<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 March 25, 1999
--------------
OR
( ) 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)
<TABLE>
<S> <C>
DELAWARE 68-0363266
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
3478 BUSKIRK AVENUE, PLEASANT HILL, CA 94523
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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 May 7, 1999, the Registrant had outstanding 6,954,807 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; 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
<C> <S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 25, 1999 and
June 30, 1998..............................................................1
Consolidated Statements of Operations for the Three and Nine Months
Ended March 25, 1999 and March 26, 1998....................................2
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Loss for the Nine Months Ended March 25, 1999................3
Consolidated Statements of Cash Flow for the Nine Months
Ended March 25, 1999 and March 26, 1998....................................4
Condensed Notes to Consolidated Financial Statements as of
March 25, 1999 ............................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk...............................................................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.........................................................18
Item 2. Changes in Securities and Use of Proceeds.................................18
Item 3. Defaults Upon Senior Securities...........................................18
Item 4. Submission of Matters to a Vote of Security Holders.......................18
Item 5. Other Information.........................................................18
Item 6. Exhibits and Reports on Form 8-K..........................................19
Signatures..................................................................................20
</TABLE>
<PAGE>
ITEM 1.
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 25, June 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,564 $ 2,244
Accounts receivable, net of allowances of $1,304 and $3,084, respectively 23,665 28,463
Inventories, net 53,835 42,306
Prepaid expenses and other 912 1,803
------------- -------------
Total current assets 79,976 74,816
TREE INVENTORIES 3,249 3,607
PROPERTY, PLANT AND EQUIPMENT, net 52,307 54,197
INTANGIBLE ASSETS, net 51,754 56,117
DEFERRED INCOME TAXES 27,034 20,167
NOTES RECEIVABLE AND OTHER ASSETS 1,232 1,446
------------- -------------
Total assets $ 215,552 $ 210,350
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 10,662 $ 16,305
Accrued liabilities 16,699 14,404
Dividends payable to stockholders 169 232
Deferred income taxes 16,013 16,013
Current maturities of long-term debt 889 1,053
------------- -------------
Total current liabilities 44,432 48,007
LONG-TERM DEBT 156,168 135,044
------------- -------------
Total liabilities 200,600 183,051
------------- -------------
SERIES A PREFERRED STOCK, $0.01 par value, 100,000 shares authorized,
46,779 and 42,504 shares issued and outstanding, respectively 37,421 32,524
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 and 1,163,550
shares issued and outstanding, respectively 2,486 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,
5,811,468 and 5,773,518 shares issued and outstanding, respectively 12 12
Additional paid-in capital 51,281 50,975
Treasury stock, 6,220,439 and 6,200,228 shares, respectively (45,633) (45,488)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (38,865) (21,240)
------------- -------------
Total stockholders' deficit (24,955) (7,491)
------------- -------------
Total liabilities and stockholders' deficit $ 215,552 $ 210,350
============= =============
</TABLE>
The accompanying 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 Nine Months Ended
March 25, March 26, March 25, March 26,
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 42,433 $ 38,549 $ 118,060 $ 102,739
COST OF SALES 20,294 26,791 71,805 70,438
----------- ----------- ------------ ------------
Gross profit 22,139 11,758 46,255 32,301
SALES, MARKETING AND DELIVERY EXPENSES 9,023 10,196 30,182 29,695
GENERAL AND ADMINISTRATIVE EXPENSES 5,167 2,941 14,152 8,233
SPECIAL CHARGES AND OTHER - - 3,652 -
AMORTIZATION OF INTANGIBLE ASSETS 427 614 1,286 1,588
TERMINATION OF MANAGEMENT FEE AND OTHER - - - 2,400
----------- ----------- ------------ ------------
Income (loss) from operations 7,522 (1,993) (3,017) (9,615)
INTEREST EXPENSE 4,369 3,556 12,103 9,361
OTHER (INCOME) EXPENSE 96 (63) 146 (30)
----------- ----------- ------------ ------------
Income (loss) before income taxes, cumulative effect of change
in accounting principle and extraordinary loss 3,057 (5,486) (15,266) (18,946)
INCOME TAX (PROVISION) BENEFIT (1,082) 417 5,408 7,579
----------- ----------- ------------ ------------
Income (loss) before cumulative effect of change in accounting 1,975 (5,069) (9,858) (11,367)
principle and extraordinary loss
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax benefit - - 1,687 -
EXTRAORDINARY LOSS, net of tax benefit - - 999 2,594
----------- ----------- ------------ ------------
Net income (loss) 1,975 (5,069) (12,544) (13,961)
SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 1,710 1,524 4,840 1,524
----------- ----------- ------------ ------------
Net income (loss) applicable to common stock $ 265 $ (6,593) $ (17,384) $ (15,485)
=========== =========== ============ ============
Basic income (loss) per common share:
Income (loss) before cumulative effect of change in accounting $ 0.04 $ (0.95) $ (2.12) $ (1.88)
principle and extraordinary loss
Cumulative effect of change in accounting principle - - (0.24) -
Extraordinary loss - - (0.15) (0.38)
----------- ----------- ------------ ------------
Total $ 0.04 $ (0.95) $ (2.51) $ (2.26)
=========== =========== ============ ============
Shares used in per share calculation 6,942,981 6,937,068 6,939,039 6,852,057
=========== =========== ============ ============
Diluted income (loss) per common share:
Income (loss) before cumulative effect of change in accounting $ 0.03 $ (0.95) $ (2.12) $ (1.88)
principle and extraordinary loss
Cumulative effect of change in accounting principle - - (0.24) -
Extraordinary loss - - (0.15) (0.38)
----------- ----------- ------------ ------------
Total $ 0.03 $ (0.95) $ (2.51) $ (2.26)
=========== =========== ============ ============
Shares used in per share calculation 8,144,239 6,937,068 6,939,039 6,852,057
=========== =========== ============ ============
</TABLE>
The accompanying 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>
Common Common Paid-In Treasury Accumulated
Shares Stock Capital Stock Warrants Deficit
---------- ---------- --------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 5,773,518 $ 12 $ 50,975 $(45,488) $ 8,250 $ (21,240)
Accretion of Series A preferred stock - - - - - (622)
Accretion of redeemable common stock - - - - - (240)
Exercise of stock options 37,950 - 54 - - -
Series A preferred stock dividends - - - - - (4,219)
Other - - 252 (145) - -
Net loss - - - - - (12,544)
---------- ---------- --------- ------------ --------- --------------
Balance, March 25, 1999 (unaudited) 5,811,468 $ 12 $ 51,281 $(45,633) $ 8,250 $ (38,865)
========== ========== ========= ============ ========= ==============
<CAPTION>
Total
Stockholders' Comprehensive
Deficit Loss
------------ --------------
<S> <C> <C>
Balance, June 30, 1998 $ (7,491) $ -
Accretion of Series A preferred stock (622) -
Accretion of redeemable common stock (240) -
Exercise of stock options 54 -
Series A preferred stock dividends (4,219) -
Other 107 -
Net loss (12,544) (12,544)
---------- ---------------
Balance, March 25, 1999 (unaudited) $ (24,955) $ (12,544)
========== ===============
</TABLE>
The accompanying 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>
Nine Months Ended
March 25, March 26,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,544) $ (13,961)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 5,553 5,484
Interest paid in kind 496 449
Deferred compensation 286 -
Deferred income taxes (6,867) (9,309)
Write-off of organization costs 2,612 -
Write-off of unamortized financing costs 1,547 4,324
Changes in operating assets and liabilities, net of effect of acquired
businesses:
Decrease (increase) in accounts receivable 4,955 (1,548)
Increase in inventories (11,171) (31,334)
Decrease (increase) in prepaid expenses and other assets 891 (332)
Increase (decrease) in accounts payable (5,643) 9,999
Increase in accrued and other liabilities 3,191 389
------------ ------------
Net cash used in operating activities (16,694) (35,839)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less cash acquired - (40,539)
Purchases of fixed assets (2,382) (11,240)
------------ ------------
Net cash used in investing activities (2,382) (51,779)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 5,130
Purchase of treasury stock (85) (260)
Financing costs (1,983) (756)
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 21,176 16,933
Repayments of long-term debt (712) (104,489)
------------ ------------
Net cash provided by financing activities 18,396 85,513
NET DECREASE IN CASH (680) (2,105)
CASH AT BEGINNING OF PERIOD 2,244 2,762
------------ ------------
CASH AT END OF PERIOD $ 1,564 $ 657
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,061 $ 5,337
============ ============
Income taxes $ 26 $ 3
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ - $ 625
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
4
<PAGE>
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 25, 1999
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 March 25, 1999,"
relates to the period from December 25, 1998, through March 25, 1999, and the
term "three months or quarter ended March 26, 1998," relates to the period
from December 26, 1997, through March 26, 1998, the term "nine months ended
March 25, 1999," relates to the period from July 1, 1998, through March 25,
1999, and the term "nine months ended March 26, 1998," relates to the period
from July 1, 1997, through March 26, 1998.
During the quarter ended September 24, 1998, the Company hired several
new executives with significant operating experience to bolster its current
management team. The new management team redesigned the Company's
organizational structure and quickly implemented measures designed to improve
production, distribution and selling efficiencies and reduce product returns
and shrink. 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 consequently, less shrink (i.e. write-off of unsaleable
excess inventory). The Company recorded a $3.7 million non-recurring special
charge during the three months ended September 24, 1998 relating to the
reduction of excess capacity through the closure of certain facilities,
employee severance and other non-recurring consulting costs associated with
actions taken by the new management team.
The Company's fiscal 1998 operating results were adversely impacted by
severe weather and inventory overproduction that resulted in significant
write-offs of unsaleable excess product. As a result, for the fiscal year
ended June 30,1998, 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 June 30,
1998, but a waiver was obtained from the banks for the violations.
As of March 25, 1999, the Company had $156.2 million of long-term
indebtedness and an accumulated deficit of $38.9 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 meet its financial
goals to comply with debt covenants in the future. 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 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
5
<PAGE>
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 maintain profitability or there will be a material adverse
impact on the Company's business, financial position and results of
operations.
The consolidated financial statements as of March 25, 1999, and for the
three and nine months ended March 25, 1999, and March 26, 1998, 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.
NOTE 2 - INVENTORIES
Inventories at March 25, 1999 and June 30, 1998, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 25, JUNE 30,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current:
Plants, shrubs and ground cover $ 51,458 $ 39,764
Raw materials and supplies 4,743 7,565
Inventory reserves (2,366) (5,023)
----------- -----------
Total current inventories 53,835 42,306
Non-current:
Christmas trees 3,249 3,607
----------- -----------
Total inventories $ 57,084 $ 45,913
=========== ===========
</TABLE>
6
<PAGE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 25, 1999, and June 30, 1998,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 25, JUNE 30,
1999 1998
---------------- -------------
(UNAUDITED)
<S> <C> <C>
Land $ 10,049 $ 10,047
Greenhouses and buildings 25,439 21,157
Furniture and fixtures 5,027 4,593
Machinery and equipment 17,529 16,333
Leasehold improvements 5,690 5,356
Other - 3,789
---------------- -------------
63,734 61,275
Less: Accumulated depreciation (11,427) (7,078)
---------------- -------------
Total property, plant and equipment $ 52,307 $ 54,197
================ =============
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 25, 1999, and June 30, 1998, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 25, JUNE 30,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Goodwill $ 47,517 $ 47,517
Organization costs - 3,578
Financing costs 6,218 5,911
Non-compete agreements 1,694 1,694
Other 916 911
------------- -------------
56,345 59,611
Less: Accumulated amortization (4,591) (3,494)
------------- -------------
Total intangible assets $ 51,754 $ 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.
7
<PAGE>
NOTE 5 - ACQUISITIONS
Between July 31, 1997 and September 3, 1997, the Company acquired six
businesses. The Company accounted for all of these acquisitions using the
purchase method of accounting whereby the purchase price, including
liabilities assumed, was 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.
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>
NINE MONTHS ENDED
MARCH 25, MARCH 26,
1999 1998
-------------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 118,060 $ 104,602
Loss before cumulative effect of
change in accounting principle
and extraordinary loss (9,858) (12,075)
Loss per share before cumulative
effect of change in accounting
principle and extraordinary loss
(including the effect of
preferred stock dividends/accretion) (2.12) (1.98)
Shares used in per share calculation 6,939,039 6,856,897
</TABLE>
NOTE 6 - DEBT
Debt at March 25, 1999, and June 30, 1998, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 25, JUNE 30,
1999 1998
-------------------- --------------------
(UNAUDITED)
<S> <C> <C>
Revolving line of credit $ 45,214 $ 24,038
Senior subordinated notes 100,000 100,000
Convertible note 8,471 7,986
Non-compete agreements 819 1,073
Other 2,553 3,000
----------------- -----------------
157,057 136,097
Less: Current maturities (889) (1,053)
----------------- -----------------
Long-term portion $ 156,168 $ 135,044
================= =================
</TABLE>
8
<PAGE>
On October 15, 1998, the Company entered into a Loan and Security
Agreement with Fleet Capital Corporation, (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 March 25, 1999, a total of $45.2 million was
outstanding and an additional $15.4 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 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 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 March 25, 1999, 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 credit facility in connection with the
refinancing in its second fiscal quarter of fiscal 1999.
9
<PAGE>
NOTE 7 - EARNINGS PER SHARE
Basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 25, 1999 March 25, 1999
-------------- --------------
Income/ Per Share Income/ Per Share
(loss) Shares Amount (loss) Shares Amount
------ ------ ------ ------ ------ ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) before
cumulative effect of change
in accounting principle and
extraordinary loss $ 1,975 $ 0.29 $ (9,858) $ (1.42)
Preferred stock
dividends/accretion (1,710) (0.25) (4,840) (0.70)
----------------- -------------- ---------------- -------------
Income (loss) before
extraordinary loss and
cumulative effect of change
in accounting principle
(including preferred
stock dividends/accretion) 265 0.04 (14,698) (2.12)
Cumulative effect of change
in accounting principle - - (1,687) (0.24)
Extraordinary loss - - (999) (0.15)
----------------- -------------- ---------------- -------------
Net income (loss) applicable
to common stock $ 265 6,942,981 $ 0.04 $ (17,384) 6,939,039 $ (2.51)
================= ============== ================ =============
DILUTED EARNINGS PER SHARE:
Convertible debt, options,
etc. 1,201,258
------------
Net income applicable to
common stock $ 265 8,144,239 $ 0.03
================= ==============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 26, 1998 March 26, 1998
-------------- --------------
Income/ Per Share Income/ Per Share
(loss) Shares Amount (loss) Shares Amount
------ ------ ------ ------ ------ ---------
(in (in
thousands) Thousands)
<S> <C> <C> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE:
$ (5,069) $ (0.73) $ (11,367) $ (1.66)
Loss before extraordinary loss
Preferred stock dividends/accretion (1,524) (0.22) (1,524) (0.22)
-------------- ------------- -------------- ------------
Loss before extraordinary loss
(including preferred stock
dividends/accretion (6,593) (0.95) (12,891) (1.88)
Extraordinary loss - - (2,594) (0.38)
-------------- ------------- -------------- -----------
Net loss applicable to common stock $ (6,593) 6,937,068 $ (0.95) $ (15,485) 6,852,057 $ (2.26)
============= ============= ============== ===========
</TABLE>
For the nine months ended March 25, 1999 and the three and nine months
ended March 26, 1998, 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 quarter ended September 24, 1998, the Company recorded a
pre-tax special charge of $3.7 million related to the closure of certain
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 DISCUSSION 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 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.
During the quarter ended September 24, 1998, the Company hired several
new executives with significant operating experience to bolster its current
management team. The new management team redesigned the Company's
organizational structure and quickly implemented measures designed to improve
production and distribution efficiencies and reduce product returns and
excess inventory. 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 consequently, less shrink (i.e. write-off of unsaleable
excess inventory).
The Company recorded a $3.7 million pre-tax, non-recurring special
charge during the three months ended September 24, 1998 relating to the
reduction of excess production capacity through the closure of certain
facilities, employee severance and other non-recurring consulting costs
associated with actions taken by the new management team.
THREE MONTHS ENDED MARCH 25, 1999, AS COMPARED TO THE THREE MONTHS ENDED MARCH
26, 1998
NET SALES. Net sales increased $3.9 million, or 10.1%, to $42.4 million
for the three months ended March 25, 1999, from $38.5 million during the
three months ended March 26, 1998. This increase is primarily the result of
higher sales in the Company's southwestern division and lower product returns
in the western division.
GROSS PROFIT. Gross profit increased $10.4 million, or 88.3%, to $22.1
million for the three months ended March 25, 1999, from $11.8 million during
the three months ended March 26, 1998. Gross profit as a percentage of net
sales increased to 52.2% for the three months ended March 25, 1999, from
30.5% for the three months ended March 26, 1998. The increase in gross profit
percentage was primarily the result of a decrease in the write-off of excess
inventory of $5.8 million, or 80.4%, a decrease in product returns of $1.7
million and decreases in production units. These decreases were accomplished
through improved production planning and control combined with management's
initiatives to better match supply with demand.
OPERATING EXPENSES. Operating expenses include sales, marketing and
delivery expenses, general and administrative expenses, amortization of
intangible assets. Sales, marketing and delivery expenses decreased $1.2
million, or 11.5%, to $9.0 million for the three months ended March 25, 1999,
from $10.2 million in the three months ended March 26, 1998. As a percentage
of net sales, sales, marketing and delivery expenses decreased to 21.3% for
the three months ended March 25, 1999, from 26.4% for the three months ended
March 26, 1998. This decrease as a percentage of net sales was primarily the
result of significantly improved delivery efficiencies that decreased
delivery expenses as a percent of net sales to 10.7% for the three months
ended March 25, 1999, from 14.2% for the three months ended March 26, 1998.
General and administrative expenses increased $2.2 million, to $5.2 million
for the three months ended March 25, 1999, from $2.9 million in the three
months ended March 26, 1998. As a percentage of net sales, general and
administrative expenses increased to 12.2% for the three months ended March
25, 1999, from 7.6% for the three months ended March 26, 1998. 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. Amortization of intangible assets decreased
$0.2 million to $0.4 million for the three months ended March 25, 1999, from
$0.6 million for the three months ended March 26,1998, due to the write-off
of unamortized organization costs during the three months ended September 24,
1998.
12
<PAGE>
INTEREST EXPENSE. Interest expense increased $0.8 million to $4.4
million for the three months ended March 25, 1999, from $3.6 million in the
three months ended March 26, 1998, as a result of higher levels of borrowings
required to fund operating losses in prior periods and the Company's working
capital requirements.
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 increased to 35.4% for the three months ended March 25,
1999, from 7.6% for the three months ended March 26, 1998. This increase was
primarily the result of adjustments necessary during the three months ended
March 26, 1998 to record income taxes at the projected effective tax rate for
the fiscal year ending June 30, 1998.
NINE MONTHS ENDED MARCH 25, 1999, AS COMPARED TO THE NINE MONTHS ENDED MARCH 26,
1998
NET SALES. Net sales increased $15.3 million, or 14.9 %, to $118.1
million for the nine months ended March 25, 1999, from $102.7 million during
the nine months ended March 26, 1998. This increase is primarily the result
of a $4.5 million increase in net sales of the Company's Christmas tree
division, higher sales in the Company's southwestern division, lower product
returns in the western division as well as additional sales resulting from
business acquisitions made during the nine months ended March 26, 1998.
GROSS PROFIT. Gross profit increased $14.0 million, or 43.2%, to $46.3
million for the nine months ended March 25, 1999, from $32.3 million during
the nine months ended March 26, 1998. Gross profit as a percentage of net
sales increased to 39.2% for the nine months ended March 25, 1999, from 31.4%
for the nine months ended March 26, 1998. The increase in gross profit
percentage was primarily the result of a decrease in the write-off of excess
inventory of $8.7 million, or 17.4% and a decrease in product returns of $4.3
million. These decreases were accomplished through improved production
planning and control combined with management's initiatives to better match
supply with demand.
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 $0.5 million, or 1.6%, to $30.2 million for the nine
months ended March 25, 1999, from $29.7 million in the nine months ended
March 26, 1998. As a percentage of net sales, sales, marketing and delivery
expenses decreased to 25.6% for the nine months ended March 25, 1999, from
28.9% for the nine months ended March 26, 1998. This decrease as a percentage
of net sales was primarily the result of significantly improved delivery
efficiencies that decreased delivery expense as a percent of net sales to
14.8% for the nine months ended March 25, 1999, from 17.2% for the nine
months ended March 26, 1998. General and administrative expenses increased
$6.0 million, to $14.2 million for the nine months ended March 25, 1999, from
$8.2 million for the nine months ended March 26, 1998. As a percentage of
net sales, general and administrative expenses increased to 12.0% for the
nine months ended March 25, 1999, from 8.0% for the nine months ended March
26, 1998. 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. Amortization of
intangible assets decreased $0.3 million to $1.3 million for the nine months
ended March 25, 1999, from $1.6 million for the nine months ended March
26,1998, due to the write-off of unamortized organization costs during the
nine months ended March 25, 1998.
SPECIAL CHARGES AND OTHER. During the quarter ended September 24, 1998,
the Company recorded a pre-tax special charge of $3.7 million related to the
closure of certain facilities, employee severance, and other non-recurring
consulting costs. These costs were associated with new management's ongoing
review of the Company's operations.
INTEREST EXPENSE. Interest expense increased $2.7 million to $12.1
million for the nine months ended March 25, 1999, from $9.4 million in the
nine months ended March 26, 1998, 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 nine months ended March 25, 1999, from 40.0%
for the nine months ended March 26, 1998. 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 nine months
ended March 25, 1999, the Company's primary source of capital was a revolving
line of credit.
On October 15, 1998, the Company entered into a Loan and Security
Agreement with Fleet Capital Corporation (the "Fleet Loan Agreement"), and
repaid in full its prior credit facility. 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 March 25, 1999, a total of $45.2 million was outstanding and an additional
$15.4 million was available under this line of credit.
During the nine months ended March 25, 1999, net cash used in operating
activities was $16.7 million primarily as a result of operating losses and
seasonal increases in inventory and decreases in accounts payable partially
offset by lower levels of receivables resulting from improved collection
efforts. Net cash used in investing activities during the nine months ended
March 25, 1999, and March 26, 1998, was $2.4 million and $51.8 million,
respectively. The Company used $40.5 million of cash to acquire six
businesses during the nine months ended March 26, 1998, and spent $2.4
million and $11.2 million on capital expenditures during the nine months
ended March 25, 1999, and March 26, 1998, respectively.
The Company is highly leveraged. As of March 25, 1999, the Company has
$156.2 million of long-term indebtedness and an accumulated deficit of $38.9
million. Although the Company believes that the cash available from the
Fleet Loan Agreement and operations 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 and comply with its 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. 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.
14
<PAGE>
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 vendors and whether they are Year 2000 compliant.
The Company has tested its primary financial systems and hardware and
determined that they are generally Year 2000 compliant; however, 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 of 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 through March 25, 1999).
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
15
<PAGE>
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 may increase its 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.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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."
<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>
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%
Convertible Note - - - - - $12.2 $12.2
Average Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Non-compete Agreements $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.
17
<PAGE>
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
During the quarter ended March 25, 1999, the Company issued 37,950
shares of common stock to two employees upon exercise of options. For both
of these transactions, the Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual meeting of Stockholders held March 17, 1999, the
Company's stockholders:
- elected George T. Brophy, Richard E. George, Gary E. Mariani, and
William F. Dordelman as directors;
- ratified the appointment of Marion Antonini, Raju Boligala, William F.
Dordelman and A. Stephen Diamond as directors; and
- approved an amendment to the Company's Certificate of Incorporation
that will allow directors to take action by written consent.
ITEM 5. OTHER INFORMATION
None.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<C> <S>
3.1 Amendment to Articles of Incorporation.
10.1 Amended and Restated Employment Agreement between the Registrant and
Raju Boligala.
11.1 Computations of Earnings Per Share -- See Note 7 to the Notes to
Consolidated Financial Statements.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
19
<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: May 7, 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)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
<C> <S>
3.1 Amendment to Articles of Incorporation.
10.1 Amended and Restated Employment Agreement between the Registrant and Raju
Boligala.
11.1 Computations of Earnings Per Share -- See Note 7 to the Notes to
Consolidated Financial Statements.
27.1 Financial Data Schedule.
</TABLE>
21
<PAGE>
EXHIBIT 3.1
AMENDMENT TO ARTICLES OF INCORPORATION
OF
COLOR SPOT NURSERIES, INC.
PURSUANT TO SECTION 242 OF THE
DELAWARE GENERAL CORPORATION LAW
COLOR SPOT NURSERIES, INC., a corporation organized under the laws of the
State of Delaware (the "Corporation"), does hereby certify:
1. The name of the Corporation is COLOR SPOT NURSERIES, INC.
2. The Board of Directors and stockholders of the Corporation on
January 27, 1999 and March 17, 1999, respectively, duly adopted the following
amendment to the Corporation's Articles of Incorporation pursuant to Section
242 of the Delaware General Corporation Law providing that Section 5 of
Article V of the Corporation's Articles of Incorporation is amended to read
in its entirety as follows:
ARTICLE V
* * * * *
Section 5. STOCKHOLDER ACTION. Except as otherwise prescribed by
law and subject to the rights of holders or any class or series of Preferred
Stock, special meetings of stockholders of the Corporation, for any purpose or
purposes, may be called only by the Chairman of the Board, if there be one, the
President, or the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors and shall be called by the Secretary
or any Assistant Secretary, if there be one, at the request in writing of a
majority of the entire Board of Directors or by holders of outstanding stock of
the Corporation having not less than the minimum number of votes that would be
necessary to authorize such action; provided, however, that any action required
or permitted to be taken at any annual or special meeting of stockholders of the
Corporation may be taken without a meeting, without prior notice, and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock of the Corporation having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Any such consent may be in
counterparts and shall bear the date of signature of each stockholder who signs
the consent. No such consent shall be effective to take any action unless,
within sixty days following the date of the earliest
<PAGE>
signature thereon, the consent or counterparts thereof, bearing the
signatures of holders of stock of the Corporation having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote were present and
voted to take such action, are delivered to the Corporation by delivery to
its principal place of business o to the secretary of the Corporation. Any
action taken pursuant to such consent shall be effective, as of the date of
the last signature thereon needed to make it effective, unless otherwise
provided in the consent. All counterparts of such consent necessary to make
it effective shall be filed with the minutes of proceedings of the
stockholders.
* * * * *
3. The number of shares of the Corporation's stock voted in favor of
the foregoing amendment by each voting group entitled to vote separately on
the amendment was sufficient for approval by such voting group.
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED 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.
<PAGE>
(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 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
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<PAGE>
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.
(g) Executive acknowledges that he is responsible
for any taxes payable on account of any amount received by him under this
Agreement (including Section 1.4). The Company shall be permitted to
withhold any amount required to be withheld by it under this Agreement.
1.4 LOANS. The Company will loan to Executive $275,000
in cash on the Effective Date (the "Start Date Loan"). At such time as the
Employment Period is terminated for any reason, 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
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<PAGE>
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 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
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<PAGE>
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
-5-
<PAGE>
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 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:
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<PAGE>
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.
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<PAGE>
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.
4.10 PRIOR AGREEMENT. This Agreement amends and restates in
its entirety the Employment Agreement dated as of July 30, 1998 between
Executive and the Company.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date set forth above.
COLOR SPOT NURSERIES, INC.
By:
---------------------------------
Michael Vukelich
Chief Executive Officer
---------------------------------
Raju Boligala
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
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BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-25-1999
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<ALLOWANCES> 1,304
<INVENTORY> 53,835
<CURRENT-ASSETS> 79,976
<PP&E> 52,307
<DEPRECIATION> 11,427
<TOTAL-ASSETS> 215,552
<CURRENT-LIABILITIES> 44,432
<BONDS> 156,168
37,421
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<TOTAL-LIABILITY-AND-EQUITY> 215,552
<SALES> 118,060
<TOTAL-REVENUES> 118,060
<CGS> 71,805
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<OTHER-EXPENSES> 49,418
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<INCOME-PRETAX> (15,266)
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<EPS-PRIMARY> (2.12)
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