COLOR SPOT NURSERIES INC, 10-K, 1998-10-15

COLOR SPOT NURSERIES INC
10-K, 1998-10-15
MISCELLANEOUS NONDURABLE GOODS

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<PAGE>

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended June 30, 1998
-------------------------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________

Commission file number 000-23483
---------

COLOR SPOT NURSERIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 68-0363266
- ------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3478 BUSKIRK AVENUE
PLEASANT HILL, CALIFORNIA 94523
- ------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (925) 934-4443
--------------

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------------------ -----------------------------------------
None None

Securities registered pursuant to Section 12(g) of the Act:

13% Series A Cumulative Preferred Stock
-------------------------------------------------------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not

<PAGE>

contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the Registrant's voting stock held as of
September 1, 1998 by non-affiliates of the Registrant was $2,139,744. This
calculation assumes that certain parties may be affiliates of the Registrant and
that, therefore, 713,248 shares of voting stock are held by non affiliates. As
of September 1, 1998, the Registrant had 6,725,350 shares of its common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS UNDER THE CAPTIONS "ITEMS 1 AND 2. BUSINESS AND
PROPERTIES," "ITEM 5., MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS," "ITEM 7., MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND ELSEWHERE THROUGHOUT THIS ANNUAL
REPORT ON FORM 10-K ("ANNUAL REPORT") OF COLOR SPOT NURSERIES, INC. (THE
"COMPANY") WHICH ARE NOT HISTORICAL IN NATURE ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS DEAL WITH THE
CURRENT INTENTIONS, BELIEFS AND EXPECTATIONS OF MANAGEMENT WITH RESPECT TO THE
COMPANY'S BUSINESS AND ARE TYPICALLY IDENTIFIED BY PHRASES SUCH AS "THE COMPANY
PLANS," "MANAGEMENT BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. THESE
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE
ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
OR THE INDUSTRY IN WHICH THE COMPANY COMPETES TO DIFFER, PERHAPS MATERIALLY,
FROM ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS:
THE COMPANY'S SUBSTANTIAL LEVERAGE AND DEBT SERVICE; RESTRICTIONS IMPOSED BY
DEBT COVENANTS AND THE EFFECT OF A DEFAULT ON THE COMPANY'S OPERATIONS; THE
ABILITY OF THE COMPANY TO DEVELOP AND ACQUIRE ADDITIONAL PRODUCTION FACILITIES
AND THE SUCCESSFUL INTEGRATION OF SUCH FACILITIES INTO THE COMPANY'S NETWORK;
THE EFFECT OF GROWTH ON THE COMPANY'S RESOURCES; THE AVAILABILITY OF SUITABLE
NEW MARKETS AND SUITABLE LOCATIONS WITHIN SUCH MARKETS; CHANGES IN THE COMPANY'S
OPERATING OR EXPANSION STRATEGY AND THE DEPENDENCE ON ACQUISITIONS FOR FUTURE
GROWTH; FAILURE TO CONSUMMATE OR SUCCESSFULLY INTEGRATE PROPOSED DEVELOPMENTS OR
ACQUISITIONS; THE UNCERTAINTY OF ADDITIONAL FINANCING TO FUND DESIRED GROWTH AND
OTHER FUTURE CAPITAL NEEDS; WEATHER AND GENERAL AGRICULTURAL RISKS; SEASONALITY
AND THE VARIABILITY OF QUARTERLY RESULTS; THE COMPANY'S DEPENDENCE ON MAJOR
CUSTOMERS SUCH AS HOME DEPOT; REGULATORY CONSTRAINTS AND CHANGES IN LAWS OR
REGULATIONS CONCERNING THE GARDENING INDUSTRY; LABOR LAWS AND CHANGES IN THE
MINIMUM WAGE; THE COMPANY'S SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT;
SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS; THE COMPANY'S
DEPENDENCE ON LEASED FACILITIES; COMPETITION; LACK OF A MARKET FOR THE COMPANY'S
SECURITIES; PAYMENT OR NONPAYMENT OF DIVIDENDS AND CASH OUTLAYS FOR INCOME
TAXES; RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE AND ESTIMATED COSTS ASSOCIATED
WITH THE COMPANY'S AND ITS MAJOR CUSTOMERS' AND SUPPLIERS' COMPLIANCE EFFORTS;
TRENDS IN THE GARDENING INDUSTRY, THE SPECIFIC MARKETS IN WHICH THE COMPANY'S
PRODUCTION FACILITIES ARE LOCATED OR ARE PROPOSED TO BE LOCATED, AND THE GENERAL
ECONOMY OF THE UNITED STATES; AND OTHER FACTORS AS MAY BE IDENTIFIED FROM TIME
TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR
IN THE COMPANY'S PRESS RELEASES.

FOR A DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- CERTAIN BUSINESS FACTORS" OF THIS ANNUAL REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS MADE IN, OR
INCORPORATED BY REFERENCE INTO, THIS ANNUAL REPORT OR OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, ANY DOCUMENT OR STATEMENT REFERRING TO THIS
ANNUAL REPORT OR THE COMPANY'S PRESS RELEASES.

ii
<PAGE>

COLOR SPOT NURSERIES, INC.

INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I ..................................................................................................1
Items 1. and 2. Business and Properties ..........................................................1
Item 3. Legal Proceedings ........................................................................9
Item 4. Submission of Matters to a Vote of Security Holders ......................................9

PART II .................................................................................................9
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................9
Item 6. Selected Consolidated Financial Data ...................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................24
Item 8. Financial Statements and Supplementary Data ............................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...24

PART III ...............................................................................................25
Item 10. Directors and Executive Officers of the Registrant .....................................25
Item 11. Executive Compensation .................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management .........................32
Item 13. Certain Relationships and Related Transactions .........................................33

PART IV ................................................................................................33
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................33
</TABLE>

iii
<PAGE>

COLOR SPOT NURSERIES, INC.

ANNUAL REPORT ON

FORM 10-K

FOR YEAR ENDED JUNE 30, 1998

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES.

OVERVIEW

Color Spot Nurseries, Inc. and its consolidated subsidiaries ("Color Spot"
or the "Company") is one of the largest wholesale nurseries 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. As of September 1, 1998, the Company
distributes products to over 1,710 retail and 1,340 commercial customers,
representing over 8,750 locations, primarily in the western and southwestern
regions of the United States.

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. As of
September 1, 1998, the Company produced over 2,000 varieties of live plants,
including bedding plants, shrubs, flowering potted plants, ground cover and
fresh cut Christmas trees. Through its sales force of approximately 300 sales
merchandisers, 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 nursery production facilities located in California, Arizona, Texas,
Oregon and Washington and Christmas tree growing fields in Oregon, Michigan,
North Carolina and Tennessee.

HISTORY

Color Spot America, Inc., a predecessor to the Company ("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. Following a change in 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. With
Mr. Vukelich as Chief Executive Officer, 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, revising its pricing strategies, renewing its
focus on operating efficiencies and restructuring its sales organization.

RECENT ACQUISITIONS. In June 1996, Color Spot embarked on an aggressive
acquisition strategy and completed 13 acquisitions between October 1996 and
September 1997. The following table sets forth the increase in the number of
production facilities in the last two fiscal years:

<PAGE>

<TABLE>
<CAPTION>
Fiscal Year
-----------
1997 1998
---- ----
<S> <C> <C>
Production facilities at beginning of the period...... 6 13
Production facilities acquired........................ 7 6
---- ----
Production facilities at end of the period............ 13 19
---- ----
---- ----
</TABLE>

1996 RECAPITALIZATION. In December 1996, the Company completed a
recapitalization in which KCSN Acquisition Company, L.P. ("KCSN"), an affiliate
of Kohlberg & Company LLC, a New York merchant banking firm ("Kohlberg"),
acquired newly issued shares constituting a majority interest in the Company and
in which the Company repurchased shares of Common Stock held by management and
other shareholders (the "Recapitalization"). See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Certain Business Considerations" and "Item 13. Certain Relationships and Related
Transactions."

1997 OFFERINGS. In December 1997, the Company completed a public
offering (the "1997 Units Offering") of 40,000 Units (the "Units") at $1,000 per
Unit, with each Unit consisting of one share of 13% 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 $0.001 per share (the "Common Stock") of the Company for a total of
825,000 warrants. Concurrently, the Company completed a public offering (the
"1997 Notes Offering" and together with the 1997 Units Offering, the "1997
Offerings") of $100 million aggregate principal amount of 10 1/2% Senior
Subordinated Notes due 2007 (the "Notes"). The net proceeds of the Offering
$133.5 million were used to repay debt.

INDUSTRY

Gardening is one of the most popular leisure activities in the United
States. According to the 1997-1998 National Gardening Survey conducted by the
Gallup Organization, Inc., 67% of the approximately 102 million U.S. households
participated in some form of gardening in 1997. The Company believes that the
popularity of gardening is likely to increase in coming years. According to the
National Gardening 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 $19 billion
in 1997. In recent years, the live plant market has demonstrated consistent
growth. The Company also competes in the fresh cut Christmas tree market, a
market that generated wholesale revenues nationwide of approximately $513
million in 1997. 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 1997:

<TABLE>
<CAPTION>
RETAIL % OF
SALES(1) RETAIL
CATEGORY TYPICAL PRODUCTS (IN BILLIONS) SALES
-------- ---------------- ------------ ------
<S> <C> <C> <C>
Evergreens and Shrubs Pines and junipers $7.6 39.5%
Trees Outdoor fruit and nut trees, shade trees 4.8 25.3
Bedding Plants Outdoor flowers and vegetables 3.1 16.4
Flowering Potted Plants Indoor flowering plants, such as chrysanthemums, 2.2 11.5
poinsettias and African violets
Foliage Indoor house plants 0.9 4.6
Bulbs Flower bulbs 0.5 2.7
-------------------------
$19.1 100.0%
-------------------------
-------------------------
</TABLE>

(1) Source: February/March 1998 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, Lowe's,
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 complementary product sales,

2
<PAGE>

according to the National Gardening Survey. Moreover, the relatively low prices
of most live plants encourage 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
1997, 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.

BUSINESS STRATEGY

The Company's long term 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 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. As of September 1, 1998, the Company
offered over 2,000 varieties of live plants, including bedding plants, shrubs,
flowering potted plants, ground cover and fresh cut Christmas trees. In
addition, the Company continually seeks to develop new products through
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 allow Color Spot to establish itself as a preferred supplier
to high-volume retail customers. The Company services its retail customers
through a salesforce of approximately 300 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 and
retail sales growth.

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 attempt to increase distribution efficiency, better serve customers
and minimize the effects of adverse weather conditions.

3
<PAGE>

CONTINUE TO STRENGTHEN RELATIONSHIP WITH LARGE RETAIL CUSTOMERS

The Company has long standing relationships with many leading home centers
and other 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 high-volume retail customers
to develop proprietary products, new packaging and sales and promotional
programs.

GROWTH STRATEGY

The Company's goal is to enhance its leadership position in the wholesale
nursery industry. Color Spot's long-term growth strategy is to expand its
presence in its existing markets and continue to enter new geographic markets
through acquisitions. An important aspect of the Company's growth strategy is to
increase its penetration in targeted markets thereby enabling the Company to
better serve high-volume retail customers, enhancing its brand name recognition
and increasing operating efficiencies. The Company's growth strategy includes
three key elements.

EXISTING AND NEW CUSTOMER GROWTH

The Company plans to increase sales by growing with its existing
high-volume 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. In the last two fiscal years, the Company has
serviced 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 high-volume retail customers. In the last
two fiscal years, the Company has added three new retail customers representing
over 100 new stores.

ACQUISITIONS

Contingent upon improvements in its financial performance, the Company's
long-term goal is to pursue new acquisitions 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. Between October
1996 and September 1997, 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. In 1997, the Company made platform acquisitions in the Texas and
Washington markets, and believes that it has opportunities to "fill-in" these
markets. Over the near term, the Company does not anticipate pursuing
additional acquisitions but rather intends to focus on integrating acquired
businesses into the Company's operations.

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. Since June 30, 1996, the Company has expanded
its product line into new areas of the wholesale nursery industry, including
shrubs, flowering potted plants and ground cover. In 1997, the Company also
expanded into the fresh cut Christmas tree business in order to utilize
available sales and distribution capacity during the winter months.

ACQUISITION STRUCTURE

4
<PAGE>

<TABLE>
<CAPTION>
Primary
Company Location Date Product Line
--------------------------------------------------------------------------------------------
<C> <C> <C> <C>
NAB Nurseries Arizona October 1996 Bedding Plants, Foliage
B&C Growers S. California October 1996 Bedding Plants, Ground Cover
Sunrise Growers S. California November 1996 Bedding Plants
Sunnyside Plants N. California January 1997 Flowering Potted Plants
Lone Star Growers Co. Texas February 1997 Shrubs and Bedding Plants
Signature Trees Oregon March 1997 Christmas Trees
Hi-C Nursery N. California April 1997 Bedding Plants
Plants, Inc. Texas July 1997 Bedding Plants
Peters' Wholesale
Greenhouses, Inc. Texas July 1997 Bedding Plants
Wolfe Greenhouses, LLC Texas July 1997 Flowering Potted Plants
Cracon, Inc. Michigan August 1997 Christmas Trees
Summersun Greenhouse Co. Washington August 1997 Bedding Plants
Oda Nursery, Inc. S. California September 1997 Shrubs
</TABLE>

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. The Company typically finances
acquisitions through a combination of cash, promissory notes and, in certain
cases, Company stock. The Company normally obtains non-compete 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. Over the near term, the Company does not anticipate pursuing additional
acquisitions but rather intends to focus on integrating acquired businesses into
the Company's operations.

INTEGRATION OF ACQUIRED FACILITIES

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. Integration of a
platform acquisition is more difficult because it usually 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. Although
the Company has initiated policies to make acquired production facilities more
efficient, there is no assurance that the Company will be successful in its
efforts. See "Item 7. Management's Discussion and Analysis of Financial
Discussion and Results of Operation."

PROPERTIES AND FACILITIES

As of September 1, 1998, Color Spot operates 19 production facilities in
five states. Each production facility consists primarily of growing fields,
greenhouses, warehouse space and distribution areas. 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:

5
<PAGE>

<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) 103 988,000 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.

In addition to its production facilities, the Company also leases growing
fields for Christmas trees in Oregon, Michigan, North Carolina, and Tennessee.

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, flowering potted plants, ground cover and fresh cut
Christmas trees. 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 Fiscal
Product 1998 Net Sales Typical Growing Time
-----------------------------------------------------------------------------------------
<S> <C> <C>
Bedding Plants 63% 6 to 9 weeks
Flowering Potted Plants 12 8 to 14 weeks
Shrubs 15 10 to 16 weeks
Ground Cover 4 10 to 14 months
Christmas Trees 6 7 to 9 years
----
100%
</TABLE>

Color Spot constantly strives for product innovations, such as new
packaging and "premium" potted flowers. In addition, Color Spot works closely
with its large retail customers to develop proprietary branded products.

6
<PAGE>

CUSTOMERS

During fiscal year 1998 the Company sold products to over 1,710 retail
customers as well as to over 1,340 commercial customers, representing over 8,750
locations. In order to promote efficiency and improve profitability, the Company
anticipates reducing low volume purchasers from its customer base. 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:

Home Centers Mass Merchants Drug & 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
Lowe's Wal Mart Rite Aid Drug Stores Star Nursery
Orchard Supply Hardware 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 1998, the Company's top eight retail
customers accounted for approximately 71% of total net sales. Sales to Home
Depot represented 35% of total net sales.

The Company also serves commercial customers, such as landscapers, golf
courses, office parks and hotels. Approximately 4.4% of the Company's fiscal
1998 net sales was 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 a majority 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. The Company
services its retail customers through a salesforce of approximately 300 sales
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

7
<PAGE>

- 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.

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.

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 1997, 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.

EMPLOYEES

As of August 1998, the Company had approximately 2,800 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 4,000 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

8
<PAGE>

subsidized water rates, is governed by federal reclamation laws and regulations.
Changes in the law could have a material adverse effect on the Company.

TRADEMARKS AND TRADE NAMES

The Company is the registered owner of the COLOR SPOT-Registered
Trademark- trademark in the United States. A majority of the Company's
products are sold under this trademark. The Company does not have any other
registered trademarks.

ITEM 3. LEGAL PROCEEDINGS.

The Company and its subsidiaries are from time to time subject to various
legal proceedings incidental to its business. Management believes that the
ultimate resolution of these proceedings will not have a material adverse effect
on the Company's financial position or results of operations, taken as a whole.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

COMMON STOCK

There is no established trading market for the Company's Common Stock. At
September 1, 1998, the number of holders of record of the Common Stock was
approximately 43.

The Company has not declared or paid dividends on its Common Stock since
its formation. The Company plans to retain earnings to finance future growth
and does not anticipate paying dividends on its Common Stock or any class of
capital stock in the foreseeable future. The Company's credit facilities and
corollary agreements associated with the 1997 Offerings prohibit the payment
of cash dividends on Common Stock without the lender's consent. Any future
credit facilities are also likely to prohibit the payment of dividends.
Future declaration or payment of dividends, if any, will be at the sole
discretion of the Board of Directors and will depend on the Company's then
current financial condition, results of operations, capital requirements and
other factors deemed relevant by the Board of Directors. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources and -- Certain Business
Considerations."

WARRANTS

As part of the 1997 Offerings, the Company issued 825,000 Warrants to
purchase Common Stock at $.01 per share, subject to certain adjustments. None of
the Warrants has been exercised. The Warrants are exercisable prior to
5:00 p.m., New York City time, on December 15, 2008 (the "Expiration Date").
In the absence of an exercise, the Warrants will be automatically deemed to have
been exercised immediately prior to 5:00 p.m. on the Expiration Date on a
cash-less basis. Although the issuance of the Warrants was registered under
the Securities Act of 1933, as amended (the "Securities Act"), there is no
established trading market for the Warrants.

PREFERRED STOCK

As part of the 1997 Offerings, the Company issued 40,000 shares of
Series A Preferred Stock in December of 1997. Although the issuance of Series
A Preferred Stock was registered under the Securities Act, there is no
established trading market

9
<PAGE>

for the Series A Preferred Stock. Through 2002, 13% dividends on the Series A
Preferred Stock are expected to be paid in additional shares of Series A
Preferred Stock. In addition, the Company's credit facilities and corollary
agreements associated with the 1997 Offerings restrict the payment of cash
dividends on the Series A Preferred Stock. Future declaration or payment of
dividends, if any, will be at the discretion of the Board of Directors and
will depend on the Company's then current financial condition, results of
operations, capital requirements and other factors deemed relevant by the
Board of Directors. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources" and "-- Certain Business Considerations."

RECENT SALES OF UNREGISTERED SECURITIES

During the fiscal year ended June 30, 1998, the Company issued Common
Stock as set forth below:

RECIPIENT NUMBER OF SHARES DATE AMOUNT PAID
--------- ---------------- ---- -----------
<S> <C> <C> <C>
Clay Murphy 6,273 07/31/97 100,000
Fletcher Murphy 15,682 07/31/97 250,000
Craig Steinhart 6,900 08/05/97 110,000
Conrad Steinhart 6,900 08/05/97 110,000
Jody Wilkes 3,450 08/05/97 55,000
</TABLE>

- -----------------

These issuances were made in connection with an acquisition (valued at
$15.94 per share) in a private transaction not invloving any public offering
in reliance on Section 4(2) of the Securities Act.

In fiscal 1998, the Company issued stock options to purchase 262,300 shares
of Common Stock under the 1997 Stock Option Plan, with a weighted average
exercise price of $10.00 per share. The options were issued in reliance upon
Rule 701, the exemption from registration provided for transactions pursuant to
compensatory benefit plans.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The Company commenced operations on September 8, 1995 through the purchase
of certain assets of its predecessor in a transaction accounted for under the
purchase method of accounting. The Company's predecessor commenced operations on
March 1, 1993 through the purchase of certain assets 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 the Recapitalization and several acquisitions
made by the Company, the financial information presented below is not comparable
in certain respects.

The financial information of the Company presented below as of June 30,
1998, 1997 and 1996 and for the fiscal year ended June 30, 1998 and 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
Form 10-K. The financial information of the Company's predecessor 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 the Company's predecessor. The financial
information as of December 31, 1993 and for the period from February 28, 1993
through December 31, 1993 is derived from the underlying records of the
Company's predecessor, 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 the Company's
predecessor as of and for the periods presented.

<PAGE>

<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR
-----------------------------------------------------------------------------------
9/8/95 1/1/95 2/28/93
YEAR ENDED YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH
6/30/98(3) 6/30/97(2) 6/30/96(1) 9/8/95 12/31/94 12/31/93
----------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................... $187,731 $113,400 $51,995 $ 28,991 439,411 438,650
Gross profit ............................ 51,517 49,374 24,310 11,491 14,995 12,863
Sales, marketing and delivery expenses... 50,033 31,168 15,495 10,488 13,459 11,879
General and administrative expenses ..... 13,338 7,300 2,886 3,659 3,986 3,370
Amortization of intangible assets ....... 2,308 990 94 291 424 423
Income (loss) from operations ........... (16,562) 9,916 5,835 (2,947) (2,874) (2,809)
Interest expense ........................ 13,405 4,179 687 2,576 3,170 2,182
Other expense (income), net ............. (285) (148) 91 (38) (97) (83)
Income tax provision (benefit) .......... (10,514) 2,830 2,269
Income before extraordinary gain (loss).. (19,168) 3,055 2,788 (5,485) (5,947) (4,908)
Extraordinary gain (loss) ............... (2,792) (215)
---------- --------- -------- --------- --------- ----------
Net income (loss) ....................... $(21,960) $ 2,840 $ 2,788 $ (5,485) $ (5,947) $ (4,908)
---------- --------- -------- --------- --------- ----------
---------- --------- -------- --------- --------- ----------
Per share amounts (4)
Income (loss) before extraordinary
loss-basic ............................ $ (3.25) $ 0.49 $ 0.50
---------- --------- --------
---------- --------- --------
Income (loss) before extraordinary
loss-basic diluted .................... $ (3.25) $ 0.45 0.50
---------- --------- --------
---------- --------- --------
Dividends per share ..................... 0.22
OPERATING DATA:
EBITDA(5) ............................... $(10,585) $ 13,357 $ 6,433 $ (2,022) $ (1,619)
Cash flows from operating activities .... (25,865) (4,093) (3,485) (5,220) (2,720)
Cash flows from investing activities .... (54,047) (58,234) (9,660) (260) (609)
Cash flows from financing activities .... 79,394 64,388 13,846 5,587 3,715
Depreciation and amortization ........... 5,977 3,441 598 925 1,255 $ 956
Capital expenditures .................... 13,508 6,181 1,529 260 668 1,148
Ratio of earnings to fixed charges (6) .. 2.10 4.68
Number of production facilities (7) ..... 19 13 6 6 6 6
BALANCE SHEET DATA (END OF PERIOD):
Working capital ......................... $ 26,809 $ 14,161 $ 6,136 $(29,722) $(21,435) $ 4,022
Total assets ............................ 210,350 133,417 33,219 22,695 24,554 25,874
Long term debt, excluding
current portion ....................... 135,044 83,408 6,785 1,430 4,249 5,785
Stockholders' equity (deficit) .......... (7,491) 4,075 12,535 (16,090) (10,605) (4,658)
</TABLE>

- --------------------

(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) Per share amounts exclude extraordinary loss which would decrease the basic
diluted share amounts by $0.03 and $0.40 for the year ended June 30, 1997
and 1998, respectively.

(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." EBITDA for the year ended June 30, 1998 includes $2,400,000 of
non-recurring charges.

(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
expenses (the portion deemed representative of the interest factor).
Earnings were insufficient to cover fixed charges by $4,908,000,
$5,947,000, $5,485,000, and $29,682,000 for 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, and the year ended
June 30, 1998, respectively.

(7) Facilities include owned and leased properties as of the end of each
period, excluding Christmas tree fields.

11
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

GENERAL

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere in
this Annual Report. This Annual Report contains forward-looking statements.
Discussions containing such forwardlooking statements may be found in the
material set forth below and under Items 1 and 2. "Business and Properties," as
well as in this Annual Report generally. Prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation the risk factors set
forth in this Item 7 under the heading "Certain Business Considerations."

OVERVIEW

The Company is one of the largest wholesale nurseries in the United States,
based on revenue and greenhouse square footage. The Company sells a wide
assortment of high quality bedding plants, shrubs, flowering potted plants,
ground cover and Christmas trees as well as provides extensive merchandising
services primarily to leading home centers and mass merchants. The Company has
grown rapidly, primarily through acquisitions completed prior to September 1997,
generating net sales of $187.7 million in fiscal 1998, as compared to $113.4
million in fiscal 1997. The percentage distribution of net sales in fiscal 1998
and fiscal 1997 by major product category was as follows:

<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997
-------------------
<S> <C> <C>
Bedding Plants 63% 67%
Flowering Potted Plants 12% 12%
Shrubs 15% 13%
Ground Cover 4% 2%
Christmas Trees 6% 6%
</TABLE>

The Company commenced operations on September 8, 1995 through the purchase
of certain assets of its predecessor. Management of the Company immediately
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.
Between October 1996 and September 1997 the Company completed 13 acquisitions,
seven of which occurred in fiscal 1997 and six of which occurred in fiscal 1998.
These acquisitions resulted in the Company's expansion into several states,
including Texas, Washington, Oregon and Michigan, and the Company's entry into
the fresh cut Christmas tree business. The Company paid for these acquisitions
through a combination of cash, promissory notes and common stock.

The Company recognized an operating loss of $16.6 million during fiscal
1998 primarily due to the effects of the severe weather conditions associated
with the weather phenomena known as "El Nino", overproduction in the Company's
western division, acquisition integration difficulties, and certain nonrecurring
charges. Sales of the Company's products are highly dependent upon general
weather conditions and cold and wet weather, particularly on weekends, tends to
curtail gardening activities and results in a reduction in demand for the
Company's products. As a result of "El Nino", seasonal rainfall amounts in the
Company's key selling regions ranged from 150 to 200% of normal levels. The
severity of the weather particularly in the Company's western division from
January through April was greater than the Company's expectations which resulted
in high levels of product shrinkage and returns. Also, the Company increased
production in anticipation that sales in May and June would be higher than
normal due to

12
<PAGE>

promotional sales programs with its key customers and a delay in the start of
the peak gardening season. Sales in May and June 1998 fell significantly short
of expectations for the Company's western division resulting again in high
levels of shrinkage and returns. The severe impact of weather and overproduction
was isolated in the Company's western division which primarily sells bedding
products that have shorter growing periods and shelf lives and consequently are
more subject to weather related production and selling risks. In addition,
during fiscal 1998, the Company incurred a $4.3 million non-cash pre-tax
extraordinary charge related to the write off of deferred financing fees, a $2.0
million pre tax charge related to the termination of an annual management fee,
and a $0.4 million pre-tax charge related to the payment of bonuses to certain
members of management.

The Company is examining and addressing the factors contributing to the
earnings shortfall in fiscal 1998. The Company has implemented several steps to
improve its operating results, including hiring new executives to bolster the
current management team, operating with a more conservative sales and production
plan, and adjusting its production process to attempt to better match supply and
demand while maintaining high quality customer service. Over the near term, the
Company does not anticipate pursuing additional acquisitions but rather
intends to focus on integrating acquired businesses into the Company's
operations.

Color Spot's designation as an agricultural company provides favorable tax
treatment for a majority of its operations. While the Company's financial
statements include tax expense, the Company has historically not paid 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's effective tax
rate was 35.4% in fiscal 1998 and 48.0% in fiscal 1997 which was higher than the
U.S. statutory rate of 34% due to state tax provisions and other California tax
limitations on the use of net operating loss carryforwards. As of June 30, 1998,
the Company had a net operating loss carryforward of approximately $63.5 million
for federal income tax purposes and $24.4 million for state income tax purposes.

The Company's business is highly seasonal and the Company has historically
reported operating losses in its first and second fiscal quarters. 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; however, the Company believes it will continue to report operating
losses during the first half of its fiscal year.

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
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.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain
consolidated income statement items as a percentage of net sales:

13
<PAGE>

<TABLE>
<CAPTION>
Fiscal Year Fiscal Year 9/8/95
ended ended through
6/30/98 6/30/97 06/30/96
----------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 72.6 56.5 53.2
----------------------------------------
Gross profit 27.4 43.5 46.8
Sales, marketing and delivery expenses 26.7 27.5 29.8
General and administrative expenses 7.1 6.4 5.6
Amortization of intangible assets 1.2 0.9 0.2
Termination of management fee and other 1.3 0.0 0.0
----------------------------------------
Income (loss) from operations (8.8) 8.7 11.2

Interest expense 7.1 3.7 1.3
Other expense (income), net (0.2) (0.1) 0.2
----------------------------------------
Income (loss) before income tax provision
and extraordinary loss (15.7) 5.2 9.7
Income tax provision 5.6 2.5 4.4
----------------------------------------
Income (loss) before extraordinary loss (10.1) 2.7 5.3
Extraordinary loss 1.5 0.2 0.0
----------------------------------------
Net Income (loss) (11.6)% 2.5% 5.3%
----------------------------------------
</TABLE>

FISCAL YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") AS COMPARED TO FISCAL YEAR ENDED
JUNE 30, 1997 ("FISCAL 1997")

NET SALES. Net sales increased $74.3 million, or 65.5%, to $187.7 million
in fiscal 1998 from $113.4 million in fiscal 1997. This increase was primarily
attributable to increased sales volume resulting from the acquisition of seven
companies in fiscal 1997 and six companies in fiscal 1998.

GROSS PROFIT. Gross profit increased $2.1 million, or 4.3%, to $51.5
million in fiscal 1998 from $49.4 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 27.4% in fiscal 1998 from 43.5% in fiscal
1997. The significant reduction in gross profit percentage was the result of
higher production costs and high product shrinkage and return rates due to below
planned sales. Gross profit percentage was adversely affected by the impact of
over-production combined with the adverse weather conditions of "El Nino."
Additionally, gross profit percentage declined due to higher production labor
costs as a result of the statutory increase in the minimum wage and higher costs
resulting from difficulties faced in fully integrating the operations of
acquired companies. Finally, management believes that its return policy was
applied too liberally, resulting in credits that were either issued prematurely
or for traditionally non returnable items.

OPERATING EXPENSES. Sales, marketing and delivery expenses increased $18.9
million, or 60.5%, to $50.0 million in fiscal 1998 from $31.2 million in fiscal
1997. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 26.7% in fiscal 1998 from 27.5% in fiscal 1997. This decrease as a
percentage of net sales was primarily due to lower per unit distribution costs
associated with newly acquired product lines. General and administrative
expenses increased $6.0 million, or 82.7%, to $13.3 million in fiscal 1998 from
$7.3 million in fiscal 1997. As a percentage of net sales, general and
administrative expenses increased to 7.1% in fiscal 1998 from 6.4% in fiscal
1997. This increase is the result of additional general and administrative
resources needed to support the Company's growth combined with certain operating
inefficiencies as a result of difficulties in fully integrating the operations
of acquired businesses. Amortization of intangible assets increased $1.3 million
to $2.3 million in fiscal 1998 from $1.0 million in fiscal 1997 due to the
Company's acquisitions in fiscal 1997 and fiscal 1998.

INTEREST EXPENSE. Interest expense increased $9.2 million to $13.4 million
in fiscal 1998 from $4.2 million in fiscal 1997. This increase resulted from
increased levels of debt required to fund acquisitions, capital

14
<PAGE>

expenditures and operating losses.

TAXES. The effective tax benefit decreased to a rate of 35.4% in fiscal
1998 from a provision rate of 48.0% in 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.

FISCAL 1997 AS COMPARED TO THE PERIOD FROM SEPTEMBER 8, 1995 THROUGH JUNE 30,
1996 ("FISCAL 1996")

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.

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.

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. 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. 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.

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 and to effect the
recapitalization on December 31, 1996.

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.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash needs are primarily to fund seasonal working capital
requirements, capital expenditures and acquisitions. For fiscal 1998, cash was
also required to fund substantial operating losses. In December 1997, the
Company raised approximately $133.5 million of net offering proceeds from the
1997 Offerings, all of which was used to repay outstanding debt. Simultaneously
with the completion of the 1997 Offerings, the Company entered into a new senior
credit facility (the "Indosuez Loan Agreement") with a number of banking
institutions led by Credit Agricole Indosuez. For fiscal 1998, the Indosuez Loan
Agreement served as the Company's primary source of operating capital.

During fiscal 1998, fiscal 1997, and for the period from September 8, 1995
through June 30, 1996, net cash used in operations was $25.9 million, $4.1
million and $3.5 million, respectively. Net cash used to purchase businesses

15
<PAGE>

during fiscal 1998, fiscal 1997 and for the period from September 8, 1995
through June 30, 1996, was $40.5 million, $52.1 million and $9.0 million,
respectively. The Company invested $13.5 million, $6.2 million and $1.5 million
on capital expenditures in fiscal 1998, fiscal 1997 and for the period from
September 8, 1995 through June 30, 1996, respectively. Approximately $8.3
million of the expenditures during fiscal 1998 were for expansion capital
projects. Expansion capital projects increase the productive capabilities of the
Company and typically include grading of new land, purchasing and building new
greenhouses and related improvements, such as the installation of ventilation
and irrigation systems.

On December 31, 1996, in connection with the recapitalization (See Note 1
to Notes to Consolidated Financial Statements), the Company entered into a loan
agreement with Credit Agricole Indosuez and a syndicate of banks. 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 a note payable 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.

On December 24, 1997, the Company closed the 1997 Offerings, raising
$133.5 million, net of fees and expenses from the sales of the Notes, the 13%
Series A Preferred Stock and the Warrants which it used to repay existing
indebtedness (See Notes 10 and 13 to Notes to Consolidated Financial
Statements). Interest on the Notes is due semiannually on June 15 and
December 15 commencing June 15, 1998. Dividends on the Series A Preferred
Stock are payable quarterly in cash or shares of Series A Preferred Stock
through December 15, 2002 on March 15, June 15, September 15 and December 15.
On March 15, 1998, and June 15, 1998 the Company issued 1,153 shares and
1,351 shares, respectively of Series A Preferred Stock as payment of such
dividends.

Also on December 24, 1997, the Company entered into the Indosuez Loan
Agreement, which provided 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. Borrowings
under the Indosuez Loan Agreement were secured by substantially all of the
Company's assets. On June 30, 1998 the Company had borrowed $24.0 million under
the Indosuez Loan Agreement and had not yet borrowed under the acquisition term
loan facility or supplemental line. At June 30, 1998, the Company had $45.1
million of total remaining credit availability under the revolving credit
facility and supplemental lines. At March 26, 1998, and June 30, 1998, the
Company was in default of certain of its financial covenants but received a
waiver of such non compliance for the March 1998 and June 1998 test periods. The
financial covenants were also amended through March 31, 1999. Additionally, the
Indosuez Loan Agreement required that the revolving line and the portion of the
supplemental line used for working capital must be reduced below $15.0 million
for a 30-day period between the months of July through September ("Clean down
Requirement").

On October 15, 1998, the Company entered into a Loan and Security
Agreement with Fleet Capital Corporation, as agent (the "Fleet Loan
Agreement"), and the Indosuez Loan Agreement was terminated and repaid in
full. The Fleet Loan Agreement provides a $70,000,000 revolving credit
facility, $55.0 million of which is subject to certain borrowing base
limitations based on a percentage of eligible inventory and eligible accounts
receivable and $15 million of which is available from November 1 through
April 30 of each fiscal year. The Fleet Loan Agreement is secured by
substantially all of the Color Spot's assets. Interest under the Fleet Loan
Agreement accrues at a variable rate equal to the Base Rate (as defined) plus
1.00% or the LIBOR Rate (as defined) plus 3.00%. In addition, to the extent
that Color Spot's borrowings exceed certain borrowing base limitations during
the period from November 1 through April 30, the interest rates increase by
an additional 0.50%. The interest rates may also increase by such amount 90
days following October 15, 1998 in the event that Color Spot fails to take
certain specified actions with respect to the collateral securing the Fleet
Loan Agreement. The Fleet Loan Agreement terminates on October 15, 2001.

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YEAR 2000 COMPLIANCE PROGRAM

YEAR 2000 PROBLEM

The Year 2000 problem is the result of computer programs being written
using two digits (rather that four) to define the applicable year. Any of the
Company's programs that have time sensitive software or equipment that has
time sensitive embedded components may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company also may be vulnerable to other companies' Year
2000 issues. The Company's current estimates of the impact of the Year 2000
problem on its operations and financial results do not include costs and time
that may be incurred as a result of any vendors' or customers' failure to
become Year 2000 compliant on a timely basis. See " -- Certain Business
Considerations -- Year 2000."

STATE OF READINESS

During fiscal 1998, Color Spot developed and began to implement a Year 2000
compliance plan to ensure that its business is not interrupted by the year 2000
problem. In its compliance plan, the Company identified seven basic operational
areas that have been and will continue to be examined:

-- financial systems, such as general ledger, accounts receivable
and payable, inventory, order entry, sales force automation and
purchasing

-- computer hardware, including major hardware to operate the
financial systems and related operating software

-- operational and support systems, such as telephone equipment,
greenhouse automation and watering systems

-- secondary computer systems, including custom built software

-- customers' compliance efforts, including identifying whether the
Company's high volume customers are Year 2000 compliant

-- suppliers' compliance efforts, including whether significant
suppliers are Year 2000 compliant

-- service vendors' compliance efforts, including identifying
significant service venders and whether they are Year 2000
compliant.

The Company has tested its primary financial systems and hardware and
determined that they are Year 2000 compliant. The Company has determined that
one of its divisional financial systems and certain of its operational and
support systems and secondary systems are not Year 2000 compliant, but that the
cost in making the necessary changes to ensure Year 2000 compliance will not be
material. See " -- Cost of Compliance and Risks of Non-Compliance." With respect
to its customers, the Company has contacted, or has been contacted by, its major
customers and determined that such customers are Year 2000 compliant. The
Company is in the process of contacting its major suppliers and service vendors
regarding Year 2000 compliance and anticipates that its compliance plan will be
completed by the end of calendar 1998 or early 1999.

COST OF COMPLIANCE AND RISKS OF NON-COMPLIANCE

Color Spot believes that the cost of ensuring Year 2000 compliance for its
own financial systems, computer hardware, operational and support systems and
secondary computer systems will be less than $50,000 ($20,000 of which was
incurred in fiscal 1998). Such costs will be expensed as incurred. The Company
continues to bear some risk, however, related to the Year 2000 issue and could
be adversely affected if other entities affiliated with the

17
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Company do not appropriately address their own Year 2000 compliance issues.
Although the Company believes that its major customers are Year 2000 compliant,
the Company is still in the process of reviewing the compliance programs of
suppliers and service vendors. The Company's current estimates of the impact of
the Year 2000 problem on its operations and financial results do not include
costs and time that may be incurred as a result of other companies' failure to
become Year 2000 compliant on a timely basis. There can be no assurance that
such other companies will achieve Year 2000 compliance or that any conversions
by such companies to become Year 2000 compliant will be compatible with the
Company's computer system. The inability of the Company or any of its principal
vendors or customers to become Year 2000 compliant in a timely manner could have
a material adverse effect on the Company's financial condition or results of
operation.

CONTINGENCY PLANS

If the Company's suppliers and service vendors are not Year 2000 compliant,
the Company may have to arrange for alternative sources of supply and
stockpiling raw materials in the fall of 1999 in preparation for the Year 2000
growing season. Because most of the Company's raw material purchases are made
prior to year end, the Company does not expect that its contingency plans will
have an material effect on cash flows.

CERTAIN BUSINESS CONSIDERATIONS

SUBSTANTIAL LEVERAGE AND DEBT SERVICE

As of June 30, 1998, the Company has approximately $135.0 million of
consolidated long term indebtedness and an accumulated deficit of $7.5 million.
Simultaneously with the completion of the 1997 Offerings, the Company entered
into the Indosuez Loan Agreement with a number of banking institutions, led by
Credit Agricole Indosuez. As of June 30, 1998, the Company borrowed $24.0
million of the $150 million available to be borrowed under the Indosuez Loan
Agreement. As of June 30, 1998, the Company was in default on the Indosuez Loan
Agreement and its ability to borrow an additional $110 million under the
Indosuez Loan Agreement was suspended indefinitely. Although the Company
succeeded in refinancing the debt under the Indosuez Loan Agreement on October
15, 1998 with borrowings under the Fleet Loan Agreement, there can be no
assurance that the Company will be able to generate sufficient cash flows and
financial goals to comply with debt covenants in the future.

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 has significant
debt service obligations. The Company's debt service obligations will have
important consequences to holders of the Notes, the Series A Preferred Stock,
the Common 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 Fleet Loan
Agreement, the Indenture and the Certificate of Designation for the Series A
Preferred Stock 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.

18
<PAGE>

may be required to refinance all or a portion of its existing debt, including
the Notes, sell assets or 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 Fleet Loan Agreement insufficient to meet the Company's capital needs. See
" -- Future Capital Needs; Uncertainty of Additional Financing."

RESTRICTIONS IMPOSED BY FLEET LOAN AGREEMENT AND EFFECT OF DEFAULT

The Fleet Loan Agreement restricts, 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 Fleet Loan Agreement. Upon the occurrence of an Event of
Default (as defined in the Fleet Loan Agreement), the lenders could elect to
declare all amounts outstanding under the Fleet 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 Fleet 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 Fleet 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.

ENCUMBRANCES ON ASSETS TO SECURE THE FLEET LOAN AGREEMENT

In addition to being subordinated to all existing and future Senior Debt of
the Company, the Notes are not secured by any of the Company's assets. The
Company's obligations under the Fleet Loan Agreement are secured by
substantially all of the assets of the Company. If the Company becomes insolvent
or is liquidated, or if payment under the Indosuez Loan Agreement is
accelerated, the lenders under the Fleet Loan Agreement will be entitled to
exercise the remedies available to a secured lender under applicable law.

ABILITY TO INTEGRATE ACQUISITIONS

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.

EFFECT OF GROWTH ON COMPANY RESOURCES

The recent growth and expansion of the Company's business have placed 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

19
<PAGE>

manage its growth effectively could have a material adverse effect on the
Company.

DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH

Contingent upon improvement in its financial performance, the Company
intends to pursue 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 by incurring 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 in fiscal 1998. The Company anticipates one or more potential
acquisition opportunities, including those that would be material, may become
available in the near future. No assurance can be given that an acquisition by
the Company will occur, or, 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."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

There can be no assurance that borrowings under the Fleet 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.

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. During
fiscal 1998, the severe weather phenomenon known as "El Nino," materially and
adversely impacted greatly reduced 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. 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.

SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES

The Company's business is highly seasonal. In fiscal 1998, approximately
65.8% of net sales occurred in the second half of the fiscal 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. In fiscal 1998, the Company also
reported an operating loss during the second half of the 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

<PAGE>

customers; and (vi) the Company's relationship with each of its retail
customers.

CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT

The Company is highly dependent on the purchases of its top eight retail
customers, which together accounted for 71% and 75% of the Company's net sales
in fiscal 1998 and fiscal 1997, respectively. The Company's largest customer,
Home Depot, accounted for approximately 35% and 39% of the Company's net sales
in fiscal 1998 and fiscal 1997, 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
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.

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.

SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT

Color Spot America, which was managed by certain of the Company's current
management, was incorporated and commenced operations in 1983. Following a
change of control in 1991, Mr. Vukelich left the Company and new management was
installed. In September 1995, an investor group including Mr. Vukelich formed
the Company and acquired business. See "Item 1. Business--Company History." In
August 1998, Raju Boligala joined the Company as its President. 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 assurance
that the Company will be able to continue to achieve or sustain revenue growth
or profitability.

In addition, in fiscal 1998, the Company incurred a: (i) $4.3 million
non-cash pre-tax extraordinary charge related to the write-off of deferred
financing fees, (ii) a $2.0 million pre tax charge related to the termination of
an annual management fee; and (iii) a $0.4 million pre-tax charge related to the
payment of bonuses to certain members of management.

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<PAGE>

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.

SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS

The Company and its competitors are vulnerable to price increases for raw
materials. For fiscal 1998, raw material costs accounted for approximately 26.9%
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.

CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT

KCSN 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
5.4% of the outstanding Common Stock (approximately 4.9% 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 (the
"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 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.

CHANGE OF CONTROL

The Indenture and Certificate of Designation Agreements which the Company
entered pursuant to the 1997 Offerings provide that, upon the occurrence of a
Change of Control (as defined), 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 Fleet 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 (as defined). The Fleet
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 purchase
tendered Notes would constitute an Event of Default (as defined) under the
Indenture. If, as a result thereof, a default occurs with

22
<PAGE>

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 acquirer obtaining control of the Company.

DEPENDENCE ON LEASED FACILITIES

The majority of the Company's production facilities are leased. These
leases expire at varying times over the next two to 15 years and certain leases
are month-to-month. 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.

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 1997, 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 multiregional 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.

LACK OF MARKET FOR COMMON STOCK AND SERIES A PREFERRED STOCK

There is currently no public market for the Company's Common Stock and
Series A Preferred Stock (together the "Capital Stock"). The Company has no
present plan to list the Capital Stock on a national securities exchange or to
include the Capital Stock 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.

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. Although the underwriters in the 1997 Notes
Offering advised the Company that they intended to make a market in the Notes
after consummation of the Notes Offering, the underwriters are not obligated to
do so and any such market making activities may be discontinued at any time
without notice.

YEAR 2000

The Company has conducted a review of and is continuing to monitor its
respective computer systems to identify the systems that could be affected by
the "Year 2000" issue. While some upgrades will be necessary, the Company
presently believes that the Year 2000 problem will not pose significant
operational problems for the Company's computer systems. Additionally, the Year
2000 problem is not expected to have a material effect on the cost of operations
for the Company. However, the Company may be vulnerable to other companies' Year
2000 issues. The Company's current estimates of the impact of the Year 2000
problem on its operations and financial results do not include costs and time
that may be incurred as a result of any customers', vendors' or service vendors'
failure to become

23
<PAGE>

Year 2000 compliant on a timely basis. Although the Company has completed a
review of major customers' compliance efforts, the Company is still in the
process of contacting its significant suppliers and service vendors with respect
to the efficacy and status of their Year 2000 compliance programs. There can be
no assurance that such other companies will achieve Year 2000 compliance or that
any conversions by such companies to become Year 2000 compliant will be
compatible with the Company's computer system. The inability of the Company or
any of its principal vendors or customers to become Year 2000 compliant in a
timely manner could have a material adverse effect on the Company's financial
condition or results of operation. "See"--Year 2000 Compliance Program."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's liabilities consist primarily of a revolving line of credit,
senior subordinated notes and other notes and accounts payable. The Company has
also issued Series A Preferred Stock and Redeemable Common Stock. Such
liabilities and stockholders' equity have varying levels of sensitivity to
changes in market interest rates. Interest rate risk results when, due to
different maturity dates and repricing intervals, interest rate indices for
interest-bearing liabilities increase relative to income earning assets, thereby
creating a risk of decreased net earnings and cash flow.

The following table provides information about the Company's market
sensitive liabilities, categorized by maturity, and constitutes a
"forward-looking statement." For more information, please refer to Appendix A
"Financial Statements and Notes to Consolidate Financial Statements." [COMPLETE
AFTER REFINANCING]
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------------------
Expected Maturities
-----------------------------------------------------------------
There-
Long-term Liabilities: 1999 2000 2001 2002 2003 after Total
---- ---- ---- ---- ---- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate:

Series A Preferred Stock - - - - $2.6 $ 94.6 $ 97.2
Average Interest Rate 13% 13% 13% 13% 13% 13%

Senior Subordinated Notes $10.5 $10.5 $10.5 $10.5 $10.5 $142.0 $194.5
Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

Heller Note - - - - - $ 12.2 $ 12.2
Average Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

ODA Note $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 1.0 $ 1.6
Average Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Variable Rate:
Fleet Loan Agreement $70.0(1) $ 70.0
Average Interest Rate Base Rate, as defined, plus 1.0% or LIBOR, as defined, plus 3.0%
</TABLE>

(1) On October 15, 1998, the Company entered into the Fleet Loan Agreement,
borrowed approximately $32 million, and repaid in full amounts due under
the Indosuez Loan Agreement. The Fleet Loan Agreement terminates in October
2001 (fiscal 2002). See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources" and Note 20 to the Notes to Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Appendix A.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

24
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth information concerning each of the
directors, executive officers and key employees of the Company. All directors
shall serve until their successors are duly elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Officers are appointed by and serve at the discretion of the Board
of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael F. Vukelich(1) 48 Chairman of the Board, Chief Executive Officer and Director
Jerry L. Halamuda 48 Vice Chairman of the Board
Raju Boligala(1) 48 President, Chief Operating Officer and Director
Carlos R. Plaza 56 Executive Vice President and Chief Financial Officer
Karla D. Vukelich 36 Executive Vice President of Administration and Secretary
Marion Antonini(1) 68 Director and Chairman of the Executive Committee
Ranjit S. Bhonsle(1)(2) 29 Director
George T. Brophy 63 Director
William F. Dordelman 57 Director Nominee
Samuel P. Frieder(1)(2)(3) 34 Director
Richard E. George(3) 59 Director
James A. Kohlberg 40 Director
Gary E. Mariani(2) 54 Director
Geoffrey A. Thompson(3) 57 Director

</TABLE>

- ------------------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) 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 Vice Chairman of the Board since July
1998. Prior to that time, Mr. Halamuda was the Company's President from
September 1995 to July 1998. Prior to joining Color Spot, 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. BOLIGALA joined Color Spot as President and Chief Operating Officer in
August 1998. Prior to joining Color Spot, Mr. Boligala was a senior executive
with Sun Gro Horticulture, a division of Hines Horticulture, Inc. from 1997 to
1998. From 1994 to 1997, Mr. Boligala was with Hines Nurseries, Inc. Prior to
that time, he served as an operational executive with Imperial Nurseries. Mr.
Boligala has 20 years experience in the nursery business.

MR. PLAZA was appointed Chief Financial Officer in July 1998. Prior to that
time, Mr. Plaza served as controller of Welbilt Corporation, a manufacturer of
commercial food service equipment ("Welbilt").

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 she held since September 1995. Prior to that time,
Ms. Vukelich was Secretary and Vice President of Administration of M.F. Vukelich
& Co.

MR. ANTONINI has been a principal at Kohlberg since March 1998. Prior to
that time, Mr. Antonini was Chief

25
<PAGE>

Executive Officer of Welbilt.

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 private business
consultant from 1988 to 1992. Mr. Brophy is also a Director of Banta
Corporation, a printing company.

MR. DORDELMAN has been a Principal at Kohlberg since September 1998. Prior
to that time, Mr. Dordelman was Chairman of the Board and Chief Executive
Officer of Colorado Prime Corporation.

MR. FRIEDER joined Kohlberg in 1989 and was named a Principal in 1995. Mr.
Frieder is also a Director of ABTCo.

MR. GEORGE has been the President of R.G. Trends, an independent consulting
firm since June 1996. From 1995 through 1996, Mr. George was President and Chief
Executive Officer of Handy Andy Home Improvement Centers, Inc. From 1994 through
1995, Mr. George was an independent business consultant. From 1989 to 1994, Mr.
George served as 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, a position he held
through August 1998. 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.

With respect to each of the officers and directors, refer to "Item 13.
Certain Relationships and Related Transactions--Relationship With Kohlberg."
Michael F. Vukelich and Karla D. Vukelich are married.

DIRECTORS' MEETINGS AND COMMITTEES

The entire Board of Directors met eight times during the fiscal year ended
June 30, 1998, including four actions by unanimous consent. Each incumbent
director attended 100% of the board meetings. The Company's Board of Directors
has appointed an Audit Committee, a Compensation Committee and an Executive
Committee.

AUDIT COMMITTEE. The primary responsibilities of the Audit Committee are to
recommend an independent public accountant to audit the annual financial
statements of the Company and to review internal and external audits, internal
accounting controls, annual financial statements and, at its discretion,
compliance with corporate policies and codes of conduct. The Audit Committee is
comprised of outside directors. The current members of the Audit Committee are
Messrs. Bhonsle, Frieder and Mariani. The Audit Committee met one time in the
fiscal year ended June 30, 1998.

COMPENSATION COMMITTEE. The Compensation Committee determines officers'
salaries and bonuses and

26
<PAGE>

administers the grant of stock options and other awards pursuant to the
Company's 1996 Stock Option Incentive Plan, 1997 Stock Option Plan and Special
Stock Option Plan. The Compensation Committee is comprised of outside directors.
The current members of the Compensation Committee are Messrs. Frieder, George
and Thompson. The Compensation Committee met one time in the fiscal year ended
June 30, 1998.

EXECUTIVE COMMITTEE. The primary responsibilities of the Executive
Committee are to deal with day to day issues at the Company prior to meetings of
the full Board of Directors. The Executive Committee met 12 times in the fiscal
year ended June 30, 1998. The current members of the Executive Committee are
Messrs. Vukelich, Boligala, Antonini, Bhonsle, and Frieder.

NOMINATING COMMITTEE. The Board of Directors has no standing Nominating
Committee.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

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.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION

The following table sets forth a summary of certain information regarding
compensation paid or accrued by the Company to the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal year ended
June 30, 1998 (collectively, the "Named Executives").

<PAGE>

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- ------ ----- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Michael F. Vukelich, Chairman of
the Board, Chief Executive Officer and
Director $200,000 $50,000 $5,400 0 $573,346
Jerry Halamuda, Vice Chairman of the
Board(2) and Director 200,000 50,000 5,400 0 299,104
Paul Yeager, Chief Financial Officer(3) 150,000 31,250 5,400 69,000
Robert F. Strange, Director and
President-Western-North Division(4) 125,000 31,250 5,400 5,000
Karla D. Vukelich, Executive Vice
President of Administration and Secretary 65,000 50,000 0 0
</TABLE>

- ------------------------
(1) Represents car allowance.
(2) Mr. Halamuda served as President and Chief Operating Officer from September
1995 to August 1998.
(3) Mr. Yeager left Color Spot in August 1998.
(4) Mr. Strange served as Executive Vice President and Chief Operating Officer
from July 1997 to April 1998.

OPTION GRANTS DURING FISCAL 1998. The following table summarizes the options
granted during fiscal 1998 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.

INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED PER SHARE FOR OPTION TERM(2)
UNDERLYING TO EMPLOYEES EXERCISE EXPIRATION --------------------------
NAME OPTIONS GRANTED IN FISCAL 1998 PRICE(1) DATE 5% 10%
---- --------------- ---------------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich 0 0
Jerry L. Halamuda 0 0
Robert F. Strange 5,000 0.2 $10.00 01/01/08 0 0
Paul Yeager 0 0
Karla D. Vukelich 2,000 0.1 $10.00 01/01/08 0 0
</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.

AGGREGATE OPTION EXERCISES IN FISCAL 1998 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, 1998.

<PAGE>
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>

NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT JUNE 30, MONEY OPTIONS AT JUNE 30,
1998 1998(1)
------------------------------- ----------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISABLE UNEXERCISEABLE
---- -------- -------- ----------- -------------- ----------- --------------

<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich 0 0 568,247 34,362 $613,196 $0
Jerry L. Halamuda 0 0 379,020 34,362 319,892 0
Robert F. Strange 0 0 3,450 10,350 0 0
Paul D. Yeager(2) 0 0 17,250 51,750 0 0
Karla D. Vukelich 0 0 2,587 7,763 0 0
</TABLE>

- ------------------------
(1) Represents the value of the shares of Common Stock subject to outstanding
options, based on a fair market value of $3.00 share, less the aggregate option
exercise price.
(2) Mr. Yeager is no longer employed by the Company and his options have been
cancelled.

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, 1998, 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 eligible to receive an annual
bonus of up to 150% of his base salary based on the achievement of certain
performance targets and upon completion of the 1997 offerings, deferred
compensation of $573,346. 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, which options were
granted in fiscal 1997. 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 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. In fiscal 1998, Mr.
Halamuda was paid a base salary of $200,000 and, upon completion of the 1997
offerings, deferred compensation of $299,104. In fiscal 1999, Mr.

29
<PAGE>

Halamuda will be paid an annual base salary of $100,000 for his services as
the Company's Vice Chairman of the Board. 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,
which options were granted in fiscal 1997. 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.

The Company entered an employment agreement with Raju Boligala, the
Company's President and Chief Operating Officer, effective as of August 12,
1998. The agreement has no fixed term. Under the terms of the agreement, Mr.
Boligala is paid an annual base salary of $200,000, and is eligible to receive
an annual bonus between 50% and 200% of his base salary based on the achievement
of certain performance targets. Mr. Boligala is guaranteed a minimum bonus for
the first year of the agreement of $100,000, subject to his continued employment
with the Company. If Mr. Boligala is terminated without cause, he is entitled to
receive an amount equal to one year's base salary, payable over the following
twelve month period, which amount is increased to two year's base salary in
certain circumstances. Mr. Boligala was paid a starting bonus of $250,000, and
awarded 100,000 stock options to purchase Common Stock at $3.00 per share, which
options vest over a four year period. The agreement provides that if Mr.
Boligala is employed by Color Spot on August 12, 2000, he will be awarded an
additional 50,000 stock options to purchase Common Stock at the fair market
value of a share of Common Stock on such date. The Company also loaned to Mr.
Boligala on an interest free basis an additional $275,000, which amount is
deemed to be repaid on a monthly basis at the rate of $55,000 per annum, subject
to Mr. Boligala's continued employment with Color Spot. The employment agreement
entitles Mr. Boligala to be nominated to the Board of Directors of Color Spot.

STOCK OPTION PLANS

1996 STOCK OPTION 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 June 30, 1998, options
to purchase 569,417 of these shares had been exercised, and 602,002 options,
all of which are 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%

30
<PAGE>

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 unexerciseable. All of the optionee's options which have vested shall
expire and become unexerciseable 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 June 30, 1998, under the 1997 Stock Option Plan, there were
414,000 stock options outstanding with an exercise price of $7.17 per share,
412,168 stock options outstanding with an exercise price of $7.19 per share,
262,300 stock options outstanding with an exercise price of $10.00 per share
and 150,000 stock options outstanding with an exercise price of $3.00 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"). Options to purchase a total of 139,383
shares of Common Stock at $1.43 per share were issued under the Special Option
Plan. As of June 30, 1998, none of the outstanding options have been exercised.
The purpose of the Special Option Plan was to provide incentives to employees of
Lone Star Growers, L.P. in connection with the acquisition of Lone Star Growers
Co., the predecessor to Lone Star Growers, L.P., by the Company. No further
awards will be made under the Special Option Plan. The Special Option Plan is
otherwise identical to the 1997 Stock Option Plan.

31
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 1, 1998, by:
(i) all persons known by the Company to be the beneficial owners of five percent
or more of the Common Stock; (ii) each director, (iii) each of the executive
officers, and (iv) all executive officers as a group. Unless otherwise
indicated, the address of each of the persons named below is in care of the
Company, 3478 Buskirk Avenue, Pleasant Hill, California 94523.

NAME SHARES BENEFICIALLY OWNED(1) PERCENTAGE OWNERSHIP(2)
---- ---------------------------- -----------------------

<S> <C> <C>
KCSN Acquisition Company, L.P.(3) 4,797,716 61.8%
Heller Equity Capital Corporation(4) 575,881 7.1
Michael F. Vukelich(5) 1,355,738 16.3
Jerry L. Halamuda 391,624 4.8
Robert F. Strange(7) 71,847 *
Paul Yeager(8) 224,250 2.9
Karla D. Vukelich(9) 12,938 *
Ranjit S. Bhonsle(10) 0 0
William F. Dordelman(10) 0 0
Samuel P. Frieder(10) 0 0
James A. Kohlberg(10) 0 0
Geoffrey A. Thompson 0 0
Marion Antonini10) 0 0
George T. Brophy(11) 29,064 *
Richard E. George(12) 74,955 1.0
Gary E. Mariani(12) 78,975 1.0
Total Officers and Directors as a Group (14 Persons) 2,239,391 25.5
</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) 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. See "Item 13. Certain
Relationships and Related Transactions--Relationship With Kohlberg."
(4) Includes 397,499 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 options to purchase 568,247 shares of Common Stock which are
presently exercisable. Excludes shares held by Karla D. Vukelich.
(6) Includes options to purchase 379,020 shares of Common Stock which are
presently exercisable.
(7) Includes options to purchase 3,450 shares of Common Stock which are
presently exercisable.
(8) Includes options to purchase 17,250 shares of Common Stock which are
presently exercisable. Mr. Yeager is no longer employed by the Company and
his stock options have been cancelled.
(9) Includes options to purchase 2,587 shares of Common Stock which are
presently exercisable. Excludes shares held by Michael F. Vukelich.
(10) Excludes 4,797,715 shares held by KCSN. Such person disclaims beneficial
ownership of such shares.
(11) Includes options to purchase 29,064 shares of Common Stock which are
presently exercisable.
(12) Includes options to purchase 2,588 shares of Common Stock which are
presently exercisable.

32
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 1, 1998
(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
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation--Certain Business Considerations--Control by Significant
Stockholders and Management." 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 paid to Kohlberg a fee of $2.0 million
on January 2, 1998 to terminate its annual management fee obligations under a
Fee Agreement dated December 31, 1996.

OTHER TRANSACTIONS

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.

The Company paid to Michael F. Vukelich, Jerry L. Halamuda, Paul D. Yeager
and Karla D. Vukelich, $200,000, $100,000, $50,000 and $50,000, respectively, on
January 2, 1998 as a special bonus.

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.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Index to Consolidated Financial Statements, Financial Statement Schedules
and Exhibits

(1) Financial Statements:

The following consolidated financial statements of the Company are included
in Appendix A.

Consolidated Statements of Operations-
Years ended June 30, 1998, 1997 and the period from September 8,
1995 through June 30, 1996

Consolidated Balance Sheets-
June 30, 1998 and 1997

33
<PAGE>

Consolidated Statements of Cash Flows-
Years ended June 30, 1998, 1997 and the period from
September 8, 1995 through June 30, 1996

Consolidated Statements of Shareholders' Equity-
Years ended June 30, 1998, 1997 and the period from
September 8, 1995 through June 30, 1996

Notes to Consolidated Financial Statements

Report of Independent Public Accountants

(2) Financial Statement Schedules:

The following financial statement schedule is included in Exhibit B.

II - Valuation and Qualifying Accounts-
Years ended June 30, 1998, 1997 and the period from
September 8, 1995 through June 30, 1996

Inasmuch as Registrant is primarily a holding company and all subsidiaries
are wholly-owned, only consolidated statements are being filed. Schedules other
than those listed above are omitted because of the absence of the conditions
under which they are required or because the information is included in the
financial statements or notes to the financial statements.

(b) Reports on Form 8-K: Not applicable.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 25, 1997
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.

3.2 Amended and Restated Bylaws, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.

3.3 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.

4.1 Form of Preferred Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.

4.2 Indenture (including Form of Note), incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.

4.3 Warrant Agreement (including Form of Warrant), incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 25, 1997 (SEC File No. 000-23483), as
previously filed with the Securities and Exchange Commission.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------

<S> <C>
10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.

10.2 First Amendment and Waiver to Second Amended And Restated Credit
Agreement dated as of December 24, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 26, 1998 (SEC File No. 000-23483), as previously filed
with the Securities and Exchange Commission.

10.3 Second Amended and Restated Credit Agreement dated as of December 24,
1997, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.

10.4 Amended and Restated Credit Agreement dated as of February 20, 1997,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.

10.5 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, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.6 8% Subordinated Convertible Note issued to Heller, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

10.7 Put/Call Option Agreement dated as of December 31, 1996, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

10.8 Stockholders Agreement dated as of December 31, 1996, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

10.9 Employee Stockholders Agreement dated as of June 1, 1997, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

10.10 Employment Agreement with Michael F. Vukelich dated as of December 31,
1996, incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.

10.11 Employment Agreement with Jerry L. Halamuda dated as of December 31,
1996. incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.

10.12 1996 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.13 1997 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.14 Special Stock Option Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.15 Form of Stock Purchase Option incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.

35
<PAGE>

10.16 Fee Agreement dated as of December 31, 1996 between Registrant and
Kohlberg Company, LLC incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.17 Merger Agreement dated as of February 20, 1997 for the acquisition of
Lone Star Growers Co. incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.18 Real Property Lease between M.F. Vukelich Co. and the Registrant dated
December 1, 1995, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.

10.19 Real Property Lease between Michael F. Vukelich as Guardian for Trisha
Vukelich and the Registrant dated as of December 31, 1995,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.

10.20 Asset Purchase Agreement dated as of March 14, 1997 between Color Spot
Christmas Trees, Inc. and Signature Trees, incorporated by reference
to the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.

10.21 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.

10.22 Stockholders Repurchase Agreement dated as of December 31, 1996,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.

10.23 Employment Agreement dated as of July 30, 1998 with Raju Boligala.

10.24 1998 Employees Stockholders Agreement.

10.25 Loan and Security Agreement dated as of October 15, 1998, between
Fleet Capital Corporation, as agent, and the Company.

10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Company.

11.1 Computations of Earnings Per Share -- See Note 14 to the Notes to
Consolidated Financial Statements.

12.1 Computation of Ratio of Earnings to Fixed Charges.

21.1 Subsidiaries of the Registrant incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.

23.1 Consent of Arthur Andersen LLP.

27.1 Financial Data Schedule.
</TABLE>

36
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Date: October 15, 1998.

COLOR SPOT NURSERIES, INC.
a Delaware corporation

By: /s/ Michael F. Vukelich
-----------------------------------------------
Name: Michael F. Vukelich
Title: Chairman of the Board, Chief Executive
Officer and Director (PRINCIPAL EXECUTIVE
OFFICER)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons of the Registrant and in
the capacities and on the dates indicated:

NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ MICHAEL F. VUKELICH Chairman of the Board, Chief October 15, 1998
- ---------------------------------- Executive Officer and Director
Michael F. Vukelich (PRINCIPAL EXECUTIVE OFFICER)

/s/ RAJU BOLIGALA President, Chief Operating Officer October 15, 1998
- ---------------------------------- and Director
Raju Boligala

/s/ CARLOS R. PLAZA Executive Vice President and October 15, 1998
- ---------------------------------- Chief Financial Officer (PRINCIPAL
Carlos R. Plaza FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)

/s/ JERRY L. HALAMUDA Vice Chairman of the Board and October 15, 1998
- ---------------------------------- Director
Jerry L. Halamuda

/s/ MARION ANTONINI Director October 15, 1998
- ----------------------------------
Marion Antonini

/s/ RANJIT S. BHONSLE Director October 15, 1998
- ----------------------------------
Ranjit S. Bhonsle

/s/ GEORGE T. BROPHY Director October 15, 1998
- ----------------------------------
George T. Brophy

37
<PAGE>

/s/ SAMUEL P. FRIEDER Director October 15, 1998
- ----------------------------------
Samuel P. Frieder

/s/ RICHARD E. GEORGE Director October 15, 1998
- ----------------------------------
Richard E. George

/s/ JAMES A. KOHLBERG Director October 15, 1998
- ----------------------------------
James A. Kohlberg

/s/ GARY E. MARIANI Director October 15, 1998
- ----------------------------------
Gary E. Mariani

/s/ GEOFFREY A. THOMPSON
- ---------------------------------- Director October 15, 1998
Geoffrey A. Thompson
</TABLE>

38
<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------

<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 25, 1997
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.

3.3 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.

10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.

39
<PAGE>

10.23 Employment Agreement dated as of July 30, 1998 with Raju Boligala.

10.24 1998 Employees Stockholders Agreement.

10.25 Loan and Security Agreement dated as of October 15, 1998, between
Fleet Capital Corporation, as agent, and the Company.

10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Company.

40
<PAGE>

11.1 Computations of Earnings Per Share -- See Note 14 to the Notes to
Consolidated Financial Statements.

12.1 Computation of Ratio of Earnings to Fixed Charges.

23.1 Consent of Arthur Andersen LLP.

27.1 Financial Data Schedule.

</TABLE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Color Spot Nurseries, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Color
Spot Nurseries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as
of June 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
June 30, 1998 and 1997 and the period from September 8, 1995 through June 30,
1996. 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 at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
ended June 30, 1998 and 1997 and for the period from September 8, 1995 to June
30, 1996 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

San Francisco, California
August 20, 1998 (except with respect to the matter discussed in Note 20, as to
which date is October 15, 1998)

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,244 $ 2,762
Accounts receivable, net of allowances of $3,084 and $1,661 respectively 28,463 25,524
Inventories, net 42,306 28,854
Prepaid expenses and other 1,803 893
--------------- ---------------

Total current assets 74,816 58,033

TREE INVENTORIES 3,607 541
PROPERTY, PLANT AND EQUIPMENT, net 54,197 31,774
INTANGIBLE ASSETS, net 56,117 31,383
DEFERRED INCOME TAXES 20,167 10,120
NOTES RECEIVABLE AND OTHER ASSETS 1,446 1,566
--------------- ---------------
Total assets $ 210,350 $ 133,417
--------------- ---------------
--------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,053 $ 4,595
Revolving line of credit - 2,105
Accounts payable 16,305 9,815
Accrued liabilities 14,404 12,395
Dividends payable to stockholders 232 906
Deferred income taxes 16,013 14,056
--------------- ---------------

Total current liabilities 48,007 43,872

LONG-TERM DEBT 135,044 83,408
--------------- ---------------

Total liabilities 183,051 127,280
--------------- ---------------

SERIES A PREFERRED STOCK, redeemable, $0.01 par value, 100,000 shares
authorized, 42,504 shares issued and outstanding at June 30, 1998 32,524 -
REDEEMABLE COMMON STOCK, $0.001 par value, 1,163,550
and 1,199,744 shares issued and outstanding, respectively 2,266 2,062
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par value, 4,900,000 shares authorized, no shares
issued and outstanding - -
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,773,518
and 5,021,118 issued and outstanding, respectively 12 162
Additional paid-in capital 50,975 45,033
Treasury stock, 6,200,228 and 6,164,034 shares, respectively (45,488) (45,228)
Warrants, 825,000 exercisable at $0.01 per share 8,250 -
Retained earnings (accumulated deficit) (21,240) 4,108
--------------- ---------------

Total stockholders' equity (deficit) (7,491) 4,075
--------------- ---------------

Total liabilities and stockholders' equity $ 210,350 $ 133,417
--------------- ---------------
--------------- ---------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 8, 1995
YEARS ENDED JUNE 30, THROUGH
1998 1997 JUNE 30, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
NET SALES $ 187,731 $ 113,400 $ 51,995
COST OF SALES 136,214 64,026 27,685
----------------- ----------------- --------------------

Gross profit 51,517 49,374 24,310

SALES, MARKETING AND
DELIVERY EXPENSES 50,033 31,168 15,495
GENERAL AND ADMINISTRATIVE
EXPENSES 13,338 7,300 2,886
AMORTIZATION OF INTANGIBLE
ASSETS 2,308 990 94
TERMINATION OF MANAGEMENT
FEE AND OTHER 2,400 - -
----------------- ----------------- --------------------

Income (loss) from operations (16,562) 9,916 5,835

INTEREST EXPENSE 13,405 4,179 687
OTHER EXPENSE (INCOME), net (285) (148) 91
----------------- ----------------- --------------------

Income (loss) before income taxes
and extraordinary loss (29,682) 5,885 5,057

INCOME TAX BENEFIT (EXPENSE) 10,514 (2,830) (2,269)
----------------- ----------------- --------------------

Income (loss) before extraordinary loss (19,168) 3,055 2,788

EXTRAORDINARY LOSS, net of tax benefit 2,792 215 -
----------------- ----------------- --------------------

Net income (loss) (21,960) 2,840 2,788

SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 3,148 - -

Net income (loss) applicable to
common stock $ (25,108) $ 2,840 $ 2,788
----------------- ----------------- --------------------
----------------- ----------------- --------------------

Basic income (loss) per share:
Income (loss) before extraordinary loss $ (3.25) $ 0.49 $ 0.50
Extraordinary loss (0.40) (0.03) -
----------------- ----------------- --------------------

Total $ (3.65) $ 0.46 $ 0.50
----------------- ----------------- --------------------
----------------- ----------------- --------------------

Shares used in per share calculation 6,874,416 6,208,735 5,593,146
----------------- ----------------- --------------------
----------------- ----------------- --------------------

Diluted income (loss) per share
Income (loss) before extraordinary loss $ (3.25) $ 0.45 $ 0.50
Extraordinary loss (0.40) (0.03) -
----------------- ----------------- --------------------

Total $ (3.65) $ 0.42 $ 0.50
----------------- ----------------- --------------------
----------------- ----------------- --------------------

Shares used in per share calculation 6,874,416 6,818,031 5,593,146
----------------- ----------------- --------------------
----------------- ----------------- --------------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT COMMON SHARES)

<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDERS'
COMMON COMMON PAID-IN TREASURY (ACCUMULATED EQUITY
SHARES STOCK CAPITAL STOCK WARRANTS DEFICIT) (DEFICIT)
----------- -------- --------- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>

Balance, September 8, 1995 1,000 $ - $ 250 $ - $ - $ (16,340) $ (16,090)

Elimination of the 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

Issuance of common stock:
Existing shareholders and management 713,196 7 5,123 - - - 5,130
Acquisition of businesses 39,204 1 625 - - - 626
Issuance of warrants - - - - 8,250 - 8,250
Purchase of redeemable common stock, net - - 36 (260) - - (224)
Accretion of redeemable common stock - - - - - (240) (240)
Accretion of Series A preferred stock - - - - - (410) (410)
Par value adjustment - (158) 158 - - - -
Series A Preferred stock dividends - - - - - (2,738) (2,738)
Net loss - - - - - (21,960) (21,960)
----------- -------- --------- ---------- --------- ------------- -----------
Balance, June 30, 1998 5,773,518 $ 12 $ 50,975 $(45,488) $ 8,250 $ (21,240) $ (7,491)
----------- -------- --------- ---------- --------- ------------- -----------
----------- -------- --------- ---------- --------- ------------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 8, 1995
YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
--------------- --------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21,960) $ 2,840 $ 2,788
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 5,977 3,441 598
Interest paid in kind 602 284 -
Deferred income taxes (10,080) 2,631 2,268
Extraordinary loss, write-off of deferred financing costs 2,792 - -
Changes in operating assets and liabilities, net of effect
of acquired businesses:
Decrease (increase) in accounts receivable (984) (9,435) (8,568)
Decrease (increase) in inventories (2,717) (4,273) 1,920
Decrease (increase) in prepaid expenses and other current assets (819) (260) (407)
Decrease (increase) in noncurrent tree inventory (3,066) (372) -
Decrease (increase) in other long term assets 65 (396) -
Increase (decrease) in accounts payable 3,482 596 (556)
Increase (decrease) in accrued liabilities 843 1,670 (1,207)
Increase (decrease) in other liabilities - (819) (321)
--------------- --------------- ----------------

Net cash used in operating activities (25,865) (4,093) (3,485)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, net of cash acquired (40,539) (52,069) (8,966)
Purchases of fixed assets (13,508) (6,181) (1,529)
Proceeds from sale of fixed assets - 16 835
--------------- --------------- ----------------

Net cash used in investing activities (54,047) (58,234) (9,660)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on cash overdraft (787) 3,520 -
Issuance of common stock 5,130 34,439 9,746
Purchase of treasury stock (260) (37,124) -
Financing and organizational costs (616) (5,584) -
Dividend paid - (614) -
Issuance of preferred stock and warrants 40,000 - -
Proceeds from borrowings 136,803 98,035 1,936
Debt and stock issuance costs (8,051) - -
Net borrowings under revolving line of credit 11,933 3,598 3,791
Repayments of long-term debt (104,758) (31,882) (1,627)
--------------- --------------- ----------------

Net cash provided by financing activities 79,394 64,388 13,846

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (518) 2,061 701

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,762 701 -
--------------- --------------- ----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,244 $ 2,762 $ 701
--------------- --------------- ----------------
--------------- --------------- ----------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 11,725 $ 3,876 $ 936
--------------- --------------- ---------------
--------------- --------------- ---------------

Income taxes $ - $ - $ 2
--------------- --------------- ---------------
--------------- --------------- ---------------

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:

Stock issued for acquisitions $ 626 $ 2,524 $ -
--------------- --------------- ---------------
--------------- --------------- ---------------

Issuance of notes payable in connection with acquisition $ 1,000 $ -
--------------- --------------- ---------------
--------------- --------------- ---------------

Issuance of notes receivable in connection with asset sale $ - $ 1,170 $ -
--------------- --------------- ---------------
--------------- --------------- ---------------

Issuance of notes payable in connection with treasury stock purchase $ - $ 7,100 $ -
--------------- --------------- ---------------
--------------- --------------- ---------------

Series A Preferred Stock dividends $ 2,738 $ - $ -
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>

The acompanying notes are an integral part of these financial statements.

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION, OPERATIONS, AND SIGNIFICANT EVENTS

OPERATIONS

The Company is a producer and distributor of packaged bedding plants
and flowers, groundcover, ornamental plants and shrubs, and commencing in
1997, Christmas trees. Color Spot's Christmas tree business is conducted
through its wholly owned subsidiary, Color Spot Christmas Trees, Inc. As of
June 30, 1998, the Company operates 19 production facilities located in 5
states. In addition, the Company owns or leases growing fields for Christmas
Trees in Oregon, Michigan, North Carolina, and Tennessee. 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.

In 1998 the Company reported a net loss before income taxes and
extraordinary items of $ 29.7 million and used $25.9 million of cash in
operating activities. Consequently, the Company was not in compliance with
certain financial covenants on its revolving credit facility at March 26,
1998 and June 30, 1998, but a waiver was obtained from the banks for the
violations. The Company's operating results were adversely impacted by the
severe weather associated with El Nino, and inventory overproduction that
resulted in the write-off of unsaleable excess products.

In order to improve its operating results the Company has hired
several new executives with significant operating experience to bolster its
current management team and adjust the production process to attempt to
better match supply and demand and limit excess inventory while maintaining
high quality customer service. The management team is analyzing other
operational changes and anticipates recording a non-recurring pre-tax charge
of approximately $5.0 million in the first quarter of fiscal 1999 and may
record an additional charge in the second quarter of fiscal 1999. In
addition, on July 1, 1998, the Company will record a $1.7 million non-cash
charge, net of tax benefit, related to the write-off of organizational costs
in accordance with Statements of Position 98-5, "Reporting on the Costs of
Start-Up Activities".

On October 15, 1998, the Company entered into a loan agreement
providing up to $70.0 million. In connection with this loan agreement, the
Company's revolving credit facility was repaid in full and the revolving
credit facility, the associated acquisition term loan facility and
supplemental line were terminated. The Company will record a $0.8 million
non-cash extraordinary charge, net of tax benefit, related to the write-off
of unamortized financing costs associated with the terminated facilities in
its second fiscal quarter of 1999 (see Note 20-Subsequent Events).

Although the accompanying financial statements have been prepared
contemplating the realization of all recorded assets, including intangible
assets and deferred tax assets of $56.1 million and $20.2 million,
respectively, and the satisfaction of liabilities in the normal course of
business, the Company must generate sufficient cash flow to meet its
obligations as they come due, comply with the terms of its new credit
facility, including attaining its financial covenants, and ultimately
attain profitability and achieve its other business objectives or there will
be a material adverse impact on the Company's business, financial position
and results of operations. No assurance can be provided that the Company will
be able to attain profitability or achieve its business objectives.

LEVERAGE AND FINANCING

As of June 30, 1998, the Company has approximately $135 million of
consolidated long-term indebtedness and an accummulated deficit of $7.5
million. Simultaneously with the completion of the Company's 1997 offerings
of preferred stock and debt, the Company entered into a loan agreement with a
number of banking institutions, led by Credit Agricole Indosuez. As of June
30, 1998, the Company was in default on the loan agreement and its ability to
borrow an additional $110 million under the loan agreement was suspended
indefinitely. Although the Company succeeded in refinancing the debt on
October 14, 1998, there can be no assurance that the Company will be able to
generate sufficient cash flows and financial goals to comply with debt
covenants in the future.

<PAGE>

The Company may incur additional indebtedness in the future, subject
to certain limitations contained in the instruments governing its
indebtedness and capital stock. Accordingly, the Company has significant debt
service obligations. The Company's debt service obligations will have
important consequences to holders of the Senior Subordinated Notes, the
Series A Preferred Stock, its common stock and the Warrants (see Notes 10,
12, and 13), 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 (see Note 20), the indenture and the certificate of
designation for the Series A Preferred Stock 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 principal and interest
payments or to refinance its indebtedness to pay dividends and make
redemption payments on the Series A Preferred Stock and to pay dividends on
its common stock depends on future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. 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 fund 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, sell
assets or 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
available under its loan agreements insufficient to meet the Company's
capital needs.

The Company's new loan agreement (see Note 20) restricts, 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.

BASIS OF PRESENTATION AND RECAPTALIZATION

The consolidated balance sheets as of June 30, 1998 and 1997, and
the consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the years ended June 30, 1998 and 1997 and the period from
inception, September 8, 1995, 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 former parent company of Color
Spot Nurseries, Inc.) into Color Spot Nurseries, Inc., which occurred
simultaneously with the

<PAGE>

consummation of the Company's Senior Subordinated Note, Series A Preferred
Stock and Warrant offerings on December 24, 1997 (see Notes 10, 12, and 13).
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, an aggregate dividend to stockholders of
record prior to the recapitalization of $1.5 million was declared to the
existing stockholders immediately prior to the recapitalization and a
prepayment penalty of $415,000 was incurred in connection with the early
extinguishment of debt.

OFFERINGS

In December 1997, the Company sold $100 million of 10 1/2% Senior
Subordinated Notes and 40,000 units each consisting of one share of 13%
Series A Cumulative Preferred Stock and 825,000 Warrants each representing
the right to purchase one share of the Company's common stock for $0.01 each.
The Company raised $133.5 million net of fees and expenses, from these
offerings which it used to repay existing indebtedness (see Notes 10 and 13).

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.

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 $238,000, of which
$98,000 is being held to satisfy an obligation to purchase common stock from
certain stockholders through December, 1998. This repurchase obligation is
included in redeemable common stock on the accompanying consolidated balance
sheet. In addition, $140,000 is being held to satisfy an obligation to
purchase Christmas trees from a supplier.

<PAGE>

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. Direct costs associated with inventory
shrink are charged to cost of sales as a period expense. Reserves are
recorded for inventory quantities in excess of projected sales.

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. For assets
held financed under capital leases, the present value of the future minimum
lease payments is recorded at the date of acquisition as equipment, with a
corresponding amount recorded as a capital lease obligation.

Depreciation is computed on a straight-line basis over the following
estimated useful lives:

<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Land Improvements 40 years
Buildings 15 to 20 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.

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:

INTANGIBLE CATEGORY ESTIMATED USEFUL LIFE
------------------- ---------------------
<S> <C>
Goodwill 40 years
Trademarks and patents 15 years
Organization costs 5 years
Noncompete agreements 5 years
Financing costs 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

<PAGE>

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.

SERIES A PREFERRED STOCK AND WARRANTS

The Company is required to redeem all outstanding shares of Series A
Preferred Stock at a price equal to the liquidation preference (see Note 13),
plus accrued and unpaid dividends, if any, at December 15, 2008. The Series A
Preferred Stock may be redeemable in whole or in part, at the Company's
option on or after December 15, 2002 at specified redemption prices. The
difference between the carrying amount and redemption amount is accreted over
eleven years (the period from the date of issuance to the date of mandatory
redemption). As a result of the mandatory redemption feature, redeemable
Preferred Stock is classified outside of stockholders' equity.

Warrants are recorded at their estimated fair value on the date of
issuance.

REDEEMABLE COMMON STOCK

The Company is required to repurchase shares of Common Stock from
certain 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 Board of Directors will
retain an independent appraisal firm to assist them in determining the fair
market value of the Common Stock on a periodic basis. 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.

In order to decrease its exposure to unfavorable interest rate
movements, the Company may from time to time, purchase interest rate
protection agreements to cap the interest rates on its floating rate
obligations. The purchase price of the interest rate protection agreements is
capitalized and amortized over the life of the agreement. Amortization of the
purchase price is charged to interest expense. Subsequent to purchase, the
Company does not have any cash requirements related to its interest rate cap
agreements. If interest rates exceed the interest rate on the interest rate
protection agreement, the Company's counterparty will pay the Company the
differential between the interest due on a floating basis and the interest
due on the fixed basis. Payments made by the Company's counterparties are
recorded as a reduction of interest expense in the period earned (see Note
10).

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 utilizing 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.

<PAGE>

EARNINGS PER SHARE

Basic earnings per share was calculated by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share include the impact of common stock options
and warrants outstanding, if dilutive. Earnings per share and all share data
for all periods presented reflect the Company's 0.69-for-one reverse stock
split, which occurred in December, 1997.

ASSET IMPAIRMENT

Long-lived assets, certain identifiable intangible assets and
goodwill will 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 1998 or 1997 (see Note 1).

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has adopted the disclosure provisions of SFAS 123, and
as permitted by the provisions therein continues to measure compensation
costs related to stock option activities in accordance with APB 25.

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"). In 1998, the FASB issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). 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
replaces the notion of industry and geographic segments. SFAS establishes a
new accounting model for derivative instruments and hedging activities. The
Company will adopt SFAS 130 and SFAS 131 in fiscal year 1999 and SFAS 133 in
fiscal year 2000. The Company believes adoption of SFAS 130, SFAS 131 and
SFAS 133 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 periods ended
June 30, 1998, 1997 and 1996 sales to the eight largest customers constituted
71%, 75% and 82% of net sales, respectively. Sales to the Company's largest
customer constituted 35%, 39% and 41% of net sales in these respective
periods. Accounts receivable balances generally reflect the net sales
percentages for the Company's largest customers. Because of the credit
worthiness of its largest customers, the Company believes its credit risk is
mitigated. The loss of, or reduction in orders from, any major retail
customer could have a material adverse effect on the Company.

<PAGE>

4. INVENTORIES

Inventories at June 30, 1998 and 1997, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Current:
Outdoor flowers and vegetable plants $39,764 $24,811
Raw materials and supplies 7,565 3,374
Tree inventories 0 1,095
Inventory reserve (5,023) (426)
---------------- --------------
Total current inventories 42,306 28,854

Noncurrent:
Tree inventories 3,607 541
---------------- --------------
Total inventories, net 45,913 29,395
---------------- --------------
---------------- --------------
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of June 30, 1998 and 1997,
consisted of the following (in thousands):

<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Land and land improvements $10,047 $8,621
Greenhouses and buildings 21,157 9,029
Furniture and fixtures 4,593 2,108
Machinery and equipment 16,333 10,929
Leasehold improvements 5,356 2,587
Assets under capital leases 1,068 752
Construction in progress 2,721 550
---------------- --------------
61,275 34,576
Less: Accumulated depreciation (7,078) (2,802)
---------------- --------------
Total property, plant and equipment $54,197 $31,774
---------------- --------------
---------------- --------------
</TABLE>

Depreciation expense for the periods ended June 30, 1998, 1997 and
1996 was $3,048,000, $2,296,000 and $504,000, respectively. Greenhouses with
an original cost of $5,915,000 and $4,961,000 at June 30, 1998 and June 30,
1997, respectively, are in service on property leased by the Company under
operating lease agreements.

6. NOTES RECEIVABLE

Notes receivable primarily 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 values of $1,170,000 and $250,000, respectively;
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 $10,000 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
approximates fair value. Other notes receivable of $228,000 represent amounts
due from third parties for the purchase of Christmas trees and is due in
August, 1998.

<PAGE>

7. INTANGIBLE ASSETS

Intangible assets as of June 30, 1998 and 1997, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Goodwill $47,517 $23,971
Organization costs 3,578 1,670
Financing costs 5,911 4,352
Noncompete agreements 1,694 1,731
Other 911 856
---------------- --------------
59,611 32,580
Less: Accumulated amortization (3,494) (1,197)
---------------- --------------
Total intangible assets $56,117 $31,383
---------------- --------------
---------------- --------------
</TABLE>

Amortization expense for the periods ending June 30, 1998, 1997 and 1996 was
$2,929,000, $1,145,000, and $94,000, respectively.

On July 1, 1998, the Company will record a $1.7 million non-cash charge, net
of tax benefit, related to the write-off of organizational costs in
accordance with Statements of Position 98-5, "Reporting on the Costs of
Start-Up Activities".

8. ACQUISITIONS

During the years ended June 30, 1998 and 1997, the Company effected
the following acquisitions:

ENTITY DATE OF ACQUISITION
------ -------------------
<S> <C>
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
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 Signature Trees and Cracon, Inc., which grow, broker and
distribute Christmas trees. Financial results of the entities acquired are
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 during years ended June 30, 1998 and 1997 were as follows
(in thousands):

<PAGE>

<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------------------------------------
NAB
Nursery, B&C Sunrise Sunnyside Lone Star Signature Hi-C
Inc. Growers Growers, Inc. Plants, Inc. Growers Co. Trees Co. Nursery Total
--------- ------- ------------- ------------ ----------- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase price 1,782 935 2,416 3,270 37,305 3,175 3,536 52,419

Organization and
financing costs 120 210 565 123 1,328 108 159 2,613
----- ----- ----- ----- ------ ----- ----- ------
Total purchas price 1,902 1,145 2,981 3,393 38,633 3,283 3,695 55,032

Less: Value assigned
to assets and liabilities

Current assets 973 569 963 2,611 14,266 747 1,975 22,104
Long-term assets 785 693 2,212 932 14,763 288 2,028 21,701
Current liabilities (783) (146) (194) (761) (4,656) (48) (1,593) (8,181)
Long-term liabilities - - - - - - - -
Debt - (181) - - (5,000) (137) - (5,318)
----- ----- ----- ----- ------ ----- ----- ------
975 935 2,981 2,782 19,373 850 2,410 30,306
----- ----- ----- ----- ------ ----- ----- ------
Goodwill 927 210 - 611 19,260 2,433 1,285 24,726
----- ----- ----- ----- ------ ----- ----- ------
</TABLE>

<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------------------------
Peters
Wholesale Wolfe Summersun
Plants, Greenhouses, Greenhouses Cracon, Greenhouse ODA
Inc. Inc. LLC Inc. Company Nurseries Total
------- ------------ ----------- ------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase price 4,088 5,698 6,161 1,954 7,546 16,052 41,499

Organization and
financing costs 223 394 413 91 286 479 1,886
----- ------ ----- ----- ----- ------ ------
Total purchase price 4,311 6,092 6,574 2,045 7,832 16,531 43,385

Less: Value assigned
to assets and liabilities

Current assets 994 1,434 1,355 - 1,693 7,356 12,832
Long-term assets 3,623 3,226 4,242 276 1,520 3,566 16,453
Current liabilities (321) (1,155) (644) - (952) (2,941) (6,013)
Long-term liabilities - (1,241) - - - - (1,241)
Debt (307) - - - - (491) (798)
----- ------ ----- ----- ----- ------ ------
3,989 2,264 4,953 276 2,261 7,490 21,233
----- ------ ----- ----- ----- ------ ------
Goodwill 322 3,828 1,621 1,769 5,571 9,041 22,152
----- ------ ----- ----- ----- ------ ------
</TABLE>

<PAGE>

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 certain acquisitions
occurring in fiscal 1998, the Company issued 39,204 shares of common stock,
which were valued at $15.94 per share. In connection with the fiscal 1997
acquisitions of Lone Star Growers Co., Signature Trees and the other
acquisitions, the Company issued 278,940, 55,788 and 17,434 shares of common
stock, respectively, which were valued at $7.17 per share, a price negotiated
between the parties. A Vice-Chairman of the Company is a 20% partner of
Signature Trees. In connection with the acquisition of Signature Trees, he
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 fiscal 1997 acquisitions occurred
on September 8, 1995, and the fiscal 1998 acquisitions occurred on July 1, 1996
are presented below (in thousands, except share data).

<TABLE>
<CAPTION>
September 8,
Year Ended Year Ended 1995 through
June 30, 1998 June 30, 1997 June 30, 1996
----------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>

Net sales $ 189,594 $183,074 $ 101,374

Income (loss) before extraordinary loss (19,815) 3,067 2,796
Preferred stock dividends/accretion (3,148) - -
----------------- ---------------- ----------------
Income applicable to common share
holders $ (22,963) $ 3,067 $ 2,796
Income (loss) per share before
extraordinary loss:
Basic earnings (loss) per share (3.34) 0.47 0.36
Diluted earnings (loss) per share (3.34) 0.43 0.36
Shares used in per share calculation
Basic 6,877,983 6,479,814 7,858,279
Diluted 6,877,983 7,089,110 7,858,279

</TABLE>

Shares issued in connection with the Company's acquisitions have been
included in the calculations as if they were outstanding for all periods
presented.

9. ACCRUED LIABILITIES

Accrued liabilities as of June 30, 1998 and 1997, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Compensation and benefits $6,832 $4,750
Cash Overdraft 2,733 3,520
Payable due to related party - 164
Other 4,839 3,961
------------ -------------
Total accrued liabilities 14,404 12,395
------------ -------------
------------ -------------
</TABLE>

<PAGE>

10. DEBT

In December 1997, simultaneous with the Series A Preferred Stock and
Warrants offering (see Note 13), the Company sold $100 million of 10 1/2 %
Senior Subordinated Notes (the "Notes"). The Company raised, net of fees and
expenses, $133.5 million from the Notes and Series A Preferred Stock and
Warrants offerings (the "Offerings"). The Company used the proceeds from the
Offerings to extinguish existing debt. As a result of the early extinguishment
of debt, the Company recognized an extraordinary loss on the write-off of
deferred financing costs of $2.8 million, net of tax (see Note 18).

Simultaneous with the completion of the Offerings, the Company entered
into a new loan agreement with a syndicate of banks. The new agreement provided
the Company with a two-year acquisition term loan facility of $75.0 million, a
five-year revolving facility of $40.0 million and a five-year supplemental line
of $35.0 million. The loan agreement, among other things, requires the Company
to comply with certain financial and non-financial covenants, restricts the
Company's ability to incur additional indebtedness, pay or declare dividends and
enter into certain transactions. At June 30, 1998, the Company had outstanding
borrowings of $24.0 million on the revolving credit facility and no borrowings
on the acquisition term loan or the supplemental line. At June 30, 1998, the
Company was in default of certain financial covenants relating to these loans.
On August 7, 1998, the credit agreement was amended and the lender waived any
default or event of default caused by the Company's failure to meet certain
covenants at June 30, 1998. The Company also was out of compliance with certain
financial covenants at March 26, 1998 and received a waiver of such default for
the March 1998 test period. The August amendment also halted borrowings under
both the acquisition term loan and the supplemental line. In October 1998, the
Company entered into a $70 million loan agreement with a group of lenders and
terminated its acquisition term loan, five-year revolving facility and five-year
supplement line (see Note 20).

Debt as of June 30, 1998 and 1997, consisted of the following (in
thousands):

<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Senior Subordinated Notes redeemable, in whole or in part, at the option of the
Company, at any time on or after December 15, 2002 at specified redemption
prices. Interest accrues at 10 1/2% per annum and is payable semiannually on
each June 15 and December 15 beginning on June 15, 1998 and maturing on
December 15, 2007. $100,000 -

Five year revolving credit facility up to $40,000 based on eligible accounts
receivable and inventory. Advances under the line accrue interest at the
Company's option, at the prime rate plus 1.25% (9.75% at June 30, 1998) or
LIBOR plus 2.75% (ranging from 8.41% to 8.44% at June 30, 1998). The line is
secured by substantially all the Company's assets. This credit facility must
be reduced annually below $15,000 for a 30-day period between the months of
July through September (such requirement was waived for the period ended
September 30, 1998). 24,038 -

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%, or
LIBOR plus 2.75%. The line was secured by substantially all of the Company's
assets and was extinguished in December 1997 with proceeds from the Offerings. - 12,105

Term loan in the amount of $25,000. The loan accrues interest, at the
Company's option, at the prime rate plus 1.25%, or LIBOR plus 2.75%. The loan
is secured by substantially all of the Company's assets and was extinguished in
December 1997 with proceeds from the Offerings. - 23,925

Term loan in the amount of $35,000. The loan accrues interest, at the
Company's option, at the prime rate plus 1.75% or LIBOR plus 3.25%. The loan
was secured by substantially all of the Company's assets and was extinguished
in December 1997 with proceeds from the Offerings. - 34,825

<PAGE>

Acquisition loans under a revolving line of $15,000. Advances under the
acquisition loans accrue interest at the Company's option, at the prime rate
plus 1.75%, or LIBOR plus 3.25%. The loan was secured by substantially all of
the Company's assets and was extinguished in December 1997 with proceeds from
the Offerings. - 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 principle and all accrued and unpaid interest on
December 31, 2004. The note bears interest at 8%. At June 30, 1998 and 1997,
the unpaid accrued interest amount of $602 and $281 respectively, was
capitalized into the original principal balance of $7,100. 7,986 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. 1,073 1,395

In connection with acquisition of ODA Nursery, Inc., the Company issued a 9%
Subordinated Promissory Note with a principal amount of $1,000 to stockholders
of ODA Nursery, Inc. on September 3, 1997. Interest at the rate of 9% per annum
accrues daily and is payable monthly in arrears. The note is due on August 31,
2004. The 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. 1,000 -

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. 1,391 1,620

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. 609 627

------------ ------------
Total Debt 136,097 90,108
Less: Current maturities (1,053) (6,700)
------------ ------------
Long-term portion $135,044 $83,408
------------ ------------
------------ ------------
</TABLE>

The Company has entered into interest rate protection agreements to cap
the interest rate on certain outstanding loans. The principal protected at June
30, 1998 and 1997 is approximately $35 million and $37 million, respectively,
with interest rate caps ranging from 8.5% to 9.8% in 1998 and 1997. The Company
is paid to the extent that the three month LIBOR exceeds the cap rates. In 1998
and 1997 the carrying amount of the interest rate protection agreement is
$62,000 and $125,000, respectively. 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, 1998 and 1997, the
agreements were not in-the-money for any period presented.

<PAGE>

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 lease obligations are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL
DEBT LEASES TOTAL
---- ------- -----
<S> <C> <C> <C>
1999 $ 779 $ 274 $ 1,053
2000 648 239 887
2001 424 70 494
2002 614 26 640
2003 24,038 --- 24,038
Thereafter 108,986 --- 108,985
------------------ ------------------ -----------------
$135,489 $ 609 $136,097
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>

The net book value of the assets held under capital lease obligations
was $834,000 and $649,000 at June 30, 1998 and 1997, respectively.

The book value of long-term debt and current maturities, excluding
Senior Subordinated Notes, approximates fair value because all significant
amounts outstanding at June 30, 1998, 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, 1998. The fair value of the Senior Subordinated Notes, based
on the current market prices is $35.0 million. The fair value could change
materially upon the sale or purchase of a significant portion of the Notes.

11. INCOME TAXES

The benefit (provision) for income taxes from continuing operations
consists of the following (in thousands):

<TABLE>
<CAPTION>
SEPT. 8, 1995
YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Current:
Federal $-- $-- $--
State and local -- -- (2)
---------------- ---------------- ---------------
-- -- (2)
Deferred:
Federal 9,935 (1,611) (1,500)
State and local 579 (1,219) (767)
---------------- ---------------- ---------------
$10,514 ($2,830) ($2,269)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</TABLE>

<PAGE>

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>
SEPT. 8, 1995
YEAR ENDED YEAR ENDED THROUGH
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% (34.0%) (34.0%)
State income tax rate, net of federal
benefit 3.6% (4.9%) (6.1%)
Permanent items:
Limitation on state net operating
losses (1.7)% (8.2%) (4.5%)
Other (0.5)% (0.9%) (0.2%)
Valuation allowance -- -- --
---------------- ---------------- ---------------
35.4% (48.0%) (44.8%)
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</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 or benefited at a rate significantly
different than the statutory rate. The benefit is recorded after the effect of
the limitation on the use of net operating losses. As a result, the future use
of the net operating loss carryforwards will not impact the Company's effective
tax rate.

Deferred tax assets and liabilities are composed of the following at
June 30, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
1998 1997
--------------------- ------------------
<S> <C> <C>
Current deferred tax assets:
Accounts payable $6,366 $3,700
Accrued liabilities 5,989 3,797
--------------------- ------------------
Total current deferred tax assets 12,355 7,497
--------------------- ------------------
Noncurrent deferred tax assets:
Net operating loss carryforward 23,080 10,779
--------------------- ------------------
Total noncurrent deferred tax assets 23,080 10,950
--------------------- ------------------
Total deferred tax assets $ 35,435 $ 18,447
--------------------- ------------------
--------------------- ------------------

<CAPTION>
1998 1997
--------------------- ------------------
<S> <C> <C>
Current deferred tax liabilities:
Receivables $11,173 10,007
Inventory 16,837 11,272
Prepaids 358 274
--------------------- ------------------
Total current deferred tax liability 28,368 21,553
--------------------- ------------------
Non-current deferred tax liabilities:
Depreciation and amortization 2,284 830
Tree Inventory 629 0
--------------------- ------------------
Total noncurrent deferred tax liability 2,913 0
--------------------- ------------------
Total deferred tax liabilities $31,281 $22,383
--------------------- ------------------
--------------------- ------------------
</TABLE>

At June 30, 1998 the Company has available federal and state net
operating loss carryforwards of approximately $64 million and $24 million,
respectively. The federal net operating losses expire beginning

<PAGE>

on June 30, 2011 and the state net operating loss carryforwards expire
beginning on June 30, 2001. The Company must generate significant taxable
income in order to realize the recorded benefits. Although the Company has
not provided a valuation allowance on the operating loss carryforward, the
realizability of the related assets is periodically evaluated. If a
significant valuation allowance is recorded in a future period, the tax
provision will be adversely impacted (see Note 1).

12. STOCKHOLDERS' EQUITY

COMMON STOCK AND REDEEMABLE COMMON STOCK

The Company has 50,000,000 authorized shares of $0.001 par value common
stock of which 6,937,068 shares were outstanding as of June 30, 1998. Holders of
common stock are entitled to one vote per share on all actions submitted to a
vote of stockholders.

The Company is required to repurchase shares of Common Stock from
certain 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 Board of Directors will retain an
independent appraisal firm to assist them in determining the fair market value
of the Common Stock on a periodic basis. 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 (on average 30 years) by charging
"retained earnings." The fair value of the redeemable Common Stock, as estimated
by management, at June 30, 1998 is approximately $3.5 million. In the event of
an initial public offering of the Common Stock, the requirement to repurchase
shares automatically terminates. As a result of the redemption feature,
redeemable Common Stock is classified outside of stockholders' equity
(irrespective of voting rights of the stock).

In addition to the shares issued in connection with the
recapitalization (Note 1), and the shares issued to effect the acquisitions
(Note 8), the company issued 713,196 shares of common stock to existing
shareholders and management in July and August 1997. The Company also issued
1,741,602 shares of common stock to existing stockholders in February 1997 in
order to raise capital to complete the acquisition of Lone Star Growers Co. In
both instances, the shares were valued at $7.17 per share, management's estimate
of the fair value of the shares on the date of issuance. In September 1995,
4,803,838 shares were issued at $1.45 per share in connection with the formation
of the Company. Subsequently, in March 1996, 1,921,512 shares were issued in
order to raise capital to complete the acquisition of Barcelo's Plant Growers
and in June 1996, 541,572 shares were issued to raise capital for general
corporate purposes. The March and June 1996 issuances were at $1.45 per share,
management's estimate of the fair value of the shares on the issue dates. All
shares were issued for cash.

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 of incorporation, electing directors and
approving or disapproving mergers or sales of all or substantially all of the
Company's assets.

<PAGE>

In addition to the voting agreement under the Stockholders Agreement,
KCSN and certain members of management are parties to a put/call option
agreement dated December 31, 1996 to effect the repurchase by the Company of
shares of Common Stock held by such management stockholders at $7.17, the fair
value of the shares on the date of the agreement. 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 June 30, 1998, KCSN had an irrevocable
proxy to vote 20,211 shares of Common Stock held by the management stockholders.

With the consummation of the Offerings, the Company effected a
0.69-for-one reverse stock split. This reverse stock split was reflected
retroactively for all financial statements presented.

PREFERRED STOCK

The Company has 4,900,000 shares authorized of $0.01 par value
undesignated preferred stock. 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 determine the voting powers, if any, of such shares. No shares are
outstanding at June 30, 1998 and June 30, 1997.

13. SERIES A PREFERRED STOCK AND WARRANTS

In December 1997, simultaneous with the issue of the Notes, (see
Note 10), the Company sold 40,000 shares of 13% Series A Cumulative Preferred
Stock (the "Series A Preferred Stock") and 825,000 warrants each representing
the right to purchase one share of the Company's common stock for $0.01 each
(the "Warrants"). The Series A Preferred Stock and Warrants were sold for an
aggregate cost of $40.0 million. Dividends on the Series A Preferred Stock
accrue at a rate of 13% of the liquidation preference of $1,000 per share and
are payable quarterly on March 15, June 15, September 15 and December 15
commencing on March 15, 1998. At the Company's option, dividends may be paid by
the issuance of additional shares of Series A Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. During
fiscal 1998, the Company issued 2,504 additional shares of Series A Preferred
Stock and $3,930 in cash as dividends on its Series A Preferred Stock. Through
2002, 13% dividends are expected to be paid in additional shares of Series A
Preferred Stock. In addition, the Company's credit facilities and corollary
agreements associated with the 1997 Offerings restrict the payment of cash
dividends on the Series A Preferred Stock. On December 15, 2008, the Company is
required to redeem all outstanding shares of Series A Preferred Stock at a price
equal to the liquidation preference, plus accrued and unpaid dividends to date,
if any. The Series A Preferred Stock is redeemable, in whole or in part, at the
option of the Company, at any time on or after December 15, 2002 at specified
redemption prices. The Series A Preferred Stock ranks senior to all other
outstanding classes or series of capital stock with respect to dividends and
liquidation rights.

The Warrants will be exercisable on December 15, 2008 (the "Expiration Date").
In the absence of an exercise, the Warrants will be automatically deemed to have
been exercised immediately on the Expiration Date with payment of the exercise
price on a cash-less basis.

<PAGE>

14. EARNINGS PER SHARE

Earnings per share is as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1998
---------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Basic and diluted earnings per share:
Loss before extraordinary loss $ (19,168)
Preferred stock dividends/accretion (3,148)
-----------------
Loss before extraordinary loss $ (22,316) $ (3.25)
Extraordinary loss (2,792) (0.40)
----------------- ----------------
Net income loss applicable to
Common stock $ (25,108) 6,874,416 $ (3.65)

FOR THE YEAR ENDED JUNE 30, 1997
---------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Basic earnings per share:
Income before extraordinary loss $ 3,055 $ 0.49
Extraordinary loss (215) (0.03)
----------------- -----------------
Net income 2,840 6,208,735 $ 0.46

Options issued to employees 609,296

Diluted earnings per share:
Income before extraordinary loss $ 3,055 $ 0.45
Extraordinary loss (215) (0.03)
----------------- -----------------
Net income $ 2,840 6,818,031 $ 0.42

FROM SEPTEMBER 8, 1995 THROUGH JUNE 30, 1996
---------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
Basic and diluted earnings per share: $ 2,788 5,593,146 $ 0.50
</TABLE>

Options to purchase 1,829,853 common shares were excluded from the
computation of diluted earnings per share for the year ended June 30, 1998,
as the shares were antidilutive given the Company's reported net loss.
Options to purchase 974,582 common shares were excluded from the computation
of diluted earnings per share for the year ended June 30, 1997 as the
options' exercise price was greater than the market price of the common
shares. The note payable (see Note 10) convertible to 397,511 and 367,546
shares of common stock were excluded from computation of diluted earnings per
share for the years ended June 30, 1998 and 1997, as the conversion price was
greater than the market price of the common shares in the respective periods.
No options were outstanding at June 30, 1996.

<PAGE>

15. 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 January
1998, the Company granted an additional 262,300 options at $10 per share
under the 1997 plan. These options 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. However, pursuant to the Company's 1998 Employees
Stockholders' agreement, the options granted in January, 1998 do not vest
immediately upon a change in control of the Company or an initial public
offering of common stock.

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. The Company will recognize total compensation expense of
$798,000 over the vesting period of the options.

<PAGE>

Activity under the three plans is summarized as follows:

<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
----------------------- ---------------------
----------------------- ---------------------
Granted 262,300 10.00
Exercised 0 0
Forfeited (16,325) 7.19
----------------------- ---------------------
Outstanding at June 30, 1998 1,829,853 5.27
----------------------- ---------------------
----------------------- ---------------------
Options exercisable at year-end 843,389 2.85
----------------------- ---------------------
----------------------- ---------------------
</TABLE>

There were no forfeitures or expirations during the year ended June 30,
1997.

The following summarizes information about stock options outstanding at
June 30, 1998:

<TABLE>
<CAPTION>
Weighted Average Weighted Average Fair
Options Outstanding at Remaining Contractual Value of Options
Exercise Price June 30, 1998 Life Granted
- --------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
$ 10.00 262,300 9.6 Years $ 3.25
$ 7.17 or 7.19 826,169 8.5 Years 2.32
$ 1.45 602,002 8.1 Years 0.47
$ 1.43 139,383 8.7 Years 6.21
- --------------------------- --------------------------
$ 5.32 2.14
- --------------------------- --------------------------
- --------------------------- --------------------------
</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 6.56%, 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, 1998 June 30, 1997
--------------------------- --------------------------
<S> <C> <C>
Net Income (loss):
As reported $(21,960) $ 2,840
Pro forma (23,319) 1,925
</TABLE>

<PAGE>

16. RELATED-PARTY TRANSACTIONS

The Company's revolving lines of credit, term loans and acquisition
line of credit were provided by Credit Agricole Indosuez ("Indosuez"), an
affiliated and limited partner in KCSN. Indosuez was paid $1,324,800 and
$3,200,000 in loan fees in fiscal 1998 and 1997 respectively. The Company
incurred interest of $4,133,964 and $3,882,000 in connection with the amounts
outstanding with Indosuez during fiscal 1998 and 1997 respectively.

The Company leases certain property that is owned directly or
indirectly by certain members of management. Payments pursuant to these
operating leases for the years ended June 30, 1998 and 1997, were $287,000 and
$276,000, respectively.

The Company paid Kohlberg a quarterly fee pursuant to a Fee Agreement
for certain management services. Under the Fee Agreement, Kohlberg was paid
$1,520,000 for services rendered in connection with the December 31, 1996
recapitalization (the "Transaction Fee") and 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 December 1997, Kohlberg was paid
$2,000,000 and the annual management fee was terminated.

As part of the recapitalization transaction (see Note 1), the Company
(1) 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 and (2) purchased 36,194 and 730,284 shares
during the years ended June 30, 1998 and 1997, respectively from employees
during the year at $7.17 per share.

In 1997, 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 a Vice Chairman of the Company. The dividend was paid
in fiscal year 1998.

During the year ended June 30, 1997, the Company paid management fees
to Heller Investments, Inc. of $279,000.

17. 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 periods ended June 30,
1998, 1997, and 1996.

18. EXTRAORDINARY LOSS

In connection with the Offerings, the Company incurred a $4.3 million
non-cash pre-tax charge related to the write-off of deferred financing fees.
This charge is reported net of income tax benefit of $1.5 million in
extraordinary loss on the Company's consolidated statements of operations.

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. This charge was reported net of income taxes, as an
extraordinary loss on the consolidated statements of operations in the amount of
$215,000.

<PAGE>

19. 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 2018. 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 periods ended June 30, 1998, 1997 and 1996
was approximately $5,978,000, $3,493,000 and $2,065,000, respectively.

At June 30, 1998, future minimum rental payments on non-cancellable
operating leases are as follows (in thousands):

<TABLE>

<S> <C>
1999 $4,533
2000 4,333
2001 3,602
2002 2,892
2003 2,447
Thereafter 9,673
-------------------
Total minimum lease payments $27,480
-------------------
-------------------
</TABLE>

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, 1998, future minimum purchase commitments
under the contracts are as follows (in thousands):

<TABLE>

<S> <C>
1999 $5,163
2000 251
2001 178
2002 10
2003 10
Thereafter 30
--------------
Total minimum purchase commitments $5,642
--------------
--------------
</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. Certain of the contracts may be canceled
with proper notice.

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.

<PAGE>

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with certain of its
executive officers, with remaining service periods ranging from one to five
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 $1,366,000 at June 30, 1998. The agreements also provide
for certain officers to receive guaranteed bonuses based on years of service
ranging from two to four years. The aggregate estimated commitment for bonuses
under these agreements was $1,750,000 at June 30, 1998.

20. SUBSEQUENT EVENTS

On October 15, 1998, the Company entered in a Loan and Security
Agreement with Fleet Capital Corporation, as agent (the "Fleet Loan
Agreement"), and the Company's $40.0 million revolving credit facility was
repaid in full and the revolving credit facility, the associated acquisition
term loan facility and supplemental line were terminated. The Fleet Loan
Agreement provides a $70.0 million revolving credit facility, $55.0 million
of which is subject to certain borrowing base limitations based on a
percentage of eligible inventory and eligible accounts receivable and $15.0
million of which is available from November 1 through April 30 of each fiscal
year. The Fleet Loan Agreement is secured by substantially all of the
Company's assets. Interest under the Fleet Loan Agreement accrues at a
variable rate equal to the Base Rate (as defined) plus $1.00% of the LIBOR
rate (as defined) plus 3.00%. In addition, to the extent that the Company's
borrowings exceed certain borrowing base limitations during the period from
November 1 through April 30, the interest rates increase by an additional
0.50%. The interest rates may also increase by such amount 90 days following
October 15, 1998 in the event that the Company fails to take certain
specified actions with respect to the collateral securing the Fleet Loan
Agreement. The Fleet Loan Agreement terminates October 15, 2001. The Fleet
Loan Agreement restricts among other things, the Company's ability to incur
additional indebtedness, incur liens, pay or declare dividends, or enter into
certain transactions. In addition, the Fleet Loan Agreement requires the
Company to meet certain financial covenants.

The Company will record a $0.8 million non-cash extraordinary
charge, net of tax benefit, related to the write-off of unamortized financing
costs associated with the terminated facilities in its second fiscal quarter
of 1999.

21. QUARTERLY FINANCIAL DATA--(UNAUDITED)

Summarized quarterly financial information for the years ended June 30,
1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
Sept. 25, Dec. 25, March 26, June 30,
1997 1997 1998 1998
1998 Q1 Q2 Q3 Q4
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>

Net sales $ 25,482 $ 38,708 $ 38,549 $ 84,992
Gross profit 7,464 13,206 11,758 19,089
Operating income (4,218) (3,512) (1,993) (6,839)
Extraordinary loss, net of income taxes 0 2,162 0 630
Net income (loss) (3,691) (5,201) (5,069) (7,999)
Basic and diluted earnings per share:
Net loss before extraordinary loss (0.55) (0.44) (0.95) (1.30)
Extraordinary loss (Note 18) - (0.31) - (0.09)
-------- -------- -------- --------
Net loss (0.55) (0.75) (0.95) (1.39)

</TABLE>

Sept. 26, Dec. 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 income taxes -- -- 215 --
Net income (loss) (820) (740) 932 3,468
Basic earnings per share:
Net income (loss) before extraordinary loss (0.12) (0.11) 0.23 0.56
Extraordinary loss (Note 18) - - (0.04) -
---------- ---------- ---------- ----------
Net income (loss) (0.12) (0.11) 0.19 0.56
Diluted earnings per share:
Net income (loss) before extraordinary loss (0.12) (0.11) 0.21 0.52
Extraordinary loss (Note 18) - - (0.04) -
---------- ---------- ---------- ----------
Net income (loss) (0.12) (0.11) 0.17 0.52
</TABLE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II

To Color Spot Nurseries, Inc. and Subsidiaries:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Color Spot Nurseries, Inc. and
Subsidiaries included in this Form 10-K, and have issued our report thereon
dated August 20, 1998 (except with respect to the matter discussed in Note
20, as to which the date is October 15, 1998). Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. Schedule
II, "Valuation and Qualifying Accounts," is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.

/s/ ARTHUR ANDERSEN LLP

San Francisco, California
August 20, 1998

<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E

BALANCE AT ADDITIONS DEDUCTION BALANCE AT
BEGINNING OF CHARGED TO FROM END OF
PERIOD COSTS AND EXPENSES RESERVES PERIOD
------------------- ------------------ ------------ ------------
------------------- ------------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>

CLASSIFICATION
Valuation and qualifying accounts deducted
from the assets to which they apply:

For the year ended June 30, 1998

Allowance for uncollectible accounts...... $ 1,661 $ 2,647 $ 1,224 3,084
------------------- ------------------ ------------ ------------
------------------- ------------------ ------------ ------------

For the year ended June 30, 1997

Allowance for uncollectible accounts...... 524 1,164 27 1,661
------------------- ------------------ ------------ ------------
------------------- ------------------ ------------ ------------

For the year ended June 30, 1996

Allowance for uncollectible accounts...... 278 139 - 417
------------------- ------------------ ------------ ------------
------------------- ------------------ ------------ ------------
</TABLE>

<PAGE>

[EXHIBIT 10.23]

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT dated as of July 30, 1998 between COLOR SPOT
NURSERIES, INC., a Delaware corporation (the "Company"), and RAJU BOLIGALA
("Executive").

This Agreement provides for the employment of Executive as President and
Chief Operating Officer of the Company, upon the terms and subject to the
conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual undertakings contained
herein, the parties agree as follows:

ARTICLE 1. EMPLOYMENT

1.1 EMPLOYMENT. The Company agrees to employ Executive, and
Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on August 12,
1998 (the "Effective Date") and ending as provided in Section 1.5 (the
"Employment Period").

1.2 POSITION AND DUTIES.

(a) During the Employment Period, Executive shall serve as
President and Chief Operating Officer of the Company.

(b) Executive shall be responsible for the operation and
performance of the Company and will have the responsibilities and carry out the
customary functions of a President and Chief Operating Officer.

(c) Executive shall devote his best efforts and his full
business time and attention (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Company and its Subsidiaries. Executive shall perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner.

1.3 SALARY, BONUS, OPTIONS AND BENEFITS.

(a) During the Employment Period, Executive's base salary
(the "Base Salary") shall initially be $200,000 per annum which salary shall be
payable in regular installments in accordance with the Company's general payroll
practices. The Base Salary may be increased annually by the Board of Directors
of the Company (the "Board") in its discretion.

(b) During the Employment Period, in addition to the Base
Salary, Executive shall be eligible to receive a cash bonus of between 50% and
200% of his Base Salary based on performance targets for each fiscal year of the
Company to be established by the Board. The Company's fiscal year ends June
30. To the extent achieved, such bonus shall be paid following the delivery of
the Company's signed audited financial statements for such year by the Company's
independent accountants, but only if Executive is employed by the Company as of
the end of such fiscal year and the Executive's employment has not terminated
voluntarily or for cause (as determined by the Board) on or prior to such
delivery of financial statements. Notwithstanding anything contained herein to
the contrary, Executive's bonus for the first year of the Employment Period
shall be guaranteed at $100,000 subject to Executive's being employed
continuously with the Company through the end of such year and the Executive's
employment has not terminated voluntarily or for cause (as determined by the
Board) on or prior to the last day of such year (the "Minimum Bonus").

(c) The Company will pay Executive a starting bonus of
$250,000 in cash on the Effective Date (the "Starting Bonus"). The Company will
pay to Executive an additional $250,000 in cash on August 12, 2000 if Executive
is still employed by the Company on such date and the Executive's employment has
not terminated voluntarily or for cause (as determined by the Board) on or prior
to such date.

(d) Executive shall be entitled to participate in the
Company's 1997 Stock Plan (the "Plan"). Executive shall be awarded options
under the Plan to purchase 100,000 shares of common stock, par value $.001 per
share of the Company, at $3.00 per share (the "Options"). The Options will
vest daily over a 4 year period, subject to Executive's continued employment
with the Company. The Options will be evidenced by an option award and will be
subject to the Company's 1998 Employee Stockholders Agreement dated as of July
1, 1998; provided that the definition of "Cause" shall be deemed to be the
definition contained in this Agreement. In addition, if Executive is still
employed by the Company on August 12, 2000, Executive shall be awarded options
under the Plan to purchase 50,000 shares of common stock, par value $.001 per
share of the Company, at the fair market value per share of common stock on such
date (as determined in good faith by the Board) (the "Additional Options").
The Additional Options will vest daily over a 4 year period, subject to
Executive's continued employment with the Company. The Additional Options will
be evidenced by an option award and will be subject to the Company's 1998
Employee Stockholders Agreement dated as of July 1, 1998; provided that the
definition of "Cause" shall be deemed to be the definition contained in this
Agreement.

(e) During the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit programs for
which senior executive employees of the Company and its Subsidiaries are
generally eligible. Executive shall be entitled to three weeks of paid vacation
per year, plus Company holidays. Nothing in this Agreement, however, shall be
deemed to prevent the

1
<PAGE>

Company from amending or terminating any employee benefit program on a
non-discriminatory basis to eliminate, reduce or otherwise change the terms
thereof or the benefits thereunder.

(f) The Company shall reimburse Executive for all
reasonable out-of-pocket expenses incurred by him in the course of performing
his duties under this Agreement upon completion of an expense report in
accordance with the Company's and its Subsidiaries' reimbursement, reporting and
documentation policies in effect from time to time with respect to travel,
entertainment and other business expenses. Executive shall be entitled to a car
allowance of $800 per month.

1.4 LOANS. The Company will loan to Executive $275,000 in cash
on the Effective Date (the "Start Date Loan"). The Start Date Loan will be
deemed to have been repaid at the rate of $4,583.333 per month (i.e., $55,000
per year) on the last day of each month. In the event that the Employment
Period is terminated for any reason prior to the fifth anniversary of the
Effective Date, Executive shall be required to repay to the Company by August 1,
2003, $275,000 less the amount which has been deemed to have been repaid.

1.5 TERM. (a) The Employment Period shall terminate on the date
(i) of Executive's death or Disability (as determined by the Board),
(ii) determined by the Board by resolution of the Board for Cause,
(iii) determined by the Board by resolution of the Board without Cause or
(iv) voluntary resignation by Executive.

(b) If the Employment Period is terminated without Cause,
Executive shall be entitled to continue to receive an amount equal to one times
the sum of Executive's then current Base Salary (the "Severance Amount") over
the following twelve month period. The Severance Amount shall be increased to
2 year's Base Salary (payable over a two year period) in the event the
Employment Period is terminated by the Company without Cause upon the
consummation of the acquisition of the Company by Hines Horticulture, Inc.
Executive hereby agrees that no severance compensation shall be payable in the
event Executive's employment is terminated pursuant to Section 1.5(a)(i), (ii)
or (iv) and Executive waives any claim for severance or other compensation. Any
amount payable under this Section 1.5(b) shall be payable in installments in
accordance with the Company's normal payroll practices over the period following
the termination of the Employment Period in which such payments are to be made.

(c) Except as expressly set forth in this Section 1.5, all
compensation and other benefits shall cease to accrue upon termination of the
Employment Period.

1.6 CERTAIN REPAYMENTS. In the event that the Employment Period
is terminated for any reason prior to the second anniversary of the Effective
Date, Executive agrees to repay to the Company (without interest) the Starting
Bonus within 15 days of the termination date but in no event shall such amount
exceed the amount which is payable to Executive as a result of the Company
exercising its rights to repurchase any vested Options or other equity interests
in the Company issued to Executive plus the amount of any severance payable to
Executive hereunder. Following the termination of the Employment Period, the
Company shall have the right to offset any payments owing to Executive under
this Agreement, against any amount owing to the Company from Executive,
including without limitation, any amount owing under Sections 1.4 and 1.5 and
any amount payable to Executive in the event the Company exercises any right it
may have to repurchase any vested Options or other equity interests in the
Company issued to Executive.

1.7 CONFIDENTIAL INFORMATION. Executive acknowledges that the
information, observations and data obtained by him while employed by the Company
and its Subsidiaries concerning the business or affairs of the Company and its
Subsidiaries that are not generally available to the public other than as a
result of a breach of this Agreement by Executive ("Confidential Information")
are the property of the Company and its Subsidiaries. Executive agrees that he
shall not disclose to any unauthorized person or use for his own account any
Confidential Information without the prior written consent of the Company
unless, and in such case only to the extent that, such matters become generally
known to and available for use by the public other than as a result of
Executive's acts or omissions to act. Notwithstanding the foregoing, in the
event Executive becomes legally compelled to disclose Confidential Information
pursuant to judicial or administrative subpoena or process or other legal
obligation, Executive may make such disclosure only to the extent required, in
the opinion of counsel for Executive, to comply with such subpoena, process or
other obligation. Executive shall, as promptly as possible and in any event
prior to the making of such disclosure, notify the Company of any such subpoena,
process or obligation and shall cooperate with the Company in seeking a
protective order or other means of protecting the confidentiality of the
Confidential Information.

1.8 INVENTIONS AND PATENTS. Executive agrees that all copyrights,
works, inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports, and all similar or related information which relate
to the actual or anticipated business, research and development or existing or
anticipated future products or services of the Company or its Subsidiaries and
which are conceived, developed or made by Executive while employed by the
Company ("Work Product") belong to the Company. Executive will promptly
disclose such Work Product to the Board and perform all actions reasonably
requested by the Company (whether during or after the Employment Period) to
establish and confirm such ownership at the Company's expense (including,
without limitation, assignments, consents, powers of attorney and other
instruments).

1.9 NON-COMPETE; NON-SOLICITATION.

(a) Executive acknowledges that in the course of his
employment with the Company he will become familiar with the Company's trade
secrets and with other confidential information concerning the Company and its
predecessors and that his services have been and will be of special, unique and
extraordinary value to the Company. Executive agrees that, in consideration of
the payments made to Executive hereunder, during the period in which Executive
is receiving compensation hereunder (including severance), or in the event that
Executive voluntarily terminates his employment, for the one year period
following such voluntary termination (the "Noncompete Period"), he shall not
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business in which

2
<PAGE>

the Company or its Subsidiaries is engaged any where in the United States.
Nothing herein shall prohibit Executive from being a passive owner of not
more than 5% of the outstanding stock of another corporation, so long as
Executive has no active participation in the management or the business of
such corporation.

(b) During the Noncompete Period, Executive shall not
directly or indirectly induce or attempt to induce any officer of the Company
or any Subsidiary of the Company to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any such Subsidiary and any employee thereof.

ARTICLE 2. REPRESENTATIONS AND WARRANTIES

2.1 REPRESENTATIONS AND WARRANTIES OF EXECUTIVE. Executive
represents and warrants to the Company that:

(i) this Agreement constitutes the legal, valid and binding
obligation of Executive, enforceable in accordance with its terms, and the
execution, delivery and performance of this Agreement by Executive will not
conflict with, violate or cause a breach of or default under any agreement,
contract or instrument, order, judgment or decree to which Executive is a
party or by which he is bound, and

(ii) Executive is not a party to or bound by any employment
agreement or noncompete agreement with any other person or entity.

2.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Executive that:

(i) the execution, delivery and performance of this Agreement
by the Company does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment
or decree to which the Company is a party or by which it is bound, and

(ii) upon the execution and delivery of this Agreement by
Executive, this Agreement shall be the valid and binding obligation of the
Company enforceable in accordance with its terms.

ARTICLE 3. DEFINITIONS

As used in this Agreement, the following terms shall have the
definitions set forth below:

"CAUSE" means (i) a material breach of this Agreement by Executive,
(ii) Executive's willful and repeated failure to comply with the lawful
directives of the Board or supervisory personnel, (iii) gross negligence or
willful misconduct by Executive in the performance of his duties hereunder, or
(iv) the commission by Executive of theft or embezzlement of Company property or
any other act (including but not limited to a felony or a crime involving moral
turpitude) that is injurious in any significant respect to the property,
operations, business or reputation of the Company or its Subsidiaries, as
determined in good faith by the Board.

"DISABILITY" means Executive's inability to substantially perform his
normal duties hereunder for six months or more during any twelve-month period
determined in good faith by the Board.

"SUBSIDIARY" of an entity shall mean any corporation, limited
liability company, limited partnership or other business organization of which
the securities having a majority of the normal voting power in electing the
board of directors, board of managers, general partner or similar governing body
of such entity are, at the time of determination, owned by such entity directly
or indirectly through one or more Subsidiaries.

ARTICLE 4. GENERAL PROVISIONS

4.1 ENFORCEMENT. If, at the time of enforcement of Sections 1.7,
1.8 or 1.9, a court holds that the restrictions stated herein are unreasonable
under the circumstances then existing, the parties hereto agree that the maximum
period, scope or geographical area reasonable under such circumstances shall be
substituted for the stated period, scope or area. Because Executive's services
are unique and because Executive has access to Confidential Information and Work
Product, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. In the event of a breach or threatened
breach of this Agreement, the Company, its Subsidiaries and their respective
successors or assigns may, in addition to other rights and remedies existing in
their favor, apply to any court of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce, or prevent
any violation of, the provisions hereof (without posting a bond or other
security).

4.2 SURVIVAL. Sections 1.7, 1.8 and 1.9 shall survive and
continue in full force and effect in accordance with their terms notwithstanding
any termination of the Employment Period.

4.3 NOTICES. All notices or other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, one
business day following when sent via a

3
<PAGE>

nationally recognized overnight courier, or when sent, when sent via
facsimile confirmed in writing to the recipient. Such notices and other
communications will be sent to the addresses indicated below:

To the Company:

3478 Buskirk Avenue, Suite 260
Pleasant Hill, CA 94523
Attention: Chief Executive Officer
Fax: (925) 935-0799

with a copy to:

Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street
Denver, CO 80202
Attention: Steven S. Siegel
Fax: (303) 623-1956

To Executive:

1414 - 233 Avenue N.E.
Redmond, WA 98053

or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.

4.4 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

4.5 ENTIRE AGREEMENT. This Agreement and those documents
expressly referred to herein embody the complete agreement and understanding
among the parties and supersede and preempt any prior understandings, agreements
or representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way.

4.6 AMENDMENTS AND WAIVERS. Any provision of this Agreement may
be amended or waived only with the prior written consent of the Company and
Executive.

4.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of California,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
California.

4.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.

4.9 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or of any term or provision hereof.

* * * * *

4
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.

COLOR SPOT NURSERIES, INC.

By: /s/ MICHAEL F. VUKELICH
-------------------------------
Michael Vukelich
Chief Executive Officer

/s/ RAJU BOLIGALA
-------------------------------
Raju Boligala

<PAGE>

[EXHIBIT 10.24]

1998 EMPLOYEE STOCKHOLDERS AGREEMENT

1998 Employee Stockholders Agreement dated as of July 1, 1998 among COLOR
SPOT NURSERIES, INC., a Delaware corporation (the "COMPANY"), KCSN ACQUISITION
COMPANY, L.P., a Delaware limited partnership ("KCSN"), and each of the
employees of the Company which have executed this Agreement or have otherwise
agreed to be bound by the provisions hereof (the "EMPLOYEE STOCKHOLDERS").

The parties hereby agree as follows:

SECTION XV. DEFINITIONS. For purposes of this Agreement, the
following terms have the indicated meanings:

"AFFILIATE" of a person means any other person controlling, controlled
by or under common control with such person, whether by ownership of voting
securities, by contract or otherwise, and in the case of KCSN shall include any
member of KCSN and in the case of the Company shall include any officer or
director of the Company.

"BOARD" means the Board of Directors of the Company.

"CAUSE" means, with respect to any Employee Stockholder, (i) the
commission by the Employee Stockholder of theft or embezzlement of Company
property or other acts of dishonesty or criminal conduct harmful in any
significant respect to the business, property or reputation of the Company or
the commission by the Employee Stockholder of other acts harmful in any
significant respect to the business, property or reputation of the Company;
(ii) the commission by the Employee Stockholder while an employee of the
Company or its Affiliates of an act determined in good faith by the Company's
Board of Directors to amount to gross, willful or wanton negligence of the
Employee Stockholder's duties under the terms of his or her employment;
(iii) the refusal by the Employee Stockholder while an employee of the Company
or its Affiliates to perform, or substantial neglect of, the duties assigned to
the Employee Stockholder by the Company; (iv) any significant violation by
the Employee Stockholder of any statutory or common law duty of loyalty to
the Company; or (v) a material breach by the Employee Stockholder of his or
her employment agreement (if any) with the Company. The determination of
Cause shall be made in good faith by the Board of Directors after written
notice to the Employee Stockholder and, in the case of conduct described in
clause (iii), (iv) or (v) above, a reasonable opportunity to cure such
conduct.

"COMMON STOCK" means the Company's Common Stock, $.001 par value.

"EMPLOYEE STOCK" means Stockholder Shares held by any Employee
Stockholder.

"FAIR MARKET VALUE" means, the fair market value of a share of Common
Stock as determined in good faith by the Board, and, in the case of a vested
Option to purchase a share of Common Stock, means the fair market value of a
share of Common Stock as determined in good faith by the Board, less the
exercise price therefore.

"INDEPENDENT THIRD PARTY" means any person who does not own in excess
of 10% of the Common Stock on a fully-diluted basis, who is not controlling,
controlled by or under common control with any such 10% owner of Common Stock
and who is not the spouse, ancestor or descendant (by birth or adoption) of any
such 10% owner of Common Stock.

"INVESTOR STOCK" means the Common Stock held by KCSN, its Affiliates
and their Permitted Transferees.

"OPTION" means an option to acquire a share of Common Stock issued
under an option plan established by the Board.

"ORIGINAL COST" means a Employee Stockholder's average original
purchase price per share of Employee Stock and held by such Employee
Stockholder, as reflected in the records of the Company.

"PERMITTED TRANSFEREE" is defined in Section 3(c).

"SALE OF THE COMPANY" means the acquisition of beneficial ownership of
a majority or more of the outstanding voting securities of the Company by any
person or "group" (as that term is used in Regulation 13D under the Securities
Exchange Act of 1934) other than stockholders of the Company as of the date
hereof and their respective Affiliates.

"SECURITIES ACT" means the Securities Act of 1933, as amended.

"STOCKHOLDER SHARES" means (i) all shares of Common Stock held or
deemed to be held by the Employee Stockholders which were acquired upon the
exercise of an Option issued after January 1, 1998, including all shares of
Common Stock acquired pursuant to exercise of Options, (ii) all Options which
were issued after January 1, 1998 held by the Employee Stockholders to acquire
Common Stock and (iii) all shares of Common Stock or other securities issued or
issuable directly or indirectly with respect to the securities referred to in
clause (i) by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization.

"VESTED OPTION" means any Option which has vested and is currently
exerciseable.

1
<PAGE>

"VOLUNTARY TERMINATION" means the voluntary termination of employment
by a Employee Stockholder of this employment with the Company.

SECTION XVI. REPURCHASE ON TERMINATION OF EMPLOYMENT.

(1) REPURCHASE OPTION. Upon the termination of a Employee
Stockholder's employment by the Company and its subsidiaries:

(1) if such termination is for any reason other than for Cause
or a Voluntary Termination, the Company may elect to repurchase all but not
less than all of the Employee Stock and Vested Options held by such
Employee Stockholder and his Permitted Transferees at a cash price per
share equal to Fair Market Value (as of the date of termination); and

(2) if such termination is for Cause or is a Voluntary
Termination, the Company may elect to repurchase all but not less than all
of the Employee Stock and Vested Options held by such Employee Stockholder
and his Permitted Transferees at a cash price per share equal to the lesser
of Fair Market Value (as of the date of termination) and Original Cost.

(2) REPURCHASE PROCEDURE. The Company may exercise its option to
purchase Employee Stock pursuant to Section 2(a) by delivery to the Employee
Stockholder, within 90 days after the termination of such Employee Stockholder's
employment, of a written notice specifying the number of shares of Employee
Stock to be repurchased. The closing of any repurchase of securities pursuant
to this Section 2 shall take place not later than 120 days following the
termination of the Employee Stockholder's employment. The shares of Employee
Stock to be repurchased by the Company shall be satisfied (i) first, from the
shares of Employee Stock held by the Employee Stockholder at the time of
delivery of the Repurchase Notice and (ii) second, if the number of such shares
is less than the number of shares to be repurchased by the Company, from the
shares of Employee Stock held by the Permitted Transferees of such Employee
Stockholder in such proportions as shall be determined by the Employee
Stockholder.

SECTION XVII. REPURCHASE IF WORK FOR COMPETITOR.

(1) REPURCHASE OPTION. In the event that the Company does not elect
to exercise its repurchase rights under Section 2 and an Employee Stockholder
accepts employment with a competitor of the Company (as determined by the Board
in good faith) within one year following the termination of such Employee
Stockholder's employment with the Company or its subsidiaries for any reason
whatsoever, the Company may elect to repurchase all but not less than all of the
Employee Stock held by such Employee Stockholder and his Permitted Transferees
at a cash price per share equal to its Original Cost and all vested Options
which have not already terminated shall automatically terminate.

(2) REPURCHASE PROCEDURE. The Company may exercise its option to
purchase Employee Stock pursuant to Section 3(a) by delivery to the Employee
Stockholder, within 90 days after learning that such Employee Stockholder has
accepted employment with a competitor, of a written notice specifying the number
of shares of Employee Stock to be repurchased.

SECTION IV. RESTRICTIONS ON TRANSFER.

(1) PROHIBITION ON TRANSFERS. No Employee Stock may be sold,
transferred, pledged or otherwise disposed of (including by gift) otherwise than
in accordance with this Section 4. No Employee Stock may be transferred without
the prior written consent of the Company, which will not be unreasonably
withheld.

(b) RIGHT OF FIRST REFUSAL.

(1) Not less than 30 days prior to any proposed transfer of
Employee Stock, the transferring Employee Stockholder shall deliver to the
Company a written notice (the "OFFER NOTICE") specifying in reasonable
detail the number of shares to be transferred, the identity of the
transferee(s), the price (which shall be payable solely in cash) and the
other terms and conditions of the proposed transfer. The Company may elect
to purchase all but not less than all of the Employee Stock proposed to be
transferred upon the terms and conditions specified in the Offer Notice by
delivering to the transferring Employee Stockholder a written notice of
such election within the 20-day period following its receipt of the Offer
Notice (the "ELECTION PERIOD"). The purchase of such shares by the Company
shall be consummated within 120 days following expiration of the Election
Period.

(2) In the event that the Company does not elect to purchase the
Employee Stock described in the Offer Notice, during the 120-day period
following expiration of the Election Period, the transferring Employee
Stockholder may transfer such Employee Stock to the transferee(s) specified
in the Offer Notice on terms no more favorable to such transferee(s) than
those specified in the Offer Notice. Any shares of Employee Stock not
transferred within such 120-day period shall again be subject to
Section 3(b)(i) in connection with any proposed transfer thereof.

(c) CERTAIN PERMITTED TRANSFERS. Sections 4(a) and 4(b) shall not
apply to transfers of Employee Stock (i) pursuant to Section 6 hereof, or (ii)
within a Employee Stockholder's family group (including by will or pursuant to
applicable laws of descent and distribution); provided that, in connection with
any transfer pursuant to this clause (ii), each transferee (a "PERMITTED
TRANSFEREE") agrees in writing to be bound by the provisions of this Agreement.
Any shares of Employee Stock transferred to a Permitted Transferee shall
continue to be Employee Stock for purposes of this Agreement (including with
respect to the provisions of Section 3 if the transferor accepts employment with
a competitor of the Company). A Employee Stockholder's "FAMILY GROUP" means
such Employee Stockholder's spouse and lineal descendants (whether natural or
adopted) and any trust formed and maintained solely for the benefit of such
Employee Stockholder, such Employee Stockholder's spouse and/or

2
<PAGE>

such Employee Stockholder's lineal descendants.

SECTION XIX. ADDITIONAL RESTRICTIONS ON TRANSFER.

(1) STOCK LEGEND. The certificates representing Employee Stock shall
bear the following legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY
ISSUED ON _______________, 19__, HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH
IN A 1998 EMPLOYEE STOCKHOLDERS AGREEMENT DATED AS OF JULY 1,
1998 AMONG COLOR SPOT NURSERIES, INC. AND CERTAIN STOCKHOLDERS
THEREOF, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY THE
HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS.

(2) OPINION OF COUNSEL. No holder of Employee Stock may sell,
transfer or dispose of any such stock (other than pursuant to an effective
registration statement under the Securities Act) without first delivering to the
Company upon its request an opinion of counsel reasonably acceptable in form and
substance to the Company that registration under the Securities Act is not
required in connection with such transfer.

SECTION XX. SALE OF THE COMPANY. If the holders of a majority of
the Investor Stock then outstanding approve the sale of the Company to an
Independent Third Party, whether by merger, consolidation, sale of all or
substantially all of its assets, sale of all of the outstanding Common Stock or
otherwise (an "APPROVED SALE"), the Employee Stockholders shall consent to and
raise no objections against such Approved Sale (including exercising any rights
of appraisal) and shall take all necessary and desirable actions in their
capacities as stockholders in connection with the consummation of such Approved
Sale. If the Approved Sale is structured as a sale of stock, the Employee
Stockholders shall agree to sell all of their shares of Common Stock and rights
to acquire shares of Common Stock on the terms and conditions approved by the
holders of a majority of the Investor Stock then outstanding. The obligations
of the Employee Stockholders with respect to any Approved Sale are subject to
the condition that, upon the consummation of such Approved Sale, all of the
holders of Common Stock will receive the same form and amount of consideration
per share of Common Stock, or if any holders are given an option as to the form
and amount of consideration to be received, all holders will be given the same
option.

SECTION XXI. LOCK-UP. In the event that any shares of Common Stock
are registered for sale under the Securities Act (other than on Form S-8), each
Employee Stockholder agrees that for a period of 180 days from the consummation
of any such offering, he shall not offer for sale, sell, or otherwise dispose
of, directly or indirectly, any shares of Common Stock, including any shares of
Common Stock issued on conversion of the Common Stock, or sell or grant options,
rights or warrants with respect to any shares of Common Stock, without the prior
written consent of the managing underwriter for any such offering.

SECTION XXII. ASSIGNMENT OF RIGHTS; REPRESENTATIONS ON SALE. The
Company may assign to one or more third parties its right to repurchase shares
of Employee Stock pursuant to Sections 2 and 3, subject only to compliance with
applicable securities laws. The purchasers of Employee Stock pursuant to
Sections 2, 3, 4 and 6 shall be entitled to receive customary representations
and warranties from the seller regarding the seller's good title to, and freedom
from liens, encumbrances and restrictions on the sale of, such Employee Stock.

SECTION XXIII. TRANSFERS IN VIOLATION OF AGREEMENT. Any transfer or
attempted transfer of any Stockholder Shares in violation of this Agreement
shall be void, and the Company shall not be obligated to record such transfer on
its books or treat any purported transferee of such Stockholder Shares as the
owner of such shares for any purpose.

SECTION XXIV. AMENDMENT AND WAIVER. Except as otherwise provided
herein, no amendment or waiver of any provision of this Agreement shall be
effective against the Company, KCSN, or the Employee Stockholders unless such
amendment or waiver is approved in writing by the Company, KCSN, or the holders
of at least a majority of the then-outstanding Employee Stock, as the case may
be. The failure of any party to enforce any provision of this Agreement shall
not be construed as a waiver of such provision and shall not affect the right of
such party thereafter to enforce each provision of this Agreement in accordance
with its terms.

SECTION XXV. SEVERABILITY. If any provision of this Agreement is
held to be invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision or any other jurisdiction, but this
Agreement shall be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.

SECTION XXVI. ENTIRE AGREEMENT. Except as otherwise expressly set
forth herein, this document embodies the complete agreement and understanding
among the parties hereto with respect to the subject matter hereof and
supersedes and preempts any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.

3
<PAGE>

SECTION XXVII. SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of and be enforceable by the Company, KCSN and their
respective successors and transferees, and by the Employee Stockholders and
their Permitted Transferees, in each case so long as such persons hold Employee
Stock.

SECTION XXVIII. COUNTERPARTS. This Agreement may be executed in
separate counterparts each of which shall be an original and all of which taken
together shall constitute one and the same agreement.

SECTION XXIX. REMEDIES. The Company and KCSN shall be entitled to
enforce their rights under this Agreement specifically to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that the Company and KCSN may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief (without posting a bond or other
security) in order to enforce or prevent any violation of the provisions of this
Agreement. In the event of any legal proceedings seeking to enforce any rights
or obligations under this Agreement, the prevailing party shall be entitled to
recover its attorneys fees and costs in connection with such proceeding from the
non-prevailing party.

SECTION XXX. NOTICES. Any notice provided for in this Agreement
shall be in writing and shall be either personally delivered, or sent by
telecopy (confirmed in writing) or sent by reputable overnight courier service
for next-day delivery (charges prepaid) to the Company or KCSN at their
respective addresses set forth below and to any other recipient at the address
indicated on the schedules hereto and to any subsequent holder of Employee Stock
subject to this Agreement at such address as indicated by the Company's records,
or at such address or to the attention of such other person as the recipient
party has specified by prior written notice to the sending party. Notices will
be deemed to have been given hereunder when delivered personally, on the date of
transmission if sent by confirmed telecopy (or on the next business day if
transmission is not made on a business day) or on the next business day after
deposit with a reputable overnight courier service.

The Company's address is:

3478 Buskirk Avenue, Suite 260
Pleasant Hill, CA 94523
Attention: Michael F. Vukelich
Telecopy: (925) 935-0799

KCSN's address is:

c/o Kohlberg & Company, L.L.C.
111 Radio Circle
Mt. Kisco, NY 10549
Attention: Samuel Frieder
Telecopy: (914) 241-7476

SECTION XXXI. GOVERNING LAW. The corporate law of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement shall be governed by the internal law, and not
the law of conflicts, of California.

SECTION XXXII. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.

SECTION 21. SPOUSAL CONSENT. By his or her signature on this
Agreement, each spouse of a Employee Stockholder agrees to be bound by the
provisions hereof to the extent of such spouse's interest in any Stockholder
Shares and further agrees (i) in the event of the death of such spouse, the
surviving Employee Stockholder shall succeed to such deceased spouse's interest
in the Stockholder Shares held by such Employee Stockholder on the date of
death, (ii) in the event of separation or dissolution of marriage, the Employee
Stockholder shall have the right to purchase the spouse's interest in the
Stockholder Shares held by such Employee Stockholder at Fair Market Value (as
defined in Section 1), and (iii) any decree of divorce or dissolution of
marriage, separate maintenance agreement or property settlement between any
Employee Stockholder and his or her spouse shall include a provision granting
such Employee Stockholder such spouse's entire interest in the Stockholder
Shares held by such Employee Stockholder as part of the division of the
community property or separate property of the marriage.

SECTION 23. TERMINATION; SURVIVAL. This Agreement (other than
Sections 3 and 7 hereof) shall terminate and be of no further force and effect
upon consummation of the Company's initial public offering of Common Stock under
the Securities Act. This Agreement shall terminate in its entirety on the tenth
anniversary of the date hereof.

SECTION 24. EMPLOYMENT. Each Employee Stockholder agrees to
provide to the Company confirmation of such Employee Stockholder's then current
employment following termination of such Employee Stockholder's employment with
the Company or its subsidiaries promptly upon request.

* * * * *

4
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

COLOR SPOT NURSERIES, INC.

By: /s/ Michael Vukelich
------------------------------------
Michael Vukelich
Chief Executive Officer

KCSN ACQUISITION COMPANY, L.P.

By: KCSN Management Company, L.P.,
------------------------------------
its general partner

By: KCSN G.P., Inc.,
------------------------------------
its general partner

By: /s/ Samuel P. Frieder
------------------------------------
Samuel P. Frieder
Vice President

EMPLOYEE STOCKHOLDERS:

---------------------------------------

<PAGE>

[EXHIBIT 10.25]
------------------------------------------------

COLOR SPOT NURSERIES, INC.

------------------------------------------------

LOAN AND SECURITY AGREEMENT

Dated: October __, 1998

$70,000,000

------------------------------------------------

FLEET CAPITAL CORPORATION,
AS AGENT

AND ADDITIONAL LENDERS
FROM TIME TO TIME PARTY THERETO

------------------------------------------------

<PAGE>

TABLE OF CONTENTS

<TABLE>
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Page
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<S> <C>
SECTION 1. CREDIT FACILITY. . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1. Revolving Credit Loans.. . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 2. INTEREST, FEES AND CHARGES . . . . . . . . . . . . . . . . . . . . 3

2.1. Interest.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.2. Computation of Interest and Fees.. . . . . . . . . . . . . . . . . . . 4

2.3. LIBOR Option.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2.4. Closing Fee; Annual Agency Fee.. . . . . . . . . . . . . . . . . . . . 5

2.5. Letter of Credit and LC Guaranty Fees. . . . . . . . . . . . . . . . . 5

2.6. Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.7. Capital Adequacy.. . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2.8. Audit and Appraisal Fees.. . . . . . . . . . . . . . . . . . . . . . . 6

2.9. Reimbursement of Expenses. . . . . . . . . . . . . . . . . . . . . . . 6

2.10. Bank Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

SECTION 3. LOAN ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . 7

3.1. Manner of Borrowing Revolving Credit Loans.. . . . . . . . . . . . . . 7

3.2. Payments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.3. Mandatory Prepayment from Proceeds of Sale, Loss, Destruction or
Condemnation of Collateral.. . . . . . . . . . . . . . . . . . . . .10

3.4. Application of Payments and Collections. . . . . . . . . . . . . . . .11

3.5. All Loans to Constitute One Obligation.. . . . . . . . . . . . . . . .11

3.6. Loan Account.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

3.7. Statements of Account. . . . . . . . . . . . . . . . . . . . . . . . .12

3.8. Sharing of Payments, Etc.. . . . . . . . . . . . . . . . . . . . . . .12

SECTION 4. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . .12

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<PAGE>

4.1. Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .12

4.2. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

SECTION 5. SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . .14

5.1. Security Interest in Collateral. . . . . . . . . . . . . . . . . . . .14

5.2. Lien Perfection; Further Assurances. . . . . . . . . . . . . . . . . .15

5.3. Lien on Realty.. . . . . . . . . . . . . . . . . . . . . . . . . . . .15

SECTION 6. COLLATERAL ADMINISTRATION. . . . . . . . . . . . . . . . . . . . .15

6.1. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

6.2. Administration of Accounts.. . . . . . . . . . . . . . . . . . . . . .16

6.3. Administration of Inventory. . . . . . . . . . . . . . . . . . . . . .18

6.4. Administration of Equipment. . . . . . . . . . . . . . . . . . . . . .18

6.5. Payment of Charges.. . . . . . . . . . . . . . . . . . . . . . . . . .19

SECTION 7. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . .19

7.1. General Representations and Warranties.. . . . . . . . . . . . . . . .19

7.2. Continuous Nature of Representations and Warranties. . . . . . . . . .26

7.3. Survival of Representations and Warranties.. . . . . . . . . . . . . .26

SECTION 8. COVENANTS AND CONTINUING AGREEMENTS . . . . . . . . . . . . . .27

8.1. Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . . . .27

8.2. Negative Covenants.. . . . . . . . . . . . . . . . . . . . . . . . . .29

8.3. Specific Financial Covenants.. . . . . . . . . . . . . . . . . . . . .32

SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . .32

9.1. Documentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

9.2. No Default.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

9.3. Other Conditions.. . . . . . . . . . . . . . . . . . . . . . . . . . .33

9.4. Availability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

9.5. No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

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SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT . . . . . . . .33

10.1. Events of Default.. . . . . . . . . . . . . . . . . . . . . . . . . .33

10.2. Acceleration of the Obligations.. . . . . . . . . . . . . . . . . . .36

10.3. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . .36

10.4. Remedies Cumulative; No Waiver. . . . . . . . . . . . . . . . . . . .38

SECTION 11. THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

11.1. Authorization and Action. . . . . . . . . . . . . . . . . . . . . . .38

11.2. Agent's Reliance, Etc.. . . . . . . . . . . . . . . . . . . . . . . .39

11.3. Fleet and Affiliates. . . . . . . . . . . . . . . . . . . . . . . . .40

11.4. Lender Credit Decision. . . . . . . . . . . . . . . . . . . . . . . .40

11.5. Indemnification.. . . . . . . . . . . . . . . . . . . . . . . . . . .40

11.6. Agency Provisions Relating to Collateral. . . . . . . . . . . . . . .41

11.7. Agent's Right to Purchase Commitments.. . . . . . . . . . . . . . . .42

11.8. Right of Sale, Assignment, Participations.. . . . . . . . . . . . . .42

11.9. Amendment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

11.10. Resignation of Agent; Appointment of Successor.. . . . . . . . . . .44

SECTION 12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .45

12.1. Power of Attorney.. . . . . . . . . . . . . . . . . . . . . . . . . .45

12.2. Indemnity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

12.3. No Sale of Interest by Borrower.. . . . . . . . . . . . . . . . . . .46

12.4. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

12.5. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . .46

12.6. Cumulative Effect; Conflict of Terms. . . . . . . . . . . . . . . . .46

12.7. Execution in Counterparts.. . . . . . . . . . . . . . . . . . . . . .47

12.8. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

12.9. Agent's and Lenders' Consent. . . . . . . . . . . . . . . . . . . . .48

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<PAGE>

12.10. Credit Inquiries.. . . . . . . . . . . . . . . . . . . . . . . . . .48

12.11. Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . .48

12.12. Entire Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . .48

12.13. Interpretation.. . . . . . . . . . . . . . . . . . . . . . . . . . .48

12.14. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . .49

12.15. GOVERNING LAW; CONSENT TO FORUM. . . . . . . . . . . . . . . . . . .49

12.16. WAIVERS BY BORROWER. . . . . . . . . . . . . . . . . . . . . . . . .50

12.17. Illinois Collateral Protection Act.. . . . . . . . . . . . . . . . .50
</TABLE>

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<PAGE>

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT is made this ____ day of October, 1998,
by and among FLEET CAPITAL CORPORATION ("Fleet"), a Rhode Island corporation
with an office at One North Franklin Street, Suite 3600, Chicago, Illinois
60606, individually as a Lender and as Agent (the "Agent") for itself and any
other financial institution that is or becomes a party hereto (each such
financial institution, including Fleet, is referred to herein as a "Lender" and
collectively as the "Lenders"), each Lender and COLOR SPOT NURSERIES, INC., a
Delaware corporation with its chief executive office and principal place of
business at 3478 Buskirk Avenue, Suite 260, Pleasant Hill, California 94523
("Borrower"). Capitalized terms used in this Agreement have the meanings
assigned to them in Appendix A, General Definitions. Accounting terms not
otherwise specifically defined herein shall be construed in accordance with GAAP
consistently applied. All references to Borrower's months shall be deemed to
mean Borrower's fiscal months.

SECTION 1. CREDIT FACILITY

Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lenders agree to make a Total Credit Facility of up to $70,000,000
available upon Borrower's request therefor, as follows:

1.1. REVOLVING CREDIT LOANS.

1.1.1. LOANS. Each Lender agrees, for so long as no Default
or Event of Default exists, to make Revolving Credit Loans to Borrower
from time to time, as requested by Borrower in the manner set forth in
subsection 3.1.1 hereof, up to a maximum principal amount at any time
outstanding equal to the lesser of (i) such Lender's Revolving Loan
Commitment and (ii) the product of such Lender's Revolving Loan
Percentage multiplied by the Borrowing Base at such time MINUS reserves,
if any and MINUS the LC Amount. Without duplicating such matters as are
taken into account in determining eligibility, Agent shall have the right
to establish reserves in such amounts, and with respect to such matters,
as Agent shall reasonably deem necessary or appropriate, against the
amount of Revolving Credit Loans which Borrower may otherwise request
under this subsection 1.1.1, including, without limitation, with respect
to (i) price adjustments, damages, unearned discounts, returned products
or other matters for which credit memoranda are issued in the ordinary
course of Borrower's or any of its Subsidiary's businesses; (ii) other
sums then due which are chargeable against Borrower's Loan Account as
Revolving Credit Loans under any section of this Agreement; and
(iii) such other matters, events, conditions or contingencies as to which
Agent, in its reasonable credit judgment, determines reserves should be
established from time to time hereunder.

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1.1.2. SWINGLINE LOANS. In order to reduce the frequency of
transfers of funds from Lenders to Agent for making Revolving Credit
Loans and for so long as no Default or Event of Default exists, Agent
agrees to make Revolving Credit Loans to Borrower when Borrower requests
any Revolving Credit Loan (such Revolving Credit Loans to be designated
as "Swingline Loans") provided that the aggregate amount of Swingline
Loans outstanding at any time will not (i) exceed $3,000,000; (ii) when
added to the principal amount of Agent's other Revolving Credit Loans
then outstanding, exceed Agent's Revolving Credit Commitment; or (iii)
when added to the principal amount of all other Revolving Credit Loans
then outstanding, exceed the Borrowing Base. Within the foregoing
limits, Borrower may borrow, repay and reborrow Swingline Loans during
the Term. All Swingline Loans shall be treated as Revolving Credit Loans
for purposes of this Agreement, except that all Swingline Loans shall be
Base Rate Revolving Credit Portions.

1.1.3. LETTERS OF CREDIT; LC GUARANTIES. Agent agrees, for
so long as no Default or Event of Default exists and if requested by
Borrower, to (i) issue or cause to be issued by Bank or another Affiliate
of Agent, on the date requested by Borrower, Letters of Credit for the
account of Borrower or (ii) execute LC Guaranties by which Agent, Bank or
another Affiliate of Agent, on the date requested by Borrower, shall
guaranty the payment or performance by Borrower of its reimbursement
obligations with respect to letters of credit, PROVIDED that the LC
Amount shall not exceed $3,000,000 at any time. No trade Letter of
Credit or LC Guaranty may have an expiration date that is more than 180
days after the date of issuance thereof; no standby Letter of Credit or
LC Guaranty may have an expiration date that is more than one year after
the date of issuance thereof (provided, however, that any such Letter of
Credit or LC Guaranty may be renewable for one or more additional
one-year periods); and no Letter of Credit or LC Guaranty may have an
expiration date (including any renewals) that is later than the 60th day
prior to the last day of the Term. Notwithstanding anything to the
contrary contained herein, Borrower, Lenders and Agent hereby agree that
all LC Obligations shall be satisfied by the prompt issuance of one or
more Base Rate Revolving Credit Loans, which Borrower hereby acknowledges
are requested and Lenders hereby agree to fund. In the event that
Revolving Credit Loans are not, for any reason, promptly made to satisfy
all then existing LC Obligations, each Lender hereby agrees to pay to
Agent, on demand, an amount equal to such LC Obligations MULTIPLIED BY
such Lender's Revolving Loan Percentage, and until so paid, such amount
shall be secured by the Collateral and shall bear interest and be payable
at the same rate and in the same manner as Base Rate Revolving Credit
Portions. Immediately upon the issuance of a Letter of Credit or an LC
Guaranty under this Agreement, each Lender shall be deemed to have
irrevocably and unconditionally purchased and received from Agent,
without recourse or warranty, an undivided interest and participation
therein to the extent of such Lender's Revolving Loan Commitment.

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1.1.4. USE OF PROCEEDS. The Revolving Credit Loans shall be
used solely for the satisfaction of existing Indebtedness of Borrower to
Credit Agricole Indosuez and the other lenders under that certain Second
Amended and Restated Credit Agreement, dated as of December 27, 1997
among Borrower and such lenders and for Borrower's general operating
capital needs in a manner consistent with the provisions of this
Agreement and all applicable laws.

SECTION 2. INTEREST, FEES AND CHARGES

2.1. INTEREST.

2.1.1. RATES OF INTEREST. Except as provided in the last
sentence of this subsection 2.1, interest shall accrue on the principal
amount of the Base Rate Revolving Credit Portion and the Base Rate
Seasonal Portion outstanding at the end of each day at a fluctuating rate
per annum equal to the Applicable Margin PLUS the Base Rate. The
foregoing rate of interest shall increase or decrease by an amount equal
to any increase or decrease in the Base Rate, effective as of the opening
of business on the day that any such change in the Base Rate occurs. If
Borrower properly exercises the LIBOR Option as provided in Section 2.3,
then, except as provided in the last sentence of this subsection 2.1,
interest shall accrue on the principal amount of the LIBOR Revolving
Credit Portions and the LIBOR Seasonal Portions outstanding at the end of
each day at a rate per annum equal to the Applicable Margin PLUS the
LIBOR Rate applicable to each LIBOR Portion for the corresponding LIBOR
Period. On and after the 90th day following the Closing Date, Interest
on any Base Rate Revolving Credit Portion or LIBOR Revolving Credit
Portion consisting of advances against Capped Inventory shall be
calculated, using the Applicable Margin for Seasonal Advances for so long
as such Inventory constitutes Capped Inventory.

2.1.2. DEFAULT RATE OF INTEREST. Upon and after the
occurrence of an Event of Default set forth in subsection 10.1.1 or
10.1.3 and during the continuation thereof, the Agent at its option may,
and upon direction of the Majority Lenders shall, cause the principal
amount of all Loans to bear interest at a rate per annum equal to 2.0%
PLUS the interest rate otherwise applicable thereto (the "Default Rate").

2.1.3. MAXIMUM INTEREST. In no event whatsoever shall the
aggregate of all amounts deemed interest hereunder and charged or
collected pursuant to the terms of this Agreement exceed the highest rate
permissible under any law which a court of competent jurisdiction shall,
in a final determination, deem applicable hereto. If any provisions of
this Agreement, are in contravention of any such law, such provisions
shall be deemed amended to conform thereto.

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2.2. COMPUTATION OF INTEREST AND FEES.

Interest, Letter of Credit and LC Guaranty fees and unused line fees
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year of 360 days. For the purpose of computing interest
hereunder, all items of payment received by Agent shall be deemed applied by
Agent on account of the Obligations (subject to final payment of such items) 1
Business Day after receipt by Agent of such items in Agent's account located in
Chicago, Illinois.

2.3. LIBOR OPTION.

(i) Upon the conditions that: (1) Agent shall
have received a LIBOR Request from Borrower at least 3 Business
Days prior to the first day of the LIBOR Period requested,
(2) there shall have occurred no change in applicable law which
would make it unlawful for any Lender to obtain deposits of U.S.
dollars in the London interbank foreign currency deposits market,
(3) as of the date of the LIBOR Request and the first day of the
LIBOR Period, there shall exist no Default or Event of Default,
(4) Agent is able to determine the LIBOR Rate in respect of the
requested LIBOR Period (5) each Lender is able to obtain deposits
of U.S. dollars in the London interbank foreign currency deposits
market in the applicable amounts and for the requested LIBOR
Period, and (6) as of the first date of the LIBOR Period, there
are no more than 5 outstanding LIBOR Portions including the LIBOR
Portion being requested; then interest on the LIBOR Portion
requested during the LIBOR Period requested will be based on the
applicable LIBOR Rate.

(ii) Each LIBOR Request shall be irrevocable and
binding on Borrower. Borrower shall indemnify each Lender for any
loss, penalty or expense incurred by such Lender due to failure on
the part of Borrower to fulfill, on or before the date specified
in any LIBOR Request, the applicable conditions set forth in this
Agreement or due to the prepayment of the applicable LIBOR Portion
prior to the last day of the applicable LIBOR Period, including,
without limitation, any loss or expense incurred by reason of the
liquidation or redeployment of deposits or other funds acquired by
any Lender to fund or maintain the requested LIBOR Portion.

(iii) If any Legal Requirement shall (1) make it
unlawful for any Lender to fund through the purchase of U.S.
dollar deposits any LIBOR Portion or otherwise give effect to its
obligations as contemplated under this Section 2.3, or (2) shall
impose on any Lender any costs based on or measured by the excess
above a specified level of the amount of a category of deposits or
other liabilities of such Lender which includes deposits by
reference to which the LIBOR Rate is determined as provided herein
or a category of extensions of credit or other assets of such
Lender which includes any LIBOR Portion or

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(3) shall impose on any Lender any restrictions on the amount of
such a category of liabilities or assets which such Lender may
hold, then, in each such case, such Lender may, by notice thereof
to Borrower, terminate the LIBOR Option. Any LIBOR Portion
subject thereto shall immediately bear interest thereafter at the
rate and in the manner provided for Base Rate Portions pursuant to
subsection 2.1.1. Borrower shall indemnify each Lender against
any loss, penalty or expense incurred by such Lender due to
liquidation or redeployment of deposits or other funds acquired by
such Lender to fund or maintain any LIBOR Portion that is
terminated hereunder.

(iv) Subject to subsection 11.8.4, each Lender
shall receive payments of amounts of principal of and interest
with respect to the LIBOR Portions free and clear of, and without
deduction for, any Taxes. If (1) any Lender shall be subject to
any Tax in respect of any LIBOR Portion or any part thereof or,
(2) Borrower shall be required to withhold or deduct any Tax from
any such amount, the LIBOR Rate applicable to such LIBOR Portion
shall be adjusted by Agent on behalf of the affected Lender to
reflect all additional costs incurred by such Lender in connection
with the payment by such Lender or the withholding by Borrower of
such Tax and Borrower shall provide Agent such Lender with a
statement detailing the amount of any such Tax actually paid by
Borrower. Determination by Agent on behalf of a Lender of the
amount of such costs shall, in the absence of manifest error, be
conclusive. If after any such adjustment any part of any Tax paid
by any Lender is subsequently recovered by such Lender, such
Lender shall reimburse Borrower to the extent of the amount so
recovered. A certificate of an officer of such Lender setting
forth the amount of such recovery and the basis therefor shall, in
the absence of manifest error, be conclusive.

2.4. CLOSING FEE; ANNUAL AGENCY FEE.

Borrower shall pay to Agent fees in accordance with the terms of the fee
letter between Borrower and Agent.

2.5. LETTER OF CREDIT AND LC GUARANTY FEES.

Borrower shall pay to Agent, for the ratable benefit of Lenders, a per
annum fee equal to the Applicable Margin then in effect for LIBOR Revolving
Credit Portions MULTIPLIED BY the aggregate face amount of all Letters of Credit
and LC Guaranties outstanding from time to time during the term of this
Agreement, which fees shall be payable monthly in arrears on the first day of
each month, PLUS all normal and customary charges associated with the issuance
of such Letters of Credit and LC Guaranties, which fees and charges shall be
deemed fully earned and shall be due and payable upon issuance of each such
Letter of Credit or LC Guaranty and shall not be subject to rebate or proration
upon the termination of this Agreement for any reason.

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2.6. UNUSED LINE FEE.

Borrower shall pay to Agent, for the ratable benefit of Lenders, a fee
equal to 3/8 of 1.0% per annum of the average daily amount by which $70,000,000
exceeds the sum of (i) the outstanding principal balance of the Revolving Credit
Loans PLUS (ii) the LC Amount, MINUS the product of any Swingline Loans and the
ratio of the total Revolving Loan Commitment of all Lenders other than Agent to
the total Revolving Loan Commitments. The unused line fee shall be payable
monthly in arrears on the first day of each calendar month hereafter.

2.7. CAPITAL ADEQUACY.

If any Lender shall have determined that the adoption after the date of
this Agreement of any law, rule or regulation regarding capital adequacy, or any
change after the date of this Agreement therein or in the interpretation or
application thereof or compliance by any Lender with any request or directive
after the date of this Agreement regarding capital adequacy (whether or not
having the force of law) from any central bank or governmental authority, does
or shall have the effect of reducing the rate of return on such Lender's capital
as a consequence of its obligations hereunder to a level below that which such
Lender could have achieved but for such adoption, change or compliance (taking
into consideration such Lender's policies with respect to capital adequacy) by
an amount deemed by such Lender, in its sole discretion, to be material, then
from time to time, after submission by such Lender to Agent and Borrower of a
written demand therefor, Borrower shall pay to such Lender such additional
amount or amounts as will compensate such Lender for such reduction. A
certificate of such Lender claiming entitlement to payment as set forth above
shall be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such payment, the additional
amount or amounts to be paid to such Lender, and the method by which such
amounts were determined. In determining such amount, such Lender may use any
reasonable averaging and attribution method.

2.8. AUDIT AND APPRAISAL FEES.

Borrower shall pay to Agent out-of-pocket fees in connection with audits
and appraisals conducted by Agent's loan analysts of Borrower's books and
records and such other matters as Agent shall deem appropriate; PROVIDED, that
so long as no Default or Event of Default has occurred, Borrower shall only be
required to pay for two such audits and appraisals in any fiscal year of
Borrower. Audit fees shall be payable on the first day of the month following
the date of issuance by Agent of a request for payment thereof to Borrower.

2.9. REIMBURSEMENT OF EXPENSES.

If, (a) at any time or times regardless of whether or not an Event of
Default then exists, Agent, or (b) at any time or times that an Event of Default
exists, any Lender, incurs legal or accounting expenses or any other costs or
out-of-pocket expenses in connection with (i) the negotiation and preparation of
this Agreement or any of the other Loan Documents, any amendment of or
modification of this Agreement or any of the other Loan Documents, or any

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sale or attempted sale of any interest herein to a Participating Lender or an
assignee; (ii) the administration of this Agreement or any of the other Loan
Documents and the transactions contemplated hereby and thereby; (iii) any
litigation, contest, dispute, suit, proceeding or action (whether instituted
by Agent, any Lender, Borrower or any other Person) in any way relating to
the Collateral, this Agreement or any of the other Loan Documents or
Borrower's affairs; (iv) any attempt to enforce any rights of Agent, any
Lender or any Participating Lender against Borrower or any other Person which
may be obligated to any Lender by virtue of this Agreement or any of the
other Loan Documents, including, without limitation, the Account Debtors; or
(v) any attempt to inspect, verify, protect, preserve, restore, collect,
sell, liquidate or otherwise dispose of or realize upon the Collateral; then
all such legal and accounting expenses, other costs and out of pocket
expenses shall be charged to Borrower. All amounts chargeable to Borrower
under this Section 2.9 shall be Obligations secured by all of the Collateral,
shall be payable on demand to Agent for distribution to the applicable
Lender, and shall bear interest from the date such demand is made until paid
in full at the rate applicable to Base Rate Revolving Credit Portions from
time to time. Borrower shall also reimburse Agent and any Lender for
expenses incurred by Agent or such Lender in its administration of the
Collateral to the extent and in the manner provided in Section 6 hereof.

2.10. BANK CHARGES.

Borrower shall pay to Agent, on demand, for distribution to the
applicable Lenders any and all fees, costs or expenses which any Lender pays to
a bank or other similar institution (including, without limitation, any fees
paid by any Lender to any other Lender) arising out of or in connection with (i)
the forwarding to Borrower or any other Person on behalf of Borrower, by any
Lender of proceeds of loans made by any Lender to Borrower pursuant to this
Agreement and (ii) the depositing for collection, by any Lender, of any check or
item of payment received or delivered to such Lender on account of the
Obligations.

SECTION 3. LOAN ADMINISTRATION.

3.1. MANNER OF BORROWING REVOLVING CREDIT LOANS.

Borrowings under the credit facility established pursuant to Section 1
hereof shall be as follows:

3.1.1. LOAN REQUESTS. A request for a Revolving Credit Loan
shall be made, or shall be deemed to be made, in the following manner:
(i) Borrower shall give Agent notice of its intention to borrow, in which
notice Borrower shall specify the amount of the proposed borrowing (which
shall be no less than $100,000 in the case of Base Rate Portions which
are not Swingline Loans (with respect to which there shall be no minimum
borrowing amount)) and the proposed borrowing date, no later than 12:00
noon, Chicago, Illinois, time on the proposed borrowing date (or in
accordance with Section 2.3 hereof in the case of a request for a LIBOR
Portion), PROVIDED, however, that no such request may be made at a time
when there exists a

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Default or an Event of Default; and (ii) the becoming due of any amount
required to be paid under this Agreement, whether as interest or for any
other Obligation, shall be deemed irrevocably to be a request for a
Revolving Credit Loan on the due date in the amount required to pay such
interest or other Obligation.

3.1.2. DISBURSEMENT. Borrower hereby irrevocably authorizes
Agent to disburse the proceeds of each Revolving Credit Loan requested,
or deemed to be requested, pursuant to this subsection 3.1.2 as follows:
(i) the proceeds of each Revolving Credit Loan requested under subsection
3.1.1(i) shall be disbursed by Agent in lawful money of the United States
of America in immediately available funds, in the case of the initial
borrowing, in accordance with the terms of the written disbursement
letter from Borrower, and in the case of each subsequent borrowing, by
wire transfer to such bank account as may be agreed upon by Borrower and
Agent from time to time or elsewhere if pursuant to a written direction
from Borrower; and (ii) the proceeds of each Revolving Credit Loan
requested under subsection 3.1.1(ii) shall be disbursed by Agent by way
of direct payment of the relevant interest or other Obligation.

3.1.3. PAYMENT BY LENDERS. Agent shall give to each Lender
prompt written notice by facsimile, telex or cable of the receipt by
Agent from Borrower of any request for a Revolving Credit Loan. Each
such notice shall specify the requested date and amount of such Revolving
Credit Loan, whether such Revolving Credit Loan shall be subject to the
LIBOR Option, and the amount of each Lender's advance thereunder (in
accordance with its applicable Revolving Loan Percentage). Each Lender
shall, not later than 1:00 p.m. (Chicago time) on such requested date,
wire to a bank designated by Agent the amount of that Lender's Revolving
Loan Percentage of the requested Revolving Credit Loan. The failure of
any Lender to make the Revolving Credit Loans to be made by it shall not
release any other Lender of its obligations hereunder to make its
Revolving Credit Loan. Neither Agent nor any other Lender shall be
responsible for the failure of any other Lender to make the Revolving
Credit Loan to be made by such other Lender. The foregoing
notwithstanding, Agent in its sole discretion, may from its own funds,
make a Revolving Credit Loan on behalf of any Lender hereto. In such
event, the Lender on behalf of whom Agent made the Revolving Credit Loan
shall reimburse Agent for the amount of such Revolving Credit Loan made
on its behalf, on a weekly (or more frequent, as determined by Agent in
its sole discretion) basis. The entire amount of interest attributable
to such Revolving Credit Loan for the period from the date on which such
Revolving Credit Loan was made by Agent on such Lender's behalf until
Agent is reimbursed by such Lender, shall be paid to Agent for its own
account.

3.1.4. AUTHORIZATION. Borrower hereby irrevocably authorizes
Agent to advance to Borrower, and to charge to Borrower's Loan Account
hereunder as a Revolving Credit Loan, a sum sufficient to pay all
interest accrued on the Obligations

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during the immediately preceding month and to pay all costs, fees and
expenses at any time owed by Borrower to Agent or any Lender hereunder.

3.1.5. LETTER OF CREDIT AND LC GUARANTY REQUESTS. A request
for a Letter of Credit or LC Guaranty shall be made in the following
manner: Borrower may give Agent and Bank a written notice of its request
for the issuance of a Letter of Credit or LC Guaranty, not later than
11:00 a.m. Chicago, Illinois time, one Business Day before the proposed
issuance date thereof, in which notice Borrower shall specify the
proposed issuer and issuance date; PROVIDED, that no such request may be
made at a time when there exists a Default or Event of Default. Such
request shall be accompanied by an executed application and reimbursement
agreement in form and substance satisfactory to Agent and the Person
being asked to issue the Letter of Credit or LC Guaranty, as well as any
required corporate resolutions.

3.1.6. METHOD OF MAKING REQUESTS. As an accommodation to
Borrower, unless a Default or an Event of Default is then in existence,
(i) Agent shall permit telephonic requests for Revolving Credit Loans to
Agent, and (ii) Agent and Bank may, in their discretion, permit
electronic transmittal of requests for Letters of Credit and LC
Guaranties to them; and (iii) Agent may, in Agent's discretion, permit
electronic transmittal of instructions, authorizations, agreements or
reports to Agent. Unless Borrower specifically directs Agent in writing
not to accept or act upon telephonic or electronic communications from
Borrower, Agent shall have no liability to Borrower for any loss or
damage suffered by Borrower as a result of Agent's honoring of any
requests, execution of any instructions, authorizations or agreements or
reliance on any reports communicated to it telephonically or
electronically and purporting to have been sent to Agent by Borrower and
Agent shall have no duty to verify the origin of any such communication
or the authority of the person sending it. Each telephonic request for a
Revolving Credit Loan accepted by Agent hereunder shall be promptly
followed by a written confirmation of such request from Borrower to
Agent.

3.2. PAYMENTS.

Except where evidenced by notes or other instruments issued or made by
Borrower to any Lender and accepted by such Lender specifically containing
payment provisions which are in conflict with this Section 3.2 (in which event
the conflicting provisions of said notes or other instruments shall govern and
control), the Obligations shall be payable as follows:

3.2.1. PRINCIPAL. Principal payable on account of Revolving
Credit Loans shall be payable by Borrower to Agent, for the ratable
benefit of Lenders, immediately upon the earliest of (i) the receipt by
Agent or Borrower of any proceeds of any of the Collateral, to the extent
of said proceeds, except as provided in subsection 6.4.2 and except that,
so long as no Default or Event of Default exists, if all Loans
outstanding at the time of receipt by Borrower of any such proceeds are
LIBOR Portions, then Borrower may direct that such proceeds be held by
Agent in

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either a non-interest bearing cash collateral account maintained by Agent
or in an investment that is not a Restricted Investment that is in the
possession of Agent to be applied to the payment of principal on the
last day of the LIBOR Period applicable to each LIBOR Portion in the
order of maturity; (ii) the occurrence of an Event of Default in
consequence of which Agent elects to accelerate the maturity and payment
of the Obligations, or (iii) termination of this Agreement pursuant to
Section 4 hereof; PROVIDED, HOWEVER, that if an Overadvance shall exist
at any time, Borrower shall, on demand, repay the Overadvance.

3.2.2. INTEREST.

(i) BASE RATE PORTION. Interest accrued on Base
Rate Portions shall be due on the earliest of (1) the first
calendar day of each month (for the immediately preceding month),
computed through the last calendar day of the preceding month, (2)
the occurrence of an Event of Default in consequence of which
Agent elects to accelerate the maturity and payment of the
Obligations or (3) termination of this Agreement pursuant to
Section 4 hereof.

(ii) LIBOR PORTION. Interest accrued on each
LIBOR Portion shall be due and payable on each LIBOR Interest
Payment Date and on the earlier of (1) the occurrence of an Event
of Default in consequence of which Agent elects to accelerate the
maturity and payment of the Obligations or (2) termination of this
Agreement pursuant to Section 4 hereof.

3.2.3. COSTS, FEES AND CHARGES. Costs, fees and charges
payable pursuant to this Agreement shall be payable by Borrower as and
when provided in Section 2 hereof, to Agent or to any other Person
designated by Agent in writing.

3.2.4. OTHER OBLIGATIONS. The balance of the Obligations
requiring the payment of money, if any, shall be payable by Borrower to
Agent as and when provided in this Agreement, the Other Agreements or the
Security Documents, or on demand, whichever is later.

3.3. MANDATORY PREPAYMENT FROM PROCEEDS OF SALE, LOSS, DESTRUCTION OR
CONDEMNATION OF COLLATERAL.

Except as provided in subsection 6.4.2 hereof, if Borrower or any of its
Subsidiaries sells any of the Equipment or real Property, or if any of the
Collateral is lost or destroyed or taken by condemnation, Borrower shall pay to
Agent, for the ratable benefit of Lenders, as and when received by Borrower or
such Subsidiary a sum equal to the proceeds (including insurance payments)
received by Borrower or such Subsidiary from such sale, loss, destruction or
condemnation. To the extent that the Collateral sold, lost, destroyed or
condemned consists of Equipment or real property, the applicable prepayment
shall be applied first, to reduce the outstanding principal balance of any
Seasonal Advance (and to permanently reduce by such amount the amount set forth
in clause (3) of the definition of Borrowing Base set forth herein)

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and second, to reduce the outstanding principal balance of the other
Revolving Credit Loans. To the extent that the Collateral sold, lost,
destroyed or condemned consists of Accounts, Inventory or other Property
other than Equipment or real Property, the applicable prepayment shall be
applied first, to reduce the outstanding principal balance of any Seasonal
Advance and second, to reduce the outstanding principal balance of the other
Revolving Credit Loans. Borrower shall be responsible for any LIBOR breakage
fees incurred by any Lender as a result of any prepayments made pursuant to
this subsection 3.3; provided, however, that, so long as no Default or Event
of Default exists, if all Loans outstanding at the time of receipt by
Borrower of any such proceeds are LIBOR Portions, then Borrower may direct
that such proceeds be held by Agent in either a non-interest bearing cash
collateral account maintained by Agent or in an investment that is not a
Restricted Investment that is in the possession of Agent to be applied to the
payment of principal on the last day of the LIBOR Period applicable to each
LIBOR Portion in the order of maturity.

3.4. APPLICATION OF PAYMENTS AND COLLECTIONS.

All items of payment received by Agent by 1:00 p.m., Chicago, Illinois,
time, on any Business Day shall be deemed received on that Business Day. All
items of payment received after 1:00 p.m., Chicago, Illinois, time, on any
Business Day shall be deemed received on the following Business Day. Borrower
irrevocably waives the right to direct the application of any and all payments
and collections at any time or times hereafter received by Agent from or on
behalf of Borrower, and Borrower does hereby irrevocably agree that, subject to
subsection 3.2.1(i), Agent shall have the continuing exclusive right to apply
and reapply any and all such payments and collections received at any time or
times hereafter by Agent or its agent against the Obligations, in such manner as
Agent may deem advisable, notwithstanding any entry by Agent or any Lender upon
any of its books and records. If as the result of collections of Accounts as
authorized by subsection 6.2.6 hereof a credit balance exists in the Loan
Account, such credit balance shall not accrue interest in favor of Borrower, but
shall be available to Borrower at any time or times for so long as no Default or
Event of Default exists.

3.5. ALL LOANS TO CONSTITUTE ONE OBLIGATION.

The Loans shall constitute one general Obligation of Borrower, and shall
be secured by Agent's Lien, for the ratable benefit of Lenders, upon all of the
Collateral.

3.6. LOAN ACCOUNT.

Agent shall enter all Loans as debits to a loan account (the "Loan
Account") and shall also record in the Loan Account all payments made by
Borrower on any Obligations and all proceeds of Collateral which are finally
paid to Agent for the ratable benefit of Lenders, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to Borrower.

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3.7. STATEMENTS OF ACCOUNT.

Agent will account to Borrower monthly with a statement of Loans, charges
and payments made pursuant to this Agreement, and such account rendered by Agent
shall, absent manifest error, be deemed final, binding and conclusive upon
Borrower unless Agent is notified by Borrower in writing to the contrary within
30 days of the date each accounting is mailed to Borrower. Such notice shall
only be deemed an objection to those items specifically objected to therein.

3.8. SHARING OF PAYMENTS, ETC.

If any Lender shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) on
account of any Loan made by it in excess of its ratable share of payments on
account of Loans made by all Lenders, such Lender shall forthwith purchase from
each other Lender such participation in such Loan as shall be necessary to cause
such purchasing Lender to share the excess payment ratably with each other
Lender; PROVIDED, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery, together with an amount equal to
such Lender's ratable share (according to the proportion of (i) the amount of
such Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. Borrower agrees
that any Lender so purchasing a participation from another Lender pursuant to
this Section 3.8 may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of set-off) with respect to such
participation as fully as if such Lender were the direct creditor of Borrower in
the amount of such participation. Notwithstanding anything to the contrary
contained herein, all purchases and repayments to be made under this Section 3.8
shall be made through Agent.

SECTION 4. TERM AND TERMINATION

4.1. TERM OF AGREEMENT.

Subject to the right of Lenders to cease making Loans to Borrower upon or
after the occurrence of any Default or Event of Default, this Agreement shall be
in effect for a period of three years from the date hereof, through and
including October __, 2001 (the "Term"), unless terminated as provided in
Section 4.2 hereof.

4.2. TERMINATION.

4.2.1. TERMINATION BY AGENT. Agent may, and at the request
of Majority Lenders shall, terminate this Agreement without notice upon
or after the occurrence and during the continuance of an Event of
Default.

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4.2.2. TERMINATION BY BORROWER. Upon at least 90 days' prior
written notice to Agent, Borrower may, at its option, terminate this
Agreement (PROVIDED, that prior written notice of 3 days shall be
required if Borrower terminates this Agreement in connection with the
sale of substantially all of its and its Subsidiaries' assets or all of
its capital stock); PROVIDED, HOWEVER, no such termination shall be
effective until Borrower has paid all of the Obligations (except for
contingent indemnification obligations under Section 12.2 or under the
indemnification provisions of the Security Documents) in immediately
available funds and all Letters of Credit and LC Guaranties have been
cash collateralized to Agent's satisfaction or Agent has received an
irrevocable letter of credit in form and substance, and issued by a bank,
satisfactory to Agent in its sole discretion pursuant to which Agent is
entitled to recover the maximum amount at any time payable under each
outstanding Letter of Credit or LC Guaranty, plus all costs and fees then
or thereafter payable with respect to such Letter of Credit or LC
Guaranty under the terms of this Agreement. Any notice of termination
given by Borrower shall be irrevocable unless Agent otherwise agrees in
writing, and no Lender shall have any obligation to make any Loans, nor
shall Agent be required to issue or procure any Letters of Credit or LC
Guaranties, on or after the termination date stated in such notice.
Borrower may elect to terminate this Agreement in its entirety only. No
section of this Agreement or type of Loan available hereunder may be
terminated singly.

4.2.3. TERMINATION CHARGES. At the effective date of
termination of this Agreement for any reason prior to the last day of the
Term (except for termination pursuant to subsection 4.2.1), Borrower
shall pay to Agent, for the ratable benefit of Lenders (in addition to
the then outstanding principal, accrued interest and other charges owing
under the terms of this Agreement and any of the other Loan Documents),
as liquidated damages for the loss of the bargain and not as a penalty,
an amount equal to 1.0% of the Total Credit Facility.

4.2.4. EFFECT OF TERMINATION. All of the Obligations (except
for contingent indemnification obligations under Section 12.2 or under
the indemnification provisions of the Security Documents) shall be
immediately due and payable upon the termination date stated in any
notice of termination of this Agreement. All undertakings, agreements,
covenants, warranties and representations of Borrower contained in the
Loan Documents shall survive any such termination and Agent shall retain
its Liens in the Collateral and Agent and each Lender shall retain all of
their respective rights and remedies under the Loan Documents
notwithstanding such termination until all Obligations (except for
contingent indemnification obligations under Section 12.2 or under the
indemnification provisions of the Security Documents) have been
discharged or paid, in full, in immediately available funds, together
with the applicable termination charge, if any. Notwithstanding the
payment in full of the Obligations, Agent shall not be required to
terminate its security interests in the Collateral unless, with respect
to any loss or damage Agent may incur as a result of dishonored checks or
other items of payment received by Agent from

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<PAGE>

Borrower or any Account Debtor and applied to the Obligations, Agent
shall, at its option, (i) have received a written agreement, executed by
Borrower and by any Person whose loans or other advances to Borrower are
used in whole or in part to satisfy the Obligations, indemnifying Agent
and each such Lender from any such loss or damage; or (ii) have retained
such cash collateral for such period of time as Agent, in its reasonable
discretion, may deem necessary to protect Lender and each Lender from any
such loss or damage.

SECTION 5. SECURITY INTERESTS

5.1. SECURITY INTEREST IN COLLATERAL.

To secure the prompt payment and performance to Agent and each Lender of
the Obligations, Borrower hereby grants to Agent, for the benefit of itself and
each Lender, a continuing Lien upon all of Borrower's assets, including all of
the following Property and interests in Property of Borrower, whether now owned
or existing or hereafter created, acquired or arising and wheresoever located:

(i) Accounts;

(ii) Inventory;

(iii) Equipment;

(iv) General Intangibles;

(v) Investment Property;

(vi) All monies and other Property of any kind now
or at any time or times hereafter in the possession or under the
control of Agent or any Lender or a bailee or Affiliate of Agent
or any Lender;

(vii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i)
through (vi) above, including, without limitation, proceeds of and
unearned premiums with respect to insurance policies insuring any
of the Collateral; and

(viii) All books and records (including, without
limitation, customer lists, credit files, computer programs,
print-outs, and other computer materials and records) of Borrower
pertaining to any of (i) through (vii) above.

Notwithstanding the foregoing, Collateral shall not include (1) any
licenses or permits the encumbrance of which would violate any law, statute or
regulation; or (2) any contract rights (including, without limitation, any
contracts or leases), the encumbrance of which would violate the terms of the
agreements establishing such rights; PROVIDED that Borrower shall use

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reasonable good faith efforts to obtain any necessary consent to enable any
such contract right to be included within the Collateral.

5.2. LIEN PERFECTION; FURTHER ASSURANCES.

Borrower shall execute such UCC-1 financing statements as are required by
the Code and such other instruments, assignments or documents as are necessary
to perfect Agent's Lien upon any of the Collateral and shall take such other
action as may be required to perfect or to continue the perfection of Agent's
Lien upon the Collateral. Unless prohibited by applicable law, Borrower hereby
authorizes Agent to execute and file any such financing statement on Borrower's
behalf. The parties agree that a carbon, photographic or other reproduction of
this Agreement shall be sufficient as a financing statement and may be filed in
any appropriate office in lieu thereof. At Agent's request, Borrower shall also
promptly execute or cause to be executed and shall deliver to Agent any and all
documents, instruments and agreements deemed necessary by Agent to give effect
to or carry out the terms or intent of the Loan Documents.

5.3. LIEN ON REALTY.

The due and punctual payment and performance of the Obligations shall
also be secured by the Lien created by Mortgages upon all real Property of
Borrower and its Subsidiaries described therein. The Mortgages shall be
executed by Borrower or each applicable Subsidiary in favor of Agent, for the
benefit of itself and each Lender, and shall be duly recorded, at Borrower's
expense, in each office where such recording is required to constitute a fully
perfected Lien on the real Property covered thereby. Borrower shall deliver to
Agent, at Borrower's expense, mortgagee title insurance policies issued by a
title insurance company satisfactory to Agent, which policies shall be in form
and substance satisfactory to Agent and shall insure a valid first Lien in favor
of Agent, for the benefit of itself and each Lender, on the Property covered
thereby, subject only to those exceptions acceptable to Agent and its counsel.
Borrower shall, and shall cause its Subsidiaries to, deliver to Agent such other
documents, including, without limitation, as-built survey prints of the real
Property, as Agent and its counsel may request relating to the real Property
subject to the Mortgage.

SECTION 6. COLLATERAL ADMINISTRATION

6.1. GENERAL.

6.1.1. LOCATION OF COLLATERAL. All Collateral, other than
Inventory in transit and motor vehicles, will at all times be kept by
Borrower and its Subsidiaries at one or more of the business locations
set forth in EXHIBIT 6.1.1 hereto and such additional business locations
as to which Borrower has given Agent 30 days advance written notice and
with respect to which Borrower has obtained mortgages, leasehold
mortgages or landlords' waivers satisfactory to Agent and shall not,
without the prior written approval of Agent, be moved therefrom (other
than to another location on EXHIBIT 6.1.1) except, prior to an Event of
Default and Agent's acceleration of the maturity of the Obligations in
consequence thereof, for (i) sales of Inventory in the

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ordinary course of business; and (ii) removals in connection with
dispositions of Equipment that are authorized by subsection 6.4.2 hereof.

6.1.2. INSURANCE OF COLLATERAL. Borrower shall maintain and
pay for insurance upon all Collateral wherever located and with respect
to Borrower's and each Subsidiary's business, covering casualty, hazard,
public liability and such other risks in such amounts and with such
insurance companies as are reasonably satisfactory to Agent. Borrower
shall deliver the originals of such policies to Agent with satisfactory
lender's loss payable endorsements, naming Agent as sole loss payee,
assignee or additional insured, as appropriate. Each policy of insurance
or endorsement shall contain a clause requiring the insurer to give not
less than 30 days' prior written notice to Agent in the event of
cancellation of the policy for any reason whatsoever and a clause
specifying that the interest of Agent, for the benefit of itself and each
Lender, shall not be impaired or invalidated by any act or neglect of
Borrower or the owner of the Property or by the occupation of the
premises for purposes more hazardous than are permitted by said policy.
Borrower agrees to deliver to Agent, promptly as rendered, true copies of
all reports made in any reporting forms to insurance companies.

6.1.3. PROTECTION OF COLLATERAL. All expenses of protecting,
storing, warehousing, insuring, handling, maintaining and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by
any state, federal, or local authority on any of the Collateral or in
respect of the sale thereof shall be borne and paid by Borrower or a
Subsidiary of Borrower. If Borrower or a Subsidiary of Borrower fails to
promptly pay any portion thereof when due, Agent may, at its option, but
shall not be required to, pay the same and charge Borrower therefor.
Neither Agent nor any Lender shall be liable or responsible in any way
for the safekeeping of any of the Collateral or for any loss or damage
thereto (except for reasonable care in the custody thereof while any
Collateral is in Agent's actual possession) or for any diminution in the
value thereof, or for any act or default of any warehouseman, carrier,
forwarding agency, or other person whomsoever, but the same shall be at
Borrower's sole risk.

6.2. ADMINISTRATION OF ACCOUNTS.

6.2.1. RECORDS, SCHEDULES AND ASSIGNMENTS OF ACCOUNTS.
Borrower shall, and shall cause each of its Subsidiaries to, keep
accurate and complete records of its Accounts and all payments and
collections thereon and shall submit to Agent and each Lender on such
periodic basis as Agent shall request (but no more frequently than once a
month so long as no Default or Event of Default exists and Availability
is not less than $2,000,000) a borrowing base certificate for the
preceding period, in form satisfactory to Agent. On or before the 20th
day of each month from and after the date hereof, Borrower shall deliver
to Agent and each Lender, in form acceptable to Agent, a summary aged
trial balance of all Accounts existing as of the last day of the
preceding month, specifying the names, addresses and face value for each
Account

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Debtor obligated on an Account so listed ("Schedule of Accounts"), and,
upon Agent's request therefor, any other information as Agent or any
Lender shall reasonably request. If requested by Agent, Borrower shall
execute and deliver, and shall cause its Subsidiaries to execute and
deliver, to Agent formal written assignments of all of its Accounts
weekly or daily, which shall include all Accounts that have been
created since the date of the last assignment, together with any other
information Agent shall reasonably request.

6.2.2. DISCOUNTS, ALLOWANCES, DISPUTES. If Borrower or any
of its Subsidiaries grants any discounts, allowances or credits that are
not shown on the face of the invoice for the Account involved, Borrower
shall, and shall cause any such Subsidiary to, report such discounts,
allowances or credits, as the case may be, to Agent as part of the next
required Schedule of Accounts. Upon the occurrence and during the
continuance of an Event of Default, Agent shall have the right to settle
or adjust all disputes and claims directly with the Account Debtor and to
compromise the amount or extend the time for payment of the Accounts upon
such terms and conditions as Agent may deem advisable, and to charge the
deficiencies, costs and expenses thereof, including attorney's fees, to
Borrower.

6.2.3. TAXES. If an Account includes a charge for any tax
payable to any governmental taxing authority, Agent is authorized, in its
sole discretion, to pay the amount thereof to the proper taxing authority
for the account of Borrower and to charge Borrower therefor, provided,
however that Agent shall not be liable for any taxes to any governmental
taxing authority that may be due by Borrower or any of its Subsidiaries.

6.2.4. ACCOUNT VERIFICATION. Whether or not a Default or an
Event of Default has occurred, any of Agent's officers, employees or
agents shall have the right, at any time or times hereafter, in the name
of Agent or any Lender, any designee of any Lender or Borrower, to verify
the validity, amount or any other matter relating to any Accounts by
mail, telephone, telegraph or otherwise; PROVIDED, that prior to the
occurrence of a Default or Event of Default, Agent shall obtain
Borrower's approval of any procedure utilized in connection with such
verification. Borrower shall, and shall cause it Subsidiaries to,
cooperate fully with Agent in an effort to facilitate and promptly
conclude any such verification process.

6.2.5. MAINTENANCE OF DOMINION ACCOUNT. Borrower shall, and
shall cause each Company to, maintain a Dominion Account or Accounts
pursuant to lockbox arrangements reasonably acceptable to Agent with such
banks as may be selected by Borrower or such Company and be reasonably
acceptable to Agent. Borrower shall, and shall cause each Company to,
issue to any such banks an irrevocable letter of instruction directing
such banks to deposit all payments or other remittances received in the
lockbox to the Dominion Account for application on account of the
Obligations. All funds deposited in any Dominion Account shall
immediately become the property

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of Agent, for the ratable benefit of Lenders, for payment of Obligations,
and Borrower shall, and shall cause each Company to, obtain the agreement
by such banks in favor of Agent to waive any offset rights against the
funds so deposited. Agent assumes no responsibility for such lockbox
arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder.

6.2.6. COLLECTION OF ACCOUNTS, PROCEEDS OF COLLATERAL. To
expedite collection, Borrower shall, and shall cause each Company to,
endeavor in the first instance to make collection of its Accounts for
Lenders. All remittances received by Borrower or any Company on account
of Accounts, together with the proceeds of any other Collateral, shall be
held as Agent's property by Borrower or such Company as trustee of an
express trust for Agent's benefit and Borrower or such Company shall
immediately deposit the same in kind in the Dominion Account. Agent
retains the right at all times after the occurrence of a Default or an
Event of Default to notify Account Debtors that Accounts have been
assigned to Agent and to collect Accounts directly in its own name and to
charge the collection costs and expenses, including attorneys' fees, to
Borrower.

6.3. ADMINISTRATION OF INVENTORY.

6.3.1. RECORDS AND REPORTS OF INVENTORY. Borrower and each
of its Subsidiaries shall keep accurate and complete records of its
Inventory. Borrower shall furnish to Agent and each Lender Inventory
reports in form and detail satisfactory to Agent at such times as Agent
shall request, but only once each month, not later than the 20th day of
such month, at any time that no Default or Event of Default exists and
Availability is not less than $2,000,000. Borrower shall conduct a
physical inventory no less frequently than annually and shall provide to
Agent and each Lender a report based on each such physical inventory
promptly thereafter, together with such supporting information as Agent
shall request.

6.4. ADMINISTRATION OF EQUIPMENT.

6.4.1. RECORDS AND SCHEDULES OF EQUIPMENT. Borrower and each
of its Subsidiaries shall keep accurate records itemizing and describing
the kind, type, quality, quantity and book value of its Equipment and all
dispositions made in accordance with subsection 6.4.2 hereof, and shall
furnish Agent and Lenders with a current schedule containing the
foregoing information on at least an annual basis and more often if
requested by Agent. Promptly on request therefor by Agent, Borrower
shall deliver to Agent any and all evidence of ownership, if any, of any
of the Equipment.

6.4.2. DISPOSITIONS OF EQUIPMENT. Borrower shall not, and
shall cause its Subsidiaries not to, sell, lease or otherwise dispose of
or transfer any of the

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Equipment or any part thereof without the prior written consent of Agent;
PROVIDED, HOWEVER, that so long as no Default or Event of Default exists,
Borrower and its Subsidiaries may sell or dispose of Equipment, provided
that if the proceeds of any such disposition (i) are less than $500,000,
Agent shall apply such proceeds to the outstanding Revolving Credit Loan
balance outstanding and shall permit Borrower to reborrow such proceeds
in accordance with the terms of this Agreement solely for use in
replacing the Equipment disposed of with new Equipment usable in the
business of Borrower or a Subsidiary of Borrower and subject to no Liens
other than Permitted Liens or (ii) are equal to or greater than $500,000,
Agent shall provisionally apply such proceeds to reduce the outstanding
Revolving Credit Loan balance outstanding for a period of 30 days.
Within 30 days following receipt by Borrower of proceeds of disposition
in an amount equal to or greater than $500,000, Borrower may submit to
Agent a written statement detailing Borrower's plans to pay costs
incurred as a result of such disposition and to reinvest the balance of
such proceeds in productive assets to be used in its business. If Agent
receives such a statement within such period, Agent shall permit
Borrower to reborrow such proceeds in accordance with the terms of this
Agreement to execute such reinvestment plan for a period of 180 days
following receipt by Borrower of such proceeds. If no such plan is
submitted within said 30 days, all of such proceeds or, if such a plan
is so submitted, all of such proceeds remaining after said 180 days,
shall be applied to permanently reduce the amount set forth in
clause (3) of the definition of Borrowing Base set forth herein;
PROVIDED, that to the extent such proceeds are not reinvested and result
from sales of Equipment at market value, such reduction of the amount set
forth in clause (3) of the definition of Borrowing Base shall be equal
to the amount by which such proceeds exceed $2,000,000 in any fiscal
year of Borrower or $5,000,000 in the aggregate during the Term.

6.5. PAYMENT OF CHARGES.

All amounts chargeable to Borrower under Section 6 hereof shall be
Obligations secured by all of the Collateral, shall be payable on demand and
shall bear interest from the date such advance was made until paid in full at
the rate applicable to Base Rate Revolving Credit Portions from time to time.

SECTION 7. REPRESENTATIONS AND WARRANTIES

7.1. GENERAL REPRESENTATIONS AND WARRANTIES.

To induce Agent and each Lender to enter into this Agreement and to make
advances hereunder, Borrower warrants, represents and covenants to Agent and
each Lender that:

7.1.1. ORGANIZATION AND QUALIFICATION. Borrower and each of
its Subsidiaries, as applicable, is a corporation or limited partnership
duly organized, validly existing and in good standing under the laws of
the jurisdiction of its

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incorporation or formation. Borrower and each of its Subsidiaries is
duly qualified and is authorized to do business and is in good standing
as a foreign corporation or limited partnership, as applicable, in each
state or jurisdiction listed on EXHIBIT 7.1.1 hereto and in all other
states and jurisdictions where the character of its Properties or the
nature of its activities make such qualification necessary, except when
the failure to so qualify would not have a Material Adverse Effect.

7.1.2. POWER AND AUTHORITY. Borrower and each of its
Subsidiaries is duly authorized and empowered to enter into, execute,
deliver and perform this Agreement and each of the other Loan Documents
to which it is a party. The execution, delivery and performance of this
Agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and limited partnership action, as applicable,
and do not and will not (i) require any consent or approval of the
general or limited partners or the shareholders of Borrower or any of
Borrower's Subsidiaries; (ii) contravene Lone Star's agreement of limited
partnership or Borrower's or any of its other Subsidiary's charter,
articles or certificate of incorporation or by-laws; (iii) violate, or
cause Borrower or any of its Subsidiaries to be in default under, any
provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award in effect having applicability
to Borrower or any such Subsidiary; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which Borrower or any of its
Subsidiaries is a party or by which it or its Properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any
Lien (other than Permitted Liens) upon or with respect to any of the
Properties now owned or hereafter acquired by Borrower or any of its
Subsidiaries.

7.1.3. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and
each of the other Loan Documents when delivered under this Agreement will
be, a legal, valid and binding obligation of Borrower and each of its
Subsidiaries party thereto, enforceable against it in accordance with its
respective terms, except as may be limited by applicable bankruptcy,
reorganization, insolvency or similar laws affecting the enforcement of
creditor's rights generally.

7.1.4. CAPITAL STRUCTURE. EXHIBIT 7.1.4 hereto states, as of
the date hereof, (i) the correct name of each of the Subsidiaries of
Borrower, its jurisdiction of incorporation or formation and the
percentage of its Voting Stock or limited partnership interests, as
applicable, owned by Borrower, (ii) the names of Borrower's corporate or
joint venture Affiliates and the nature of the affiliation, (iii) the
number, nature and holder of all outstanding Securities of Borrower and
each Subsidiary of Borrower and (iv) the number of partnership interests
of Lone Star and the number of authorized, issued and treasury shares of
Borrower and each other Subsidiary of Borrower. Borrower has good title
to all of the shares and limited partnership interests it purports to own
of the stock and limited partnership interests of each of its
Subsidiaries, free and clear in each case of any Lien other than
Permitted Liens. All

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such shares and limited partnership interests have been duly issued and
are fully paid and non-assessable. Except as set forth on EXHIBIT 7.1.4,
and except for options issued to purchase capital stock of Borrower to
non-management employees, directors and consultants of Borrower or its
Subsidiaries, there are no outstanding options to purchase, or any rights
or warrants to subscribe for, or any commitments or agreements to issue
or sell, or any Securities or obligations convertible into, or any powers
of attorney relating to, partnership interests or shares of the capital
stock of Borrower or any of its Subsidiaries. Except as set forth on
EXHIBIT 7.1.4, and except for options issued to non-management employees
of Borrower or its Subsidiaries, there are no outstanding agreements or
instruments binding upon any of Borrower's shareholders relating to the
ownership of its shares of capital stock. Lone Star GP is the sole
general partner of Lone Star.

7.1.5. CORPORATE NAMES. Neither Borrower nor any of its
Subsidiaries has been known as or used any corporate, fictitious or trade
names except those listed on EXHIBIT 7.1.5 hereto and except for those
used by Borrower or any Subsidiary in the future after giving Agent 30
days advance written notice. Except as set forth on EXHIBIT 7.1.5,
neither Borrower and nor any of its Subsidiaries has been the survivor of
a merger or consolidation or has acquired all or substantially all of the
assets of any Person.

7.1.6. BUSINESS LOCATIONS; AGENT FOR PROCESS. Borrower's and
each of its Subsidiaries' chief executive office and other places of
business are as listed on EXHIBIT 6.1.1 hereto. During the preceding
one-year period of the date hereof, neither Borrower nor any of its
Subsidiaries has had an office, place of business or agent for service of
process other than as listed on EXHIBIT 6.1.1. Except as shown on
EXHIBIT 6.1.1, no Inventory is stored with a bailee, warehouseman or
similar party, nor is any Inventory consigned to any Person.

7.1.7. TITLE TO PROPERTIES; PRIORITY OF LIENS. Borrower and
each of its Subsidiaries has good, indefeasible and marketable title to
and fee simple ownership of, or valid and subsisting leasehold interests
in, all of its real Property, and good title to all of the Collateral and
all of its other Property, in each case, free and clear of all Liens
except Permitted Liens. Borrower or one of its Subsidiaries has paid or
discharged all lawful claims which, if unpaid, might become a Lien
against any of Borrower's or such Subsidiary's Properties that is not a
Permitted Lien. The Liens granted to Agent under Section 5 hereof are
first priority Liens, subject only to Permitted Liens.

7.1.8. ACCOUNTS. Agent may rely, in determining which
Accounts are Eligible Accounts, on all statements and representations
made by any Company with respect to any Account or Accounts. Unless
otherwise indicated in writing to Agent, with respect to each Eligible
Account:

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(i) It is genuine and in all respects what it
purports to be, and it is not evidenced by a judgment;

(ii) It arises out of a completed, BONA FIDE sale
and delivery of goods or rendition of services by a Company in the
ordinary course of its business and in accordance with the terms
and conditions of all purchase orders, contracts or other
documents relating thereto and forming a part of the contract
between such Company and the Account Debtor and the Account Debtor
is not an Affiliate of such Company;

(iii) It is for a liquidated amount maturing as
stated in the duplicate invoice covering such sale or rendition of
services, a copy of which has been furnished or is available to
Agent;

(iv) Such Account, and Agent's Lien therein, is
not, and will not (by voluntary act or omission of any Company) be
in the future, subject to any offset, Lien, deduction, defense,
dispute, counterclaim or any other adverse condition except as
disclosed in the most recent schedule of Accounts delivered by
Borrower to Agent and except for disputes resulting in returned
goods where the amount in controversy is deemed by Agent to be
immaterial, and each such Account is absolutely owing to a Company
and is not contingent in any respect or for any reason;

(v) Except pursuant to the Conditional Sales
Program, no company has made any agreement with any Account Debtor
thereunder for any extension, compromise, settlement or
modification of any such Account or any deduction therefrom,
except discounts or allowances which are granted by such Company
in the ordinary course of its business for prompt payment and
which are reflected in the calculation of the net amount of each
respective invoice related thereto and are reflected in the
Schedules of Accounts submitted to Agent pursuant to subsection
6.2.1 hereof;

(vi) There are no facts, events or occurrences
which in any way impair the validity or enforceability of any
Accounts or tend to reduce the amount payable thereunder from the
face amount of the invoice and statements delivered to Agent with
respect thereto;

(vii) To the best of Borrower's knowledge, the
Account Debtor thereunder (1) had the capacity to contract at the
time any contract or other document giving rise to the Account was
executed and (2) such Account Debtor is Solvent; and

(viii) To the best of Borrower's knowledge, there
are no proceedings or actions which are threatened or pending
against any Account Debtor

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thereunder which might result in any material adverse change in
such Account Debtor's financial condition or the collectibility
of such Account.

7.1.9. EQUIPMENT. The Equipment taken as a whole is in good
operating condition and repair, and all necessary replacements of and
repairs thereto shall be made so that the value and operating efficiency
of the Equipment shall be maintained and preserved, reasonable wear and
tear excepted. Borrower shall not, and shall cause each of its
Subsidiaries not to, permit any of the Equipment to become affixed to any
real Property leased to Borrower or such Subsidiary so that an interest
arises therein under the real estate laws of the applicable jurisdiction
unless the landlord of such real Property has executed a landlord waiver
or leasehold mortgage in favor of and in form acceptable to Agent, and
Borrower shall not, and shall cause each of its Subsidiaries not to,
permit any of the Equipment to become an accession to any personal
Property other than Equipment that is subject to first priority (except
for Permitted Liens) Liens in favor of Agent.

7.1.10. FINANCIAL STATEMENTS; FISCAL YEAR. The Consolidated
and consolidating balance sheets of Borrower and such other Persons
described therein (including the accounts of all Subsidiaries of Borrower
and their respective Subsidiaries for the respective periods during which
a Subsidiary relationship existed) as of June 30, 1998, and the related
statements of income, changes in stockholder's equity, and changes in
financial position for the periods ended on such dates, have been
prepared in accordance with GAAP, and present fairly the financial
positions of Borrower and such Persons at such dates and the results of
Borrower's and such Persons' operations for such periods. Since June 30,
1998, there has been no material change in the condition, financial or
otherwise, of Borrower or such other Persons as shown on the Consolidated
balance sheet as of such date and no change in the aggregate value of
Equipment and real Property owned by Borrower or such other Persons,
except changes in the ordinary course of business, none of which
individually or in the aggregate has been materially adverse. The fiscal
year of Borrower and each of its Subsidiaries ends on June 30 of each
year.

7.1.11. FULL DISCLOSURE. The financial statements referred to
in subsection 7.1.10 hereof do not, nor does this Agreement or any other
written statement of Borrower or any of its Subsidiaries to Agent or any
Lender, contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or
herein not misleading, except in cases where corrections are made to the
financial statements with the consent of Agent. There is no fact which
Borrower or any of its Subsidiaries has failed to disclose to Agent in
writing which materially affects adversely or, so far as Borrower can now
reasonably foresee, will materially affect adversely the Properties,
business, prospects or condition (financial or otherwise) of Borrower or
any of its Subsidiaries or the ability of Borrower or any of its
Subsidiaries to perform this Agreement or the other Loan Documents.

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<PAGE>

7.1.12. SOLVENT FINANCIAL CONDITION. Borrower and each of its
Subsidiaries is now and, after giving effect to the Loans to be made
hereunder, at all times will be, Solvent.

7.1.13. SURETY OBLIGATIONS. Neither Borrower nor any of its
Subsidiaries is obligated as surety or indemnitor under any surety or
similar bond or other contract issued or entered into to assure payment,
performance or completion of performance of any undertaking or obligation
of any Person.

7.1.14. TAXES. The federal tax identification number of
Borrower and each of its Subsidiaries is shown on EXHIBIT 7.1.14 hereto.
Borrower and each of its Subsidiaries has filed all federal, state and
local tax returns and other reports it is required by law to file and has
paid, or made provision for the payment of, all taxes, assessments, fees,
levies and other governmental charges upon it, its income and Properties
as and when such taxes, assessments, fees, levies and charges are due and
payable, unless and to the extent any thereof are being actively
contested in good faith and by appropriate proceedings and Borrower or
such Subsidiary maintains reasonable reserves on its books therefor. The
provision for taxes on the books of Borrower and each of its Subsidiaries
is adequate for all years not closed by applicable statutes, and for the
current fiscal year.

7.1.15. BROKERS. There are no claims for brokerage
commissions, finder's fees or investment banking fees in connection with
the transactions contemplated by this Agreement.

7.1.16. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES.
Borrower and each of its Subsidiaries owns or possesses all the patents,
trademarks, service marks, trade names, copyrights and licenses necessary
for the present and planned future conduct of its business without any
known conflict with the rights of others. All such patents, trademarks,
service marks, trade names, copyrights, licenses and other similar rights
are listed on EXHIBIT 7.1.16 hereto.

7.1.17. GOVERNMENTAL CONSENTS. Borrower and each of its
Subsidiaries has, and is in good standing with respect to, all
governmental consents, approvals, licenses, authorizations, permits,
certificates, inspections and franchises necessary to continue to conduct
its business as heretofore or proposed to be conducted by it and to own
or lease and operate its Properties as now owned or leased by it, except
in cases where the failure to have any such items does not cause a
Material Adverse Effect.

7.1.18. COMPLIANCE WITH LAWS. Borrower and each of its
Subsidiaries has duly complied with, and its Properties, business
operations and leaseholds are in compliance in all material respects
with, the provisions of all federal, state and local laws, rules and
regulations applicable to Borrower or such Subsidiary, as applicable, its
Properties or the conduct of its business and there have been no
citations, notices

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<PAGE>

or orders of noncompliance issued to Borrower or any of its
Subsidiaries under any such law, rule or regulation which could
reasonably be expected to have a Material Adverse Effect. Borrower
and each of its Subsidiaries has established and maintains an adequate
monitoring system to insure that it remains in compliance with all
federal, state and local laws, rules and regulations applicable to it.
No Inventory has been produced in violation of the Fair Labor
Standards Act (29 U.S.C. Section 201 ET SEQ.), as amended.

7.1.19. RESTRICTIONS. Neither Borrower nor any of its
Subsidiaries is a party or subject to any contract, agreement, or charter
or other corporate or limited partnership restriction, which materially
and adversely affects the use or ownership of any of its Properties.
Neither Borrower nor any of its Subsidiaries is a party or subject to any
contract or agreement which restricts its right or ability to incur
Indebtedness, other than as set forth on EXHIBIT 7.1.19 hereto, none of
which prohibit the execution of or compliance with this Agreement or the
other Loan Documents by Borrower or any of its Subsidiaries, as
applicable.

7.1.20. LITIGATION. Except as set forth on EXHIBIT 7.1.20
hereto, there are no actions, suits, proceedings or investigations
pending, or to the knowledge of Borrower, threatened, against or
affecting Borrower or any of its Subsidiaries, or the business,
operations, Properties, prospects, profits or condition of Borrower or
any of its Subsidiaries which could reasonably be expected to cause a
Material Adverse Effect. Neither Borrower nor any of its Subsidiaries is
in default with respect to any order, writ, injunction, judgment, decree
or rule of any court, governmental authority or arbitration board or
tribunal.

7.1.21. NO DEFAULTS. No event has occurred and no condition
exists which would, upon or after the execution and delivery of this
Agreement or Borrower's performance hereunder, constitute a Default or an
Event of Default. Neither Borrower nor any of its Subsidiaries is in
default in (and no event has occurred and no condition exists which
constitutes, or which with the passage of time or the giving of notice or
both would constitute, a default in) the payment of any Indebtedness to
any Person for Money Borrowed which is not being repaid on the Closing
Date.

7.1.22. LEASES. EXHIBIT 7.1.22 hereto is a complete listing
of all capitalized leases and operating leases of Borrower and its
Subsidiaries. Borrower and each of its Subsidiaries is in material
compliance with all of the terms of each of its respective capitalized
and operating leases.

7.1.23. PENSION PLANS. Except as disclosed on EXHIBIT 7.1.23
hereto, neither Borrower nor any of its Subsidiaries has any Plan.
Borrower and each of its Subsidiaries is in material compliance with the
requirements of ERISA and the regulations promulgated thereunder with
respect to each Plan. No fact or situation that could reasonably be
expected to result in a Material Adverse Effect exists in

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<PAGE>

connection with any Plan. Neither Borrower nor any of its
Subsidiaries has any withdrawal liability in connection with a
Multiemployer Plan.

7.1.24. TRADE RELATIONS. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change
in, the business relationship between Borrower or any of its Subsidiaries
and any customer or any group of customers whose purchases individually
or in the aggregate are material to the business of Borrower or any of
its Subsidiaries, or with any material supplier, and there exists no
present condition or state of facts or circumstances which would
materially affect adversely Borrower or any of its Subsidiaries or
prevent Borrower or any of its Subsidiaries from conducting such business
after the consummation of the transaction contemplated by this Agreement
in substantially the same manner in which it has heretofore been
conducted.

7.1.25. LABOR RELATIONS. Except as described on EXHIBIT
7.1.25 hereto, neither Borrower nor any of its Subsidiaries is a party to
any collective bargaining agreement. There are no material grievances,
disputes or controversies with any union or any other organization of
Borrower's or any of its Subsidiaries' employees, or threats of strikes,
work stoppages or any asserted pending demands for collective bargaining
by any union or organization.

7.1.26. YEAR 2000. Borrower has reviewed its operations and
those of its Subsidiaries with a view to assessing whether its
businesses, or the businesses of any of its Subsidiaries, will have a
Year 2000 Problem. Borrower represents and warrants that it has a
reasonable basis to believe that no Year 2000 Problem will cause a
material adverse effect on the business of Borrower or any of its
Subsidiaries.

7.1.27. DESIGNATED SENIOR DEBT. Other than the Obligations,
there exists no other Designated Senior Debt (as defined in the
Indenture).

7.2. CONTINUOUS NATURE OF REPRESENTATIONS AND WARRANTIES.

Each representation and warranty contained in this Agreement and the
other Loan Documents shall be continuous in nature and shall remain accurate,
complete and not misleading at all times during the term of this Agreement,
except for changes in the nature of Borrower's or any of its Subsidiaries'
business or operations that would render the information in any exhibit attached
hereto either inaccurate, incomplete or misleading, so long as Agent has
consented to such changes or such changes are expressly permitted by this
Agreement. Schedules to this Agreement may be updated by Borrower to reflect
any such changes.

7.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

All representations and warranties of Borrower contained in this
Agreement or any of the other Loan Documents shall survive the execution,
delivery and acceptance thereof by

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<PAGE>

Lenders and the parties thereto and the closing of the transactions described
therein or related thereto.

SECTION 8. COVENANTS AND CONTINUING AGREEMENTS

8.1. AFFIRMATIVE COVENANTS.

During the term of this Agreement, and thereafter for so long as there
are any Obligations outstanding (other than contingent indemnification
obligations under Section 12.2 or under the indemnification provisions of the
Security Documents), Borrower covenants that, unless otherwise consented to by
Majority Lenders in writing, it shall:

8.1.1. VISITS AND INSPECTIONS. Permit representatives of
Agent, or any Lender accompanying Agent, from time to time, as often as
may be reasonably requested, but only during normal business hours, to
visit and inspect the Properties of Borrower and each of its
Subsidiaries, inspect, audit and make extracts from their respective
books and records, and discuss with their respective officers, employees
and independent accountants, Borrower's and each of its Subsidiaries'
business, assets, liabilities, financial condition, business prospects
and results of operations.

8.1.2. NOTICES. Promptly notify Agent in writing of the
occurrence of any event or the existence of any fact which renders any
representation or warranty in this Agreement or any of the other Loan
Documents inaccurate, incomplete or misleading.

8.1.3. FINANCIAL STATEMENTS. Keep, and cause its
Subsidiaries to keep, adequate records and books of account with respect
to its business activities in which proper entries are made in accordance
with GAAP reflecting all its financial transactions; and cause to be
prepared and furnished to Agent and each Lender the following (all to be
prepared in accordance with GAAP applied on a consistent basis, unless
Borrower's certified public accountants concur in any change therein and
such change is disclosed to Agent and is consistent with GAAP):

(i) not later than 90 days after the close of
each fiscal year of Borrower, unqualified (except for a
qualification for a change in accounting principles with which the
accountant concurs) audited financial statements of Borrower and
each of its Subsidiaries as of the end of such year, on a
Consolidated and consolidating basis, certified by a firm of
independent certified public accountants of recognized standing
selected by Borrower acceptable to Agent;

(ii) not later than 30 days after the end of each
month hereafter, including the last month of Borrower's fiscal
year, unaudited interim financial statements (which shall consist
of an income statement, statement of cash flows and a balance
sheet) of Borrower and each of its Subsidiaries as of the end of
such month and of the portion of Borrower's fiscal year then
elapsed, on

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<PAGE>

a Consolidated and consolidating basis, certified by the
principal financial officer of Borrower as prepared in
accordance with GAAP and fairly presenting the Consolidated
financial position and results of operations of Borrower and
each of its Subsidiaries for such month and period subject only
to changes from audit and year-end adjustments and except that
such statements need not contain notes;

(iii) promptly after the sending or filing thereof,
as the case may be, copies of any proxy statements, financial
statements or reports which Borrower has made available to its
shareholders in their capacity as shareholders and copies of any
regular, periodic and special reports or registration statements
which Borrower files with the Securities and Exchange Commission
or any governmental authority which may be substituted therefor,
or any national securities exchange;

(iv) promptly after the filing thereof, copies of
any annual report to be filed with ERISA in connection with each
Plan; and

(v) such other data and information (financial
and otherwise) as Agent, from time to time, may reasonably
request, bearing upon or related to the Collateral or Borrower's
or any of its Subsidiaries' financial condition or results of
operations.

Concurrently with the delivery of the financial statements described in
clause (i) of this subsection 8.1.3, Borrower shall forward to Agent and each
Lender a copy of the accountants' letter to Borrower's management that is
prepared in connection with such financial statements and also shall cause to be
prepared and shall furnish to Agent and each Lender a certificate of the
aforesaid certified public accountants certifying to Agent and Lenders that,
based upon their examination of the financial statements of Borrower and its
Subsidiaries performed in connection with their examination of said financial
statements, they are not aware of any Default or Event of Default, or, if they
are aware of such Default or Event of Default, specifying the nature thereof,
and acknowledging, in a manner satisfactory to Agent, that they are aware that
Agent and each Lender is relying on such financial statements in making its
decisions with respect to the Loans. Concurrently with the delivery of the
financial statements described in clauses (i) and (ii) of this subsection 8.1.3,
or more frequently if requested by Agent, Borrower shall cause to be prepared
and furnished to Agent a Compliance Certificate in the form of EXHIBIT 8.1.3
hereto executed by the Chief Financial Officer of Borrower.

8.1.4. LANDLORD AND STORAGE AGREEMENTS. Provide Agent with
copies of all agreements between Borrower or any of its Subsidiaries and
any landlord or warehouseman which owns any premises at which any
Inventory may, from time to time, be kept.

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<PAGE>

8.1.5. GUARANTOR FINANCIAL STATEMENTS. Deliver or cause to
be delivered to Agent financial statements for each Guarantor (to the
extent not delivered pursuant to subsection 8.1.3 hereof) in form and
substance satisfactory to Agent at such intervals and covering such time
periods as Agent may request.

8.1.6. PROJECTIONS. No later than the end of each fiscal
year of Borrower, deliver to Agent Projections of Borrower and its
Subsidiaries for the forthcoming fiscal year, month by month.

8.1.7. YEAR 2000 ISSUES. Take all actions reasonably
necessary and commit adequate resources to assure that its computer-based
and other systems (and those of all Subsidiaries of Borrower) are able to
effectively process data, including dates before, on and after January 1,
2000, without experiencing any Year 2000 Problem that is reasonably
likely to cause a material adverse effect on the business of Borrower or
any of its Subsidiaries. Borrower will provide Agent with assurances and
substantiations (including, but not limited to, the results of internal
or external audit reports prepared in the ordinary course of business)
reasonably acceptable to Agent as to the capability of Borrower and any
of its Subsidiaries to conduct its and their businesses and operations
before, on and after January 1, 2000 without experiencing a Year 2000
Problem causing a material adverse effect of the business of Borrower or
any of its Subsidiaries.

8.2. NEGATIVE COVENANTS.

During the term of this Agreement, and thereafter for so long as there
are any Obligations outstanding (other than contingent indemnification
obligations under Section 12.2 or under the indemnification provisions of the
Security Documents), Borrower covenants that, unless Majority Lenders have first
consented thereto in writing, it will not:

8.2.1. MERGERS; CONSOLIDATIONS; ACQUISITIONS. Merge or
consolidate, or permit any Subsidiary of Borrower to merge or
consolidate, with any Person; or acquire, or permit any of its
Subsidiaries to acquire, all or any substantial part of the Properties of
any Person; PROVIDED, that any Subsidiary of Borrower may merge with and
into any other Subsidiary of Borrower.

8.2.2. LOANS. Make, or permit any Subsidiary of Borrower to
make, any loans or other advances of money (other than for salary, travel
advances, advances against commissions and other similar advances in the
ordinary course of business and advance payments made for Christmas tree
purchases in the ordinary course of business) to any Person, other than
Subsidiary Loans.

8.2.3. TOTAL INDEBTEDNESS FOR MONEY BORROWED. Create, incur,
assume, or suffer to exist, or permit any Subsidiary of Borrower to
create, incur or suffer to exist, any Indebtedness for Money Borrowed,
except:

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(i) Obligations owing to Agent and Lenders under
this Agreement;

(ii) other Indebtedness for Money Borrowed
existing on the Closing Date as set forth on EXHIBIT 8.2.3 hereto;

(iii) indebtedness of any Subsidiary of Borrower
resulting from a Subsidiary Loan;

(iv) Permitted Purchase Money Indebtedness;

(v) obligations incurred in connection with
interest rate protection arrangements; and

(vi) unsecured indebtedness for Money Borrowed not
included in paragraphs (i) through (vi) above which does not
exceed at any time, in the aggregate, the sum of $1,000,000.

8.2.4. AFFILIATE TRANSACTIONS. Enter into, or be a party to,
or permit any Subsidiary of Borrower to enter into or be a party to, any
transaction with any Affiliate of Borrower, except (i) in the ordinary
course of and pursuant to the reasonable requirements of Borrower's or
such Subsidiary's business and upon fair and reasonable terms which are
fully disclosed to Agent and are no less favorable to Borrower than would
obtain in a comparable arm's length transaction with a Person not an
Affiliate of Borrower or such Subsidiary and (ii) usual and customary
employment agreements and indemnification arrangements contained in a
Borrower's or a Subsidiary's formation documents as in effect on the date
hereof.

8.2.5. LIMITATION ON LIENS. Create or suffer to exist, or
permit any Subsidiary of Borrower to create or suffer to exist, any Lien
upon any of its Property, income or profits, whether now owned or
hereafter acquired, except:

(i) Liens at any time granted in favor of Agent,
for the benefit of itself and each Lender;

(ii) Liens for taxes (excluding any Lien imposed
pursuant to any of the provisions of ERISA) not yet due, or being
contested in the manner described in subsection 7.1.14 hereto, but
only if in Agent's reasonable judgment such Lien does not
adversely affect Agent's or Lenders' rights or the priority of
Agent's Lien in the Collateral;

(iii) Liens arising in the ordinary course of
Borrower's or any Subsidiary's business by operation of law or
regulation, but only if payment in respect of any such Lien is not
at the time required and such Liens do not, in the aggregate,
materially detract from the value of the Property of Borrower or

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<PAGE>

such Subsidiary or materially impair the use thereof in the
operation of Borrower's or such Subsidiary's business;

(iv) Purchase Money Liens securing Permitted
Purchase Money Indebtedness;

(v) such other Liens as appear on EXHIBIT 8.2.5
hereto;

(vi) so long as no Event of Default has occurred
and is continuing, attachment, judgment and other similar non-tax
Liens arising in connection with court proceedings, but only if
and for so long as the execution or other enforcement of such
Liens is and continues to be effectively stayed and bonded on
appeal, the validity and amount of the claims secured thereby are
being actively contested in good faith and by appropriate lawful
proceedings and such Liens do not, in the aggregate, materially
detract from the value of the Property of Borrower or its
Subsidiaries or materially impair the use thereof in the operation
of Borrower's or any of its Subsidiary's businesses;

(vii) reservations, exceptions, easements, rights
of way and other similar encumbrances affecting real Property,
provided, that, in Agent's sole judgment, they do not in the
aggregate materially detract from the value of said Properties or
materially interfere with their use in the ordinary conduct of
Borrower's or any of its Subsidiary's businesses, and, if said
real Property constitutes Collateral, Agent has consented thereto;
and

(viii) such other Liens as Agent may hereafter
approve in writing.

8.2.6. SUBORDINATED DEBT. Make, or permit any Subsidiary of
Borrower to make, any payment of any part or all of any Subordinated Debt
or take any other action or omit to take any other action in respect of
any Subordinated Debt, except in accordance with the subordination
agreement relative thereto.

8.2.7. DISTRIBUTIONS. Declare or make, or permit any
Subsidiary of Borrower to declare or make, any Distributions (other than
Distributions made when no Default or Event of Default exists to Borrower
by a Subsidiary) except for redemptions of stock or options issued to
employees whose employment has been terminated, provided that (i) such
redemptions shall not exceed $2,000,000 in the aggregate during the Term,
and (ii) Availability equals or exceeds $3,000,000 after giving effect to
any such redemptions.

8.2.8. CAPITAL EXPENDITURES. Make Capital Expenditures
(including, without limitation, by way of capitalized leases), excluding
any reinvestments in Equipment as described in subsection 6.4.2 and any
casualty insurance proceeds received by Borrower or any of its
Subsidiaries which are spent to replace Collateral which is lost or
destroyed, which, in the aggregate, as to Borrower and all of its
Subsidiaries,

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<PAGE>

exceed $3,000,000 for the period beginning on the Closing Date and
ending June 30, 1999 and $5,000,000 during any fiscal year of Borrower
thereafter, except that any unused portion of the Capital Expenditure
allowance for any fiscal year may be carried over to the immediately
succeeding fiscal year to be used in such succeeding fiscal year after
all of the Capital Expenditure allowance for that year has been used.

8.2.9. DISPOSITION OF ASSETS. Sell, lease or otherwise
dispose of any of, or permit any Subsidiary of Borrower to sell, lease or
otherwise dispose of, any of its Properties, including any disposition of
Property as part of a sale and leaseback transaction, to or in favor of
any Person, except (i) sales of Inventory in the ordinary course of
business for so long as no Event of Default exists hereunder, (ii)
transfers of Property to Borrower by a Subsidiary of Borrower or (iii)
dispositions expressly authorized by this Agreement.

8.2.10. STOCK OF SUBSIDIARIES. Permit any of Borrower's
Subsidiaries to issue any additional shares of its capital stock or any
additional partnership interests, except director's qualifying shares.

8.2.11. BILL-AND-HOLD SALES, ETC. Except pursuant to the
Conditional Sales Program, make a sale to any customer on a
bill-and-hold, guaranteed sale, sale and return, sale on approval or
consignment basis, or any sale on a repurchase or return basis.

8.2.12. RESTRICTED INVESTMENT. Make or have, or permit any
Subsidiary of Borrower to make or have, any Restricted Investment.

8.2.13. TAX CONSOLIDATION. File or consent to the filing of
any consolidated income tax return with any Person other than any
Subsidiary of Borrower.

8.2.14. FISCAL YEAR. Change, or permit any of its
Subsidiaries to change, its fiscal year except, upon reasonable advance
notice to Agent, a change to a calendar year end.

8.3. SPECIFIC FINANCIAL COVENANTS.

SECTION 9. CONDITIONS PRECEDENT

Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Agent or any
Lender under the

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other sections of this Agreement, neither Agent nor any Lender shall be
required to make any Loan, nor shall Agent be required to issue or procure
any Letter of Credit or LC Guaranty, under this Agreement unless and until
each of the following conditions has been and continues to be satisfied or
waived pursuant to Section 11.9 hereof:

9.1. DOCUMENTATION.

Agent shall have received, in form and substance satisfactory to Agent
and its counsel, a duly executed copy of this Agreement and the other Loan
Documents, together with such additional documents, instruments and certificates
as Agent and its counsel shall require in connection therewith from time to
time, all in form and substance satisfactory to Agent and its counsel.

9.2. NO DEFAULT.

No Default or Event of Default shall exist.

9.3. OTHER CONDITIONS.

Each of the conditions precedent set forth in the Loan Documents shall
have been satisfied.

9.4. AVAILABILITY.

Agent shall have determined that immediately after Lenders have made the
initial Loans contemplated hereby, and all closing costs incurred in connection
with the transactions contemplated hereby have been paid or accrued,
Availability shall not be less than $5,000,000.

9.5. NO LITIGATION.

No action, proceeding, investigation, regulation or legislation shall
have been instituted, threatened or proposed before any court, governmental
agency or legislative body to enjoin, restrain or prohibit, or to obtain damages
in respect of, or which is related to or arises out of this Agreement or the
consummation of the transactions contemplated hereby.

SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT

10.1. EVENTS OF DEFAULT.

The occurrence of one or more of the following events shall constitute an
"Event of Default":

10.1.1. PAYMENT OF OBLIGATIONS. Borrower shall fail to pay
any of the Obligations on the due date thereof (whether due at stated
maturity, on demand, upon acceleration or otherwise) and, in the case of
interest payments only, such failure continues for 5 days after the due
date thereof.

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10.1.2. MISREPRESENTATIONS. Any representation, warranty or
other statement made or furnished to Agent or any Lender by or on behalf
of Borrower, any Subsidiary of Borrower or any Guarantor in this
Agreement, any of the other Loan Documents or any instrument, certificate
or financial statement furnished in compliance with or in reference
thereto proves to have been false or misleading in any material respect
when made or furnished or when reaffirmed pursuant to Section 7.2 hereof.

10.1.3. BREACH OF SPECIFIC COVENANTS. Borrower shall fail or
neglect to perform, keep or observe any covenant contained in Sections
5.2, 5.3, 6.1.1, 6.2, 8.1.1, 8.1.3, 8.2 or 8.3 hereof on the date that
Borrower is required to perform, keep or observe such covenant.

10.1.4. BREACH OF OTHER COVENANTS. Borrower shall fail or
neglect to perform, keep or observe any covenant contained in this
Agreement (other than a covenant which is dealt with specifically
elsewhere in Section 10.1 hereof) and the breach of such other covenant
is not cured to Agent's satisfaction within 30 days after the sooner to
occur of Borrower's receipt of notice of such breach from Agent or the
date on which such failure or neglect first becomes known to any
executive officer of Borrower.

10.1.5. DEFAULT UNDER SECURITY DOCUMENTS, OTHER AGREEMENTS OR
PURCHASE DOCUMENT. Any event of default shall occur under, or Borrower
or any of its Subsidiaries shall default in the performance or observance
of any term, covenant, condition or agreement contained in, any of the
Security Documents or the Other Agreements and such default shall
continue beyond any applicable grace period.

10.1.6. OTHER DEFAULTS. There shall occur any default or
event of default on the part of Borrower or any of its Subsidiaries under
any agreement, document or instrument to which Borrower or such
Subsidiary is a party or by which Borrower or such Subsidiary or any of
its Property is bound, creating or relating to any Indebtedness for Money
Borrowed in an amount exceeding, at any time, $500,000 in the aggregate
(other than the Obligations), if the payment or maturity of such
Indebtedness is accelerated in consequence of such event of default or
demand for payment of such Indebtedness is made.

10.1.7. UNINSURED LOSSES. Any material loss, theft, damage or
destruction of any of the Collateral such that the aggregate value of
such Collateral MINUS the amount of such Collateral covered by insurance
exceeds $500,000.

10.1.8. INSOLVENCY AND RELATED PROCEEDINGS. Borrower or any
Guarantor shall cease to be Solvent or shall suffer the appointment of a
receiver, trustee, custodian or similar fiduciary, or shall make an
assignment for the benefit of creditors, or any petition for an order for
relief shall be filed by or against Borrower or

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any Guarantor under the federal bankruptcy laws (if against Borrower
or any Guarantor, the continuation of such proceeding for more than 60
days), or Borrower or any Guarantor shall make any offer of
settlement, extension or composition to their respective unsecured
creditors generally.

10.1.9. BUSINESS DISRUPTION; CONDEMNATION. There shall occur
a cessation of a substantial part of the business of Borrower, any
Subsidiary of Borrower or any Guarantor for a period which significantly
and adversely affects Borrower's, such Subsidiary's or such Guarantor's
capacity to continue its business, on a profitable basis; or Borrower,
any Subsidiary of Borrower or any Guarantor shall suffer the loss or
revocation of any license or permit now held or hereafter acquired by
Borrower, such Subsidiary or such Guarantor which is necessary to the
continued or lawful operation of its business; or Borrower, any
Subsidiary of Borrower or any Guarantor shall be enjoined, restrained or
in any way prevented by court, governmental or administrative order from
conducting all or any material part of its business affairs; or any
material lease or agreement pursuant to which Borrower, such Subsidiary
or any Guarantor leases, uses or occupies any Property shall be canceled
or terminated prior to the expiration of its stated term; or any material
part of the Collateral shall be taken through condemnation or the value
of such Property shall be impaired through condemnation.

10.1.10. CHANGE OF OWNERSHIP. (i) Kohlberg & Company, LLC or
an Affiliate thereof ceases to own and control 100% of the issued and
outstanding general partnership interests of KCSN Acquisition Company,
L.P.; (ii) KCSN Acquisition Company, L.P. ceases to own and control, on a
fully diluted basis, at least 30% of the issued and outstanding stock of
Borrower and to possess the power to elect a majority of the Board of
Directors of Borrower or otherwise direct the management and policies of
Borrower; (iii) Borrower ceases to own and control 100% of the issued and
outstanding shares of each of CSCT , Lone Star GP and LSGR Holdings, Inc.
and (iv) (a) Loan Star GP ceases to be the sole general partner of Lone
Star or (b) LSGR Holdings, Inc. ceases to be the sole limited partner of
Lone Star.

10.1.11. ERISA. A Reportable Event shall occur which Agent, in
its sole discretion, shall determine in good faith constitutes grounds
for the termination by the Pension Benefit Guaranty Corporation of any
Plan or for the appointment by the appropriate United States district
court of a trustee for any Plan, or if any Plan shall be terminated or
any such trustee shall be requested or appointed, or if Borrower, any
Subsidiary of Borrower or any Guarantor is in "default" (as defined in
Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer
Plan resulting from Borrower's, such Subsidiary's or such Guarantor's
complete or partial withdrawal from such Plan.

10.1.12. CHALLENGE TO AGREEMENT. Borrower, any Subsidiary of
Borrower or any Guarantor, or any Affiliate of any of them, shall
challenge or contest in any

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action, suit or proceeding the validity or enforceability of this
Agreement or any of the other Loan Documents, the legality or
enforceability of any of the Obligations or the perfection or priority
of any Lien granted to Agent, for the benefit of itself and Lenders.

10.1.13. REPUDIATION OF OR DEFAULT UNDER GUARANTY AGREEMENT.
Any Guarantor shall revoke or attempt to revoke the Guaranty Agreement
signed by such Guarantor, or shall repudiate such Guarantor's liability
thereunder or shall be in default under the terms thereof.

10.1.14. JUDGMENTS. Any money judgment, writ of attachment or
similar process (collectively, "Judgments") is issued or rendered against
Borrower or any of its Subsidiaries, or any of their respective Property
(i) in the case of money Judgments, in an amount of $250,000 or more for
any single judgment, attachment or process or $500,000 for all such
judgments, attachments or processes in the aggregate, in each case in
excess of any applicable insurance with respect to which the insurer has
admitted liability and (ii) in the case of non-monetary Judgments, such
Judgment or Judgments (in the aggregate) are reasonably likely to have a
material adverse effect on the business of Borrower or any of its
Subsidiaries, and, in each case, which judgment, attachment or process is
not stayed, released or discharged within 45 days of if being filed
against Borrower, any Subsidiary of Borrower or any Guarantor, or any of
their respective Property.

10.2. ACCELERATION OF THE OBLIGATIONS.

Without in any way limiting the right of Lenders to demand payment of any
portion of the Obligations payable on demand in accordance with Section 3.2
hereof, upon or at any time after the occurrence and during the continuance of
an Event of Default, all or any portion of the Obligations shall, at the option
of Agent and without presentment, demand protest or further notice by Agent or
any Lender, become at once due and payable and Borrower shall forthwith pay to
Agent, for the ratable benefit of Lenders, the full amount of such Obligations,
PROVIDED, that upon the occurrence of an Event of Default specified in
subsection 10.1.9 hereof, all of the Obligations shall become automatically due
and payable without declaration, notice or demand by Agent.

10.3. OTHER REMEDIES.

Upon or at any time after the occurrence and during the continuance of an
Event of Default, Agent shall have and may exercise from time to time the
following rights and remedies:

10.3.1. All of the rights and remedies of a secured party
under the Code or under other applicable law, and all other legal and
equitable rights to which Agent or any Lender may be entitled, all of
which rights and remedies shall be cumulative and

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shall be in addition to any other rights or remedies contained in this
Agreement or any of the other Loan Documents, and none of which shall
be exclusive.

10.3.2. The right to take immediate possession of the
Collateral, and to (i) require Borrower or any Subsidiary of Borrower to
assemble the Collateral, at Borrower's expense, and make it available to
Agent at a place designated by Agent which is reasonably convenient to
both parties, and (ii) enter any premises where any of the Collateral
shall be located and to keep and store the Collateral on said premises
until sold (and if said premises be the Property of Borrower or any
Subsidiary of Borrower, Borrower agrees not to charge, and shall cause
its Subsidiaries not to charge, Agent for storage thereof).

10.3.3. The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice
as may be required by law, in lots or in bulk, for cash or on credit, all
as Agent, in its sole discretion, may deem advisable. Borrower agrees
that 10 days' written notice to Borrower of any public or private sale or
other disposition of Collateral shall be reasonable notice thereof, and
such sale shall be at such locations as Agent may designate in said
notice. Agent shall have the right to conduct such sales on Borrower's
or any of its Subsidiary's premises, without charge therefor, and such
sales may be adjourned from time to time in accordance with applicable
law. Agent shall have the right to sell, lease or otherwise dispose of
the Collateral, or any part thereof, for cash, credit or any combination
thereof, and Agent, on behalf of Lenders, may purchase all or any part of
the Collateral at public or, if permitted by law, private sale and, in
lieu of actual payment of such purchase price, may set off the amount of
such price against the Obligations. The proceeds realized from the sale
of any Collateral may be applied, after allowing 2 Business Days for
collection, first to the costs, expenses and attorneys' fees incurred by
Agent in collecting the Obligations, in enforcing the rights of Lenders
under the Loan Documents and in collecting, retaking, completing,
protecting, removing, storing, advertising for sale, selling and
delivering any Collateral; second to the interest due upon any of the
Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Borrower and each Guarantor shall remain jointly
and severally liable to Lenders therefor.

10.3.4. Agent is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks and advertising
matter, or any Property of a similar nature, as it pertains to the
Collateral, in advertising for sale and selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall
inure to Agent's benefit.

10.3.5. Agent may, at its option, require Borrower to deposit
with Agent funds equal to the LC Amount and, if Borrower fails to
promptly make such deposit,

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Agent may advance such amount as a Revolving Credit Loan (whether or
not an Overadvance is created thereby). Each such Revolving Credit
Loan shall be secured by all of the Collateral and shall bear interest
and be payable at the same rate and in the same manner as Base Rate
Revolving Credit Portions. Any such deposit or advance shall be held
by Agent as a reserve to fund future payments on such LC Guaranties
and future drawings against such Letters of Credit. At such time as
all LC Guaranties have been paid or terminated and all Letters of
Credit have been drawn upon or expired, any amounts remaining in such
reserve shall be applied against any outstanding Obligations, or, if
all Obligations have been indefeasibly paid in full, returned to
Borrower.

10.4. REMEDIES CUMULATIVE; NO WAIVER.

All covenants, conditions, provisions, warranties, guaranties,
indemnities, and other undertakings of Borrower and each of its Subsidiaries
contained in this Agreement and the other Loan Documents, or in any document
referred to herein or contained in any agreement supplementary hereto or in any
schedule or in any Guaranty Agreement given to Agent or contained in any other
agreement between Agent and Borrower or any of its Subsidiaries, heretofore,
concurrently, or hereafter entered into, shall be deemed cumulative to and not
in derogation or substitution of any of the terms, covenants, conditions, or
agreements of Borrower herein contained. The failure or delay of Agent to
require strict performance by Borrower of any provision of this Agreement or to
exercise or enforce any rights, Liens, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents or security or Collateral
shall not operate as a waiver of such performance, Liens, rights, powers and
remedies, but all such requirements, Liens, rights, powers, and remedies shall
continue in full force and effect until all Loans and all other Obligations
owing or to become owing from Borrower to any Lender shall have been fully
satisfied. None of the undertakings, agreements, warranties, covenants and
representations of Borrower or any of its Subsidiaries contained in this
Agreement or any of the other Loan Documents and no Event of Default by Borrower
or any of its Subsidiaries under this Agreement or any other Loan Documents
shall be deemed to have been suspended or waived by Agent, unless such
suspension or waiver is by an instrument in writing specifying such suspension
or waiver and is signed by a duly authorized representative of Agent and
directed to Borrower.

SECTION 11. THE AGENT

11.1. AUTHORIZATION AND ACTION.

Each Lender hereby appoints and authorizes Agent to take such
action on its behalf and to exercise such powers under this Agreement and the
other Loan Documents as are delegated to Agent by the terms hereof and thereof,
together with such powers as are reasonably incidental thereto. Each Lender
hereby acknowledges that Agent shall not have by reason of this Agreement
assumed a fiduciary relationship in respect of any Lender. In performing its
functions and duties under this Agreement, Agent shall act solely as Agent of

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Lenders and shall not assume, or be deemed to have assumed, any obligation
toward, or relationship of agency or trust with or for, Borrower. As to any
matters not expressly provided for by this Agreement and the other Loan
Documents, Agent may, but shall not be required to, exercise any discretion or
take any action, but shall be required to act or to refrain from acting (and
shall be fully protected in so acting or refraining from acting) upon the
instructions of the Majority Lenders, whenever such instruction shall be
requested by Agent or required hereunder, or a greater or lesser number of
Lenders if so required hereunder, and such instructions shall be binding upon
all Lenders; PROVIDED, however, that Agent shall not be required to take any
action which exposes Agent to any liability or which is contrary to this
Agreement, the other Loan Documents or applicable law, unless Agent is
indemnified therefor to its satisfaction (which may, at Agent's option, include
indemnification by each Lender other than Fleet for its pro rata share of all
such liabilities). If Agent seeks the consent or approval of the Majority
Lenders (or a greater or lesser number of Lenders as required in this
Agreement), with respect to any action hereunder, Agent shall send notice
thereof to each Lender and shall notify each Lender at any time that the
Majority Lenders (or such greater or lesser number of Lenders) have instructed
Agent to act or refrain from acting pursuant hereto.

11.2. AGENT'S RELIANCE, ETC.

Neither Agent, any Affiliate of Agent, nor any of their respective
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them under or in connection with this Agreement or
the other Loan Documents, except for its or their own gross negligence or
willful misconduct. Without limitation of the generality of the foregoing,
Agent: (i) may consult with legal counsel, independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants or experts, (ii) makes no warranties or representations to
any Lender and shall not be responsible to any Lender for any recitals,
statements, warranties or representations made in or in connection with this
Agreement or any other Loan Documents; (iii) shall not have any duty beyond
Agent's customary practices in respect of loans in which Agent is the only
lender, to ascertain or to inquire as to the performance or observance of any of
the terms, covenants or conditions of this Agreement or the other Loan Documents
on the part of Borrower, to inspect the property (including the books and
records) of Borrower or any of its Subsidiaries, to monitor the financial
condition of Borrower or any of its Subsidiaries or to ascertain the existence
or possible existence or continuation of any Default or Event of Default; (iv)
shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; (v) shall not be liable to any Lender for any action taken,
or inaction, by Agent upon the instructions of Majority Lenders pursuant to
Section 11.1 hereof or refraining to take any action pending such instructions;
(vi) shall not be liable for any apportionment or distributions of payments made
by it in good faith pursuant to Section 3 hereof; and (vii) shall incur no
liability under or in respect of this Agreement or the other Loan Documents by
acting upon any notice, consent, certificate, message or other instrument or
writing (which may be by telephone, facsimile, telegram, cable or telex)
believed in good faith

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by it to be genuine and signed or sent by the proper party or parties. In
the event any apportionment or distribution described in clause (vi) above is
determined to have been made in error, the sole recourse of any Person to
whom payment was due but not made shall be to recover from the recipients of
such payments any payment in excess of the amount to which they are
determined to have been entitled.

11.3. FLEET AND AFFILIATES.

With respect to its commitment hereunder to make Loans, Fleet
shall have the same rights and powers under this Agreement and the other Loan
Documents as any other Lender and may exercise the same as though it were not
Agent; and the terms "Lender," "Lenders" or "Majority Lenders" shall, unless
otherwise expressly indicated, include Fleet in its individual capacity as a
Lender. Fleet and its Affiliates may lend money to, and generally engage in any
kind of business with, Borrower, and any Person who may do business with or own
Securities of Borrower all as if Fleet were not Agent and without any duty to
account therefor to any other Lender.

11.4. LENDER CREDIT DECISION.

Each Lender acknowledges that it has, independently and without
reliance upon Agent or any other Lender and based on the financial statements
referred to in subsection 7.1.10 hereof and such other documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement. Each Lender also acknowledges that it will, independently
and without reliance upon Agent or any other Lender and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement. Agent
shall not have any duty or responsibility, either initially or on an ongoing
basis, to provide any Lender with any credit or other similar information
regarding Borrower or any of its Subsidiaries.

11.5. INDEMNIFICATION.

Lenders agree to indemnify Agent (to the extent not reimbursed by
Borrower), in accordance with their respective Revolving Loan Percentages, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against
Agent in any way relating to or arising out of this Agreement or any other Loan
Document or any action taken or omitted by Agent under this Agreement; PROVIDED
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from Agent's gross negligence or willful misconduct.
Without limitation of the foregoing, each Lender agrees to reimburse Agent
promptly upon demand for its ratable share, as set forth above, of any
out-of-pocket expenses (including attorneys' fees) incurred by Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiation, legal
proceedings or otherwise) of, or legal advice in respect of rights or

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responsibilities under, this Agreement and each other Loan Document, to the
extent that Agent is not reimbursed for such expenses by Borrower. The
obligations of Lenders under this Section 11.5 shall survive the payment in
full of all Obligations and the termination of this Agreement. In the event
that after payment and distribution of any amount by Agent to Lenders, any
Lender or any other Person, including Borrower, any creditor of Borrower or a
trustee in bankruptcy, recovers from Agent any amount found to have been
wrongfully paid to Agent or disbursed by Agent to Lenders, then Lenders, in
accordance with their respective Revolving Loan Percentages, shall reimburse
Agent for all such amounts.

11.6. AGENCY PROVISIONS RELATING TO COLLATERAL.

Each Lender authorizes and ratifies Agent's entry into this
Agreement and the Security Documents for the benefit of Lenders. Each Lender
agrees that any action taken by Agent with respect to the Collateral in
accordance with the provisions of this Agreement or the Security Documents, and
the exercise by Agent of the powers set forth herein or therein, together with
such other powers as are reasonably incidental thereto, shall be authorized and
binding upon all Lenders. Agent is hereby authorized on behalf of all Lenders,
without the necessity of any notice to or further consent from any Lender, from
time to time prior to an Event of Default, to take any action with respect to
any Collateral or the Loan Documents which may be necessary to perfect and
maintain perfected Agent's Liens upon the Collateral, for its benefit and the
ratable benefit of Lenders. Lenders hereby irrevocably authorize Agent, at its
option and in its discretion, to release any Lien granted to or held by Agent
upon any Collateral (i) upon termination of the Agreement and payment and
satisfaction of all Obligations; or (ii) constituting property being sold or
disposed of if Borrower certifies to Agent that the sale or disposition is made
in compliance with Section 3.3.1 and subsection 8.2.9 hereof (and Agent may rely
conclusively on any such certificate, without further inquiry); or (iii)
constituting property in which Borrower does not own any interest at the time
the Lien was granted or at any time thereafter; or (iv) in connection with any
foreclosure sale or other disposition of Collateral after the occurrence and
during the continuation of an Event of Default or (v) if approved, authorized or
ratified in writing by Agent at the direction of all Lenders. Upon request by
Agent at any time, Lenders will confirm in writing Agent's authority to release
particular types or items of Collateral pursuant hereto. Agent shall have no
obligation whatsoever to any Lender or to any other Person to assure that the
Collateral exists or is owned by Borrower or any of its Subsidiaries or is cared
for, protected or insured or has been encumbered or that the Liens granted to
Agent herein or pursuant to the Security Documents have been properly or
sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any particular
manner or under any duty of care, disclosure or fidelity, or to continue
exercising, any of its rights, authorities and powers granted or available to
Agent in this Section 11.6 or in any of the Loan Documents, it being understood
and agreed that in respect of the Collateral, or any act, omission or event
related thereto, Agent may act in any manner it may deem appropriate, in its
sole discretion, but consistent with the provisions of this Agreement,
including, without limitation, the provisions of Section 6.1.3 hereof, given
Agent's own interest in the Collateral as a Lender and that Agent shall have no
duty or liability whatsoever to any Lender.

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11.7. AGENT'S RIGHT TO PURCHASE COMMITMENTS.

Agent shall have the right, but shall not be obligated, at any
time upon written notice to any Lender and with the consent of such Lender,
which may be granted or withheld in such Lender's sole discretion, to purchase
for Agent's own account all of such Lender's interests in this Agreement, the
other Loan Documents and the Obligations, for the face amount of the outstanding
Obligations owed to such Lender, including, without limitation, all accrued and
unpaid interest and fees.

11.8. RIGHT OF SALE, ASSIGNMENT, PARTICIPATIONS.

Borrower hereby consents to any Lender's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, such Lender's rights, title, interests,
remedies, powers, and duties hereunder or thereunder subject to the terms and
conditions set forth below:

11.8.1. SALES, ASSIGNMENTS. Each Lender hereby agrees that,
with respect to any sale or assignment (i) no such sale or assignment
shall be for an amount of less than the lesser of (a) $5,000,000 and (b)
such Lender's total Revolving Loan Commitment at such time, (ii) each
such sale or assignment shall be made on terms and conditions which are
customary in the industry at the time of the transaction, (iii) Agent
must consent, such consent not to be unreasonably withheld, to each such
assignment to a party which is not an original signatory to this
Agreement, (iv) the assigning Lender shall pay to the Agent a processing
and recordation fee of $3,500 and any out-of-pocket attorneys' fees and
expenses incurred by the Agent in connection with any such sale or
assignment. After such sale or assignment has been consummated (x) the
assignee lender thereupon shall become a "Lender" for all purposes of
this Agreement and (y) the assigning Lender shall have no further
liability for funding the portion of Revolving Loan Commitments assumed
by such other Lender.

11.8.2. PARTICIPATIONS. Any Lender may grant participations
in its extensions of credit hereunder to any other Lender or other
lending institution (a "Participating Lender"), provided that (i) no
Participating Lender shall thereby acquire any direct rights under this
Agreement, (ii) no Participating Lender shall be granted any right to
consent to any amendment, except to the extent any of the same pertain to
(A) reducing the aggregate principal amount of, or interest rate on, or
fees applicable to, any Loan or (B) extending the final stated maturity
of any Loan or the stated maturity of any portion of any payment of
principal of, or interest or fees applicable to, any of the Loans;
provided, however, that the rights described in this subclause (B) shall
not be deemed to include the right to consent to any amendment with
respect to or which has the effect of requiring any mandatory prepayment
of any portion of any Loan or any amendment or waiver of any Default or
Event of Default, (iii) no sale of a participation in extensions of
credit shall in any manner relieve the originating Lender of its
obligations hereunder,

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(iv) the originating Lender shall remain solely responsible for the
performance of such obligations, (v) Borrower and the Agent shall
continue to deal solely and directly with the originating Lender in
connection with the originating Lender's rights and obligations under
this Agreement and the other Loan Documents, (vi) in no event shall
any financial institution purchasing the participation grant a
participation in its participation interest in the Loans without the
prior written consent of Borrower (so long as no Event of Default shall
have occurred and be continuing) and Agent, which consents shall not
unreasonably be withheld and (vii) all amounts payable by Borrower
hereunder shall be determined as if the originating Lender had not sold
any such participation.

11.8.3. CERTAIN AGREEMENTS OF BORROWER. Borrower agrees that
(i) it will assist and cooperate with each Lender in any manner
reasonably requested by such Lender to effect the sale of participation
in or assignments of any of the Loan Documents or any portion thereof or
interest therein, including, without limitation, assisting in the
preparation of appropriate disclosure documents; and (ii) subject to the
provisions of Section 12.14 hereof, such Lender may disclose credit
information regarding Borrower to any potential participant or assignee.

11.8.4. NON U.S. RESIDENT TRANSFEREES. If, pursuant to this
Section 11.8, any interest in this Agreement or any Loans is transferred
to any transferee which is organized under the laws of any jurisdiction
other than the United States or any state thereof, the transferor Lender
shall cause such transferee (other than any participant), and may cause
any participant, concurrently with the effectiveness of such transfer, to
(i) represent to the transferor Lender (for the benefit of the transferor
Lender, the Agent and Borrower) that under applicable law and treaties no
Taxes will be required to be withheld by Agent, Borrower or the
transferor Lender with respect to any payments to be made to such
transferee in respect of the interest so transferred, (ii) furnish to the
transferor Lender, Agent and Borrower either United States Internal
Revenue Service Form 4224 or United States Internal Revenue Service Form
1001 (wherein such transferee claims entitlement to complete exemption
from United States federal withholding tax on all interest payments
hereunder), and (iii) agree (for the benefit of the transferor Lender,
Agent and Borrower) to provide the transferor Lender, Agent and Borrower
a new Form 4224 or Form 1001 upon the obsolescence of any previously
delivered form and comparable statements in accordance with applicable
United States laws and regulations and amendments duly executed and
completed by such transferee, and to comply from time to time with all
applicable United States laws and regulations with regard to such
withholding tax exemption.

11.9. AMENDMENT.

No amendment or waiver of any provision of this Agreement or any
other Loan Document, nor consent to any departure by Borrower therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Majority Lenders and Borrower, and then such waiver or consent shall be
effective only in the specific instance and for the specific

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purpose for which given; PROVIDED, HOWEVER, that no amendment, waiver or
consent shall be effective, unless (i) in writing and signed by each Lender,
do any of the following: (1) increase or decrease the aggregate Revolving
Loan Commitments, or any Lender's Revolving Loan Commitment, (2) reduce the
principal of, or interest on, amounts payable hereunder other than those
payable only to Fleet in its capacity as Agent, which may be reduced by Fleet
unilaterally, (3) increase or decrease any interest rate payable hereunder
except as provided in subsection 2.1.2, (4) postpone any date fixed for any
payment of principal of, or interest on, amounts payable hereunder, other
than those payable only to Fleet in its capacity as Agent, which may be
postponed by Fleet unilaterally, (5) reduce the number of Lenders that shall
be required for Lenders or any of them to take any action hereunder, (6)
release or discharge any Person liable for the performance of any obligations
of Borrower hereunder or under any of the Loan Documents, (7) amend any
provision of this Agreement that requires the consent of all Lenders or
consent to or waive any breach thereof, (8) amend this Section 11.9 or (9)
release any substantial portion of the Collateral, unless otherwise permitted
pursuant to Section 11.6 hereof; or (ii) in writing and signed by Lenders
holding the Revolving Loan Percentages specified therein with respect to any
provision of this Agreement that requires the agreement, consent or approval
of Lenders holding such Revolving Loan Percentages in a different amount than
Majority Lenders; or (iii) in writing and signed by Agent in addition to the
Majority Lenders required above to take such action, if the amendment, waiver
or consent in question affects the rights or duties of Agent under this
Agreement or any Loan Document.

11.10. RESIGNATION OF AGENT; APPOINTMENT OF SUCCESSOR.

The Agent may resign as Agent by giving not less than 30 days'
prior written notice to the Lenders and Borrower. If the Agent shall resign
under this Agreement, then, subject to the consent of the Borrower (which
consent shall not be unreasonably withheld and which consent shall not be
required during any period in which an Event of Default exists) either (i) the
Majority Lenders shall appoint from among the Lenders a successor agent for the
Lenders or (ii) if a successor agent shall not be so appointed and approved
within the 30 day period following the Agent's notice to the Lenders and
Borrower of its resignation, then the Agent shall appoint a successor agent who
shall serve as Agent until such time as the Majority Lenders appoint a successor
agent. Upon its appointment, such successor agent shall succeed to the rights,
powers and duties of the Agent and the term "Agent" shall mean such successor
effective upon its appointment, and the former Agent's rights, powers and duties
as Agent shall be terminated without any other or further act or deed on the
part of such former Agent or any of the parties to this Agreement. After the
resignation of any Agent hereunder, the provisions of this Section 11 shall
inure to the benefit of such former Agent and such former Agent shall not by
reason of such resignation be deemed to be released from liability for any
actions taken or not taken by it while it was an Agent under this Agreement.

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<PAGE>

SECTION 12. MISCELLANEOUS

12.1. POWER OF ATTORNEY.

Borrower hereby irrevocably designates, makes, constitutes and appoints
Agent (and all Persons designated by Agent) as Borrower's true and lawful
attorney (and agent-in-fact) and Agent, or Agent's agent, may, without notice to
Borrower and in Borrower's or Agent's name, but at the cost and expense of
Borrower:

12.1.1. At such time or times upon and during the continuance
of the occurrence of a Default or an Event of Default as Agent or said
agent, in its sole discretion, may determine, endorse Borrower's name on
any checks, notes, acceptances, drafts, money orders or any other
evidence of payment or proceeds of the Collateral which come into the
possession of Agent or under Agent's control.

12.1.2. At such time or times upon and during the continuance
of the occurrence of an Event of Default as Agent or its agent in its
sole discretion may determine: (i) demand payment of the Accounts from
the Account Debtors, enforce payment of the Accounts by legal proceedings
or otherwise, and generally exercise all of Borrower's rights and
remedies with respect to the collection of the Accounts; (ii) settle,
adjust, compromise, discharge or release any of the Accounts or other
Collateral or any legal proceedings brought to collect any of the
Accounts or other Collateral; (iii) sell or assign any of the Accounts
and other Collateral upon such terms, for such amounts and at such time
or times as Agent deems advisable; (iv) take control, in any manner, of
any item of payment or proceeds relating to any Collateral; (v) prepare,
file and sign Borrower's name to a proof of claim in bankruptcy or
similar document against any Account Debtor or to any notice of lien,
assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (vi) receive, open and dispose of all mail
addressed to Borrower and notify postal authorities to change the address
for delivery thereof to such address as Agent may designate; (vii)
endorse the name of Borrower upon any of the items of payment or proceeds
relating to any Collateral and deposit the same to the account of Agent
on account of the Obligations; (viii) endorse the name of Borrower upon
any chattel paper, document, instrument, invoice, freight bill, bill of
lading or similar document or agreement relating to the Accounts,
Inventory and any other Collateral; (ix) use Borrower's stationery and
sign the name of Borrower to verifications of the Accounts and notices
thereof to Account Debtors; (x) use the information recorded on or
contained in any data processing equipment and computer hardware and
software relating to the Accounts, Inventory, Equipment and any other
Collateral; (xi) make and adjust claims under policies of insurance; and
(xii) do all other acts and things necessary, in Agent's determination,
to fulfill Borrower's obligations under this Agreement.

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<PAGE>

The power of attorney granted hereby shall constitute a power
coupled with an interest and shall be irrevocable.

12.2. INDEMNITY.

Borrower hereby agrees to indemnify and hold Agent and each Lender
harmless from and against any liability, loss, damage, suit, action or
proceeding ever suffered or incurred by Agent or such Lender (including
reasonable attorneys fees and legal expenses) as the result of Borrower's
failure to observe, perform or discharge Borrower's duties hereunder. In
addition, Borrower shall defend each Lender against and save it harmless from
all claims of any Person with respect to the Collateral. Without limiting the
generality of the foregoing, these indemnities shall extend to any claims
asserted against Agent or any Lender by any Person under any Environmental Laws
or similar laws by reason of Borrower's or any other Person's failure to comply
with laws applicable to solid or hazardous waste materials or other toxic
substances. Notwithstanding any contrary provision in this Agreement, the
Obligations of Borrower under this Section 12.2 shall survive the payment in
full of the other Obligations and the termination of this Agreement.

12.3. NO SALE OF INTEREST BY BORROWER.

Borrower may not sell, assign or transfer any interest in this Agreement,
any of the other Loan Documents, or any of the Obligations, or any portion
thereof, including, without limitation, Borrower's rights, title, interests,
remedies, powers, and duties hereunder or thereunder.

12.4. SEVERABILITY.

Wherever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.

12.5. SUCCESSORS AND ASSIGNS.

This Agreement, the Other Agreements and the Security Documents shall be
binding upon and inure to the benefit of the successors and assigns of Borrower
and Agent permitted under Section 11.8 hereof.

12.6. CUMULATIVE EFFECT; CONFLICT OF TERMS.

The provisions of the Other Agreements and the Security Documents are
hereby made cumulative with the provisions of this Agreement. Except as
otherwise provided in Section 3.2 hereof and except as otherwise provided in any
of the other Loan Documents by specific reference to the applicable provision of
this Agreement, if any provision contained in this

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<PAGE>

Agreement is in direct conflict with, or inconsistent with, any provision in
any of the other Loan Documents, the provision contained in this Agreement
shall govern and control.

12.7. EXECUTION IN COUNTERPARTS.

This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.

12.8. NOTICE.

Except as otherwise provided herein, all notices, requests and demands to
or upon a party hereto, to be effective, shall be in writing and shall be sent
by personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, 1
Business Day after sent with an overnight courier for next Business Day delivery
or, in the case of facsimile notice, the Business Day when sent, addressed as
follows:

If to Agent: Fleet Capital Corporation
20800 Swenson Drive
Suite 350
Waukesha, Wisconsin 53186
Attention: Loan Administration Manager
Facsimile No.: (414) 798-4882

With a copy to: Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz, Ltd.
55 East Monroe Street
Suite 3700
Chicago, Illinois 60603
Attention: Karen Ruth Bieber
Facsimile No.: (312) 332-2196

If to Borrower: Color Spot Nurseries, Inc.
3478 Buskirk Avenue
Suite 260
Pleasant Hill, California 94523
Attention: Carlos Plaza
Facsimile No.: (925) 935-0799

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<PAGE>

With a copy to: Brownstein, Hyatt, Farber & Strickland, P.C.
410 Seventeenth Street
22nd Floor
Denver, Colorado 80202-4437
Attention: Steven S. Siegel
Facsimile No.: (303) 623-1956

or to such other address as each party may designate for itself by notice given
in accordance with this Section 12.8; PROVIDED, HOWEVER, that any notice,
request or demand to or upon Agent pursuant to subsection 3.1.1 or 4.2.2 hereof
shall not be effective until received by Agent.

12.9. AGENT'S AND LENDERS' CONSENT.

Whenever Agent's or any Lender's consent is required to be obtained under
this Agreement, any of the Other Agreements or any of the Security Documents as
a condition to any action, inaction, condition or event, Agent or any Lender
shall be authorized to give or withhold such consent in its sole and absolute
discretion and to condition its consent upon the giving of additional collateral
security for the Obligations, the payment of money or any other matter.

12.10. CREDIT INQUIRIES.

Borrower hereby authorizes and permits Agent and each Lender to respond
to usual and customary credit inquiries from third parties concerning Borrower
or any of its Subsidiaries.

12.11. TIME OF ESSENCE.

Time is of the essence of this Agreement, the Other Agreements and the
Security Documents.

12.12. ENTIRE AGREEMENT.

This Agreement and the other Loan Documents, together with all other
instruments, agreements and certificates executed by the parties in connection
therewith or with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
inducements, whether express or implied, oral or written.

12.13. INTERPRETATION.

No provision of this Agreement or any of the other Loan Documents shall
be construed against or interpreted to the disadvantage of any party hereto by
any court or other governmental or judicial authority by reason of such party
having or being deemed to have structured or dictated such provision.

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<PAGE>

12.14. CONFIDENTIALITY.

Each Lender shall hold all nonpublic information obtained pursuant to the
requirements of this Agreement in accordance with such Lender's customary
procedures for handling confidential information of this nature and in
accordance with safe and sound banking practices and in any event may make
disclosure reasonably required by a prospective participant or assignee in
connection with the contemplated participation or assignment or as required or
requested by any governmental authority or representative thereof or pursuant to
legal process and shall require any such participant or assignee to agree to
comply with this Section 12.14.

12.15. GOVERNING LAW; CONSENT TO FORUM.

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL
SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN ILLINOIS, THE LAWS OF SUCH
JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF
AGENT'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF AGENT'S OTHER REMEDIES
IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION
ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF ILLINOIS. AS PART OF THE
CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE
DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER, AGENT OR ANY LENDER,
BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURT OF COOK COUNTY,
ILLINOIS, OR, AT AGENT'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND
AGENT OR ANY LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF
OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE AS
PROVIDED IN SECTION 12.8,. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE
TO AFFECT THE RIGHT OF AGENT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY AGENT OF ANY JUDGMENT

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<PAGE>

OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS
AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.

12.16. WAIVERS BY BORROWER.

BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH EACH LENDER HEREBY
ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING
OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE
COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT,
PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT,
EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS,
DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY AGENT
OR ANY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND
CONFIRMS WHATEVER AGENT OR ANY LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR
TO AGENT'S TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR
SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING AGENT TO
EXERCISE ANY OF AGENT'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION,
APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER
ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO EACH
LENDER'S ENTERING INTO THIS AGREEMENT AND THAT EACH LENDER IS RELYING UPON THE
FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND
HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY
BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

12.17. ILLINOIS COLLATERAL PROTECTION ACT.

Unless Borrower provides Agent with evidence of the insurance coverage
required by this Agreement, Agent may purchase insurance at Borrower's expense
to protect Agent's and Lenders' interests in the Collateral. This insurance
may, but need not, protect Borrower's or any of its Subsidiary's interests. The
coverage that Agent purchases may not pay any claim that Borrower or any of its
Subsidiaries may make or any claim that is made against Borrower or any of its
Subsidiaries in connection with the Collateral. Borrower may later cancel any
insurance purchased by Agent, but only after providing Agent with evidence that
Borrower has obtained insurance as required by this Agreement. If Agent
purchases insurance for the Collateral, Borrower will be responsible for the
costs of that insurance, including interest and

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<PAGE>

any other charges that may be imposed in connection with the placement of the
insurance, until the effective date of the cancellation or expiration of the
insurance. The costs of the insurance may be added to the Loans. The cost of
the insurance may be more than the cost of insurance Borrower or any of its
Subsidiaries may be able to obtain on its own.

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<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed in Chicago,
Illinois, on the day and year specified at the beginning of this Agreement.

COLOR SPOT NURSERIES, INC., a Delaware
corporation

By
--------------------------------------
Title: Chief Financial Officer

Accepted in Chicago, Illinois:

FLEET CAPITAL CORPORATION, as Agent

By
--------------------------------------
Title
-----------------------------------

FLEET CAPITAL CORPORATION, as a Lender

By
--------------------------------------
Title
-----------------------------------

Revolving Loan Commitment: $70,000,000

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<PAGE>

APPENDIX A

GENERAL DEFINITIONS

When used in the Loan and Security Agreement dated as of October,
1998, by and among Fleet Capital Corporation, as Agent, the other Lenders and
Color Spot Nurseries, Inc., the following terms shall have the following
meanings (terms defined in the singular to have the same meaning when used in
the plural and vice versa):

ACCOUNT DEBTOR - any Person who is or may become obligated under
or on account of an Account.

ACCOUNTS - all accounts, contract rights, chattel paper,
instruments and documents, whether now owned or hereafter created or
acquired by Borrower or any of its Subsidiaries, or in which Borrower or
any of its Subsidiaries now has or hereafter acquires any interest.

AFFILIATE - a Person (other than a Subsidiary): (i) which
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, a Person; (ii) which
beneficially owns or holds 10% or more of any class of the Voting Stock
of a Person; or (iii) 10% or more of the Voting Stock (or in the case of
a Person which is not a corporation, 10% or more of the equity interest)
of which is beneficially owned or held by a Person or a Subsidiary of a
Person.

AGREEMENT - the Loan and Security Agreement referred to in the
first sentence of this Appendix A, all Exhibits thereto and this
Appendix A.

APPLICABLE MARGIN - the percentages set forth below with respect
to the Base Rate Revolving Credit Portion, the Base Rate Seasonal
Portion, the LIBOR Revolving Credit Portion and the LIBOR Seasonal
Portion:

<TABLE>
LIBOR LIBOR
Base Rate Revolving Base Rate Seasonal
Revolving Credit Credit Seasonal Advance Advance
Margin Margin Margin Margin
<S> <C> <C> <C>
1.00% 3.00% 1.50% 3.50%

</TABLE>

AVAILABILITY - the amount of money which Borrower is entitled to
borrow from time to time as Revolving Credit Loans, such amount being the
difference derived when the sum of the principal amount of Revolving
Credit Loans then outstanding (including any amounts which Agent may have
paid for the account of Borrower or any of its Subsidiaries pursuant to
any of the Loan Documents and which have not been reimbursed by Borrower
or such Subsidiary) PLUS the LC Amount, and the

<PAGE>

amount of any reserves is subtracted from the Borrowing Base. If the
amount outstanding is equal to or greater than the Borrowing Base,
Availability is 0.

BANK - Fleet National Bank.

BASE RATE - the rate of interest announced or quoted by Bank from
time to time as its prime rate for commercial loans, whether or not such
rate is the lowest rate charged by Bank to its most preferred borrowers;
and, if such prime rate for commercial loans is discontinued by Bank as a
standard, a comparable reference rate designated by Bank as a substitute
therefor shall be the Base Rate.

BASE RATE PORTION - a Base Rate Seasonal Portion or a Base Rate
Revolving Credit Portion.

BASE RATE REVOLVING CREDIT PORTION - that portion of the Revolving
Credit Loans (other than Seasonal Advances) that is not subject to a
LIBOR Option.

BASE RATE SEASONAL PORTION - that portion of the Revolving Credit
Loans which constitute Seasonal Advances that is not subject to a LIBOR
Option.

BORROWING BASE - as at any date of determination thereof, an
amount equal to the lesser of:

(i) $70,000,000; or

(ii) an amount equal to:

(1) 80% of the net amount of Eligible Accounts
outstanding at such date;

PLUS

(2) the lesser of i) $40,000,000 or ii) (a) 50%
of the value of Eligible Ordinary Inventory consisting
of raw materials and finished goods at such date, in
each case calculated on the basis of the lower of cost
or market with the cost calculated on an average cost
basis, PLUS the lesser of (b) (1) $1,500,000 or (2) 50%
of the value of Eligible Christmas Tree Inventory
calculated on the basis of the lower of cost or market
with the cost calculated on an average cost basis;

PLUS

(3) $15,000,000 during the period commencing on
each November 1 and ending on the following April 30
during the Term.

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<PAGE>

For purposes hereof, the net amount of Eligible Accounts at any time
shall be the face amount of such Eligible Accounts less any and all
returns, rebates, discounts (which may, at Agent's option, be
calculated on shortest terms), credits, allowances or excise taxes of any
nature at any time issued, owing, claimed by Account Debtors, granted,
outstanding or payable in connection with such Accounts at such time.

BUSINESS DAY - (i) when used with respect to the LIBOR Option,
shall mean a day on which dealings may be effected in deposits of U.S.
Dollars in the London interbank foreign currency deposits market and on
which Agent is conducting and other banks may conduct business in London,
England, in the State of Wisconsin or the State of Illinois and (ii) when
used with respect to any other provision of the Agreement, any day
excluding Saturday, Sunday and any day which is a legal holiday under the
laws of the State of Wisconsin, the State of Illinois or the State of
California or is a day on which banking institutions located in any of
such states are closed.

CAPITAL EXPENDITURES - expenditures made or liabilities incurred
for the acquisition of any fixed assets or improvements, replacements,
substitutions or additions thereto which have a useful life of more than
one year, including the total principal portion of Capitalized Lease
Obligations.

CAPITALIZED LEASE OBLIGATION - any indebtedness represented by
obligations under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP.

CAPPED INVENTORY - Inventory situated at a location that is not a
CSCT location and with respect to which an acceptable mortgage, leasehold
mortgage or landlord's, warehouseman's or processors agreement has not
been delivered to Agent.

CHRISTMAS TREE DIVISION - the business operations of CSCT.

CHRISTMAS TREE INVENTORY - all tree Inventory of CSCT.

CLOSING DATE - the date on which all of the conditions precedent
in Section 9 of the Agreement are satisfied or waived and the initial
Loan is made under the Agreement.

CODE - the Uniform Commercial Code as adopted and in force in the
State of Illinois, as from time to time in effect.

COLLATERAL - all of the Property and interests in Property
described in Section 5 of the Agreement, and all other Property and
interests in Property that now or hereafter secure the payment and
performance of any of the Obligations.

COMPANIES - collectively, Borrower, CSCT and Lone Star.

A-3
<PAGE>

CONDITIONAL SALES PROGRAM - The Companies' rebate program for
certain of its Account Debtors as heretofore conducted in the ordinary
course of business.

CONSOLIDATED - the consolidation in accordance with GAAP of the
accounts or other items as to which such term applies.

CSCT - Color Spot Christmas Trees, Inc., a Delaware corporation
and a wholly-owned Subsidiary of Borrower.

CURRENT ASSETS - at any date means the amount at which all of the
current assets of a Person would be properly classified as current assets
shown on a balance sheet at such date in accordance with GAAP.

DEFAULT - an event or condition the occurrence of which would,
with the lapse of time or the giving of notice, or both, become an Event
of Default.

DEFAULT RATE - as defined in subsection 2.1.2 of the Agreement.

DISTRIBUTION - in respect of any company means and includes: (i)
the payment of any dividends or other distributions on capital stock or
other equity interests of the company (except distributions in such
stock) and (ii) the redemption or acquisition of Securities unless made
substantially contemporaneously from the net proceeds of the sale of
Securities.

DOMINION ACCOUNT - a special account or accounts of Agent
established by Borrower pursuant to the Agreement at banks selected by
Borrower, but acceptable to Agent in its reasonable discretion, and over
which Agent shall have sole and exclusive access and control for
withdrawal purposes.

ELIGIBLE ACCOUNT - an Account arising in the ordinary course of a
Company's business from the sale of goods or rendition of services which
Agent, in its reasonable credit judgment, deems to be an Eligible
Account. Without limiting the generality of the foregoing, no Account
shall be an Eligible Account if:

(i) it arises out of a sale made by a Company to
a Subsidiary or an Affiliate of such Company or to a Person
controlled by an Affiliate of such Company; or

(ii) it is an open Account and remains unpaid more
than 90 days after the original invoice date with respect to
Accounts of the Western Division or the Christmas Tree Division or
more than 60 days from the due date with respect to Accounts of
the Southwestern Division; or

(iii) 25% or more of the Accounts from the Account
Debtor are not deemed Eligible Accounts hereunder; or

A-4
<PAGE>

(iv) except with respect to Account Debtors with a
rating of at least 5(A)(2) by Dun & Bradstreet, the total unpaid
Accounts of the Account Debtor exceed 20% of the net amount of all
Eligible Accounts, to the extent of such excess; or

(v) any covenant, representation or warranty
contained in the Agreement with respect to such Account has been
breached; or

(vi) the Account Debtor is also a Company's
creditor or supplier, or the Account Debtor has disputed liability
with respect to such Account, or the Account Debtor has made any
claim with respect to any other Account due from such Account
Debtor to a Company, or the Account otherwise is or may become
subject to any right of setoff or rebate by the Account Debtor in
each case to the extent of such dispute, setoff or rebate; or

(vii) the Account Debtor has commenced a voluntary
case under the federal bankruptcy laws, as now constituted or
hereafter amended, or made an assignment for the benefit of
creditors, or a decree or order for relief has been entered by a
court having jurisdiction in the premises in respect of the
Account Debtor in an involuntary case under the federal bankruptcy
laws, as now constituted or hereafter amended, or any other
petition or other application for relief under the federal
bankruptcy laws has been filed against the Account Debtor, or if
the Account Debtor has failed, suspended business, ceased to be
Solvent, or consented to or suffered a receiver, trustee,
liquidator or custodian to be appointed for it or for all or a
significant portion of its assets or affairs; or

(viii) it arises from a sale to an Account Debtor
outside the United States, unless the sale is on letter of credit,
guaranty or acceptance terms, in each case acceptable to Agent in
its sole discretion; or

(ix) except pursuant to the Conditional Sales
Program, it arises from a sale to the Account Debtor on a
bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval,
consignment or any other repurchase or return basis; or

(x) the Account Debtor is the United States of
America or any department, agency or instrumentality thereof,
unless the applicable Company assigns its right to payment of such
Account to Agent, for the benefit of itself and Lenders, in a
manner satisfactory to Agent, so as to comply with the Assignment
of Claims Act of 1940 (31 U.S.C. Section 203 ET SEQ., as amended);
or

(xi) it is not at all times subject to Agent's
duly perfected, first priority security interest and to no other
Lien that is not a Permitted Lien; or

(xii) the goods giving rise to such Account have
not been delivered to and accepted by the Account Debtor or the
services giving rise to such

A-5
<PAGE>

Account have not been performed by a Company and accepted by the
Account Debtor or the Account otherwise does not represent a
final sale; or

(xiii) the Account is evidenced by chattel paper or
an instrument of any kind, or has been reduced to judgment; or

(xiv) the applicable Company has made any agreement
with the Account Debtor for any deduction therefrom, except for
discounts or allowances which are made in the ordinary course of
business for prompt payment and which discounts or allowances are
reflected in the calculation of the face value of each invoice
related to such Account; or

(xv) the applicable Company has made an agreement
with the Account Debtor to extend the time of payment thereof.

ELIGIBLE CHRISTMAS TREE INVENTORY - Eligible Inventory consisting
of Christmas Tree Inventory.

ELIGIBLE INVENTORY - such Inventory of a Company (other than
packaging materials, supplies, displays and parts) which Agent, in its
reasonable credit judgment, deems to be Eligible Inventory. Without
limiting the generality of the foregoing, no Inventory shall be Eligible
Inventory if:

(i) it is not raw materials or finished goods; or

(ii) it is not in good, new and saleable
condition; or

(iii) it is slow-moving, obsolete or
unmerchantable; or

(iv) it does not meet all standards imposed by any
applicable governmental agency or authority; or

(v) it does not conform in all respects to the
warranties and representations set forth in the Agreement; or

(vi) it is not at all times subject to Agent's
duly perfected, first priority security interest and no other Lien
except a Permitted Lien; or

(vii) it is not situated at a location in
compliance with the Agreement or is in transit; or

(viii) except for up to $7,500,000 of Capped
Inventory, it is situated at a location for which an acceptable
mortgage, leasehold mortgage or landlord's, warehouseman's or
processor's agreement has not been delivered to Agent, unless
otherwise agreed by Agent.

A-6
<PAGE>

ELIGIBLE ORDINARY INVENTORY - Eligible Inventory consisting of
Ordinary Inventory.

ENVIRONMENTAL LAWS - all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidances, orders and consent
decrees relating to health, safety and environmental matters.

EQUIPMENT - all machinery, apparatus, equipment, fittings,
furniture, fixtures, motor vehicles and other tangible personal Property
(other than Inventory) of every kind and description used in a Company's
operations or owned by such Company or in which such Company has an
interest, whether now owned or hereafter acquired by such Company and
wherever located, and all parts, accessories and special tools and all
increases and accessions thereto and substitutions and replacements
therefor.

ERISA - the Employee Retirement Income Security Act of 1974, as
amended, and all rules and regulations from time to time promulgated
thereunder.

EVENT OF DEFAULT - as defined in Section 10.1 of the Agreement.

GAAP - generally accepted accounting principles in the United
States of America in effect from time to time.

GENERAL INTANGIBLES - all intangible personal property of Borrower
and each of its Subsidiaries (including things in action) other than
goods, Accounts, chattel paper, documents, instruments and money, whether
now owned or hereafter created or acquired by Borrower or any of its
Subsidiaries.

GUARANTORS - CSCT, Lone Star, Lone Star GP and any other Person
who may hereafter guarantee payment or performance of the whole or any
part of the Obligations.

GUARANTY AGREEMENTS - the Continuing Guaranty Agreements which are
to be executed by each Guarantor in form and substance satisfactory to
Agent.

INDENTURE - that certain Indenture dated as of December 24, 1997
with respect to $100,000,000 of 10 1/2% senior subordinated notes due
2007 naming U.S. Trust Company of California, N.A. as Trustee.

INVENTORY - all of each Company's inventory, whether now owned or
hereafter acquired including, but not limited to, all goods intended for
sale or lease by each Company or for display or demonstration; all work
in process; all crops growing or to be grown; all plants; all raw
materials and other materials and supplies of every nature and
description used or which might be used in connection with the
manufacture, printing, packing, shipping, advertising, selling, leasing
or furnishing of such goods or otherwise used or consumed in each
Company's business; and all documents

A-7
<PAGE>

evidencing and General Intangibles relating to any of the foregoing,
whether now owned or hereafter acquired by any Company.

INVESTMENT PROPERTY - all of Borrower's and each of its
Subsidiary's investment property, whether now owned or hereafter
acquired, including, but not limited to, all securities (certificated or
uncertificated), securities accounts, securities entitlements, commodity
accounts and commodity contracts.

LC AMOUNT - at any time, the aggregate undrawn face amount of all
Letters of Credit and LC Guaranties then outstanding.

LC GUARANTY - any guaranty pursuant to which Agent or any
Affiliate of Agent shall guaranty the payment or performance by Borrower
of its reimbursement obligation under any letter of credit.

LC OBLIGATIONS - any Obligations that arise from any draw against
any Letter of Credit or against any letter of credit supported by an LC
Guaranty.

LEGAL REQUIREMENT - any requirement imposed upon Agent or any
Lender by any law of the United States of America or the United Kingdom
or by any regulation, order, interpretation, ruling or official directive
(whether or not having the force of law) of the Federal Reserve Board,
the Bank of England or any other board, central bank or governmental or
administrative agency, institution or authority of the United States of
America, the United Kingdom or any political subdivision of either
thereof.

LETTER OF CREDIT - any letter of credit issued by Agent, Bank or
any other Affiliate of Agent for the account of Borrower.

LIBOR INTEREST PAYMENT DATE - with respect to any LIBOR Portion,
the last day of each calendar month during or immediately following the
last day of the applicable LIBOR Period.

LIBOR OPTION - the option granted pursuant to subsection 2.3 of
the Agreement to have the interest on all or any portion of the principal
amount of the Revolving Credit Loans based on a LIBOR Rate.

LIBOR PERIOD - any period of one month, two months, three months
or six months, commencing on a Business Day, selected as provided in
subsection 2.3(i) of the Agreement; PROVIDED, however that no LIBOR
Period shall extend beyond the last day of the Term unless Borrower and
Lenders have agreed to an extension of the Term beyond the expiration of
the LIBOR Period in question. If any LIBOR Period so selected shall end
on a date that is not a Business Day, such LIBOR Period shall instead end
on the next preceding or succeeding Business Day as determined by Agent
in accordance with the then current banking practice in London; PROVIDED,
that Borrower shall not be required to pay double interest, even though
the preceding

A-8
<PAGE>

LIBOR Period ends and the new LIBOR Period begins on the same day. Each
determination by Agent of the LIBOR Period shall, in the absence of
manifest error, be conclusive.

LIBOR PORTION - a LIBOR Revolving Credit Portion or a LIBOR
Seasonal Portion.

LIBOR RATE - with respect to any LIBOR Portion for the related
LIBOR Period, an interest rate per annum (rounded upwards, if necessary,
to the next higher 1/16 of 1% equal to the product of (i) the Base LIBOR
Rate (as hereinafter defined) MULTIPLIED by (ii) Statutory Reserves. For
purposes of this definition, the term "Base LIBOR Rate" shall mean the
rate (rounded to the next higher 1/16 of 1%) at which deposits of U.S.
dollars approximately equal in principal amount to the LIBOR Portion
specified in the applicable LIBOR Request are offered to Agent by prime
banks in the London interbank foreign currency deposits market at
approximately 11:00 a.m., London time, 3 Business Days prior to the
commencement of such LIBOR Period, for delivery on the first day of such
LIBOR Period. Each determination by Agent of any LIBOR Rate shall, in the
absence of manifest error, be conclusive.

LIBOR REQUEST - a notice in writing (or by telephone confirmed by
telex, telecopy or other facsimile transmission on the same day as the
telephone request) from Borrower to Agent requesting that interest on a
Revolving Credit Loan be based on the LIBOR Rate, specifying: (i) the 1st
day of the LIBOR Period; (ii) the length of the LIBOR Period consistent
with the definition of that term; and (iii) the dollar amount of the
LIBOR Revolving Credit Portion or the LIBOR Seasonal Portion consistent
with the definition of such terms.

LIBOR REVOLVING CREDIT PORTION - that portion of the Revolving
Credit Loans (other than Seasonal Advances) specified in a LIBOR Request
(including any portion of Revolving Credit Loans which is being borrowed
by Borrower concurrently with such LIBOR Request) which is not less than
$1,000,000 and is an integral multiple of $100,000, which does not exceed
the outstanding balance of Revolving Credit Loans not already subject to
a LIBOR Option and, which, as of the date of the LIBOR Request specifying
such LIBOR Portion, has met the conditions for basing interest on the
LIBOR Rate in Section 2.3 of the Agreement and the LIBOR Period of which
was commenced and not terminated.

LIBOR SEASONAL PORTION - that portion of the Revolving Credit
Loans which constitutes a Seasonal Advance specified in a LIBOR Request
(including any portion of a Seasonal Advance which is being borrowed by
Borrower concurrently with such LIBOR Request) which is not less than
$1,000,000 and is an integral multiple of $100,000, which does not exceed
the outstanding balance of Revolving Credit Loans not already subject to
a LIBOR Option and, which, as of the date of the LIBOR Request

A-9
<PAGE>

specifying such LIBOR Portion, has met the conditions for basing interest
on the LIBOR Rate in Section 2.3 of the Agreement and the LIBOR Period of
which was commenced and not terminated.

LIEN - any interest in Property securing an obligation owed to, or
a claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract. The term "Lien"
shall also include rights of seller under conditional sales contracts or
title retention agreements, reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases and
other title exceptions and encumbrances affecting Property. For the
purpose of the Agreement, Borrower shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale
agreement or other arrangement pursuant to which title to the Property
has been retained by or vested in some other Person for security
purposes.

LOAN ACCOUNT - the loan account established on the books of Agent
pursuant to Section 3.6 of the Agreement.

LOAN DOCUMENTS - the Agreement, the Other Agreements and the
Security Documents.

LONE STAR - Lone Star Growers, L.P., a Delaware limited
partnership and a Subsidiary of Borrower.

LOAN STAR GP - Lone Star, Inc., a Delaware corporation and the
general partner of Lone Star.

LOANS - all loans and advances of any kind made by any Lender
pursuant to the Agreement.

MAJORITY LENDERS - as of any date, Lenders holding 66-2/3% or more
of the Revolving Loan Percentages of all Lenders as of such date.

MATERIAL ADVERSE EFFECT - (i) a material adverse effect on the
business, condition (financial or otherwise), operation, performance or
properties of Borrower and its Subsidiaries taken as a whole, (ii) a
material adverse effect on the rights and remedies of Agent and Lenders
under the Loan Documents, or (iii) the material impairment of the ability
of Borrower or any of its Subsidiaries to perform its obligations
hereunder or under any Loan Document.

MONEY BORROWED - means (i) indebtedness arising from the lending
of money by any Person to Borrower or any Subsidiary of Borrower; (ii)
indebtedness, whether or not in any such case arising from the lending by
any Person of money to Borrower or any Subsidiary of Borrower, (1) which
is represented by notes payable or drafts accepted that evidence
extensions of credit, (2) which constitutes obligations

A-10
<PAGE>

evidenced by bonds, debentures, notes or similar instruments, or (3) upon
which interest charges are customarily paid (other than accounts payable)
or that was issued or assumed as full or partial payment for Property;
(iii) indebtedness that constitutes a Capitalized Lease Obligation;
(iv) reimbursement obligations with respect to letters of credit or
guaranties of letters of credit and (v) indebtedness of Borrower or any
Subsidiary of Borrower under any guaranty of obligations that would
constitute Indebtedness for Money Borrowed under clauses (i) through
(iii) hereof, if owed directly by Borrower or such Subsidiary.

MORTGAGES - the mortgages, deeds of trust and leasehold mortgages
to be executed by Borrower and certain Subsidiaries on or about the
Closing Date in favor of Agent, for the benefit of itself and Lenders,
and by which Borrower or such Subsidiary shall grant and convey to Agent,
for the benefit of itself and Lenders, as security for the Obligations, a
Lien upon the real Property of Borrower listed on EXHIBIT A hereto.

MULTIEMPLOYER PLAN - has the meaning set forth in Section
4001(a)(3) of ERISA.

OBLIGATIONS - all Loans and all other advances, debts,
liabilities, obligations, covenants and duties, together with all
interest, fees and other charges thereon, owing, arising, due or payable
from Borrower to any Lender of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument,
whether arising under the Agreement or any of the other Loan Documents
whether direct or indirect (including those acquired by assignment),
absolute or contingent, primary or secondary, due or to become due, now
existing or hereafter arising and however acquired.

ORDINARY INVENTORY - Inventory other than Christmas Tree
Inventory, including without limitation Capped Inventory.

OTHER AGREEMENTS - any and all agreements, instruments and
documents (other than the Agreement and the Security Documents),
heretofore, now or hereafter executed by Borrower, any Subsidiary of
Borrower or any other third party and delivered to Agent in respect of
the transactions contemplated by the Agreement.

OVERADVANCE - the amount, if any, by which the outstanding
principal amount of Revolving Credit Loans PLUS the LC Amount PLUS
reserves, if any, exceeds the Borrowing Base.

PARTICIPATING LENDER - each Person who shall be granted the right
by a Lender to participate in any of the Loans described in the Agreement
and who shall have entered into a participation agreement in form and
substance satisfactory to such Lender.

A-11
<PAGE>

PERMITTED LIENS - any Lien of a kind specified in subsection 8.2.5
of the Agreement.

PERMITTED PURCHASE MONEY INDEBTEDNESS - Purchase Money
Indebtedness of Borrower or any of its Subsidiaries incurred after the
date hereof which is secured by a Purchase Money Lien and which, when
aggregated with the principal amount of all other Purchase Money
Indebtedness and Capitalized Lease Obligations of Borrower and its
Subsidiaries at the time outstanding, does not exceed $6,000,000. For
the purposes of this definition, the principal amount of any Purchase
Money Indebtedness consisting of capitalized leases shall be computed as
a Capitalized Lease Obligation.

PERSON - an individual, partnership, corporation, limited
liability company, joint stock company, land trust, business trust, or
unincorporated organization, or a government or agency or political
subdivision thereof.

PLAN - an employee benefit plan now or hereafter maintained for
employees of Borrower that is covered by Title IV of ERISA.

PROJECTIONS - Borrower's forecasted Consolidated and consolidating
(i) balance sheets, (ii) profit and loss statements, (iii) cash flow
statements, and (iv) capitalization statements, all prepared on a
consistent basis with Borrower's historical financial statements,
together with appropriate supporting details and a statement of
underlying assumptions.

PROPERTY - any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.

PURCHASE MONEY INDEBTEDNESS - means and includes (i) Indebtedness
(other than the Obligations) for the payment of all or any part of the
purchase price of any fixed assets, (ii) any Indebtedness (other than the
Obligations) incurred at the time of or within 10 days prior to or after
the acquisition of any fixed assets for the purpose of financing all or
any part of the purchase price thereof, and (iii) any renewals,
extensions or refinancings thereof, but not any increases in the
principal amounts thereof outstanding at the time.

PURCHASE MONEY LIEN - a Lien upon fixed assets which secures
Purchase Money Indebtedness, but only if such Lien shall at all times be
confined solely to the fixed assets (and proceeds thereof) the purchase
price of which was financed through the incurrence of the Purchase Money
Indebtedness secured by such Lien.

RENTALS - as defined in subsection 8.2.13 of the Agreement.

REPORTABLE EVENT - any of the events set forth in Section 4043(b)
of ERISA.

A-12
<PAGE>

RESTRICTED INVESTMENT - any investment made in cash or by delivery
of Property to any Person, whether by acquisition of stock, Indebtedness
or other obligation or Security, or by loan, advance or capital
contribution, or otherwise, or in any Property except the following:

(i) investments, to the extent existing on the
Closing Date, in one or more Subsidiaries of Borrower by Borrower;

(ii) Property to be used in the ordinary course of
business;

(iii) Current Assets arising from the sale of goods
and services in the ordinary course of business of Borrower or any
Subsidiary of Borrower;

(iv) investments in direct obligations of the
United States of America, or any agency thereof or obligations
guaranteed by the United States of America, provided that such
obligations mature within one year from the date of acquisition
thereof;

(v) investments in certificates of deposit
maturing within one year from the date of acquisition issued by a
bank or trust company organized under the laws of the United
States or any state thereof having capital surplus and undivided
profits aggregating at least $100,000,000; and

(vi) investments in commercial paper given the
highest rating by a national credit rating agency and maturing not
more than 270 days from the date of creation thereof.

REVOLVING CREDIT LOAN - a Loan made by any Lender as provided in
Section 1.1 of the Agreement.

REVOLVING LOAN COMMITMENT - with respect to any Lender, the amount
of such Lender's commitment pursuant to subsection 1.1.1 of the
Agreement, as set forth below such Lender's name on the signature page
thereof.

REVOLVING LOAN PERCENTAGE - with respect to each Lender, the
percentage equal to the quotient of such Lender's Revolving Loan
Commitment DIVIDED BY the aggregate of all Revolving Loan Commitments.

SEASONAL ADVANCE - the amount by which the Revolving Loans at any
time outstanding exceed the sum of clauses (ii)(1) and (ii)(2) contained
in the definition of the term Borrowing Base.

SCHEDULE OF ACCOUNTS - as defined in subsection 6.2.1 of the
Agreement.

SECURITY - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.

A-13
<PAGE>

SECURITY DOCUMENTS - the Guaranty Agreements, the Mortgages and
all other instruments and agreements now or at any time hereafter
securing the whole or any part of the Obligations.

SOLVENT - as to any Person, such Person (i) owns Property whose
fair saleable value is greater than the amount required to pay all of
such Person's Indebtedness (including contingent debts), (ii) is able to
pay all of its Indebtedness as such Indebtedness matures and (iii) has
capital sufficient to carry on its business and transactions and all
business and transactions in which it is about to engage.

SOUTHWESTERN DIVISION - the business operations of Lone Star.

STATUTORY RESERVES - a fraction (expressed as a decimal) the
numerator of which is the number one, and the denominator of which is the
number one MINUS the aggregate of the maximum reserve percentages
(including, without limitation, any marginal, special, emergency or
supplemental reserves), expressed as a decimal, established by the Board
of Governors of the Federal Reserve System and any other banking
authority to which Bank or any Lender is subject for Eurocurrency
Liabilities (as defined in Regulation D of the Board of Governors of the
Federal Reserve System or any successor thereto). Such reserve
percentages shall include, without limitation, those imposed under such
Regulation D. LIBOR Portions shall be deemed to constitute Eurocurrency
Liabilities and as such shall be deemed to be subject to such reserve
requirements without benefit of or credit for proration, exceptions or
offsets which may be available from time to time to Bank or any Lender
under such Regulation D. Statutory Reserves shall be adjusted
automatically on and as of the effective date of any change in any
reserve percentage.

SUBORDINATED DEBT - Indebtedness of Borrower that is subordinated
to the Obligations in a manner satisfactory to Agent and contains terms,
including, without limitation, payment terms, satisfactory to Agent.

SUBSIDIARY - any corporation of which a Person owns, directly or
indirectly through one or more intermediaries, more than 50% of the
Voting Stock at the time of determination.

SUBSIDIARY LOANS - Indebtedness of CSCT and/or Lone Star to
Borrower incurred from time to time after the Closing Date; PROVIDED,
that such loans shall only be permitted to CSCT or Lone Star to the
extent of the portion of the Borrowing Base which is attributable to the
Eligible Accounts and Eligible Inventory of either CSCT or Lone Star, as
applicable (or to the extent such loan is part of a Seasonal Advance).

SWINGLINE LOANS - as defined in subsection 1.1.2 of the Agreement.

TAX - in relation to any LIBOR Portion and the applicable LIBOR
Rate, any tax, levy, impost, duty, deduction, withholding or charges of
whatever nature required

A-14
<PAGE>

by any Legal Requirement (i) to be paid by any Lender and/or (ii) to be
withheld or deducted from any payment otherwise required hereby to be
made by Borrower to any Lender; PROVIDED, that the term "Tax" shall not
include any taxes imposed upon the net income of Lender by the United
States of America, United Kingdom or any political subdivision thereof.

TERM - as defined in Section 4.1 of the Agreement.

TOTAL CREDIT FACILITY - $70,000,000.

VOTING STOCK - Securities of any class or classes of a corporation
the holders of which are ordinarily, in the absence of contingencies,
entitled to elect a majority of the corporate directors (or Persons
performing similar functions).

WESTERN DIVISION - business operations of Borrower.

YEAR 2000 PROBLEM - any significant risk that computer hardware,
software or equipment containing embedded microchips essential to the
business or operations of Borrower or any of its Subsidiaries will not,
in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively and reliably as in the case of dates or
time periods occurring before January 1, 2000, including the making of
accurate leap year calculations.

OTHER TERMS. All other terms contained in the Agreement shall
have, when the context so indicates, the meanings provided for by the Code to
the extent the same are used or defined therein.

CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of the Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any of the Loan Documents shall include any and
all modifications thereto and any and all extensions or renewals thereof.

A-15
<PAGE>

Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first above written.

COLOR SPOT NURSERIES, INC., a Delaware
corporation

By
------------------------------------
Title
---------------------------------

Accepted in Chicago, Illinois:

FLEET CAPITAL CORPORATION, as Agent

By
------------------------------------
Title
---------------------------------

FLEET CAPITAL CORPORATION, as a Lender

By
------------------------------------
Title
---------------------------------

A-16

<PAGE>

LIST OF EXHIBITS

<TABLE>
<S> <C>
Exhibit 6.1.1 Borrower's and each Subsidiary's Business Locations
Exhibit 7.1.1 Jurisdictions in which Borrower and each Subsidiary is
Authorized to do Business
Exhibit 7.1.4 Capital Structure
Exhibit 7.1.5 Corporate Names; Transactions
Exhibit 7.1.14 Tax Identification Numbers
Exhibit 7.1.16 Patents, Trademarks, Copyrights and Licenses
Exhibit 7.1.19 Contracts Restricting Right to Incur Debts
Exhibit 7.1.20 Litigation
Exhibit 7.1.22 Operating Leases; Capitalized Leases
Exhibit 7.1.23 Pension Plans
Exhibit 7.1.25 Labor Contracts
Exhibit 8.1.3 Compliance Certificate
Exhibit 8.2.5 Permitted Liens
Exhibit 8.3 Financial Covenants
Exhibit A Real Property Subject to Mortgages

</TABLE>

<PAGE>

EXHIBIT 8.1.3

COMPLIANCE CERTIFICATE

[Letterhead of Borrower]

,
------------------ -----

- -------------------------------

The undersigned, the chief financial officer of Color Spot
Nurseries, Inc., a Delaware corporation ("Borrower"), on behalf of Borrower
in his capacity as Chief Financial Officer, gives this certificate to Fleet
Capital Corporation, as agent ("Agent"), in accordance with the requirements
of subsection 8.1.2 of that certain Loan and Security Agreement dated
______________, 1998, between Borrower and Agent ("Loan Agreement").
Capitalized terms used in this Certificate, unless otherwise defined herein,
shall have the meanings ascribed to them in the Loan Agreement.

1. Based upon my review of the balance sheets and
statements of income of Borrower for the [fiscal year] [quarterly period]
ending __________________, 19__, copies of which are attached hereto, I
hereby certify that:

(i) Consolidated [ADJUSTED TANGIBLE] Net Worth is
$____________;]

(ii) The Interest Coverage Ratio is ____ to ____;

(iii) Capital Expenditures during the period and for the
fiscal year to date total $__________ and $__________,
respectively.

[LIST OTHERS, IF ANY]

2. No Default exists on the date hereof, other than:
______________________________________________________ [if none, so state]; and

<PAGE>

3. No Event of Default exists on the date hereof, other
than ____________________________________________________ [if none, so state].

Very truly yours,

-------------------------------------
Chief Financial Officer

-2-
<PAGE>

EXHIBIT 8.3

FINANCIAL COVENANTS

A. INTEREST COVERAGE RATIO

[TO COME]

B. [ADJUSTED TANGIBLE] NET WORTH

[TO COME]

[OTHERS?]

<PAGE>

EXHIBIT A

REAL PROPERTY SUBJECT TO MORTGAGES

<PAGE>

[EXHIBIT 10.26]

SUBORDINATION AGREEMENT

THIS SUBORDINATION AGREEMENT (the "AGREEMENT") is made as of
October __, 1998 by and among Color Spot Nurseries, Inc., a Delaware
corporation (the "ISSUER"), Heller Equity Capital Corporation, a Delaware
corporation, (the "INITIAL NOTEHOLDER" and, together with its successors and
assigns, the "NOTEHOLDERS") and Fleet Capital Corporation, as Agent under the
Senior Credit Agreement described below (the "AGENT").

RECITALS

WHEREAS, on or about December 31, 1996, Color Spot Nurseries, Inc.,
a Delaware corporation (later known as CSN, Inc.) ("Color Spot") and its
wholly owned subsidiary, the Issuer (previously known as Color Spot
Watsonville, Inc.), issued to the Initial Noteholder their 8% Convertible
Subordinated Pay-in-Kind Note due 2004 (the "SUBORDINATED NOTE" and, together
with any like notes issued upon the transfer or partial conversion of the
Subordinated Note, the "SUBORDINATED NOTES") in the form of Exhibit A hereto;
and

WHEREAS, Color Spot subsequently merged with and into the Issuer,
with the Issuer being the surviving entity; and

WHEREAS, the Issuer has entered into a Loan and Security Agreement
dated as of October __, 1998, among the Issuer, the Agent, and the other
lending institutions from time to time parties thereto (collectively, the
"BANKS"), pursuant to which the Banks have agreed to extend loans to the
Issuer, in order, among other things, to provide working capital for the
Issuer and its subsidiaries; and

WHEREAS, as a condition to the willingness of the Agent and the
Banks to enter into the Senior Credit Agreement (as hereinafter defined), and
of the Banks to make the extensions of credit to the Issuer referred to
above, they have required that the parties enter into this Agreement,
providing for the subordination of the Issuer's indebtedness under the
Subordinated Notes to its obligations under the Senior Credit Agreement and
related documents, all on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the above recitals and the
provisions set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:

AGREEMENT

ARTICLE 1. DEFINITIONS.

Section 1.1. CERTAIN DEFINED TERMS. The following terms used in
this Agreement shall have the following meanings:

<PAGE>

"ACCELERATION EVENT" is defined in Section 2.4(a)(i).

"AGENT" is defined in the preamble to this Agreement, and shall
mean and include any successor Agent under the Senior Credit Agreement;
PROVIDED that, in the event that there is Senior Indebtedness for which there
is not an Agent, the "Agent" shall mean the holders of over 50% in principal
amount of such Senior Indebtedness, including any undrawn commitments to lend
under the Senior Credit Agreement.

"BANKRUPTCY CODE" means Title 11 of the United States Code, as now
and hereafter in effect, or any successor statute.

"BUSINESS DAY" means any day excluding Saturday, Sunday and any day
which shall be in the State of Illinois or the State of California a legal
holiday or a day on which banking institutions are authorized by law or other
governmental actions to close.

"CASH" means U.S. dollars in money, currency or a credit balance in
a Deposit Account.

"CASH" means (a) cash, (b) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the
United States of America is pledged in support thereof) having maturities of
not more than one year from the date of acquisition; (c) marketable direct
obligations issued by any State of the United States of America or any local
government or other political subdivision thereof rated (at the time of
acquisition of such security) at least AA by S&P or the equivalent thereof by
Moody's having maturities of not more than one year from the date of
acquisition; (d) U.S. dollar denominated time deposits, certificates of
deposit and bankers' acceptances of (i) any Bank, (ii) any domestic
commercial bank of recognized standing having capital and surplus in excess
of $10,000,000,000 or (iii) any bank whose short-term commercial paper rating
(at the time of acquisition of such security) by S&P is at least A-1 or the
equivalent thereof or by Moody's is at least P-1 or the equivalent thereof
(any such bank, an "APPROVED BANK"), in each case with maturities of not more
than six months from the date of acquisition; (e) commercial paper and
variable or fixed rate notes issued by any Bank or Approved Bank or by the
parent company of any Bank or Approved Bank and commercial paper and variable
rate notes issued by, or guaranteed by, any industrial or financial company
with a short-term commercial paper rating (at the time of acquisition of such
security) of at least A-1 or the equivalent thereof by S&P or at least P-1 or
the equivalent thereof by Moody's, or guaranteed by any industrial company
with a long-term unsecured debt rating (at the time of acquisition of such
security) of at least AA or the equivalent thereof by S&P or the equivalent
thereof by Moody's and in each case maturing within one year after the date
of acquisition; (f) repurchase agreements with any Bank or any primary dealer
maturing within one year from the date of acquisition that are fully
collateralized by investment instruments that would otherwise be "Cash";
PROVIDED that the terms of such repurchase agreements comply with the
guidelines set forth in the Federal Financial Institutions Examination
Council Supervisory Policy - Repurchase Agreements of Depository Institutions

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<PAGE>

With Securities Dealers and Others, as adopted by the Comptroller of the
Currency on October 31, 1985; and (g) investments in money market mutual
funds, all of the assets of which are invested in securities and instruments
of the types set forth in clauses (a) through (e) above.

"CREDIT PARTY" means each of the Issuer and each Subsidiary of the
Issuer.

"DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like
account with a bank, savings and loan association, credit union or like
organization, other than an account evidenced by a negotiable certificate of
deposit.

"ENFORCEMENT ACTION" is defined in Section 2.4(a)(ii).

"INITIAL NOTEHOLDER" has the meaning set forth in the recitals
hereto.

"ISSUER" has the meaning set forth in the preamble hereto.

"MATURITY DATE" means December 31, 2004.

"NOTEHOLDERS" has the meaning set forth in the recitals hereto, and
shall mean and include (i) the Initial Noteholder and (ii) any assignees of
the Subordinated Notes, in whole or in part.

"OBLIGATIONS" means all amounts, direct or indirect, contingent or
absolute, of every type or description, and at any time existing, owing to
the Agent or any Bank pursuant to the terms of the Senior Credit Agreement or
any other Senior Credit Document or secured by any of the "Security
Documents" (as defined in the Senior Credit Agreement).

"PERSON" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts,
business trusts or other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.

"POST-PETITION INTEREST" shall mean interest at the contract rate
accruing subsequent to the filing of a petition initiating any proceeding in
bankruptcy, insolvency or like proceeding whether or not such interest is an
allowed claim enforceable against the debtor in a bankruptcy case under the
Bankruptcy Code.

"SENIOR CREDIT AGREEMENT" means the Loan and Security Agreement
dated as of October __, 1998, among the Issuer, the Agent, and the Banks
signatory thereto, as such agreement may be amended, restated, supplemented
or otherwise modified from time to time, including, without limitation, to
increase the principal amount and/or available commitments thereunder, and
any agreement changing the maturity of, refinancing, replacing, or otherwise
restructuring all or any portion of the "Obligations" under such agreements
or any successor thereto, whether with the same or different lenders.

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<PAGE>

"SENIOR CREDIT DOCUMENTS" means, collectively, the Senior Credit
Agreement, and the other "Loan Documents" (as defined in the Senior Credit
Agreement), and each other document or instrument executed by the Issuer or
any other Credit Party in connection therewith, as such agreements may be
amended, restated, supplemented or otherwise modified from time to time, and
any agreement changing the maturity of, refinancing, replacing, or otherwise
restructuring all or any portion of the Obligations under any such agreements
or any successors thereto, whether with the same or different lenders.

"SENIOR INDEBTEDNESS" shall mean, collectively, all Obligations now
or hereafter incurred pursuant to or in connection with the Senior Credit
Documents, in each case, including, without limitation, principal, premium
(if any), interest (including Post-Petition Interest), expenses, fees and
indemnifications thereunder.

"SUBORDINATED NOTE" and "SUBORDINATED NOTES" have the respective
meanings set forth in the recitals hereto.

"SUBORDINATED OBLIGATIONS" shall mean all Obligations to the
Noteholders now or hereafter incurred pursuant to or in connection with the
Subordinated Notes, including, without limitation, any principal or interest
on the Subordinated Notes and any expenses payable thereunder.

"SUBSIDIARY" of any Person shall mean and include (i) any
corporation more than 50% of whose stock of any class or classes having by
the terms thereof ordinary voting power to elect a majority of the directors
of such corporation (irrespective of whether or not at the time stock of any
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time owned by such
Person directly or indirectly through Subsidiaries and (ii) any partnership,
association, joint venture or other entity in which such Person directly or
indirectly through Subsidiaries has more than a 50% equity interest at the
time.

ARTICLE 2. SUBORDINATION

Section 2.1. OBLIGATIONS SUBORDINATE TO SENIOR INDEBTEDNESS.
Each of the Issuer and the Initial Noteholder covenant and agree, for the
benefit of the Banks, and any subsequent Noteholders by their acceptance of
Subordinated Notes likewise covenant and agree, that all Subordinated Notes
shall be issued and all Subordinated Obligations shall be incurred hereunder
subject to the provisions of this Agreement; and each Noteholder, whether
upon original issue of the Subordinated Note or upon transfer, assignment or
exchange thereof, accepts and agrees that the payment of all Subordinated
Obligations, to the extent and in the manner hereinafter set forth, be
subordinated and junior in right of payment to the prior payment in Cash in
full of all Senior Indebtedness from time to time outstanding; that the
subordination provided herein is for the benefit of, and shall be enforceable
directly by (subject to the powers and duties of the Agent provided herein),
each holder of Senior Indebtedness, and that each holder of Senior
Indebtedness shall be deemed to have acquired

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<PAGE>

its Senior Indebtedness in reliance upon the covenants and provisions
contained in this Agreement. The Senior Indebtedness shall not be deemed to
have been paid in full for all purposes of the Senior Credit Documents and
the Subordinated Obligations until all Senior Indebtedness has been paid in
full in Cash (including, without limitation, Post-Petition Interest) and all
commitments to lend under the Senior Credit Documents have been terminated.

Section 2.2. PAYMENT OVER TO HOLDERS OF SENIOR INDEBTEDNESS.

(a) In the event of any payment by or distribution of assets of
the Issuer or any other Credit Party of any kind or character, in part or in
whole, whether in cash, property or securities, to creditors of the Issuer,
including in connection with (i) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization, adjustment,
composition or other similar case or proceeding in connection therewith,
relative to the Issuer or any other Credit Party or to any of its creditors
or to their assets, or (ii) any liquidation, dissolution or other winding up
of the Issuer or any other Credit Party, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy, or (iii) any assignment
for the benefit of creditors or any other marshaling of assets and
liabilities of the Issuer or any other Credit Party, then and in any and all
such events:

(i) all Obligations due or to become due under or with
respect to all Senior Indebtedness in such proceeding shall be paid in
full in Cash before the Noteholders are entitled to receive any
payment or distribution of the assets of the Issuer or such Credit
Party, whether in cash, securities or other property, on account of
the Subordinated Obligations;

(ii) any payment or distribution of assets of the Issuer
or any other Credit Party of any kind or character, whether in Cash,
property or securities, by set-off or otherwise, to which the
Noteholders would be entitled but for the provisions of this
Agreement, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other
obligation of the Issuer being subordinated to the payment of the
Subordinated Obligations, shall be paid by the liquidating trustee or
agent or other Person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or otherwise,
directly to the Agent, until all Obligations shall have been paid in
Cash, ratably according to the aggregate amounts remaining unpaid on
account of the principal of, and interest on, such Senior Indebtedness
to the extent necessary to make payment in Cash in full of all such
Senior Indebtedness remaining unpaid after giving effect to any
concurrent payment or distribution to the holders of such Senior
Indebtedness, and

(iii) in the event that, notwithstanding the foregoing
provisions, the holders of the Subordinated Notes shall have received
any such

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<PAGE>

payment or distribution of assets of the Issuer of any kind or
character, whether in cash, property or securities, before all such
Senior Indebtedness is paid in full in Cash, then and in such event such
payment or distribution shall be received by such holders in trust and
paid over or delivered promptly, in the form received, to the Agent,
until all Obligations shall have been paid in full, in Cash, to the
extent necessary to pay all such other Senior Indebtedness in full in
Cash, after giving effect to any concurrent payment or distribution to
or for the holders of such other Senior Indebtedness.

(iv) The Agent shall have the right to request any
Noteholder to file and, in the event that the Noteholder fails to do
so within 30 days prior to the date such claims or proofs of claim
would be barred for failure to make a timely filing, is hereby
authorized to file a proof of claim for and on behalf of that
Noteholder or any other holder of the Subordinated Notes in such form
as the Agent may determine to be necessary or appropriate for the
enforcement of the provisions of this Section 2.2, to accept and
receive any payment or distribution which may be payable or
deliverable at any time upon or in respect of the Subordinated
Obligations in an amount not in excess of the Senior Indebtedness then
outstanding and to take such other action as may be reasonably
necessary to effectuate the foregoing. Each holder of a Subordinated
Note shall provide to the Agent all such powers of attorney, proofs of
claim, assignments of claim and other instruments, documents and
information, reasonably necessary to present any such claims or seek
enforcement as aforesaid.

(v) If there shall occur any consolidation of the Issuer
with, or any merger of the Issuer into, another corporation or the
liquidation or dissolution of the Issuer following any conveyance,
transfer or lease of its properties and assets substantially as an
entirety to another corporation, such consolidation, merger or
liquidation shall not be deemed a dissolution, winding up,
liquidation, reorganization, assignment for the benefit of creditors
or marshaling of assets and liabilities of the Issuer for the purposes
of this Section 2.2.

Section 2.3. NO PAYMENT IN CERTAIN CIRCUMSTANCES.

(a) In the event that the Issuer or any other Credit Party shall
fail to pay when due, upon acceleration or otherwise, any principal, interest
or fees with respect to Senior Indebtedness, which payment default shall not
have been cured or waived, or any other "Event of Default" (as defined in the
Senior Credit Agreement) shall not have been cured or waived, then no payment
shall be made by the Issuer, or accepted by any Noteholder, on account of the
Subordinated Obligations unless and until all Senior Indebtedness shall have
been paid in Cash, in full, or provision shall have been made for such
payment or until such "Event of Default" shall have been cured or waived;
PROVIDED that the

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<PAGE>

foregoing shall not prevent the capitalization of accrued interest payable on
the Subordinated Notes, pursuant to section 1 thereof, or the conversion of
said Subordinated Notes in accordance with section 3 thereof.

(b) Without limiting the foregoing clause (a), prior to the
payment in full of all Senior Indebtedness and the termination of all
commitments to lend under the Senior Credit Agreement, absent the prior
written consent of the Agent, Issuer shall not make, and no Noteholder shall
accept, any payment on or with respect to any Subordinated Note, including,
without limitation, any payment with respect to interest on the Subordinated
Notes or any optional or mandatory prepayment or redemption payment, except
that the Issuer may make, and the Noteholders may accept, (i) payments
pursuant to section 3.1(f) of the Subordinated Notes which (x) do not exceed
$1,000 in the aggregate for all such payments, and (y) are not made during
the pendency of any "Event of Default" under the Senior Credit Agreement and
(ii) payments of cash interest in respect of the Subordinated Notes on each
June 30 and December 31, pursuant to the terms of the Subordinated Notes as
they exist on the date hereof, so long as (A) no "Event of Default" under the
Senior Credit Agreement is in existence at the time of each payment or would
be caused by the making of such payment and (B) after making such payment,
"Availability" under the Senior Credit Agreement is equal to or greater than
$3,000,000; PROVIDED that the foregoing shall not prevent the capitalization
of accrued interest payable on the Subordinated Notes pursuant to section 1
thereof, or the conversion of said Subordinated Notes in accordance with
section 3 thereof.

(c) In the event that any payment shall be received by any
Noteholder which is prohibited by the foregoing provisions of this Section
2.3, then and in such event such payment shall be held in trust by such
Noteholder for the benefit of the holders of Senior Indebtedness, and shall
be paid over and delivered to the Agent, promptly, in the form received, for
application to the Senior Indebtedness.

(d) The provisions of this Section 2.3 shall not apply to any
payment with respect to which Section 2.2 would be applicable.

Section 2.4. FORBEARANCE SO LONG AS SENIOR INDEBTEDNESS
OUTSTANDING.

(a) Until all Senior Indebtedness has been paid in full in Cash
and all commitments to lend under the Senior Credit Agreement shall have been
terminated, no Noteholder may, without the prior written consent of the Agent,

(i) accelerate the maturity of the Subordinated Notes
other than by reason of the occurrence and continuation of an event
described in section 8.1(d) or (g) of the Subordinated Notes or of an
event described in section 8.1(f) of the Subordinated Notes with
respect to acceleration of the Senior Indebtedness (any such event, an
"ACCELERATION EVENT"), or

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<PAGE>

(ii) commence any action, suit or proceeding to accelerate
or to enforce any claims, rights, demands, causes of action,
liabilities, or suits, of any kind whatsoever, whether known or
unknown, that have been, could have been, or in the future might be
asserted by the holders of the Subordinated Notes based upon, arising
out of, or in any way relating to, the Subordinated Notes (each, an
"ENFORCEMENT ACTION") other than upon the occurrence and continuation
of an Acceleration Event; PROVIDED that the foregoing shall not
preclude the Noteholders from seeking specific performance of the
covenants set forth in sections 5.1 through 5.6 of the Subordinated
Notes; and PROVIDED further that the foregoing shall not preclude the
Noteholders from asserting any defense in an affirmative suit or claim
against them, or from raising their entitlement to payment on the
Subordinated Notes in offset or as a defense in any such affirmative
action.

(b) So long as any Senior Indebtedness remains outstanding, and
there remain any outstanding commitments to make advances or issue letters of
credit under the Senior Credit Agreement, each Noteholder agrees that it
shall not commence an Enforcement Action (which it may, in any event, only
commence upon the occurrence of an Acceleration Event), until the first to
occur of the following: (i) the expiration of 60 days following the delivery
by such Noteholder of a written notice to the Agent informing it of the
existence of the Acceleration Event and of its intention to commence an
Enforcement Action and (ii) the occurrence of any event described in section
8.1(d) of the Subordinated Notes; PROVIDED that the Noteholders may
accelerate the Subordinated Notes upon the occurrence of an Acceleration
Event, but may not take any other Enforcement Action until the expiry of the
above-described period.

Section 2.5. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR
INDEBTEDNESS. Upon the payment in full in Cash of all Senior Indebtedness,
the Noteholders shall become subrogated to the rights of the holders of such
Senior Indebtedness to receive payments and distributions of cash, property
and securities applicable to such Senior Indebtedness until the principal of
and interest on the Subordinated Notes shall be paid in full in cash. For
purposes of such subrogation, no payments or distributions to the holders of
such Senior Indebtedness of any cash, property or securities to which the
Noteholders would be entitled except for the provisions of this Agreement,
and no payments over pursuant to the provisions of this Agreement to the
holders of such Senior Indebtedness by the Noteholders shall, as among the
Issuer, its creditors (other than holders of such Senior Indebtedness) and
the Noteholders be deemed to be a payment or distribution by the Issuer to or
on account of such Senior Indebtedness.

Section 2.6. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The
provisions of this Agreement are and are intended solely for the purpose of
defining the relative rights of the holders of the Subordinated Notes on the
one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Agreement or in the Subordinated

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<PAGE>

Notes (including, without limitation, the failure of any Noteholder to bring
an Enforcement Action which is barred under the provisions of this Agreement)
is intended to or shall (i) impair, as among the Issuer, its creditors (other
than holders of Senior Indebtedness) and the Noteholders, the obligation of
the Issuer, which is absolute and unconditional, to pay to the Noteholders
the principal of, and premium and interest on, and any other amount payable
by the Issuer under, the Subordinated Notes as and when the same shall become
due and payable in accordance with its terms; or (ii) affect the relative
rights against the Issuer of the Noteholders and its creditors (other than
the holders of Senior Indebtedness); or (iii) prevent the Noteholders from
accelerating the Subordinated Obligations and exercising all other remedies
otherwise permitted by applicable law upon a default under the Subordinated
Notes after the payment in full in Cash of the Senior Indebtedness and
termination of commitments to make advances or issue letters of credit under
the Senior Credit Agreement or otherwise in accordance with the provisions of
this Agreement; or (iv) constitute or effect a waiver of any claims, defenses
or rights of such Noteholders which may be available to them in an action by
or against the Issuer or any other creditor (other than the holders of Senior
Indebtedness).

Section 2.7. NO WAIVER OF SUBORDINATION PROVISIONS. No right of
any present or future holder of any Senior Indebtedness 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 Issuer, any other
Credit Party, the Agent or any holder of Senior Indebtedness or by any act or
failure to act by the Agent or any such holder, or by any noncompliance by
the Issuer, the Agent or any holder of Senior Indebtedness with the terms,
provisions and covenants of this Agreement, regardless of any knowledge of
such act or failure to act any holder thereof may have or be otherwise
charged with. Without in any way limiting the generality of the foregoing,
the holders of Senior Indebtedness may at any time and from time to time,
without the consent of or notice to the Noteholders, without incurring
responsibility to the Noteholders and without impairing or releasing the
subordination provided in this Agreement or the obligations hereunder of the
Noteholders to the holders of Senior Indebtedness, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter, or increase or reduce the available
commitments under or principal amount of, or otherwise amend, supplement,
modify, refinance or restructure in any manner any Senior Indebtedness or any
instrument evidencing the same or any agreement under which the Senior
Indebtedness is outstanding or is related thereto; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing Senior Indebtedness; (iii) release any Person liable in any manner
for the collection of Senior Indebtedness; and (iv) exercise or refrain from
exercising or waiving any rights, powers or remedies against the Issuer or
any other Person.

Section 2.8. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF
LIQUIDATING AGENT. Upon any payment or distribution of assets of the Issuer
referred to in this Agreement, the Noteholders shall be entitled to rely upon
any order or decree entered by any court of competent jurisdiction in which
such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a

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<PAGE>

certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Noteholders for the
purpose of ascertaining the Persons entitled to participate in such payment
or distribution, the holders of Senior Indebtedness and other debt of any
Credit Party, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto.

ARTICLE 3. MISCELLANEOUS

Section 3.1. REINSTATEMENT. The holders of Senior Indebtedness
shall continue to benefit from the subordination created hereunder and the
provisions of this Agreement shall continue to govern the relative rights and
priorities of such holders, on the one hand, and the Noteholders, on the
other, notwithstanding the fact that part or all of the Senior Indebtedness
or the liens securing payment thereof are subordinated, set aside, avoided or
disallowed under Section 548 of the Bankruptcy Code or any successor statute
or other applicable insolvency law or equitable principles.

Section 3.2. REPRESENTATIONS AND WARRANTIES. Each of the parties
hereto hereby represents and warrants that (a) it has full power, authority
and legal right to make and perform this Agreement, and (b) this Agreement is
its legal, valid and binding obligation, enforceable against it in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, moratorium or other laws affecting creditors' rights generally
and by general principles of equity (whether enforcement is sought in a
proceeding in equity or at law).

Section 3.3. AMENDMENT. This Agreement may only be amended by a
writing executed by the "Required Holders" (as defined in the Subordinated
Notes), the Issuer and the Agent. No modification, amendment or waiver to the
Subordinated Notes (other than to the conversion mechanisms in section 3
thereof) prior to the payment in full, in Cash, of all Senior Indebtedness
and the termination of all commitments under the Senior Credit Agreement,
shall be effected without the prior written consent of the Agent, other than
a waiver granted by the Noteholders of a default by the Issuer.

Section 3.4. LEGEND. The Subordinated Notes shall bear a legend
substantially in the form of the following:

THIS 8.0% SUBORDINATED CONVERTIBLE NOTE (THIS "NOTE") IS
SUBORDINATED TO THE PRIOR PAYMENT AND SATISFACTION OF ALL
SENIOR INDEBTEDNESS, PURSUANT TO, AND AS DEFINED IN, THE
SUBORDINATION AGREEMENT DATED AS OF OCTOBER ___, 1998, AS
AMENDED FROM TIME TO TIME (THE "SUBORDINATION AGREEMENT")
AMONG THE ISSUER, HELLER EQUITY CAPITAL CORPORATION

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<PAGE>

AND THE AGENT (AS DEFINED IN THE SUBORDINATION AGREEMENT)
TO THE EXTENT, AND IN THE MANNER PROVIDED IN, THE
SUBORDINATION AGREEMENT. A COPY OF THE SUBORDINATION
AGREEMENT WILL BE PROVIDED TO ANY HOLDER OF THIS NOTE
UPON WRITTEN REQUEST TO THE ISSUER.

Section 3.5. REMEDIES. The holders of Senior Indebtedness shall
be entitled to enforce their rights under this Agreement specifically, to
recover damages by reason of any breach of any provision of this Agreement
and to exercise all other rights existing in their favor. The Noteholders and
the Issuer acknowledge and agree that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that the Agent
on behalf of the holders of Senior Indebtedness may apply to any court of law
or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting bond or other security) in order to
enforce or prevent any violation of the provisions of this Agreement.

Section 3.6. NOTICES. So long as any Senior Indebtedness or any
commitments to make loans or issue letters of credit under the Senior Credit
Agreement remain outstanding, all notices, demands or other communications to
be given or delivered under or by reason of the provisions of the
Subordinated Notes shall be simultaneously transmitted to the Agent by the
Issuer or Noteholder delivering such communication, and any notice of
acceleration of Senior Indebtedness provided to the Issuer by the Agent shall
also be provided to the Noteholders; PROVIDED that the failure of a
Noteholder or the Agent to so provide a copy of any such notice to the Agent
or the Noteholders, respectively, shall not prevent such notice from being
effective as to the Issuer. Notwithstanding the foregoing, so long as any
Senior Indebtedness or any commitments to lend under the Senior Credit
Agreement remain outstanding, no acceleration of, redemption of, or action
for specific performance of any covenant under, any Subordinated Note or any
Enforcement Action shall be effective without notice of the same being
provided to the Agent. All notices, demand or other communications to be
given or delivered under or by reason of the provisions of the Subordinated
Notes or this Agreement shall be in writing and delivered personally, mailed
by certified or registered mail, return receipt requested and postage
prepaid, sent via a nationally recognized overnight courier or sent via
facsimile. Such notices, demands and other communications will be sent to the
address indicated below:

If to the Issuer, to it at:
3478 Burkirk Avenue, Suite 260
Pleasant Hill, CA 94523
Attention: President

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<PAGE>

with a copy to each of the following:

Brownstein Hyatt Farber & Strickland, PC
410 Seventeenth Street
22nd Floor
Denver, CO 80202-4437
Attention: Steven Siegel, Esq.
Telecopy: (303) 623-1956

and

Kohlberg & Company
111 Radio Circle
Mt. Kisco, NY 10549
Attention: Samuel Frieder
Telecopy: (914) 241-7476

If to the Initial Noteholder:

Heller Equity Capital Corporation
500 West Monroe Street
Chicago, IL 60661
Attention: Charles P. Brisman, Esq.
Telecopy: (312) 441-7208

with a copy to:

Katten Muchin & Zavis
1999 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067
Attention: James K. Baer, Esq.
Telecopy: (310) 788-4471

If to the Agent, to it at:

Fleet Capital Corporation
20800 Swenson Drive
Suite 350
Waukesha, Wisconsin 53186
Attention: Loan Administration Manager
Telecopy: (414) 798-4882

with a copy to:

Goldberg, Kohn, Bell, Black,
Rosenbloom & Moritz

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<PAGE>

55 East Monroe Street
Suite 3700
Chicago, IL 60603
Attention: Karen R. Bieber, Esq.
Telecopy: (312) 332-2196

or such other address or to the attention of such other Person as the
recipient party shall have specified by prior written notice to the sending
party; PROVIDED that the failure to deliver copies of notices as indicated
above shall not affect the validity of any notice. Any such communication
shall be deemed to have been received (i) when delivered, if personally
delivered, or sent by nationally recognized overnight courier or via
facsimile or (ii) on the third Business Day following the date on which the
piece of mail containing such communication is posted if sent by certified or
registered mail.

Section 3.7. SEVERABILITY. In case any provision in this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction,
shall not in any way be affected or impaired thereby.

Section 3.8. HEADING. Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.

Section 3.9. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF ILLINOIS WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

Section 3.10. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon the parties hereto and their respective successors and assigns
and shall inure to the benefit of the parties hereto and their successors and
assigns, and each holder of Senior Indebtedness shall be deemed to have
acquired its Senior Indebtedness in reliance on the terms hereof. Without
limitation, any and all holders of Subordinated Indebtedness shall be bound
by the provisions hereof.

Section 3.11. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All
judicial proceedings brought against the Issuer or any Noteholder with
respect to this Agreement or any Subordinated Note may be brought in any
State or Federal court of competent jurisdiction in the State of Illinois
located in Cook County and by execution and delivery of this Agreement (or
the acceptance of any Subordinated Note) each such Person accepts for itself
and in connection with its properties, generally and unconditionally, the
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by
any judgment rendered thereby in connection with this Agreement subject,
however, to rights of appeal. The Issuer and each

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such Noteholder hereby designates and appoints CT Corporation System, with an
address at 1633 Broadway, New York, New York 10019 and such other Persons as
may hereafter be selected by such Person irrevocably agreeing in writing to
serve as its agent to receive on its behalf, service of all process in any
such proceedings in any such court, such service being hereby acknowledged by
each such person to be effective and binding service in every respect. A copy
of such process so served shall be sent by air courier to the applicable
party at its address provided in section 3.6, except that unless otherwise
provided by applicable law, any failure to mail such copy shall not affect
the validity of service of process. If any agent appointed by the Issuer or
any Noteholder refuses to accept service, such Person hereby agrees that
service upon it by mail shall constitute sufficient notice. Nothing herein
shall affect the right to serve process in any other manner permitted by law.

Section 3.12. WAIVER OF JURY TRIAL. Each of the parties to this
Agreement and each holder of any Subordinated Note hereby irrevocably waives
all rights to a trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement or the Subordinated Notes or the
transactions contemplated hereby or thereby.

Section 3.13. COUNTERPARTS: EFFECTIVENESS. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but
one and the same instrument.

-14-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by the respective duly authorized officers of the undersigned
as of the date first written above.

THE ISSUER:

COLOR SPOT NURSERIES, INC.

By:
----------------------------------
Name:
Title:

THE INITIAL NOTEHOLDER:

HELLER EQUITY CAPITAL CORPORATION

By:
----------------------------------
Name:
Title:

THE AGENT:

FLEET CAPITAL CORPORATION

By:
----------------------------------
Name:
Title:

-15-

<PAGE>

[EXHIBIT] 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

The Predecessor The Company
----------------------------------------- -----------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
2/28/93 Year 1/1/95 9/8/95 Year Year
Through Ended Through Through Ended Ended
12/31/93 12/31/94 9/8/95 6/30/96 6/30/97 6/30/98
- ---------------------------------------------------------------------------------------------------------------------------------
In Thousands In Thousands
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax income from
continuing operations $ (4,908) $ (5,947) $ (5,485) $ 5,057 $ 5,885 $ (29,682)
- ---------------------------------------------------------------------------------------------------------------------------------
Total fixed charges 2,846 3,636 2,963 1,375 5,343 15,404
- ---------------------------------------------------------------------------------------------------------------------------------
--------- --------- --------- ------- -------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earnings (1) $ (2,062) $ (2,311) $ (2,522) $ 6,432 $ 11,228 $ (14,278)
- ---------------------------------------------------------------------------------------------------------------------------------
--------- --------- --------- ------- -------- ---------
--------- --------- --------- ------- -------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed Charges:
Interest expense,
including amortization
of deferred financing fees $ 2,182 $ 3,170 $ 2,576 $ 687 $ 4,179 $ 13,405
- ---------------------------------------------------------------------------------------------------------------------------------
Interest element of rentals(2) 664 466 387 688 1,164 1,999
- ---------------------------------------------------------------------------------------------------------------------------------
--------- --------- --------- ------- -------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Fixed Charges(1) $ 2,846 $ 3,636 $ 2,963 $ 1,375 $ 5,343 $ 15,404
- ---------------------------------------------------------------------------------------------------------------------------------
--------- --------- --------- ------- -------- ---------
--------- --------- --------- ------- -------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to
Fixed Charges -- -- -- 4.68 2.10 --
- ---------------------------------------------------------------------------------------------------------------------------------
Dollar Deficiency of
Earnings to Fixed
Charges(3) $ (4,908) $ (5,947) $ (5,485) -- -- $ (29,682)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(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" consist 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 periods from January 1, 1993 through February 28, 1993 and
from March 1, 1993 through December 31, 1993, the year ended December 31, 1994,
the period from January 1, 1995 through September 8, 1995, and the year ended
June 30, 1998, earnings are inadequate to cover fixed charges.

<PAGE>

[EXHIBIT] 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report dated August 20, 1998 (except with respect to the matter discussed in
Note 20, as to which date is October 15, 1998) included in this Form 10-K.

/s/ ARTHUR ANDERSEN LLP

SAN FRANCISCO, CALIFORNIA
October 15, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE FISCAL YEAR ENDED 6/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1999
<CASH> 2,244
<SECURITIES> 0
<RECEIVABLES> 28,463
<ALLOWANCES> 3,084
<INVENTORY> 45,913
<CURRENT-ASSETS> 74,816
<PP&E> 54,197
<DEPRECIATION> 7,078
<TOTAL-ASSETS> 210,350
<CURRENT-LIABILITIES> 48,007
<BONDS> 135,044
32,524
0
<COMMON> 12
<OTHER-SE> 13,737
<TOTAL-LIABILITY-AND-EQUITY> 210,350
<SALES> 187,731
<TOTAL-REVENUES> 187,731
<CGS> 136,214
<TOTAL-COSTS> 136,214
<OTHER-EXPENSES> 68,079
<LOSS-PROVISION> 2,647
<INTEREST-EXPENSE> 13,405
<INCOME-PRETAX> (29,682)
<INCOME-TAX> 10,514
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (2,792)
<CHANGES> 0
<NET-INCOME> (21,960)
<EPS-PRIMARY> (3.65)
<EPS-DILUTED> (3.65)

</TABLE>