COLOR SPOT NURSERIES INC, 10-Q, 1999-02-05

COLOR SPOT NURSERIES INC
10-Q, 1999-02-05
MISCELLANEOUS NONDURABLE GOODS

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<PAGE>

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

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

FORM 10-Q

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

For the quarterly period ended DECEMBER 24, 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 Identification No.)
Incorporation or Organization)

3478 BUSKIRK AVENUE, PLEASANT HILL, CA 94523
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (925) 934-4443
---------------------------

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

As of February 1, 1999, the Registrant had outstanding 6,937,068 shares of
Common Stock, par value $0.001 per share.

<PAGE>

COLOR SPOT NURSERIES, INC.

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS UNDER THE CAPTIONS "ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND ELSEWHERE
THROUGHOUT THIS QUARTERLY REPORT ON FORM 10-Q ("QUARTERLY 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 THE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --
CERTAIN BUSINESS FACTORS" OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED JUNE 30, 1998 (AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 15, 1998). READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS MADE IN, OR INCORPORATED BY REFERENCE
INTO, THIS QUARTERLY REPORT OR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, ANY DOCUMENT OR STATEMENT REFERRING TO THIS QUARTERLY REPORT OR THE
COMPANY'S PRESS RELEASES.

<PAGE>

COLOR SPOT NURSERIES, INC.

INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of December 24, 1998 and
June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Consolidated Statements of Operations for the Three and Six Months
Ended December 24, 1998 and December 25, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Loss for the Six Months Ended December 24, 1998. . . . . . . . . . . . . . . . . 3

Consolidated Statements of Cash Flow for the Six Months
Ended December 24, 1998 and December 25, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 4

Condensed Notes to Consolidated Financial Statements as of
December 24, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . .12

Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

PART II - OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . .17

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>

<PAGE>

ITEM 1.
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIE

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
December 24, June 30,
1998 1998
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,499 $ 2,244
Accounts receivable, net of allowances of $1,946 and $3,084, respectively 25,992 28,463
Inventories, net 49,015 42,306
Prepaid expenses and other 697 1,803
--------- --------
Total current assets 77,203 74,816

TREE INVENTORIES 4,423 3,607
PROPERTY, PLANT AND EQUIPMENT, net 53,733 54,197
INTANGIBLE ASSETS, net 52,563 56,117
DEFERRED INCOME TAXES 28,147 20,167
NOTES RECEIVABLE AND OTHER ASSETS 1,264 1,446
--------- --------

Total assets $ 217,333 $210,350
--------- --------
--------- --------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 11,645 $ 16,305
Accrued liabilities 18,593 14,404
Dividends payable to stockholders 146 232
Deferred income taxes 16,013 16,013
Current maturities of long-term debt 993 1,053
--------- --------

Total current liabilities 47,390 48,007

LONG-TERM DEBT 156,924 135,044
--------- --------

Total liabilities 204,314 183,051
--------- --------

SERIES A PREFERRED STOCK, $0.01 par value, 100,000 shares authorized,
43,884 and 42,504 shares issued and outstanding, respectively 35,739 32,524
REDEEMABLE COMMON STOCK, $0.001 par value, 1,163,550
shares issued and outstanding 2,425 2,266
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 shares issued and outstanding 12 12
Additional paid-in capital 51,130 50,975
Treasury stock, 6,200,228 shares (45,488) (45,488)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (39,049) (21,240)
---------- ---------

Total stockholders' deficit (25,145) (7,491)
---------- ---------

Total liabilities and stockholders' deficit $ 217,333 $ 210,350
---------- ---------
---------- ---------
</TABLE>

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

1
<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 24, December 25, December 24, December 25,
1998 1997 1998 1997
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
NET SALES $47,921 $ 38,708 $ 75,627 $64,190
COST OF SALES 32,125 25,502 51,511 43,647
---------- ---------- ----------- ----------
Gross profit 15,796 13,206 24,116 20,543

SALES, MARKETING AND DELIVERY EXPENSES 11,266 11,095 21,159 19,499
GENERAL AND ADMINISTRATIVE EXPENSES 5,506 2,594 8,985 5,292
SPECIAL CHARGES AND OTHER - - 3,652 -
AMORTIZATION OF INTANGIBLE ASSETS 430 629 859 974
TERMINATION OF MANAGEMENT FEE AND OTHER - 2,400 - 2,400
---------- ---------- ----------- ----------

Loss from operations (1,406) (3,512) (10,539) (7,622)

INTEREST EXPENSE 3,717 3,305 7,734 5,805
OTHER (INCOME) EXPENSE (325) (69) 50 33
---------- ---------- ----------- ----------

Loss before income taxes, cumulative effect of change
in accounting principle and extraordinary loss (4,798) (6,748) (18,323) (13,460)
INCOME TAX BENEFIT 1,699 3,709 6,490 6,730
---------- ---------- ----------- ----------
Loss before cumulative effect of change in accounting principle (3,099) (3,039) (11,833) (6,730)
and extraordinary loss
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax benefit - - 1,687 -

EXTRAORDINARY LOSS, net of tax benefit 999 2,162 999 2,162
---------- ---------- ----------- ----------

Net loss (4,098) (5,201) (14,519) (8,892)

SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 1,631 - 3,130 -
---------- ---------- ----------- ----------

Net loss applicable to common stock $(5,729) $ (5,201) $(17,649) $ (8,892)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------

Net loss per common share:
Loss before cumulative effect of change in accounting principle $(0.68) $(0.44) $ (2.16) $(0.97)
and extraordinary loss
Cumulative effect of change in accounting principle - - (0.24) -
Extraordinary loss (0.14) (0.31) (0.14) (0.31)
---------- ---------- ----------- ----------
Total $(0.83) $(0.75) $(2.54) $ (1.28)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------

Shares used in per share calculation 6,937,068 6,937,068 6,937,068 6,932,805
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>

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

2
<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT COMMON SHARES)

<TABLE>
<CAPTION>
Additional
Common Common Paid-In Treasury
Shares Stock Capital Stock
---------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, June 30, 1998 5,773,518 $ 12 $50,975 $ (45,488)

Accretion of Series A preferred stock - - - -
Accretion of redeemable common stock - - - -
Series A preferred stock dividends - - - -
Deferred compensation - - 155 -
Net loss - - - -
---------- ------ --------- -----------
Balance, December 24, 1998 (unaudited) 5,773,518 $ 12 $51,130 $ (45,488)
---------- ------ --------- -----------
---------- ------ --------- -----------

<CAPTION>
Total
Accumulated Stockholders' Comprehensive
Warrants Deficit Deficit Loss
---------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, June 30, 1998 $ 8,250 $ (21,240) $ (7,491) $ -

Accretion of Series A preferred stock - (410) (410) -
Accretion of redeemable common stock - (160) (160) -
Series A preferred stock dividends - (2,720) (2,720) -
Deferred compensation - - 155 -
Net loss - (14,519) (14,519) (14,519)
-------- ----------- ---------- ----------

Balance, December 24, 1998 (unaudited) $8,250 $ (39,049) $ (25,145) $ (14,519)
-------- ----------- ---------- ----------
-------- ----------- ---------- ----------
</TABLE>

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

3
<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
Six Months Ended
December 24, December 25,
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,519) $(8,892)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 3,633 2,952
Interest paid in kind 322 297
Deferred compensation 157 -
Deferred income taxes (7,980) (8,892)
Write-off of extraordinary items 2,612 -
Write-off of deferred financing costs 1,547 4,324
Changes in operating assets and liabilities, net of effect of
acquired businesses:
Decrease in accounts receivable 2,653 2,357
Increase in inventories (7,525) (17,597)
(Decrease) increase in prepaid expenses and other assets 1,106 (206)
Increase (decrease) in accounts payable (4,660) 6,017
Increase in accrued and other liabilities 4,590 5,663
-------- --------
Net cash used in operating activities (18,064) (13,977)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less cash acquired - (40,539)
Purchases of fixed assets (2,310) (7,309)
-------- --------
Net cash used in investing activities (2,310) (47,848)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 5,121
Purchase of treasury stock - (260)
Financing costs (1,869) (743)
Issuance of preferred stock and warrants - 40,000
Proceeds from borrowings - 136,803
Debt and stock issuance costs - (7,848)
Net borrowings under revolving line of credit 21,935 (9,386)
Repayments of long-term debt (437) (104,272)
-------- --------
Net cash provided by financing activities 19,629 59,415

NET DECREASE IN CASH (745) (2,410)
CASH AT BEGINNING OF PERIOD 2,244 2,762
-------- --------
CASH AT END OF PERIOD $1,499 $ 352
-------- --------
-------- --------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $7,019 $5,207
-------- --------
-------- --------
Income taxes $3 $3
-------- --------
-------- --------

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ - $ 625
-------- --------
-------- --------
</TABLE>

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

4
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

NOTE 1 - BASIS OF PRESENTATION AND OPERATIONS

The information contained in the following notes to the consolidated
financial statements of Color Spot Nurseries, Inc. (the "Company") is condensed
from that which would appear in the annual consolidated financial statements.
Accordingly, these financial statements should be read in conjunction with the
Company's annual financial statements for its fiscal year ended June 30, 1998
contained in its Annual Report on Form 10-K filed with the Securities and
Exchange Commission. For purposes of this quarterly report on Form 10-Q, the
term "three months or quarter ended December 24, 1998" relates to the period
from September 25, 1998 through December 24, 1998, the term "three months or
quarter ended December 25, 1997" relates to the period from September 26, 1997
through December 25, 1997, the term "six months ended December 24, 1998" relates
to the period from July 1, 1998 through December 24, 1998 and the term "six
months ended December 25, 1997" relates to the period from July 1, 1997 through
December 25, 1997.

In the fiscal year ended December 24,1998, 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. During the three months ended
September 24, 1998, the Company reported a net loss before income taxes and
cumulative effect of change in accounting principle of $8.7 million and used
$5.3 million of cash in operating activities. Consequently, the Company was not
in compliance with certain financial covenants on its revolving credit facility
at June 30, 1998, but a waiver was obtained from the banks for the violations.
The Company's fiscal 1998 operating results were adversely impacted by severe
weather and inventory overproduction that resulted in the write-off of
unsaleable excess products. The Company's results during the six months ended
December 24, 1998 were adversely impacted by its seasonal cycles and fixed
operating costs as well as special charges. In order to improve its operating
results, the Company hired several new executives with significant operating
experience to bolster its current management team. One of the tactical
initiatives implemented by management has been to adjust the production planning
process to better match supply and demand and limit excess inventory while
maintaining high quality customer service. This production change has resulted
in reduced strategic overproduction and reduced shrink, or write-off of
unsaleable excess inventory. Management has also implemented measures designed
to increase efficiency in product returns, labor, delivery and selling expenses.
The Company recorded a $3.7 million non-recurring special charge during the
three months ended September 24, 1998 relating to facility closings, employee
severance and other non-recurring consulting costs associated with actions taken
by the new management team. The Company may record additional charges as
management finalizes its review of the Company's operations.

As of December 24, 1998, the Company had $156.9 million of long-term
indebtedness and an accumulated deficit of $39.0 million. The Company is highly
leveraged. On October 15, 1998, the Company entered into a new three-year loan
agreement providing up to $70.0 million of availability. In connection with this
refinancing, the Company's existing revolving credit facility and its associated
acquisition term loan facility and supplemental line were terminated (see Note
6). Although the Company succeeded in refinancing its debt on October 15, 1998,
there can be no assurance that the Company will be able to generate sufficient
cash flows or meets its financial goals to comply with debt covenants in the
future. 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 its debt, preferred stock, warrants and common stock
including the following: (i) a substantial portion of

5
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

the Company's cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Company for operations, acquisitions, future business opportunities and
other purposes and increasing the Company's vulnerability to adverse general
economic and industry conditions; (ii) the Company's leveraged position may
increase its vulnerability to competitive pressures; (iii) the financial
covenants and other restrictions contained in the new loan agreement, the
indenture for its outstanding senior subordinated notes 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 accompanying financial statements have been prepared contemplating
the realization of all recorded assets, including intangible assets and
deferred tax assets 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, and ultimately attain profitability or there will be a material
adverse impact on the Company's business, financial position and results of
operations. No assurances can be provided that the Company will be able to
attain profitability or achieve its business objectives.

The consolidated financial statements as of December 24, 1998 and for the
three and six months ended December 24, 1998 and December 25, 1997 are
unaudited. However, in the opinion of management, these financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
for a fair presentation of the financial position, results of operations and
cash flows for the interim periods. 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 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. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The Company's
operations are highly seasonal and the results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
entire year.

6
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

NOTE 2 - INVENTORIES

Inventories at December 24, 1998 and June 30, 1998, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 24, JUNE 30,
1998 1998
----------- ----------
<S> <C> <C>
Current: (UNAUDITED)
Plants, shrubs and ground cover $ $45,015 $ 39,764
Raw materials and supplies 6,091 7,565
Inventory reserves (2,091) (5,023)
----------- ----------
Total current inventories 49,015 42,306
Noncurrent:
Christmas trees 4,423 3,607
----------- ----------
Total inventories $ 53.438 $ 45,913
----------- ----------
----------- ----------
</TABLE>

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 24, 1998 and June 30, 1998
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 24, JUNE 30,
1998 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
Land $ 10,049 $ 10,047
Greenhouses and buildings 21,633 21,157
Furniture and fixtures 5,004 4,593
Machinery and equipment 17,526 16,333
Leasehold improvements 5,661 5,356
Other 3,788 3,789
---------- ----------

63,661 61,275
Less: Accumulated depreciation (9,928) (7,078)
---------- ----------
Total property, plant and equipment $ 53,733 $ 54,197
---------- ----------
---------- ----------

</TABLE>

7
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

NOTE 4 - INTANGIBLE ASSETS

Intangible assets at December 24, 1998 and June 30, 1998 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 24, JUNE 30,
1998 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
Goodwill $ 47,517 $ 47,517
Organization costs - 3,578
Financing costs 6,104 5,911
Non-compete agreements 1,694 1,694
Other 916 911
---------- ---------
56,231 59,611
Less: Accumulated amortization (3,668) (3,494)
---------- ---------
Total intangible assets $ 52,563 $ 56,117
---------- ---------
---------- ---------
</TABLE>

In April 1998, the AICPA issued Statement of Position 98-5 "Reporting on
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires non-governmental
entities to expense start-up costs, including organization costs, as incurred.
The Company early-adopted SOP 98-5 on July 1, 1998 and recognized a $2.6 million
pre-tax charge ($1.7 million after tax benefit), which was accounted for as a
change in accounting principle.

NOTE 5 - ACQUISITIONS

Between July 31, 1997 and September 3, 1997, the Company effected six
business acquisitions. The Company accounted for all of these acquisitions
using the purchase method of accounting whereby the purchase price, including
liabilities assumed, is allocated based upon the fair value of the tangible and
intangible assets of the acquired entity. Results of operations of the acquired
entities subsequent to the purchase date are included in the consolidated
financial statements.

8
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

Pro forma operating results of the Company, assuming all the above
acquisitions occurred on July 1, 1997, are presented below (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 24, DECEMBER 25,
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 75,627 $ 66,053
Loss before cumulative effect of change
in accounting principle and
extraordinary loss (11,833) (7,319)
Loss per share before cumulative effect of
change in accounting principle and
extraordinary loss (including the effect
of Series A preferred stock dividends/
accretion (2.16) (1.05)
Shares used in per share calculation 6,937,068 6,490,119
</TABLE>

NOTE 6 - DEBT

Debt at December 24, 1998 and June 30, 1998 consisted of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 24, JUNE 30,
1998 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
Revolving line of credit $ 45,973 $ 24,038
Senior subordinated notes 100,000 100,000
Convertible note 8,308 7,986
Non-compete agreements 954 1,073
Other 2,682 3,000
--------- ---------
157,917 136,097
Less: Current maturities (993) (1,053)
--------- ---------
Long-term portion $ 156,924 $ 135,044
--------- ---------
--------- ---------
</TABLE>

On October 15, 1998, the Company's revolving line of credit was refinanced.
The Company entered into a Loan and Security Agreement with Fleet Capital
Corporation, as agent (the "Fleet Loan Agreement"), and the Company's existing
credit facility was repaid in full. 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, without
limitation, from November 1 through April 30 each year. As of December 24,
1998, $12.3 million was available under this line of credit.

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 Prime plus 1.0% or LIBOR plus 3.0%. In

<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

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 0.5%. 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. As of December 24,
1998, the Company was in compliance with these covenants.

The Company recorded a $1.0 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 fiscal 1999.

NOTE 7 - EARNINGS PER SHARE

Basic and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 24, 1998 December 24, 1998
------------------ -----------------
Per Share Per Share
(Loss) Shares Amount (Loss) Shares Amount
---------- -------- --------- ---------- ------- -----------
(in (in
thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Loss before cumulative effect of
change in accounting principle
and extraordinary loss $(3,099) $ (0.45) $ (11,833) $(1.71)

Preferred stock dividends/accretion (1,631) (0.24) (3,130) (0.45)
-------- -------- ---------- --------
Loss before extraordinary loss and
Cumulative effect of change in
Accounting principle (4,730) (0.68) (14,963) (2.16)

Cumulative effect of change in
Accounting principle - - (1,687) (0.24)

Extraordinary loss (999) (0.14) (999) (0.14)
-------- -------- ---------- --------

Net loss applicable to common
Stock $(5,729) 6,937,068 $ (0.83) $ (17,649) 6,937,068 $(2.54)
-------- -------- ---------- --------
-------- -------- ---------- --------
</TABLE>

10
<PAGE>

COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 24, 1998

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 25, 1997 December 25, 1997
------------------ -----------------
Per Share Per Share
(Loss) Shares Amount (Loss) Shares Amount
----------- ---------- ----------- ---------- --------- ----------
(in (in
thousands) thousands)
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary loss $(3,039) $ (0.44) $(6,730) $(0.97)

Extraordinary loss (2,162) $ (0.31) (2,162) $(0.31)

Net Loss $(5,201) 6,937,068 $ (0.75) $(8,892) 6,932,805 $(1.28)
</TABLE>

For the three and six months ended December 24, 1998 and December 25, 1997,
the effect of options, warrants and convertible securities was antidilutive and
is therefore excluded from the computation of earnings per share.

NOTE 8 - SPECIAL CHARGES AND OTHER

During the first quarter of fiscal 1999, the Company recorded a pre-tax
special charge of $3.7 million related to the closure of two facilities,
employee severance, and other incurred, non-recurring consulting costs. These
costs were associated with new management's ongoing review of the Company's
operations.

11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

The Company is one of the largest wholesale nurseries in the United States,
based on annual revenue and greenhouse square footage. The Company sells a wide
assortment of high-quality bedding plants, shrubs, potted flowering plants,
ground cover and Christmas trees as well as provides extensive merchandising
services primarily to leading home centers and mass merchants. The Company's
business is highly seasonal with a peak selling season in the spring generally
from March through June. Consequently, the Company has historically reported
losses and lower revenues during its first and second fiscal quarters.

THREE MONTHS ENDED DECEMBER 24, 1998 AS COMPARED TO THE THREE MONTHS ENDED
DECEMBER 25, 1997

NET SALES. Net sales increased $9.2 million, or 23.8%, to $47.9 million
for the three months ended December 24, 1998 from $38.7 million during the three
months ended December 25, 1997. This increase is primarily the result of a
33.7% reduction in returns and a 16.0% increase in sales, mainly of seasonal
products.

GROSS PROFIT. Gross profit increased $2.6 million, or 19.6%, to $15.8
million for the three months ended December 24, 1998 from $13.2 million during
the three months ended December 25, 1997. Gross profit as a percentage of net
sales decreased to 33.0% for the three months ended December 24, 1998 from 34.1%
for the three months ended December 25, 1997. The decrease in gross profit
percentage was primarily the result of higher sales of lower margin seasonal
products offset by a 20.3% decrease in labor and a 45.6% decrease in shrink, or
write-off of unsaleable excess inventory.

OPERATING EXPENSES. Operating expenses include sales, marketing and
delivery expenses, general and administrative expenses, amortization of
intangible assets and special charges. Sales, marketing and delivery expenses
increased $0.2 million, or 1.5%, to $11.3 million for the three months ended
December 24, 1998 from $11.1 million in the three months ended December 25,
1997. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 23.5% for the three months ended December 24, 1998 from 28.7% for
the three months ended December 25, 1997. This decrease as a percentage of net
sales was the result of a 12% reduction in the Company's sales force from
December 25, 1997 to December 24, 1998 as well as the implementation of
significant delivery cost efficiencies. As a percentage of net sales, delivery
expense decreased to 14.5% for the three months ended December 24, 1998 from
17.9% for the three months ended December 25, 1997. General and administrative
expenses increased $2.9 million, to $5.5 million for the three months ended
December 24, 1998 from $2.6 million in the three months ended December 25, 1997.
As a percentage of net sales, general and administrative expenses increased to
11.5% for the three months ended December 24, 1998 from 6.7% for the three
months ended December 25, 1997. This increase as a percentage of net sales is
primarily the result of increased hiring and a revised compensation structure
for key management and other employees to support the company's operations. The
Company is currently reviewing all delivery, sales, marketing, general and
administrative expenses. Amortization of intangible assets decreased $0.2
million to $0.4 million for the three months ended December 24, 1998 due to the
write-off of unamortized organization costs during the three months ended
September 24, 1998.

INTEREST EXPENSE. Interest expense increased $0.4 million to $3.7 million
for the three months ended December 24, 1998 from $3.3 million in the three
months ended December 25, 1997 as a result of higher levels of borrowings
required to fund operating losses and the Company's working capital
requirements.

12
<PAGE>

tax limitations on the use of net operating loss carryforwards. The Company's
effective tax rate decreased to 35.4% for the three months ended December 24,
1998 from 55.0% for the three months ended December 25, 1997. This decrease was
primarily the result of expected full year results and the corresponding impact
of the various state limitations thereon.

SIX MONTHS ENDED DECEMBER 24, 1998 AS COMPARED TO THE SIX MONTHS ENDED DECEMBER
25, 1997

NET SALES. Net sales increased $11.4 million, or 17.8%, to $75.6 million
for the six months ended December 24, 1998 from $64.2 million during the six
months ended December 25, 1997. This increase is primarily the result of
business acquisitions during the six months ended December 25, 1997 and $6.5
million in increased sales of seasonal product as well as a 26.9% decrease in
returns.

GROSS PROFIT. Gross profit increased $3.6 million, or 17.4%, to $24.1
million for the six months ended December 24, 1998 from $20.5 million during the
six months ended December 25, 1997. Gross profit as a percentage of net sales
decreased to 31.9% for the six months ended December 24, 1998 from 32.0% for the
six months ended December 25, 1997. This slight decrease is due to higher sales
of lower margin seasonal products offset by 25.6% less shrink, or write-off of
unsaleable excess inventory, recognized during the six months ended December 24,
1998 and a 0.9% reduction in labor costs.

OPERATING EXPENSES. Operating expenses include sales, marketing and
delivery expenses, general and administrative expenses, amortization of
intangible assets and special charges. Sales, marketing and delivery expenses
increased $1.7 million, or 8.5%, to $21.2 million for the six months ended
December 24, 1998 from $19.5 million in the six months ended December 25, 1997.
As a percentage of net sales, sales, marketing and delivery expenses decreased
to 28.0% for the six months ended December 24, 1998 from 30.4% for the six
months ended December 25, 1997. This decrease as a percentage of net sales was
the result of a 12% reduction in the Company's sales force from December 25,
1997 to December 24, 1998 as well as the implementation of significant delivery
cost efficiencies. As a percentage of net sales, delivery expense decreased to
17.2% for the six months ended December 24, 1998 from 18.9% for the six months
ended December 25, 1997. General and administrative expenses increased $3.7
million, to $9.0 million for the six months ended December 24, 1998 from $5.3
million in the six months ended December 25, 1997. As a percentage of net
sales, general and administrative expenses increased to 11.9% for the six months
ended December 24, 1998 from 8.2% for the six months ended December 25, 1997.
This increase as a percentage of net sales is primarily the result of increased
hiring and a revised compensation structure for key management and other
employees to support the company's operations. The Company is currently
reviewing all delivery, sales, marketing, general and administrative expenses.
Amortization of intangible assets of $0.9 for the six months ended December 24,
1998 and December 25, 1997 decreased as a percentage of net sales to 1.1% for
the six months ended December 24, 1998 from 1.5% for the six months ended
December 25, 1997 due to the write-off of unamortized organization costs during
the three months ended September 24, 1998.

SPECIAL CHARGES AND OTHER. During the first quarter of 1999, the Company
recorded a pre-tax special charge of $3.7 million related to the closure of two
facilities, employee severance, and other incurred, non-recurring consulting
costs. These costs were associated with new management's ongoing review of the
Company's operations.

INTEREST EXPENSE. Interest expense increased $1.9 million to $7.7 million
for the six months ended December 24, 1998 from $5.8 million in the six months
ended December 25, 1997 as a result of significantly higher levels of borrowings
required to fund operating losses and the Company's working capital
requirements.

13
<PAGE>

TAXES. While the Company's financial statements include tax expense or
benefit, 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. In addition, the Company's effective tax rate has
been different than the U.S. statutory rate of 34%. The difference between the
Company's effective tax rate and the U.S. statutory rate is due to state tax
provisions and other California tax limitations on the use of net operating loss
carryforwards. The Company's effective tax rate decreased to 35.4% for the six
months ended December 24, 1998 from 50.0% for the six months ended December 25,
1997. This decrease was primarily the result of expected full year results and
the corresponding impact of the various state limitations thereon.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash needs are primarily to fund seasonal working capital
requirements and capital expenditures. During the three and six months ended
December 24, 1998, the Company's primary source of capital was a revolving line
of credit. At June 30, 1998 and throughout the first quarter of fiscal 1999,
the Company was not in compliance with certain financial covenants on its
revolving credit facility, but a waiver was obtained from the Company's
banks. The Company refinanced this credit facility in October 1998. The
Company's results for the three months ended September 24, 1998 were adversely
impacted by its seasonal cycles, fixed operating costs and special charges. In
order to improve its operating results, the Company hired several new executives
with significant operating experience to bolster its current management team.
One of the tactical initiatives implemented by management has been to adjust the
production planning process to better match supply and demand and limit excess
inventory while maintaining high quality customer service. This production
change has resulted in reduced strategic overproduction and reduced shrink, or
write-off of unsaleable excess inventory. Management has also implemented
measures designed to increase efficiency in product returns, labor, delivery and
selling expenses. The company recorded a $3.7 million pre-tax, non-recurring
special charge during the three months ended September 24, 1998 relating to the
closure of two facilities, employee severance and other incurred, non-recurring
consulting costs. These costs were associated with management's ongoing review
of the Company's operations. The Company may record additional charges as
management finalizes its review of the Company's operations.

On October 15, 1998, the Company entered into a Loan and Security Agreement
with Fleet Capital Corporation, as agent (the "Fleet Loan Agreement"), and
repaid the existing credit facility in full. The Fleet Loan Agreement provides
a $70.0 million revolving credit facility, $55.0 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 without
limitation from November 1 through April 30 each year. As of December 24, 1998,
$12.3 million was available under this line of credit.

During the six months ended December 24, 1998, net cash used in
operating activities was $18.1 million primarily as a result of seasonal
operating losses and seasonal increases in inventory partially offset by
decreased receivables. Net cash used in investing activities during the six
months ended December 24, 1998 and December 25 1997 was $2.3 million and
$47.8 million, respectively. The Company used cash to acquire six businesses
during the six months ended December 25, 1997 and spent $2.3 million and $7.3
million on capital expenditures during the six months ended December 24, 1998
and December 25, 1997, respectively. The business acquisitions during the six
months ended December 25, 1997 were financed with $36.8 million of
acquisition loans. The Company anticipates that it will spend a total of
$2.6 million during the year ended June 30, 1999 on capital expenditures, of
which approximately $1.4 million relates to expansion capital expenditures.
Expansion capital expenditures represent expenditures for capital which
increase the Company's productive capabilities and typically include grading
of new land, purchasing and building new greenhouses and related
improvements, such as the installation of ventilation and irrigation systems.

The Company is highly leveraged. As of December 24, 1998, the Company has
$156.9 million of long-term indebtedness and an accumulated deficit of $39.0
million. Although the Company believes that the cash available from the Fleet
Loan Agreement will be sufficient to finance working capital requirements and
capital expenditures for the next 12 months, there is no assurance that the
Company will be able to generate sufficient cash flows or meet its financial
goals to comply with debt covenants in the future. The

14
<PAGE>

Company may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments governing its indebtedness and capital
stock. The Company's debt service obligations have important consequences to
holders of its debt, preferred stock, warrants and common stock 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 for the outstanding senior
subordinated notes 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.

YEAR 2000 COMPLIANCE PROGRAM

YEAR 2000 PROBLEM

The Year 2000 problem is the result of computer programs being written
using two digits (rather than 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.

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

15
<PAGE>

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." The Company has contacted, or has been contacted
by, its top ten customers and vendors and determined they are Year 2000
compliant. The Company anticipates that its compliance plan will be
completed by mid-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 as of December 24, 1998). In addition, the Company has decided
to hire an outside consulting firm to confirm that its financial systems,
computer hardware, operational and support systems and secondary computer
systems are Year 2000 compliant. The Company estimates that it will spend up
to $100,000 on this endeavor in the second half of calendar year 1999. 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 Company do not appropriately address their own Year 2000 compliance
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 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 increasing
it inventory of 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 a material effect on cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's liabilities consist primarily of a revolving line of credit,
senior subordinated notes, 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 Item 1.
"Financial Statements and Notes to Consolidated Financial Statements."

16
<PAGE>

June 30, 1998

<TABLE>
<CAPTION>
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
</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 its
existing credit facility. The Fleet Loan Agreement terminates in October 2001
(fiscal 2002). See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources" and Note
6 to the Notes to Consolidated Financial Statements. The average interest rate
is the Base Rate plus 1.0% or LIBOR plus 3.0%, as defined in the Fleet Loan
Agreement.

PART II. - OTHER INFORMATION

ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At June 30, 1998, the Company was in default of certain of its financial
covenants under its loan agreement with Credit Agricole Indosuez and a syndicate
of banks and was therefore in default under section 8.03(a) of the agreement.
On August 7, 1998, the credit agreement was amended and the banks waived any
default or event of default caused by the Company's failure to meet certain
covenants at June 30, 1998 and through October 15, 1998, when the Company
entered into the Fleet Loan Agreement.

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

None.

ITEM 5. OTHER INFORMATION

None.

17
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
11.1 Computations of Earnings Per Share -- See Note 7 to the Notes to
Consolidated Financial Statements.
27.1 Financial Data Schedule.

(b) REPORTS ON FORM 8-K.

None.
</TABLE>

<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: February 5, 1999.

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)

By: /s/ Carlos R. Plaza
-----------------------------------
Name: Carlos R. Plaza
Title: Executive Vice President and Chief
Financial Officer (PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER)

19
<PAGE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER FORM 10-Q FOR THE FISCAL YEAR 6/30/99 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-24-1998
<CASH> 1,499
<SECURITIES> 0
<RECEIVABLES> 25,992
<ALLOWANCES> 1,946
<INVENTORY> 49,015
<CURRENT-ASSETS> 77,203
<PP&E> 53,733
<DEPRECIATION> 9,928
<TOTAL-ASSETS> 217,333
<CURRENT-LIABILITIES> 47,390
<BONDS> 156,924
35,739
0
<COMMON> 12
<OTHER-SE> (25,157)
<TOTAL-LIABILITY-AND-EQUITY> 217,333
<SALES> 75,627
<TOTAL-REVENUES> 75,627
<CGS> 51,511
<TOTAL-COSTS> 51,511
<OTHER-EXPENSES> 34,705
<LOSS-PROVISION> 139
<INTEREST-EXPENSE> 7,734
<INCOME-PRETAX> (18,323)
<INCOME-TAX> (6,490)
<INCOME-CONTINUING> (11,833)
<DISCONTINUED> 0
<EXTRAORDINARY> (999)
<CHANGES> (1,687)
<NET-INCOME> (14,519)
<EPS-PRIMARY> (2.54)
<EPS-DILUTED> (2.54)

</TABLE>