Series A Preferred Stock may
be required to treat a portion of the difference between the Series A Preferred
Stock's issue price and its redemption price as constructive distributions of
property includible in income on a periodic basis. For purposes of determining
whether such constructive distribution treatment
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applies, the Mandatory Redemption and the Optional Redemption are tested
separately. Constructive distribution treatment is required if either (or both)
of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that is subject to mandatory redemption
is treated as being distributed to the holders of such preferred stock on an
economic accrual basis. Preferred stock generally is considered to have a
redemption premium for this purpose if the price at which it must be redeemed
(the "Redemption Price") exceeds its issue price (as determined in accordance
with an allocation of the issue price of the Units, as discussed above) by more
than a DE MINIMIS amount. For this purpose, such excess (the "Series A Preferred
Stock Discount") will be treated as zero if it is less than 1/4 of 1% of the
Redemption Price multiplied by the number of complete years from the date of
issuance of the stock until the stock must be redeemed. Series A Preferred Stock
Discount is taxable as a constructive distribution to the holder (treated as a
dividend to the extent of the Company's current and accumulated earnings and
profits and otherwise subject to the treatment described above for
distributions) over the term of the preferred stock using a constant interest
rate method.
Under recently issued regulations (the "Regulations"), Series A Preferred
Stock Discount will arise due to the Optional Redemption feature only if, based
on all of the facts and circumstances as of the date the Series A Preferred
Stock is issued, redemptions pursuant to the Optional Redemption are more likely
than not to occur. Even if redemption were more likely than not to occur,
however, constructive distribution treatment would not result if the redemption
premium were solely in the nature of a penalty for premature redemption. For
this purpose, a penalty for premature redemption is a premium paid as a result
of changes in economic or market conditions over which neither the issuer nor
the holder has legal or practical control, such as changes in prevailing
dividend rates. The Regulations provide a safe harbor pursuant to which
constructive distribution treatment will not result from an issuer call right if
(i) the issuer and the holder are unrelated, (ii) there are no arrangements that
effectively require the issuer to redeem the stock and (iii) exercise of the
option to redeem would not reduce the yield of the stock. The Company does not
believe that the Optional Redemption would be treated as more likely than not to
be exercised under these rules.
Dividend Shares may bear Series A Preferred Stock Discount depending upon
the issue price of such shares (I.E., the fair market value of the Dividend
Shares on the date of their issuance). If shares of Series A Preferred Stock
(including Dividend Shares) bear Series A Preferred Stock Discount, such shares
generally will have different tax characteristics from other shares of Series A
Preferred Stock and might trade separately, which might adversely affect the
liquidity of such shares.
REDEMPTION OR OTHER DISPOSITION OF STOCK
In the event the Company exercises its right to redeem the Series A
Preferred Stock, the redemption proceeds will generally be treated as a sale or
exchange if the holder does not own, actually or constructively within the
meaning of Section 318 of the Code, any stock of the Company other than the
stock redeemed. If a holder does own, actually or constructively, such other
stock, a redemption of stock may be treated as a dividend to the extent of the
Company's current or accumulated earnings and profits (as determined for federal
income tax purposes). Such dividend treatment would not be applied if the
redemption is "substantially disproportionate" with respect to the holder under
Section 302(b)(2) of the Code or is "not essentially equivalent to a dividend"
with respect to the holder under Section 302(b)(1) of the Code. A distribution
to a holder will be "not essentially equivalent to a dividend" if it results in
a "meaningful reduction" in the holder's stock interest in the Company. For
these purposes, a redemption of stock for cash that results in a reduction in
the proportionate interest in the Company (taking into account any constructive
ownership) of a holder whose relative stock interest in the Company is minimal
and who exercises no control over corporate affairs may be regarded as a
meaningful reduction in the holder's stock interest in the Company.
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If a redemption of stock is treated as a distribution that is taxable as a
dividend, the amount of the distribution will be measured by the amount received
by the holder. The holder's adjusted tax basis in the redeemed stock will be
transferred to his remaining stock holdings in the Company. If the holder does
not retain any stock ownership in the Company, the holder may lose such basis
entirely.
A redemption of stock that is not treated as a distribution taxable as a
dividend, and a sale or other disposition of stock results in capital gain or
loss equal to the difference between the amount of cash and the fair market
value of property received and the holder's adjusted tax basis in the stock that
is disposed. Such gain or loss would be long term capital gain or loss if the
holding period for the stock exceeded one year. For corporate taxpayers,
long-term capital gains are taxed at the same rate as ordinary income. For
individual taxpayers, net capital gains (the excess of the taxpayer's net
long-term capital gains over this net short-term capital losses) are subject to
a maximum tax rate of (i) 28%, if such stock was held for more than one year but
not more than 18 months, or (ii) 20%, if such stock was held for more than 18
months. The deductibility of capital losses are restricted, and, in general, may
only be used to reduce capital gains to the extent thereof. However, individual
taxpayers may deduct annually $3,000 of capital losses in excess of their
capital gains. Capital losses which cannot be utilized because of the
aforementioned limitation are, for corporate taxpayers carried back three years
and, in most circumstances, carried forward for five years; for individual
taxpayers, capital losses may be carried forward without a time limitation.
PROPOSED LEGISLATION
The President has previously proposed legislation which would reduce the 70%
dividends-received deduction to 50%. Although such legislation was not enacted
as part of the recently enacted Taxpayer Relief Act of 1997, it cannot be
predicted with certainty whether in the future such proposal will be enacted
into law or, if enacted, what would be its effective date. Corporate holders of
stock are urged to consult their own tax advisors regarding the possible effects
of such proposed legislation.
WARRANTS
The sale or exchange of a Warrant ordinarily will result in the recognition
of gain or loss to the holder of the Warrant for federal income tax purposes in
an amount equal to the difference between the amount realized on such sale or
exchange (I.E. the value of property or cash received in exchange therefor) and
the holder's tax basis in the Warrant. A holder's initial tax basis in a Warrant
acquired in this offering will be that portion of the issue price of the Unit
allocable to the Warrant, as described above. See the discussion above under
"Allocation of Issue Price Between Series A Preferred Stock and Warrants." Such
gain or loss recognized by a holder upon the sale or exchange of a Warrant to a
person other than the Company will generally be capital gain or loss provided
that the Common Stock issuable upon exercise of such Warrants would have been
capital assets if acquired by such holder. The gain or loss recognized will be
long-term capital gain or loss with respect to Warrants held for more than one
year.
No gain or loss will be recognized for federal income tax purposes upon
exercise of a Warrant (except that gain will be recognized to the extent cash is
received in lieu of fractional shares). A holder's tax basis in the Common Stock
acquired upon exercise of the Warrants shall be equal to his tax basis in the
Warrants exercised. Provided the holder holds the Common Stock as capital
assets, gain or loss recognized upon the subsequent sale or exchange of the
Common Stock will be capital gain or loss. However, the holding period for such
Common Stock acquired upon exercise of the Warrants will begin on the date of
exercise of such Warrants and will not include the period during which the
Warrants were held.
Upon expiration of a Warrant, a holder of a Warrant will recognize loss
equal to such holder's tax basis in the Warrant. Such loss will generally be a
capital loss provided that the Common Stock issuable upon exercise of the
Warrant would have been capital assets if acquired by such holder and will be
long-term capital loss if the Warrant has been held for more than one year.
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Under Section 305 of the Code, adjustments to the exercise price of the
Warrants which occur under certain circumstances may result in a deemed dividend
to Warrant holders.
If the exercise price of the Warrants is a nominal amount, it may be
possible that the Warrants will be considered to be constructively exercised for
federal income tax purposes on the day on which the Warrants first become
exercisable or, possibly, on the day of issuance. In that event, (i) no gain or
loss will be recognized to a holder on such deemed exercise or upon actual
exercise of the Warrants, (ii) the adjusted basis of the Common Stock deemed
received for federal income tax purposes on the constructive exercise of the
Warrants will be equal to the adjusted basis in the Warrants until the Warrants
are actually
exercised (and the exercise price paid) at which time such basis would be
increased by the exercise price of the Warrants, and (iii) the holding period of
the Common Stock deemed received for federal income tax purposes on the
constructive exercise of the Warrants will begin on the day following the day of
constructive exercise.
BACKUP WITHHOLDING
A holder of the Series A Preferred Stock and Warrants may be subject to
backup withholding at a rate of 31% with respect to dividends on the Series A
Preferred Stock and gross proceeds upon sale, exchange or retirement of the
Series A Preferred Stock or Warrants, unless such holder (i) is a corporation or
other exempt recipient and, when required, demonstrates that fact, or (ii)
provides a correct taxpayer identification number, certifies, when required,
that such holder is not subject to backup withholding, and otherwise complies
with applicable requirements of the backup withholding rules. Backup withholding
is not an additional tax; any amounts so withheld are creditable against the
holder's federal income tax, provided the required information is provided to
the IRS. A holder who does not provide the Company with a correct taxpayer
identification number may be subject to penalties imposed by the IRS. Holders
should consult their tax advisors regarding their qualification for exemption
from backup withholding and the procedure for obtaining any applicable
exemption.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement for the
Units (the "Underwriting Agreement") between BT Alex. Brown Incorporated (the
"Underwriter") and the Company, the Underwriter has agreed to purchase from the
Company all of the Units offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Units is subject to the approval of
certain legal matters by counsel and various other conditions.
The Underwriter proposes to offer the Units directly to the public at the
public offering price set forth on the cover page hereof. After the initial
public offering of the Units, the public offering price may be changed by the
Underwriter.
The Underwriter has informed the Company that it will not confirm sales to
any accounts over which it exercises discretionary authority without prior
written approval of such transactions by the customer.
The Company does not intend to apply for listing of the Units, the Series A
Preferred Stock or the Warrants on a national securities exchange. The
Underwriter does not intend to make a market in the Units, the Series A
Preferred Stock or the Warrants. The Underwriter does not expect any market to
develop for the Units, the Series A Preferred Stock, the Warrants or the Common
Stock.
In connection with the Units Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Units, the Series A Preferred Stock or the Warrants. Specifically, the
Underwriter may overallot the Units, the Series A Preferred Stock or the
Warrants, creating a short position. The Underwriter may bid for and purchase
Units, Series A Preferred Stock or Warrants in the open market to cover short
positions or in stabilizing transactions. These activities may stabilize or
maintain the market price of the Units, the Series A Preferred Stock or the
Warrants above independent market levels. The Underwriter is not required to
engage in these activities, and may end these activities at any time.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriter may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Units being offered hereby will be passed upon for the
Company by Brownstein Hyatt Farber & Strickland, P.C., Denver, Colorado. Certain
legal matters will be passed upon for the Underwriter by Latham & Watkins, Los
Angeles, California.
EXPERTS
The audited consolidated financial statements and schedule of Color Spot
Nurseries, Inc. and Subsidiaries and Color Spot, Inc., an Oregon corporation,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The audited financial statements of Oda Nursery, Inc., Cracon, Inc.,
Signature Trees, Peters' Wholesale Greenhouses, Inc., Lone Star Growers Co. and
The Wholesale Division of Sunnyside Plants, Inc., included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of The Wholesale Bedding Plant Division of
Summersun Greenhouse Co., included in this Prospectus, have been audited by Moss
Adams LLP, independent public
102
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accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The audited financial statements of Wolfe Greenhouses, L.L.C., included in
this Prospectus have been audited by Jaynes, Reitmeier, Boyd & Therrell, P.C.,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Units. This Prospectus, which is part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any agreement or other document filed as an
exhibit or schedule to the Registration Statement and each such statement shall
be deemed qualified in its entirety by such reference. For further information
with respect to the Company and the Units, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected without charge at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, and at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10007 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of prescribed fees. The Commission also
maintains a web site that contains reports, proxy and information statements and
other materials that are filed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System. This web site can be accessed at
http:// www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by independent public accountants and
quarterly reports containing unaudited consolidated financial data for each of
the first three quarters of each fiscal year.
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- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Company History................................ 15
Recent Acquisitions............................ 15
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Selected Consolidated Financial and Operating
Data......................................... 18
Unaudited Pro Forma Consolidated Statement of
Operations................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 31
Management..................................... 40
Certain Transactions........................... 46
Principal Stockholders......................... 48
Description of Capital Stock................... 49
Description of Certain Indebtedness............ 54
Description of Notes........................... 55
Description of Units........................... 71
Description of Series A Preferred Stock........ 71
Description of Warrants........................ 81
Certain Definitions............................ 83
Certain Federal Income Tax Consequences........ 97
Underwriting................................... 102
Legal Matters.................................. 102
Experts........................................ 102
Additional Information......................... 103
Index to Consolidated Financial Statements..... F-1
</TABLE>
----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$40,000,000
[LOGO]
40,000 UNITS
_% SERIES A CUMULATIVE PREFERRED STOCK
AND
WARRANTS TO PURCHASE COMMON STOCK
------------
PROSPECTUS
------------
BT ALEX. BROWN
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses of the Registrant in connection
with the issuance and distribution of the securities being registered, other
than underwriting discounts. Expenses other than registration, filing and
listing fees are estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee.............................................................. $ 44,541
NASD filing fee................................................................... 15,699
Blue sky fees and expenses........................................................ 5,000
Printing and engraving............................................................ *
Legal fees and expenses........................................................... 225,000
Accounting fees and expenses...................................................... 160,000
Transfer Agent fees............................................................... *
Miscellaneous..................................................................... *
----------
Total............................................................................. $ *
----------
----------
</TABLE>
- ------------------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to limit the personal liability of its directors
in accordance with the provisions set forth therein. The Amended and Restated
Certificate of Incorporation of the Registrant provides that the personal
liability of its directors shall be limited to the fullest extent permitted by
applicable law.
Section 145 of the General Corporation Law of the State of Delaware contains
provisions permitting corporations organized thereunder to indemnify directors,
officers, employees or agents against expenses, judgments and fines reasonably
incurred and against certain other liabilities in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person was or is a director, officer, employee or agent of the corporation. The
Amended and Restated Certificate of Incorporation of the Registrant provides for
indemnification of its directors and officers to the fullest extent permitted by
applicable law.
The forms of Underwriting Agreements attached hereto as Exhibit 1.1 and 1.2,
which provide for, among other things, the Registrant's sale to the Underwriters
of the securities being registered herein, will obligate the Underwriters under
certain circumstances to indemnify the Registrant and the Registrant's officers
and directors against certain liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). In addition, the Registrant maintains an
officers and directors liability insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
SALES OF SECURITIES OF COLOR SPOT NURSERIES, INC.
<TABLE>
<CAPTION>
NUMBER OF
RECIPIENT SHARES DATE AMOUNT PAID EXEMPTION
- ---------------------------------------------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C>
CSN, Inc...................................... 100 9/8/95 $ 1,000 4(2)
</TABLE>
II-1
<PAGE>
SALES OF SECURITIES OF CSN, INC.
<TABLE>
<CAPTION>
NUMBER OF
RECIPIENT SHARES DATE AMOUNT PAID EXEMPTION
- ------------------------------------------------------------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Heller Equity Capital Corporation............................ 3,450,000 9/8/95 $ 5,000,000 4(2)
M.F. Vukelich Co............................................. 345,000 9/8/95 50,000 4(2)
Michael Vukelich............................................. 991,588 9/8/95 1,437,084 4(2)
Heller Equity Capital Corporation............................ 1,380,000 2/29/96 2,000,000 4(2)
Michael Vukelich............................................. 240,810 6/11/96 349,000 4(2)
Jerry Halamuda............................................... 86,250 6/11/96 125,000 4(2)
Gary E. Mariani.............................................. 86,250 6/11/96 125,000 4(2)
Gene Malcolm................................................. 69,000 6/11/96 100,000 4(2)
Steven Bookspan.............................................. 28,152 6/11/96 40,800 4(2)
Jim Tsurudome................................................ 17,250 6/11/96 25,000 4(2)
Michael T. Neenan............................................ 6,900 6/11/96 10,000 4(2)
Robert F. Strange............................................ 6,900 6/11/96 10,000 4(2)
Richard E. George............................................ 69,000 6/11/96 100,000 4(2)
Jerry Halamuda............................................... 206,382 12/31/96 299,104 Rule 701
Steven J. Bookspan........................................... 39,561 12/31/96 57,334 Rule 701
Gary Crook................................................... 39,561 12/31/96 57,335 Rule 701
David Grimshaw............................................... 39,561 12/31/96 57,335 Rule 701
Gene Malcolm................................................. 39,561 12/31/96 57,335 Rule 701
Michael T. Neenan............................................ 39,561 12/31/96 57,335 Rule 701
Robert T. Strange............................................ 39,561 12/31/96 57,335 Rule 701
Jim Tsurudome................................................ 39,561 12/31/96 57,335 Rule 701
John Negrete................................................. 17,250 12/31/96 25,000 Rule 701
Dennis Behan................................................. 6,900 12/31/96 10,000 Rule 701
Gary E. Mariani.............................................. 39,561 12/31/96 57,335 Rule 701
Richard E. George............................................ 39,561 12/31/96 57,335 Rule 701
KCSN Aquisition Company, L.P................................. 2,996,746 12/31/96 21,500,001 4(2)
Joseph Bradberry(1).......................................... 278,767 2/20/97 2,000,000 4(2)
KCSN Acquisition Company, L.P................................ 1,524,829 2/20/97 10,939,813 4(2)
Heller Equity Capital Corporation............................ 147,772 2/20/97 1,060,185 4(2)
Signature Trees(1)........................................... 55,753 3/14/97 400,000 4(2)
Michael Cerny................................................ 17,250 4/4/97 123,759 4(2)
Michael F. Vukelich.......................................... 68,095 2/20/07 489,497 4(2)
Jerry Halamuda............................................... 12,604 2/20/97 90,604 4(2)
Steven Bookspan.............................................. 8,625 2/20/97 62,000 4(2)
Dave Grimshaw................................................ 4,869 2/20/97 34,998 4(2)
Robert Strange............................................... 1,725 2/20/97 12,400 4(2)
Jim Tsurudome................................................ 1,380 2/20/97 9,920 4(2)
John Negrete................................................. 690 2/20/97 4,960 4(2)
Dennis Bahen................................................. 2,921 2/20/97 21,000 4(2)
Gary Mariani................................................. 17,737 2/20/97 127,502 4(2)
John Strange................................................. 1,380 6/1/97 9,920 4(2)
Mike Proffit................................................. 5,520 6/1/97 39,680 4(2)
Frank Preiss................................................. 207 6/1/97 1,488 4(2)
Dave Sabalka................................................. 2,829 6/1/97 20,336 4(2)
Paul Yeager.................................................. 207,000 6/1/97 1,488,000 4(2)
Tom Dickerson................................................ 13,800 6/1/97 99,200 4(2)
Homer Holler................................................. 3,450 6/1/97 24,800 4(2)
Jay Strass................................................... 3,450 6/1/97 24,800 4(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
RECIPIENT SHARES DATE AMOUNT PAID EXEMPTION
- ------------------------------------------------------------- ---------- --------- ------------- ----------
Tom Harris................................................... 1,380 6/1/97 9,920 4(2)
<S> <C> <C> <C> <C>
Karla Vukelich............................................... 10,350 6/1/97 75,000 4(2)
Gary Costa................................................... 3,450 6/1/97 24,800 4(2)
Glen Hansen.................................................. 6,900 6/1/97 49,600 4(2)
David Harris................................................. 1,380 6/1/97 9,920 4(2)
Patty Nick................................................... 1,380 6/1/97 9,920 4(2)
Steve Pyle................................................... 1,380 6/1/97 9,920 4(2)
Peter Landowski.............................................. 1,380 6/1/97 9,920 4(2)
Peter Fontinos............................................... 1,380 6/1/97 9,920 4(2)
Robert Strange............................................... 1,380 6/1/97 9,920 4(2)
Ron Sims..................................................... 2,070 6/1/97 14,880 4(2)
Ken Lam...................................................... 1,173 6/1/97 8,432 4(2)
Clay Murphy.................................................. 15,862 7/31/97 250,000 4(2)
Fletcher Murphy.............................................. 6,273 7/31/97 100,000 4(2)
Craig Steinhart(2)........................................... 6,900 8/5/97 110,000 4(2)
Conrad Steinhart(2).......................................... 6,900 8/5/97 110,000 4(2)
Jody Wilkes(2)............................................... 3,450 8/5/97 55,000 4(2)
</TABLE>
- ------------------------
(1) Issued in connection with an acquisition valued at $7.17 per share.
(2) Issued in connection with an acquisition valued at $15.94 per share.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Note Underwriting Agreement between the Registrant and the Underwriters.
1.2 -- Form of Unit Underwriting Agreement between the Registrant and the Underwriters.*
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2 -- Amended and Restated Bylaws of the Registrant.**
3.3 -- Form of Certificate of Designation of the Series A Preferred Stock.
4.1 -- Form of Preferred Stock certificate.*
4.2 -- Form of Indenture (including form of Note).
4.3 -- Form of Warrant Agreement (including form of Warrant).*
5.1 -- Opinion of Brownstein Hyatt Farber & Strickland, P.C. regarding legality of securities being
registered.
10.1 -- Amended and Restated Credit Agreement dated as of February 20, 1997.**
10.2 -- Recapitalization and Stock Purchase Agreement among the Registrant, Heller Equity Capital
Corporation ("Heller"), M.F. Vukelich Co., Michael F. Vukelich, Jerry Halamuda, Gary E. Mariani,
Steven J. Bookspan, Richard E. George and KCSN Acquisition Company, L.P. dated as of December 31,
1996.
10.3 -- 8% Subordinated Convertible Note issued to Heller.**
10.4 -- Put/Call Option Agreement dated as of December 31, 1996.**
10.5 -- Stockholders Agreement dated as of December 31, 1996.**
10.6 -- Employee Stockholders Agreement dated as of June 1, 1997.**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
10.7 -- Employment Agreement with Michael F. Vukelich dated as of December 31, 1996.**
10.8 -- Employment Agreement with Jerry L. Halamuda dated as of December 31, 1996.**
10.9 -- 1996 Stock Incentive Plan.**
10.10 -- 1997 Stock Option Plan.**
10.11 -- Special Stock Option Plan.**
10.12 -- Form of Stock Purchase Option.**
10.13 -- Fee Agreement dated as of December 31, 1996 between Registrant and Kohlberg & Company, LLC.**
10.14 -- Merger Agreement dated as of February 20, 1997 for the acquisition of Lone Star Growers Co.**
10.15 -- Real Property Lease between M.F. Vukelich Co. and the Registrant dated December 1, 1995.**
10.16 -- Real Property Lease between Michael F. Vukelich as Guardian for Trisha Vukelich and the Registrant
dated December 31, 1995.**
10.17 -- Asset Purchase Agreement dated as of March 14, 1997 between Color Spot Christmas Trees, Inc. and
Signature Trees.**
10.18 -- 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
10.19 -- Stockholders Repurchase Agreement dated as of December 31, 1996.
10.20 -- Second Amended and Restated Credit Agreement.*
12.1 -- Computation of ratio of earnings to fixed charges.**
21.1 -- Subsidiaries of the Registrant.**
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Moss Adams LLP.
23.3 -- Consent of Jaynes, Reitmeier, Boyd & Therrell, P.C.
23.4 -- Consent of Brownstein Hyatt Farber & Strickland, P.C.. (included in Exhibit 5.1).
24.1 -- Power of Attorney (included in Part II of Registration Statement).**
25.1 -- Statement of Eligibility of Trustee.
27.1 -- Financial Data Schedule.**
</TABLE>
- ------------------------
* To be filed by Amendment.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to
II-4
<PAGE>
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be a part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding), is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pleasant
Hill, State of California, on November 26, 1997.
<TABLE>
<S> <C> <C>
COLOR SPOT NURSERIES, INC
By: /s/ MICHAEL F. VUKELICH
-----------------------------------------
Michael F. Vukelich
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL F. VUKELICH
- ------------------------------ Chief Executive Officer November 26, 1997
Michael F. Vukelich and Director
/s/ JERRY L. HALAMUDA*
- ------------------------------ President and Director November 26, 1997
Jerry L. Halamuda
/s/ PAUL D. YEAGER* Principal Financial
- ------------------------------ Officer and Principal November 26, 1997
Paul D. Yeager Accounting Officer
/s/ JAMES A. KOHLBERG*
- ------------------------------ Director November 26, 1997
James A. Kohlberg
/s/ SAMUEL P. FRIEDER*
- ------------------------------ Director November 26, 1997
Samuel P. Frieder
/s/ RANJIT S. BHONSLE*
- ------------------------------ Director November 26, 1997
Ranjit S. Bhonsle
/s/ GEOFFREY A. THOMPSON*
- ------------------------------ Director November 26, 1997
Geoffrey A. Thompson
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ RICHARD E. GEORGE*
- ------------------------------ Director November 26, 1997
Richard E. George
/s/ GARY E. MARIANI*
- ------------------------------ Director November 26, 1997
Gary E. Mariani
/s/ GEORGE T. BROPHY*
- ------------------------------ Director November 26, 1997
George T. Brophy
</TABLE>
*By: /s/ MICHAEL F. VUKELICH
-------------------------
Michael F. Vukelich November 26, 1997
ATTORNEY-IN-FACT
II-7
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
COLUMN B ADDITIONS
BALANCE AT CHARGED TO COLUMN D COLUMN E
BEGINNING OF COSTS AND DEDUCTION FROM BALANCE AT
COLUMN A PERIOD EXPENSES RESERVES END OF PERIOD
------------- --------------- --------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CLASSIFICATION
Valuation and qualifying accounts deducted from the
assets to which they apply:
For the period July 1, 1997 through
September 25, 1997
Allowance for uncollectible accounts................. $ 1,661 $ 349 $ 30 $ 1,980
------ ------ --- ------
------ ------ --- ------
For the year ended June 30, 1997
Allowance for uncollectible accounts................. 524 1,164 27 1,661
------ ------ --- ------
------ ------ --- ------
For the period September 8, 1995 through
June 30, 1996
Allowance for uncollectible accounts................. 278 139 -- 417
------ ------ --- ------
------ ------ --- ------
For the period January 1, 1995 through
September 8, 1995
Allowance for uncollectible accounts................. 72 241 35 278
------ ------ --- ------
------ ------ --- ------
For the year ended December 31, 1994
Allowance for uncollectible accounts................. 100 (10) 18 72
------ ------ --- ------
------ ------ --- ------
</TABLE>
S-1
<PAGE>
EXHIBIT 1.1
COLOR SPOT NURSERIES, INC.
$85,000,000
__% SENIOR SUBORDINATED NOTES DUE 2007
UNDERWRITING AGREEMENT
___________, 1997
BT Alex. Brown Incorporated
130 Liberty Street
New York, New York 10006
Donaldson, Lufkin & Jenrette Securities Corporation
600 California Street, Suite 1900
San Francisco, California 94108
Ladies and Gentlemen:
Color Spot Nurseries, Inc., a Delaware corporation (the "Company"),
hereby confirms its agreement with each of you (collectively, the
"Underwriters"), as set forth below.
1. THE SECURITIES. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the Underwriters
$85,000,000 aggregate principal amount of its __% Senior Subordinated Notes due
2007 (the "Securities"). The Securities are to be issued under an indenture
(the "Indenture") by and between the Company and U.S. Trust Company of
California, N.A., as trustee (the "Trustee").
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-37335)
with respect to the Securities has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus
<PAGE>
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means (a) the form of prospectus first filed with
the Commission pursuant to Rule 424(b) with respect to the Securities or (b)
the last preliminary prospectus included in the Registration Statement filed
prior to the time it becomes effective or filed pursuant to Rule 424(a) under
the Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Securities, together with the term sheet or abbreviated
term sheet filed with the Commission pursuant to Rule 424(b)(7) under the
Act. Each preliminary prospectus included in the Registration Statement prior
to the time it becomes effective is herein referred to as a "Preliminary
Prospectus."
(b) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than the subsidiaries listed in Exhibit 21 to Item 16(a) of the
Registration Statement. Each of the subsidiaries of the Company as listed in
Exhibit 21 to Item 16(a) of the Registration Statement (collectively, the
"Subsidiaries") has been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Company and each of
the Subsidiaries are duly qualified to transact business in the jurisdictions
set forth opposite their names in Schedule I hereto and, to the best of the
Company's knowledge, in all other jurisdictions in which the conduct of their
business requires such qualification. The outstanding shares of capital stock
of each of the Subsidiaries have been duly authorized and validly issued, are
fully paid and non-assessable and are owned by the Company or another Subsidiary
free and clear of all liens, encumbrances and equities and claims, except as
described in the Registration Statement; and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests in
the Subsidiaries are outstanding. On or prior to the Closing Date, CSN, Inc., a
Delaware corporation, shall be merged with and into the Company and all of the
business operations of the Company are conducted through the Company and its
subsidiaries.
(c) The information set forth under "Capitalization" in the
Prospectus is true and correct. The outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable and were not issued in violation of any preemptive or similar
rights; and except as disclosed in the Prospectus or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus, all of the outstanding
shares of capital stock of the Company and each of the Subsidiaries are free and
clear of all liens, encumbrances, equities and claims or restrictions on
transferability (other than those imposed by the Act and the securities or "Blue
Sky" laws of certain jurisdictions) or voting. Except for the capital stock of
the Subsidiaries, the Company does not own, directly or indirectly, any shares
of stock or any other equity or long-term debt securities or have any equity
interest in any firm, partnership, joint venture or other entity. No holders of
securities of the Company are entitled to have such securities registered under
the Registration Statement.
2
<PAGE>
(d) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Securities nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated therein
by, and will conform to, the requirements of the Act and the Rules and
Regulations. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and do
not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and
will not contain, any untrue statement of material fact; and do not omit, and
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information contained in
or omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by the Underwriters, specifically for
use in the preparation thereof, or to the Statement of Eligibility and
Qualification (Form T-1) under the Trust Indenture Act of 1939, as amended
and the rules and regulations of the Commission thereunder (the "Trust
Indenture Act"), of the Trustee filed as an exhibit to the Registration
Statement.
(e) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, as well as the financial statements, together with
related notes and schedules, of Oda Nursery, Inc., Lone Star Growers Co.,
Summersun Greenhouse Co., Wolfe Greenhouses, LLC, Signature Trees, Peter's
Wholesale Greenhouses, Inc., Sunnyside Plants, Inc. and Cracon Inc.
(collectively the "Acquired Entities") present fairly the financial position and
the results of operations and cash flows of the Company and the consolidated
Subsidiaries and the Acquired Entities, at the indicated dates and for the
indicated periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as otherwise noted
therein, and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary financial and statistical data
included in the Registration Statement presents fairly the information shown
therein and such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company. The pro
forma financial statements and other pro forma financial information included in
the Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described herein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein. No other financial statements or schedules
of the Company or any other entity are required to be included in the
Registration Statement pursuant to any requirement of the Act or any Rules or
Regulations, including Rule 3-05 of Regulation S-X.
3
<PAGE>
(f) Arthur Andersen LLP, Moss Adams LLP and Jaynes, Reitmeier,
Boyd & Therrell, P.C., who have certified certain of the financial statements
filed with the Commission as part of the Registration Statement, are independent
public accountants as required by the Act and the Rules and Regulations.
(g) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of the Subsidiaries might result in
any material adverse change in the business, properties, assets, operations or
financial condition of the Company and of the Subsidiaries taken as a whole or
might prevent the consummation of the transactions contemplated hereby, except
as set forth in the Registration Statement.
(h) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described, subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material in amount. The Company and the
Subsidiaries occupy their leased properties under valid and binding leases
conforming in all material respects to the description thereof set forth in the
Registration Statement.
(i) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due. All tax
liabilities have been adequately provided for in the financial statements of the
Company.
(j) Since the respective dates as of which information is given
in the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, assets,
operations or financial condition of the Company and the Subsidiaries taken as a
whole, whether or not occurring in the ordinary course of business, and there
has not been any material transaction entered into or any material transaction
that is probable of being entered into by the Company or the Subsidiaries, other
than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. The Company and the Subsidiaries have no material contingent
obligations which are not disclosed in the Company's financial statements which
are included in the Registration Statement.
(k) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both will be, in violation of or in
default under its charter or bylaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound or any statute, judgment, decree, order,
rule or regulation applicable to the Company or any Subsidiary and which default
is of material significance in respect of the condition, financial or otherwise,
of the Company and
4
<PAGE>
the Subsidiaries taken as a whole or the business, properties, assets,
operations or financial condition of the Company and the Subsidiaries taken
as a whole. Except with respect to that certain Second Amended and Restated
Credit Facility, dated as of __________, 1997, as amended, the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with
or result in a breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, or of the
charter or by-laws of the Company or any order, rule or regulation applicable
to the Company or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction which
conflict, breach or default could reasonably be expected to have a material
adverse effect on the Company.
(l) The Company and each of the Subsidiaries hold all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor any of
the Subsidiaries has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company and the Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks or
copyrights owned by or licensed to the Company or any Subsidiary.
(m) Neither the Company nor any Subsidiary is an "investment
company" or an affiliated person of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
of the Commission thereunder.
(n) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company and each of the Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(p) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to
5
<PAGE>
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412
or 4971 of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(q) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA (Fla. Stat. ch.
517.075). The Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in Cuba
after the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's
business with Cuba or with any person or affiliate located in Cuba changes in
any material way, the Company will provide the Department notice of such
business or change, as appropriate, in a form acceptable to the Department.
(r) The Securities have been duly authorized by the Company and,
when the Securities are executed by the Company and authenticated by the Trustee
in accordance with the provisions of the Indenture and delivered to and paid for
by the Underwriters in accordance with the terms of this Agreement, the
Securities will be entitled to the benefits of the Indenture and will constitute
valid and legally binding obligations of the Company enforceable in accordance
with their terms, except that the enforcement thereof may be subject to
(i) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally, and (ii) general principles of equity and the discretion of the court
before which proceeding therefor may be brought. The Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under the Indenture; the Indenture has been duly authorized by the Company and
qualified under the Trust Indenture Act and, when executed and delivered by the
Company (assuming the due authorization, execution and delivery by the Trustee),
will constitute a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except that the
enforcement thereof may be subject to (i) bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) general principles of
equity and the discretion of the court before which any proceeding therefor may
be brought.
(s) The Company has all requisite corporate power and authority
to enter into this Agreement, to issue and deliver the Securities and to
consummate the transactions contemplated hereby. This Agreement has been duly
authorized, executed and delivered by the Company. No consent, approval,
authorization or order of any court or governmental agency or body is required
for the performance of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except such as have been
obtained and
6
<PAGE>
such as may be required under state securities or "Blue Sky" laws in
connection with the purchase and distribution of the Securities by the
Underwriters.
(t) Except as provided in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
consensual encumbrances or restrictions on the ability of any Subsidiary (i) to
pay dividends or make any other distributions on such Subsidiary's capital stock
or to pay any indebtedness owed to the Company or any other Subsidiary, (ii) to
make any loans or advances to, or investments in, the Company or any other
Subsidiary, or (iii) to transfer any of its property or assets to the Company or
any other Subsidiary.
(u) Neither the Company nor any agent acting on its behalf has
taken or will take any action that might cause this Agreement or the sale of the
Securities to violate Regulation G, T, U or X of the Board of Governors of the
Federal Reserve System, in each case as in effect, or as the same may hereafter
be in effect, on the Closing Date.
(v) The Securities, the Indenture, and this Agreement will
conform in all material respects to the descriptions thereof in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. On the basis
of the representations, warranties, agreements and covenants herein contained
and subject to the terms and conditions herein set forth, the Company agrees
to issue and sell to the Underwriters, and each Underwriter agrees severally,
but not jointly, to purchase from the Company, at ____% of their principal
amount, $85,000,000 aggregate principal amount of the Securities.
Certificates in definitive form for the Securities that the Underwriters have
agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Underwriters request upon notice to
the Company at least 48 hours prior to the Closing Date, shall be delivered
by or on behalf of the Company to the Underwriters, against payment by or on
behalf of the Underwriters of the purchase price therefor by wire transfer
payable in immediately available funds to the account of the Company. Such
delivery of and payment for the Securities shall be made at the offices of
_______________________________________________________, at 10:00 A.M.,
Eastern Standard Time, on ___________, 1997, or at such other place, time
or date as the Underwriters and the Company may agree upon or as the
Underwriters may determine pursuant to Section 7(a) hereof, such time and
date of delivery against payment being herein referred to as the "Closing
Date." The Company will make such certificate or certificates for the
Securities available for checking and packaging by the Underwriters at the
offices in New York, New York of BT Alex. Brown at least 24 hours prior to
the Closing Date.
4. OFFERING BY THE UNDERWRITERS. After the Registration Statement
becomes effective, the Underwriters propose to offer for sale to the public the
Securities at the price and upon the terms set forth in the Prospectus.
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<PAGE>
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective promptly. If
required, the Company will file the Prospectus and any amendment or supplement
thereto with the Commission in the manner and within the time period required by
Rule 424(b) under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, (i) the Company will
comply with all requirements imposed upon it by the Act, the Rules and
Regulations and the Trust Indenture Act to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) the Company will not file with the Commission the Prospectus or any
amendment or supplement to such Prospectus or any amendment to the Registration
Statement of which the Underwriters shall not previously have been advised and
furnished a copy for a reasonable period of time prior to the proposed filing
and as to which filing the Underwriters shall not have given their consents.
The Company will prepare and file with the Commission, in accordance with the
Act, the Rules and Regulations and the Trust Indenture Act, promptly upon the
reasonable request by the Underwriters or counsel for the Underwriters, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the Underwriters, and will use its best
efforts to cause any such amendment to the Registration Statement to be declared
effective by the Commission promptly. The Company will advise the Underwriters,
promptly after it receives notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Underwriters of each such filing or
effectiveness.
(b) The Company will advise the Underwriters promptly (A) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will deliver to, or upon the order of, the
Underwriters, from time to time, as many copies of any Preliminary Prospectus as
the Underwriters may reasonably request. The Company will deliver to, or upon
the order of, the Underwriters during the period when delivery of a Prospectus
is required under the Act, as many copies of the Prospectus in final form, or as
thereafter amended or supplemented, as the Underwriters may reasonably request.
The Company will deliver to the Underwriters at or before the Closing Date, one
copy of the Registration Statement and all amendments thereto
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<PAGE>
including all exhibits filed therewith, and will deliver to the Underwriters
such number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested), and
of all amendments thereto, as the Underwriters may reasonably request.
(d) If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(e) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(f) The Company will, for a period ending on the date no
Securities are outstanding, deliver to the Underwriters copies of annual reports
and copies of all other documents, reports and information furnished by the
Company to the Trustee or its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission pursuant to
the Act or the Exchange Act. During such time, the Company will deliver to the
Underwriters similar reports with respect to significant subsidiaries, as that
term is defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(g) The Company shall apply the net proceeds of its sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Securities in such a manner as
would require the Company or any of the Subsidiaries to register as an
"investment company" under the 1940 Act and the rules and regulations
thereunder.
(i) The Company will cooperate with the Underwriters in
arranging for the qualification of the Securities for offering and sale under
the securities or "Blue Sky" laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities; PROVIDED, HOWEVER,
that in connection therewith the Company shall not be required to
9
<PAGE>
qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction.
(j) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared, a copy of any unaudited
interim consolidated financial statements of the Company for any period
subsequent to the period covered by its most recent financial statements
appearing in the Registration Statement and Prospectus.
(k) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
6. EXPENSES. The Company agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 10 hereof, including all costs and expenses
incident to (i) the printing, word processing or other production of documents
with respect to the transactions, including any costs of printing the
registration statement originally filed with respect to the Securities and any
amendment thereto, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, and any "Blue Sky" memoranda, (ii) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company,
(iv) preparation (including printing), issuance and delivery to the Underwriters
of the Securities, including trustee's fees, (v) the qualification of the
Securities under state securities and "Blue Sky" laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto,
(vi) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Securities (including the fees,
disbursements and charges of counsel to the Underwriters in connection
therewith), (vii) expenses of the Company in connection with any meetings with
prospective investors in the Securities, (viii) fees and expenses of the
Trustee, including fees and expenses of counsel and (ix) any fees charged by
investment rating agencies for the rating of the Securities. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 7 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 10 hereof or because of
any failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by the Underwriters, the Company
will reimburse the Underwriters upon demand (accompanied by documentation) for
all out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by the Underwriters in connection with the proposed purchase
and sale of the Securities.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of
the Underwriters to purchase and pay for the Securities shall, in their sole
discretion, be subject to the following conditions:
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<PAGE>
(a) If the registration statement originally filed with respect
to the Securities or any amendment thereto filed prior to the Closing Date has
not been declared effective as of the time of execution hereof, the Registration
Statement or such amendment shall have been declared effective not later than
10:00 a.m., New York City time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission, or such later time and date as shall have been consented to by the
Underwriters; if required, the Prospectus and any amendment or supplement
thereto shall have been filed in accordance with Rule 424(b) under the Act; no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto or the qualification of the Indenture under the Trust
Indenture Act shall have been issued and no proceedings for those purposes shall
have been instituted or, to the knowledge of the Company or the Underwriters,
threatened or are contemplated by the Commission; and the Company shall have
complied with or satisfactorily responded to any request of the Commission for
additional information.
(b) The Underwriters shall have received an opinion in form and
substance satisfactory to the Underwriters, dated the Closing Date, of
Brownstein, Hyatt, Farber & Strickland, P.C., counsel for the Company,
substantially in the form of Exhibit A hereto.
(c) The Underwriters shall have received an opinion, dated the
Closing Date, of Latham & Watkins, counsel for the Underwriters, with respect to
certain legal matters relating to this Agreement, and such other related matters
as the Underwriters may require. In rendering such opinion, Latham & Watkins
shall have received and may rely upon such certificates and other documents and
information as they may reasonably request to pass upon such matters. In
addition, in rendering their opinion, Latham & Watkins may state that their
opinion is limited to matters of New York and Delaware General Corporation Law
and federal law.
(d) The Underwriters shall have received from Arthur
Andersen LLP, Moss Adams LLP and Jaynes, Reitmeier, Boyd & Therell, P.C., a
letter or letters dated, respectively, the date hereof and the Closing Date,
each in form and substance satisfactory to the Underwriters.
(e) The representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and as of the Closing Date; the Company shall have performed all
covenants and agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing Date; and subsequent
to the date of the most recent financial statements in the Prospectus, there
shall have been no material adverse change in the business, properties, assets,
operations or financial condition of the Company and the Subsidiaries, taken as
a whole, except as set forth in, or contemplated by, the Registration Statement
and the Prospectus.
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<PAGE>
(f) The sale of the Securities by the Company hereunder shall
not be enjoined (temporarily or permanently) on the Closing Date.
(g) Subsequent to the effective date of the Registration
Statement, there shall not have occurred any material adverse change, or any
event that would have a material adverse effect on the business, properties,
assets, operations or financial condition of the Company and the Subsidiaries,
taken as a whole.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except in each case
as described in or as contemplated by the Prospectus, none of the Company or any
of the Subsidiaries shall have incurred any liabilities or obligations, direct
or contingent (other than in the ordinary course of business) that are material
to the Company and the Subsidiaries, taken as a whole, or entered into any
transactions not in the ordinary course of business that are material to the
business, properties, assets, operations or financial condition of the Company
and the Subsidiaries, taken as a whole, and, other than as contemplated by the
Prospectus, there shall not have been any change in the capital stock or long-
term indebtedness of the Company or the Subsidiaries that is material to the
business, properties, assets, operations or financial condition of the Company
and the Subsidiaries, taken as a whole.
(i) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the conduct of the
business and operations of the Company or any of the Subsidiaries has not been
interfered with by strike, fire, flood, hurricane, accident or other calamity
(whether or not insured) or by any court or governmental action, order or
decree, and, except as otherwise stated therein, the properties of the Company
or any of the Subsidiaries have not sustained any loss or damage (whether or not
insured) as a result of any such occurrence, except any such interference, loss
or damage which would not have a material adverse effect on the business,
properties, assets, operations or financial condition of the Company and the
Subsidiaries, taken as a whole.
(j) The Underwriters shall have received a certificate, dated
the Closing Date, signed on behalf of the Company by its Chief Executive Officer
or President, and the Chief Financial Officer of the Company, on behalf of the
Company, to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct in all material respects as of the date
hereof and as if made on and as of the Closing Date, and the Company has
performed all covenants and agreements and satisfied hereunder all
conditions on its part to be performed or satisfied hereunder at or prior
to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto or the qualification of the
Indenture under the Trust Indenture Act has been issued, and no proceedings
for those purposes have been instituted or, to the knowledge of the
Company, threatened or are contemplated by the Commission;
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<PAGE>
(iii) Subsequent to the effective date of the
Registration Statement, there has not occurred any event or events that,
individually or in the aggregate, would have a material adverse effect on
the business, properties, assets, operations or financial condition of the
Company and the Subsidiaries, taken as a whole;
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except in each case as described in or as contemplated by the Prospectus,
none of the Company or any of the Subsidiaries has incurred any liabilities
or obligations, direct or contingent (other than in the ordinary course of
business) that are material to the Company and the Subsidiaries, taken as a
whole, or entered into any transactions not in the ordinary course of
business that are material to the business, properties, assets, operations
or financial condition of the Company and the Subsidiaries, taken as a
whole, and, other than as contemplated by the Prospectus, there shall not
have been any change in the capital stock or long-term indebtedness of the
Company or the Subsidiaries that is material to the business, properties,
assets, operations or financial condition of the Company and the
Subsidiaries, taken as a whole;
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
conduct of the business and operations of the Company or any of the
Subsidiaries has not been interfered with by strike, fire, flood,
hurricane, accident or other calamity (whether or not insured) or by any
court or governmental action, order or decree, and, except as otherwise
stated therein, the properties of the Company or any of the Subsidiaries
have not sustained any loss or damage (whether or not insured) as a result
of such occurrence, except any such interference, loss or damage which
would not have a material adverse effect on the business, properties,
assets, operations or financial condition of the Company and the
Subsidiaries, taken as a whole; and
(vi) The sale of the Securities by the Company hereunder has
not been enjoined (temporarily or permanently).
On or before the Closing Date, the Underwriters and counsel for the
Underwriters shall have received such further documents, opinions, certificates
and schedules or instruments relating to the business, corporate, legal and
financial affairs of the Company as they shall have heretofore reasonably
requested from the Company.
All such opinions, certificates, letters, schedules, documents or
instruments delivered pursuant to this Agreement will comply with the provisions
hereof only if they are reasonably satisfactory in all material respects to the
Underwriters and counsel for the Underwriters. The Company shall furnish to the
Underwriters such conformed copies of such opinions, certificates, letters,
schedules, documents and instruments in such quantities as the Underwriters
shall reasonably request.
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<PAGE>
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the
Underwriters, and each person, if any, who controls the Underwriters within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriters or such controlling person may become subject under the Act, the
Exchange Act or otherwise, insofar as any such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of any
material fact contained in (A) the registration statement originally filed
with respect to the Securities or any amendment thereto or any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto or (B)
any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify the
Securities under the securities or "Blue Sky" laws thereof or filed with
the Commission or any securities association or securities exchange (each
an "Application"); or
(ii) the omission or alleged omission to state, in such
registration statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading,
and will reimburse, as incurred, the Underwriters and each such controlling
person for any legal or other expenses incurred by the Underwriters or such
controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, the Company will not be liable
in any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application in reliance upon and in conformity
with written information furnished to the Company by the Underwriters
specifically for use therein; and PROVIDED, FURTHER, that the Company will not
be liable to the Underwriters or any person controlling the Underwriters with
respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from the Underwriters in reliance upon the Preliminary
Prospectus but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
so amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5(c) of this Agreement. This
indemnity agreement will be in addition to any liability that the Company may
otherwise have to the indemnified parties. The Company shall
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<PAGE>
not be liable under this Section 8 for any settlement of any claim or action
effected without its consent, which shall not be unreasonably withheld.
(b) The Underwriters will indemnify and hold harmless each of
the Company, its directors, its officers who signed the Registration Statement
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act against any losses, claims,
damages or liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act, the Exchange Act, or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or (ii) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by the
Underwriters specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action in respect thereof. This indemnity agreement will
be in addition to any liability that the Underwriters may otherwise have to the
indemnified parties. The Underwriters shall not be liable under this Section 8
for any settlement of any claim or action effected without its consent, which
shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action for which such indemnified
party is entitled to indemnification under this Section 8, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party (i) will not
relieve it from any liability under paragraph (a) or (b) above unless and to the
extent it did not otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses and
(ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraphs (a) and (b) above. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if (i) the use
of counsel chosen by the indemnifying party to represent the indemnified party
would present such counsel with a conflict of interest, (ii) the defendants in
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have been advised by counsel that there may be
one or more legal defenses available to it and/or other indemnified parties that
15
<PAGE>
are different from or additional to those available to the indemnifying party,
or (iii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action, then, in each
such case, the indemnifying party shall not have the right to direct the defense
of such action on behalf of such indemnified party or parties and such
indemnified party or parties shall have the right to select separate counsel to
defend such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the immediately preceding sentence (it being understood, however,
that in connection with such action the indemnifying party shall not be liable
for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the Underwriters in the case of paragraph (a) of this Section 8 or
the Company in the case of paragraph (b) of this Section 8, representing the
indemnified parties under such paragraph (a) or paragraph (b), as the case may
be, who are parties to such action or actions) or (ii) the indemnifying party
has authorized in writing the employment of counsel for the indemnified party at
the expense of the indemnifying party. [After such notice from the indemnifying
party to such indemnified party, the indemnifying party will not be liable for
the costs and expenses of any settlement of such action effected by such
indemnified party without the consent of the indemnifying party, unless such
indemnified party waived in writing its rights under this Section 8, in which
case the indemnified party may effect such a settlement without such consent.]
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unavailable or insufficient
to hold harmless an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof), each indemnifying party, in
order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof). The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
16
<PAGE>
relates to information supplied by the Company on the one hand, or the
Underwriters on the other, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Company and the Underwriters agree that it would not be equitable if the amount
of such contribution were determined by pro rata or per capita allocation or by
any other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriters
shall not be obligated to make contributions hereunder that in the aggregate
exceed the total underwriting discounts and commissions received by the
Underwriters under this Agreement, less the aggregate amount of any damages that
the Underwriters have otherwise been required to pay by reason of the untrue or
alleged untrue statements or the omissions or alleged omissions to state a
material fact, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this paragraph (d), each person, if any, who controls the Underwriters within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall
have the same rights to contribution as the Underwriters, and each director of
the Company, each officer of the Company who signed the Registration Statement
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, shall have the same
rights to contribution as the Company.
9. SURVIVAL CLAUSE. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriters or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
10. TERMINATION.
(a) This Agreement may be terminated in the sole discretion of
the Underwriters by notice to the Company given prior to the Closing Date in the
event that the Company shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to the Closing Date:
(i) the Company shall have sustained any loss or
interference with respect to its businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance,
or from any labor dispute or any legal or governmental proceeding, which
loss or interference, in the sole judgment of the Underwriters, has had or
has a material adverse effect the business, properties, assets, operations
or financial condition of the Company and the Subsidiaries, taken as a
whole,
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or there shall have been, in the sole judgment of the Underwriters,
any material adverse change, or any development involving a prospective
material adverse change (including without limitation a change in
management or control of the Company), in the business, properties, assets,
operations or financial condition of the Company and the Subsidiaries,
taken as a whole, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in securities generally on the New York Stock
Exchange, American Stock Exchange or the Nasdaq National Market shall have
been suspended or minimum or maximum prices shall have been established on
any such exchange or trading in securities of the Company shall have been
suspended;
(iii) a banking moratorium shall have been declared by
New York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, or (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or any other national or international calamity
or emergency, or (C) any material change in the financial markets of the
United States which, in the sole judgment of the Underwriters, makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities as contemplated by the Registration Statement,
as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 10
shall be without liability of any party to any other party except as provided in
Section 9 hereof.
11. INFORMATION SUPPLIED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page of the Prospectus, the
stabilization legend on the page following the cover page of the Prospectus and
the first, second, third, fourth, fifth and sixth paragraphs under the heading
"Underwriting" in the Prospectus (to the extent such statements relate to the
Underwriters) constitute the only information furnished by the Underwriters to
the Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters
confirm that such statements (to the extent such statements relate to the
Underwriters) are correct.
12. NOTICES. All communications hereunder shall be in writing and,
if sent to the Underwriters, shall be mailed or delivered or telecopied and
confirmed in writing to (i) BT Alex. Brown Incorporated, 300 South Grand Avenue,
41st Floor, Los Angeles, California 90071, Attention: Corporate Finance
Department; and (ii) Donaldson, Lufkin & Jenrette Securities Corporation,
600 California Street, Suite 1900, San Francisco, California 94108; if sent to
the Company, shall be mailed or delivered or telecopied and confirmed in writing
to the Company at 3478 Buskirk Avenue, Pleasant Hill, California 94523,
Attention: Michael Vukelich; with a copy to Brownstein Hyatt Farber &
Strickland, P.C., 410 Seventeenth Street, 22nd Floor, Denver, Colorado 80202,
Attention: Steven S. Siegel, Esq.
18
<PAGE>
13. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Underwriters, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained; this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company contained in Section 8 of this Agreement shall also be for the benefit
of any person or persons who control the Underwriters within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities
of the Underwriters contained in Section 8 of this Agreement shall also be for
the benefit of the directors of the Company, its officers who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Securities from the Underwriters will be deemed a successor because
of such purchase.
14. APPLICABLE LAW. The validity and interpretation of this
agreement, and the terms and conditions set forth herein shall be governed by
and construed in accordance with the laws of the state of New York, without
giving effect to any provisions relating to conflicts of law.
15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between the Company
and the Underwriters.
Very truly yours,
COLOR SPOT NURSERIES, INC.
By:
---------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
BT ALEX. BROWN INCORPORATED
By:
---------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------
Name:
Title:
20
<PAGE>
Exhibit A
Opinion of Brownstein, Hyatt, Farber & Strickland, P.C.
(a) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; to the knowledge of such
counsel, based solely upon a review of the corporate records of the Company, the
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the subsidiaries listed in Exhibit 21 to
Item 16(a) of the Registration Statement (the "Subsidiaries"); each of the
Subsidiaries has been duly organized and is validly existing as a corporation or
limited partnership in good standing under the laws of the jurisdiction of its
incorporation, with corporate or partnership power and authority to own or lease
its properties and conduct its business as described in the Registration
Statement (provided that such counsel need not express any opinion as to the
organization of Oda Nursery, Inc.); the Company and each of the Subsidiaries are
duly qualified to transact business in the jurisdictions set forth on Schedule I
hereto; the outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued and are fully paid and nonassessable
and, based solely upon the review of the corporate or partnership records of
each such Subsidiary, are owned by the Company or a Subsidiary; to the knowledge
of such counsel, based solely upon the review of the corporate or partnership
records of each such Subsidiary, the outstanding shares of capital stock of each
of the Subsidiaries are owned free and clear of all liens, encumbrances and
equities and claims (other than those in favor of Credit Agricole Indosuez, as
agent for the Company's senior lenders), and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(b) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock (i) issued in connection with that certain
Recapitalization dated as of December 31, 1996 (the "Recapitalization") and (ii)
issued since the date of the Recapitalization have been duly authorized and
validly issued and are fully paid and nonassessable. Based soley upon the
review of the Company's and the Subsidiaries' minute books, to such counsel's
knowlege, except as otherwise stated in the Prospectus, all of the outstanding
shares of capital stock of the Subsidiaries are owned, directly or indirectly,
by the Company, free and clear of all perfected security interests and, to the
knowledge of such counsel, free and clear of all other restrictions on
transferability (other than those imposed by the Act and the securities or "Blue
Sky" laws of certain jurisdictions) or voting.
(c) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, based solely on the review of the corporate
minute book of the Company, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company
A-1
<PAGE>
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or
any securities convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of such stock; and except as described
in the Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, any shares of Common Stock or the right to have any shares of
Common Stock or other securities of the Company included in the Registration
Statement or the right, as a result of the filing of the Registration
Statement, to require registration under the Act of any shares of Common
Stock or other securities of the Company.
(d) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the Act;
and any required filing of the Prospectus pursuant to Rule 424(b) under the Act
has been made in accordance with Rules 424(b) and 430A under the Act.
(e) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules therein, including the notes thereto and supporting
schedules and other financial and statistical data included therein or omitted
therefrom, or with respect to the Form T-1).
(f) The statements under the captions "Risk Factors--Shares
Eligible for Future Sale," "Management--Compensation Committee Interlocks and
Insider Participation," "Management--Limitation on Directors' Liability and
Indemnification," "Description of Capital Stock," "Description of the Notes" and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with respect to
such documents and matters.
(g) The information required to be set forth in the Registration
Statement in answer to Items 14 and 15 of Form S-1 to such counsel's knowledge
is accurately and adequately set forth therein in all material respects.
(h) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(i) The execution and delivery of the Underwriting Agreement and
the consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the charter or bylaws of the Company, or any
agreement filed as an exhibit to the Registration Statement which the Company or
any of the Subsidiaries may be bound or of any federal or New York statute, rule
or regulation or Delaware General Corporation Law known to such counsel to be
applicable
A-2
<PAGE>
to the Company (other than federal or state securities laws, which are
specifically addressed elsewhere herein) which conflict, breach or default
could reasonably be expected to have a material adverse effect on the Company.
(j) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company.
(k) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body by the Company is necessary in connection with the execution
and delivery of the Underwriting Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the NASD or
as required by state securities and Blue Sky laws as to which such counsel need
express no opinion) except such as have been obtained or made, specifying the
same.
(l) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by the Underwriting Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an "investment company" or an affiliated person of, or
"promoter" or "principal underwriter" for, an "investment company," as such
terms are defined in the 1940 Act and the rules and regulations thereunder.
(m) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under the Indenture. The
Indenture has been duly and validly authorized, executed and delivered by the
Company and (assuming due authorization, execution and delivery by the Trustee)
is the legally valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms.
(n) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under the Notes. The Notes,
when executed and authenticated in accordance with the terms of the Indenture
and delivered to and paid for by the Underwriters in accordance with the terms
of the Underwriting Agreement, will be legally valid and binding obligations of
the Company, enforceable against the Company in accordance with their terms.
(o) The Indenture has been duly qualified under the Trust
Indenture Act.
(p) Neither the issuance, sale and delivery of the Notes, nor
the application of the proceeds thereof by the Company as set forth in the
Prospectus, will violate Regulations G, T, U or X promulgated by the Board of
Governors of the Federal Reserve System.
(q) CSN, Inc., a Delaware corporation, has been merged with and
into the Company, with the Company surviving such merger, under the General
Corporation Law of the State of Delaware.
A-3
<PAGE>
In addition to the matters set forth above, such counsel shall also
furnish a separate written opinion to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A under the
Act) and as of the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date, contained an untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no opinion as to
financial statements and related schedules therein, including the notes thereto
and supporting schedules and other financial and statistical data included
therein or omitted therefrom, or with respect to the Form T-1). With respect to
such statement, such counsel may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
A-4
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
COLOR SPOT NURSERIES, INC.
Color Spot Nurseries, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies
as follows:
1. The name of the Corporation is Color Spot Nurseries, Inc. The
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of Delaware on August 17, 1995. A Restated Certificate of
Incorporation was filed with the Secretary of State of Delaware on
December 31, 1996.
2. This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the Certificate of this Corporation as more
particularly set forth on EXHIBIT A.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is restated as more particularly set forth on EXHIBIT A.
4. This Amended and Restated Certificate of Incorporation was duly
adopted by written consent of the stockholders in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware.
5. This Amended and Restated Certificate of Incorporation shall be
effective on the ___ day of , 1997.
IN WITNESS WHEREOF, Color Spot Nurseries, Inc. has caused this Certificate
to be signed by MICHAEL F. VUKELICH, its Chief Executive Officer, this ___ day
of , 1997.
COLOR SPOT NURSERIES, INC.
By
-------------------------------------
MICHAEL F. VUKELICH
Chief Executive Officer
1
<PAGE>
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COLOR SPOT NURSERIES, INC.
ARTICLE I
The name of the corporation is COLOR SPOT NURSERIES, INC. (hereinafter
referred to as the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the state of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is THE CORPORATION TRUST
COMPANY.
ARTICLE III
The nature of the business of the Corporation and the purposes for
which it is organized are to engage in any business and lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware and to possess and employ all powers and privileges now or
hereafter granted or available under the laws of the State of Delaware to such
corporations.
ARTICLE IV
Section 1. AUTHORIZED SHARES. The number of shares of capital
stock of all classes which the Corporation shall have authority to issue is
55,000,000 shares, consisting of 50,000,000 shares of Common Stock, par value
$0.001 per share (the "Common Stock"), and 5,000,000 shares of Preferred Stock,
par value $0.01 per share (the "Preferred Stock").
Section 2. DESIGNATIONS, POWERS, AND PREFERENCES. The
designations and the powers, preferences and rights, and the qualifications,
limitations or restrictions of the shares of each class of stock are as follows:
A. PREFERRED STOCK. Shares of Preferred Stock may be issued in
one or more series at such time or times as the Board of Directors may
determine. All shares of any one series of Preferred Stock shall be of equal
rank and identical in all respects except as to the dates from and after which
dividends thereon shall cumulate, if cumulative. The number of authorized
shares of Preferred Stock may be increased or decreased by the affirmative vote
of a majority of the capital
1
<PAGE>
stock of the Corporation entitled to vote without the separate vote of holders
of Preferred Stock as a class. Subject to the limitations hereof and the
limitations prescribed by law, the Board of Directors of the Corporation (the
"Board of Directors") is expressly authorized to fix from time to time, by
resolution or resolutions adopted prior to the issuance of and providing for the
establishment or issuance of any series of Preferred Stock, the designation of
such series and the powers, preferences and rights of such series, and the
qualifications, limitations or restrictions thereof. The authority of the Board
of Directors with respect to each such series shall include, but shall not be
limited to, determination of the following:
(i) The distinctive serial designation and number of
shares comprising each such series (provided that the aggregate number of
shares constituting all series of Preferred Stock shall not exceed the total
number of authorized shares of Preferred Stock pursuant to Section 1 of this
Article IV), which number may (except where otherwise provided by the Board
of Directors in creating such series) be increased or decreased (but not
below the number of shares of such series then outstanding) from time to time
by action of the Board of Directors;
(ii) The rate of dividends, if any, on the shares of
that series, whether dividends shall be noncumulative, cumulative to the
extent earned or cumulative (and, if cumulative, from which date or dates),
whether dividends shall be payable in cash, property, or rights, or in shares
of the Corporation's capital stock, and the relative priority, if any, of
payment of dividends on shares of that series over shares of any other series;
(iii) Whether the shares of that series shall be
redeemable and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, the event or
events upon or after which they shall be redeemable or at whose option they
shall be redeemable, and the amount per share payable upon redemption (which
amount may vary under different conditions and at different redemption dates)
or the property or rights, including securities of any other corporation,
payable upon redemption;
(iv) Whether that series shall have a sinking fund for
the redemption or purchase of shares of that series and, if so, the terms and
amounts payable into such sinking fund;
(v) The rights to which the holders of the shares of
that series shall be entitled in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, and the relative
rights of priority, if any, of payment of shares of that series in any such
event;
(vi) Whether the shares of that series shall be
convertible into or exchangeable for any other securities and, if so, the
terms and conditions of such conversion or exchange, including the rate or
rates of conversion or exchange, the date or dates upon or after which they
shall be convertible or exchangeable or at whose option they shall be
convertible or exchangeable, and the method, if any, of adjusting the rates
of conversion or exchange in the event of a stock split, stock dividend,
combination or reclassification of shares or similar event;
2
<PAGE>
(vii) Whether the issuance of any additional shares of
such series shall be subject to restrictions, or whether any shares of any other
series shall be subject to restrictions as to issuance, or as to the powers,
preferences or rights of any such other series;
(viii) Whether the shares of that series shall have
voting rights in addition to the voting rights provided by law, and, if so,
the terms of such voting rights, including, without limitation, the authority
to confer multiple votes per share, voting rights as to specified matters or
issues or, subject to the provisions of this Second Amended and Restated
Certificate of Incorporation, voting rights to be exercised either together
with holders of Common Stock as a single class, or independently as a
separate class;
(ix) The rights of the holders of the shares of that
series to elect additional directors of the Corporation under specified
circumstances and the provisions under which such additional directors so
elected shall serve; and
(x) Any other preferences, privileges and powers and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Second Amended and Restated Certificate of Incorporation and to the full
extent now or hereafter permitted by the laws of the State of Delaware.
B. COMMON STOCK.
Subject to all of the rights of the Preferred Stock, and except as may
be provided with respect to the Preferred Stock herein, by law or by the Board
of Directors pursuant to this Article IV:
(i) Dividends may be declared and paid or set apart
for payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends;
(ii) The holders of Common Stock shall have the right
to vote for the election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote; and
(iii) Upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
shall be distributed pro rata to the holders of the Common Stock in accordance
with their respective rights and interests.
C. PREEMPTIVE RIGHTS. No holder of any stock of the
Corporation of any class shall have the preemptive right to subscribe for or
purchase any part of any new or additional issue of stock of any class
whatsoever of the Corporation, or of securities convertible into or exchangeable
3
<PAGE>
for stock of any class whatsoever, whether now or hereafter authorized, or
whether issued for cash or other consideration or by way of dividend.
ARTICLE V
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. For the management of the
business and for the conduct of the affairs of the Corporation, and in further
creation, definition, limitation and regulation of the powers of the Corporation
and of its directors and of its stockholders, it is further provided:
Section 1. ELECTIONS OF DIRECTORS. Elections of directors need
not be by written ballot unless the Bylaws of the Corporation shall so provide.
Section 2. NUMBER, ELECTION, AND TERMS OF DIRECTORS. Except as
otherwise fixed pursuant to the provisions of Article IV hereof relating to the
rights of the holders of any class or series of Preferred Stock to elect
additional directors under specified circumstances, the number of directors of
the Corporation shall be fixed from time to time exclusively by resolutions
adopted by the Board of Directors; provided, however, that no decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
The directors, other than those who may be elected by the holders of
any class or series of Preferred Stock, shall be classified, with respect to the
time for which they severally hold office, into three (3) classes, as nearly
equal in number as possible, as shall be provided in the manner specified in the
Bylaws of the corporation, Class I to hold office initially for a term expiring
at the annual meeting of stockholders to be held during the fiscal year ending
in 1998, Class II to hold office initially for a term expiring at the annual
meeting of stockholders to be held during the fiscal year ending in 1999, and
Class III to hold office initially for a term expiring at the annual meeting of
stockholders to be held during the fiscal year ending in 2000, with the members
of each class to hold office until their successors are elected and qualified.
At each annual meeting of the stockholders of the Corporation, the successors to
the class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election.
Section 3. STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES. Advance
notice of nominations for the election of directors, other than by the Board of
Directors or a committee thereof, shall be given in the manner provided in the
Bylaws.
Section 4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as
otherwise fixed pursuant to the provisions of Article IV hereof relating to the
rights of the holders of any class or series of Preferred Stock to elect
directors under specified circumstances, newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled solely by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors, or by a sole remaining director. Any director elected in
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<PAGE>
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such directors successor shall have
been elected and qualified, or until such director's earlier resignation or
removal.
Section 5. STOCKHOLDER ACTION. Any action required or permitted
to be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of such stockholders.
Except as otherwise prescribed by law and subject to the rights of
holders or any class or series of Preferred Stock, special meetings of
stockholders of the Corporation, for any purpose or purposes, may be called only
by the Chairman of the Board, if there be one, the President, or the Board of
Directors pursuant to a resolution approved by a majority of the entire Board of
Directors and shall be called by the Secretary or any Assistant Secretary, if
there be one, at the request in writing of a majority of the entire Board of
Directors or by holders of outstanding stock of the Corporation having not less
than the minimum number of votes that would be necessary to authorize such
action.
Section 6. BYLAW AMENDMENTS. The Board of Directors shall have
power to make, alter, amend and repeal the Bylaws (except so far as the Bylaws
adopted by the stockholders shall otherwise provide). Any Bylaws made by the
Board of Directors under the powers conferred hereby may be altered, amended or
repealed by the Board of Directors or by the stockholders of the Corporation.
Notwithstanding the foregoing and anything contained in this Second Amended and
Restated Certificate of Incorporation to the contrary, Section 7 of Article II
and Section 3 of Article III of the Bylaws shall not be altered, amended or
repealed and no provision inconsistent therewith shall be adopted without the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
the shares of capital stock of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock"), voting together as a single class.
Section 7. REMOVAL OF DIRECTORS. Any director, other than those
who may be elected by the holders of any class or series of Preferred Stock, or
the entire Board of Directors, may be removed from office only for cause by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of Voting Stock, voting together as a single
class.
Section 8. AMENDMENT, REPEAL, ETC. Notwithstanding any other
provision of this Second Amended and Restated Certificate of Incorporation or
the Bylaws (and notwithstanding the fact that a lesser percentage may be
specified by law), the affirmative vote of the holders of at least 66 2/3% of
the voting power of all the then outstanding shares of Voting Stock, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with, or repeal, this Article V or any provision hereof.
ARTICLE VI
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The Corporation expressly elects to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
ARTICLE VII
SECTION 1. NATURE OF INDEMNITY. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article VII, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article VII shall
be a contract right and, subject to Sections 2 and 5 of this Article VII, shall
include the right to payment by the Corporation of the expenses incurred in
defending any such proceeding in advance of its final disposition. The
Corporation may, by action of the Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 2. PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Any indemnification of a director or officer of the Corporation under Section 1
of this Article VII or advance of expenses under Section 5 of this Article VII
shall be made promptly, and in any event within 30 days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
VII is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within 30 days, the right to indemnification or
advances as granted by this Article VII shall be enforceable by the director or
officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to
6
<PAGE>
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of such defense
shall be on the Corporation. Neither the failure of the Corporation (including
the Board of Directors, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
SECTION 3. NONEXCLUSIVITY OF ARTICLE VII. The rights to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Article VII shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of this Second Amended and Restated Certificate of
Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors
or otherwise.
SECTION 4. INSURANCE. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the Corporation or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by him
or her in any such capacity, whether or not the Corporation would have the power
to indemnify such person against such liability under this Article VII.
SECTION 5. EXPENSES. Expenses incurred by any person described in
Section 1 of this Article VII in defending a proceeding shall be paid by the
Corporation in advance of such proceeding's final disposition unless otherwise
determined by the Board of Directors in the specific case upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
SECTION 6. EMPLOYEES AND AGENTS. Persons who are not covered by the
foregoing provisions of this Article VII and who are or were employees or agents
of the Corporation, or who are or were serving at the request of the Corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the Board of Directors.
SECTION 7. CONTRACT RIGHTS. The provisions of this Article VII shall
be deemed to be a contract right between the Corporation and each director or
officer who serves in any such capacity
7
<PAGE>
at any time while this Article VII and the relevant provisions of the General
Corporation Law of the State of Delaware or other applicable law are in effect,
and any repeal or modification of this Article VII or any such law shall not
affect any rights or obligations then existing with respect to any state of
facts or proceeding then existing.
SECTION 8. MERGER OR CONSOLIDATION. For purposes of this Article
VII, references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
VII with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.
SECTION 9. LIMITATION OF LIABILITY. To the fullest permitted by the
General Corporation Law of the State of Delaware, no director shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
In accordance with the provisions of Section 103(d) of the General
Corporation Law of the State of Delaware, this Second Amended and Restated
Certificate of Incorporation shall become effective upon its filing date.
8
<PAGE>
IN WITNESS WHEREOF, Color Spot Nurseries, Inc. has caused this Amended
and Restated Certificate of Incorporation to be signed and acknowledged by its
President and attested by its Secretary and its corporate seal to be affixed
hereto this ___ day of September, 1997.
COLOR SPOT NURSERIES, INC.
By:
-----------------------------------------
Michael Vukelich, Chief Executive Officer
ATTEST:
----------------------------------
Karla Vukelich, Secretary
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COLOR SPOT NURSERIES, INC.
AND
U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
AS TRUSTEE
-------------------------------
INDENTURE
DATED AS OF DECEMBER __, 1997
-------------------------------
$85,000,000
___% SENIOR SUBORDINATED NOTES
DUE 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE TABLE
TIA Indenture
Section Section
- ---------- ----------
310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
310(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
310(b)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11
311(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11
312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.6
313(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.6
313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8.6
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.9
318(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be
a part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S><C>
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE. . . . . . . . . . . . . . . . . . 1
Section 1.1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Incorporation by Reference of TIA. . . . . . . . . . . . . . . . . . .19
Section 1.3. Rules of Construction. . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE II. THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Section 2.1. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Section 2.2. Execution and Authentication.. . . . . . . . . . . . . . . . . . . . .21
Section 2.3. Registrar and Paying Agent.. . . . . . . . . . . . . . . . . . . . . .22
Section 2.4. Paying Agent To Hold Assets in Trust.. . . . . . . . . . . . . . . . .22
Section 2.5. Holder Lists.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Section 2.6. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . . . . .23
Section 2.7. Replacement Securities.. . . . . . . . . . . . . . . . . . . . . . . .24
Section 2.8. Outstanding Securities.. . . . . . . . . . . . . . . . . . . . . . . .24
Section 2.9. Treasury Securities. . . . . . . . . . . . . . . . . . . . . . . . . .25
Section 2.10. Temporary Securities. . . . . . . . . . . . . . . . . . . . . . . . .25
Section 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Section 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 2.13. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
ARTICLE III. REDEMPTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 3.1. Notices to Trustee.. . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 3.2. Selection of Securities To Be Redeemed.. . . . . . . . . . . . . . . .26
Section 3.3. Notice of Redemption.. . . . . . . . . . . . . . . . . . . . . . . . .27
Section 3.4. Effect of Notice of Redemption.. . . . . . . . . . . . . . . . . . . .28
Section 3.5. Deposit of Redemption Price. . . . . . . . . . . . . . . . . . . . . .28
Section 3.6. Securities Redeemed in Part. . . . . . . . . . . . . . . . . . . . . .28
ARTICLE IV. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 4.1. Securities Subordinated to Senior Debt.. . . . . . . . . . . . . . . .28
Section 4.2. Suspension of Payment When Senior Debt in Default. . . . . . . . . . .29
Section 4.3. Securities Subordinated to Prior Payment of All Senior Debt on
Dissolution, Liquidation or Reorganization of Company. . . . . . . . . . . . .30
Section 4.4. Holders To Be Subrogated to Rights of Holders of Senior
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Section 4.5. Obligations of the Company Unconditional.. . . . . . . . . . . . . . .32
Section 4.6. Trustee Entitled To Assume Payments Not Prohibited in
Absence of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
<PAGE>
Section 4.7. Application by Trustee of Assets Deposited with It.. . . . . . . . . .32
Section 4.8. No Waiver of Subordination Provisions. . . . . . . . . . . . . . . . .33
Section 4.9. Holders Authorize Trustee To Effectuate Subordination of Securities. .34
Section 4.10. Right of Trustee To Hold Senior Debt. . . . . . . . . . . . . . . . .34
Section 4.11. No Suspension of Remedies.. . . . . . . . . . . . . . . . . . . . . .34
Section 4.12. No Fiduciary Duty of Trustee to Holders of Senior Debt. . . . . . . .35
ARTICLE V. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Section 5.1. Payment of Securities. . . . . . . . . . . . . . . . . . . . . . . . .35
Section 5.2. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . .35
Section 5.3. Limitation on Restricted Payments. . . . . . . . . . . . . . . . . . .35
Section 5.4. Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . . .37
Section 5.5. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . . . .37
Section 5.6. Maintenance of Properties and Insurance. . . . . . . . . . . . . . . .38
Section 5.7. Compliance Certificate; Notice of Default. . . . . . . . . . . . . . .38
Section 5.8. Compliance with Laws.. . . . . . . . . . . . . . . . . . . . . . . . .39
Section 5.9. SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Section 5.10. Waiver of Stay, Extension or Usury Laws.. . . . . . . . . . . . . . .40
Section 5.11. Limitation on Transactions with Affiliates. . . . . . . . . . . . . .40
Section 5.12. Limitation on Incurrences of Additional Indebtedness. . . . . . . . .41
Section 5.13. Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Section 5.14. Limitation on Liens.. . . . . . . . . . . . . . . . . . . . . . . . .42
Section 5.15. Limitation on Change of Control.. . . . . . . . . . . . . . . . . . .42
Section 5.16. Limitation on Asset Sales.. . . . . . . . . . . . . . . . . . . . . .44
Section 5.17. Limitation on Preferred Stock of Restricted Subsidiaries. . . . . . .47
Section 5.18. Limitation on Other Senior Subordinated Debt. . . . . . . . . . . . .47
Section 5.19. Limitation on Restricted and Unrestricted Subsidiaries. . . . . . . .47
Section 5.20. Limitation of Guarantees by Restricted Subsidiaries.. . . . . . . . .48
Section 5.21. Conduct of Business.. . . . . . . . . . . . . . . . . . . . . . . . .48
ARTICLE VI. SUCCESSOR CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Section 6.1. Limitations on Mergers and Certain Other Transactions. . . . . . . . .49
Section 6.2. Successor Corporation Substituted. . . . . . . . . . . . . . . . . . .50
ARTICLE VII. DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Section 7.1. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . .50
Section 7.2. Acceleration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Section 7.3. Other Remedies.. . . . . . . . . . . . . . . . . . . . . . . . . . . .52
<PAGE>
Section 7.4. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . . . .52
Section 7.5. Control by Majority. . . . . . . . . . . . . . . . . . . . . . . . . .53
Section 7.6. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . .53
Section 7.7. Rights of Holders To Receive Payment.. . . . . . . . . . . . . . . . .53
Section 7.8. Collection Suit by Trustee.. . . . . . . . . . . . . . . . . . . . . .54
Section 7.9. Trustee May File Proofs of Claim.. . . . . . . . . . . . . . . . . . .54
Section 7.10. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Section 7.11. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . .55
Section 7.12. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . .55
Section 7.13. Undertaking for Costs.. . . . . . . . . . . . . . . . . . . . . . . .55
ARTICLE VIII. TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Section 8.1. Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . .55
Section 8.2. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . .56
Section 8.3. Individual Rights of Trustee.. . . . . . . . . . . . . . . . . . . . .57
Section 8.4. Trustee's Disclaimer.. . . . . . . . . . . . . . . . . . . . . . . . .57
Section 8.5. Notice of Default. . . . . . . . . . . . . . . . . . . . . . . . . . .57
Section 8.6. Reports by Trustee to Holders. . . . . . . . . . . . . . . . . . . . .58
Section 8.7. Compensation and Indemnity.. . . . . . . . . . . . . . . . . . . . . .58
Section 8.8. Replacement of Trustee.. . . . . . . . . . . . . . . . . . . . . . . .59
Section 8.9. Successor Trustee by Merger, Etc.. . . . . . . . . . . . . . . . . . .60
Section 8.10. Eligibility; Disqualification.. . . . . . . . . . . . . . . . . . . .60
Section 8.11. Preferential Collection of Claims Against Company.. . . . . . . . . .60
ARTICLE IX. SATISFACTION AND DISCHARGE OF INDENTURE. . . . . . . . . . . . . . . . . . .60
Section 9.1. Termination of the Company's Obligations.. . . . . . . . . . . . . . .60
Section 9.2. Legal Defeasance and Covenant Defeasance.. . . . . . . . . . . . . . .61
Section 9.3. Application of Trust Money.. . . . . . . . . . . . . . . . . . . . . .64
Section 9.4. Repayment to the Company.. . . . . . . . . . . . . . . . . . . . . . .64
Section 9.5. Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
ARTICLE X. AMENDMENTS, SUPPLEMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . .65
Section 10.1. Without Consent of Holders. . . . . . . . . . . . . . . . . . . . . .65
Section 10.2. With Consent of Holders.. . . . . . . . . . . . . . . . . . . . . . .65
Section 10.3. Compliance with TIA.. . . . . . . . . . . . . . . . . . . . . . . . .66
Section 10.4. Revocation and Effect of Consents.. . . . . . . . . . . . . . . . . .66
Section 10.5. Notation on or Exchange of Securities.. . . . . . . . . . . . . . . .67
Section 10.6. Trustee To Sign Amendments, Etc.. . . . . . . . . . . . . . . . . . .67
<PAGE>
ARTICLE XI. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Section 11.1. TIA Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Section 11.2. Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
Section 11.3. Communications by Holders with Other Holders. . . . . . . . . . . . .69
Section 11.4. Certificate and Opinion as to Conditions Precedent. . . . . . . . . .69
Section 11.5. Statements Required in Certificate or Opinion.. . . . . . . . . . . .69
Section 11.6. Rules by Trustee, Paying Agent, Registrar.. . . . . . . . . . . . . .69
Section 11.7. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Section 11.8. Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Section 11.9. No Adverse Interpretation of Other Agreements.. . . . . . . . . . . .70
Section 11.10. No Recourse Against Others.. . . . . . . . . . . . . . . . . . . . .70
Section 11.11. Successors.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Section 11.12. Duplicate Originals. . . . . . . . . . . . . . . . . . . . . . . . .70
Section 11.13. Severability.. . . . . . . . . . . . . . . . . . . . . . . . . . . .70
</TABLE>
<PAGE>
INDENTURE dated as of December __, 1997, between COLOR SPOT NURSERIES,
INC., a Delaware corporation, and U.S. TRUST COMPANY OF CALIFORNIA, N.A., a
national banking association, as Trustee.
Each party hereto agrees as follows for the benefit of each other
party and for the equal and ratable benefit of the Holders of the Company's
____% Senior Subordinated Notes due 2007 (the "Securities"):
ARTICLE I.
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person.
The term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Affiliate Transaction" shall have the meaning provided in Section
5.11(a).
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or of any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of
<PAGE>
the Company; or (b) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; PROVIDED, HOWEVER, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000;
(ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under Section 6.1,
(iii) sales of accounts receivable and related assets of the type specified in
the definition of "Qualified Receivables Transaction" to a Receivables
Subsidiary in connection with a Qualified Receivables Transaction; and (iv)
sales of Permitted Investments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or of a subsidiary of such Person or any duly
authorized committee of that Board.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means a day that is not a Legal Holiday.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and (ii) with
respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's;
(iv) certificates of deposit or bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank organized under the laws
of the United States of America
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or any state thereof or the District of Columbia or any U.S. branch of a foreign
bank having at the date of acquisition thereof combined capital and surplus of
not less than $250,000,000; (v) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause
(i) above entered into with any bank meeting the qualifications specified in
clause (iv) above; and (vi) investments in money market funds which invest
substantially all their assets in securities of the types described in clauses
(i) through (v) above.
"Change of Control" means the occurrence of one or more of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of this
Indenture); (ii) the approval by the holders of Capital Stock of the Company of
any plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of this Indenture); (iii) any
Person or Group (other than the Permitted Holder(s)) shall become the owner,
directly or indirectly, beneficially or of record, of shares representing more
than 50% of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company; or (iv) the replacement of a majority
of the Board of Directors of the Company over a two-year period from the
directors who constituted the Board of Directors of the Company at the beginning
of such period, and such replacement shall not have been approved by a vote of
at least a majority of the Board of Directors of the Company then still in
office who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.
"Change of Control Offer" shall have the meaning provided in Section
5.15(a).
"Change of Control Payment Date" shall have the meaning provided in
Section 5.15(b).
"Commission" means the Securities and Exchange Commission.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means Color Spot Nurseries, Inc., a Delaware corporation,
until a successor replaces it pursuant to this Indenture and thereafter means
such successor.
"Consolidated EBITDA" means, with respect to any Person, for any
period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to
the extent Consolidated Net Income has been reduced thereby, (A) all income
taxes of such Person and its Restricted Subsidiaries paid or accrued in
accordance with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or taxes attributable to
sales or dispositions outside the ordinary course of business), (B) Consolidated
Interest Expense, (C) Consolidated Non-cash Charges LESS any non-cash items
increasing Consolidated Net Income
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for such period, all as determined on a consolidated basis for such Person and
its Restricted Subsidiaries in accordance with GAAP, (D) any expenses or charges
related to the termination of the Fee Agreement and (E) any write-off of
deferred financing costs in connection with the refinancing of the Company's
credit agreement in existence prior to the Credit Agreement and any refinancings
of the Credit Agreement.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a
PRO FORMA basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income") attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give (without duplication) effect to the incurrence of such guaranteed
Indebtedness as if such Person or any Restricted Subsidiary of such Person had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date; (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period; and (3)
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notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Swap Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum (without duplication) of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of (without duplication): (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries of such period determined
on a consolidated basis in accordance with GAAP, including without limitation,
(a) any amortization of debt discount and amortization or write-off of deferred
financing costs (excluding any write-off of deferred financing costs in
connection with the refinancing of the Company's credit agreement in existence
prior to the Credit Agreement or any refinancing of the Credit Agreement),
(b) the net costs under Interest Swap Obligations, (c) all capitalized interest
and (d) the interest portion of any deferred payment obligation; and (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by such Person and its Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of the
referent Person, (d) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is restricted
by a contract, operation of law or otherwise, (e) the net income of any Person,
other than a Restricted Subsidiary of the referent Person, except to the extent
of cash dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
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"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for
any period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net Income
of such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Credit Agent" means, at any time, the then-acting Administrative
Agent as defined in and under the Credit Agreement, which initially shall be
Credit Agricole Indosuez. The Company shall promptly notify the Trustee of any
change in the Credit Agent.
"Credit Agreement" means the Second Amended and Restated Credit
Agreement dated as of __________, 1997, between the Company, the lenders party
thereto in their capacities as lenders thereunder and Credit Agricole Indosuez,
as agent, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (PROVIDED that such increase in borrowings is Permitted Indebtedness
or is permitted by Section 5.12) or adding Restricted Subsidiaries of the
Company as additional guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Depository" shall mean the Depository Trust Company, New York, New
York, or a successor thereto registered under the Exchange Act or other
applicable statute or regulation.
"Designated Senior Debt" means (i) Indebtedness under or in respect of
the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt
which, at the time of determination, has an aggregate principal amount of at
least $25,000,000 and is specifically designated in the instrument evidencing
such Senior Debt as "Designated Senior Debt" by the Company.
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<PAGE>
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable (other than in connection with a
Change of Control), pursuant to a sinking fund obligation or otherwise, or is
redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Securities.
"Event of Default" shall have the meaning provided in Section 7.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto and the rules and regulations
promulgated by the Commission thereunder.
"Fee Agreement" means that certain fee agreement between the Company
and Kohlberg & Company, LLC dated as of December 31, 1996, as amended.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Global Security" shall mean a Security which is executed by the
Company and authenticated and delivered by the Trustee to the Depository or
pursuant to the Depository's instruction, all in accordance with this Indenture
and pursuant to a written order, which shall be registered in the name of the
Depository or its nominee and which, together with any other Global Security
representing Securities hereunder, shall represent, and shall be denominated in
an amount equal to the aggregate principal amount of, all of the outstanding
Securities.
"Guarantee" shall have the meaning set forth in Section 5.20.
"Holder" means the Person in whose name a Security is registered on
the Registrar's books.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to, directly or indirectly, create, incur, assume, guarantee,
acquire, become liable, contingently or otherwise, with respect to, or otherwise
become responsible for payment of Indebtedness or other obligations or the
recording, as required pursuant to GAAP or otherwise, of any such Indebtedness
or other obligation on the balance sheet of such Person (and "Incurrence,"
"Incurred" and "Incurring" shall have meanings correlative to the foregoing).
"Indebtedness" means with respect to any Person, without duplication,
(i) all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of
such Person issued or assumed as the deferred purchase price
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of property, all conditional sale obligations and all Obligations under any
title retention agreement (but excluding trade accounts payable and other
accrued liabilities arising in the ordinary course of business that are not
overdue by 90 days or more or are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and excluding
long-term, deferred purchase price obligations for trees, PROVIDED that such
obligations for trees are not recorded as liabilities on such Person's balance
sheet in accordance with GAAP), (v) all Obligations for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under Currency Agreements and Interest Swap
Obligations of such Person and (ix) all Disqualified Capital Stock issued by
such Person with the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but excluding
accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to this
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Disqualified Capital Stock.
"Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof.
"Independent Financial Advisor" means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company (other than an interest in less than
5% of the Company's Common Stock after such time as the Company's Common Stock
is publicly traded) and (ii) which, in the judgment of the Board of Directors of
the Company, is otherwise independent and qualified to perform the task for
which it is to be engaged.
"Interest Payment Date" means the stated maturity of an installment of
interest on the Securities.
"Interest Swap Obligation" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
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<PAGE>
"Investment" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of Section 5.3, (i)
"Investment" shall include and be valued at the fair market value of the net
assets of any Restricted Subsidiary at the time that such Restricted Subsidiary
is designated as an Unrestricted Subsidiary and shall exclude the fair market
value of the net assets of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated as a Restricted Subsidiary and (ii) the
amount of any Investment shall be the original cost of such Investment plus the
cost of all additional Investments by the Company or any of its Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; PROVIDED that no such
payment of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, 100% of the
outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means ___________, 1997, the date of original issuance of
the Securities under this Indenture.
"Legal Holiday" shall have the meaning provided in Section 11.7.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Maturity Date" means _______ ___, 2007.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in
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consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) repayment of Indebtedness that is required to be
repaid in connection with such Asset Sale and (d) appropriate amounts to be
provided by the Company or any of its Restricted Subsidiaries, as the case may
be, as a reserve, in accordance with GAAP, against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Net Proceeds Offer" shall have the meaning provided in Section
5.16(a).
"Net Proceeds Offer Amount" shall have the meaning provided in Section
5.16(a).
"Net Proceeds Offer Payment Date" shall have the meaning provided in
Section 5.16(a).
"Net Proceeds Trigger Date" shall have the meaning provided in Section
5.16(a).
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chief Executive
Officer, the Chief Financial Officer or the Chief Accounting Officer of such
Person.
"Officers' Certificate" means a certificate signed on behalf of the
Company by two officers of the Company, one of whom must be an Officer of the
Company and otherwise complying with the requirements of Sections 11.4 and 11.5.
"operating lease" means any lease the obligations under which do not
constitute Capitalized Lease Obligations.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee complying with the requirements of Sections
11.4 and 11.5. Unless otherwise required by the Trustee, the legal counsel may
be an employee of or counsel to the Company or the Trustee.
"Paying Agent" shall have the meaning provided in Section 2.3, except
that for the purposes of Articles Three and Nine and Sections 5.15 and 5.16, the
Paying Agent shall not be the Company or an Affiliate of the Company.
"Permitted Holder(s)" means KCSN Acquisition Company, L.P. and its
Affiliates, Kohlberg & Company, LLC and its Affiliates and Michael F. Vukelich
and his Affiliates.
"Permitted Indebtedness" means, without duplication, each of the
following:
(i) Indebtedness under the Securities and this Indenture;
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(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $150.0
million, less the amount of all mandatory principal payments actually made
by the Company in respect of the Term Loan Facility (excluding any such
payments to the extent refinanced at the time of payment under a replaced
Credit Agreement), PROVIDED that (1) not more than $110.0 million of
borrowings under the Credit Agreement are used to make Asset Acquisitions
and (2) not more than $90.0 million of borrowings under the Credit
Agreement are used for any other purpose;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with this Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnitees and
compensation payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company (other than the Lien of the Credit Agent under
the Credit Agreement); PROVIDED that if as of any date any Person other
than the Company or a Wholly Owned Restricted Subsidiary of the Company
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company, in each case subject to
no Lien; PROVIDED that (a) any Indebtedness of the Company to any Wholly
Owned Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the
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Company's obligations under this Indenture and the Securities and (b) if as
of any date any Person other than a Wholly Owned Restricted Subsidiary of
the Company owns or holds any such Indebtedness or any Person holds a Lien
in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; PROVIDED, HOWEVER, that such
Indebtedness is extinguished within two business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(x) Refinancing Indebtedness;
(xi) Indebtedness incurred in a Qualified Receivables Transaction that
is without recourse to the Company or to any Restricted Subsidiary of the
Company or their assets (other than a Receivables Subsidiary and its
assets); and
(xii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $25,000,000 at
any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company; (ii) Investments in the Company by any
Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Securities and this Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $2,000,000
at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with this
Indenture; (vi) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers; (vii) Investments
made by the Company or its Restricted Subsidiaries as a result of consideration
received in connection with an Asset Sale made in compliance with Section 5.16;
(viii) Investment by the Company or a Wholly Owned Restricted Subsidiary of the
Company in a Receivables Subsidiary or any Investment by a Receivables
Subsidiary in any other Person in
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connection with a Qualified Receivables Transaction; (ix) notes received from
management as payment for purchases of Capital Stock; and (x) additional
Investments by the Company or any Restricted Subsidiary of the Company in an
aggregate amount, based on original cost, not to exceed $1,000,000 at any one
time outstanding.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest (including UCC filings) or title of a lessor under
any Capitalized Lease Obligation; PROVIDED that such Liens do not extend to
any property or assets which is not leased property subject to such
Capitalized Lease Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; PROVIDED, HOWEVER, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and (B) the Lien securing such Indebtedness shall be created within 90 days
of such acquisition.
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(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptance issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements or the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under this
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
Section 5.12; PROVIDED that (A) such Liens secured such Acquired
Indebtedness at the time of and prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
were not granted in connection with, or in anticipation of, the incurrence
of such Acquired Indebtedness by the Company or a Restricted Subsidiary of
the Company and (B) such Liens do not extend to or cover any property or
assets of the Company or of any of its Restricted Subsidiaries other than
the property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary of the Company and are no more favorable to the
lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company;
(xiv) Liens on accounts receivable and related assets of the type
described in the definition of "Qualified Receivables Transaction" or on
assets of a Receivables Subsidiary, in either case, incurred in connection
with a Qualified Receivables Transaction; and
(xv) Liens securing Indebtedness in an aggregate amount not to exceed
$5,000,000 at any one time outstanding.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, limited liability company, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
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"pro forma" means, with respect to any calculation made or required to
be made pursuant to the terms of this Indenture, a calculation in accordance
with Article 11 of Regulation S-X under the Securities Act, as interpreted by
the Company's chief financial officer or Board of Directors in consultation with
its independent certified public accountants.
"Prospectus" means the prospectus of the Company dated December __,
1997 relating to the Securities.
"Public Equity Offering" means an underwritten public offering of
Qualified Capital Stock of the Company, sold by the Company, after the Issue
Date pursuant to a registration statement filed with the Commission in
accordance with the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted Subsidiaries
may sell, convey or otherwise transfer to (i) a Receivables Subsidiary (in the
case of a transfer by the Company or any of its Restricted Subsidiaries) and
(ii) any other Person (in the case of a transfer by a Receivables Subsidiary),
or may grant a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Company or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such accounts receivable, all contracts and all guarantees
or other obligations in respect of such accounts receivable, proceeds of such
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Restricted Subsidiary of
the Company that engages in no activities other than in connection with the
financing of accounts receivable and that is designated by the Board of
Directors of the Company (as provided below) as a Receivables Subsidiary (a)
which has no Indebtedness or any other Obligations (contingent or otherwise)
which (i) is guaranteed by the Company or any other Restricted Subsidiary of the
Company (excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness) pursuant to representations, warranties, covenants
and indemnities entered into in the ordinary course of business in connection
with a Qualified Receivables Transaction), (ii) is recourse to or obligates the
Company or any other Restricted Subsidiary of the Company in any way other than
pursuant to representations, warranties, covenants and indemnities entered into
in the ordinary course of business in connection with a Qualified Receivables
Transaction or (iii) subjects any property or asset of the Company or any other
Restricted Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction, (b) with which
neither the Company nor any other Restricted Subsidiary of the Company has any
material contract, agreement, arrangement or
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understanding other than on terms no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing accounts receivable and (c) with
which neither the Company nor any other Restricted Subsidiary of the Company has
any obligation to maintain or preserve such Restricted Subsidiary's financial
condition or cause such Restricted Subsidiary to achieve certain levels of
operating results. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a Board
Resolution of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"Record Date" means the record dates specified in the Securities;
provided, however, that if any such date is a Legal Holiday, the Record Date
shall be the first day immediately preceding such specified day that is not a
Legal Holiday.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption pursuant to this Indenture
and Paragraph 5 of the Securities.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price fixed for such redemption pursuant to this Indenture
and Paragraph 5 of the Securities.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, pre-pay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
Section 5.12 (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (xi) or (xii) of the definition of Permitted Indebtedness), in
each case that does not (1) result in an increase in the aggregate principal
amount of Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium required to be paid under the terms
of the instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company in connection with such Refinancing) or (2)
create Indebtedness with (A) a Weighted Average Life to Maturity that is less
than the Weighted Average Life to Maturity of the Indebtedness being Refinanced
or (B) a final maturity earlier than the final maturity of the Indebtedness
being Refinanced; PROVIDED that (x) if such Indebtedness being Refinanced is
solely Indebtedness of the Company, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced
is subordinate or junior to the Securities, then such Refinancing Indebtedness
shall be subordinate to the Securities at least to the same extent and in the
same manner as the Indebtedness being Refinanced.
"Registrar" shall have the meaning provided in Section 2.3.
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"Replacement Assets" shall have the meaning provided in Section
5.16(a).
"Representative" means the indenture trustee or other trustee, agent
or representative in respect of any Designated Senior Debt; PROVIDED that if,
and for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times constitute
the holders of a majority in outstanding principal amount of such Designated
Senior Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such
Person which is not an Unrestricted Subsidiary.
"Revolving Credit Facility" means one or more revolving credit
facilities under the Credit Agreement.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Securities. Without limiting the
generality of the foregoing, "Senior Debt" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities, (y) all Interest Swap Obligations and (z) all obligations under
Currency Agreements, in each case whether outstanding on the Issue Date or
thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not
include (i) any Indebtedness of the Company to a Restricted Subsidiary of the
Company or any Affiliate of the Company or any of such Affiliate's Subsidiaries,
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director,
officer or employee of the Company or any Restricted Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented
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by Disqualified Capital Stock, (v) any liability for federal, state, local or
other taxes owed or owing by the Company, (vi) Indebtedness (other than
Permitted Indebtedness) incurred in violation of this Indenture provisions set
forth under Section 5.12, (vii) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company and (viii) any Indebtedness which is, by its
express terms, subordinated in right of payment to any other Indebtedness of the
Company including, without limitation, the Company's $7.1 million 8%
Subordinated Convertible Note due December 31, 2004 held by Heller Equity
Capital Corporation or any transferee and the $1 million 9% Subordinated
Promissory Note held by the former stockholders of Oda Nursery, Inc. or any
transferee. The holders of any Indebtedness which by its terms expressly
provides that such Indebtedness is senior in right of payment to the Securities
shall be entitled to rely conclusively for purposes of determining that such
Indebtedness is not being incurred in violation of this Indenture upon a
certificate of the chief financial officer of the Company which demonstrates
that, as of the date of the most recently published financial statements of the
Company, such Indebtedness is permitted to be incurred by the terms of this
Indenture.
"Significant Subsidiary" shall have the meaning set forth in Rule
1.02(v) of Regulation S-X under the Securities Act.
"subsidiary" with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary" means any subsidiary of the Company.
"Surviving Entity" shall have the meaning provided in Section
6.1(a)(i).
"Term Loan Facility" means one or more term loan facilities under the
Credit Agreement.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb), as amended, as in effect on the date this Indenture is qualified
under the TIA, except as otherwise provided in Section 10.3.
"Trust Officer" means any officer of the Trustee assigned by the
Trustee to administer its corporate trust matters.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of
such Person that at the time of determination shall be or continue to be
designated an Unrestricted Subsidiary by the Board of Directors of such Person
in the manner provided below and (ii) any Subsidiary
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of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Company or any other Subsidiary
of the Company that is not a Subsidiary of the Subsidiary to be so designated;
PROVIDED that (x) the Company certifies to the Trustee that the Company's
investment in such Unrestricted Subsidiary is a Permitted Investment or that
such designation complies with Section 5.3 and (y) each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of designation, and
does not thereafter, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant to which
the lender has recourse to any of the assets of the Company or any of its
Restricted Subsidiaries. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary only if (x) immediately after giving
effect to such designation, the Company is able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in compliance with
Section 5.12 and (y) immediately before and immediately after giving effect to
such designation, no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct non-callable obligations
of, or non-callable obligations guaranteed by, the United States of America for
the payment of which guarantee or obligation the full faith and credit of the
United States is pledged.
"U.S. Legal Tender" means such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any
Restricted Subsidiary of such Person of which all the outstanding voting
securities (other than in the case of a foreign Restricted Subsidiary,
directors' qualifying shares or an immaterial amount of shares required to be
owned by other Persons pursuant to applicable law) are owned by such Person or
any Wholly Owned Restricted Subsidiary of such Person.
(xv)
Section 1.2. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such
provision is incorporated by reference in, and made a part of, this Indenture.
The following TIA terms used in this Indenture have the following meanings:
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"indenture securities" means the Securities.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or any other
obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them therein.
(xv)
Section 1.3. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
(6) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE II.
THE SECURITIES
Section 1.2. Form and Dating.
The Securities and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A. The Securities may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Company and the Trustee shall approve the form of the Securities and any
notation, legend or endorsement on them. Each Security shall be dated the date
of its authentication.
The terms and provisions contained in the Securities shall constitute,
and are hereby expressly made, a part of this Indenture and, to the extent
applicable, the Company and
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the Trustee, by their execution and delivery of this Indenture, expressly agree
to such terms and provisions and to be bound thereby.
Section 2.2 Execution and Authentication.
Two Officers, or an Officer and an Assistant Secretary, shall sign, or
one Officer shall sign and one Officer or an Assistant Secretary (each of whom
shall, in each case, have been duly authorized by all requisite corporate
actions) shall attest to, the Securities for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Security was an Officer at the
time of such execution but no longer holds that office at the time the Trustee
authenticates the Security, the Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of $85,000,000 upon a written order of the Company in
the form of an Officers' Certificate. The Officers' Certificate shall specify
the amount of Securities to be authenticated and the date on which the
Securities are to be authenticated. Such Securities shall be in the form of one
or more Global Securities, which (i) shall represent, and shall be denominated
in an amount equal to the aggregate principal amount of, the outstanding
Securities, (ii) shall be registered in the name of the Depository for such
Global Security or Securities or its nominee, (iii) shall be delivered by the
Trustee to the Depository or pursuant to the Depository's instruction and (iv)
shall bear a legend substantially to the following effect: "Unless and until
this Global Security is exchanged in whole or in part for the individual
Securities represented hereby, this Global Security may not be transferred
except as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or by a Depository or any such
nominee to a successor Depository or a nominee of a successor Depository." The
aggregate principal amount of Securities outstanding at any time may not exceed
$85,000,000 (or such lesser amount as is requested authenticated by the Trustee
and issued by the Company on the Issue Date), except as provided in Section 2.7.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate Securities. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company and Affiliates of the Company.
The Securities shall be issuable only in registered form without
coupons in denominations of $1,000 and integral multiples thereof.
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Section 2.3 Registrar and Paying Agent.
The Company shall maintain an office or agency in the Borough of
Manhattan, The City of New York, where (a) Securities may be presented or
surrendered for registration of transfer or for exchange ("Registrar"), (b)
Securities may be presented or surrendered for payment ("Paying Agent") and (c)
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company may also from time to time designate one
or more other offices or agencies where the Securities may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Company of its obligation to maintain an office or agency
in the Borough of Manhattan, The City of New York, for such purposes. The
Company may act as its own Registrar or Paying Agent except that for the
purposes of Articles Three and Nine and Sections 5.15 and 5.16, neither the
Company nor any Affiliate of the Company shall act as Paying Agent. The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company, upon notice to the Trustee, may have one or more
co-Registrars and one or more additional paying agents reasonably acceptable to
the Trustee. The term "Paying Agent" includes any additional paying agent. The
Company initially appoints the Trustee as Registrar and Paying Agent until such
time as the Trustee has resigned or a successor has been appointed.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall
notify the Trustee, in advance, of the name and address of any such Agent. If
the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act
as such.
Section 2.4. Paying Agent To Hold Assets in Trust.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that, subject to Article Four, each Paying Agent shall hold in
trust for the benefit of Holders or the Trustee all assets held by the Paying
Agent for the payment of principal of, or interest on, the Securities (whether
such assets have been distributed to it by the Company or any other obligor on
the Securities), and shall notify the Trustee of any Default by the Company (or
any other obligor on the Securities) in making any such payment. If the Company
or a Subsidiary acts as Paying Agent, it shall segregate such assets and hold
them as a separate trust fund, subject to Article Four. The Company at any time
may require a Paying Agent to distribute all assets held by it to the Trustee
and account for any assets disbursed and the Trustee may at any time during the
continuance of any payment Default, upon written request to a Paying Agent,
require such Paying Agent to distribute all assets held by it to the Trustee and
to account for any assets distributed. Upon distribution to the Trustee of all
assets that shall have been delivered by the Company to the Paying Agent, the
Paying Agent shall have no further liability for such assets.
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Section 2.5. Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders. If the Trustee is not the Registrar, the Company shall furnish to the
Trustee on or before each Interest Payment Date and at such other times as the
Trustee may request in writing a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Holders, which list
may be conclusively relied upon by the Trustee.
Section 2.6. Transfer and Exchange.
(a) When Securities are presented to the Registrar or a
co-Registrar with a request to register the transfer of such Securities or to
exchange such Securities for an equal principal amount of Securities of other
authorized denominations, the Registrar or co-Registrar shall register the
transfer or make the exchange as requested if its requirements for such
transaction are met; provided, however, that the Securities surrendered for
transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Registrar or
co-Registrar, duly executed by the Holder thereof or his or her attorney duly
authorized in writing. To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Securities at the
Registrar's or co-Registrar's request. No service charge shall be made for any
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchanges or transfers pursuant to Sections
2.2, 2.7, 2.10, 3.6, 5.15, 5.16 or 10.5). The Registrar or co-Registrar shall
not be required to register the transfer of or exchange of any Security (i)
during a period beginning at the opening of business 15 days before the mailing
of a notice of redemption of Securities and ending at the close of business on
the day of such mailing and (ii) selected for redemption in whole or in part
pursuant to Article Three, except the unredeemed portion of any Security being
redeemed in part. A Global Security may be transferred, in whole but not in
part, in the manner provided in this Section 2.6(a), only to a nominee of the
Depository for such Global Security, or to the Depository, or a successor
Depository for such Global Security selected or approved by the Company, or to a
nominee of such successor Depository.
(b) If at any time the Depository for the Global Security or
Securities notifies the Company that it is unwilling or unable to continue as
Depository for such Global Security or Securities or the Company becomes aware
that the Depository has ceased to be a clearing agency registered under the
Exchange Act, the Company shall appoint a successor Depository with respect to
such Global Security or Securities. If a successor Depository for such Global
Security or Securities has not been appointed within 120 days after the Company
receives such notice or becomes aware of such ineligibility, the Company shall
execute, and the Trustee, upon receipt of an Officers' Certificate for the
authentication and delivery of Securities, shall authenticate and deliver,
Securities in definitive form, in an aggregate principal amount at maturity
equal to the principal amount at maturity of the Global Security representing
such Securities, in exchange for such Global Security. The Company shall
reimburse the Registrar, the Depository and the
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Trustee for expenses they incur in documenting such exchanges and issuances of
Securities in definitive form.
The Company may at any time and in its sole discretion determine that
the Securities shall no longer be represented by such Global Security or
Securities. In such event the Company will execute, and the Trustee, upon
receipt of a written order for the authentication and delivery of individual
Securities in exchange in whole or in part for such Global Security or
Securities, will authenticate and deliver individual Securities in definitive
form in an aggregate principal amount equal to the principal amount of such
Global Security or Securities in exchange for such Global Security or
Securities.
In any exchange provided for in any of the preceding two paragraphs,
the Company will execute and the Trustee will authenticate and deliver
individual Securities in definitive registered form in authorized
denominations. Upon the exchange of a Global Security for individual
Securities, such Global Security shall be cancelled by the Trustee.
Securities issued in exchange for a Global Security pursuant to this Section
2.6(b) shall be registered in such names and in such authorized denominations
as the Depository for such Global Security, pursuant to instructions from its
direct or indirect participants or otherwise, shall instruct the Trustee.
The Trustee shall deliver such Securities to the persons in whose names such
Securities are so registered.
None of the Company, the Trustee, any Paying Agent or the Registrar
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
a Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Section 2.7. Replacement Securities.
If a mutilated Security is surrendered to the Trustee or if the
Holder of a Security claims that the Security has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate
a replacement Security if the Trustee's requirements are met. If required by
the Trustee or the Company, such Holder must provide an indemnity bond or
other indemnity, sufficient in the judgment of both the Company and the
Trustee, to protect the Company, the Trustee or any Agent from any loss which
any of them may suffer if a Security is replaced. The Company may charge
such Holder for its reasonable out-of-pocket expenses in replacing a Security
pursuant to this Section 2.7, including reasonable fees and expenses of
counsel.
Every replacement Security is an additional obligation of the Company.
Section 2.8. Outstanding Securities.
Securities outstanding at any time are all the Securities that have
been authenticated by the Trustee except those cancelled by it, those
delivered to it for cancellation and those described in this Section as not
outstanding. A Security does not cease to be outstanding because the Company
or any of its respective Affiliates holds the Security.
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If a Security is replaced pursuant to Section 2.7 (other than a
mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a bona fide purchaser. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section 2.7.
If on a Redemption Date or the Maturity Date the Paying Agent (other
than the Company or a Subsidiary) holds U.S. Legal Tender or U.S. Government
Obligations sufficient to pay all of the principal and interest due on the
Securities payable on that date, then on and after that date such Securities
cease to be outstanding and interest on them ceases to accrue unless, pursuant
to the provisions of Article Four, the Paying Agent is unable to make payments
on the Securities to the Holders thereof.
Section 2.9. Treasury Securities.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, the Subsidiaries or any of their respective Affiliates shall be
disregarded, except that, for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities that the Trustee knows or has reason to know are so owned shall be
disregarded.
Section 2.10. Temporary Securities.
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but
may have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate definitive Securities in exchange for temporary
Securities. Until such exchange, temporary Securities shall be entitled to
the same rights, benefits and privileges as definitive Securities.
Notwithstanding the foregoing, so long as the Securities are represented by a
Global Security, such Global Security may be in typewritten form.
Section 2.11. Cancellation.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the
Trustee any Securities surrendered to them for transfer, exchange or payment.
The Trustee, or at the direction of the Trustee, the Registrar or the Paying
Agent (other than the Company or a Subsidiary), and no one else, shall cancel
and, at the written direction of the Company, shall dispose of all Securities
surrendered for transfer, exchange, payment or cancellation. Subject to
Section 2.7, the Company may not issue new Securities to replace Securities
that it has paid or delivered to the Trustee for cancellation. If the
Company shall acquire any of the Securities, such acquisition shall not
operate as a redemption or satisfaction of the Indebtedness represented by
such Securities unless and until the same are surrendered to the Trustee for
cancellation pursuant to this Section 2.11.
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Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Securities, it
shall, unless the Trustee fixes another record date pursuant to Section 7.10,
pay the defaulted interest, plus (to the extent lawful) any interest payable on
the defaulted interest, to the persons who are Holders on a subsequent special
record date, which date shall be the fifteenth day next preceding the date fixed
by the Company for the payment of defaulted interest or the next succeeding
Business Day if such date is not a Business Day. At least 15 days before the
subsequent special record date, the Company shall mail to each Holder, with a
copy to the Trustee, a notice that states the subsequent special record date,
the payment date and the amount of defaulted interest, and interest payable on
such defaulted interest, if any, to be paid.
Section 2.13. CUSIP Number.
The Company in issuing the Securities may use a "CUSIP" number, and if
so, the Trustee shall use the CUSIP number in notices of redemption or exchange
as a convenience to Holders; provided, however, that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Securities, and that reliance may be
placed only on the other identification numbers printed on the Securities.
ARTICLE III.
REDEMPTION
Section 3.1. Notices to Trustee.
If the Company elects to redeem Securities pursuant to Paragraph 5 of
the Securities, it shall notify the Trustee, with a copy to the Credit Agent, of
the Redemption Date and the principal amount of Securities to be redeemed and
whether it wants the Trustee to give notice of redemption to the Holders at
least 30 days (unless a shorter notice shall be satisfactory to the Trustee) but
not more than 60 days before the Redemption Date. Any such notice may be
cancelled at any time prior to notice of such redemption being mailed to any
Holder and shall thereby be void and of no effect.
Section 3.2. Selection of Securities To Be Redeemed.
If fewer than all of the Securities are to be redeemed, the Trustee
shall select the Securities to be redeemed pro rata, by lot or by any other
method that the Trustee considers fair and appropriate and, if such Securities
are listed on any securities exchange, by a method that complies with the
requirements of such exchange; provided, however, that any redemption pursuant
to Paragraph 5 of the Securities with the proceeds of a Public Equity Offering
shall be made on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to Depository procedures), unless such method is otherwise
prohibited.
The Trustee shall make the selection from the Securities outstanding
and not previously called for redemption and shall promptly notify the Company
in writing of the
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Securities selected for redemption and, in the case of any Security selected for
partial redemption, the principal amount thereof to be redeemed. Securities in
denominations of $1,000 may be redeemed only in whole. The Trustee may select
for redemption portions (equal to $1,000 or integral multiples thereof) of the
principal amount of Securities that have denominations larger than $1,000.
Provisions of this Indenture that apply to Securities called for redemption also
apply to portions of Securities called for redemption.
Section 3.3. Notice of Redemption.
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall mail a notice of redemption by first class mail to each Holder
whose Securities are to be redeemed at such Holder's registered address, with a
copy to the Trustee and the Credit Agent. In order to effect a redemption
pursuant to Paragraph 5 of the Securities with the proceeds of a Public Equity
Offering, the Company shall send the redemption notice not later than 120 days
after the consummation of such Public Equity Offering. At the Company's
request, the Trustee shall give the notice of redemption in the Company's name
and at the Company's expense. Each notice for redemption shall identify the
Securities to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(5) that, unless (a) the Company defaults in making the redemption
payment on the Redemption Date or (b) such redemption payment is prohibited
pursuant to Article Four or otherwise, interest on Securities called for
redemption ceases to accrue on and after the Redemption Date, and the only
remaining right of the Holders of such Securities is to receive payment of the
Redemption Price upon surrender to the Paying Agent of the Securities redeemed;
(6) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the Redemption
Date, and upon surrender of such Security, a new Security or Securities in
aggregate principal amount equal to the unredeemed portion thereof will be
issued; and
(7) if fewer than all the Securities are to be redeemed, the
identification of the particular Securities (or portion thereof) to be redeemed,
as well as the aggregate principal amount of Securities to be redeemed and the
aggregate principal amount of Securities to be outstanding after such partial
redemption.
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Section 3.4. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.3,
Securities called for redemption become due and payable on the Redemption Date
and at the Redemption Price. Upon surrender to the Trustee or Paying Agent,
such Securities called for redemption shall be paid at the Redemption Price
unless prohibited pursuant to Article Four or otherwise pursuant to this
Indenture. Securities that are redeemed by the Company or that are purchased by
the Company pursuant to a Net Proceeds Offer as described in Section 5.16 or
pursuant to a Change of Control Offer as described in Section 5.15 or that are
otherwise acquired by the Company will be surrendered to the Trustee for
cancellation.
Section 3.5. Deposit of Redemption Price.
On or before 11:00 a.m. New York City time on the Redemption Date, the
Company shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay
the Redemption Price of all Securities to be redeemed on that date (other than
Securities or portions thereof called for redemption on that date which have
been delivered by the Company to the Trustee for cancellation). The Paying
Agent shall promptly return to the Company any U.S. Legal Tender so deposited
which is not required for that purpose upon the written request of the Company,
except with respect to monies owed as obligations to the Trustee pursuant to
Article Eight.
If the Company complies with the preceding paragraph and payment of
the Securities called for redemption is not prohibited under Article Four or
otherwise, then, unless the Company defaults in the payment of such Redemption
Price, interest on the Securities or portions thereof to be redeemed will cease
to accrue on and after the applicable Redemption Date, whether or not such
Securities are presented for payment.
Section 3.6. Securities Redeemed in Part.
Upon surrender of a Security that is to be redeemed in part, the
Trustee shall authenticate for the Holder a new Security or Securities equal in
principal amount to the unredeemed portion of the Security surrendered.
ARTICLE IV.
SUBORDINATION
Section 4.1. Securities Subordinated to Senior Debt.
Anything herein to the contrary notwithstanding, the Company, for
itself and its successors, and each Holder, by his or her acceptance of
Securities, agrees that the payment of the Obligations on the Securities is
subordinated, to the extent and in the manner provided in this Article Four, to
the prior payment in full in cash or Cash Equivalents of all Senior Debt,
whether outstanding on the Issue Date or thereafter Incurred, including with
respect to Designated Senior Debt, any interest accruing thereon subsequent to
the occurrence of any Event of Default
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specified in clauses (vi) or (vii) of Section 7.1 relating to the Company,
whether or not such interest is an allowed claim enforceable against the Company
under any Bankruptcy Law.
This Article Four shall constitute a continuing offer to all persons
who become holders of, or continue to hold, Senior Debt, and such provisions are
made for the benefit of the holders of Senior Debt and such holders are made
obligees hereunder and any one or more of them may enforce such provisions.
The obligations of the Company to the Trustee under Section 8.7 shall
not be subject to the provisions of this Article Four.
Section 4.2 Suspension of Payment When Senior Debt in Default.
(a) Unless Section 4.3 shall be applicable, no direct or indirect
payment (other than payments by a trust previously established pursuant to
Article Nine) or distribution of any asset of the Company of any kind or
character by or on behalf of the Company of Obligations on the Securities or on
account of the purchase or redemption or other acquisition of the Securities
whether pursuant to the terms of the Securities or upon acceleration or
otherwise shall be made if, at the time of such payment or distribution, there
exists a default in the payment of all or any portion of principal of, premium,
if any, or interest on any Designated Senior Debt and such default shall not
have been cured or waived by or on behalf of the holders of such Designated
Senior Debt or shall have ceased to exist, until such default shall have been
cured or waived or shall have ceased to exist or such Designated Senior Debt
shall have been discharged or paid in full in cash or Cash Equivalents, after
which the Company shall resume making any and all required payments in respect
of the Securities, including any missed payments.
(b) Unless Section 4.3 shall be applicable, during the continuance of
any other event of default with respect to any Designated Senior Debt pursuant
to which the maturity thereof may be accelerated, upon the earlier to occur of
(a) receipt by the Trustee of written notice from the holders of a majority of
the outstanding principal amount of the Designated Senior Debt or their
Representative stating that such notice is a notice pursuant to Section 4.2 of
this Indenture, or (b) if such event of default results from the acceleration of
the Securities, the date of such acceleration, no such payment (other than
payments by a trust previously established pursuant to Article Nine) or
distribution of any asset of the Company of any kind or character shall be made
by the Company upon or in respect of the Securities (including without
limitation on account of any principal of, premium, if any, or interest on the
Securities) or on account of the purchase or redemption or other acquisition of
Securities for a period ("Payment Blockage Period") commencing on the earlier of
the date of receipt of such notice or the date of such acceleration and ending
180 days thereafter (provided such Designated Senior Debt shall theretofore not
have been accelerated) (unless (x) such Payment Blockage Period shall be
terminated by written notice to the Trustee from the holders of a majority of
the outstanding principal amount of such Designated Senior Debt or their
Representative who delivered such notice or (y) such default is cured or waived,
or ceases to exist or such Designated Senior Debt is discharged or paid in full
in cash or Cash Equivalents), after which the Company shall promptly notify the
Trustee of such cure or waiver and resume making any and all required payments
in
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respect of the Securities, including any missed payments. Notwithstanding
anything herein to the contrary, in no event will a Payment Blockage Period
extend beyond 180 days from the date on which such Payment Blockage Period was
commenced. Not more than one Payment Blockage Period may be commenced with
respect to the Securities during any period of 360 consecutive days. No event
of default which existed or was continuing on the date of the commencement of
any Payment Blockage Period with respect to the Designated Senior Debt
initiating such Payment Blockage Period shall be, or be made, the basis for the
commencement of a second Payment Blockage Period by the holders of such
Designated Senior Debt or their Representative whether or not within a period of
360 consecutive days unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days (it being acknowledged
that any subsequent action, or any breach of any financial covenants for a
period commencing after the date of commencement of such Blockage Period that,
in either case, would give rise to an event of default pursuant to any
provisions under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose).
(c) In the event that, notwithstanding the foregoing, the Trustee or
a Holder shall have received any payment prohibited by the foregoing provisions
of this Section 4.2, then and in such event such payment shall be paid over and
delivered forthwith to the Representative or as a court of competent
jurisdiction shall direct.
Section 4.3. Securities Subordinated to Prior Payment of All Senior Debt on
Dissolution, Liquidation or Reorganization of Company.
Upon any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, upon any dissolution,
winding-up, total or partial liquidation or reorganization of the Company
(including, without limitation, in bankruptcy, insolvency or receivership
proceedings or upon any assignment for the benefit of creditors or any other
marshalling of the Company's assets and liabilities and whether voluntary or
involuntary):
(a) the holders of Senior Debt shall first be entitled to receive
payments in full in cash or Cash Equivalents, or such payment duly provided for
to the satisfaction of the holders of Senior Debt, of all amounts payable under
Senior Debt before the Holders will be entitled to receive any payment with
respect to the Securities, or for the acquisition of any of the Securities for
cash or property or otherwise;
(b) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the Holders or
the Trustee on behalf of the Holders would be entitled except for the provisions
of this Article Four, shall be paid by the liquidating trustee or agent or other
person making such a payment or distribution, directly to the holders of Senior
Debt or their Representative, ratably according to the respective amounts of
Senior Debt remaining unpaid held or represented by each, until all Senior Debt
remaining unpaid shall have been paid in full in cash or Cash Equivalents after
giving effect to any concurrent payment or distribution to the holders of such
Senior Debt; and
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(c) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, shall be received by the Trustee or the Holders or any
Paying Agent on account of principal of, premium, if any, or interest on the
Securities before all Senior Debt is paid in full in cash or Cash Equivalents,
such payment or distribution (subject to the provisions of Sections 4.6 and 4.7)
shall be received, segregated from other funds, and held in trust by the Trustee
or such Holder or Paying Agent for the benefit of, and shall immediately be paid
over to, the holders of Senior Debt or their Representative, ratably according
to the respective amounts of Senior Debt held or represented by each, until all
Senior Debt remaining unpaid shall have been paid in full in cash or Cash
Equivalents, after giving effect to any concurrent payment or distribution to or
for the holders of Senior Debt. Notwithstanding anything to the contrary
contained herein, in the absence of its gross negligence or willful misconduct,
the Trustee shall have no duty to collect or retrieve monies previously paid by
it in good faith; provided, however, that this sentence shall not affect the
obligation of any other party receiving such payment to hold such payment for
the benefit of, and to pay over such payment over to, the holders of Senior Debt
or their Representative.
The consolidation of the Company with, or the merger of the Company
with or into, another person or the liquidation or dissolution of the Company
following the conveyance, transfer or lease of its properties and assets
substantially as an entirety to another person upon the terms and conditions set
forth in Article Six shall not be deemed a dissolution, winding-up, liquidation,
reorganization, assignment for the benefit of creditors or marshaling of assets
and liabilities of the Company for the purposes of this Article Four if the
person formed by such consolidation or the surviving entity of such merger or
the person which acquires by conveyance, transfer or lease such properties and
assets substantially as an entirety, as the case may be, shall, as a part of
such consolidation, merger, conveyance, transfer or lease, comply with the
conditions set forth in such Article Six.
The Company shall give prompt notice to the Trustee prior to any
dissolution, winding-up, total or partial liquidation or reorganization
(including, without limitation, in bankruptcy, insolvency, or receivership
proceedings or upon any assignment for the benefit of creditors or any other
marshalling of the Company's assets and liabilities).
Section 4.4. Holders To Be Subrogated to Rights of Holders of Senior Debt.
Subject to the payment in full in cash or Cash Equivalents of all
Senior Debt, Holders shall be subrogated to the rights of the holders of Senior
Debt to receive payments or distributions of assets of the Company applicable to
the Senior Debt until all amounts owing on the Securities shall be paid in full
in cash, and for the purpose of such subrogation no payments or distributions to
the holders of Senior Debt by or on behalf of the Company, or by or on behalf of
the Holders by virtue of this Article Four, which otherwise would have been made
to the Holders, shall, as between the Company and the Holders, be deemed to be
payment by the Company to or on account of the Senior Debt, it being understood
that the provisions of this Article Four are and are intended solely for the
purpose of defining the relative rights of the Holders, on the one hand, and the
holders of Senior Debt, on the other hand.
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If any payment or distribution to which the Holders would otherwise
have been entitled but for the provisions of this Article Four shall have been
applied, pursuant to the provisions of this Article Four, to the payment of all
amounts payable under the Senior Debt, then the Holders shall be entitled to
receive from the holders of such Senior Debt any payments or distributions
received by such holders of Senior Debt in excess of the amount sufficient to
pay all amounts payable under or in respect of the Senior Debt in full in cash
or Cash Equivalents.
Section 4.5. Obligations of the Company Unconditional.
Nothing contained in this Article Four or elsewhere in this Indenture
or in the Securities is intended to or shall impair, as between the Company and
the Holders, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders the principal of and interest on the Securities as and
when the same shall become due and payable in accordance with their terms, or is
intended to or shall affect the relative rights of the Holders and creditors of
the Company other than the holders of the Senior Debt, nor shall anything herein
or therein prevent the Trustee or any Holder from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture, subject
to the rights, if any, under this Article Four, of the holders of Senior Debt in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy. Upon any payment or distribution of assets or
securities of the Company referred to in this Article Four, the Trustee, subject
to the provisions of Sections 8.1 and 8.2, and the Holders shall be entitled to
rely upon any order or decree made by any court of competent jurisdiction in
which any dissolution, winding-up, liquidation or reorganization proceedings are
pending, or a certificate of the receiver, trustee in bankruptcy, liquidating
trustee or agent or other person making any payment or distribution to the
Trustee or to the Holders for the purpose of ascertaining the persons entitled
to participate in such payment or distribution, the holders of Senior Debt and
other Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article Four. Nothing in this Section 4.5 shall apply to the
claims of, or payments to, the Trustee under or pursuant to Section 8.7.
Section 4.6. Trustee Entitled To Assume Payments Not Prohibited in Absence of
Notice.
The Trustee shall not at any time be charged with knowledge of the
existence of any facts that would prohibit the making of any payment to or by
the Trustee unless and until the Trustee shall have received written notice
thereof from the Company or from one or more holders of Senior Debt or from any
Representative therefor and, prior to the receipt of any such notice, the
Trustee, subject to the provisions of Sections 8.1 and 8.2, shall be entitled in
all respects conclusively to assume that no such fact exists.
Section 4.7. Application by Trustee of Assets Deposited with It.
U.S. Legal Tender or U.S. Government Obligations deposited in trust
with the Trustee pursuant to and in accordance with Section 9.2 shall be for the
sole benefit of Holders and, to the extent allocated for the payment of
Securities, shall not be subject to the subordination provisions of this Article
Four. Otherwise, any deposit of assets or securities by or
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on behalf of the Company with the Trustee or any Paying Agent (whether or not in
trust) for the payment of principal of or interest on any Securities shall be
subject to the provisions of this Article Four; provided, however, that if prior
to the second Business Day preceding the date on which by the terms of this
Indenture any such assets may become distributable for any purpose (including,
without limitation, the payment of principal of or premium or interest on any
Security) the Trustee or such Paying Agent shall not have received with respect
to such assets the notice provided for in Section 4.6, then the Trustee or such
Paying Agent shall have full power and authority to receive such assets and to
apply the same to the purpose for which they were received, and shall not be
affected by any notice to the contrary received by it on or after such date.
The foregoing shall not apply to the Paying Agent if the Company or any
Subsidiary or Affiliate of the Company is acting as Paying Agent. Nothing
contained in this Section 4.7 shall limit the right of the holders of Senior
Debt to recover payments as contemplated by this Article Four.
Section 4.8. No Waiver of Subordination Provisions.
(a) No right of any present or future holder of any Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
(b) Without limiting the generality of subsection (a) of this Section
4.8, the holders of Senior Debt may, at any time and from time to time, without
the consent of or notice to the Trustee or the Holders without incurring
responsibility to the Holders and without impairing or releasing the
subordination provided in this Article Four or the obligations hereunder of the
Holders to the holders of Senior Debt, do any one or more of the following: (1)
change the manner, place or terms of payment or extend the time of payment of,
or renew or alter, Senior Debt or any instrument evidencing the same or any
agreement under which Senior Debt is outstanding; (2) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Debt; (3) release any person liable in any manner for the collection or payment
of Senior Debt; and (4) exercise or refrain from exercising any rights against
the Company and any other person; provided, however, that in no event shall any
such actions limit the right of the Holders to take any action to accelerate the
maturity of the Securities pursuant to Article Seven or to pursue any rights or
remedies hereunder or under applicable laws if the taking of such action does
not otherwise violate the terms of this Indenture.
(c) Each Holder by accepting a Security agrees that the
Representative of any Senior Debt (including, without limitation, the Credit
Agent), in its discretion, without notice or demand and without affecting any
rights of any holder of Senior Debt under this Article Four, may foreclose any
mortgage or deed of trust covering interests in real property secured thereby,
by judicial or nonjudicial sale; and such Holder hereby waives any defense to
the enforcement by the Representative of any Senior Debt (including, without
limitation, the Credit Agent) or by any holder of any Senior Debt against such
Holder of this Article Four after a judicial or nonjudicial
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sale or other disposition of its interests in real property secured by such
mortgage or deed of trust; and such Holder expressly waives any defense or
benefits that may be derived from comparable provisions of the laws of any
jurisdiction or any similar statute in effect in any jurisdiction.
Section 4.9. Holders Authorize Trustee To Effectuate Subordination of
Securities.
Each Holder by his or her acceptance of a Security authorizes and
expressly directs the Trustee on his or her behalf to take such action as may be
necessary or appropriate to effect the subordination provisions contained in
this Article Four, and appoints the Trustee his or her attorney-in-fact for such
purpose, including, in the event of any dissolution, winding-up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company) tending towards
liquidation or reorganization of the business and assets of the Company, the
immediate filing of a claim for the unpaid balance of such Holder's Securities
in the form required in said proceedings and cause said claim to be approved. If
the Trustee does not file a proper claim or proof of debt in the form required
in such proceeding prior to 30 days before the expiration of the time to file
such claim or claims, then the holders of the Senior Debt or their
Representative is hereby authorized to file an appropriate claim for and on
behalf of the Holders. Nothing herein contained shall be deemed to authorize
the Trustee or the holders of Senior Debt or their Representative to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee or the holders
of Senior Debt or their Representative to vote in respect of the claim of any
Holder in any such proceeding.
Section 4.10. Right of Trustee To Hold Senior Debt.
The Trustee shall be entitled to all of the rights set forth in this
Article Four in respect of any Senior Debt at any time held by it to the same
extent as any other holder of Senior Debt, and nothing in this Indenture shall
be construed to deprive the Trustee of any of its rights as such holder.
Section 4.11. No Suspension of Remedies.
The failure to make a payment on account of principal of or interest
on the Securities by reason of any provision of this Article Four shall not be
construed as preventing the occurrence of a Default or an Event of Default under
Section 7.1.
Nothing contained in this Article Four shall limit the right of the
Trustee or the Holders to take any action to accelerate the maturity of the
Securities pursuant to Article Seven or to pursue any rights or remedies
hereunder or under applicable law, subject to the rights, if any, under this
Article Four of the holders, from time to time, of Senior Debt.
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Section 4.12. No Fiduciary Duty of Trustee to Holders of Senior Debt.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders (other than
for its willful misconduct or gross negligence) if it shall in good faith
mistakenly pay over or deliver to the Holders or the Company or any other
person, money or assets to which any holders of Senior Debt shall be entitled by
virtue of this Article Four or otherwise. Nothing in this Section 4.12 shall
affect the obligation of any person other than the Trustee to hold such payment
for the benefit of, and to pay such payment over to, the holders of Senior Debt
or their Representative.
ARTICLE V.
COVENANTS
Section 5.1. Payment of Securities.
The Company shall pay the principal of and interest on the Securities
on the dates and in the manner provided in the Securities. An installment of
principal of or interest on the Securities shall be considered paid on the date
it is due if the Trustee or Paying Agent (other than the Company or a
Subsidiary) holds on that date U.S. Legal Tender designated for and sufficient
to pay the installment; provided, however, that U.S. Legal Tender held by the
Trustee for the benefit of holders of Senior Debt or the payment of which to the
Holders is prohibited pursuant to the provisions of Article Four or otherwise
shall not be considered to be designated for the payment of any installment of
principal or interest on the Securities within the meaning of this Section 5.1.
The Company shall pay interest on overdue principal at the rate borne
by the Securities and it shall pay interest on overdue installments of interest
at the same rate, to the extent lawful.
Section 5.2. Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, The City
of New York, the office or agency required under Section 2.3. The Company shall
give prior notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the address of the Trustee set forth in Section 11.2.
Section 5.3. Limitation on Restricted Payments.
(a) The Company will not, and will not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any
dividend or make any distribution (other than dividends or distributions payable
in Qualified Capital Stock of the Company) on or in respect of shares of the
Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem
or otherwise acquire or retire for value any Capital Stock of the Company
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or any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock, (c) make any principal payment on, purchase, defease,
redeem, prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company that is subordinate or junior in right of
payment to the Securities or (d) make any Investment (other than Permitted
Investments) (each of the foregoing actions set forth in clauses (a), (b), (c)
and (d) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto, (i) a Default of
an Event of Default shall have occurred and be continuing or (ii) the Company is
not able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the proviso in Section 5.12 or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined reasonably and in good faith by the Board of Directors of
the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated
Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100%
of such loss) of the Company earned subsequent to the Issue Date and on or prior
to the date the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus (x) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary) from
the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company (excluding net cash
proceeds received from the sale of Capital Stock to employees of the Company and
any of its Subsidiaries after the Issue Date to the extent such amounts have
been applied in accordance with clause (4) of the following paragraph); plus
(y) without duplication of any amounts included in clause (iii) (x) above, 100%
of the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock (excluding, in the case of
clauses (iii) (x) and (y), any net cash proceeds from a Public Equity Offering
to the extent used to redeem the Securities); plus (z) aggregate net cash
proceeds received by the Company or any of its Subsidiaries as a distribution or
repayment with respect to, or from the sale of, Investments (other than
Permitted Investments) made after the Issue Date up to the original amount of
such Investments.
(b) Notwithstanding the foregoing, the provisions set forth in
the immediately preceding paragraph do not prohibit: (1) the payment of any
dividend within 60 days after the date of declaration of such dividend if the
dividend would have been permitted on the date of declaration; (2) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any shares of Capital Stock of the Company, either (i) solely in exchange for
shares of Qualified Capital Stock of the Company or (ii) through the application
of net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Securities either (i) solely in exchange for shares of
Qualified Capital Stock of the Company, or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary) of (A) shares of Qualified Capital Stock of the Company or
(B) Refinancing Indebtedness; (4) so long as no Default or Event of Default
shall have occurred and be continuing, repurchases by the Company of Capital
Stock of the
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Company from employees of the Company or any of its Subsidiaries or their
authorized representatives upon the death, disability or termination of
employment of such employees or pursuant to a written contract or plan or
pursuant to a put/call arrangement covering 20,211 shares of Common Stock in
existence on the Issue Date, in an aggregate amount not to exceed $1,000,000 in
any calendar year plus an aggregate amount of net cash proceeds received by the
Company subsequent to the Issue Date from the sale of Capital Stock to employees
of the Company and any of its Subsidiaries to the extent such proceeds have not
been included in making the calculation in clause (iii) of the immediately
preceding paragraph; (5) so long as no Default or Event of Default shall have
occurred and be continuing, the payment of cash dividends on the Series A
Preferred Stock commencing with the first payment due after ____________, 2002;
and (6) so long as no Default or Event of Default shall have occurred and be
continuing, the repurchase of Series A Preferred Stock after a Change of
Control; PROVIDED that the Company has completed the Change of Control Offer.
In determining the aggregate amount of Restricted Payments made subsequent to
the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2), (4) and (5) shall be
included in such calculation.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment complies with this Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available internal quarterly
financial statements.
Section 5.4. Corporate Existence.
Except as otherwise permitted by Article Six, the Company shall do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence and the rights (charter and statutory) and
franchises of the Company; provided, however, that the Company shall not be
required to preserve, with respect to itself, any right or franchise, if the
Board of Directors of the Company, as the case may be, shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company.
Section 5.5. Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (i) all taxes, assessments and
governmental charges (including withholding taxes and any penalties, interest
and additions to taxes) levied or imposed upon it or any of the Restricted
Subsidiaries or properties of it or any of the Restricted Subsidiaries and (ii)
all lawful claims for labor, materials and supplies that, if unpaid, might by
law become a Lien upon the property of it or any of the Restricted Subsidiaries;
provided, however, that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim if
either (a) the amount, applicability or validity thereof is being contested in
good faith by appropriate proceedings and an adequate reserve has been
established therefor to the extent required by GAAP or (b) the failure to make
such payment or effect such discharge (together with all other such failures)
would not have a material adverse effect on the
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financial condition or results or operations of the Company and the Restricted
Subsidiaries taken as a whole.
Section 5.6. Maintenance of Properties and Insurance.
(a) The Company shall cause all properties used or useful to the
conduct of its business or the business of any of the Restricted Subsidiaries to
be maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and shall cause to be made all necessary repairs,
renewals, replacements, betterments and improvements thereof, all as in its
judgment may be necessary, so that the business carried on in connection
therewith may be properly and advantageously conducted at all times unless the
failure to so maintain such properties (together with all other such failures)
would not have a material adverse effect on the financial condition or results
of operations of the Company and the Restricted Subsidiaries taken as a whole;
provided, however, that nothing in this Section 5.6 shall prevent the Company or
any Restricted Subsidiary from discontinuing the operation or maintenance of any
of such properties, or disposing of any of them, if such discontinuance or
disposal is either (i) in the ordinary course of business, (ii) in the good
faith judgment of the Board of Directors of the Company or the Restricted
Subsidiary concerned, or of the senior officers of the Company or such
Restricted Subsidiary, as the case may be, desirable in the conduct of the
business of the Company or such Restricted Subsidiary, as the case may be, or
(iii) is otherwise permitted by this Indenture.
(b) The Company shall provide or cause to be provided, for
itself and each of the Restricted Subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds that, in the reasonable,
good faith opinion of the Company are adequate and appropriate for the conduct
of the business of the Company and the Restricted Subsidiaries in a prudent
manner, with reputable insurers or with the government of the United States of
America or an agency or instrumentality thereof, in such amounts, with such
deductibles, and by such methods as shall be either (i) consistent with past
practices of the Company or the applicable Restricted Subsidiary or (ii)
customary, in the reasonable, good faith opinion of the Company, for
corporations similarly situated in the industry, unless the failure to provide
such insurance (together with all other such failures) would not have a material
adverse effect on the financial condition or results of operations of the
Company and the Restricted Subsidiaries, taken as a whole.
Section 5.7. Compliance Certificate; Notice of Default.
(a) The Company shall deliver to the Trustee within 120 days after
the end of the Company's fiscal year an Officers' Certificate stating that a
review of its activities and the activities of the Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether it has kept, observed, performed and
fulfilled its obligations under this Indenture and further stating, as to each
such Officer signing such certificate, that to the best of his or her knowledge
the Company during such preceding fiscal year has kept, observed, performed and
fulfilled each and every such covenant and no event of default in respect of any
payment obligation under the Credit Agreement and no Default or Event of Default
occurred during such year or, if such signers do
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know of such an event of default, Default or Event of Default, the certificate
shall describe the event of default, Default or Event of Default and its status
with particularity. The Officers' Certificate shall also notify the Trustee
should the Company elect to change the manner in which it fixes its fiscal year
end.
(b) So long as, and to the extent, not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
Company shall deliver to the Trustee within 120 days after the end of each
fiscal year a written statement by the Company's independent certified public
accountants stating (A) that their audit examination has included a review of
the terms of this Indenture and the Securities as they relate to accounting
matters, and (B) whether, in connection with their audit examination, any
Default has come to their attention and if such a Default has come to their
attention, specifying the nature and period of existence thereof.
(a) The Company shall deliver to the Trustee, forthwith upon becoming
aware, and in any event within 5 days after the occurrence, of (i) any Default
or Event of Default; (ii) any event of default in respect of any payment
obligation under the Credit Agreement or any event of default under any bond,
debenture, note, or other evidence of Indebtedness of the Company or any of the
Subsidiaries, or under any mortgage, indenture or other instrument, an Officers'
Certificate specifying with particularity such event.
Section 5.8. Compliance with Laws.
The Company shall comply, and shall cause each of the Restricted
Subsidiaries to comply, with all applicable statutes, rules, regulations, orders
and restrictions of the United States of America, all states and municipalities
thereof, and of any governmental department, commission, board, regulatory
authority, bureau, agency and instrumentality of the foregoing, in respect of
the conduct of their respective businesses and the ownership of their respective
properties, except such as are being contested in good faith and by appropriate
proceedings and except for such noncompliances as would not in the aggregate
have a material adverse effect on the financial condition or results of
operations of the Company and the Restricted Subsidiaries taken as a whole.
Section 5.9. SEC Reports.
The Company will deliver to the Trustee within 15 days after the
filing of the same with the Commission, copies of the quarterly and annual
reports and of the information, documents and other reports, if any, which the
Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company
will also comply with the other provisions of TIA Section 314(a).
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Section 5.10. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury law or
other law that would prohibit or forgive the Company from paying all or any
portion of the principal of or interest on the Securities as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Indenture; and (to the extent
that it may lawfully do so) the Company hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not hinder, delay or
impede the execution of any power herein granted to the Trustee, but will suffer
and permit the execution of every such power as though no such law had been
enacted.
Section 5.11. Limitation on Transactions with Affiliates.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction or series of related transactions (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with, or for the benefit of, any of its Affiliates (each an "Affiliate
Transaction"), other than (x) Affiliate Transactions permitted under paragraph
(b) below and (y) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $1,000,000 shall be approved by the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $5,000,000, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company (including customary provisions contained in
employment agreements with executive officers of the Company) as determined in
good faith by the Company's Board of Directors or senior management; (ii)
transactions exclusively between or among the Company and any of its Wholly
Owned Restricted Subsidiaries or exclusively between or among such Wholly Owned
Restricted Subsidiaries, provided such transactions are not otherwise prohibited
by this Indenture; (iii) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction
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contemplated thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; (iv) Restricted
Payments permitted by Section 5.3; (v) the payments by the Company under that
certain lease of its Richmond, California facility between the Company and M. F.
Vukelich Co. dated as of December 1, 1995, as amended on December 13, 1995; and
(vi) the payments by the Company under that certain residential lease rental
agreement and deposit receipt between the Company and Michael F. Vukelich, as
guardian of Trisha Vukelich, dated as of December 13, 1995.
Section 5.12. Limitation on Incurrences of Additional Indebtedness.
The Company will not, and will not permit any of its Restricted
Subsidiaries to Incur any Indebtedness (other than Permitted Indebtedness);
PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred
and be continuing at the time of or as a consequence of the incurrence of any
such Indebtedness, the Company may incur Indebtedness (including, without
limitation, Acquired Indebtedness) and Restricted Subsidiaries of the Company
may incur Acquired Indebtedness, in each case if on the date of the Incurrence
of such Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to
1.0.
Section 5.13. Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries.
The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) this Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired; (5) agreements existing on the
Issue Date to the extent and in the manner such agreements are in effect on the
Issue Date; (6) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) above; PROVIDED, HOWEVER, that the provisions relating to
such encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (4) or (5); (7) Indebtedness or other
contractual requirements of a Receivables Subsidiary in connection with a
Qualified Receivables
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Transaction, provided that such restrictions apply only to such Receivables
Subsidiary; or (8) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (c) above on the property so acquired.
Section 5.14. Limitation on Liens.
The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
permit or suffer to exist any Liens of any kind against or upon any property or
assets of the Company or any of its Restricted Subsidiaries whether owned on the
Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom
unless (i) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Securities, the Securities are
secured by Lien on such property, assets or proceeds that is senior in priority
to such Liens and (ii) in all other cases, the Securities are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Senior Debt; (C) Liens securing the Securities; (D) Liens of the
Company or a Wholly Owned Restricted Subsidiary of the Company on assets of any
Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under this Indenture and which has been incurred in accordance with
the provisions of this Indenture; PROVIDED, HOWEVER, that such Liens (A) are no
less favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (B) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
Section 5.15. Limitation on Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder will have
the right to require that the Company purchase all or a portion of such Holder's
Securities pursuant to the offer described below (the "Change of Control
Offer"), at a purchase price equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase.
(b) No later than 30 days following the date upon which the Change of
Control occurred, the Company must send, by first class mail, a notice to each
Holder, with a copy to the Trustee, which notice shall govern the terms of the
Change of Control Offer. Notice of an event giving rise to a Change of Control
shall be given on the same date and in the same manner to all Holders. Such
notice shall state:
(1) that the Change of Control Offer is being made pursuant to
this Section 5.15 and that all Securities tendered will be accepted for
payment;
(2) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be no earlier than 30 days nor
later than 45 days from the date such notice is mailed, other than as may be
required by law) (the "Change of Control Payment Date");
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(3) that any Security not tendered will continue to accrue
interest if interest is then accruing;
(4) that, unless (i) the Company defaults in making payment
therefor or (ii) such payment is prohibited pursuant to Article Four, any
Security accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control Payment Date;
(5) that Holders electing to have a Security purchased
pursuant to a Change of Control Offer will be required to surrender the
Security, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Security completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
prior to the Change of Control Payment Date;
(6) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than two Business Days prior to the
Change of Control Payment Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the
Securities the Holder delivered for purchase and a statement that such Holder
is withdrawing his or her election to have such Security purchased;
(7) that Holders whose Securities are purchased only in part
will be issued new Securities equal in principal amount to the unpurchased
portions of the Securities surrendered; provided that each Security purchased
and each Security issued shall be in an original principal amount of $1,000
or integral multiples thereof;
(8) that each Change of Control Offer is required to remain
open for at least 20 Business Days or such longer period as may be required
by law and until 5:00 p.m. New York City time on the applicable Change of
Control Payment Date; and
(9) the circumstances and relevant facts regarding such Change
of Control.
(c) On or before the Change of Control Payment Date, the Company
shall (i) accept for payment Securities or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent U.S. Legal
Tender sufficient to pay the purchase price of all Securities so tendered and
(iii) deliver to the Trustee Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail to the Holders of Securities so
accepted payment in an amount equal to the purchase price (and the Trustee shall
promptly authenticate and mail to such Holders new Securities equal in principal
amount to any unpurchased portion of the Securities surrendered provided that
each such new Security shall be in the principal amount of $1,000 or integral
multiples thereof) unless such payment is prohibited pursuant to Article Four or
otherwise. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date. For purposes of this Section 5.15, the Trustee shall act as the Paying
Agent.
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(d) Notwithstanding the foregoing, prior to the mailing of the notice
of a Change of Control Offer referred to above, within 30 days following a
Change of Control, the Company shall either (i) repay in full and terminate all
commitments under Indebtedness under the Credit Agreement and all other Senior
Debt the terms of which require repayment upon a Change of Control or offer to
repay in full and terminate all such commitments under all Indebtedness under
the Credit Agreement and all such other Senior Debt and to repay the
Indebtedness owed to each lender which has accepted such offer, or (ii) obtain
the requisite consents under the Credit Agreement and all other Senior Debt to
permit the repurchase of the Securities as provided above. The Company shall
first comply with the covenant in the immediately preceding sentence before it
shall be required to repurchase Securities pursuant to the provisions described
above.
(e) The Company must comply with Rule 14e-1 under the Exchange Act
and other provisions of state and federal securities laws to the extent
applicable in connection with a Change of Control Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this Section 5.15, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the provisions of this Section 5.15 by virtue thereof.
Section 5.16. Limitation on Asset Sales.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company or the
applicable Restricted Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the fair market value of the
assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors), (ii) at least 70% of the consideration received
by the Company or the Restricted Subsidiary, as the case may be, from such Asset
Sale shall be in the form of cash or Cash Equivalents and is received at the
time of such disposition; and (iii) upon the consummation of an Asset Sale, the
Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 365 days of receipt thereof either
(A) to prepay any Senior Debt and, in the case of any Senior Debt under any
revolving credit facility, effect a permanent reduction in the availability
under such revolving credit facility, (B) to make an investment in a similar
business or properties or assets that replace the business, properties or assets
that were the subject of such Asset Sale or in properties and assets that will
be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 366th day
after an Asset Sale or such earlier date, if any, as the Board of Directors of
the Company or of such Restricted Subsidiary determines not to apply the Net
Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A),
(iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds
Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not
been applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a
"Net Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer
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Payment Date") not less than 30 nor more than 45 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a PRO RATA basis, that
amount of Securities equal to the Net Proceeds Offer Amount at a price equal to
100% of the principal amount of the Securities to be purchased, plus accrued and
unpaid interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER,
that if at any time any non-cash consideration received by the Company or any
Restricted Subsidiary of the Company, as the case may be, in connection with any
Asset Sale is converted into or sold or otherwise disposed of for cash (other
than interest received with respect to any such non-cash consideration), then
such conversion or disposition shall be deemed to constitute an Asset Sale
hereunder and the Net Cash Proceeds thereof shall be applied in accordance with
this Section 5.16. The Company may defer the Net Proceeds Offer until there is
an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of
$5,000,000 resulting from one or more Asset Sales (at which time, the entire
unutilized Net Proceeds Offer Amount, and not just the amount in excess of
$5,000,000, shall be applied as required pursuant to this paragraph).
(b) In the event of the transfer of substantially all (but not all)
of the property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under Section 6.1, the successor
corporation shall be deemed to have sold the properties and assets of the
Company and its Restricted Subsidiaries not so transferred for purposes of this
covenant, and shall comply with the provisions of this Section 5.16 with respect
to such deemed sale as if it were an Asset Sale. In addition, the fair market
value of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this Section 5.16.
(c) Notwithstanding Sections 5.16(a) and (b), the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent (i) at least 70% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED, that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
(d) Each Net Proceeds Offer will be mailed to the record Holders as
shown on the register of Holders of such Securities within 25 days following the
Net Proceeds Offer Trigger Date, with a copy to the Trustee. The notice shall
contain all instructions and materials necessary to enable such Holders to
tender Securities pursuant to the Net Proceeds Offer and shall state the
following terms:
(1) that the Net Proceeds Offer is being made pursuant to
Section 5.16 and that all Securities tendered will be accepted for payment,
provided, however, that if the aggregate principal amount of Securities tendered
in a Net Proceeds Offer plus accrued interest at the expiration of such offer
exceeds the aggregate amount of the Net Proceeds Offer, the Company shall select
the Securities to be purchased on a pro rata basis (with such adjustments as
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may be deemed appropriate by the Company so that only Securities in
denominations of $1,000 or multiples thereof shall be purchased);
(2) the purchase price (including the amount of accrued
interest) and the Net Proceeds Offer Payment Date;
(3) that any Security not tendered will continue to accrue
interest if interest is then accruing;
(4) that, unless (i) the Company defaults in making payment
therefor or (ii) such payment is prohibited pursuant to Article Four or
otherwise, any Security accepted for payment pursuant to the Net Proceeds Offer
shall cease to accrue interest after the Net Proceeds Offer Payment Date;
(5) that Holders electing to have a Security purchased pursuant
to a Net Proceeds Offer will be required to surrender the Security, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Security completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day prior to the Net Proceeds
Offer Payment Date;
(6) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than two Business Days prior to the Net
Proceeds Offer Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Securities the
Holder delivered for purchase and a statement that such Holder is withdrawing
his or her election to have such Security purchased;
(7) that Holders whose Securities were purchased only in part
will be issued new securities equal in principal amount to the unpurchased
portion of the Securities surrendered; provided, however, that each Security
purchased and each new Security issued shall be in an original principal amount
of $1,000 or integral multiples thereof; and
(8) that the Net Proceeds Offer shall remain open for a period
of 20 Business Days or such longer period as may be required by law.
(e) On or before the Net Proceeds Offer Payment Date, the Company
shall (i) accept for payment Securities or portions thereof tendered pursuant to
the Net Proceeds Offer which are to be purchased in accordance with item (b)(1)
above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay
the purchase price of all Securities to be purchased and (iii) deliver to the
Trustee Securities so accepted together with an Officers' Certificate stating
the Securities or portions thereof being purchased by the Company. The Paying
Agent shall promptly mail to the Holders of Securities so accepted payment in an
amount equal to the purchase price (and the Trustee shall promptly authenticate
and mail or deliver to such Holders a new Security equal in principal amount to
any unpurchased portion of the Security surrendered provided that each such new
Security shall be in the principal amount of $1,000 or integral multiples
thereof) unless such payment is prohibited pursuant to Article Four or
otherwise. The Company will publicly announce the results of the Net Proceeds
Offer on or as soon as
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practicable after the Net Proceeds Offer Payment Date. For purposes of this
Section 5.16, the Trustee shall act as the Paying Agent.
(f) Any amounts remaining after the purchase of Securities pursuant
to a Net Proceeds Offer shall be returned by the Trustee to the Company.
(g) The Company must comply with Rule 14e-1 under the Exchange Act
and other provisions of State and federal securities laws to the extent
applicable in connection with a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
this Section 5.16, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the provisions of this Section 5.16 by virtue thereof.
Section 5.17. Limitation on Preferred Stock of Restricted Subsidiaries.
The Company will not permit any of its Restricted Subsidiaries to
issue any Preferred Stock (other than to the Company or to a Wholly Owned
Restricted Subsidiary of the Company) or permit any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company) to own any
Preferred Stock of any Restricted Subsidiary of the Company.
Section 5.18. Limitation on Other Senior Subordinated Debt.
The Company will not incur or suffer to exist Indebtedness that is
senior in right of payment to the Securities and subordinate in right of payment
to any other Indebtedness of the Company.
Section 5.19. Limitation on Restricted and Unrestricted Subsidiaries.
(a) The Board of Directors of the Company may, if no Default or Event
of Default shall have occurred and be continuing or would result therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation is at that time permitted under Section 5.3. The Board of Directors
of the Company may, if no Default or Event of Default shall have occurred and be
continuing or would result therefrom, designate an Unrestricted Subsidiary to be
a Restricted Subsidiary; provided, however, that (i) any such redesignation
shall be deemed to be an Incurrence as of the date of such redesignation by the
Company and the Restricted Subsidiaries of the Indebtedness (if any) of such
redesignated Subsidiary for purposes of Section 5.12; and (ii) unless such
redesignated Subsidiary shall not have any Indebtedness outstanding (other than
Indebtedness which would be Permitted Indebtedness), no such designation shall
be permitted if immediately after giving effect to such redesignation and the
Incurrence of any such Indebtedness, the Company could not incur $1.00 of
additional Indebtedness pursuant to the proviso of Section 5.12. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by the filing with the Trustee of a Board Resolution of the Company
giving effect to such designation or redesignation and an Officers' Certificate
certifying that such designation or redesignation complied with the foregoing
conditions and setting forth in reasonable detail the underlying calculations.
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(b) Subsidiaries that are not designated by the Board of Directors as
Restricted or Unrestricted Subsidiaries will be deemed to be Restricted
Subsidiaries. The designation of a Restricted Subsidiary as an Unrestricted
Subsidiary shall be deemed to include a designation of all of the subsidiaries
of such Unrestricted Subsidiary as Unrestricted Subsidiaries.
Section 5.20. Limitation of Guarantees by Restricted Subsidiaries.
(a) The Company will not permit any of its Restricted Subsidiaries,
directly or indirectly, by way of the pledge of any intercompany note or
otherwise, to assume, guarantee or in any other manner become liable with
respect to any Indebtedness of the Company or any other Restricted Subsidiary of
the Company (other than (A) Indebtedness and other obligations under the Credit
Agreement, (B) Permitted Indebtedness of a Restricted Subsidiary of the Company,
(C) Indebtedness under Currency Agreements in reliance on clause (v) of the
definition of Permitted Indebtedness, or (D) Interest Swap Obligations incurred
in reliance on clause (iv) of the definition of Permitted Indebtedness), unless,
in any such case (a) such Restricted Subsidiary executes and delivers a
supplemental indenture to this Indenture, providing a guarantee of payment of
the Securities by such Restricted Subsidiary (the "Guarantee") and (b) (x) if
any such assumption, guarantee or other liability of such Restricted Subsidiary
is provided in respect of Senior Debt, the guarantee or other instrument
provided by such Restricted Subsidiary in respect of such Senior Debt may be
superior to the Guarantee pursuant to subordination provisions no less favorable
to the Holders of the Securities than those contained in this Indenture and (y)
if such assumption, guarantee or other liability of such Restricted Subsidiary
is provided in respect of Indebtedness that is expressly subordinated to the
Securities, the guarantee or other instrument provided by such Restricted
Subsidiary in respect of such subordinated Indebtedness shall be subordinated to
the Guarantee pursuant to subordination provisions no less favorable to the
Holders of the Securities than those contained in this Indenture.
(b) Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Securities shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; PROVIDED that
(a) such sale or disposition of such Capital stock or assets is otherwise in
compliance with the terms of this Indenture and (b) such assumption, guarantee
or other liability of such Restricted Subsidiary has been released by the
holders of the other Indebtedness so guaranteed.
Section 5.21. Conduct of Business.
The Company and its Restricted Subsidiaries will not engage in any
businesses which are not the same, similar or related to the businesses in which
the Company and its Restricted Subsidiaries are engaged on the Issue Date.
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ARTICLE VI.
SUCCESSOR CORPORATION
Section 6.1. Limitations on Mergers and Certain Other Transactions.
(a) The Company will not, in a single transaction or series of
related transactions, consolidate or merge with or into any Person, or sell,
assign, transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or
otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Company's Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless:
(i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Securities and the
performance of every covenant of the Securities and this Indenture on the part
of the Company to be performed or observed;
(ii) immediately after giving effect to such transaction and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
Section 5.12;
(iii) immediately before and immediately after giving effect
to such transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and
(iv) the Company or the Surviving Entity shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with the applicable
provisions of this Indenture and that all conditions precedent in this Indenture
relating to such transaction have been satisfied.
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(b) For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all of the properties or assets of one or
more Restricted Subsidiaries of the Company the Capital Stock of which
constitutes all or substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
Section 6.2. Successor Corporation Substituted.
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company in accordance with Section 6.1,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this Indenture
and the Securities with the same effect as if such surviving entity had been
named as such.
ARTICLE VII
DEFAULT AND REMEDIES
Section 7.1. Events of Default.
Each of the following events constitutes an "Event of Default":
(i) the failure to pay interest on any Securities when the same
becomes due and payable and the default continues for a period of 30 days
(whether or not such payment shall be prohibited by Article Four);
(ii) the failure to pay the principal on any Securities, when such
principal becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Securities tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not
such payment shall be prohibited by Article Four);
(iii) a default in the observance or performance of any other
covenant or agreement contained in this Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Securities
(except in the case of a failure to comply with Section 6.1, which will
constitute an Event of Default with such notice requirement but without such
passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary of the Company, or the
acceleration of the final stated maturity of any such Indebtedness if the
Aggregate principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay principal at
final maturity or which has been accelerated, aggregates $5,000,000 or more at
any time;
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(v) one or more judgments in an aggregate amount in excess of
$5,000,000 (excluding any amounts covered by insurance as to which the insurer
has acknowledged coverage) shall have been rendered against the Company or any
of its Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become final
and non-appealable;
(vi) the Company or any of its Significant Subsidiaries pursuant to or
within the meaning of any Bankruptcy Law: (a) commences a voluntary case or
proceeding; (b) consents to the entry of an order for relief against it in an
involuntary case or proceeding; (c) consents to the appointment of a Custodian
of it or for all or substantially all of its property; (d) makes a general
assignment for the benefit of its creditors; or (e) generally is not paying its
debts as they become due;
(vii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that: (a) is for relief against the Company or any of
its Significant Subsidiaries in an involuntary case or proceeding; (b) appoints
a Custodian of the Company or any of its Significant Subsidiaries, or for all or
any substantial part of their respective properties; or (c) orders the
liquidation of the Company or any of its Significant Subsidiaries, and in each
case the order or decree remains unstayed and in effect for 60 days; or
(viii) the lenders under the Credit Agreement shall commence
judicial proceedings to foreclose upon any material portion of the assets of the
Company and the Subsidiaries.
Section 7.2. Acceleration.
(a) If an Event of Default (other than an Event of Default specified
in clauses (vi) or (vii) of Section 7.1 with respect to the Company) shall occur
and be continuing, the Trustee or the Holders of at least 25% in principal
amount of outstanding Securities may declare the principal of and accrued
interest on all the Securities to be due and payable by notice in writing to the
Company and the Trustee specifying the respective Event of Default and that it
is a "notice of acceleration" (the "Acceleration Notice"), and the same (i)
shall become immediately due and payable or (ii) if there are any amounts
outstanding under the Credit Agreement, shall become immediately due and payable
upon the first to occur of an acceleration under the Credit Agreement or 5
business days after receipt by the Company and the Credit Agent under the Credit
Agreement of such Acceleration Notice. If an Event of Default specified in
clauses (vi) or (vii) of Section 7.1 with respect to the Company occurs and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding Securities shall IPSO FACTO become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder.
(b) At any time after a declaration of acceleration with respect to
the Securities as described in the preceding paragraph, the Holders of a
majority in principal amount of the Securities may rescind and cancel such
declaration and its consequences (i) if the rescission would not conflict with
any judgment or decree, (ii) if all existing Events of Default have been cured
or waived except nonpayment of principal or interest that has become due solely
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because of the acceleration, (iii) to the extent the payment of such interest is
lawful, interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of acceleration, has
been paid, (iv) if the Company has paid the Trustee its reasonable compensation
and reimbursed the Trustee for its expenses, disbursements and advances and (v)
in the event of the cure or waiver of an Event of Default of the type described
in clauses (vi) or (vii) of Section 7.1, the Trustee shall have received an
Officers' Certificate and an Opinion of Counsel that such Event of Default has
been cured or waived. No such rescission shall affect any subsequent Default or
impair any right consequent thereto.
(c) The Holders of a majority in principal amount of the Securities
may waive any existing Default or Event of Default under this Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any Securities.
(d) Holders of the Securities may not enforce this Indenture or the
Securities except as provided in this Indenture and under the TIA. Subject to
the provisions of Article Eight, the Trustee is under no obligation to exercise
any of its rights or powers under this Indenture at the request, order or
direction of any of the Holders, unless such Holders have offered to the Trustee
reasonable indemnity. Subject to all provisions of Section 7.5 and applicable
law, the Holders of a majority in aggregate principal amount of the then
outstanding Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
(e) The Company is required to provide an Officers' Certificate to
the Trustee promptly upon any such officer obtaining knowledge of any Default or
Event of Default (provided that such officers shall provide such certification
at least annually whether or not they know of any Default or Event of Default)
that has occurred and, if applicable, describe such Default or Event of Default
and the status thereof.
Section 7.3. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. No remedy is exclusive of
any other remedy. All available remedies are cumulative to the extent permitted
by law.
Section 7.4. Waiver of Past Defaults.
Subject to Sections 7.7 and 10.2, the Holders of a majority in
principal amount of the outstanding Securities by notice to the Trustee may
waive an existing Default or Event of
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Default and its consequences, except a Default in the payment of principal of or
interest on any Security as specified in clauses (i) and (ii) of Section 7.1
(other than any such Default arising solely by reason of acceleration of the
Securities). When a Default or Event of Default is waived, it is cured and
ceases.
Section 7.5. Control by Majority.
Subject to Section 2.9, the Holders of a majority in principal amount
of the outstanding Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on it, including, without limitation, any remedies
provided for in Section 7.3. Subject to Section 8.1, however, the Trustee may
refuse to follow any direction that conflicts with any law or this Indenture,
that the Trustee determines may be unduly prejudicial to the rights of another
Holder, or that may involve the Trustee in personal liability; provided,
however, that the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
Section 7.6. Limitation on Suits.
A Holder may not pursue any remedy with respect to this Indenture or
the Securities unless:
(1) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(2) the Holder or Holders of at least 25% in principal amount of the
outstanding Securities make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense to be
incurred in compliance with such request;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period the Holder or Holders of a majority in
principal amount of the outstanding Securities do not give the Trustee a
direction which, in the opinion of the Trustee, is inconsistent with the
request.
A Holder may not use this Indenture to prejudice the rights of another
Holder or to obtain a preference or priority over such other Holder.
Section 7.7. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of
any Holder to receive payment of principal of and interest on a Security, on or
after the respective due dates expressed in such Security, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of the Holder.
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Section 7.8. Collection Suit by Trustee.
If an Event of Default in payment of principal or interest specified
in clause (i) or (ii) of Section 7.1 occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company or any other obligor on the Securities for the whole amount of principal
and accrued interest remaining unpaid, together with interest on overdue
principal and, to the extent that payment of such interest is lawful, interest
on overdue installments of interest, in each case at the rate per annum borne by
the Securities and such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
Section 7.9. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders allowed in any judicial proceedings relating to the Company or any other
obligor upon the Securities, any of their respective creditors or any of their
respective property and shall be entitled and empowered to collect and receive
any monies or other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial proceedings is
hereby authorized by each Holder to make such payments to the Trustee and, in
the event that the Trustee shall consent to the making of such payments directly
to the Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel, and any other amounts due the Trustee under Section 8.7. Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder, or to authorize the Trustee to vote in respect of
the claim of any Holder in any such proceeding.
Section 7.10. Priorities.
If the Trustee collects any money pursuant to this Article Seven, it
shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 8.7;
Second: subject to Article Four, to Holders for interest accrued on
the Securities, ratably, without preference or priority of any kind, according
to the amounts due and payable on the Securities for interest; and
Third: subject to Article Four, to Holders for principal amounts due
and unpaid on the Securities, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Securities for principal.
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The Trustee, upon prior notice to the Company, may fix a record date
and payment date for any payment to Holders pursuant to this Section 7.10.
Section 7.11. Rights and Remedies Cumulative.
No right or remedy herein conferred upon or reserved to the Trustee or
to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 7.12. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder to exercise any
right or remedy accruing upon any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article Seven or by law to the
Trustee or to the Holders may be exercised from time to time, and as often as
may be deemed expedient, by the Trustee or by the Holders, as the case may be.
Section 7.13. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 7.13 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 7.7, or a suit by a Holder or Holders of more than 10% in
principal amount of the outstanding Securities.
ARTICLE VIII.
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture
and covenants and agrees to perform the same, as herein expressed.
Section 8.1. Duties of Trustee.
(a) If a Default or an Event of Default of which a Trust Officer of
the Trustee is aware has occurred and is continuing, the Trustee shall exercise
such of the rights and powers vested in it by this Indenture and use the same
degree of care and skill in its exercise thereof as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs.
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(b) Except during the continuance of a Default or an Event of Default
of which the Trust Officer of the Trustee is aware:
(1) The Trustee need undertake to perform only those duties as
are specifically set forth in this Indenture and no covenants or obligations
shall be implied in this Indenture against the Trustee.
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. However, the
Trustee shall examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee shall have no liability except for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(1) This paragraph does not limit the effect of paragraph (b) of
this Section 8.1.
(2) The Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction received
by it pursuant to Section 7.5.
(d) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 8.1.
(f) The Trustee shall not be liable for interest on any assets
received by it. Assets held in trust by the Trustee need not be segregated from
other assets except to the extent required by law.
Section 8.2. Rights of Trustee.
Subject to Section 8.1:
(a) The Trustee may rely on and shall be protected in acting or
refraining from acting upon any document believed by it to be genuine and to
have been signed or presented by the proper Person, including, without
limitation, any Person purporting to be a holder of Senior
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Debt or a Representative. The Trustee need not investigate any fact or matter
stated in the document or the status of any such Person delivering such
document.
(b) Before the Trustee acts or refrains from acting, it may consult
with counsel and may require in addition to written direction from the Company
an Officers' Certificate or an Opinion of Counsel, which shall conform to
Sections 11.4 and 11.5. The Trustee shall not be liable for any action it takes
or omits to take in good faith in reliance on such certificate or opinion.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any attorney or agent
appointed with due care.
(d) The Trustee shall not be liable for any action that it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, notice, request, direction, consent, order, bond, debenture, or other
paper or document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Section 8.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company, its
Subsidiaries, or their respective Affiliates with the same rights it would have
if it were not Trustee. Any Agent may do the same with like rights. However,
the Trustee must comply with Sections 8.10 and 8.11.
Section 8.4. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement in the Securities other than the Trustee's certificate of
authentication.
Section 8.5. Notice of Default.
If a Default or an Event of Default occurs and is continuing and if it
is known to a Trust Officer of the Trustee, the Trustee shall mail to each
Holder notice of the Default or Event of Default within 90 days after such
Default or Event of Default occurs or if such Default or
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Event of Default is known to a Trust Officer of the Trustee during such 90-day
period, promptly after such Default or Event of Default becomes known to a Trust
Officer of the Trustee; provided, however, that, except in the case of a Default
or Event of Default in the payment of the principal of or interest on any
Security, including the failure to make payment on a Change of Control Payment
Date pursuant to a Change of Control Offer or payment when due pursuant to a Net
Proceeds Offer, the Trustee may withhold such notice if it in good faith
determines that withholding such notice is in the interest of the Holders.
Section 8.6 Reports by Trustee to Holders.
Within 60 days after each September 30 beginning with the first
September 30 following the date of this Indenture, the Trustee shall, to the
extent that any of the events described in TIA Section 313(a) occurred within
the previous twelve months, but not otherwise, mail to each Holder a brief
report dated as of such September 30 that complies with TIA Section 313(a).
The Trustee also shall comply with TIA Sections 313(b) and 313(c).
A copy of each report at the time of its mailing to Holders shall be
mailed to the Company and filed with the Commission and each stock exchange, if
any, on which the Securities are listed.
The Company shall notify the Trustee if the Securities become listed
on any stock exchange.
Section 8.7. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, expenses
and advances incurred or made by it. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss or liability incurred by it except for such actions to the
extent caused by any negligence or bad faith on its part, arising out of or in
connection with the administration of this trust and its rights or duties
hereunder. The Trustee shall notify the Company promptly of any claim asserted
against the Trustee for which it may seek indemnity. The Company shall defend
the claim and the Trustee shall cooperate in the defense. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel; provided, however, that the Company will not be required to pay
such fees and expenses if it assumes the Trustee's defense and there is no
conflict of interest between the Company and the Trustee in connection with such
defense as reasonably determined by the Trustee. The Company need not pay for
any settlement made without its written consent. The Company need not reimburse
any expense or indemnify against any loss or liability to the extent incurred by
the Trustee through its negligence, bad faith or willful misconduct.
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To secure the Company's payment obligations in this Section 8.7, the
Trustee shall have a lien prior to the Securities on all assets held or
collected by the Trustee, in its capacity as Trustee, except assets held in
trust to pay principal of or interest on particular Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 7.1(vi) or (vii) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 8.8. Replacement of Trustee.
The Trustee may resign by so notifying the Company. The Holders of a
majority in principal amount of the outstanding Securities may remove the
Trustee and appoint a successor trustee with the Company's consent, by so
notifying the Company and the Trustee. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 8.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall notify each Holder of such
event and shall promptly appoint a successor Trustee. Within one year after the
successor Trustee takes office, the Holders of a majority in principal amount of
the Securities may appoint a successor Trustee to replace the successor Trustee
appointed by the Company.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee, subject to the lien provided in Section 8.7, the resignation
or removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. A successor Trustee shall mail notice of its succession to each
Holder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the outstanding Securities may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee fails to comply with Section 8.10, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
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Notwithstanding replacement of the Trustee pursuant to this Section
8.8, the Company's obligations under Section 8.7 shall continue for the benefit
of the retiring Trustee.
Section 8.9. Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee.
Section 8.10. Eligibility; Disqualification.
This Indenture shall always have a Trustee who satisfies the
requirement of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall have a
combined capital and surplus of at least $100,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which
other securities, or certificates of interest or participation in other
securities, of the Company are outstanding, if the requirements for such
exclusion set forth in TIA Section 310(b)(1) are met.
Section 8.11. Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE IX.
SATISFACTION AND DISCHARGE OF INDENTURE
Section 9.1. Termination of the Company's Obligations.
The Company may terminate its obligations under the Securities and
this Indenture, except those obligations referred to in the penultimate
paragraph of this Section 9.1, if
(1) either (a) all Securities theretofore authenticated and
delivered (except lost, stolen or destroyed Securities which have been
replaced or paid or Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as provided
in Section 9.4) have been delivered to the Trustee for cancellation and the
Company has paid all sums payable by it hereunder, or (b) all Securities not
theretofore delivered to the Trustee for cancellation have become due and
payable and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay and discharge the
entire Indebtedness on the Securities not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and interest on
the Securities to the date of deposit together with irrevocable instructions
from the Company directing the Trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be;
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(2) the Company has paid all other sums payable by it hereunder; and
(3) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent providing for the termination of the Company's obligations under
the Securities and this Indenture have been complied with. Such Opinion of
Counsel shall also state that such satisfaction and discharge does not result
in a default under the Credit Agreement (if then in effect) or any other
agreement or instrument then known to such counsel that binds or affects the
Company.
Notwithstanding the foregoing paragraph, the Company's obligations
in Sections 2.5, 2.6, 2.7, 2.8, 5.1, 5.2 and 8.7 shall survive until the
Securities are no longer outstanding pursuant to the last paragraph of
Section 2.8. After the Securities are no longer outstanding, the Company's
obligations in Sections 8.7, 9.4 and 9.5 in respect thereof shall survive.
After such delivery or irrevocable deposit the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
the Securities and this Indenture except for those surviving obligations
specified above.
Section 9.2 Legal Defeasance and Covenant Defeasance.
(a) The Company may, at its option by Board Resolution of the Board
of Directors of the Company, at any time, with respect to the Securities, elect
to have either paragraph (b) or paragraph (c) below be applied to the
outstanding Securities upon compliance with the conditions set forth in
paragraph (d).
(b) Upon the Company's exercise under paragraph (a) of the option
applicable to this paragraph (b), the Company shall be deemed to have been
released and discharged from its obligations with respect to the outstanding
Securities on the date the conditions set forth below are satisfied
(hereinafter, "legal defeasance"). For this purpose, legal defeasance means
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Securities, which shall thereafter
be deemed to be "outstanding" only for the purposes of paragraph (e) below and
the other Sections of and matters under this Indenture referred to in (i) and
(ii) below, and to have satisfied all its other obligations under such
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same), and Holders of the Securities and any amounts deposited
under paragraph (d) below shall cease to be subject to any obligations to, or
the rights of, any holder of Senior Debt under Article Four or otherwise, except
for the following which shall survive until otherwise terminated or discharged
hereunder: (i) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Securities when such payments
are due, (ii) the Company's obligations with respect to such Securities under
Sections 2.6, 2.7 and 5.2, and, with respect to the Trustee, under Section 8.7,
(iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder
and the Company's obligations in connection therewith and (iv) this Section 9.2
and Section 9.5. Subject to compliance with this Section 9.2, the Company may
exercise its option under this paragraph (b) notwithstanding the prior exercise
of its option under paragraph (c) below with respect to the Securities.
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(c) Upon the Company's exercise under paragraph (a) of the option
applicable to this paragraph (c), the Company shall be released and discharged
from its obligations under any covenant contained in Article Four and Article
Six and in Sections 5.3, 5.5 through 5.9 and 5.11 through 5.21 with respect to
the outstanding Securities on and after the date the conditions set forth below
are satisfied (hereinafter, "covenant defeasance"), and the Securities shall
thereafter be deemed to be not "outstanding" for the purpose of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder and Holders of the Securities and
any amounts deposited under paragraph (d) below shall cease to be subject to any
obligations to, or the rights of, any holder of Senior Debt under Article Four
or otherwise. For this purpose, covenant defeasance means that, with respect to
the outstanding Securities, the Company may omit to comply with and shall have
no liability in respect of any term, condition or limitation set forth in any
such covenant listed above, whether directly or indirectly, by reason of any
reference elsewhere herein to any such covenant or by reason of any reference in
any such covenant to any other provision herein or in any other document and
such omission to comply shall not constitute a Default or an Event of Default
under Section 7.1(iii), but, except as specified above, the remainder of this
Indenture and such Securities shall be unaffected thereby.
(d) The following shall be the conditions to application of either
paragraph (b) or paragraph (c) above to the outstanding Securities:
(i) the Company must have irrevocably deposited with the Trustee
(or another trustee satisfying the requirements of Section 8.10 who shall agree
to comply with the provisions of this Section 9.2 applicable to it) in trust,
for the benefit of the Holders, cash in U.S. dollars, U.S. Government
Obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the Securities on the
Maturity Date or Redemption Date, as the case may be; provided that the Trustee
shall have been irrevocably instructed to apply such money or the proceeds of
such U.S. Government Obligations to said payments with respect to the Securities
on the Maturity Date or such Redemption Date, as the case may be;
(ii) in the case of legal defeasance, the Company shall have
delivered to the Trustee one or more Opinions of Counsel to the effect that (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this Indenture, there has been
a change in the applicable federal income tax law, in either case to the effect
that, and based thereon such Opinion of Counsel shall confirm that, the Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such legal defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such legal defeasance had not occurred;
(iii) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an Opinion of Counsel reasonably acceptable to the
Trustee confirming that the Holders will not recognize income, gain or loss for
federal income tax purposes as a
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result of such covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clauses (vi) or (vii) of
Section 7.1 are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(v) such legal defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under this Indenture
or any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound;
(vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others;
(vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the legal defeasance or the
covenant defeasance have been complied with; and
(viii) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that, after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally.
(a) All money and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee (or other qualifying trustee, collectively
for purposes of this paragraph (e), the "Trustee") pursuant to paragraph (d)
above in respect of the outstanding Securities shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Securities and
this Indenture, to the payment, either directly or through any Paying Agent
(other than the Company or any Affiliate of the Company), to the Holders of such
Securities of all sums due and to become due thereon in respect of principal,
premium and interest, but such money need not be segregated from other funds
except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to paragraph (d) above or the principal, premium, if any, and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding
Securities. The Company's obligations to pay and indemnify the Trustee as set
forth in this paragraph shall survive the termination of this Indenture and the
Securities.
Anything in this Section 9.2 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request,
in writing, by the Company any money or U.S. Government Obligations held by it
as provided in paragraph (d) above which,
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in the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof which would then be required to be deposited to
effect an equivalent legal defeasance or covenant defeasance.
Section 9.3. Application of Trust Money.
The Trustee shall hold in trust money or U.S. Government Obligations
deposited with it pursuant to Sections 9.1 and 9.2, and shall apply the
deposited money and the money from U.S. Government Obligations in accordance
with this Indenture to the payment of principal of, premium, if any, and
interest on the Securities.
Section 9.4. Repayment to the Company.
Subject to Sections 8.7, 9.1 and 9.2, the Trustee shall promptly pay
to the Company upon receipt by the Trustee of an Officers' Certificate, any
excess money, determined in accordance with Section 9.2, held by it at any
time. The Trustee and the Paying Agent shall pay to the Company, as the case
may be, upon receipt by the Trustee or the Paying Agent, as the case may be,
of an Officers' Certificate, any money held by it for the payment of
principal, premium, if any, or interest that remains unclaimed for two years
after payment to the Holders is required; provided, however, that the Trustee
and the Paying Agent before being required to make any payment may, but need
not, at the expense of the Company cause to be published once in a newspaper
of general circulation in The City of New York or mail to each Holder
entitled to such money notice that such money remains unclaimed and that
after a date specified therein, which shall be at least 30 days from the date
of such publication or mailing, any unclaimed balance of such money then
remaining will be repaid to the Company. After payment to the Company, as
the case may be, Holders entitled to money must look solely to the Company
for payment as general creditors unless an applicable abandoned property law
designates another person, and all liability of the Trustee or Paying Agent
with respect to such money shall thereupon cease.
Section 9.5. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Indenture by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then and only then the Company's, if any, obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had been made pursuant to this Indenture until such time as the
Trustee is permitted to apply all such money or U.S. Government Obligations
in accordance with this Indenture; provided, however, that if the Company
have made any payment of principal of, premium, if any, or interest on any
Securities because of the reinstatement of its obligations, the Company shall
be subrogated to the rights of the holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
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ARTICLE X.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 10.1. Without Consent of Holders.
The Company when authorized by a Board Resolution, and the Trustee,
together, may amend or supplement this Indenture or the Securities without
notice to or consent of any Holder:
(1) to cure any ambiguity, defect or inconsistency or to comply
with requirements of the Commission in order to maintain the qualification of
this Indenture under the TIA, so long as such change does not, in the opinion
of the Trustee, adversely affect the rights of any of the Holders in any
material respect; and
(2) to comply with Article Six.
In formulating its opinion on such matters, the Trustee will be
entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an Opinion of Counsel.
Section 10.2. With Consent of Holders.
Subject to Section 7.7, the Company, when authorized by a Board
Resolution, the Trustee and the Holders of not less than a majority in
aggregate principal amount of the Securities then outstanding, may amend or
supplement (or waive compliance with any provision of) this Indenture or the
Securities without any notice to any other Holder, except that without the
consent of each Holder of the Securities affected, no such amendment,
supplement or waiver may:
(1) reduce the principal amount of the Securities whose
Holders must consent to an amendment, supplement or waiver of any provision
of this Indenture or the Securities;
(2) reduce the rate of or change or have the effect of changing
the time for payment of interest, including defaulted interest, on any
Securities;
(3) reduce the principal of or change or have the effect of
changing the fixed maturity of any Securities, or change the date on which any
Securities may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor (other than a payment required under Sections 5.15
or 5.16);
(4) make the principal of, or interest on, any Securities
payable with anything or in any manner other than as provided for in the
Securities;
(5) make any changes in the provisions of this Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Securities on or after
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the due date thereof or to bring suit to enforce such payment, or permitting
Holders of a majority in principal amount of Securities to waive Defaults or
Events of Default; or
(6) modify or change any provision of this Indenture or the
related definitions affecting the Subordination or ranking of the Securities in
a manner which adversely affects the Holders.
The Company agrees that no amendment, supplement or waiver under this
Article Ten may make any change that adversely affects the rights under Article
Four of any holders of any Senior Debt unless the holders of such Senior Debt
consent to the change.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental indenture.
In connection with any amendment, supplement or waiver under this
Article Ten, the Company may, but shall not be obligated to, offer to any Holder
who consents to such amendment, supplement or waiver, or to all Holders,
consideration for such Holder's consent to such amendment, supplement or waiver.
Section 10.3. Compliance with TIA.
From the date on which this Indenture is qualified under the TIA,
every amendment, waiver or supplement of this Indenture or the Securities shall
comply with the TIA as then in effect.
Section 10.4. Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent
to it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. However, any such Holder or subsequent Holder may revoke the
consent as to his or her Security or portion of his or her Security by notice to
the Trustee or the Company received before the date on which the Trustee
receives an Officers' Certificate certifying that the Holders of the requisite
principal amount of Securities have consented (and not theretofore revoked such
consent) to the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which
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<PAGE>
record date shall be at least 30 days prior to the first solicitation of such
consent. If a record date is fixed, then notwithstanding the last sentence of
the immediately preceding paragraph, those persons who were Holders at such
record date (or their duly designated proxies), and only those persons, shall be
entitled to revoke any consent previously given, whether or not such persons
continue to be Holders after such record date. No such consent shall be valid
or effective for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Holder, unless it makes a change described in Section 10.2, in which
case, the amendment, supplement or waiver shall bind only each Holder of a
Security who has consented to it and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security; provided, however, that any such waiver shall not impair or affect the
right of any Holder to receive payment of principal of and interest on a
Security, on or after the respective due dates expressed in such Security, or to
bring suit for the enforcement of any such payment on or after such respective
dates without the consent of such Holder.
Section 10.5. Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a
Security, the Trustee may require the Holder of the Security to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Security
about the changed terms and return it to the Holder. Alternatively, if the
Company or the Trustee so determines, the Company in exchange for the
Security shall issue and the Trustee shall authenticate a new Security that
reflects the changed terms.
Section 10.6. Trustee To Sign Amendments, Etc.
The Trustee shall execute any amendment, supplement or waiver
authorized pursuant to this Article Ten; provided, however, that the Trustee
may, but shall not be obligated to, execute any such amendment, supplement or
waiver which affects the Trustee's own rights, duties or immunities under
this Indenture. The Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution
of any amendment, supplement or waiver authorized pursuant to this Article
Ten is authorized or permitted by this Indenture.
ARTICLE XI.
MISCELLANEOUS
Section 11.1 TIA Controls.
If any provision of this Indenture limits, qualifies, or conflicts
with the duties imposed by operation of Section 318(c) of the TIA, the imposed
duties shall control.
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<PAGE>
Section 11.2. Notices.
Any notices or other communications required or permitted hereunder
shall be in writing, and shall be sufficiently given if made by hand delivery,
by telex, by telecopier or registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
if to the Company:
Color Spot Nurseries, Inc.
3478 Buskirk Avenue
Pleasant Hill, California 94523
Attention: Chief Executive Officer
w/a copy to:
Brownstein Hyatt Farber & Strickland, P.C.
410 Seventeenth Street, 22nd Floor
Denver, Colorado 80202
Attention: Steven S. Siegel
if to the Trustee:
U.S. Trust Company of California, N.A.
515 South Flower Street
Suite 2700
Los Angeles, California 90071
Attention: Corporate Trust Administration
if to the Credit Agent:
Credit Agricole Indosuez
[address]
Attention: _____________
Each of the Company, the Trustee and the Credit Agent by written
notice to each other such person may designate additional or different addresses
for notices to such person. Any notice or communication to the Company, the
Trustee and the Credit Agent shall be deemed to have been given or made as of
the date so delivered if personally delivered; when answered back, if telexed;
when receipt is acknowledged, if telecopied; and five (5) calendar days after
mailing if sent by registered or certified mail, postage prepaid (except that a
notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Holder shall be mailed to him
or her by first class mail or other equivalent means at his or her address as it
appears on the registration books of the Registrar and shall be sufficiently
given to him or her if so mailed within the time prescribed.
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<PAGE>
Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.
Section 11.3. Communications by Holders with Other Holders.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Securities. The
Company, the Trustee, the Registrar and any other person shall have the
protection of TIA Section 312(c).
Section 11.4. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company, upon request, shall furnish to the
Trustee:
(1) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
Section 11.5. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture, other than the Officers'
Certificate required by Section 5.7, shall include:
(1) a statement that the person making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she has
made such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of each such
person, such condition or covenant has been complied with; provided, however,
that with respect to matters of fact an Opinion of Counsel may rely on an
Officers' Certificate or certificates of public officials.
Section 11.6. Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Paying Agent or Registrar may make reasonable rules for its
functions.
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<PAGE>
Section 11.7. Legal Holidays.
A "Legal Holiday" used with respect to a particular place of payment
is a Saturday, a Sunday or a day on which banking institutions in New York, New
York, in the city in which the principal corporate trust office of the Trustee
is located or at such place of payment are not required to be open. If a
payment date is a Legal Holiday at such place, payment may be made at such place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
Section 11.8. Governing Law.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. Each of the parties hereto agrees to submit to the
jurisdiction of the courts of the State of New York in any action or proceeding
arising out of or relating to this Indenture.
Section 11.9. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of any of the Company or any of its Subsidiaries. Any such
indenture, loan or debt agreement may not be used to interpret this Indenture.
Section 11.10. No Recourse Against Others.
No director, officer, employee, stockholder or incorporator, as such,
of the Company or its Subsidiaries shall have any liability for any obligations
of the Company under the Securities or this Indenture or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each Holder
by accepting a Security waives and releases all such liability. Such waiver and
release are part of the consideration for the issuance of the Securities.
Section 11.11 Successors.
All agreements of the Company in this Indenture and the Securities
shall bind their respective successors. All agreements of the Trustee in this
Indenture shall bind its successor.
Section 11.12. Duplicate Originals.
All parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together shall represent the
same agreement.
Section 11.13. Severability.
In case any one or more of the provisions in this Indenture or in the
Securities shall be held invalid, illegal or unenforceable, in any respect for
any reason, the validity, legality
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<PAGE>
and enforceability of any such provision in every other respect and of the
remaining provisions shall not in any way be affected or impaired thereby, it
being intended that all of the provisions shall be enforceable to the full
extent permitted by law.
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<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the date first written above.
COLOR SPOT NURSERIES, INC.
By:
------------------------------
Name:
Title:
Attest:
---------------------------
[name]
[title]
U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:
--------------------------------
Name:
Title:
Attest:
---------------------------
[name]
[title]
<PAGE>
EXHIBIT A
FORM OF SECURITY
[FACE OF SECURITY]
Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to the Company
or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.
Unless and until this Global Security is exchanged in whole or in part
for the individual Securities represented hereby, this Global Security may not
be transferred except as a whole by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or by a
Depository or any such nominee to a successor Depository or a nominee of a
successor Depository.
COLOR SPOT NURSERIES, INC.
____% Senior Subordinated Note
due 2007
No. $_______________________
Cusip No. ___________
COLOR SPOT NURSERIES, INC., a Delaware corporation (the "Company,"
which term includes any successor corporation), for value received promises to
pay to ____________________ or registered assigns, the principal sum of
________________ Dollars, on ________, 2007.
Interest Payment Dates: __________ and __________ commencing on
__________, 1998.
Record Dates: _______ and _______.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Security to be signed
manually or by facsimile by its duly authorized officers.
Dated:
COLOR SPOT NURSERIES, INC.
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
Trustee's Certification of Authentication
This is one of the _____% Senior Subordinated Notes Due 2007 described in the
within-mentioned Indenture
U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:
.------------------------------------
Authorized Signatory
A-2
<PAGE>
[REVERSE SIDE OF SECURITY]
COLOR SPOT NURSERIES, INC.
____% Senior Subordinated Note
due 2007
1. Interest.
COLOR SPOT NURSERIES, INC., a Delaware corporation (the "Company"),
promises to pay interest on the principal amount of this Security at the rate
per annum shown above. The Company will pay interest semi-annually on each
_______ and _______ of each year (the "Interest Payment Date"), commencing on
_______, 1998, to the Holders of record on the immediately preceding _______ and
_______. Interest on the Securities will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance of the Securities. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
The Company shall pay interest on overdue principal and interest on
overdue installments of interest, to the extent lawful, at a rate equal to the
rate of interest otherwise payable on the Securities.
2. Method of Payment.
The Company shall pay interest on the Securities (except defaulted
interest) to the persons who are the registered Holders at the close of business
on the Record Date immediately preceding the Interest Payment Date even if the
Securities are cancelled on registration of transfer or registration of exchange
after such Record Date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company shall pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts ("U.S. Legal Tender"). However, the Company
may pay principal and interest by wire transfer of Federal funds, or interest by
its check payable in such U.S. Legal Tender. The Company may deliver any such
interest payment to the Paying Agent or to a Holder at the Holder's registered
address. Notwithstanding the foregoing, the Company shall pay or cause to be
paid all amounts payable with respect to non-DTC eligible Securities by wire
transfer of Federal funds to the account of the Holders of such Securities.
3. Paying Agent and Registrar.
Initially, U.S. Trust Company of California, N.A. (the "Trustee") will
act as Paying Agent and Registrar. The Company may change any Paying Agent,
Registrar or co-Registrar without notice to the Holders. The Company or any of
its Subsidiaries may, subject to certain exceptions, act as Paying Agent,
Registrar or co-Registrar.
A-3
<PAGE>
4. Indenture.
The Company issued the Securities under an Indenture, dated as of
______, 1997 (the "Indenture"), between the Company and the Trustee.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The terms of the Securities include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"), as in
effect on the date of the Indenture until such time as the Indenture is
qualified under the TIA, and thereafter as in effect on the date on which the
Indenture is qualified under the TIA. Notwithstanding anything to the contrary
herein, the Securities are subject to all such terms, and Holders of Securities
are referred to the Indenture and said Act for a statement of them. The
Securities are general unsecured obligations of the Company limited in aggregate
principal amount to $85,000,000.
5. Optional Redemption.
The Securities will be redeemable, at the option of the Company, in
whole at any time or in part from time to time, on and after ____ __, 2002, at
the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on _______ of the
year set forth below, plus, in each case, accrued and unpaid interest to the
date of redemption:
Year Redemption
Price
2002........................................... ______%
2003........................................... ______%
2004........................................... ______%
2005 and thereafter............................ 100.000%
In addition, at any time, or from time to time, on or prior to ______ __, 2000,
the Company may, at its option, use the Net Cash Proceeds of one or more Public
Equity Offerings to redeem up to an aggregate of 35% of the principal amount of
the Securities originally issued, at a price equal to _____% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided that at least 65% of the original aggregate principal
amount of the Securities remains outstanding and provided that the redemption
notice shall have been sent not later than 120 days after the consummation of
such Public Equity Offering.
6. Notice of Redemption.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each Holder of Securities to be redeemed
at such Holder's registered address. In order to effect a redemption with the
proceeds of a Public Equity Offering, the Company shall send the redemption
notice not later than 120 days after the consummation of such Public Equity
Offering. Securities in denominations larger than $1,000 may be redeemed in
part.
A-4
<PAGE>
Except as set forth in the Indenture, from and after any Redemption
Date, if monies for the redemption of the Securities called for redemption shall
have been deposited with the Paying Agent for redemption on such Redemption Date
and payment of the Securities called for redemption is not prohibited under
Article Four of the Indenture, then, unless the Company defaults in the payment
of such Redemption Price, the Securities called for redemption will cease to
bear interest and the only right of the Holders of such Securities will be to
receive payment of the Redemption Price.
7. Change of Control Offer.
Upon the occurrence of a Change of Control, each Holder shall have the
right to require the repurchase of such Holder's Securities pursuant to a Change
of Control Offer at a purchase price equal to 101% of the principal amount
thereof plus accrued interest, if any, to the date of purchase. The Company
shall not be required to repurchase Securities until it has complied with its
covenants to repay in full all Indebtedness of the Company and its Subsidiaries
under the Credit Agreement or offer to repay in full all such Indebtedness and
repay the Indebtedness of each lender who has accepted its offer to repay such
Indebtedness or to obtain the requisite consent under the Credit Agreement to
permit the repurchase of the Securities pursuant to a Change of Control Offer.
8. Limitation on Asset Sales.
Under certain circumstances the Company is required to apply the net
proceeds from Asset Sales to the repayment of Senior Debt, to make an investment
in Replacement Assets, an investment in properties and assets that replace the
properties and assets that are the subject of such Asset Sale, an investment in
properties and assets that will be used in the business of the Company and the
Restricted Subsidiaries existing on the Issue Date or in a business reasonably
related thereto or to purchase in a Net Proceeds Offer (at a price equal to 100%
of the aggregate principal amount thereof, plus accrued interest to the date of
purchase) such aggregate principal amount of Securities which, when added to the
accrued interest thereon, shall be equal to the net proceeds required to be
applied thereto.
9. Denominations; Transfer; Exchange.
The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection therewith as
permitted by the Indenture. The Registrar need not register the transfer of or
exchange any Securities or portions thereof selected for redemption.
10. Persons Deemed Owners.
The registered Holder of a Security shall be treated as the owner of
it for all purposes.
A-5
<PAGE>
11. Unclaimed Money.
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee and the Paying Agents will pay the money back to the
Company at its request. After that, all liability of the Trustee and such
Paying Agents with respect to such money shall cease.
12. Discharge Prior to Redemption or Maturity.
If the Company at any time deposits with the Trustee U.S. Legal Tender
or U.S. Government Obligations sufficient to pay the principal of and interest
on the Securities to redemption or maturity and complies with the other
provisions of the Indenture relating thereto, the Company will be discharged
from certain provisions of the Indenture and the Securities (including the
financial covenants, but excluding its obligation to pay the principal of and
interest on the Securities).
13. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture and the Securities may be
amended or supplemented with the written consent of the Holders of at least a
majority in aggregate principal amount of the Securities then outstanding, and
any existing Default or Event of Default or compliance with any provision may be
waived with the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without notice to or consent of any
Holder, the parties thereto may amend or supplement the Indenture or the
Securities to cure any ambiguity, defect or inconsistency or to comply with
requirements of the Commission in order to maintain the qualification of the
Indenture under the TIA; so long as such change does not, in the opinion of the
Trustee, adversely affect the rights of any of the Holders in any material
respect, and to comply with Article Six of the Indenture.
14. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the
Company and the Restricted Subsidiaries to, among other things, incur additional
Indebtedness or Liens, make payments in respect of its Capital Stock and merge
or consolidate with any other person and sell, lease, transfer or otherwise
dispose of substantially all of its properties or assets. The limitations are
subject to a number of important qualifications and exceptions. The Company must
annually report to the Trustee on compliance with such limitations.
15. Subordination.
The Securities will be subordinated in right of payment to the prior
payment in full of all Senior Debt (as defined in the Indenture) of the Company.
To the extent and in the manner provided in the Indenture, Senior Debt must be
paid before any payment may be made to any Holder of this Security. Any Holder
by accepting this Security agrees to the subordination and authorizes the
Trustee to give it effect.
A-6
<PAGE>
16. Successors.
When a successor assumes all the obligations of its predecessor under
the Securities and the Indenture, the predecessor will be released from those
obligations.
17. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of Securities then
outstanding may declare all the Securities to be due and payable immediately in
the manner and with the effect provided in the Indenture. Holders of Securities
may not enforce the Indenture or the Securities except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Securities. Subject to certain limitations,
Holders of a majority in aggregate principal amount of the Securities then
outstanding may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of Securities notice of any continuing Default
or Event of Default (except a Default in payment of principal or interest) if it
determines that withholding notice is in their interest.
18. Trustee Dealings with Company.
The Trustee under the Indenture, in its individual or any other
capacity, may become the owner or pledgee of Securities and may otherwise deal
with the Company, its Subsidiaries or their respective Affiliates as if it were
not the Trustee.
19. No Recourse Against Others.
No stockholder, director, officer, employee or incorporator, as such,
of the Company shall have any liability for any obligation of the Company under
the Securities or the Indenture or for any claim based on, in respect of or by
reason of, such obligations or their creation. Each Holder of a Security by
accepting a Security waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the Securities.
20. Authentication.
This Security shall not be valid until the Trustee or authenticating
agent manually signs the certificate of authentication on this Security.
21. Abbreviations and Defined Terms.
Customary abbreviations may be used in the name of a Holder of a
Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
A-7
<PAGE>
22. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company will cause CUSIP numbers to be
printed on the Securities immediately prior to the qualification of the
Indenture under the TIA as a convenience to the Holders of the Securities. No
representation is made as to the accuracy of such numbers as printed on the
Securities and reliance may be placed only on the other identification numbers
printed hereon.
The Company will furnish to any Holder of a Security upon written
request and without charge a copy of the Indenture. Requests may be made to:
Color Spot Nurseries, Inc.
3478 Buskirk Avenue
Pleasant Hill, CA 94523
Attention: Corporate Secretary
A-8
<PAGE>
[FORM OF ASSIGNMENT]
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
Please insert Social Security or other
identifying number of assignee
- ---------------------------------------
and irrevocably appoint _______________________ agent to transfer this Security
on the books of the Company. The agent may substitute another to act for him or
her.
Dated:____________________ Signature:________________________________
- ------------------------------------------------------------------
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee:__________________________________________
A-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 5.15 or Section 5.16 of the Indenture, as the case may be,
check the appropriate box below: Section 5.15 [ ] Section 5.16 [ ]
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 5.15 or Section 5.16 of the Indenture, as the
case may be, state the amount you want to be purchased:
$
Date: Signature:
------------ ---------------------------------------
(Sign exactly as your name appears on the face of
this Security)
Signature Guarantee:
--------------------------------------
A-10
<PAGE>
[LETTERHEAD]
November 25, 1997
Color Spot Nurseries, Inc.
3478 Buskirk Avenue, Suite 260
Pleasant Hill, California 94523
Ladies and Gentlemen:
Color Spot Nurseries, Inc. (the "Company") has filed with the Securities
and Exchange Commission a registration statement (the "Registration Statement")
on Form S-1 (No. 333-37335), as amended through Amendment No. 1 filed on the
date hereof, which relates to the sale of up to $85,000,000 of the Company's __%
Senior Subordinated Notes due 2007 (the "Notes") and up to 40,000 units (the
"Units") each consisting of 40,000 shares of Series A Preferred Stock (the
"Preferred Stock") and warrants (the "Warrants") to purchase __ shares of the
Company's common stock, par value $.001 per share (the "Common Stock").
We have examined such corporate records of the Company and such other
documents as we have deemed appropriate to give this opinion.
Based upon the foregoing, we are of the opinion that (i) the Warrants,
the Preferred Stock and the Common Stock underlying the Warrants, when duly
executed and delivered by authorized officers of the Company and issued upon
receipt of the consideration to be paid therefor (all in conformity with the
Board of Directors' resolutions examined by us), will be validly issued, fully
paid and nonassessable, and (ii) the Notes, when issued in accordance with the
indenture, and upon receipt by the Company of the consideration therefor in
accordance with the underwriting agreement relating thereto, will be validly
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement as it is proposed to be amended and to the use of our
name in the Prospectus that is a part of the Registration Statement under the
caption "Legal Matters."
Very truly yours,
BROWNSTEIN HYATT FARBER & STRICKLAND, P.C.
<PAGE>
Exhibit 10.2
RECAPITALIZATION AND STOCK PURCHASE AGREEMENT
Among
COLOR SPOT NURSERIES, INC.,
HELLER EQUITY CAPITAL CORPORATION,
M. F. VUKELICH CO., MICHAEL F. VUKELICH, JERRY HALAMUDA,
GARY E. MARIANI, STEVEN J. BOOKSPAN AND
RICHARD E. GEORGE
and
KCSN ACQUISITION COMPANY, L.P.
dated as of
December 31, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 REDEMPTION OF STOCK . . . . . . . . . . . . . . . . . . . . . 2
1.1 Redemption of Stock . . . . . . . . . . . . . . . . . . . . . 2
1.2 Consideration . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 2 PURCHASE AND SALE OF STOCK. . . . . . . . . . . . . . . . . . 4
2.1 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Consideration . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLERS . . . . . . . . . . 5
3.1 Corporate Organization. . . . . . . . . . . . . . . . . . . . 5
3.2 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Ownership of Stock. . . . . . . . . . . . . . . . . . . . . . 6
3.4 Authorization, Etc. . . . . . . . . . . . . . . . . . . . . . 6
3.5 Balance Sheet and Income Statement. . . . . . . . . . . . . . 6
3.6 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . 7
3.7 No Approvals or Conflicts . . . . . . . . . . . . . . . . . . 7
3.8 Compliance with Law; Governmental Authorizations. . . . . . . 8
3.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.10 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . 8
3.11 Absence of Certain Changes. . . . . . . . . . . . . . . . . . 8
3.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.13 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 9
3.14 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . 9
3.15 Patents, Trademarks, Trade Names, Etc.. . . . . . . . . . . . 10
3.16 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.17 Environmental Compliance. . . . . . . . . . . . . . . . . . . 11
3.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.19 No Brokers' or Other Fees . . . . . . . . . . . . . . . . . . 13
3.20 Material Customers and Suppliers. . . . . . . . . . . . . . . 13
3.21 Real Property . . . . . . . . . . . . . . . . . . . . . . . . 13
3.22 Investment Company Act Status . . . . . . . . . . . . . . . . 14
3.23 Product Liability . . . . . . . . . . . . . . . . . . . . . . 14
3.24 Books and Records . . . . . . . . . . . . . . . . . . . . . . 14
3.25 Acquisition for Investment. . . . . . . . . . . . . . . . . . 14
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . 14
4.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Authorization, Etc. . . . . . . . . . . . . . . . . . . . . . 14
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4.3 No Approvals or Conflicts . . . . . . . . . . . . . . . . . . 15
4.4 Acquisition for Investment. . . . . . . . . . . . . . . . . . 15
4.5 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.6 No Knowledge of Breach. . . . . . . . . . . . . . . . . . . . 15
4.7 No Brokers' or Other Fees . . . . . . . . . . . . . . . . . . 15
ARTICLE 5 CONDITIONS TO THE SELLERS' AND
THE COMPANY'S OBLIGATIONS. . . . . . . . . . . . . . . . . . 16
5.1 Representations and Warranties. . . . . . . . . . . . . . . . 16
5.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.3 Officer's Certificate . . . . . . . . . . . . . . . . . . . . 16
5.4 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.6 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.7 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . 16
5.8 Employment Agreements . . . . . . . . . . . . . . . . . . . . 16
5.9 8.0% Subordinated Convertible Notes . . . . . . . . . . . . . 17
5.10 Stockholders' Agreement . . . . . . . . . . . . . . . . . . . 17
5.11 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 6 CONDITIONS TO PURCHASER'S OBLIGATIONS . . . . . . . . . . . . 17
6.1 Representations and Warranties. . . . . . . . . . . . . . . . 17
6.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.3 Officer's Certificate . . . . . . . . . . . . . . . . . . . . 17
6.4 Resignation of Directors. . . . . . . . . . . . . . . . . . . 17
6.5 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.6 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.7 Existing Indebtedness . . . . . . . . . . . . . . . . . . . . 18
6.8 Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . 18
6.9 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . 18
6.10 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.11 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 7 COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . . . . . . 18
7.1 Conduct of Business by Company. . . . . . . . . . . . . . . . 18
7.2 Access to Books and Records; Cooperation. . . . . . . . . . . 19
7.3 Filings and Consents. . . . . . . . . . . . . . . . . . . . . 19
7.4 WARN Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.5 Supplements to Disclosure Schedule. . . . . . . . . . . . . . 20
7.6 Covenant to Satisfy Conditions. . . . . . . . . . . . . . . . 20
7.7 Exclusive Dealing . . . . . . . . . . . . . . . . . . . . . . 20
7.8 Director and Officer Liability and Indemnification. . . . . . 21
7.9 Contact with Customers and Suppliers. . . . . . . . . . . . . 21
7.10 8.0% Subordinated Convertible Notes . . . . . . . . . . . . . 21
7.11 COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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ARTICLE 8 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.2 Procedure and Effect of Termination . . . . . . . . . . . . . 22
ARTICLE 9 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 23
9.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 26
10.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 26
10.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.4 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . 26
10.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.7 Complete Agreement . . . . . . . . . . . . . . . . . . . . . 29
10.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 29
10.9 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.10 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.11 Knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . 30
10.13 Third Parties. . . . . . . . . . . . . . . . . . . . . . . . 30
10.14 CONSENT TO JURISDICTION AND SERVICE OF PROCESS . . . . . . . 31
10.15 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . 31
10.16 Sellers' Representative. . . . . . . . . . . . . . . . . . . 31
EXHIBIT 5.7 LEGAL OPINION [BROWNSTEIN HYATT FARBER & STRICKLAND, P.C.]. 34
EXHIBIT 5.8 EMPLOYMENT AGREEMENT. . . . . . . . . . . . . . . . . . . . 35
EXHIBIT 5.9 8.0% SUBORDINATED CONVERTIBLE NOTES . . . . . . . . . . . . 36
EXHIBIT 5.10 STOCKHOLDERS' AGREEMENT . . . . . . . . . . . . . . . . 37
EXHIBIT 6.8(a) LEGAL OPINION - [CHARLES P. BRISSMAN, ESQ.]. . . . . . . 38
EXHIBIT 6.8(b) LEGAL OPINION - [KNOX RICKSEN] . . . . . . . . . . . . . 39
EXHIBIT 6.8(c) LEGAL OPINION - [KATTEN MUCHIN & ZAVIS]. . . . . . . . . 40
EXHIBIT 6.10 FINANCING PROPOSAL . . . . . . . . . . . . . . . . . . . 41
EXHIBIT 6.11 FEE AGREEMENT . . . . . . . . . . . . . . . . . . . . . 42
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SCHEDULE 1 SHAREHOLDERS, EXISTING SHARES, OPTION SHARES AND REDEEMED
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 43
SCHEDULE 2 PENDING ACQUISITIONS . . . . . . . . . . . . . . . . . . 44
DISCLOSURE SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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RECAPITALIZATION AND STOCK PURCHASE AGREEMENT
This Recapitalization and Stock Purchase Agreement (this "Agreement"),
dated as of December 31, 1996, is entered into by and among Color Spot
Nurseries, Inc., a Delaware corporation (the "Company"), Heller Equity Capital
Corporation, a Delaware corporation ("Heller", or "Sellers' Representative"), M.
F. Vukelich Co., a California corporation ("MFV"), Michael F. Vukelich
("Vukelich"), Jerry Halamuda ("Halamuda"), Gary E. Mariani ("Mariani"), Steven
J. Bookspan ("Bookspan") and Richard E. George ("George")(MFV, Vukelich,
Halamuda and Bookspan are referred to herein individually as an "Executive
Manager" and collectively as the "Executive Managers"; Heller, Mariani and
George are referred to herein individually as a "Director Shareholder" and
collectively as the "Director Shareholders"; Heller, MFV, Vukelich and Halamuda
may be referred to herein individually as a "Redeeming Shareholder" and
collectively as the "Redeeming Shareholders"), and KCSN Acquisition Company,
L.P., a Delaware limited partnership ("Purchaser").
WHEREAS, the Redeeming Shareholders, Mariani, Bookspan and George,
together with Gene Malcolm, Michael T. Neenan, Robert F. Strange, Jim Tsurudome,
Gary Crook, Dave Grimshaw, John Negrete and Dennis Bahen (all such entities or
individuals are individually a "Shareholder" and collectively the
"Shareholders"), collectively own, beneficially and of record, 9,846,884 shares
(the "Existing Shares"), together with options to purchase (the "Management
Options") a collective additional 1,697,707 shares (the "Option Shares") (for a
total of 11,544,591 shares) (the Existing Shares and the Option Shares are
collectively, the "Shares"), of common stock, par value $.01 per share (the
"Common Stock"), of the Company;
WHEREAS, the Company desires to redeem (i) from Heller, all of the
Shares owned by Heller, and (ii) from the remaining Shareholders, the number of
Shares set forth opposite such Shareholder's name in the column labeled
"Redeemed Shares" on SCHEDULE 1 attached hereto (the "Redeemed Shares"), which
redemption shall be effected pursuant to this Agreement and/or pursuant to that
certain Put/Call Option Agreement of even date herewith among the Company and
each of the Shareholders other than Heller, MFV and Vukelich (the "Option
Agreement"), and each Shareholder desires to have its Shares so redeemed
pursuant to this Agreement and/or the Option Agreement; and
WHEREAS, Purchaser desires to purchase from the Company and the
Company desires to issue and to sell to the Purchaser, 4,343,110 shares of
Common Stock of the Company (the "New Shares"), upon the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained herein, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
REDEMPTION OF STOCK
1.1 REDEMPTION OF STOCK. On or prior to the Closing Date (as
defined in Section 1.3) and subject to the terms and conditions set forth in
this Agreement, each of the Redeeming Shareholders will sell, assign, transfer
and deliver to the Company all Redeemed Shares held by the Redeeming
Shareholders (except that Halamuda will sell only _____ Redeemed Shares pursuant
to this Agreement, including _____ Shares to be issued on exercise of Management
Options held by Halamuda), free and clear of all options, pledges, security
interests, liens or other encumbrances or restrictions on voting or transfer
("Encumbrances"), other than the restrictions imposed by Federal and state
securities laws (the "Redemption").
1.2 CONSIDERATION. On or prior to the Closing Date and subject to
the terms and conditions set forth in this Agreement, in reliance on the
representations, warranties, covenants and agreements of the parties contained
herein and in consideration of the sale, assignment, transfer and delivery of
the Redeemed Shares owned by the Redeeming Shareholders and to be redeemed
hereunder, the Company will pay to the Redeeming Shareholders the amounts set
forth in Sections 1.3(b)(i), (ii), (iii) and (v) hereof (such amount to be an
amount equal to $4.95037 multiplied by the number of Shares to be sold by them
hereunder) (collectively, the "Redemption Price"). The Company will purchase
the balance of the Redeemed Shares pursuant to the Option Agreement.
1.3 THE CLOSING. The closing (the "Closing") of the transactions
contemplated in this Agreement shall take place at the offices of Ropes & Gray,
________________________, New York, New York ______ at 9:00 a.m., local time,
on December 31, 1996.
(a) DELIVERIES BY REDEEMING SHAREHOLDERS. At or prior to the
Closing, the Redeeming Shareholders shall deliver or cause to be delivered to
the Company the following:
(i) certificates evidencing the Redeemed Shares to be
sold by such Redeeming Shareholders hereunder, which certificates shall be
properly endorsed for transfer or accompanied by duly executed stock
powers, in either case executed in blank or in favor of the Company, and
otherwise in a form acceptable for transfer on the books of the Company;
and
(ii) all other previously undelivered documents
required by this Agreement to be delivered by the Redeeming Shareholders to
the Company or the Purchaser, as the case may be, at or prior to the
Closing Date in connection with the transactions contemplated hereby.
(b) DELIVERIES BY THE COMPANY. At or prior to the Closing, the
Company shall deliver or cause to be delivered the following:
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(i) to Heller, $27,552,592 by wire transfer of
immediately available funds to the account(s) designated by Heller;
(ii) to MFV [VUKELICH?] $6,155,236 by wire transfer of
immediately available funds to the account designated by Vukelich;
(iii) to Halamuda, $__________ by wire transfer of
immediately available funds to the account designated by Halamuda;
(iv) to Coast Business Credit, a division of Southern
Pacific Thrift and Loan Association (successor by merger to CoastFed
Business Credit Corporation) ("Coast"), an amount in cash equal to the
principal amount of all indebtedness of the Company and the "Subsidiary"
(as hereinafter defined) owed to Coast as of the Closing Date, all accrued
and unpaid interest thereon through the Closing Date and all other
obligations of the Company and the Subsidiary payable to Coast, which
amount shall in no event exceed $15,000,000;
(v) to Heller, the 8.0% Subordinated Convertible Notes
(as defined in Section 5.9, the "Notes") in the aggregate principal amount
of $7,100,000; and
(vi) all other previously undelivered documents
required by this Agreement to be delivered by the Company, if any, to the
Redeeming Shareholders at or prior to the Closing Date in connection with
the transactions contemplated hereby.
(c) All instruments and documents executed and delivered to the
Company pursuant hereto shall be in form and substance, and shall be executed in
a manner reasonably satisfactory to legal counsel to the Company and to the
Purchaser. All instruments and documents executed and delivered to the
Redeeming Shareholders pursuant hereto shall be in form and substance, and shall
be executed in a manner reasonably satisfactory to legal counsel to the
Redeeming Shareholders and to the Purchaser.
1.4 FURTHER ASSURANCES. After the Closing, each party hereto shall
from time to time, at the request of any other party and without further cost or
expense to such other party, execute and deliver such other instruments of
conveyance and transfer and take such other actions as such other party may
reasonably request in order to more effectively consummate the transactions
contemplated hereby, including the redemption by the Company of the Redeemed
Shares to be sold by the Redeeming Shareholders hereunder (as contemplated by
this Article 1), and to vest in Purchaser good and valid title to the New Shares
(as contemplated in Article 2).
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<PAGE>
ARTICLE 2
PURCHASE AND SALE OF STOCK
2.1 TRANSFER OF STOCK. On the Closing Date and subject to the terms
and conditions set forth in this Agreement, the Company will issue and deliver
to Purchaser the New Shares, free and clear of all Encumbrances, other than the
restrictions imposed by Federal and state securities laws (the "Issuance").
2.2 CONSIDERATION. On the Closing Date and subject to the terms and
conditions set forth in this Agreement, in reliance on the representations,
warranties, covenants and agreements of the parties contained herein and in
consideration of the issuance and delivery of the New Shares, Purchaser will pay
to the Company the amount set forth in Section 2.3(b)(i) hereof (such amount to
be equal to the product of (i) $4.95037 and (ii) the number of New Shares)
(collectively, the "Purchase Price").
2.3 THE CLOSING.
(a) DELIVERIES BY THE COMPANY. At or prior to the Closing, the
Company shall deliver or cause to be delivered to Purchaser the following:
(i) certificates evidencing the New Shares;
(ii) resignations of the directors of the Company and
the "Subsidiary" (as hereinafter defined), as contemplated by and listed in
Section 6.4 hereof; and
(iii) all other previously undelivered documents
required by this Agreement to be delivered by the Company to Purchaser at
or prior to the Closing Date in connection with the transactions
contemplated hereby.
(b) DELIVERIES BY PURCHASER. At or prior to the Closing,
Purchaser shall deliver or cause to be delivered to the Company the following:
(i) $21,500,000 by wire transfer of immediately
available funds to the account(s) designated by the Company; and
(ii) all other previously undelivered documents
required by this Agreement to be delivered by Purchaser to the Company at
or prior to the Closing Date in connection with the transactions
contemplated hereby.
(c) All instruments and documents executed and delivered to
Purchaser pursuant hereto shall be in form and substance, and shall be executed
in a manner reasonably satisfactory to legal counsel to Purchaser, to the
Company and to the Redeeming Shareholders. All instruments and documents
executed and delivered to legal counsel to the Company pursuant
4
<PAGE>
hereto shall be in form and substance, and shall be executed in a manner
reasonably satisfactory to the Company, to the Purchaser and to the Redeeming
Shareholders.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Shareholder signatory hereto (each a "Seller" and collectively
the "Sellers"), severally (and not jointly) in the same proportion that such
Seller's ownership of Shares (as reflected in Section 3.3 of the Disclosure
Schedule attached hereto (the "Disclosure Schedule")) bears to the total number
of Shares prior to the Redemption and prior to the Issuance (the "Ownership
Allocation") (except with respect to representations and warranties contained in
Sections 3.3, 3.4 and 3.25 which relate to a specific Seller, which
representations and warranties are made solely by such Seller to whom or to
which such representation or warranty relates), hereby represents and warrants
to Purchaser, immediately prior to and at the moment of the Closing but not
taking into effect any transactions to be consummated in the moment immediately
subsequent to the Closing, to the extent indicated in each of the following
sections, which extent shall be unqualified unless otherwise stated, as follows:
3.1 CORPORATE ORGANIZATION. The Company is a corporation validly
existing and in good standing under the laws of the State of Delaware and Color
Spot Watsonville, Inc., a Delaware corporation (the "Subsidiary"), is a
corporation validly existing and in good standing under the laws of the State of
Delaware. The Company and the Subsidiary each has full corporate power and
authority to own its properties and assets and to carry on its business as now
being conducted and is duly qualified or licensed to do business as a foreign
corporation in good standing in the jurisdictions in which the ownership of its
property or the conduct of its business requires such qualification, except
jurisdictions in which the failure to be so qualified or licensed would not have
a material adverse effect on the business, results of operations, assets or
financial condition of the Company and the Subsidiary considered as a single
enterprise (hereinafter referred to as a "Material Adverse Effect"). Sellers
have delivered to Purchaser complete and correct copies of the Certificate of
Incorporation and all amendments thereto to the date hereof, and the Bylaws as
presently in effect of the Company and the comparable governing documents of the
Subsidiary. Except for the Subsidiary and as set forth in Section 3.1 of the
Disclosure Schedule, the Company does not own, directly or indirectly, any
capital stock or other equity securities of any corporation or have any direct
or indirect equity or ownership interest in any partnership, joint venture or
other business other than equity securities or ownership interests which are
immaterial in amount or significance.
3.2 CAPITAL STOCK. The authorized capital stock of the Company
consists of 15,000,000 shares of Common Stock, par value $.01 per share of
which, (i) prior to the Redemption, only the Existing Shares will have been
issued and outstanding, and of which, (ii) subsequent to the Issuance, only the
Existing Shares not subject to the Redemption, the Option Shares covered by
Management Options to be exercised at Closing, and the New Shares will be issued
and outstanding, and no other shares of any other class or series of capital
stock of the
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Company are issued and outstanding. Except for the Management Options and as
set forth in Section 3.2(a) of the Disclosure Schedule, there are no
subscriptions, options, warrants, calls, rights, contracts, commitments,
understandings, restrictions or arrangements relating to the issuance, sale,
transfer or voting of any shares of capital stock of the Company or the
Subsidiary, including any rights of conversion or exchange under any outstanding
securities or other instruments, other than restrictions imposed by Federal and
state securities laws. Except as set forth in Section 3.2(b) of the Disclosure
Schedule, all of the Shares and "Subsidiary Shares" (as defined below) have been
validly issued and are fully paid, nonassessable and free of preemptive rights.
All of the New Shares, when issued and paid for at Closing, will be validly
issued, fully paid and nonassessable.
3.3 OWNERSHIP OF STOCK. Each Seller is the record and beneficial
owner of the number of Existing Shares set forth opposite such Seller's name in
the column labeled "Total Existing Shares" on SCHEDULE 1 hereto. All of the
outstanding shares of capital stock of the Subsidiary (the "Subsidiary Shares")
are owned beneficially and of record by the Company. Except as set forth on
Section 3.3 of the Disclosure Schedule, the Subsidiary Shares owned by the
Company and the Existing Shares owned by the Sellers are owned free and clear of
all Encumbrances, other than the restrictions imposed by Federal and state
securities laws. Upon the consummation of the transactions contemplated hereby,
Purchaser will acquire title to the New Shares, free and clear of all
Encumbrances, other than the restrictions imposed by Federal and state
securities laws and Encumbrances arising as a result of any action taken by
Purchaser or any of its affiliates ("Affiliates") as defined in Rule 12b-2 of
the regulations promulgated pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
3.4 AUTHORIZATION, ETC. Each Seller has full power and authority
to execute and deliver this Agreement and to carry out the transactions
contemplated hereby. The Company, Heller and MFV have each duly approved and
authorized the execution and delivery by such party of this Agreement and the
Notes, as applicable, and the consummation by such parties of the transactions
contemplated hereby, and thereby no other corporate proceedings on the part of
Sellers are necessary to approve and authorize the execution and delivery by
Sellers and the Company of this Agreement or the Notes, as applicable, and the
consummation by Sellers and the Company of the transactions contemplated hereby
and thereby. This Agreement and the Notes, as applicable, have been duly and
validly executed by each Seller and the Company and, assuming this Agreement and
the Notes constitute the valid and binding agreement of the other parties hereto
and thereto, constitute a valid and binding agreement of each Seller and the
Company, enforceable against such Seller and the Company in accordance with its
terms, except that (i) the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
3.5 BALANCE SHEET AND INCOME STATEMENT. Sellers have previously
delivered to Purchaser the audited consolidated balance sheet of the Company and
Subsidiary for the period ended June 30, 1996 and the audited consolidated
income statement of the Company and
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Subsidiary for the 297-day period then ended (the "Audited Financial
Statements"). Except as set forth in the notes to the Audited Financial
Statements or as set forth in Section 3.5(a) of the Disclosure Schedule, the
Audited Financial Statements present fairly in all material respects the assets,
liabilities and results of operations and financial position of the Company and
Subsidiary as of the dates and for the periods indicated, and (including the
related notes and schedules thereto) have been prepared in accordance with
United States generally accepted accounting principles as consistently applied
by the Company and Subsidiary ("GAAP"). Sellers have previously delivered to
Purchaser the unaudited consolidated balance sheet of the Company and Subsidiary
as of September 30, 1996 (the "Balance Sheet") and the unaudited consolidated
income statement of the Company and Subsidiary for the three months then ended
(the "Income Statement" and, together with the Balance Sheet, the "Unaudited
Financial Statements"). Except as set forth in Section 3.5(b) of the Disclosure
Schedule, the Executive Managers each hereby represent and warrant, and the
Director Shareholders each hereby represent and warrant to its or his knowledge,
that except for the omission of any required notes thereto and for normal year-
end adjustments, such Unaudited Financial Statements have been prepared in all
material respects in accordance with GAAP.
3.6 NO UNDISCLOSED LIABILITIES. The Executive Managers each hereby
represent and warrant, and the Director Shareholders each hereby represent and
warrant to its or his knowledge, that (a) except as set forth on Section 3.6(a)
of the Disclosure Schedule, since June 30, 1996, no event or circumstance has
occurred which could not reasonably be expected to have a Material Adverse
Effect, (b) the Company has no outstanding indebtedness for borrowed money other
than as disclosed in Section 3.6(a) of the Disclosure Schedule, and (c) except
as disclosed in Section 3.6(b) of the Disclosure Schedule, as of the date
hereof, neither the Company nor the Subsidiary has any liabilities or
obligations, whether accrued, absolute or contingent, other than (i) liabilities
and obligations that are reflected, accrued or reserved for in the Balance
Sheet, (ii) obligations incurred in the ordinary course of business and
consistent with past practice since the date of the Balance Sheet and (iii)
other liabilities and obligations that would not reasonably be expected, in the
aggregate, to have a Material Adverse Effect.
3.7 NO APPROVALS OR CONFLICTS. Except as set forth in Section 3.7
of the Disclosure Schedule, neither the execution and delivery by Sellers and
the Company of this Agreement nor the consummation by Sellers and the Company of
the transactions contemplated hereby will (i) violate, conflict with or result
in a breach of any provision of the Certificate of Incorporation of the Company
or the Subsidiary or the By-Laws of the Company or the Subsidiary, (ii) violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties of the Sellers, the Company or the
Subsidiary or on any of the Sellers' interest in the Shares under, any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit, lease,
contract, agreement or other instrument to which the Sellers, the Company, the
Subsidiary or any of their respective properties may be bound, (iii) violate any
order, injunction, judgment, ruling, law or regulation of any court or
governmental authority applicable to the Sellers, the Company or the Subsidiary
or any of their respective properties or (iv) except for applicable requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
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"HSR Act"), require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any governmental or regulatory
authority, which, in the case of clauses (ii), (iii) and (iv) above, would have
a Material Adverse Effect.
3.8 COMPLIANCE WITH LAW; GOVERNMENTAL AUTHORIZATIONS. The Executive
Managers each hereby represent and warrant, and the Director Shareholders each
hereby represent and warrant to its or his knowledge, that (a) except as set
forth in Section 3.8(a) of the Disclosure Schedule, the Company and the
Subsidiary are not in violation of any order, injunction, judgment, ruling, law
or regulation of any court or governmental authority applicable to the property
or business of the Company or the Subsidiary which violation or violations in
the aggregate would have a Material Adverse Effect, and (b) except as set forth
in Section 3.8(b) of the Disclosure Schedule, the licenses, permits and other
governmental authorizations held by the Company and the Subsidiary are valid and
sufficient for the conduct of the Company's and the Subsidiary's businesses as
currently-conducted, except where the failure to hold such licenses, permits and
other governmental authorizations would not have a Material Adverse Effect.
3.9 LITIGATION. Except as set forth in Section 3.9 of the
Disclosure Schedule, as of the date hereof, there are no actions, proceedings or
investigations pending or, to the knowledge of Sellers, threatened against the
Company or the Subsidiary, or the transactions contemplated by this Agreement,
before any court or governmental or regulatory authority or body.
3.10 TITLE TO ASSETS. Except as set forth in Section 3.10 of the
Disclosure Schedule, and except with respect to assets disposed of in the
ordinary course of business since September 30, 1996, the Company and the
Subsidiary have good and valid title to all the properties and assets owned by
the Company or the Subsidiary and reflected on the Balance Sheet or which would
have been reflected on the Balance Sheet if acquired prior to September 30,
1996, free and clear of all Encumbrances of any nature except for (i) exceptions
to title as set forth in Section 3.10(a) of the Disclosure Schedule; (ii)
mortgages and encumbrances which secure indebtedness or obligations which are
set forth in Section 3.10(b) of the Disclosure Schedule; (iii) non-consensual
liens for "Taxes" (as defined in Section 3.12) not yet payable or any Taxes
being contested in good faith; (iv) liens arising as a matter of law in the
ordinary course of business which do not arise as a result of consensual acts by
the Company or the Subsidiary, provided that the obligations secured by such
liens are not delinquent or are being contested in good faith; and (v) such
imperfections of title and encumbrances, if any, as do not, in the aggregate,
have a Material Adverse Effect ((i)-(v) are collectively, "Permitted Liens").
The Company or the Subsidiary owns, or has valid leasehold interests in, all
material tangible properties and assets used in the conduct of the Company's
business.
3.11 ABSENCE OF CERTAIN CHANGES. The Executive Managers each hereby
represent and warrant, and the Director Shareholders each hereby represent and
warrant to its or his knowledge, that except as disclosed in Section 3.11 of the
Disclosure Schedule and as otherwise provided herein, since June 30, 1996 and
through the date of this Agreement, the business of the Company and the
Subsidiary has been conducted only in the ordinary course and consistent with
past practice in all material respects.
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3.12 TAXES. (a) Except as disclosed in Section 3.12(a) of the
Disclosure Schedule, the Company, or an Affiliate or other representative of the
Company on its behalf, has (i) duly filed with the appropriate Federal, state,
local and foreign taxing authorities all "Tax Returns" (as defined below)
required to be filed by or with respect to the Company and the Subsidiary other
than those Tax Returns the failure of which to file would not have a Material
Adverse Effect, all of which Tax Returns are true and correct in all material
respects, and (ii) paid or made provision for in the Balance Sheet all material
Taxes (as defined below) of the Company and the Subsidiary shown as being owed
on such required Tax Returns. Except as set forth in Section 3.12(b) of the
Disclosure Schedule, as of the date hereof, none of the Sellers or the Company
has received any written notice of deficiency or assessment from any Federal,
state, local or foreign taxing authority with respect to liabilities for
material Taxes of the Company or the Subsidiary and to the knowledge of each
Seller, no other Seller has received any such notice. Any such deficiency or
assessment disclosed in Section 3.12(b) of the Disclosure Schedule is being
contested in good faith through appropriate proceedings.
(b) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any United
States Federal, state, local or foreign taxing authority, including, but not
limited to, income, service, leasing, occupation, excise, property, sales and
use, transfer, franchise, payroll, withholding, social security or other taxes,
including any interest, penalties or additions attributable thereto.
(c) For purposes of this Agreement, "Tax Return" shall mean any
return, report, information return or other document (including any related or
supporting information) filed or required to be filed with any taxing authority
with respect to Taxes.
3.13 EMPLOYEE BENEFITS. Section 3.13 of the Disclosure Schedule sets
forth a true and complete list of each employee benefit plan within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), that is maintained for employees or former employees of the
Company or the Subsidiary and to which the Company is a party or obligated to
contribute (the "Plans"). Each Plan has been maintained in substantial
compliance with all applicable laws and has been operated in all material
respects in compliance with its terms. No Plan is subject to Title IV of ERISA
or the minimum funding requirements of Section 412 of the Internal Revenue Code
of 1986, as amended (the "Code"). The only Plan intended to be "qualified"
(within the meaning of Section 401(a) of the Code) is the Company's 401(k)
Savings Plan which Plan has applied for a favorable Determination Letter from
the Internal Revenue Service and, to the knowledge of Sellers, no event has
occurred nor condition exists which could reasonably be expected to result in a
Material Adverse Effect.
3.14 LABOR RELATIONS. The Executive Managers each hereby represent
and warrant, and the Director Shareholders each hereby represent and warrant to
its or his knowledge, that (a) neither the Company nor the Subsidiary is a party
to any collective bargaining agreement applicable to employees of the Company or
the Subsidiary, and (b) except as set forth in Section 3.14 of the Disclosure
Schedule, the Company and the Subsidiary are in material compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours and are not engaged in any unfair
labor practice which has had
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or is reasonably likely to have a Material Adverse Effect, and, as of the date
hereof, there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the knowledge of Sellers, threatened against or affecting the Company or
the Subsidiary.
3.15 PATENTS, TRADEMARKS, TRADE NAMES, ETC. Section 3.15(a) of the
Disclosure Schedule contains a list of all patents, trademarks, trade names and
copyrights (collectively, "Intellectual Property") used or owned by the Company
or the Subsidiary which are material to the Company and the Subsidiary
considered as a single enterprise and a list of all material licenses and other
agreements (collectively, "License Agreements") relating thereto. Except as set
forth in Section 3.15(b) of the Disclosure Schedule, (i) the consummation of the
transactions contemplated by this Agreement will not materially impair any right
to use the Intellectual Property or the License Agreements, and (ii) neither the
Company nor the Subsidiary has received written notice of any claims by any
person to the use of any such Intellectual Property, or challenging or
questioning the validity or effectiveness of any such License Agreement, which
claims, if adversely decided, would have a Material Adverse Effect.
3.16 CONTRACTS. The Executive Managers each hereby represent and
warrant, and the Director Shareholders each hereby represent and warrant to its
or his knowledge, that:
(a) Except as set forth in Section 3.13 of the Disclosure
Schedule, Section 3.16(a) of the Disclosure Schedule sets forth all of the
following contracts (collectively, "Material Contracts") to which the Company or
the Subsidiary is subject or by which any of their respective assets are bound:
(i) all leases of real property;
(ii) all collective bargaining agreements, employment
contracts, consulting contracts and severance and/or "stay bonus"
agreements or arrangements;
(iii) all license agreements (either as licensee or
licensor);
(iv) all contracts or commitments for the acquisition
or disposition of assets with a value in excess of $50,000 (other than
inventory purchase orders in the ordinary course of business);
(v) all supply contracts that are not cancelable on
ninety (90) days' (or less) notice;
(vi) all leases of personal property with a value in
excess of $50,000;
(vii) all product distribution agreements;
(viii) all non-compete or similar agreements;
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(ix) all joint venture or similar agreements;
(x) all documents evidencing any lien, right of first
refusal or similar right with respect to the Company's assets;
(xi) all contracts involving consideration in excess of
$50,000 with "change of control" or similar provisions requiring the
consent of a third party to any change in ownership of the Company;
(xii) all contracts with any officer, director or
stockholder of the Company; and
(xiii) all other contracts involving consideration in
excess of $100,000 or that are otherwise, in the opinion of Sellers,
material to the Company's business.
(b) Except as set forth in Section 3.16(b) of the Disclosure
Schedule, (i) each of the Material Contracts is in full force and effect, except
where the failure to be in full force and effect would not have a Material
Adverse Effect and (ii) there are no existing defaults by the Company or
Subsidiary thereunder which would result in a Material Adverse Effect.
3.17 ENVIRONMENTAL COMPLIANCE. The Executive Managers each hereby
represent and warrant, and the Director Shareholders each hereby represent and
warrant to its or his knowledge, except as set forth on Schedule 3.17(a) of the
Disclosure Schedule and except for such of the following as, in the aggregate,
will not have a Material Adverse Effect:
(a) The Company is and has been since September 7, 1995 in
compliance at all times with all applicable environmental laws and
regulations (including common law) and all laws and regulations related to
occupational health and safety (collectively, "Environmental and Safety
Requirements"), and the Company has received no notice, report or
information regarding any liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise), or any corrective, investigatory or
remedial obligations, arising under applicable Environmental and Safety
Requirements with respect to its past or present properties or operations.
(b) With respect to all operations and properties of the Company
conducted, owned or leased since September 7, 1995, the Company has
obtained, and is and has been in compliance at all times with all terms and
conditions of, all permits, licenses and other authorizations required
pursuant to Environmental and Safety Requirements for the occupation of its
properties and the conduct of its operations (all of which are listed on
Section 3.17(b) of the Disclosure Schedule).
(c) None of the following exists at any current or former property
owned or operated by the Company since September 7, 1995 (collectively, the
"Facilities") in violation of applicable Environmental and Safety
Requirements: hazardous or toxic
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materials, substances, pollutants, contaminants or waste; asbestos-
containing material in any form or condition; polychlorinated biphenyl-
containing materials or equipment; or underground storage tanks.
(d) The transactions contemplated by this Agreement do not impose
any obligations under Environmental and Safety Requirements for site
investigation or cleanup or notification to or consent of any government
agencies or third parties. This representation and warranty is made by the
Executive Managers solely upon the basis of their knowledge.
(e) No facts, events or conditions relating to the Facilities or
operations of the Company either (i) occurring on or after September 7,
1995 or (ii) occurring prior to September 7, 1995 so long as such fact,
event or condition has been continually in existence since September 7,
1995 and is related to ongoing operations of the Facilities and such fact,
event or condition that is known (as defined in Section 10.11 of this
Agreement) to the Executive Managers will (x) prevent, hinder or limit
continued compliance with currently applicable Environmental and Safety
Requirements, (y) give rise to any corrective, investigatory or remedial
obligations on the part of Purchaser or the Company pursuant to currently
applicable Environmental and Safety Requirements, or (z) give rise to any
liabilities on the part of Purchaser or the Company (whether accrued,
absolute, contingent, unliquidated or otherwise) pursuant to currently
applicable Environmental and Safety Requirements, including without
limitation those liabilities relating to onsite or offsite hazardous
substance releases, personal injury, property damage or natural resources
damage.
(f) Except as set forth in Section 3.17(f) of the Disclosure
Schedule, the Company has delivered or made available to Purchaser true,
complete and correct copies of all environmental reports, analyses, tests
or monitoring in the possession of or initiated by the Company or any
Redeeming Shareholder during the past five years pertaining to any Facility
and a true, complete and correct list identifying all third party
facilities at which hazardous materials generated in connection with the
operations of the Facilities (by the Company) have been transported,
treated, stored, handled or disposed within the past five years.
The Company shall provide Purchaser or its agents reasonable access to the
Facilities prior to the Closing for the purpose of carrying out, at its own
expense, an environmental site assessment of the Facilities, provided that (i)
such environmental site assessment shall be conducted in a manner that does not
unreasonably interfere with the operations of the Facilities, (ii) Purchaser
shall obtain the Company's consent (not to be unreasonably withheld) before
undertaking any soil or groundwater sampling and (iii) any "Losses" (as
hereinafter defined) incurred by the Company which are the result of the
negligence of the Purchaser or its agents in conducting such site assessment,
shall be subject to indemnification by Purchaser alone pursuant to Section
9.1(b) hereof. Any site assessment performed shall be at the request of legal
counsel to Purchaser to the environmental consultant.
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3.18 INSURANCE. Section 3.18 of the Disclosure Schedule lists all
material insurance policies covering the assets, employees and operations of the
Company and Subsidiary as of the date hereof. The Executive Managers each
hereby represent and warrant, and the Director Shareholders each hereby
represent and warrant to its or his knowledge, that all premiums for such
insurance policies have been paid when due and the Company has not received any
notice that any insurance company intends to cancel or not renew any such
insurance or substantially raise the premiums therefor.
3.19 NO BROKERS' OR OTHER FEES. Except for the fee payable to Heller
pursuant to Section 5.11 hereof, no broker, finder or investment banker is
entitled to any fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of Sellers.
3.20 MATERIAL CUSTOMERS AND SUPPLIERS. The Executive Managers each
hereby represent and warrant, and the Director Shareholders each hereby
represent and warrant to its or his knowledge, that Section 3.20(a) of the
Disclosure Schedule sets forth the names of the ten suppliers of the Company and
the Subsidiary to whom the Company and the Subsidiary paid the greatest sum of
money in respect of products and materials sold to the Company and Subsidiary
and Section 3.20(b) of the Disclosure Schedule sets forth the ten customers of
the Company and the Subsidiary from whom the Company and the Subsidiary received
the greatest sum of money in respect of products purchased from the Company and
the Subsidiary between January 1, 1996 and the date of this Agreement.
3.21 REAL PROPERTY. The Executive Managers each hereby represent and
warrant, and the Director Shareholders each hereby represent and warrant to its
or his knowledge, that:
(a) The leases listed in Section 3.21(a) of the Disclosure
Schedule constitute all the real property leases which are used in the conduct
of the business of the Company and the Subsidiary as it is presently being
conducted and/or to which the Company or the Subsidiary is a party (the
"Leases," and such property, "Leased Property").
(b) Except as set forth in Section 3.21(b) of the Disclosure
Schedule, neither the Company nor the Subsidiary has sold, assigned, transferred
or otherwise disposed of, or granted any security interest in or lien on, any
Lease. Except as set forth in Section 3.21(b)(i), each Lease is valid and
binding on the parties thereto and is in full force and effect, except where the
failure to be in full force and effect would not have a Material Adverse Effect.
With respect to each Lease, (i) all accrued and payable rents required by each
Lease to be paid by the Company or the Subsidiary have been paid or adequate
provision for such payment has been made, and (ii) except as set forth in
Section 3.21(b)(i) of the Disclosure Schedule, no written notice of default or
termination has been given or received by the Company or the Subsidiary, and no
material event of default has occurred, no condition exists and no event has
occurred that, with the giving of notice or the lapse of time, would become a
material default or permit early termination, under the Lease. Except as set
forth in Section 3.21(b)(ii) of the Disclosure Schedule, no third-party
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consent or approval under any material Lease is required for the consummation of
the transactions contemplated herein.
(c) The Company or the Subsidiary has good and valid title to,
free and clear of all Encumbrances, each of the real properties listed in
Schedule 3.21(c) hereto (the "Owned Property"), except for such Encumbrances as
(i) are listed in Section 3.21(c)(i) of the Disclosure Schedule or (ii) are
Permitted Liens. Except as set forth in Section 3.21(c)(ii) of the Disclosure
Schedule, all of the Owned Property and the Leased Property conforms in all
material respects to all zoning laws, ordinances and regulations. The Leased
Property and the Owned Property are all of the real property which is used for
the conduct of the business of the Company and the Subsidiary as it is presently
conducted.
3.22 INVESTMENT COMPANY ACT STATUS. The Company is not an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940.
3.23 PRODUCT LIABILITY. Except as set forth in Section 3.23 of the
Disclosure Schedule, neither the Company nor the Subsidiary has received written
notice of any claim or threatened claim against the Company or the Subsidiary
for product liability, nor, to the knowledge of Sellers, is there any basis for
any claim or threatened claim against the Company or the Subsidiary for product
liability.
3.24 BOOKS AND RECORDS. The financial books and records pertaining
to the business of the Company and the Subsidiary are and have been located and
maintained on the business premises of the Company.
3.25 ACQUISITION FOR INVESTMENT. Heller acknowledges that neither
the offer nor the sale of the Notes have been registered under the Securities
Act. Heller is acquiring the Notes solely for its own account and not with a
view to any distribution or disposition thereof and Heller agrees that the Notes
will not be transferred by Heller except in a transaction registered or exempt
from registration under the Securities Act of 1933, as amended, and the Rules
and Regulations in effect thereunder (the "Securities Act").
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Sellers as follows:
4.1 ORGANIZATION. Purchaser is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
4.2 AUTHORIZATION, ETC. Purchaser has full partnership power and
authority to execute and deliver this Agreement, and to carry out the
transactions contemplated hereby. The
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general partner of Purchaser has duly approved and authorized the execution and
delivery by Purchaser of this Agreement and the consummation by Purchaser of the
transactions contemplated hereby, and no other proceedings on the part of
Purchaser are necessary to approve and authorize the execution and delivery by
Purchaser of this Agreement and the consummation by Purchaser of the
transactions contemplated hereby. This Agreement has been duly and validly
executed by Purchaser and, assuming this Agreement constitutes the valid and
binding agreement of Sellers, constitutes a valid and binding agreement of
Purchaser, enforceable against Purchaser in accordance with its terms, except
that (i) the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
4.3 NO APPROVALS OR CONFLICTS. Except as set forth in Section 4.3
of the Disclosure Schedule, neither the execution and delivery by Purchaser of
this Agreement nor the consummation by Purchaser of the transactions
contemplated hereby will (i) violate, conflict with or result in a breach of any
provision of the Certificate of Limited Partnership or Limited Partnership
Agreement of Purchaser, (ii) violate, conflict with or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the creation of
any lien, security interest, charge or encumbrance upon any of Purchaser's
properties under, any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, lease, contract, agreement or other instrument to which
Purchaser or its subsidiaries or any of their respective properties may be
bound, (iii) violate any order, injunction, judgment, ruling, law or regulation
of any court or governmental authority applicable to Purchaser or its
subsidiaries or any of their respective properties, or (iv) require any consent,
approval or authorization of, or notice to, or declaration, filing or
registration with, any governmental or regulatory authority or other third
party, which, in the case of clauses (ii), (iii) and (iv) above, would have a
material adverse effect on Purchaser's ability to consummate the transactions
contemplated hereby.
4.4 ACQUISITION FOR INVESTMENT. Purchaser acknowledges that neither
the offer nor the sale of the New Shares has been registered under the
Securities Act. Purchaser is acquiring the New Shares solely for its own
account and not with a view to any distribution or other disposition of such New
Shares, and the New Shares will not be transferred except in a transaction
registered or exempt from registration under the Securities Act.
4.5 FINANCING. Purchaser, as of the Closing Date, will have
available cash or cash equivalents on hand in an amount sufficient to enable it
to pay in cash the Purchase Price for the New Shares as contemplated by Section
2.3(b)(i) of this Agreement.
4.6 NO KNOWLEDGE OF BREACH. Purchaser has no actual knowledge of
any breach of any representation set forth in Article 3 above.
4.7 NO BROKERS' OR OTHER FEES. Except for the fee in the amount of
$1,500,000 payable to Kohlberg & Company by the Company, no broker, finder or
investment
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banker is entitled to any fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of Purchaser.
ARTICLE 5
CONDITIONS TO THE SELLERS' AND
THE COMPANY'S OBLIGATIONS
The obligations of the Sellers and the Company to effect the Closing
under this Agreement are subject to the satisfaction, at or prior to the
Closing, of each of the following conditions, unless waived in writing by
Sellers' Representative.
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Purchaser in this Agreement shall be true and correct on the
Closing Date as though such representations and warranties were made at such
date, subject to the qualifications thereto, if any, except for changes
expressly permitted or contemplated by this Agreement.
5.2 PERFORMANCE. Purchaser shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by Purchaser prior to the
Closing.
5.3 OFFICER'S CERTIFICATE. Purchaser shall have delivered to
Sellers a certificate, dated as of the Closing Date and executed by the
President or a Vice President of Purchaser, certifying to the fulfillment of the
conditions specified in Sections 5.1 and 5.2 hereof.
5.4 HSR ACT. All applicable waiting periods under the HSR Act with
respect to the transactions contemplated hereby shall have expired or been
terminated.
5.5 INJUNCTIONS. On the Closing Date there shall be no injunction,
writ, preliminary restraining order or other order in effect of any nature
issued by a court or governmental agency of competent jurisdiction directing
that the transactions provided for herein not be consummated as provided herein.
5.6 CONSENTS. Those governmental and third party consents
identified in Section 5.6 of the Disclosure Schedule and necessary to effect the
Closing, which, if not obtained, would result in material liability to the
Sellers, shall have been obtained.
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5.7 LEGAL OPINION. The Sellers shall have received an opinion,
dated as of the Closing Date and addressed to them, of Brownstein Hyatt Farber &
Strickland, P.C., special counsel to Purchaser, in substantially the form of
EXHIBIT 5.7 hereto.
5.8 EMPLOYMENT AGREEMENTS. The Company shall have executed and
delivered, effective after the Issuance, to each of Vukelich and Halamuda an
Employment Agreement, substantially in the form of EXHIBIT 5.8 hereto (the
"Employment Agreements"), to which the Company and each of Vukelich and Halamuda
are parties.
5.9 8.0% SUBORDINATED CONVERTIBLE NOTES. The Company, as part of
the Redemption, shall have executed and delivered the 8.0% Subordinated
Convertible Notes substantially in the form of EXHIBIT 5.9 hereto (the "Notes"),
together with any documents to be executed in connection therewith, to Heller.
5.10 STOCKHOLDERS' AGREEMENT. The Purchaser, the Company, Heller and
each other Shareholder shall have executed and delivered the Stockholders'
Agreement of the Company, effective after the Issuance, substantially in the
form of EXHIBIT 5.10 hereto (the "Stockholders' Agreement").
5.11 PAYMENT OF FEES. A fee to Heller in the amount of $1,029,395
shall have been paid by the Sellers in accordance with such Seller's Ownership
Allocation and the legal fees and expenses of Katten Muchin & Zavis relating to
the transactions contemplated by this Agreement shall have been paid by the
Company and the legal fees and expenses of Knox Ricksen shall have been paid by
the Company.
ARTICLE 6
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to effect the Closing under this
Agreement are subject to the satisfaction, at or prior to the Closing, of each
of the following conditions, unless waived in writing by Purchaser.
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Sellers in this Agreement shall be true and correct on the
Closing Date as though such representations and warranties were made at such
date, subject to the qualifications thereto, if any, except for changes
expressly permitted or contemplated by the terms of this Agreement.
6.2 PERFORMANCE. Sellers shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be so performed or complied with by Sellers prior to the
Closing.
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6.3 OFFICER'S CERTIFICATE. Sellers and the Company shall have
delivered to Purchaser a certificate, dated as of the Closing Date and executed
by the President or a Vice President of the Company and by Sellers'
Representative, certifying to the fulfillment of the conditions specified in
Sections 6.1 and 6.2 hereof.
6.4 RESIGNATION OF DIRECTORS. Sellers shall have delivered to
Purchaser the written resignations of John Underwood and Jeffrey A. Gonyo as
directors of the Company and the Subsidiary effective as of the Closing Date.
6.5 INJUNCTIONS. On the Closing Date there shall be no injunction,
writ, preliminary restraining order or other order in effect of any nature
issued by a court or governmental agency of competent jurisdiction directing
that the transactions provided for herein not be consummated as provided herein.
6.6 CONSENTS. Those governmental and third party consents
identified in Section 6.7 of the Disclosure Schedule and necessary to effect the
Closing shall have been obtained.
6.7 EXISTING INDEBTEDNESS. All outstanding indebtedness for
borrowed money referred to in Section 1.3(b)(iv) shall have been discharged and
all liens securing the same shall have been released against payment pursuant to
Section 1.3(b)(iv) of this Agreement of the outstanding balance of such
indebtedness and any related obligation, and the Purchaser shall have received
reasonably satisfactory evidence of the foregoing.
6.8 LEGAL OPINIONS. The Purchaser shall have received an opinion,
dated as of the Closing Date and addressed to it, of (a) Charles P. Brissman,
Esq., Senior Counsel to Heller, in substantially the form of EXHIBIT 6.8(a)
hereto, (b) Knox Ricksen, special counsel to the Sellers (other than Heller), in
substantially the form of EXHIBIT 6.8(b) hereto, and (c) Katten Muchin & Zavis,
special counsel to the Company and Subsidiary, in substantially the form of
EXHIBIT 6.8(c) hereto.
6.9 OTHER AGREEMENTS.. (a) The Company and each Shareholder other
than Heller, MFV and Vukelich shall have executed and delivered the Option
Agreement, (b) each Shareholder shall have executed and delivered the
Stockholders Agreement, and (c) the Company and each of Vukelich and Halamuda
shall have executed and delivered the Employment Agreements.
6.10 FINANCING. The Company shall have received, on terms and
conditions no less favorable to the Company than the terms and conditions set
forth in the proposal letter attached hereto as EXHIBIT 6.10, financing in an
amount, together with equity from Purchaser in the amount of $21,500,000,
sufficient to enable the Company to effect the Redemption, to repay its existing
indebtedness, to pay all fees and expenses incurred by it in connection with the
transactions contemplated hereby and to satisfy the ongoing working capital
needs of the Company.
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6.11 FEES. The Company shall have entered into a Fee Agreement with
Kohlberg & Co., L.L.C., a Delaware limited liability company, in substantially
the form of EXHIBIT 6.11 hereto. The legal fees and expenses of Brownstein
Hyatt Farber & Strickland shall have been paid by the Company.
ARTICLE 7
COVENANTS AND AGREEMENTS
7.1 CONDUCT OF BUSINESS BY COMPANY. Each of the Sellers and the
Company covenant that, except (i) for actions taken to implement this Agreement
and the transactions contemplated hereby, (ii) as disclosed in the Disclosure
Schedule or (iii) as consented to by Purchaser, which consent shall not be
unreasonably withheld, from and after the date of this Agreement and until the
Closing Date the Company shall, and each of the Sellers shall cause (or, in the
case of Heller, use its best efforts to cause), the Company to:
(a) use reasonable efforts consistent with good business
judgment to preserve intact the present business organization of the Company and
Subsidiary and generally operate the Company and Subsidiary in the ordinary and
regular course of business consistent with prior practices in all material
respects (including the Company's pending acquisitions listed on SCHEDULE 2
hereof (the "Pending Acquisitions")); and
(b) not (i) cause to be issued or sold any shares of capital
stock or other securities of the Company or Subsidiary or any options, warrants
or commitments of any kind with respect thereto; (ii) directly or indirectly
cause to be purchased, redeemed or otherwise acquired or disposed of any shares
of capital stock of the Company or Subsidiary; (iii) declare, set aside or pay
any dividend or other distribution with respect to capital stock; (iv) permit or
allow the Company or Subsidiary to borrow or agree to borrow any funds or incur,
whether directly or by way of guarantee, any obligation for borrowed money,
other than in the ordinary course of business and consistent with past practice;
(v) other than in connection with Ordinary Course Acquisitions, subject any of
the property or assets of the Company or Subsidiary (real, personal or mixed,
tangible or intangible) to any material mortgage, pledge, lien or encumbrance or
otherwise permit or allow the disposition of any material property or assets of
the Company or Subsidiary (real, personal or mixed, tangible or intangible),
other than in the ordinary course of business and consistent with past practice;
or (vi) agree to do any of the foregoing.
7.2 ACCESS TO BOOKS AND RECORDS; COOPERATION.
(a) Purchaser agrees that from the date hereof and until the
fifth anniversary of the Closing, during normal business hours, it shall permit,
or shall cause the Company to permit, at no charge, cost or expense to Purchaser
or the Company, and without disruption of Purchaser's or the Company's business,
the Shareholders party hereto and their respective auditors and other
representatives to have reasonable access to the properties, auditors and
officers of the Company and Subsidiary and to all books and records relating to
the Company and Subsidiary and to examine and take copies thereof.
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(b) Purchaser agrees not to destroy at any time any files or
records which are subject to Section 7.2(a) without giving reasonable notice to
the Redeeming Shareholders, and within 30 days of receipt of such notice, any of
the Redeeming Shareholders may cause to be delivered to such Redeeming
Shareholders the records intended to be destroyed, at such Redeeming
Shareholder's expense.
7.3 FILINGS AND CONSENTS. Each of Sellers, on the one hand, and
Purchaser, on the other hand, shall use all reasonable efforts to obtain and to
cooperate in obtaining any consent, approval, authorization or order of, and in
making any registration or filing with, any governmental agency or body or other
third party required in connection with the execution, delivery or performance
of this Agreement. If required, the parties agree to cause to be made all
appropriate filings under the HSR Act within three business days of the date of
this Agreement and to diligently pursue early termination of the waiting period
under such act.
7.4 WARN ACT. Purchaser and Sellers agree that for purposes of the
United States Worker Adjustment and Retraining Notification Act (the "WARN
Act"), the Closing Date shall be the "effective date" as such term is used in
the WARN Act. Purchaser acknowledges and represents that it has no present
intent to engage in a "mass layoff" or "plant closing" with respect to the
Company or Subsidiary as defined in the WARN Act. Purchaser agrees that from
and after the Closing Date it shall be responsible for any notification required
under the WARN Act with respect to the Company and Subsidiary and shall
indemnify the Redeeming Shareholders and hold the Redeeming Shareholders
harmless from and against all fines and other payments which may become due
under the WARN Act with respect to the Company or Subsidiary.
7.5 SUPPLEMENTS TO DISCLOSURE SCHEDULE. From time to time prior to
the Closing, Sellers and Purchaser will promptly supplement or amend the
sections of the Disclosure Schedule relating to their respective representations
and warranties in this Agreement with respect to any matter, condition or
occurrence hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described in their
respective sections of the Disclosure Schedule. No supplement or amendment by
either party shall have any effect for the purpose of (i) determining
satisfaction by Sellers of the conditions set forth in Sections 6.1 and 6.2
hereof or (ii) determining satisfaction by Purchaser of the conditions set forth
in Sections 5.1 and 5.2 hereof and, in the case of an amendment or supplement by
Sellers, the basket amount set forth in Section 9.1(a) shall be reduced by the
amount by which the aggregate amount of Losses incurred by the Purchaser
Indemnified Parties in connection with the matters so disclosed exceeds $100,000
(it being understood by the parties that the Sellers shall have no further
liability for such matters set forth in this Section 7.5).
7.6 COVENANT TO SATISFY CONDITIONS. Each party agrees to use all
reasonable efforts to insure that the conditions set forth in Article 5 and
Article 6 hereof are satisfied, insofar as such matters are within the control
of such party; PROVIDED, HOWEVER, that in no event shall the Sellers be required
to expend in excess of $25,000 in the aggregate in performing under Section 7.3
above and this Section 7.6.
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7.7 EXCLUSIVE DEALING. During the period from the date of this
Agreement through the Closing (which shall be no later than December 31, 1996),
or the earlier termination of this Agreement pursuant to Article 8, the Company
and/or the Sellers shall not, directly or indirectly through any officer,
director, employee, agent, partner, affiliate or otherwise, enter into any
agreement, agreement in principle or other commitment (whether or not legally
binding) relating to any business combination with, recapitalization,
acquisition or purchase of all or a significant portion of the assets of, or
any material equity interest in, the Company or relating to any other similar
transaction (a "Competing Transaction"), or solicit, initiate or encourage the
submission of any proposal or offer from any person or entity (including any of
their officers, directors, employees and agents) relating to any Competing
Transaction, nor participate in any discussions or negotiations regarding, or
furnish to any person or entity any information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage
any effort or attempt by any person or entity to effect a Competing Transaction.
The Company and/or the Sellers shall notify Purchaser promptly if any proposal
regarding a Competing Transaction (or any inquiry or contact with any person or
entity with respect thereto) is made, and shall advise Purchaser of the contents
thereof (and, if in written form, provide Purchaser with copies thereof).
7.8 DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION. For a
period of seven years after the Closing, Purchaser shall not permit the Company
or Subsidiary to amend, repeal or modify any provision in its respective
Certificate of Incorporation or Bylaws relating to the exculpation or
indemnification of former officers and directors (unless required by law), it
being the intent of the parties that the officers and directors of the Company
and Subsidiary prior to the Closing shall continue to be entitled to such
exculpation and indemnification to the fullest extent permitted under applicable
law.
7.9 CONTACT WITH CUSTOMERS AND SUPPLIERS. Purchaser and its
representatives shall contact and communicate with the employees (other than
Executive Managers), customers, suppliers and licensors of the Company and
Subsidiary in connection with the transactions contemplated hereby only with the
prior consent of the Sellers' Representative, which consent shall not be
unreasonably withheld but which may be conditioned upon a designee of Sellers'
Representative being present at any such meeting or conference.
7.10 8.0% SUBORDINATED CONVERTIBLE NOTES.
(a) Heller acknowledges that it has acquired the Notes for its
own account and that such Notes cannot be sold or transferred unless registered
under the Securities Act or unless an exemption from such registration is
available to Heller.
(b) Each Note shall bear the following legend:
"THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE
AND MAY NOT BE
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TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH ALL APPLICABLE
PROVISIONS OF STATE SECURITIES LAWS AND (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR (B) IF (I) THE PURCHASER AND
THE COMPANY HAS BEEN FURNISHED WITH A REASONABLY SATISFACTORY OPINION
OF COUNSEL FOR THE HOLDER THAT SUCH TRANSFER, SALE, ASSIGNMENT,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE
PROVISIONS OF SECTION 5 OF THE ACT AND (II) IF THE HOLDER IS A CITIZEN
OR RESIDENT OF ANY COUNTRY OTHER THAN THE UNITED STATES, OR THE HOLDER
DESIRES TO EFFECT ANY SUCH TRANSACTION IN ANY SUCH COUNTRY, THE
PURCHASER AND THE COMPANY HAVE BEEN FURNISHED WITH A REASONABLY
SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER THAT SUCH TRANSACTION
WILL NOT VIOLATE THE LAWS OF SUCH COUNTRY."
7.11 COBRA. Purchaser shall cause the Company to maintain the Company's
health and welfare plans in such a manner so as not to give rise to any
liability to the Redeeming Shareholders under Part 6 of Subtitle B of Title I of
ERISA, Section 4980B of the Code or state continuation coverage laws
(collectively, "COBRA"), and the Redeeming Shareholders shall have no
responsibility or liability under COBRA on or after the Closing, provided that
this shall not relieve the Sellers for any breaches of any representations or
warranties contained in this Agreement.
ARTICLE 8
TERMINATION
8.1 TERMINATION. This Agreement may be terminated and abandoned at
any time prior to the Closing:
(a) by the mutual consent of Sellers' Representative and
Purchaser;
(b) by either Sellers' Representative or Purchaser in the event
the Closing has not occurred on or before December 31, 1996 (the "Cut-Off
Date"), unless the failure of such consummation shall be due to the failure of
the party seeking to terminate this Agreement to comply in all material respects
with the agreements and covenants contained herein to be performed by such party
on or before the Cut-Off Date; or
(c) by either Sellers' Representative or Purchaser in the event
any court or governmental agency of competent jurisdiction shall have issued an
order, decree or ruling or
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taken any other action restraining, enjoining or otherwise prohibiting the
transactions contemplated hereby and such order, decree or ruling or other
action shall have become final and nonappealable.
8.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of the
termination and abandonment of this Agreement by Sellers' Representative or
Purchaser pursuant to Section 8.1 hereof, written notice thereof shall forthwith
be given to the other parties. If the transactions contemplated by this
Agreement are terminated as provided herein:
(a) Each party will redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same;
(b) All confidential information received by Purchaser with
respect to the business of the Company and the Subsidiary shall be treated in
accordance with the provisions of the Confidentiality Agreement, dated as of
______ 19__, between Purchaser and the Company, as well as the provisions of
Section 8 of that certain letter agreement dated October 25, 1996, among
Purchaser, Heller and Michael Vukelich on behalf of the Shareholders other than
Heller (collectively, the "Confidentiality Agreement"), which shall survive the
termination of this Agreement in accordance with its terms; and
(c) No party to this Agreement will have any liability under
this Agreement to the other except (i) as stated in subparagraphs (a) and (b) of
this Section 8.2 and (ii) for any willful breach of any provision of this
Agreement and (iii) as provided in the Confidentiality Agreement.
ARTICLE 9
INDEMNIFICATION
9.1 INDEMNIFICATION. As between Purchaser, on the one hand, and the
Sellers, on the other hand, the rights and obligations set forth in this Article
9 and in the Confidentiality Agreement will be the exclusive remedies of the
parties hereto with respect to any disputes relating to this Agreement, the
events giving rise to this Agreement and the transactions provided for herein or
contemplated hereby.
(a) INDEMNIFICATION BY THE SELLERS. Subject to the limits set
forth in this Section 9.1, each of the Redeeming Shareholders agree severally
(but not jointly), in proportion to the Ownership Allocation, to indemnify,
defend and hold Purchaser, its officers, directors, agents and Affiliates (the
"Purchaser Indemnified Persons"), harmless from and in respect of any and all
losses, damages, costs and reasonable expenses (including, without limitation,
reasonable expenses of counsel) (collectively, "Losses"), that they may incur
arising out of or due to any inaccuracy of any representation or the breach of
any warranty, covenant, undertaking or other agreement by such Seller contained
in this Agreement or the Disclosure Schedule, determined
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<PAGE>
without regard to any qualification as to materiality or Material Adverse Effect
set forth therein; PROVIDED, HOWEVER, that the Sellers shall not have any
liability to Purchaser as a result of the breach of any representation or
warranty to the extent that Purchaser had actual knowledge that such
representation or warranty was untrue or incorrect prior to the Closing Date.
Anything to the contrary contained herein notwithstanding, none of the Purchaser
Indemnified Persons shall be entitled to recover from the Sellers for any claims
for indemnity or damages with respect to any inaccuracy or breach of any
representations or warranties or breach of any covenants, undertakings or other
agreements, whether such claims are brought under this Section 9.1(a) or
otherwise, (i) with respect to any individual claim in an amount less than
$10,000 (it being understood that multiple claims arising from the same
operative facts or circumstances shall be deemed as a single claim) and
(ii) unless and until the total of all such claims in respect of Losses pursuant
to this Section 9.1(a) exceeds $570,000, and then only for the amount by which
such claims exceed such amount; PROVIDED, HOWEVER, that, none of Purchaser or
its officers, directors, agents or Affiliates shall be entitled to recover from
any Seller pursuant to this Section 9.1(a) more than forty percent (40%) of the
proceeds received by such Seller pursuant to this Agreement and/or the Option
Agreement (but excluding, with respect to Heller, the fee payable pursuant to
Section 5.11 hereof); PROVIDED FURTHER, that any recovery to be made by a
Purchaser Indemnified Person hereunder against Heller, once finally determined,
shall, to the extent outstanding, be deemed, at Heller's option, setoff against
the principal amount outstanding under the Notes, then, if necessary, against
the interest payable thereon.
(b) INDEMNIFICATION BY PURCHASER AND THE COMPANY. Subject to
the limits set forth in this Section 9.1, Purchaser and the Company jointly and
severally agree to indemnify, defend and hold the Sellers, and their respective
officers, directors, agents and Affiliates, as that case may be, harmless from
and in respect of any and all Losses that they may incur arising out of or due
to any inaccuracy of any representation or the breach of any warranty, covenant,
undertaking or other agreement of Purchaser contained in this Agreement, or
arising out of any and all actions, suits, claims and administrative or other
proceedings of every kind and nature instituted or pending against the Sellers
or any of their respective officers, directors, agents or Affiliates, as the
case may be, at any time after the Closing Date to the extent that such Losses
(i) relate to or arise out of or in connection with the operations of the
Company subsequent to the Closing Date and (ii) do not constitute a breach of
the Sellers' representations or warranties in, or a default in the performance
of any of the Sellers' covenants under, this Agreement; PROVIDED, HOWEVER, that
neither Purchaser nor the Company shall have any liability to the Sellers as a
result of the breach of any representation or warranty to the extent that the
Sellers knew that such representation or warranty was untrue or incorrect prior
to the Closing Date.
(c) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The several
representations and warranties of the parties contained in this Agreement or in
any instrument delivered pursuant hereto will survive the Closing Date and will
remain in full force and effect thereafter (i) with respect to the
representations or warranties set forth in Sections 3.12 and 3.17, for a period
of three (3) years from the Closing Date, (ii) with respect to the
representations or warranties set forth in Section 3.3, indefinitely and (iii)
with respect to all other representations and warranties, for a period ending
April 30, 1998; PROVIDED, FURTHER, that such representations or warranties shall
survive (if at all) beyond such period with respect to any inaccuracy therein
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or breach thereof, notice of which shall have been duly given within such
applicable period in accordance with Section 9.1(d) hereof.
(d) NOTICE AND OPPORTUNITY TO DEFEND. If there occurs an event
which a party asserts is an indemnifiable event pursuant to Section 9.1(a) or
9.1(b), the party or parties seeking indemnification shall notify the other
party or parties obligated to provide indemnification (the "Indemnifying Party")
promptly. If such event involves (i) any claim or (ii) the commencement of any
action or proceeding by a third person, the party seeking indemnification will
give such Indemnifying Party prompt written notice of such claim or the
commencement of such action or proceeding; PROVIDED, HOWEVER, that the failure
to provide prompt notice as provided herein will relieve the Indemnifying Party
of its obligations hereunder only to the extent that such failure prejudices the
Indemnifying Party hereunder. In case any such action shall be brought against
any party seeking indemnification and it shall notify the Indemnifying Party of
the commencement thereof, the Indemnifying Party shall be entitled to
participate therein and, to the extent that it shall wish, to assume the defense
thereof, with counsel reasonably satisfactory to such party seeking
indemnification and, after notice from the Indemnifying Party to such party
seeking indemnification of such election so to assume the defense thereof, the
Indemnifying Party shall not be liable to the party seeking indemnification
hereunder for any legal expenses of other counsel or any other expenses
subsequently incurred by such party in connection with the defense thereof. The
party seeking indemnification agrees to cooperate fully with the Indemnifying
Party and its counsel in the defense against any such action or asserted
liability. The party seeking indemnification shall have the right to
participate at its own expense in the defense of such action or asserted
liability. In no event shall an Indemnifying Party be liable for any settlement
effected without its written consent.
(e) ADJUSTMENT FOR INSURANCE AND TAXES. The amount which an
Indemnifying Party is required to pay to, for or on behalf of any other party
(hereinafter referred to as an "Indemnitee") pursuant to this Section 9.1 shall
be adjusted (including, without limitation, retroactively) (i) by any insurance
proceeds actually recovered by or on behalf of such Indemnitee in reduction of
the related indemnifiable loss (the "Indemnifiable Loss") and (ii) to take
account of any tax benefit actually realized as a result of any Indemnifiable
Loss. Amounts required to be paid, as so reduced, are hereafter sometimes
called an "Indemnity Payment." If an Indemnitee shall have received or shall
have had paid on its behalf an Indemnity Payment in respect of an Indemnifiable
Loss and the parties in good faith believe that the Indemnitee is likely to
subsequently receive insurance proceeds in respect of such Indemnifiable Loss,
or realize any tax benefit as a result of such Indemnifiable Loss, then the
parties shall negotiate in good faith to determine the present value of such
anticipated insurance proceeds or tax benefit and the Indemnitee shall promptly
pay to the Indemnifying Party such amount or, if lesser, the amount of the
Indemnity Payment.
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(f) INDEMNIFICATION UNDER PRIOR AGREEMENTS. Purchaser
acknowledges that the Company, and therefore indirectly, the Sellers, acquired a
significant portion of its assets through various stock or asset purchase
agreements as set forth and identified in Section 9.1(f) of the Disclosure
Schedule (the "Prior Agreements"). In the event that Purchaser notifies the
Sellers of an indemnifiable event hereunder in accordance with Section 9.1(d)
above and the Sellers reasonably believe that indemnification with respect to
such indemnifiable event is available to the Company pursuant to the Prior
Agreements, the Sellers may so advise Purchaser in accordance with Section 10.6
below and, thereafter, the Sellers shall have no further liability or obligation
to Purchaser in respect of such indemnifiable event unless and until the Company
shall have exercised reasonable commercial efforts (in no event to include the
appeal of an adverse decision in any judicial or arbitral proceeding) to enforce
such right of indemnification under the Prior Agreements. Upon Purchaser's
satisfaction of its obligations pursuant to the preceding sentence, the Sellers'
liability to Purchaser in respect of such indemnifiable event, if any, shall be
reduced to the extent of any recovery by the Company under the Prior Agreements,
net of related expenses.
(g) LIMITATION ON ENVIRONMENTAL INDEMNITY. Notwithstanding
anything to the contrary set forth in this Agreement, any obligation of the
Sellers to indemnify the Purchaser Indemnified Persons with respect to
environmental remediation shall be limited to Losses incurred by Purchaser
Indemnified Persons in connection with taking such actions or incurring such
costs as may be required by Environmental Laws or the valid order or judgment of
any court or other governmental authority implementing or enforcing such
Environmental Laws, and no Seller shall have any obligation to indemnify
Purchaser Indemnified Persons for Losses beyond actions required by
Environmental Laws or the valid order or judgment of any court or other
governmental authority implementing or enforcing such Environmental Laws. Such
costs of remediation must be reasonable costs incurred by the Company,
Subsidiary, or Purchaser, which are reasonably necessary to satisfy but not
exceed enforceable limits or standards imposed by Environmental Laws or the
valid order or judgment of any court or other governmental authority
implementing or enforcing such Environmental Laws so that the Company,
Subsidiary and Purchaser can make use of the assets in the operation of the
Company's and Subsidiaries business as currently conducted.
(h) NO REPRESENTATIONS REGARDING PROJECTIONS. Purchaser
explicitly agrees that none of the Sellers shall have any obligations
whatsoever, or be deemed to have made any representations or warranties of any
kind, with respect to any projections, financial or otherwise, of any future
performance or expectation of the Company or the Subsidiary.
ARTICLE 10
MISCELLANEOUS
10.1 FEES AND EXPENSES. Except as otherwise provided in this
Agreement, the Redeeming Shareholders shall bear their own respective expenses
and Purchaser shall bear its own expenses in connection with the negotiation and
consummation of the transactions contemplated by this Agreement. Each of the
Sellers and Purchaser shall bear the fees and expenses of any
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broker or finder retained by such party or parties in connection with the
transactions contemplated herein.
10.2 GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the State of Delaware without regard to the conflicts of
laws provisions thereof.
10.3 AMENDMENT. This Agreement may not be amended, modified or
supplemented except upon the execution and delivery of a written agreement
executed by Purchaser and Sellers' Representative.
10.4 NO ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of the other parties hereto.
10.5 WAIVER. Any of the terms or conditions of this Agreement which
may be lawfully waived may be waived in writing at any time by each party which
is entitled to the benefits thereof. Any waiver of any of the provisions of
this Agreement by any party hereto shall be binding only if set forth in an
instrument in writing signed on behalf of such party. No failure to enforce any
provision of this Agreement shall be deemed to or shall constitute a waiver of
such provision and no waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
10.6 NOTICES. Any notice, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if (a) personally delivered,
(b) sent by a nationally recognized overnight courier service, to the recipient
at the address below indicated or (c) delivered by facsimile which is confirmed
in writing by sending a copy of such facsimile to the recipient thereof pursuant
to clause (a) or (b) above:
If to Purchaser:
c/o Kohlberg & Company, LLC
2400 Sand Hill Road, Suite 100
Menlo Park, California 94025
(415) 854-5415 (telecopier)
(415) 854-8450 (telephone)
Attention: Dexter Paine
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with a copy to:
Brownstein Hyatt Farber & Strickland, P.C.
410 - 17th Street
22nd Floor
Denver, Colorado 80202
(303) 623-1956 (telecopier)
(303) 534-6335 (telephone)
Attention: John Garrett, Esq.
If to the Company:
Color Spot Nurseries, Inc.
3478 Buskirk Avenue
Suite 260
Pleasant Hill, California 94523
(510) 935-0799 (telecopier)
(510) 934-4443 (telephone)
Attention: Michael F. Vukelich
with a copy to:
Katten Muchin & Zavis
1999 Avenue of the Stars
Suite 1400
Los Angeles, California 90067
(310) 788-4471 (telecopier)
(310) 788-4400 (telephone)
Attention: James K. Baer, Esq.
If to Heller:
Heller Equity Capital Corporation
500 West Monroe Street
Chicago, Illinois 60661
(312) 441-7236 (telecopier)
(312) 441-6964 (telephone)
Attention: John Underwood
Jeffrey A. Gonyo
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With copies to:
Heller International, Inc.
500 West Monroe Street
Chicago, Illinois 60661
(312) 441-7173 (telecopier)
(312) 441-6798 (telephone)
Attention: Charles P. Brissman, Esq.
and:
Katten Muchin & Zavis
1999 Avenue of the Stars
Suite 1400
Los Angeles, California 90067
(310) 788-4471 (telecopier)
(310) 788-4400 (telephone)
Attention: James K. Baer, Esq.
If to any Seller other than Heller:
c/o Color Spot Nurseries, Inc.
3478 Buskirk Avenue
Suite 260
Pleasant Hill, California 94523
(510) 935-0799 (telecopier)
(510) 934-4443 (telephone)
Attention: Michael F. Vukelich
with copies to:
Knox Ricksen
Lake Merritt Plaza
1999 Harrison Street, Suite 1700
Oakland, CA 94612-3500
(510) 446-1946 (telecopier)
(510) 893-1000 (telephone)
Attention: Thomas A. Palmer, Esq.
or to such other address as any party hereto may, from time to time, designate
in a written notice given in like manner.
Except as otherwise provided herein, any notice under this Agreement will be
deemed to have been given (x) on the date such notice is personally delivered or
delivered by confirmed facsimile, or (y) the next succeeding business day after
the date such notice is delivered to the overnight courier service if sent by
overnight courier; PROVIDED that in each case notices received after
29
<PAGE>
4:00 p.m. (local time of the recipient) shall be deemed to have been duly given
on the next business day.
10.7 COMPLETE AGREEMENT. This Agreement, the Confidentiality
Agreement and the other documents and writings referred to herein or delivered
pursuant hereto contain the entire understanding of the parties with respect to
the subject matter hereof and thereof and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
10.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
10.9 PUBLICITY. Sellers' Representative and Purchaser will consult
with each other and will mutually agree upon any publication or press release of
any nature with respect to this Agreement or the transactions contemplated
hereby and shall not issue any such publication or press release prior to such
consultation and agreement except as may be required by applicable law, in which
case the party proposing to issue such publication or press release shall use
reasonable efforts to consult in good faith with the other party or parties
before issuing any such publication or press release.
10.10 HEADINGS. The headings contained in this Agreement are for
reference only and shall not affect in any way the meaning or interpretation of
this Agreement.
10.11 KNOWLEDGE. For purposes of this Agreement, the term "knowledge"
means, with respect to Purchaser, the actual knowledge of James A. Kohlberg, W.
Dexter Paine III and Samuel P. Frieder, with respect to the Executive Managers,
the actual knowledge of Michael F. Vukelich, Steven J. Bookspan and Jerry
Halamuda, with respect to the Director Shareholders (other than Heller), the
actual knowledge of such Director Shareholder, and with respect to Heller, the
actual knowledge of John Underwood and Jeffrey A. Gonyo.
10.12 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
10.13 THIRD PARTIES. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation, other than the parties hereto
and their permitted successors or assigns, any rights or remedies under or by
reason of this Agreement.
10.14 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. THE PARTIES
HERETO HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR
30
<PAGE>
FEDERAL COURT LOCATED WITHIN THE AREA ENCOMPASSED BY THE STATE OF CALIFORNIA,
COUNTY OF CONTRA COSTA, AND IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS.
THE PARTIES HERETO EACH ACCEPT FOR ITSELF AND HIMSELF, AS THE CASE MAY BE, AND
IN CONNECTION WITH ITS OR HIS, AS THE CASE MAY BE, RESPECTIVE PROPERTIES,
GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION AND VENUE OF THE
AFORESAID COURTS AND WAIVE ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY
AGREE TO BE BOUND BY ANY NON-APPEALABLE JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT. THE PARTIES HERETO EACH DESIGNATE THE PRENTICE-HALL
CORPORATION SYSTEM, INC. AND SUCH OTHER PERSONS AS MAY HEREINAFTER BE SELECTED
BY THE SELLERS' REPRESENTATIVE WHO IRREVOCABLY AGREES IN WRITING TO SO SERVE AS
AGENT TO RECEIVE ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH
SERVICE BEING HEREBY ACKNOWLEDGED BY THE PARTIES HERETO TO BE EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE
MAILED BY PRENTICE-HALL OR SUCH OTHER PERSONS BY REGISTERED MAIL TO THE PARTIES
HERETO, AS PROVIDED HEREIN, EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE
LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF
PROCESS.
10.15 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY LAW,
THE PARTIES HERETO HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION. THE
PARTIES HERETO ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH
MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY OF THE OTHER PARTIES. THE SCOPE
OF THIS WAIVER IS INTENDED TOME ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT
MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF
DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE PARTIES HERETO
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS. THE PARTIES HERETO FURTHER WARRANT AND REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER WITH ITS OR HIS, AS THE CASE MAY BE, LEGAL COUNSEL, AND
THAT EACH KNOWINGLY AND VOLUNTARILY WAVES ITS OR HIS, AS THE CASE MAY BE, JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY
31
<PAGE>
OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY.
IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO
A TRIAL BY THE COURT.
10.16 SELLERS' REPRESENTATIVE. Each Seller, for purposes of this
Agreement and the transactions contemplated hereby, hereby irrevocably appoints
Heller as Sellers' Representative.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
32
<PAGE>
IN WITNESS WHEREOF, each of Purchaser, the Company and the Sellers
have executed this Agreement, or caused this Agreement to be executed by their
duly authorized officers, as of the day and year first above written.
KCSN ACQUISITION COMPANY, L.L.P., a Delaware
limited partnership
By: KCSN Management Company, L.P.,
Its general partner
By: KCSN GP, Inc.,
Its general partner
By:_______________________________________________
Samuel P. Frieder
Vice President
COLOR SPOT NURSERIES, INC., a Delaware corporation
By:_______________________________________________
Michael F. Vukelich
Chairman/CEO
HELLER EQUITY CAPITAL CORPORATION, a Delaware
corporation
By:_______________________________________________
Name:_________________________________________
Title:________________________________________
M.F. VUKELICH CO., a California corporation
By:_______________________________________________
Michael F. Vukelich
33
<PAGE>
President
__________________________________________________
Michael F. Vukelich
__________________________________________________
Jerry Halamuda
__________________________________________________
Gary E. Mariani
__________________________________________________
Steven J. Bookspan
__________________________________________________
Richard E. George
34
<PAGE>
EXHIBIT 5.7
LEGAL OPINION
35
<PAGE>
EXHIBIT 5.8
EMPLOYMENT AGREEMENT
36
<PAGE>
EXHIBIT 5.9
8.0% SUBORDINATED CONVERTIBLE NOTES
37
<PAGE>
EXHIBIT 5.10
STOCKHOLDERS' AGREEMENT
38
<PAGE>
EXHIBIT 6.8(A)
LEGAL OPINION - [CHARLES P. BRISSMAN, ESQ.]
39
<PAGE>
EXHIBIT 6.8(B)
LEGAL OPINION - [KNOX RICKSEN]
40
<PAGE>
EXHIBIT 6.8(C)
LEGAL OPINION - [KATTEN MUCHIN & ZAVIS]
41
<PAGE>
EXHIBIT 6.10
FINANCING PROPOSAL
42
<PAGE>
EXHIBIT 6.11
FEE AGREEMENT
43
<PAGE>
SCHEDULE 1
SHAREHOLDERS, EXISTING SHARES, OPTION SHARES
AND REDEEMED SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SHAREHOLDERS EXISTING OPTION TOTAL REDEEMED
SHARES SHARES SHARES SHARES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Heller Equity Capital Corporation 7,000,000 N/A 7,000,000 7,000,000
M.F. Vukelich Co. 500,000 N/A 500,000 500,000
Michael F. Vukelich 1,786,084 573,346 2,359,430 743,482
Jerry Halamuda 150,000 573,346 723,346 383,838
Steven J. Bookspan 40,800 57,335 98,135 32,720
Gary Crook N/A 57,335 57,335 19,117
Dave Grimshaw N/A 57,335 57,335 19,117
Gene Malcolm 100,000 57,335 157,335 52,459
Michael T. Neenan 10,000 57,335 67,335 22,451
Robert F. Strange 10,000 57,335 67,335 22,451
Jim Tsurudome 25,000 57,335 82,335 27,453
John Negrete N/A 25,000 25,000 8,336
Dennis Bahen N/A 10,000 10,000 -
Gary E. Mariani 125,000 57,335 182,335 103,434
Richard E. George 100,000 57,335 157,335 52,459
TOTALS 9,846,884 1,697,707 11,544,591 8,753,479
</TABLE>
44
<PAGE>
SCHEDULE 2
PENDING ACQUISITIONS
1. Acquisition of assets of Sunnyside Plants, Inc.
2. Acquisition of assets of Signature Trees.
45
<PAGE>
DISCLOSURE SCHEDULE
46
<PAGE>
9% SUBORDINATED PROMISSORY NOTE DUE 2004
$1,000,000 September 5, 1997
Pleasant Hill, CA
FOR VALUE RECEIVED, CSN, INC., a Delaware corporation ("BORROWER"), hereby
unconditionally promises to pay to the order of KENNETH ODA (for the benefit of
Kenneth Oda, Harunori Oda and Amy Oda Uyemura) ("LENDER"), in lawful money of
the United States of America and in immediately available funds, the principal
sum of One Million Dollars ($1,000,000) (the "LOAN") together with accrued and
unpaid interest thereon, payable on the dates and in the manner set forth below.
1. PRINCIPAL REPAYMENT. The outstanding principal amount of the Loan
shall become due and payable on August 31, 2004 (the "MATURITY DATE"); provided
that, if earlier, the principal amount of this Loan shall automatically become
due and payable on the nine month anniversary of the date on which Borrower
consummates on initial registered public offering of any class of its common
stock under the Securities Act of 1933, as amended. The Borrower may prepay
this Note at any time upon the prior written consent of the Administrative Agent
for the holders of Senior Indebtedness (as defined below) without premium or
penalty.
2. INTEREST. Borrower shall pay interest in cash on the last business
day of each month from the date of this Note until the Maturity Date at the
rate of 9.0% per annum. Interest shall be calculated on the basis of a 365-day
year for the actual number of days elapsed.
3. APPLICATION OF PAYMENTS. Payments on this Note shall be applied
first to accrued interest, and thereafter to the outstanding principal
balance hereof. All amounts payable hereunder shall be payable to Lender at
the address it specifies to Borrower in writing.
4. SUBORDINATION.
(a) AGREEMENT TO SUBORDINATE. The Borrower, for itself, its successors
and assigns, covenants and agrees, and the Lender by acceptance hereof, likewise
covenants and agrees, that the payment of the principal of and interest on this
Note is hereby expressly subordinated to the extent and in the manner
hereinafter set forth in right of payment to the prior payment in full of the
Borrower and its subsidiaries ("SENIOR INDEBTEDNESS") which shall mean (i) the
indebtedness pursuant to the Amended and Restated Credit Agreement dated as of
February 20, 1997 among Borrower, Color Spot Nurseries, Inc., and Credit
Agricole
<PAGE>
Indosuez, as Administrative Agent (the "AGENT") for itself and the other
lending institutions party thereto, IBJ Schroder Bank & Trust Company, as
Co-Agent, and the other lending institutions party thereto (the "CREDIT
AGREEMENT"), and the related security documents, guarantees, agreements in
each case as the Credit Agreement and related agreements may be amended
(including any amendment and restatement thereof), supplemented or otherwise
modified from time to time, including any agreement extending the maturity
of, refinancing, replacing or restructuring (including, without limitation,
increasing amount of available borrowings thereunder) all or a portion of the
Indebtedness under any such agreement or any successor or replacement
agreement and whether by the same or any other agents, lender or group of
lenders, and (ii) all fees, costs, indemnities, expenses, reimbursement
obligations and other obligations payable under the Credit Agreement or any
other agreement relating thereto accrued to the date of payment, and
guarantees of the foregoing, and that such subordination is for the benefit
of the holders of Senior Indebtedness and may be enforced directly by them
against the Lender (or its assignee). All persons who, in reliance upon such
provisions, become holders of, or continue to hold, Senior Indebtedness shall
be entitled to rely hereon, and such provisions are made for the benefit of
the holders of Senior Indebtedness, and the Agent for such holders may
proceed to enforce such provisions directly against the Lender.
(b) SUBORDINATION IN THE EVENT OF DEFAULT ON SENIOR INDEBTEDNESS. Unless
and until the Senior Indebtedness shall have been paid in full in cash, no
payment of principal or interest shall be made on this Note either directly or
indirectly, by set off, redemption, purchase or in any other manner; provided,
however, that the Borrower may make payments and prepayments on this Note when
and as, and only when and as, the same are due and payable in accordance with
the terms and conditions of this Note, unless there exists any Default or Event
of Default (as defined in the Credit Agreement) with respect to the Senior
Indebtedness. If any payment, distribution or security or any proceeds of any
thereof be collected or received by the Lender (or its assignee) which is
required to be paid to the holders of Senior Indebtedness by, or which is not
entitled to be received by the Lender under this Section 4, the Lender (or its
assignee) will forthwith deliver the same to the holders of the Senior
Indebtedness in precisely the form received (except for the indorsement without
recourse or the assignment without recourse of the Lender where necessary) and,
until so delivered, the same shall be held in trust by the Lender (or its
assignee) as the property of the holders of the Senior Indebtedness.
(c) ACCELERATION OF BF NOTES. Neither the Lender (nor its assignee) will,
without the prior written consent of the holders of the Senior Indebtedness,
accelerate or take action to enforce any obligation in respect of this Note and
will not commence (i) any action at law, suit in equity, arbitration proceedings
or other proceeds of a litigation nature against the Borrower or any of its
subsidiaries or assets, or any holders of Senior Indebtedness, in each case
which seeks to enforce payment on this Note, or to prevent the holders of Senior
Indebtedness from enforcing any of their rights or remedies, or (ii) any
bankruptcy, reorganization or insolvency proceedings against the Borrower or any
of its subsidiaries; provided, however, that the provisions of this sentence
shall not apply to an action to enforce a payment permitted to be
<PAGE>
made pursuant to the proviso to the first sentence of Section 4(b) hereof or
amounts due and payable on the Maturity Date (subject to the Lender's (and
its assignee's) obligations pursuant to the last sentence of Section 4(b)
hereof to turn over any such payment received in the case of amounts due and
payable on the Maturity Date); provided, further, that the Lender (or its
assignee) may, upon five days written notice given to the Borrower and the
Administrative Agent under the Credit Agreement, exercise their rights, if
any, to accelerate the maturity of the Note upon payment default if the
holders of Senior Indebtedness have accelerated the maturity thereof.
Without limiting the generality of the first sentence of this paragraph, in
no event (including without limitation a failure to make a payment permitted
to be made pursuant to the provision to the first sentence of Section 4(b)
hereof) shall the Lender or its assignees, without such written consent,
commence or join with any other creditor or creditors of the Borrower or its
subsidiaries in commencing any proceeding against the Borrower or its
subsidiaries seeking relief under any bankruptcy, reorganization or
insolvency laws.
(d) DISTRIBUTION ON DISSOLUTION, LIQUIDATION AND REORGANIZATION;
SUBROGATION OF NOTE. Upon any distribution of assets of Borrower (or Borrower's
assignee) upon any dissolution, winding up, liquidation or reorganization of
Borrower (or Borrower's assignee), whether in bankruptcy, insolvency,
reorganization or receivership proceedings, federal or state, or upon an
assignment for the benefit of creditors or any other marshaling of all or any
part of the assets and liabilities of Borrower (or Borrower's assignee) or
otherwise:
(1) the holders of all Senior Indebtedness shall first be entitled to
receive payment in full thereof before Lender is entitled to receive any payment
upon the principal of or interest on indebtedness evidenced by this Note;
(2) any payment or distribution of assets of Borrower (or Borrower's
assignee) of any kind or character, whether in cash, property or securities, to
which Lender would be entitled except for the provisions of this Section 4 shall
be paid or delivered by Borrower (or Borrower's assignee) or any liquidating
trustee, trustee in bankruptcy, receiver, agent or other person making such
payment or distribution directly to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such Senior Indebtedness
may have been issued, as their interests appear, to the extent necessary to make
payment in full of all Senior Indebtedness remaining unpaid, after giving effect
to any concurrent payment or distribution to the holders of such Senior
Indebtedness; and
(3) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of Borrower (or Borrower's assignee) of any kind or
character, whether in cash, property or securities (other than payments in the
form of equity securities of the Borrower), shall be received by Lender before
all Senior Indebtedness is paid in full, such payment or distribution shall be
paid over or delivered to the holders of such Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of such Senior Indebtedness
may have
<PAGE>
been issued, as their interests appear, for application to the payment of all
Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall
have been paid in full, after giving effect to any concurrent payment or
distribution to the holder of such Senior Indebtedness.
Subject to the prior payment in full of all Senior Indebtedness, Lender
shall be subrogated to the rights of the holders of Senior Indebtedness to
receive payments or distributions of cash, property or securities of Borrower
(or Borrower's assignee) applicable to the Senior Indebtedness until the
principal of and interest on this Note shall be paid in full and no such
payments or distributions to Lender of cash, property or securities otherwise
distributable to the Senior Indebtedness shall, as between Borrower (or
Borrower's assignee), its creditors other than the holders of Senior
Indebtedness, and Lender, be deemed to be a payment by Borrower (or Borrower's
assignee) on account of this Note. It is understood that the provisions of this
Section 4 are and are intended solely for the purpose of defining the relative
rights of the Lender, on the one hand, and the holders of Senior Indebtedness,
on the other hand. Nothing contained in this Section 4 or elsewhere in this
Note is intended to or shall impair, as between Borrower (or Borrower's
assignee), its creditors other than the holders of Senior Indebtedness, and
Lender, the obligation of Borrowers (or Borrower's assignee), which is
unconditional and absolute, to pay to Lender the principal of and interest on
this Note as and when the same shall become due and payable in accordance with
its terms or to affect the relative rights of Lender and creditors of Borrower
(or Borrower's assignee) other than the holders of Senior Indebtedness, nor
shall anything herein or in this Note prevent Lender from exercising all
remedies otherwise permitted by applicable law upon default hereunder, subject
to the rights, if any, under this Section 4 of the holders of Senior
Indebtedness in respect of cash, property or securities of Borrower (or
Borrower's assignee) received upon the exercise of any such remedy. Upon any
payment or distribution of assets of Borrower (or Borrower's assignee) referred
to in this Section 4, Lender shall be entitled to rely upon any order or decree
of a court or competent jurisdiction in which any proceedings of the nature
referred to in this Section 4 are pending or upon a certificate of the
liquidating trustee, trustee in bankruptcy, receiver, agent or other person
making any distribution to Lender, for the purpose of ascertaining the persons
entitled to participate in such payment or distribution, the holders of Senior
Indebtedness and other indebtedness of Borrower (or Borrower's assignee), the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Section 4.
(e) Lender and its assignees hereby irrevocably authorizes and empowers
(without imposing any obligation on) the holders of the Senior Indebtedness,
under the circumstances and to the extent set forth in Section 4(d) hereof, in
each case in the name of the holders of the Senior Indebtedness or in the name
of the Lender or its assignees or otherwise, as the holders of the Senior
Indebtedness may reasonably deem necessary or advisable for the enforcement of
the subordination provisions of this Section 4: (i) to demand, sue for, collect
and receive every such payment or distribution described therein, (ii) if Lender
or its assignees do not do so in a timely fashion, to file claims and proofs of
claims in any statutory or non-statutory proceedings and (iii) to vote or
consent with respect to this Note or any claim thereunder or
<PAGE>
with respect thereto, or any portion of this Note or such claim, whether in
connection with any resolution, arrangement, plan or reorganization,
compromise, settlement, election of trustees or otherwise.
(f) No holder of Senior Indebtedness shall be prejudiced in its right to
enforce the subordination contained herein in accordance with the terms hereof
by any act or failure to act on the part of the Borrower.
(g) AGREEMENT TO EFFECT SUBORDINATION. Lender by acceptance of this Note
agrees to take such action and execute such documents as may be necessary or
appropriate to effectuate the subordination as provided in this Section 4.
5. WAIVER. Borrower waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including, without limitation, reasonable attorneys'
fees, costs and other expenses. The right to plead any and all statutes of
limitations as a defense to any demands hereunder is hereby waived to the
fullest extent permitted by law.
6. ATTORNEY'S FEES. In the event of default by the Borrower (or its
assignee) in the payment of principal or interest due on this Note, Lender shall
be entitled to receive and Borrower (or its assignee) agrees to pay all costs of
collection incurred by Lender, including, without limitation, reasonable
attorney's fees for consultation and suit.
7. AMENDMENT AND WAIVER. Any term of this Note may be amended and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Borrower and the holders of Notes representing a majority of the
outstanding aggregate principal amount of the Notes; provided, however, the
subordination provisions contained herein are solely for the benefit of the
holders of the Senior Indebtedness and may not be rescinded, canceled, amended
or modified in any way without the prior written consent thereto of the
Administrative Agent under the Credit Agreement. Any waiver or amendment
effected in accordance with this Section 7 shall be binding upon the holder of
this Note and the holder of any securities into which this Note may be converted
(including securities into which such securities have been converted), and upon
each future holder of this Note and all such securities and the Borrower.
8. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
9. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to
the benefit of and be binding on any successor to Borrower and shall extend to
any holder hereof.
10. SETOFF. Payments under this Note are subject to setoff as provided in
Section
<PAGE>
7.5 of the Purchase Agreement dated as of September 3, 1997 between Color
Spot Nurseries, Inc., Oda Nursery, Inc., Kenneth Oda, Harunori Oda and Amy
Oda Uyemura.
* * * * * *
<PAGE>
IN WITNESS WHEREOF, Borrower has duly executed this Note as of the date set
forth above.
CSN, INC.
By:
----------------------------------
Jimmie H. Tsurodome
Vice President
<PAGE>
STOCK REPURCHASE AGREEMENT
Stock Repurchase Agreement dated as of December 31, 1996 among (i) COLOR
SPOT NURSERIES, INC., a Delaware corporation whose name is to be changed to
"CSN, Inc." (the "COMPANY"), and (ii) MICHAEL F. VUKELICH and JERRY L. HALAMUDA
(the "EXECUTIVES"). The Company, the Executives and other stockholders of the
Company are parties to a Stockholders Agreement of even date herewith (the
"STOCKHOLDERS AGREEMENT"). Capitalized terms used and not defined herein have
the meanings assigned such terms in the Stockholders Agreement.
The parties hereby agree as follows:
SECTION 1. COMPANY'S REPURCHASE OBLIGATION.
(a) Upon the occurrence of a Triggering Event (as defined below), each
Executive shall have the right to cause the Company to purchase all, but not
less than all, of the Subject Securities (as defined below) held by such
Executive (the "PUT") at a purchase price equal to Fair Market Value (as defined
below) as of the date of occurrence of such Triggering Event or, in the case of
options included in the Subject Securities, the excess of Fair Market Value over
the exercise price of such options. An Executive may exercise his right
pursuant to this Section 1 by delivering written notice of such election (a "PUT
NOTICE") to the Company within 30 days of the occurrence of a Triggering Event.
Upon such exercise, the Company shall purchase all of the Subject Securities
held by such Executive and shall pay the aggregate purchase price therefor as
follows: (i) 20% of such aggregate purchase price shall be paid in cash within
90 days after the Company's receipt of the Put Notice, and (ii) the balance of
such aggregate purchase price shall be paid on such date in the form of a
promissory note of the Company (a "NOTE") bearing interest at the then-current
rate payable on 10-year United States Treasury Notes, with interest payable
quarterly in arrears and principal amortized on a ten-year schedule payable
quarterly commencing on the six-month anniversary of the date of issuance, and
with all remaining unpaid principal and accrued interest thereon payable on the
fifth anniversary of the date of issuance.
(b) Notwithstanding the foregoing, (x) the Note shall be accelerated upon
consummation of the Company's initial public offering under the Securities Act,
a Sale of the Company or a disposition of all or substantially all of its
assets, and (y) the Company shall not be obligated to repurchase Subject
Securities to the extent that such repurchase is not permitted pursuant to the
terms of any of the Company's indebtedness for borrowed money or by applicable
corporate law. In the event of a restriction on the purchase of Subject
Securities, the Company shall purchase the maximum amount of Subject Securities
that it is able to purchase consistent with such restriction and shall exercise
reasonable commercial efforts (in no event to require the refinancing of the
Company's indebtedness or the payment of money) to remove such restriction and,
upon such removal, the Company shall purchase the balance of such Subject
Securities. In the event that the Company is prohibited from honoring its
obligation under the Put pursuant to the preceding clause (y), the Company shall
pay the Executive whose Subject Securities are the subject of the Put a fee of
$150,000 per annum on each anniversary of the date of the Put Notice until such
time as the Company has purchased such Subject Securities and, at the option of
such Executive, Executive shall have the right to exchange the Subject
Securities for redeemable preferred stock of the Company with a liquidation
preference equal to the Fair Market Value of the Subject Securities, which
preferred stock shall be subject to optional redemption at any time and
mandatory redemption upon a Sale of the Company and shall be convertible into
Common Stock in connection with the Company's initial public offering of Common
Stock at a conversion price equal to the public offering price. So long as the
preferred stock is outstanding, the
<PAGE>
Company will not declare any dividends on its Common Stock or repurchase any
Common Stock held by KCSN or its Affiliates.
(c) For purposes of this Agreement, (x) "SUBJECT SECURITIES" with respect
to an Executive shall mean (i) all Management Stock (other than Option Stock)
held by such Executive, (ii) all options held by such Executive on the date
hereof other than options granted under the Company's 1997 Stock Option Plan,
and (iii) to the extent that such Executive is continuously employed with the
Company for a period of three years from the date hereof (other than
interruption of service by reason of death or disability), all Option Stock and
Vested Options held by such Executive, and (y) a "TRIGGERING EVENT" with respect
to an Executive shall mean: (i) termination by the Company of such Executive's
employment without Cause, or (ii) such Executive's death or permanent
disability.
(d) For purposes of this Agreement, "FAIR MARKET VALUE" shall mean the
value per share of Common Stock determined based on the fair market value of the
entire fully-diluted common equity interest in the Company on a going concern
basis as of the date of determination, without regard to any discount for
minority interest represented by the Subject Securities or the restrictions
imposed by the Stockholders Agreement. Fair Market Value shall initially be
determined by the Board of Directors of the Company within 30 days after
delivery of the Put Notice, and written notice of such determination shall be
provided to the Executive whose shares are to be repurchased. If such Executive
disagrees with the Board's determination of Fair Market Value, such Executive
and the Company shall appoint a mutually acceptable independent appraisal firm
to determine Fair Market Value. The decision of such independent appraisal firm
shall be final and binding on all parties, and the fees and expenses of such
firm shall be borne by the Company unless the appraised Fair Market Value is
less than 110% of the value initially determined by the Board, in which case
such fees and expenses shall be borne by the Executive.
(e) In addition to the foregoing provisions, in the event that an
Executive's employment is terminated by the Company for Cause, the Company shall
have the right to purchase the Subject Securities held by such Executive at any
time following such termination, and in the event that KCSN shall transfer all
or substantially all of its interest in the Company (other than to an Affiliate
of KCSN) following termination of an Executive's employment by the Company for
Cause, such Executive shall have the right to require the Company to purchase
all of such Executive's Subject Securities for a period of 30 days following
such transfer, in either case at a purchase price equal to Fair Market Value as
of the date of such termination, which purchase price shall be payable (x) in
cash in the case of the Company's exercise of its purchase right, and (y) in the
case of Executive's exercise of his resale right, in cash to the extent that
KCSN disposes of its interest for cash and in the form of a Note in the event
that KCSN disposes of its interest for non-cash consideration. The Company
shall give such Executive written notice of such disposition by KCSN and such
Executive shall have a period of 30 days following such notice to exercise his
rights pursuant to this subsection (e). In the event that Executive's
employment is terminated for Cause, Executive hereby waives any rights to
participate in any disposition of Investor Stock by KCSN pursuant to Section 6
of the Stockholders Agreement.
SECTION 2. MODIFICATION OF STOCKHOLDERS AGREEMENT. Notwithstanding any
provision of the Stockholders Agreement to the contrary, all references to "Fair
Market Value" in Section 2 of the Stockholders Agreement as they relate to the
Executives shall mean Fair Market Value as defined in this Agreement.
SECTION 3. CONFLICTING PROVISIONS. In the event of a conflict between
the provisions of this Agreement and the express provisions of the
Stockholders Agreement, the express provisions
2
<PAGE>
of this Agreement shall control.
SECTION 4. TERMINATION. This Agreement shall terminate in its entirety
upon consummation of the Company's initial public offering of Common Stock under
the Securities Act.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Date
first above written.
COLOR SPOT NURSERIES, INC.
By:
---------------------------
------------------------------
MICHAEL F. VUKELICH
------------------------------
JERRY L. HALAMUDA
3
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
The Predecessor The Company
- ------------------------------------------------------------------------------------------------ ------------------------------
Year 1/1/93 3/1/93 Year 1/1/95 9/8/95 Year
Ended Through Through Ended Through Through Ended
12/31/92 2/28/93 12/31/93 12/31/94 9/8/95 6/30/96 6/30/97
- ------------------------------------------------------------------------------------------------ ------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing
operations $ (5,385) $ (2,186) $ (4,908) $ (5,947) $ (5,485) $ 5,057 $ 5,885
Total Fixed Charges 4,439 853 2,846 3,636 2,963 1,375 5,343
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Earnings (1) $ (946) $ (1,333) $ (2,062) $ (2,311) $ (2,522) $ 6,432 $ 11,228
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fixed Charges:
Interest expense,
including
amortization
of deferred
financing fees $ 3,728 $ 725 $ 2,182 $ 3,170 $ 2,576 $ 687 $ 4,179
Interest element
of rentals (2) 711 128 664 466 387 688 1,164
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Fixed
Charges (1) $ 4,439 $ 853 $ 2,846 $ 3,636 $ 2,963 $ 1,375 $ 5,343
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges -- -- -- -- -- 4.68 2.10
Dollar Deficiency
of Earnings to
Fixed Charges (3) (5,385) (2,186) (4,908) (5,947) (5,485) - -
</TABLE>
<TABLE>
<CAPTION>
Proforma The Company Pro Forma The Company Pro Forma Pro Forma
- ----------------------- ----------- ------------- ------------- -------------- ------------ -------------
Year 7/1/96 7/1/96 7/1/97 7/1/97 LTM
Ended Through Through Through Through Ended
6/30/97 9/26/96 9/26/96 9/25/97 9/25/97 9/25/97
- ----------------------- ----------- ------------- ------------- -------------- ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing
operations $ 5,053 (1,580) (5,874) (6,712) (7,901) 3,026
Total Fixed Charges 11,955 535 2,690 3,017 3,466 12,731
---------- ---------- ---------- ---------- ---------- ----------
Total Earnings $ 17,008 $ (1,045) $ (2,331) $ (3,695) $ (4,435) $ 15,757
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Fixed Charges:
Interest expense,
including
amortization
of deferred
financing fees 10,378 133 2,138 2,392 2,798 11,038
Interest element
of rentals 1,577 402 552 625 668 1,693
---------- ---------- ---------- ---------- ---------- ----------
Total Fixed
Charges $ 11,955 $ 535 $ 2,690 $ 3,017 $ 3,466 $ 12,731
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings to
Fixed Charges 1.42 -- -- -- -- 1.24
Dollar Deficiency
of Earnings to
Fixed Charges -- (1,580) (5,874) (6,712) (7,901) --
</TABLE>
Note:
1. In computing the ratio of earnings to fixed charges: (a) "earnings" have
been based on income from continuing operations before income taxes and
fixed charges and (b) "fixed charges" consists of interest expense,
including amortization of deferred financing fees and the estimated
interest portion of rents.
2. The interest portion of rent expense was assumed to be one-third of the
total rental expense.
3. For the year ended December 31, 1992, the periods from January 1, 1993
through February 28, 1993 and March 1, 1993 through December 31, 1993,
the year ended December 31, 1994 and the period January 1, 1995 through
September 8, 1995, earnings are inadequate to cover fixed charges.
<PAGE>
<TABLE>
<CAPTION>
Supplemental
Supplemental Pro forma
Pro forma 07/01/97
Year Ended through
06/30/97 09/25/97
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Earnings:
Pretax income from continuing operations $ 5,427 $ (7,474)
Total Fixed Charges 11,581 3,039
------- --------
Total Earnings (1) $17,008 $ (4,435)
------- --------
------- --------
Fixed Charges:
Interest expense, including amortization of deferred financing fees 10,004 2,371
Interest element of rentals (2) 1,577 668
Total Fixed Charges (1) $11,581 $ 3,039
------- --------
------- --------
Redeemable Preferred Stock:
Dividends 5,200 1,300
Accretion to liquidation value 750 188
------- --------
5,950 1,488
------- --------
------- --------
Gross up (Dividends) to pretax on 45% effective tax rate $10,205 $ 2,552
------- --------
------- --------
Redeemable Common Stock:
Accretion to liquidation value $ 250 $ 62
------- --------
------- --------
Ratio of Earnings to Fixed Charges 1.47 --
Dollar Deficiency of Earnings to Fixed Charges $ (7,474)
Ratio of Earnings to Fixed Charges, Redeemable -- --
Preferred Dividends and Accretion to Liquidation Value,
and Redeemable Comon Stock Accretion to Liquidation Value
Dollar Deficiency of Earnings to Fixed Charges, Redeemable
Preferred Dividends and Accretion to Liquidaiton Value,
and Redeemable Common Stock Accretion to Liquidation Value $(5,028) $(10,087)
</TABLE>
Note:
1. In computing the ratio of earnings to fixed charges: (a) "earnings" have
been based on income from continuing operations before income taxes and
fixed charges and (b) "fixed charges" consists of interest expense,
including amortization of deferred financing fees and the estimated
interest portion of rents.
2. The interest portion of rent expense was assumed to be one-third of the
total rental expense.
3. For the year ended December 31, 1992, the periods from January 1, 1993
through February 28, 1993 and March 1, 1993 through December 31, 1993,
the year ended December 31, 1994 and the period January 1, 1995 through
September 8, 1995, earnings are inadequate to cover fixed charges.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to the references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Francisco, California
November 25, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated June 20, 1997 relating to
the financial statements of the Wholesale Bedding Plant Division of Summersun
Greenhouse Co. for the years ended May 31, 1997 and 1996, which is included in
the Registration Statement on Form S-1 of Color Spot Nurseries, Inc. We also
consent to the reference to our Firm as experts in the same Registration
Statement.
MOSS ADAMS LLP
Seattle, Washington
November 25, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use of our report included herein and to the reference to
our firm under the heading "EXPERTS" in the prospectus.
JAYNES, REITMEIER, BOYD & THERRELL, P.C.
Waco, Texas
November 25, 1997
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)
-----
-----------------
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
(Exact name of trustee as specified in its charter)
95-4311476
(I.R.S. employer
identification No.)
515 South Flower Street, Suite 2700
Los Angeles, CA 90071
(Address of principal (Zip Code)
executive offices)
DWIGHT LIU
515 South Flower Street, Suite 2700
Los Angeles, California 90071
(213) 861-5000
(Name, address, including zip code and telephone number of agent for service)
----------------------------
COLOR SPOT NURSERIES, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 68-0363266
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<PAGE>
3478 Buskirk Avenue
Pleasant Hill, CA 94523
(510) 934-4443
(Address of principal chief executive offices)
Senior Subordinated Notes Due 2007
(Title of indenture securities)
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
490 L'Enfant Plaza East, S.W.
Washington, D.C. 20219
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Federal Reserve Bank (12th District)
San Francisco, California
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
The obligor currently is not in default under any of its outstanding
securities for which U.S. Trust Company of California, N.A. is Trustee.
Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15
of Form T-1 are not required under General Instruction B.
<PAGE>
16. LIST OF EXHIBITS
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
California, N.A. currently in effect; incorporated herein by reference to
Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 33-33031.
T-1.2 - Included in Exhibit T-1.1
T-1.3 - Included in Exhibit T-1.1
T-1.4 - A copy of the By-Laws of U.S. Trust Company of California, N.A., as
amended to date; incorporated by reference to Exhibit T-1.4 filed with Form T-1
Statement, Registration No. 33-54136.
T-1.6 - The consent of the trustee required by Section 321(b) of the Trust
Indenture Act of 1939; incorporated herein by reference to Exhibit T-1.6 filed
with Form T-1 Statement, Registration No. 33-33031.
T-1.7 - A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority
NOTE
As of April 22, 1996 the Trustee had 20,000 shares of Capital Stock
outstanding, all of which are owned by U.S. Trust Corporation
The responses to Items 2, 5, 6, 7, 8, 9, 10, 11 and 14 set forth the information
requested as though U. S. Trust Company of California, N.A. and U.S. Trust
Corporation were the "trustee."
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
<PAGE>
---------------
Pursuant to the requirements of the Trust Indenture of Act of 1939, the trustee,
U.S. Trust Company of California, N.A., a corporation organized and existing
under the laws of the State of California, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Los Angeles, and State of
California, on the 21st day of November 1997.
U.S. TRUST COMPANY OF CALIFORNIA, N.A.
Trustee
By:
-------------------------------------------
Sandee' Parks
Authorized Signatory
<PAGE>
<TABLE>
U.S. TRUST COMPANY OF CALIFORNIA, N.A. Call Date: 06/30/97 ST-BK: 06-0784 FFIEC 033
515 SOUTH FLOWER STREET, SUITE 2700 Vendor ID: D Cert #: 33332 Page RC-1
LOS ANGELES, CA 90071 Transit #: 12204024 ------------
9
------------
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30,1997
All schedules are to be reported in thousands of dollars. Unless otherwise indicated,
report the amount outstanding as of the last business day of the quarter.
SCHEDULE RC - BALANCE SHEET
C200 < -
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A) RCON
---- ---------
a. Noninterest-bearing balances and currency and coin (1) 0081 6,819 1.a
---------------- ------ ------- ---------
b. Interest bearing balances (2) 0071 82 1.b
----------------------------------------- ------ ------- ---------
2. Securities: ---------
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 0 2.a
------------ ------ ------- ---------
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 87,907 2.b
---------- ------ ------- ---------
3. Federal funds sold and securities purchased under agreements to resell 1350 24,000 3.
---- ------ ------- ---------
4. Loans and lease financing receivables: RCON
------ -------
a. Loans and leases, net of unearned income (from Schedule RC- C) 2122 138,343 4.a
-------- -------
b. LESS: Allowance for loan and lease losses 3123 2,055 4.b
--------------------------- -------
c. LESS: Allocated transfer risk reserve 3128 0 4.c
-------------------------------- -------
--------
d. Loans and leases, net of unearned income, allowance, and reserve RCON
----
(item 4.a minus 4.b and 4.c 2125 136,288 4.d
--------------------------------------------- ------ ------- --------
5. Trading assets 3545 0 5.
------------------------------------------------------------ ------ ------- --------
6. Premises and fixed assets (including capitalized leases) 2145 7,066 6.
------------------ ------ ------- --------
7. Other real estate owned (from Schedule RC-M) 2150 0 7.
------------------------------ ------ ------- --------
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 2130 0 8.
----------------------------------------------------- ------ ------- --------
9. Customers' liability to this bank on acceptances outstanding 2155 0 9.
------------- ------ ------- --------
10. Intangible assets (from Schedule RC-M) 2143 2,493 10.
----------------------------------- ------ ------- --------
11. Other assets (from Schedule RC-F) 2160 4,633 11.
---------------------------------------- ------ ------- --------
12. Total assets (sum of items 1 through 11) 2170 269,288 12.
--------------------------------- ------ ------- --------
</TABLE>
- -----------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
<TABLE>
U.S. TRUST COMPANY OF CALIFORNIA, N.A. Call Date: 06/30/97 ST-BK: 06-0784 FFIEC 033
515 SOUTH FLOWER STREET, SUITE 2700 Vendor ID: D Cert #: 33332 Page RC-2
LOS ANGELES, CA 90071 Transit #: 12204024
--------------
10
--------------
SCHEDULE RC - CONTINUED
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of RCON
columns A and C from Schedule RC-E) 2200 233,509 13.a
--------------------------------- -------
RCON
-----
(1) Noninterest-bearing (1) 26,255 13.a.1
----------------------------------------- -------
(2) Interest-bearing 6636 207,254
-------
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest- bearing
------------------------------------------
(2) Interest- bearing
---------------------------------------------
--------
14. Federal funds purchased(2) and securities sold under agreements to RCON 0 14
repurchase: 2800 --------
15. a. Demand notes issued to the U.S. Treasury 2840 0 15.a
------------------------------ ----- ------- --------
b. Trading liabilities 3548 0 15.b
-------------------------------------------------- ----- ------- --------
16. Other borrowed money (includes mortgage indebtedness and obligations
under capitalized leases):
--------
A. With a remaining maturity of one year or less 2332 0 16.a
------------------------ ------ ------- --------
B. With a remaining maturity of more than one year through three
years A547 16.b
---------------------------------------------------------------- ------ ------- --------
C. With a remaining maturity of more than three years A548 0 16.c
------------------- ------ ------- --------
17. Not applicable --------
18. Bank's liability on acceptances executed and outstanding 2920 0 18.
----------------- ------ ------- --------
19. Subordinated notes and debentures 3200 0 19.
---------------------------------------- ------ ------- --------
20. Other liabilities (from Schedule RC-G) 2930 4,664 20.
----------------------------------- ------ ------- --------
21. Total liabilities (sum of items 13 through 20) 2948 238,173 21.
--------------------------- ------ ------- --------
22. Not applicable
EQUITY CAPITAL --------
23. Perpetual preferred stock and related surplus 3838 5,000 23.
---------------------------- ------ ------- --------
24. Common stock 3230 2,000 24.
------------------------------------------------------------- ------ ------- --------
25. Surplus (exclude all surplus related to preferred stock) 3839 12,745 25.
----------------- ------ ------- --------
26. a. Undivided profits and capital reserves 3632 11,328 26.a
------------------------------- ------ ------- --------
b. Net unrealized holding gains (losses) on available-for-sale
securities 8434 42 26.b
----------------------------------------------------------- ------ ------- --------
27. Cumulative foreign currency translation adjustments
---------------------- ------- ------- --------
28. a. Total equity capital (sum of items 23 through 27) 3210 31,115 28.
-------------------- ------ ------- --------
29. Total liabilities and equity capital (sum of items 21and 28) 3300 269,288 29.
------------- ------ ------- --------
MEMORANDUM
To be reported only with the march report of condition.
1. Indicate in the box at the right the number of the statement below that best describes the most --------
comprehensive level of auditing work performed for the bank by independent external auditors as RCON
----
of any date during 1996 6724 N/A M.1
-------------------------------------------------------------- --------
1 = Independent audit of the bank with generally accepted 4 = Directors' examination of the external auditors
conducted in accordance bank performed by other (may be required by state chartering authority)
auditing standards by certified public accounting 5 = Review of the bank's financial statements by external
firm which submits a report on the bank auditors
2 = Independent audit of the bank's parent holding 6 = Compilation of the bank's statements by
company conducted in accordance with 7 = Other audit procedures (excluding tax
generally accepted auditing standards by a preparation work)
certified public financial external audit 8 = No external audit work
accounting firm which submits a report on the
consolidated holding company (but not on the
bank separately)
3 = Directors' examination of the bank conducted in
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required
by state chartering authority)
</TABLE>
- -------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) fIncludes limited life preferred stock and related surplus.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF COLOR SPOT
NURSERIES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1997 SEP-25-1997
<CASH> 2,762 1,681
<SECURITIES> 0 0
<RECEIVABLES> 27,185 18,228
<ALLOWANCES> 1,661 1,980
<INVENTORY> 29,395 47,159
<CURRENT-ASSETS> 58,033 65,070
<PP&E> 34,576 51,503
<DEPRECIATION> 2,802 3,668
<TOTAL-ASSETS> 133,417 183,743
<CURRENT-LIABILITIES> 43,872 64,485
<BONDS> 83,408 111,335
2,062 2,026
0 0
<COMMON> 162 170
<OTHER-SE> 3,913 5,727
<TOTAL-LIABILITY-AND-EQUITY> 113,417 183,743
<SALES> 113,400 25,482
<TOTAL-REVENUES> 113,400 25,482
<CGS> 64,026 18,018
<TOTAL-COSTS> 64,026 18,018
<OTHER-EXPENSES> 39,458 11,682
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,179 2,392
<INCOME-PRETAX> 5,885 (6,712)
<INCOME-TAX> 2,830 (3,021)
<INCOME-CONTINUING> 3,055 (3,691)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 215 0
<CHANGES> 0 0
<NET-INCOME> 2,840 (3,691)
<EPS-PRIMARY> (0.40) (0.49)
<EPS-DILUTED> (0.39) (0.49)
</TABLE>
