COLOR SPOT NURSERIES INC, 10-K, 2000-10-16

COLOR SPOT NURSERIES INC
10-K, 2000-10-16
MISCELLANEOUS NONDURABLE GOODS

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000

[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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

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

13%Series A Cumulative Preferred Stock and Warrants to purchase Common Stock
-------------------------------------------------------------------------------
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the Registrant's voting stock held as of
September 1, 2000 by non-affiliates of the Registrant was $2,311,374. This
calculation assumes that certain parties may be affiliates of the Registrant and
that, therefore, 770,458 shares of voting stock are held by non-affiliates. As
of September 1, 2000, the Registrant had 6,948,597 shares of its common stock
outstanding.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

None.

FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Items 1 and 2. Business and
Properties," "Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk," and elsewhere throughout this Annual Report on
Form 10-K ("Annual Report") of Color Spot Nurseries, Inc. 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 our business
and are typically identified by phrases such as "We plan," "Management believes"
and other phrases of similar meaning. These statements involve known and unknown
risks and other factors which may cause our actual results, levels of activity,
performance or achievements to differ, perhaps materially, from anticipated
results. These risks and uncertainties include, among others:

- our substantial leverage and debt service;

- restrictions imposed by debt covenants and the effect of a
default on our operations;

- our ability to integrate acquired facilities into our network;

- changes in our operating strategy;

- the uncertainty of additional financing to fund future capital
needs;

- weather and general agricultural risks;

- seasonality and the variability of quarterly results;

- our 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;

- our short operating history under current management;

- sensitivity to price increases of certain raw materials;

- our dependence on leased facilities;

- lack of a market for our securities; and

- other factors as may be identified from time to time in our
filings with the Securities and Exchange

ii
<PAGE>

Commision or in our press releases.

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

iii
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COLOR SPOT NURSERIES, INC.

INDEX TO FORM 10-K

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

PART II .........................................................................................................9
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................9
Item 6. Selected Consolidated Financial Data.......................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................23
Item 8. Financial Statements and Supplementary Data................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......24

PART III ........................................................................................................25
Item 10. Directors and Executive Officers of the Registrant..........................................25
Item 11. Executive Compensation......................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................31
Item 13. Certain Relationships and Related Transactions..............................................33

PART IV ........................................................................................................ 34
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................34
</TABLE>

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COLOR SPOT NURSERIES, INC.

ANNUAL REPORT ON

FORM 10-K

FOR YEAR ENDED JUNE 30, 2000

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES.

OVERVIEW

Color Spot Nurseries, Inc. and its consolidated subsidiaries is one of
the largest wholesale nurseries in the United States, based on revenue and
greenhouse square footage. We provide a wide assortment of high quality plants
as well as extensive merchandising services primarily to leading home centers
and mass merchants, and to premium independent garden centers. Currently, we
distribute products to over 2,800 retail and 1,000 commercial customers,
representing over 10,000 locations, primarily in the western and southwestern
regions of the United States.

We believe we are one of the few wholesale nurseries that has the scale
and distribution capabilities necessary to provide large volumes of high quality
product to our retail customers on a multi-regional basis. We currently produce
over 2,500 varieties of live plants, including bedding plants, shrubs, flowering
potted plants, ground cover and fresh cut Christmas trees. Through our sales
force of approximately 260 sales and merchandising personnel, we also provide
our retail customers with a broad array of value-added services, such as
in-store merchandising, product display and maintenance, promotional planning
and product reordering. We believe that providing these services differentiates
us from our competitors and establishes us as a preferred supplier in the
industry. We operate 17 nursery production facilities located in California,
Texas, Oregon and Washington and Christmas tree growing fields in Oregon,
Michigan, North Carolina and Tennessee.

HISTORY

Color Spot America, Inc., a predecessor of Color Spot Nurseries, Inc.,
was founded in 1983 and has grown to become one of the largest bedding plant
producers in California. Between 1992 and 1995, net sales and profitability of
the business declined. In December 1996, Kohlberg & Company, LLC, acquired a
majority interest in our company. Since that time, senior management has
implemented a number of strategic and operational programs designed to improve
our customer relationships and financial results. These initiatives included
revamping our merchandising programs, revising our pricing strategies, renewing
our focus on operating efficiencies and restructuring our sales organization. We
embarked on an aggressive acquisition strategy and completed 13 acquisitions
between October 1996 and September 1997. In 1999, we recruited two new
executives. Richard E. Parker joined us as our Chief Executive Officer in June
1999 after holding various positions at ABT Building Products Corporation, most
recently as Chief Operating Officer. Joseph P. O'Neill joined us in June 1999 as
our Chief Financial Officer and also became Chief Operating Officer in September
2000. Mr. O'Neill was also previously with ABT Building Products Corporation,
most recently serving as Chief Financial Officer.

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In fiscal 1999 we closed two production facilities to reduce excess
capacity and improve financial performance. The following table sets forth
changes in the number of production facilities in the last four fiscal years:

FISCAL YEAR
-----------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Production facilities at beginning of the period 6 13 19 17
Production facilities acquired/(closed) 7 6 (2) -
Production facilities at end of the period 13 19 17 17
== == == ==
</TABLE>

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

1997 OFFERINGS. In December 1997, we completed a public offering of
40,000 Units at $1,000 per unit, with each unit consisting of one share of 13%
Series A Cumulative Preferred Stock and 20.625 Warrants, each representing the
right to purchase one share of common stock for a total of 825,000 warrants.
Concurrently, we completed a public offering of $100 million aggregate principal
amount of 10 1/2% Senior Subordinated Notes due 2007. The net proceeds of the
two 1997 offerings of $133.5 million were used to repay debt.

INDUSTRY

Gardening is one of the most popular leisure activities in the United
States. According to the 1998-1999 National Gardening Survey conducted by the
Gallup Organization, Inc., 65% of the approximately 103 million U.S. households
participated in some form of gardening in 1998. We believe that the popularity
of gardening is likely to increase in coming years. According to the National
Gardening Survey, the demographic group that spends the most money per capita on
gardening is individuals age 50 and older. This group will be the fastest
growing demographic group through the year 2010, according to the U.S. Census.

In recent years, the live plant market has demonstrated consistent
growth. The live plant retail distribution channel has consolidated
significantly over the last 10 years, with sales shifting from local independent
nurseries to large home centers and mass merchants, such as Home Depot, Home
Base, Lowe's, Target, Wal-Mart and Kmart. Moreover, the relatively low price of
most live plants encourages impulse buying by consumers and makes these products
relatively resistant to economic downturns. Retail consolidation has altered the
nature of the wholesale demand for live plants. Given the sophistication, size
and geographic diversity of the national chains, retail customers prefer
suppliers that can meet demanding delivery schedules, fulfill large volume
requirements and provide a variety of value-added services.

Despite this retail consolidation, the wholesale nursery industry is
still highly fragmented, and is characterized by local, independent nurseries.
Due to the fragmented nature of the wholesale nursery industry, we believe the
opportunity for a branded, well capitalized and professionally managed company
to lead the consolidation of this industry continues to be viable and
attractive. We also compete in the fresh cut Christmas tree market.

2
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BUSINESS STRATEGY

Our long-term goals are to enhance our leadership position in the
wholesale nursery industry in our established markets and to become the market
share leader in targeted new regions nationwide. Our business strategy is
designed to meet the increasing demands of retail customers and consumers, both
of which are critical to our success. Our business strategy includes the
following four key elements.

OFFER BROAD SELECTION OF HIGH QUALITY PRODUCTS

We provide retail customers and consumers with a broad selection of
high quality live plants. Through frequent deliveries, careful pre-delivery
screening and regular plant maintenance, we are able to provide consistently
fresh and attractive products. Our products include over 2,500 varieties of live
plants, including bedding plants, shrubs, flowering potted plants, ground cover
and fresh cut Christmas trees. In addition, we continually seek to develop new
products through proprietary retail product lines and creative, easy-to-use
packaging. We believe we are one of the few wholesale nurseries that can
consistently provide the large volumes of high quality products desired by home
centers, mass merchants and premium independent garden centers.

PROVIDE SUPERIOR CUSTOMER SERVICE

We believe that our value-added services differentiate us from our
competitors and allow us to establish ourselves as a preferred supplier to
high-volume retail customers. We service our retail customers through a sales
force of approximately 264 sales and merchandising personnel, which we believe
is the largest service force in the wholesale nursery industry. Our service
philosophy encourages our sales merchandisers to function effectively as garden
center employees, working closely with retail store personnel to anticipate
changing customer demands and to react to local growing conditions. Our services
include in-store merchandising, product display, plant maintenance, promotional
planning and product reordering. We believe that due to the perishable nature of
our products, these services are critical to maintaining attractive and fresh
product displays and retail sales growth.

CAPITALIZE ON LARGE-SCALE AND MULTI-REGIONAL CAPABILITIES

We believe that home centers and mass merchants prefer to buy from
large wholesale nurseries that can consistently deliver high quality products to
a broad geographic area. We are one of the largest wholesale nurseries in the
United States and one of the few nurseries that has the scale and distribution
capabilities to support home centers and mass merchants on a multi-regional
basis. Our production facilities are located in diverse geographic regions to
attempt to increase distribution efficiency, better serve customers and minimize
the effects of adverse weather conditions.

CONTINUE TO STRENGTHEN RELATIONSHIP WITH LARGE RETAIL CUSTOMERS

We have long-standing relationships with many leading home centers and
other mass merchants in the United States. We believe we are the largest
supplier of live plants for Home Depot, Home Base, Target, Wal-Mart and Kmart in
the western United States. We are involved in our retail customers' sales and
inventory planning processes, allowing us to plan our production capacity more
effectively to meet our retail customers' demands. In addition, we work with a
number of our high-volume retail customers to develop proprietary products, new
packaging and sales and promotional programs.

3
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GROWTH STRATEGY

Contingent upon improvements in our financial performance, our
long-term growth strategy is to expand our presence in our existing markets and
continue to enter new geographic markets through acquisitions. An important
aspect of our growth strategy is to increase our penetration in targeted markets
thereby enabling us to better serve high-volume retail customers, enhancing our
brand name recognition and increasing operating efficiencies. Our growth
strategy includes the following three key elements.

EXISTING AND NEW CUSTOMER GROWTH

We plan to increase sales by growing with our existing high-volume
retail customers and seeking new relationships with other high-volume retailers
and premium independent garden centers. We strive to increase the number of
stores we serve for our existing retail customers both through serving (i) a
larger percentage of our retail customers' stores and (ii) our retail customers'
new stores as those retailers expand.

ACQUISITIONS

Although we closed two production facilities in fiscal 1999 in order to
improve financial performance and we do not anticipate any acquisitions during
the next 12 months, our long-term goal is to pursue new acquisitions. We seek
acquisitions that will allow us to establish a platform in a new geographic area
or "fill-in" our product line and production capacity in our existing markets.
Between October 1996 and September 1997, we completed 13 acquisitions, adding 13
production facilities, over 1,800 growing acres of production capacity and over
8.4 million square feet of greenhouse space. Our acquisition strategy is
designed to (i) increase the penetration of our existing markets, (ii) expand
into targeted new geographical areas and (iii) add new product lines. Our
strategy in entering new geographic areas is to make a strategic acquisition
that can be used as a platform for future expansion in these new areas. Our 1997
acquisitions included platform additions in the Texas and Pacific Northwest
markets, and we believe opportunities exist to "fill-in" these markets.

PRODUCT LINE EXPANSION

We actively seek new product opportunities, through both acquisitions
and internal development. By offering a greater variety of products, we believe
our retail customers are able to reduce their number of live plant suppliers.
Since June 30, 1996, we have expanded our product line into new areas of the
wholesale nursery industry, including shrubs, flowering potted plants and ground
cover. In 1997, we also expanded into the fresh cut Christmas tree business in
order to utilize available sales and distribution capacity during the winter
months.

ACQUISITION STRUCTURE

Prior to consummating an acquisition, we conduct due diligence on the
targeted company, including legal, environmental, business and accounting
reviews by senior management, our independent auditors, and outside legal
counsel and consultants. We typically finance acquisitions through a combination
of cash, promissory notes and, in certain cases, Common Stock. We normally
obtain non-compete and confidentiality agreements from selling owners and may
enter into employment or consulting agreements with key personnel of the seller.
The majority of our recent acquisitions have been consummated in less than 90
days from the date a letter of intent is executed. There can be no assurance,
however, that we will be able to identify and acquire desirable nursery
businesses on terms favorable to us or in a timely manner in the future. Over
the near term, we do not anticipate pursuing additional acquisitions but rather
intend to focus on operating efficiencies and integration of prior acquisitions.

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INTEGRATION OF ACQUIRED FACILITIES

We seek to increase the sales and profitability of acquired companies
by implementing our sales and merchandising programs and by improving operating
efficiencies of the acquired business. Integration of a platform acquisition is
more difficult because it usually involves creating a new division to be managed
by employees of the acquired company. To maximize efficiencies, we centralize
many of the acquired company's "back office" functions, including purchasing,
insurance, benefits and most financial functions. Where market conditions
dictate, an acquired company may maintain the historical branch name and use our
name during a transition period in order to minimize customer disruption.
Although we have initiated policies to make acquired production facilities more
efficient, there is no assurance that we will be successful in our efforts. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation."

PROPERTIES AND FACILITIES

We currently operate 17 production facilities in five states. Each
production facility consists primarily of growing fields, greenhouses, warehouse
space and distribution areas. We lease the majority of our facilities and
believe that most of our leases can be extended on acceptable terms. The profile
of our production facilities is as follows:

TOTAL TOTAL GREENHOUSE PRODUCT
LOCATION ACREAGE SQUARE FOOTAGE OWNED/LEASED LINE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WESTERN:
Carson, CA 68 450,000 Leased Bedding Plants
Chino, CA 38 395,000 Leased Shrubs
Fallbrook, CA (1) 247 1,660,000 Owned/Leased Bedding Plants
Lodi, CA (2) 102 1,073,000 Owned/Leased Bedding Plants /Shrubs
Richmond, CA 110 1,153,000 Leased Bedding Plants
Salinas, CA 160 2,000,000 Leased Bedding Plants/Flowering
Potted Plants
San Juan Capistrano, CA 243 908,000 Leased Shrubs
Sunol, CA 57 480,000 Leased Bedding Plants
Watsonville, CA 53 392,000 Leased Bedding Plants
Phoenix, AZ 60 565,000 Leased Bedding Plants/Foliage
Mt. Vernon, WA 42 425,000 Leased Bedding Plants
Aurora, OR 32 278,000 Leased Bedding Plants

SOUTHWESTERN:
Huntsville, TX 52 442,000 Leased Bedding Plants
San Antonio, TX 587 1,771,000 Owned Shrubs and Bedding Plants
Waco, TX 99 675,000 Owned Flowering Potted Plants
Waller, TX 60 160,000 Leased Bedding Plants
Walnut Springs, TX 195 693,000 Owned Bedding Plants
----- ---------

TOTAL: 2,205 13,520,000
===== ==========
</TABLE>

(1) The Fallbrook facility is comprised of five parcels, one of which is owned
and four of which are leased.
(2) The Lodi facility is comprised of three parcels, one of which is owned and
two of which are leased.

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facility expires in fiscal 2001 and one of two leases at the Sunol
facility has been subleased.

In addition to our production facilities, we also lease growing fields
for Christmas trees in Oregon, Michigan, North Carolina, and Tennessee.

PRODUCTS

We are committed to providing our retail customers and consumers with a
broad selection of high quality live plant products. Our products include over
2,500 varieties of plants, including a wide selection of bedding plants, shrubs,
flowering potted plants, ground cover and fresh cut Christmas trees. Most of our
products are sold under the Color Spot brand name, and include easy-to-read
labels containing growing instructions and a color picture of a mature plant.
Our products are sold in various containers and sizes, ranging from flats and
packs containing numerous small plants to single containers containing one
plant. The following is a summary of our product lines:

<TABLE>
<CAPTION>
%of Fiscal Typical Growing
Product 2000 Net Sales Time
-------------------------------------------------------------------------------
<S> <C> <C>
Bedding Plants 66% 6 to 9 weeks
Flowering Potted Plants 8 8 to 14 weeks
Ground Cover 2 10 to 16 weeks
Shrubs 16 10 to 14 months
Christmas Trees 8 7 to 9 years
----
100%
====
</TABLE>

We constantly strive for product innovations, such as new packaging and
"premium" potted flowers. In addition, we work closely with our large retail
customers to develop proprietary branded products.

CUSTOMERS

During fiscal year 2000 we sold products to over 2,800 retail customers
as well as to over 1,000 commercial customers, representing over 10,000
locations. In order to promote efficiency and improve profitability, we
anticipate continuing to reduce low-volume purchasers from our customer base.
The majority of our products are sold to large national retailers, and we have
long-standing relationships with many of these retail customers. Our retail
customer base includes home centers, mass merchants, drug and grocery stores and
premium independent nursery chains. Sales to national retail chains have
increased significantly as these retail customers continue to gain market share.
The following table sets forth a selected list of customers for each major
category of retail customers:

Home Centers Mass Merchants Drug & Grocery Chains Independent Nurseries
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Depot Fred Meyer Albertson's Cornelius Nurseries
Home Base Kmart H.E.B. Jenco Wholesale Nursery
Lowe's Target Kroger Navlets Nursery
Orchard Supply Hardware Wal-Mart Rite-Aid Drug Stores Star Nursery
Safeway
</TABLE>

We believe that our ability to consistently provide high quality
products and value-added services on a multi-regional basis provides significant
competitive advantages in serving the retail channel. Our products typically
account for over half of the live plant sales in stores supplied by us. In each
region, our goal is to serve every store operated by each of our retail
customers. In fiscal 2000, our top eight retail customers accounted for
approximately 75% of total

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net sales. Sales to Home Depot represented 41% of total net sales.

We also serve commercial customers, such as landscapers, golf courses,
office parks and hotels. Approximately 5.9% of our fiscal 2000 net sales were
derived from sales to commercial customers.

SALES AND SERVICES

We offer a broad range of value-added services to help our retail
customers maximize live plant sales and profitability. We believe that a
well-maintained product display increases sales volume and encourages impulse
buying by retail consumers. The average shelf life for a majority of our
products is two to three weeks following delivery. Live plant products, like
fresh produce in a supermarket, are unlikely to sell if they are not fresh and
merchandised correctly. Due to the perishable nature of our products, we believe
that the services we provide to our retail customers are critical to maintaining
attractive and fresh product displays. We service our retail customers through a
sales force of approximately 264 sales and merchandising personnel. Each sales
merchandiser covers an average of 10 to 12 stores, although sales merchandisers
covering large volume stores may be assigned as few as one to three locations.
Sales merchandiser typically provides merchandising services to each of their
stores four to seven times per week, which may include:

- design and layout of garden shop area

- design and construction of display tables and end caps

- creation of point-of-purchase signage

- implementation of Color Spot promotional and marketing
programs

- maintenance of clean and fresh product displays

- reordering and restocking merchandise

- maintenance of prominent floor space

- assisting consumers with product and planting information.

We believe that our sales merchandisers can provide many of these
services more effectively than the retail customers themselves because these
sales merchandisers have extensive knowledge of, and focus exclusively on, live
plants. Furthermore, our sales merchandisers receive ongoing training and are
compensated on a commission basis as a percentage of net sales. Consumers often
view our employees as employees of the retailer, and rely on our sales and
merchandising personnel to answer questions and give advice about selecting and
planting live plants.

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In addition to providing merchandising services at the store level, we
play an important role in assisting retail customers with their sales and
inventory planning. Typically, our senior sales executives will meet
periodically with their retail customer's senior representative to plan sales of
our products based on that retail customer's anticipated store growth and
general product needs. In addition, our sales executives meet frequently with
regional and corporate buyers to more specifically plan seasonal product needs
and sales forecasts and to incorporate our promotional events and pricing
strategies into their plans. At the store level, our local sales and
merchandising personnel work with in-store personnel to execute sales plans and
continually monitor sales and inventory.

COMPETITION

The wholesale nursery industry is highly competitive. Competition is
based principally on product quality, breadth of product offerings, customer
service and price. We believe we have differentiated ourselves from our
competitors through the breadth of our product offerings, multi-regional
capabilities and the value-added services we provide to our retail customers.
The wholesale nursery industry is highly fragmented with over 10,000 small and
regional nurseries nationwide. Historically, the 10 largest wholesale nurseries
in the United States have accounted for slightly under one-tenth of total
wholesale production. We compete directly with a large number of western and
southwestern producers. On a multi-regional basis, we also compete with Hines
Nurseries, primarily in bedding plants and shrubs, and Monrovia Nursery Company,
primarily in shrubs. The fresh cut Christmas tree market is also highly
fragmented and, on a regional basis, the Company competes in this market with
Holiday Tree Farms and The Kirk Company.

EMPLOYEES

As of September 1, 2000, we had approximately 2,500 full-time
employees. During the peak growing season, which runs from February through
June, we employ a substantial number of seasonal employees, and total employment
generally will grow to over 4,200 employees between February and June. All of
our seasonal employees are paid on an hourly basis. None of our employees are
covered by a collective bargaining agreement. We believe our relationship with
our employees is good.

GOVERNMENT REGULATION

We are subject to federal, state and local health, safety and
environmental laws and regulations regarding the production, storage and
transportation of certain of our products and the disposal of our waste. Certain
of our operations and activities, such as water runoff from our production
facilities and the use of certain pesticides are subject to regulation by the
EPA and similar state and local agencies. These agencies may regulate or
prohibit the use of such products, procedures or operations, thereby affecting
our operations and profitability. In addition, we must comply with a broad range
of environmental laws and regulations. Additional or more stringent
environmental laws and regulations may be enacted in the future and such changes
could have a material adverse effect on our company.

We use reclamation water as one of the sources of water supply for a
few of our production facilities. The use and pricing of reclamation water,
including availability of subsidized water rates, is governed by federal
reclamation laws and regulations. Changes in the law could have a material
adverse effect on our company.

TRADEMARKS AND TRADE NAMES

We are the registered owner of the COLOR SPOT-Registered Tradmark-
trademark in the United States. A majority of our products are sold under the
trademark. We are also the registered owner of various other trademarks that are
used by certain facilities.

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ITEM 3. LEGAL PROCEEDINGS.

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

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

Not applicable.

PART II
-------

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

COMMON STOCK

There is no established trading market for our Common Stock. At
September 1, 2000, the number of holders of record of the Common Stock was 42.

We have not declared or paid dividends on our Common Stock during the
last three fiscal years. We do not anticipate paying dividends on our Common
Stock or any class of capital stock in the foreseeable future. Our credit
facilities and corollary agreements prohibit the payment of cash dividends on
Common Stock without the lender's consent. Any future credit facilities are also
likely to prohibit the payment of dividends. Future declaration or payment of
dividends, if any, will be at the sole discretion of the Board of Directors and
will depend on our then current financial condition, results of operations,
capital requirements and other factors deemed relevant by the Board of
Directors. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources and -
Certain Business Considerations."

WARRANTS

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

PREFERRED STOCK

In December 1997, we also issued 40,000 shares of Series A Preferred
Stock. Although the issuance of Series A Preferred Stock was registered under
the Securities Act of 1933, there is no established trading market for the
Series A Preferred Stock. Through 2002, 13% dividends on the Series A Preferred
Stock have been and are expected to be paid in additional shares of Series A
Preferred Stock. Thereafter, dividends are to be paid in cash. In addition, our
credit facilities and corollary agreements associated with the 1997 Offerings
restrict the payment of cash dividends on the Series A Preferred Stock (other
than for payment of dividends associated with fractional shares). Future
declaration or payment of dividends, if any, will be at the discretion of the
Board of Directors and will depend on our then current financial condition,
results of operations, capital requirements and other factors deemed relevant by
the Board of Directors. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources"
and "- Certain Business Considerations."

9
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES

In fiscal 2000, the Company issued stock options to purchase 50,000
shares of Common Stock under the 1997 Stock Option Plan, with a weighted average
exercise price of $3.00 per share. The options were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

We commenced operations on September 8, 1995 through the purchase of
certain assets of our predecessor in a transaction accounted for under the
purchase method of accounting. On December 31, 1996, KCSN Acquisition Company,
LLC acquired control of our company through a series of stock transactions
accounted for as a recapitalization. As a result of the recapitalization and
several acquisitions we made, the financial information presented below is not
comparable in certain respects.

The financial information presented below as of June 30, 2000, 1999,
1998, 1997 and 1996, for the fiscal years ended June 30, 2000, 1999, 1998, 1997
and for the period from September 8, 1995 through June 30, 1996, is derived from
our audited financial statements, some appearing elsewhere in this Form 10-K.

10
<PAGE>

COLOR SPOT NURSERIES, INC.
---------------------------------------------------------------------------
9/8/95
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
6/30/00 6/30/99 6/30/98(3) 6/30/97(2) 6/30/96(1)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $210,887 $206,076 $187,731 $113,400 $51,995
Gross profit ........................ 79,996 88,283 51,517 49,374 24,310
Sales, marketing and delivery expenses 50,362 46,252 50,033 31,168 15,495
General and administrative expenses.. 20,840 25,610 13,338 7,300 2,886
Amortization of intangible assets.... 1,719 1,727 2,308 990 94
Termination of Management fee -- -- 2,400 -- --
Income (loss) from operations ....... 7,075 14,694 (16,562) 9,916 5,835
Interest expense..................... 15,962 16,464 13,405 4,179 687
Other expense (income), net.......... (1,260) 355 (285) (148) 91
Income tax provision (benefit)....... (791) (727) (10,514) 2,830 2,269
Income before extraordinary gain (loss) (6,836) (1,398) (19,168) 3,055 2,788
Cumulative effect of change in accounting
Principles....................... -- (1,718) -- -- --
Extraordinary gain (loss)............ -- (1,018) (2,792) (215) --
-------- -------- --------- ------ ------
Net income (loss).................... $(6,836) $(4,134) $(21,960) $2,840 $2,788
======== ======== ========= ====== ======
Per share amounts (4)
Income (loss) before cumulative effect
of change in accounting principles and
extraordinary loss-basic.............. $(2.13) $(1.22) $(3.25) $0.49 $0.50
======= ======= ======= ===== =====
Income (loss) before cumulative effect
of change in accounting principles and
extraordinary loss-basic diluted...... $(2.13) $(1.22) $(3.25) $0.45 $0.50
======= ======= ======= ====== =====
Dividends per share.................. -- -- -- $0.22 --
======= ======= ======= ====== =====
OPERATING DATA:
EBITDA(5)............................ $14,898 $21,899 $(10,585) $13,357 $6,433
Cash flows from operating activities. 7,948 15,216 (25,865) (4,093) (3,485)
Cash flows from investing activities. (4,149) (2,176) (54,047) (58,234) (9,660)
Cash flows from financing activities. (3,480) (13,864) 79,394 64,388 13,846
Depreciation and amortization........ 7,823 7,205 5,977 3,441 598
Capital expenditures................. 6,089 2,176 13,508 6,181 1,529
Ratio of earnings to fixed charges (6) -- -- -- 2.10 4.68
Number of production facilities (7) 17 17 19 13 6
BALANCE SHEET DATA (END OF PERIOD):
Working capital...................... $16,289 $20,184 $26,809 $14,161 $6,136
Total assets......................... 185,766 181,754 210,350 133,417 33,219
Long-term debt, excluding current portion 124,690 123,413 135,044 83,408 6,785
Stockholders' equity (deficit)....... (32,984) (18,489) (7,491) 4,075 12,535

</TABLE>

------------------------
(1) Includes the financial results of Barcelo's Plant Growers from March
1996.
(2) Includes the financial results of NAB Nursery and B&C Growers from
October 1996, Sunrise Growers from November 1996, Sunnyside Plants from
January 1997, Lone Star Growers Co. from February 1997, Signature Trees
from March 1997 and Hi-C Nursery from April 1997.
(3) Includes the financial results of Plants, Inc., Peters' Wholesale
Greenhouses, Inc. and Wolfe Greenhouses, LLC from July 1997, Cracon,
Inc. and Summersun Greenhouse Co. from August 1997 and Oda Nursery,
Inc. from September 1997. -
(4) Per share amounts exclude extraordinary loss which would decrease the
basic diluted share amounts by $0.15, $0.40 and $0.03 for the years
ended June 30, 1999, 1998 and 1997, respectively.
(5) EBITDA represents income before interest expense, depreciation and
amortization expense, the provision for income taxes, other (income)
expense, changes in accounting principles and extraordinary items.
While EBITDA is not intended to represent cash flow from operations as
defined by GAAP and should not be considered as an indicator of
operating performance or an alternative to cash flow (as measured by
GAAP) as a measure of liquidity, it is included herein to provide
additional information with respect to the ability of the Company to
meet our future debt service, capital expenditure and working capital
requirements. Other companies may define EBITDA differently, and as a
result, those measures may not be comparable to our EBITDA. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." EBITDA for the year ended June 30, 1998
includes $2,400,000 of non-recurring charges.
(6) For purposes of computing a ratio of earnings to fixed charges,
"earnings" consist of income (loss) before provision for income taxes
plus fixed charges. "Fixed charges" consist of interest on all
indebtedness, amortization of deferred debt financing costs and
one-third of rental expenses (the portion deemed representative of the
interest factor). Earnings were insufficient to cover fixed charges by
$29,682, $2,125 and $7,627 for the year ended years ended June 30,
1998, 1999 and 2000, respectively.
(7) Facilities include owned and leased properties as of the end of each
period, excluding Christmas tree fields.

11
<PAGE>

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

GENERAL

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

Our fiscal year runs from July 1 through June 30. Our Board of
Directors recently elected to change our fiscal year end from June 30 to
December 31. We intend to file a Transition Report covering the transition
period from July 1, 2000 to December 31, 2000. Thereafter, our fiscal year will
correspond with the calendar year.

OVERVIEW

We are one of the largest wholesale nurseries in the United States,
based on revenue and greenhouse square footage. We sell a wide assortment of
high quality bedding plants, shrubs, flowering potted plants, ground cover and
Christmas trees as well as provides extensive merchandising services primarily
to leading home centers and mass merchants. We have grown rapidly, primarily
through acquisitions completed prior to September 1997, generating net sales of
$210.9 million in fiscal 2000, as compared to $206.1 million in fiscal 1999 and
$187.7 million in fiscal 1998. The percentage distribution of net sales in
fiscal 2000, fiscal 1999 and fiscal 1998 by product category was as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
2000 1999 1998
-----------------------------
<S> <C> <C> <C>
Bedding Plants 66% 63% 63%
Flowering Potted Plants 8% 9% 12%
Shrubs 16% 16% 15%
Ground Cover 2% 4% 4%
Christmas Trees 8% 8% 6%
</TABLE>

We commenced operations on September 8, 1995 after purchasing certain
assets of our predecessor. Our management immediately implemented a number of
strategic and operational programs in an attempt to improve our customer
relationships and financial results. These initiatives included revamping our
merchandising programs, decentralizing our operations, revising our pricing
strategies, renewing our focus on operating efficiencies and restructuring our
sales organization.

After these strategic initiatives began to impact our operating
results, we embarked on an aggressive acquisition strategy. In fiscal 1997 and
in the first quarter of fiscal 1998, we completed 13 acquisitions. These
acquisitions resulted in our expansion into several states, including Texas,
Washington, Oregon and Michigan, and our entry into the fresh cut Christmas tree
business. We paid for these acquisitions through a combination of cash,
promissory notes and common stock.

We implemented several initiatives to improve our operating results and
strengthen our financial position in fiscal 1999. We implemented a more
conservative sales and production plan and adjusted our production process to
better match supply and demand while maintaining high quality customer service.
In fiscal 1999, our sales increased to $206.1 million and we generated income
from operations of $14.7 million. We also increased our focus on facility
capacity optimization and working capital management. As a result of these
efforts, as of June 30, 1999, our operating

12
<PAGE>

income improved by $31.3 million, our working capital decreased by $6.6 million
and our cash provided by operating activities increased by $41.1 million as
compared to prior year.

In fiscal 2000, our sales increased to $210.9 million and we generated
income from operations of $7.9 million. However, operating income decreased by
$7.6 million compared to fiscal 1999. Performance during the year was impacted
by a combination of underperforming facilities, inefficiencies driven by changes
in the level and mix of the production plan and cost structure expansions
related to further decentralization. The inefficiencies were evident in
materials and labor impacting gross margins and the impact of further
decentralization became evident in selling, general and administrative expenses.
The decentralization of certain functions led to inexperienced decision making
and untimely adjustments to our production plan that ultimately resulted in
overproduction. As a result, excess product was sold at compressed sales prices
during the fourth quarter of fiscal 2000 that resulted in decreased margins and
a decrease in working capital of $3.9 million from prior year. Gross profit
declined to approximately 38% for the year ended June 30, 2000, down from
approximately 43% during the prior year.

Our business is highly seasonal and we have historically reported
operating losses in our first and second fiscal quarters. Although we have
attempted to reduce the effects of seasonality with sales that are
counter-seasonal to our historic products with the acquisition of Christmas tree
operations, our sales are still highly seasonal.

Sales of our products are highly dependent upon general weather
conditions. Cold and wet weather, particularly on weekends, tends to curtail
gardening activities and results in a reduction in demand for our products. For
one example, our 1998 operating results were adversely affected by the weather
phenomenon known as "El Nino". As a result of "El Nino", seasonal rainfall
amounts in our key selling regions ranged from 150 to 200% of normal levels. The
severity of the weather, particularly in our western division from January
through April of 1998 was greater than our expectations, which resulted in high
levels of product shrinkage and returns.

Our designation as an agricultural company provides favorable tax
treatment for a majority of our operations. While our financial statements
include tax expense, we have historically not paid income taxes. Agricultural
companies are generally permitted to calculate taxable income on a cash basis.
As a result of our growth, this treatment has enabled us to generate significant
net operating losses since our inception and accumulate a large net operating
loss carry-forward. Our effective tax rate was 10.4% in fiscal 2000, 34.2% in
fiscal 1999 and 35.4% in fiscal 1998. The fiscal 2000 rate was lower than the
U.S. statutory rate of 34% due to a valuation allowance of $2.0 million recorded
against the full deferred tax asset for state operating loss carryforwards as a
result of the uncertainty of their realization. The state net operating losses
expire beginning on June 30, 2001. The fiscal 1999 and 1998 effective tax rates
were higher than the U.S. statutory rate of 34% due to state tax provisions and
other California tax limitations on the use of net operating loss
carry-forwards. As of June 30, 2000, we had a net operating loss carry-forward
of approximately $75.4 million for federal income tax purposes and $30.5 million
for state income tax purposes. Although we have not provided a valuation
allowance against the federal net operating loss carryforwards, the
realizability of the related assets is periodically evaluated. The federal net
operating losses expire beginning on June 30, 2011.

13
<PAGE>

RESULTS OF OPERATIONS

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

Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
6/30/00 6/30/99 6/30/98
------- ------- -------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.1 57.2 72.6

Gross profit 37.9 42.8 27.4

Sales, marketing and delivery expenses 23.9 22.5 26.7
General and administrative expenses 9.9 12.4 7.1
Amortization of intangible assets 0.8 0.8 1.2
Termination of management fee and other 0.0 0.0 1.3

Income (loss) from operations 3.3 7.1 (8.8)

Interest expense 7.6 8.0 7.1
Other expense (income), net (0.6) 0.1 (0.2)

Income (loss) before income tax benefit, cumulative effect (3.7) (1.0) (15.7)
of change in accounting principle and extraordinary loss
Income tax benefit 0.4 0.3 5.6

Income (loss) before cumulative effect of change in
accounting (3.3) (0.7) (10.1)
Principle and extraordinary loss 0.0 0.8 0.0
Cumulative effect of change in accounting principle
Extraordinary loss 0.0 0.5 1.5
Net Income (loss) (3.3)% (2.0)% (11.6)%
======================================

</TABLE>

FISCAL YEAR ENDED JUNE 30, 2000 ("FISCAL 2000") AS COMPARED TO FISCAL YEAR ENDED
JUNE 30, 1999 ("FISCAL 1999")

NET SALES. Net sales increased $4.8 million, or 2.3%, to $210.9 million
in fiscal 2000 from $206.1 million in fiscal 1999. This increase was primarily
the result of increased sales to our top eight customers, offset by fewer sales
to low volume customers.

GROSS PROFIT. Gross profit decreased $8.3 million to $80.0 million in
fiscal 2000 from $88.3 million in fiscal 1999. Gross profit as a percentage of
net sales decreased to 37.9% in fiscal 2000 from 42.8% in fiscal 1999. The
decrease in gross profit percentage was the result of a combination of
under-performing facilities, over-production, labor and material inefficiencies
driven by changes in the level and mix of the production plan and cost structure
expansions related to further decentralization. The inefficiencies were evident
in materials and labor. The decentralization of certain functions led to
inexperienced decision making and untimely adjustments to our production plant
that ultimately resulted in overproduction. As a result, excess product was sold
at compressed sales prices during the fourth quarter of fiscal 2000 that
resulted in decreased margins. The inefficiencies resulted in a decline in gross
margin to approximately 40% for the year ended June 30, 2000, down from 45%
during the year ended June 30, 1999. The timing of the availability of our
product did not match our customers' demand, causing increased write-offs of
excess inventory.

OPERATING EXPENSES. Sales, marketing and delivery expenses increased
$4.1 million to $50.4 million in fiscal 2000 from $46.3 million in fiscal 1999.
As a percentage of net sales, sales, marketing and delivery expenses increased
to 23.9% in fiscal 2000 from 22.5% in fiscal 1999. This increase as a percentage
of net sales was primarily

14
<PAGE>

due to additional field merchandisers, poor distribution management and higher
fuel costs. General and administrative expenses decreased $4.8 million, or 2.5%,
to $20.8 million in fiscal 2000 from $25.6 million in fiscal 1999. As a
percentage of net sales, general and administrative expenses decreased to 9.9%
in fiscal 2000 from 12.4% in fiscal 1999. This decrease is primarily the result
of no bonuses accrued under our employee bonus plan due to the fact that bonus
targets were not achieved, less employee severance and relocation, and a
decrease in other consulting costs which were incurred in fiscal 1999 associated
with the new management team's ongoing review of operations. Amortization of
intangible assets was unchanged at $1.7 million in fiscal 2000 and 1999.

INTEREST EXPENSE. Interest expense decreased $0.5 million to $16.0
million in fiscal 2000 from $16.5 million in fiscal 1999 due to lower average
levels of borrowing during most of fiscal 2000.

OTHER INCOME AND EXPENSE: Other income and expense increased $1.6
million to $1.3 million, primarily due to a gain on the sale of property owned
at one facility.

TAXES. While our financial statements include tax expense or benefit,
we have historically not paid income taxes. Agricultural companies are generally
permitted to calculate taxable income on a cash basis. As a result of our
growth, this treatment has enabled us to generate significant net operating
losses since our 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 our effective tax
rate and the U.S. statutory rate is typically due to state tax provisions and
other California tax limitations on the use of net operating loss carryforwards.
Our effective tax benefit decreased to 10.4% in fiscal 2000 from a provision
rate of 34.2% in fiscal 1999, primarily as a result of a $2.0 million valuation
allowance recorded against the deferred tax asset related to state net operating
loss carryforwards as a result of the uncertainty of their realization. The
state net operating losses expire beginning on June 30, 2001. Although we have
not provided a valuation allowance against the federal net operating loss
carryforwards, the realizability of the related assets is periodically
evaluated. The federal net operating losses expire beginning on June 30, 2011.

FISCAL YEAR ENDED JUNE 30, 1999 ("FISCAL 1999") AS COMPARED TO FISCAL YEAR ENDED
JUNE 30, 1998 ("FISCAL 1998")

NET SALES. Net sales increased $18.4 million, or 9.8%, to $206.1
million in fiscal 1999 from $187.7 million in fiscal 1998. This increase was
primarily attributable to more accurately matching supply and demand, resulting
in fewer returns. We also experienced changes in product pricing during the year
representing approximately 2.1% of the increase.

GROSS PROFIT. Gross profit increased $36.8 million to $88.3 million in
fiscal 1999 from $51.5 million in fiscal 1998. Gross profit as a percentage of
net sales increased to 42.8% in fiscal 1999 from 27.4% in fiscal 1998. The
significant increase in gross profit percentage was the result of a substantial
decrease in the write-off of excess inventory, lower production labor costs due
to headcount reductions, and a $7.0 million decrease in product returns. These
decreases were accomplished through improved production planning and control
combined with management's initiatives to better match supply with demand.

OPERATING EXPENSES. Sales, marketing and delivery expenses decreased
$3.7 million to $46.3 million in fiscal 1999 from $50.0 million in fiscal 1998.
As a percentage of net sales, sales, marketing and delivery expenses decreased
to 22.5% in fiscal 1999 from 26.7% in fiscal 1998. This decrease as a percentage
of net sales was primarily due to a $3.4 million reduction in distribution
expenses as a result of improved delivery efficiencies. These efficiencies were
generated by reducing the movement of inventory between facilities, increasing
the minimum order size, optimizing cubing, better management of truck
maintenance, and a change in the fleet structure whereby more trucks are rented
rather than leased resulting in reduced trucks and employees. These initiatives
were offset by an increase in expense related to volume increases. General and
administrative expenses increased $12.3 million, or 92.5%, to $25.6

15
<PAGE>

million in fiscal 1999 from $13.3 million in fiscal 1998. As a percentage of net
sales, general and administrative expenses increased to 12.4% in fiscal 1999
from 7.1% in fiscal 1998. This increase is primarily the result of increased
hiring and a revised compensation structure for key management and other
employees to support operations, as well as a $3.7 million pre-tax charge
related to closure or modification to certain facilities, employee severance and
relocation, and other consulting costs associated with the new management team's
ongoing review of our operations.

Amortization of intangible assets decreased $0.6 million to $1.7
million in fiscal 1999 from $2.3 million in fiscal 1998 due to the write-off of
unamortized organization costs during our first fiscal quarter. The termination
of management fees in fiscal 1998 related to the termination of a Fee Agreement
for certain management services.

INTEREST EXPENSE. Interest expense increased $3.1 million to $16.5
million in fiscal 1999 from $13.4 million in fiscal 1998 as a result of higher
average levels of borrowings throughout fiscal 1999 that were required to fund
operating losses incurred in fiscal 1998 and the first two fiscal quarters of
fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2000 and fiscal 1999, net cash provided by (used in)
operations was $7.9 million and $15.2 million, respectively. The decrease in
fiscal 2000 from prior year is primarily the result of a $7.6 million decline in
operating income. The improvement in fiscal 1999 was the result of improved
operating performance and significantly reduced working capital requirements. We
made $6.1 million and $2.2 million in capital expenditures in fiscal 2000 and
fiscal 1999, respectively. Approximately $1.6 million and $0.2 million of the
expenditures during fiscal 2000 and fiscal 1999, respectively, were for capital
expansion projects. Capital expansion projects increase our 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. Our three-year revolving credit facility
expires on October 15, 2001. There can be no assurance that an extension
will be granted and, if not, that alternative financing will be available.

Subsequent to year-end, we decided to take excess capacity out of
production. The remaining inventory at the Aurora, Sunol, Watsonville and Waco
facilities will be transferred to other facilities and production at those
facilities will cease. As demand returns, we will resume production at the
Aurora, Sunol and Waco facilities. The lease for the Watsonville facility
will expire in fiscal 2001 and one of two leases at the Sunol facility has
been subleased. We will evaluate the possibility of extending the Watsonville
lease based on production requirements at the time of expiration. As of June
30, 2000, we have $0.6 million net book value of assets at our Watsonville
facility and plan to use these assets at our other locations. We have $6.0
million net book value of assets at our Aurora, Sunol, and Waco facilities.
We plan to utilize some of these assets in our other facilities and in these
facilities when they reopen. If we decide to abandon any of these assets, we
will account for the abandonment in the period such decision is made; such
accounting could require us to take a material charge to our income statement.

Fiscal 2000. As of June 30, 2000, we were not in compliance with one
of the financial covenants of our three-year Loan and Security Agreement with
Fleet Capital Corporation, however, on August 10, 2000 a waiver curing the
noncompliance was obtained. On September 28, 2000, a waiver and amendment was
received waiving the covenant violation and amending the agreement to reset
the financial covenants for each four quarter period beginning with the four
quarters ending September 30, 2000 and to reestablish the original seasonal
line period. All other terms remain unchanged and are discussed below. At
June 30, 2000, we borrowed $13.7 million under this credit agreement and had
$17.5 million of credit remaining available.

Fiscal 1999. On October 15, 1998, we entered into the Loan and
Security Agreement with Fleet Capital Corporation, as agent, and our prior
credit facility with Credit Agricole Indosuez was terminated and repaid in
full. This agreement provides a $70 million revolving credit facility, which
is subject to certain borrowing base limitations based on a percentage of
eligible inventory and eligible accounts receivable. This agreement is
secured by substantially all our assets. Interest under this agreement
accrues at a variable rate equal to Prime plus 1.00% or LIBOR plus 3.00%. In

16
<PAGE>

addition, to the extent that our borrowings exceed certain borrowing base
limitations during the period from October 1 through March 31, the interest
rates increase by an additional 0.50%. This agreement terminates on October
15, 2001. We believe that the cash available from operations and this
agreement, as amended, will be sufficient to finance working capital
requirements and capital expenditures over the next 12 months.

Fiscal 1998. Senior Subordinated Notes and Series A Preferred Stock.
On December 24, 1997, we raised $133.5 million, net of fees and expenses
from the sales of 10 1/2% Senior Subordinated Notes and 13% Series A
Preferred Stock, including warrants, which it used to repay existing
indebtedness (See Notes 10 and 13 to Notes to Consolidated Financial
Statements). Interest on these notes is due semiannually on June 15 and
December 15 commencing June 15, 1998. Dividends on the Series A Preferred
Stock are payable quarterly in cash or shares of Series A Preferred Stock
through December 15, 2002 on March 15, June 15, September 15 and December
15. During fiscal 2000 and fiscal 1999, we issued 6,584 and 5,794 shares of
Series A Preferred Stock, respectively, as dividends.

CERTAIN BUSINESS CONSIDERATIONS

SUBSTANTIAL LEVERAGE AND DEBT SERVICE

On October 15, 1998, we entered into the Fleet Loan Agreement. The
Fleet Loan Agreement provides a $70.0 million revolving credit facility. As
of June 30, 2000, we were not in compliance with one of the covenants of this
agreement. On September 28, 2000, a waiver and amendment was received waiving
the covenant violation and amending the agreement to reset the financial
covenants for each four quarter period beginning with the four quarters
ending September 30, 2000 and to reestablish the original seasonal line period.
There can be no assurance that we will be able to generate sufficient cash
flows and financial goals to comply with debt covenants in the future, or that
we will be able to obtain waivers for our defaults, if we breach covenants.

As of June 30, 2000, we had $124.7 million of consolidated long-term
indebtedness. We are highly leveraged and may incur additional indebtedness in
the future, subject to certain limitations contained in the instruments
governing our indebtedness and capital stock. Accordingly, we will continue to
have significant debt service obligations. Our debt service obligations will
have important consequences to holders of our 10 1/2% Senior Subordinated Notes,
Series A Preferred Stock, Common Stock and Warrants, including the following:

- a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and
interest on our indebtedness, thereby reducing the funds
available to us for operations, acquisitions, future business
opportunities and other purposes and increasing our
vulnerability to adverse general economic and industry
conditions;

- our leveraged position may increase our vulnerability to
competitive pressures;

- the financial covenants and other restrictions contained in
the Fleet Loan Agreement, the Indenture and the Certificate of
Designation for the Series A Preferred Stock will require us
to meet certain financial tests and will restrict our ability
to borrow additional funds, to dispose of assets or to pay
cash dividends on, or repurchase, preferred or common stock;
and

- funds available for working capital, capital expenditures,
acquisitions and general corporate purposes may be limited.

17
<PAGE>

beyond our control. There can be no assurance, however, that our business will
continue to generate sufficient cash flow from operations in the future to
service our debt, pay dividends, make redemption payments and fund necessary
capital expenditures. See "Liquidity and Capital Resources" in this Item 7. If
unable to do so, we may be required to refinance all or a portion of our
existing debt, including the Notes, sell assets or obtain additional financing.
There can be no assurance that any such refinancing or that any such sale of
assets or additional financing would be possible on terms reasonably favorable
to us, or at all. In addition, unforeseen problems, delays, expenses and
difficulties as well as changes in economic and regulatory or competitive
conditions may lead to cost increases that would make our current cash flow and
borrowings under the Fleet Loan Agreement insufficient to meet our capital
needs. See "--Future Capital Needs; Uncertainty of Additional Financing."

RESTRICTIONS IMPOSED BY FLEET LOAN AGREEMENT AND EFFECT OF DEFAULT

The Fleet Loan Agreement restricts, among other things, our ability to
incur additional indebtedness, incur liens, pay or declare dividends, enter into
any transaction not in our usual course of business, guarantee or otherwise
become in any way liable with respect to the obligations of another party or
entity, merge or consolidate with another person or sell or transfer any
collateral (except for the sale of inventory in the ordinary course of our
business). A breach of any of these covenants could result in a default under
the Fleet Loan Agreement. Upon the occurrence of an Event of Default (as defined
in the Fleet Loan Agreement), the lenders could elect to declare all amounts
outstanding under the Fleet Loan Agreement, together with accrued interest, to
be immediately due and payable. If we were unable to pay those amounts, the
lenders could proceed against the collateral granted to them to secure that
indebtedness. If the Fleet Loan Agreement indebtedness were to be accelerated,
there can be no assurance that our assets would be sufficient to repay the
indebtedness in full and other indebtedness. Substantially all of our assets
have been pledged as security under the Fleet Loan Agreement. The restrictions
described above, in combination with our leveraged nature, may limit our ability
to obtain financing in the future or may otherwise restrict corporate
activities.

ENCUMBRANCES ON ASSETS TO SECURE THE FLEET LOAN AGREEMENT

In addition to being subordinated to all existing and future Senior
Debt of the Company, the 10 1/2% Senior Subordinated Notes are not secured by
any of our assets. Our obligations under the Fleet Loan Agreement are secured by
substantially all of our assets. If we become insolvent or are liquidated, or if
payment under the Fleet Loan Agreement is accelerated, the lenders under the
Fleet Loan Agreement will be entitled to exercise the remedies available to a
secured lender under applicable law.

ABILITY TO INTEGRATE ACQUISITIONS

There can be no assurance that we will be able to integrate our
acquisitions or successfully implement our business model in a timely manner
without substantial costs, delays or other problems. Once integrated and
operating according to our business model, these acquisitions may not achieve
sales, profitability and productivity commensurate with our historical operating
results. In addition, there can be no assurance that our management and
financial controls, personnel, computer systems and other corporate support
systems will be adequate to manage the increase in the size and scope of our
operations as a result of our acquisitions. Additionally, there can be no
assurances that the acquired businesses will enhance our business or financial
performance.

EFFECT OF GROWTH ON COMPANY RESOURCES

The recent growth and expansion of our business has placed a
significant strain on our management, operational and financial resources.
Continued growth will require an increase in personnel who possess the training
and experience necessary to operate our facilities. There can be no assurance
that we will be able to continue to attract, develop and retain the personnel
necessary to pursue our growth strategy. Moreover, as we continue to grow, we
will need to expand our production, warehouse and distribution facilities and
may require additional facilities to support such growth. In addition, our rapid
growth may place significant pressure on our financial controls and inventory

18
<PAGE>

management systems. Any failure by us to manage our growth effectively could
have a material adverse effect on our company.

DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH

Contingent upon improvement in our financial performance, we intend to
pursue the acquisition of other companies. See "Business--Growth Strategy."
Acquisitions involve a number of risks, including effects on our reported
operating results, the diversion of management's attention, the dependence on
hiring, training and retaining key personnel and risks associated with
unanticipated problems or legal liabilities, some or all of which could have a
material adverse effect on our company. Historically, we have financed
acquisitions by incurring additional debt and the issuance of our stock. See
"-Substantial Leverage and Debt Service." We completed one acquisition in fiscal
1996, seven acquisitions in fiscal 1997 and six acquisitions in fiscal 1998. We
anticipate one or more potential acquisition opportunities, including those that
would be material, may become available in the near future. No assurance can be
given that an acquisition by us will occur, or, if an acquisition does occur,
that it will not have a material adverse effect on us, that any such acquisition
will be successful in enhancing our business or that any such acquisition can be
successfully integrated into our business. See "--Future Capital Needs;
Uncertainty of Additional Financing."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

There can be no assurance that borrowings under the Fleet Loan
Agreement and funds from operations will be sufficient to meet our anticipated
working capital, capital expenditure and acquisition financing requirements. We
may need to raise additional funds through the issuance of public or private
debt or equity securities in order to take advantage of unanticipated
opportunities, including acquisitions of complementary businesses, or otherwise
respond to unanticipated competitive pressures. There can be no assurance that
additional financing will be available on terms favorable to us, or at all.

WEATHER; GENERAL AGRICULTURAL RISKS

Inclement weather or production difficulties occurring at a time of
peak production or sales (in the second half of our fiscal year), particularly
on weekends during the peak gardening season, could cause declines in net sales
and operating income that could have a material adverse effect on us . In the
event of severe weather conditions, we do not have sufficient facilities to
preserve and protect all of our products. During fiscal 1998, the severe weather
phenomenon known as "El Nino" materially and adversely impacted the demand for
our products. We intend to expand into new markets that typically have greater
weather variability than our historic markets. Our failure to adequately manage
this variability could have a material adverse effect on us. Our operations may
also be materially affected by disease, pests or other natural hazards.
Agricultural production is highly dependent upon the availability of water. We
have not installed, and is not required to install, water reclamation systems at
the majority of our production facilities. The loss of access to water at any of
our facilities would have a material adverse effect on us. Given the perishable
nature of our products, if sales do not materialize as expected, we could
experience a significant decline in profitability.

SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES

Our business is highly seasonal. In fiscal 2000, approximately 64.1% of
net sales occurred in the second half of the fiscal year. We have historically
reported operating losses in our first and second fiscal quarters. We have
experienced and expects to continue to experience variability in net sales,
operating income and net income on a quarterly basis. Factors that may
contribute to this variability include:

- weather conditions during peak growing and gardening seasons;

- shifts in demand for live plant products;

19
<PAGE>

- changes in product mix, service levels and pricing by us and
our competitors;

- the effect of acquisitions;

- the economic stability of our retail customers; and

- our relationship with each of our retail customers.

CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT

We are highly dependent on the purchases of our top eight retail
customers, which together accounted for 75% and 70% of our net sales in fiscal
2000 and fiscal 1999, respectively. Our largest customer, Home Depot, accounted
for approximately 41% and 37% of our net sales in fiscal 2000 and fiscal 1999,
respectively. We expect that a small number of customers will continue to
account for a substantial portion of our net sales for the foreseeable future.
We do not have long-term contracts with any of our retail customers, and there
can be no assurance that they will continue to purchase our products. The loss
of or significant adverse change in, our relationship with Home Depot or any
other major customer could have a material adverse effect on us. The loss of, or
reduction in orders from, any significant retail customers, losses arising from
retail customers' disputes regarding shipments, fees, merchandise condition or
related matters, or our inability to collect accounts receivable from any major
retail customer could have a material adverse effect on us. In addition, there
can be no assurance that revenue from customers that have accounted for
significant revenue in past periods, individually or as a group, will continue,
or if continued, will reach or exceed historical levels in any period.

GOVERNMENTAL REGULATIONS; MINIMUM WAGE

We are subject to certain federal, state and local health, safety and
environmental laws and regulations regarding the production, storage and
transportation of certain of our products and the disposal of our waste. Certain
of our operations and activities, such as water runoff from our production
facilities and the use of certain pesticides, are subject to regulation by the
United States Environmental Protection Agency (the "EPA") and similar state and
local agencies. These agencies may regulate or prohibit the use of such
products, procedures or operations, thereby affecting our operations and
profitability. In addition, we must comply with a broad range of environmental
laws and regulations. Additional or more stringent environmental laws and
regulations may be enacted in the future and such changes could have a material
adverse effect on us. We use reclamation water as one of the sources of water
for a few of our production facilities. The use and pricing of reclamation
water, including availability of subsidized water rates, is governed by federal
reclamation laws and regulations. Changes in the law could have a material
adverse effect on us.

In addition, we are is subject to the Fair Labor Standards Act as well
as various federal, state and local regulations that govern such matters as
minimum wage requirements, overtime and working conditions. A large number of
our employees are paid at or just above the federal minimum wage level and,
accordingly, changes in laws, regulations or ordinances could have a material
adverse effect on us by increasing our costs.

SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT

In June 1999, Richard E. Parker and Joseph P. O'Neill joined us as our
Chief Executive Officer and Chief Financial Officer, respectively. Accordingly,
we, under our current management team, have only a limited operating history
upon which investors may evaluate our performance. There can be no assurance
that we will be able to continue to achieve or sustain revenue growth or
profitability.

COMPARABILITY OF OPERATING RESULTS

In fiscal 1999, we incurred (i) a $2.6 million non-cash pre-tax
extraordinary charge to write off organization

20
<PAGE>

costs in early-adopting Statement of Position 98-5 "Reporting on Costs of
Start-Up Activities" ("SOP 98-5"), which was accounted for as a change in
accounting principle, (ii) a $1.5 million non-cash pre-tax extraordinary charge
related to the write-off of unamortized financing costs associated with the
terminated credit facilities in connection with the refinancing in the second
fiscal quarter, and (iii) a $3.7 million pre-tax special charge during the first
fiscal quarter related to the closure or leasehold modification at certain
facilities, employee severance and relocation, and consulting costs associated
with the new management team's ongoing review of our operations. In fiscal 1998,
we incurred (i) a $4.3 million non-cash pre-tax extraordinary charge related to
the write-off of deferred financing fees, (ii) a $2.0 million pre-tax charge
related to the termination of an annual management fee; and (iii) a $0.4 million
pre-tax charge related to the payment of bonuses to certain members of
management.

Due to the foregoing factors and other environmental considerations in
our business (for example, weather patterns), we believe that period-to-period
comparisons of our operating results cannot be relied upon as indicators of
future performance. In the event that our operating results in any future period
fall below the expectations of securities analysts and investors, the trading
price of the Common Stock would likely be materially and adversely affected.

SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS

We and our competitors are vulnerable to price increases for raw
materials. For fiscal 2000, raw material costs accounted for approximately 30.1%
of our net sales. We do not have long-term contracts with the majority of our
raw material suppliers. Increases in the cost of raw materials essential to our
operations, including seed, plastic, chemicals and fertilizer, would increase
our costs of production. Significant increases in the price of petrochemicals or
a scarcity of raw materials essential to plant propagation could have a material
adverse effect on us. There can be no assurance that any such price increases
can be passed on to our customers in the form of higher prices for our products.

CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT

KCSN Acquisition Company, L.P. owns 69.0% of the outstanding Common
Stock. In addition, officers and directors own 25.6% of the outstanding Common
Stock. Heller Equity Capital Corporation is the holder of an 8.0% Subordinated
Convertible Note (the "Heller Note"), which is convertible into approximately
6.3% of the outstanding Common Stock. Heller also owns 2.6% of the outstanding
Common Stock. KCSN, Heller and the management stockholders are parties to a
Stockholders Agreement, which provides that the parties to the Stockholders
Agreement shall consent to any merger, consolidation or sale of all or
substantially all of our assets involving an independent third party and
approved by a majority of KCSN's shares and vote their shares to elect certain
specified persons as directors. Subject to the terms of the Stockholders
Agreement and the Certificate of Designation, KCSN is able to elect all of our
directors and can determine the outcome of corporate actions requiring
stockholder approval, including adopting amendments to our Certificate of
Incorporation (as defined) and approving or disapproving mergers or sales of all
or substantially all of our assets.

CHANGE OF CONTROL

The Indenture and Certificate of Designation Agreements, which we
entered in 1997, provide that upon the occurrence of a Change of Control (as
defined) we must make an offer to purchase all or any part of the Notes at a
price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase and all or any part
of the Series A Preferred Stock at a price in cash equal to 101% of the
aggregate liquidation preference thereof plus accrued and unpaid dividends to
the date of purchase. The Fleet Loan Agreement prohibits us from repurchasing
any Notes or Series A Preferred Stock, except with certain proceeds of one or
more Public Equity Offerings (as defined). The Fleet Loan Agreement also
provides that certain change of control events with respect to our company would
constitute a default thereunder. Any future credit agreements or other
agreements relating to Senior Debt to which we become a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when we are prohibited from purchasing the Notes or Series A Preferred
Stock, or if we are required to make an Asset Sale Offer (as defined) pursuant
to the terms of the Notes, we could seek the consent of our lenders

21
<PAGE>

to purchase the Notes or Series A Preferred Stock or could attempt to refinance
the borrowings that contain such prohibition. If we do not obtain such a consent
or refinance such borrowings, we would remain prohibited from purchasing the
Notes or Series A Preferred Stock. In such case, our failure to purchase
tendered Notes would constitute an Event of Default (as defined) under the
Indenture. If, as a result thereof, a default occurs with respect to any Senior
Debt, the subordination provisions in the Indenture would likely restrict
payments to the holders of the Notes. The Indenture will provide that we may not
offer to repurchase any Series A Preferred Stock upon the occurrence of a Change
of Control until we have completed our offer to purchase the Notes. There can be
no assurance that we will have sufficient funds to repurchase the Notes or the
Series A Preferred Stock after a Change of Control. The provisions relating to a
Change of Control included in the Indenture and the Certificate of Designation
may increase the difficulty of a potential acquirer obtaining control of our
company.

DEPENDENCE ON LEASED FACILITIES

The majority of our production facilities are leased. These leases
expire at varying times over the next 15 years and certain leases are
month-to-month. Although we believe that we can extend most of our leases on
acceptable terms, failure to do so would require us to establish new production
facilities. No assurance can be given that any such leases can be extended on
acceptable terms or, if not so extended, that suitable replacement production
facilities can be established. Failure to extend the terms of any of these
leases could have a material adverse effect on our company.

COMPETITION

The wholesale nursery industry is highly competitive. Competition is
based principally on product quality, breadth of product offerings, customer
service and price. The wholesale nursery industry is highly fragmented with over
10,000 small and regional nurseries nationwide. Historically, the 100 largest
wholesale nurseries in the United States accounted for less than 20% of total
wholesale production. We currently compete directly with a large number of
western and southwestern wholesale nursery companies. On a multi-regional basis,
we compete with Hines Nurseries primarily in bedding plants and shrubs and
Monrovia Nursery Company primarily in shrubs. The fresh cut Christmas tree
market is also highly fragmented and, on a regional basis, we compete in this
market with Holiday Tree Farms and The Kirk Company.

LACK OF MARKET FOR COMMON STOCK AND SERIES A PREFERRED STOCK

There is currently no public market for our Common Stock and Series A
Preferred Stock. We have no present plan to list the Common Stock or the Series
A Preferred Stock on a national securities exchange or to include the Capital
Stock for quotation through an inter-dealer quotation system. There can be no
assurance that such a market will develop or, if such a market develops, as to
the liquidity of such market.

LACK OF PRIOR MARKET FOR THE NOTES

There is currently no public market for the Notes and we have no
present plan to list the Notes on a national securities exchange or to include
the Notes for quotation through an inter-dealer quotation system. There can be
no assurance that such a market will develop or, if such a market develops, as
to the liquidity of such market. Although the underwriters in the 1997 Notes
Offering advised us that they intended to make a market in the Notes after
consummation of the Notes Offering, the underwriters are not obligated to do so
and any such market making activities may be discontinued at any time without
notice.

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

Our liabilities consist primarily of a revolving line of credit, senior
subordinated notes and other notes and accounts payable. We have 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,

22
<PAGE>

due to different maturity dates and re-pricing 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. We do not have
any derivative financial instruments as of June 30, 2000.

The following table provides information about our market sensitive
liabilities, categorized by maturity, and constitutes a "forward-looking
statement." For more information, please refer to Appendix A "Financial
Statements and Notes to Consolidated Financial Statements."

June 30, 2000
Expected Maturities
There-
Long-term liabilities 2001 2002 2003 2004 2005 after Total
----- ----- ----- ----- ----- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate:

Series A Preferred Stock -- -- $2.6 $5.2 $5.2 $84.2 $97.2
Average Interest Rate 13% 13% 13% 13% 13% 13%

Senior Subordinated Notes $10.5 $10.5 $10.5 $10.5 $10.5 $120.0 $173.5
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 $0.9 $1.4
Average Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Variable Rate:
Fleet Loan Agreement (1) $70.0 $70.0

</TABLE>

Average Interest Rate Base Rate, as defined, plus 1.0% or LIBOR, as defined,
plus 3.0%

(1) On October 15, 1998, we entered into the Fleet Loan Agreement and borrowed
approximately $32 million. As of June 30, 2000, we were in default of one of the
financial covenants. On September 28, 2000, this agreement was waived and
amended, waiving the covenant violation and amending the agreement to reset the
financial covenants for each four quarter period beginning with the four
quarters ending September 30, 2000 and to reestablish the original seasonal
line period. The Fleet Loan Agreement terminates in October 2001 (fiscal 2002).
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources and Note 10 to the Notes
to Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Appendix A.

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

None.

23
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth current information concerning each
of our directors, executive officers and key employees. All directors shall
serve until their successors are duly elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Officers are appointed by and serve at the discretion of the
Board of Directors.

NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard E. Parker (1) 59 President, Chief Executive Officer, Director, Chairman of the
Executive Committee
Joseph P. O'Neill (1) 42 Executive Vice President, Chief Financial Officer, Chief
Operating Officer and Secretary
Michael F. Vukelich 50 Chairman of the Board
Marion Antonini 70 Director
Ranjit S. Bhonsle (1) (2) (3) 31 Director
George T. Brophy 65 Director
William F. Dordelman 59 Director
Samuel P. Frieder (1) (2) (3) 36 Director
Richard E. George (3) 61 Director
James A. Kohlberg 42 Director
Gary E. Mariani (2) 55 Director
A. Stephen Diamond 53 Director

</TABLE>

----------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee

MR. PARKER was appointed Chief Executive Officer in June 1999. From
October 1992 through April 1999, Mr. Parker held various positions at ABT
Building Products Corporation ("ABT"), most recently as Chief Operating Officer.

MR. O'NEILL was appointed Chief Financial Officer in June 1999 and
additionally to Chief Operating Officer in September 2000. From January 1993 to
May 1999, Mr. O'Neill was an executive of ABT, serving as Chief Financial
Officer from January 1998 through May 1999.

MR. VUKELICH has been our Chairman of the Board since September 1995.
From September 1995 through June 1999, Mr. Vukelich was also our Chief Executive
Officer. From 1992 through August 1995, Mr. Vukelich was President and Chief
Executive Officer of M.F. Vukelich Co. He is the founder of Color Spot America,
a predecessor of the Company, and was President and Chief Executive Officer of
Color Spot America from its inception in 1983 to 1991. Mr. Vukelich has 28 years
of experience in the nursery business.

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<PAGE>

MR. ANTONINI joined Printing Arts America, Inc. in August 1999 as its
Chief Executive Officer and has been a Principal at Kohlberg since March 1998.
Prior to that time, Mr. Antonini was Chief Executive Officer of Welbilt.

MR. BHONSLE joined Kohlberg in 1993 and was named Principal in 1998.

MR. BROPHY was Chairman, President and Chief Executive Officer of ABT
from October 1992 to April 1999. From 1983 to 1988, Mr. Brophy was President,
Chief Executive Officer and a Director of Morgan Products, Ltd., a building
products company, and was a private business consultant from 1988 to 1992. Mr.
Brophy is also a Director of Banta Corporation, a printing company.

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

MR. FRIEDER joined Kohlberg in 1989 and was named a Principal in 1995.
Mr. Frieder is also a Director of Holley Performance Products, Inc.

MR. GEORGE has been the President of R.G. Trends, an independent
consulting firm since June 1996. From 1995 through June 1996, Mr. George was
President and Chief Executive Officer of Handy Andy Home Improvement Centers,
Inc. From September 1994 through January 1995, Mr. George was an independent
business consultant. From August 1989 to September 1994, Mr. George served as
Chairman and Chief Executive Officer of Ulta(3) Cosmetics & Salon Inc., a
company that he founded.

MR. KOHLBERG has been a Principal of Kohlberg since 1987. Mr. Kohlberg
is also a Director of Northwestern Steel and Wire Company.

MR. MARIANI has been Chief Executive Officer of WinnDevon Art Group,
Inc., an art publisher, since 1994. From 1992 through 1993, Mr. Mariani was
Chief Executive Officer of The Garden Counsel, a national nursery association.
Prior to that time, Mr. Mariani was the President of the Nursery Product
Division of Weyerhaeuser Company.

MR. DIAMOND currently serves as President and CEO of United Signature
Foods, LLC. Previously he was President World Wide of the Foodservice Company's
Group and Executive Vice President of The Quaker Oats Company; President of
Quaker Beverages Europe; President of Pillsbury Europe; President of Pillsbury
Baked Goods, Breakfast Products and Specialty Products Division; President and
CEO of Home Delivery Services, Inc. and Vice President, Marketing for
All-American Gourmet. Mr. Diamond also spent 17 years with Procter & Gamble in
manufacturing, marketing, and general management roles.

DIRECTORS' MEETINGS AND COMMITTEES

The entire Board of Directors met four times during the fiscal year
ended June 30, 2000. Each incumbent director attended 100% of the board
meetings. The Board of Directors has appointed an Audit Committee, a
Compensation Committee and an Executive Committee.

25
<PAGE>

AUDIT COMMITTEE. The primary responsibilities of the Audit Committee
are to recommend an independent public accountant to audit our annual financial
statements and to review internal and external audits, internal accounting
controls, annual financial statements and, at its discretion, compliance with
corporate policies and codes of conduct. The Audit Committee is comprised of
outside directors. The current members of the Audit Committee are Messrs.
Bhonsle, Frieder, and Mariani. The Audit Committee met three times in the fiscal
year ended June 30, 2000.

COMPENSATION COMMITTEE. The Compensation Committee determines officers'
salaries and bonuses and administers the grant of stock options and other awards
pursuant to our 1996 Stock Option Incentive Plan, 1997 Stock Option Plan and
Special Stock Option Plan. The Compensation Committee is comprised of outside
directors. The current members of the Compensation Committee are Messrs.
Bhonsle, Frieder and George. The Compensation Committee did not meet during the
fiscal year ended June 30, 2000.

EXECUTIVE COMMITTEE. The primary responsibilities of the Executive
Committee are to deal with day to day issues prior to meetings of the full Board
of Directors. The Executive Committee met four times in the fiscal year ended
June 30, 2000. The current members of the Executive Committee are Messrs.
Parker, O'Neill, Bhonsle, and Frieder.

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

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our Amended and Restated Certificate of Incorporation (the
"Certificate") provides that each person who is or was a director or officer
shall be indemnified and held harmless by us against all expense, liability and
loss to the fullest extent allowable under the Delaware General Corporation Law
(the "DGCL"). In addition, the Certificate provides, to the fullest extent
allowable under the DGCL, that no director shall be personally liable to us or
our stockholders for monetary damages for breach of fiduciary duty as a
director. Under the DGCL, liability of a director may not be limited (i) for any
breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases or (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision in
the Certificate is to eliminate our and our stockholders rights, either directly
or through a stockholders' derivative suit brought on our behalf, to recover
monetary damages from a director for breach of the fiduciary duty of care as a
director except in those instances described under the DGCL.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION

The following table sets forth a summary of certain information
regarding compensation we paid or accrued to our Chief Executive Officer during
fiscal 2000 and each of the four other most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 during fiscal
year ended June 30, 2000 (collectively, the "Named Executives").

26
<PAGE>

ANNUAL COMPENSATION LONG-TERM COMPENSATION
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
--------------------------- ---- ------ ----- --------------- ------- ------------

<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich, Chairman of the 1998 $200,000 $50,000 $5,400 -- $573,346
Board 1999 192,308 5,800 -- --
2000 200,000 400,000 16,113 -- --

Richard E. Parker, Chief Executive 1998 -- -- -- -- --
Officer and Director 1999 12,000 -- 450 -- --
2000 260,000 -- 102,461 -- --

Joseph P. O'Neill, Executive Vice 1998 -- -- -- -- --
President, Chief Financial Officer 1999 6,731 -- 450 -- --
and Secretary 2000 175,011 -- 127,390 -- --

Boligala Raju, President, Chief 1998 -- -- -- -- --
Operating Officer and Director 1999 220,126 750,000 92,835 -- --
2000 249,057 250,000 315,682 -- --

Thomas H. Dickerson, Southwest Division 1998 93,461 -- 4,050 -- --
President 1999 187,692 745,000 5,850 -- --
2000 200,000 375,000 4,590 -- --
</TABLE>
------------------
(1) Represents car allowance, relocation, accrued severance and loan
forgiveness.

OPTION GRANTS DURING FISCAL 2000. There were no options or stock appreciation
rights granted during fiscal 2000 to the Named Executives.

AGGREGATE OPTION EXERCISES IN FISCAL 2000 AND YEAR-END OPTION VALUES. The
following table sets forth certain information regarding options exercised and
the number and value of unexercised options held by the Named Executives at June
30, 2000.

YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
NDERLYING OUTSTANDING IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 2000 JUNE 30, 2000(1)
------------------------ ------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Vukelich 0 0 550,859 51,750 613,194 0

Richard E. Parker 0 0 37,500 112,500 0 0

Boligala Raju 0 0 0 0 0 0

Tom Dickerson 0 0 35,700 21,900 32,499 10,833

Joseph P. O'Neill 0 0 18,750 56,250 0 0
</TABLE>
---------------
(1) Represents the value of the shares of Common Stock subject to outstanding
options, based on a fair market value of $3.00 share, less the aggregate option
exercise price.

27
<PAGE>

EMPLOYMENT AGREEMENTS

As part of the Recapitalization, we entered into an employment
agreement with Michael F. Vukelich, the Chairman of the Board. The agreement
expires December 31, 2000 and will be automatically renewed for successive
one-year periods unless we or Mr. Vukelich give 60 days notice of non-renewal.
As of July 1, 2000, Mr. Vukelich is paid an annual base salary of $200,000,
which is increased annually based on increases in the consumer price index, and
is eligible to participate in the annual bonus program pursuant to the terms of
the agreement. The employment agreement continues in effect an option to
purchase 395,609 shares of our Common Stock for $1.45 per share and provides
that we grant Mr. Vukelich an option to purchase 207,000 shares of our Common
Stock at $7.17 per share, which options were granted in fiscal 1997. The
agreement terminates upon the earlier to occur of (i) our non-renewal or Mr.
Vukelich's non-renewal, (ii) death or disability, (iii) termination for Cause
(as defined in the agreement) or (iv) termination without Cause. In the event
that the employment agreement is terminated without Cause, we are obligated to
pay Mr. Vukelich his base salary through the remaining term of the employment
agreement plus his pro rata portion of the bonus paid to Mr. Vukelich in the
year prior to termination. In the event of Mr. Vukelich's death or disability,
we are obligated to continue to pay to Mr. Vukelich or his estate his base
salary for one year following his termination. The employment agreement entitles
Mr. Vukelich to be nominated to a seat on the board of directors so long as he
owns 10% of the Common Stock.

As part of the employment agreement, Mr. Vukelich has agreed not to
compete with our company in certain specified counties and states for the longer
of one year following termination or one year following the receipt of any
severance from us; provided that Mr. Vukelich may elect to waive the payment of
severance, in which event the non-competition covenant expires one year
following termination.

We entered into an employment agreement with Boligala Raju, the
President and Chief Operating Officer thru July 25, 2000, effective as of
August 12, 1998. The agreement had no fixed term. Under the terms of the
agreement, Mr. Raju was paid an annual base salary of $250,000, and was
eligible to receive an annual bonus between 50% and 200% of his base salary
based on the achievement of certain performance targets. Mr. Raju was
guaranteed a minimum bonus for the first year of the agreement of $100,000,
subject to his continued employment. Mr. Raju was paid a starting bonus of
$250,000, and awarded 100,000 stock options to purchase Common Stock at $3.00
per share, which options were to vest over a four-year period. Mr. Raju
resigned effective July 25, 2000, terminating the agreement. Pursuant to Mr.
Raju's employment agreement, Mr. Raju received the following compensation:

- a $250,000 bonus;

- the amount of the loan deemed unpaid as of July 25, 2000 was
repaid by Mr. Raju; and

- an amount equal to one year's base salary, payable over the
following twelve month period.

We entered into an employment agreement with Richard E. Parker, our
Chief Executive Officer, effective June 10, 1999. Under the terms of the
agreement, Mr. Parker is paid an annual base salary of $260,000, and is eligible
to participate in our bonus program as established by the Board. If Mr. Parker
is terminated without cause, he is entitled, under certain conditions, to
receive an amount equal to one year's base salary, payable over the following
twelve month period. Mr. Parker was awarded 150,000 shares of common stock at
$4.00 per share, which options vest over a four-year period. We also loaned Mr.
Parker $250,000 on an interest free basis, which is deemed to be repaid on a
monthly basis at the rate of $50,000 per annum, subject to Mr. Parker's
continued employment with Color Spot. The employment agreement entitles Mr.
Parker to be nominated to the Board of Directors of Color Spot.

We entered into an employment agreement with Joseph P. O'Neill, our
Chief Financial Officer, effective June 10, 1999. Under the terms of the
agreement, Mr. O'Neill is paid an annual base salary of $175,000, and is
eligible to participate in our bonus program as established by the Board. If Mr.
O'Neill is terminated without cause, he is entitled,

28
<PAGE>

under certain conditions, to receive an amount equal to one year's base salary,
payable over the following twelve month period. Mr. O'Neill was awarded 75,000
shares of common stock at $4.00 per share, which options vest over a four-year
period. We also loaned Mr. O'Neill $250,000 on an interest free basis, which is
deemed to be repaid on a monthly basis at the rate of $50,000 per annum, subject
to Mr. O'Neill's continued employment with Color Spot.

STOCK OPTION PLANS

1996 STOCK OPTION INCENTIVE PLAN. In July 1996, the Board of Directors
authorized, and our stockholders approved, a stock option plan, effective
September 7, 1995, for directors, officers, employees and consultants of our
company and our subsidiaries (the "1996 Option Plan"). Options to purchase a
total of 1,171,419 shares of Common Stock at $1.45 per share were granted under
the 1996 Option Plan. As of June 30, 2000, options to purchase 569,428 of these
shares have been exercised, and 395,609 nonqualified stock options ("NQOs") are
outstanding under the 1996 Option Plan. No further options will be granted under
the 1996 Stock Option Plan.

1997 STOCK OPTION PLAN. The 1997 Stock Option Plan (the "1997 Stock
Option Plan") was adopted by the Board of Directors and approved by the
stockholders on December 31, 1996 to attract, retain and provide incentive to
our executives and key employees. Options granted under the 1997 Stock Option
Plan may be either incentive stock options ("ISOs") as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, or NQOs. A total of 1,300,000
shares of Common Stock have been reserved for issuance under the 1997 Stock
Option Plan.

The 1997 Stock Option Plan is administered by the Compensation
Committee of the Board of Directors which has the authority to determine the
terms of the options granted. Each option has a term specified in its option
agreement; provided, however, that no term can exceed ten years from the date of
grant. Each option is exercisable upon the fulfillment of certain conditions,
including agreement by the optionee to be bound by the Stockholders Agreement.
In the case of an ISO granted to an optionee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
outstanding classes of our stock (a "10% Optionee"), the term of the option
cannot exceed five years from the date of grant. No option granted under the
1997 Stock Option Plan may be transferred by the optionee other than by will or
the laws of descent and distribution and each option may be exercised, during
the lifetime of the optionee, only by such optionee. In the event that an
optionee's employment terminates for any reason other than for cause, any
options held which have not yet vested will expire and become unexercisable. All
of the optionee's options which have vested shall expire and become
unexercisable on the earlier of the expiration date stated in the option
agreement or the date 90 days after the termination of the optionee's
employment. If an optionee is terminated for cause prior to the later of January
1, 2000 or the third anniversary of the date the optionee commences employment,
all options held by the optionee (whether or not vested) shall expire on the
date of termination. The number of shares under each option and the price of any
shares under such option may be adjusted in a manner consistent with any capital
adjustment resulting from a stock dividend, stock split, recapitalization,
reorganization or a combination or other change in the shares of Common Stock.

The exercise price for all ISOs granted under the 1997 Stock Option
Plan must be no less than 100% of the fair value per share on the date of grant.
With respect to a 10% Optionee, the exercise price of any option granted must be
no less than 110% of the fair market value on the date of grant. Each option is
designated in the written option agreement as either an ISO or NQO. However, to
the extent that the aggregate fair market value of shares subject to an
optionee's ISO, which become exercisable for the first time during any year,
exceeds $100,000, the excess options shall be treated as NQOs.

As of June 30, 2000, under the 1997 Stock Option Plan, there were
207,000 stock options outstanding with an exercise price of $7.17 per share,
275,000 stock options outstanding with an exercise price of $3.00 per share,
224,253 stock options outstanding with an exercise price of $7.19 per share,
225,000 stock options outstanding with an exercise price of $4.00 per share and
179,600 stock options outstanding with an exercise price of $10.00 per share.
The 1997 Stock Option Plan will expire in 2007 unless terminated at an earlier
date by the Board of Directors.

29
<PAGE>

SPECIAL STOCK OPTION PLAN. In February 1997, the Board of Directors
authorized, and the stockholders approved, a stock option plan for employees of
Lone Star Growers, L.P., a wholly owned subsidiary (the "Special Option Plan").
Options to purchase a total of 139,383 shares of Common Stock at $1.43 per share
were issued under the Special Option Plan. As of June 30, 2000, there were
89,010 stock options outstanding. The purpose of the Special Option Plan was to
provide incentives to employees of Lone Star Growers, L.P. in connection with
the acquisition of Lone Star Growers Co., the predecessor to Lone Star Growers,
L.P., by our company. No further awards will be made under the Special Option
Plan. The Special Option Plan is otherwise identical to the 1997 Stock Option
Plan.

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

The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of September 1, 2000, by: (i) all
persons known by us to be the beneficial owners of five percent or more of the
Common Stock; (ii) each director, (iii) each of the executive officers, and (iv)
all executive officers as a group. Unless otherwise indicated, the address of
each of the persons named below is in care of Color Spot Nurseries, Inc., 3478
Buskirk Avenue, Pleasant Hill, California 94523.

30
<PAGE>

Name Shares Beneficially Owned(1) Percentage Ownership(2)
---- ---------------------------- -----------------------
<S> <C> <C>
KCSN Acquisition Company, L.P. (3) 4,797,716 69.0%

Heller Equity Capital Corporation (4) 643,148 8.7

Michael F. Vukelich(5) 1,338,350 17.8

Richard E. Parker(6) 37,500 *

Joseph P. O'Neill(7) 18,750 *

Thomas Dickerson(6) 49,500 *

Boligala Raju 0 0

Ranjit S. Bhonsle(8) 0 0

William F. Dordelman(8) 0 0

Samuel P. Frieder(8) 0 0

James A. Kohlberg(8) 0 0

Marion Antonini(8)(9) 25,000 *

George T. Brophy(10) 26,136 *

Richard E. George(11) 80,130 1.2

Gary E. Mariani(11) 84,150 1.2

Total Officers and Directors as a Group (17 persons) 1,681,738 21.9
</TABLE>
-----------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting
and investment power with respect to shares, subject to applicable
community property laws. Shares of Common Stock subject to options or
warrants currently exercisable within 60 days of the date hereof are
deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(2) Assuming exercise of warrants and options held by the named party.
(3) The address of KCSN is 111 Radio Circle, Mt. Kisco, NY 10549. KCSN is
an affiliate of Kohlberg. The ultimate general partner of KCSN is a
corporation owned 100% by James A. Kohlberg. See "Item 13. Certain
Relationships and Related Transactions--Relationship With Kohlberg."
(4) Includes 464,766 shares issuable upon conversion of the Heller Note.
The address of Heller Equity Capital Corporation is 500 West Monroe
Street, Chicago, IL 60661.
(5) Includes options to purchase 550,859 shares of Common Stock, which are
presently exercisable. Excludes shares held by Karla D. Vukelich.
(6) Includes options to purchase 37,500 shares of Common Stock which are
presently exercisable.
(7) Includes options to purchase 18,750 shares of Common Stock which are
presently exercisable.
(8) Excludes 4,797,716 shares held by KCSN. Such person disclaims
beneficial ownership of such shares.
(9) Includes options to purchase 25,000 shares of Common Stock which are
presently exercisable.
(10) Includes options to purchase 26,136 shares of Common Stock which are
presently exercisable.
(11) Includes options to purchase 7,763 shares of Common Stock which are
presently exercisable.

31
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

RELATIONSHIP WITH KOHLBERG

CONTROL BY KCSN. KCSN, an affiliate of Kohlberg, owns 4,797,716 shares
of Common Stock or 69.0% of the outstanding Common Stock as of September 1,
2000.

Due to KCSN's ownership of Color Spot common stock, KCSN is able to
control our company, to elect our Board of Directors and to approve any action
requiring stockholder approval, including adopting amendments to our certificate
of incorporation and approving or disapproving mergers or sales of all or
substantially all of our assets. As a result of such control, KCSN is able to
effectively control all of our policy decisions. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Certain Business Considerations -- Control by Significant Stockholders and
Management." As long as the Stockholders Agreement is in effect, third parties
may not be able to obtain control of our company through purchases of Common
Stock not owned by parties to the Stockholders Agreement.

OTHER TRANSACTIONS

We lease a portion of our Richmond, California facility from M.F.
Vukelich Co., which is wholly owned by Michael F. Vukelich. The lease expires on
August 31, 2005. The aggregate annual rental payment under this lease for 2000
was $0.3 million. Under the term of the lease, rent is increased annually by 3%.
The Company believes that this rent is at fair market value for the property.

We also lease a building from the daughter of Michael F. Vukelich. The
aggregate annual rental payment on this lease is $14,400. We believe that this
rent is at fair market value for the building.

We have entered into loan agreements with certain employees (see Item
11. Executive Compensation - Employment Agreements).

All future transactions among us and our officers, directors and
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.

32
<PAGE>

PART IV

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

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

(1) Financial Statements:

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

Consolidated Statements of Operations -
Years ended June 30, 2000, 1999, 1998

Consolidated Balance Sheets -
June 30, 2000 and 1999

Consolidated Statements of Cash Flows Years ended June 30,
2000, 1999, 1998

Consolidated Statements of Shareholders' Equity Years ended
June 30, 2000, 1999, 1998

Notes to Consolidated Financial Statements

Report of Independent Public Accountants

(2) Financial Statement Schedules:

The following financial statement schedule is included in Exhibit B.

II - Valuation and Qualifying Accounts -
Years ended June 30, 2000, 1999, 1998

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

(b) Reports on Form 8-K

33
<PAGE>

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 25, 1997
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.
3.2 Amendment to Certificate of Incorporation, incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 25, 1999 (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission.
3.3 Amended and Restated Bylaws, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
3.4 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
4.1 Form of Preferred Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
4.2 Indenture (including Form of Note), incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
4.3 Warrant Agreement (including Form of Warrant), incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 25, 1997 (SEC File No. 000-23483), as
previously filed with the Securities and Exchange Commission.
10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.
10.2 First Amendment and Waiver to Second Amended And Restated Credit
Agreement dated as of December 24, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 26, 1998 (SEC File No. 000-23483), as previously filed
with the Securities and Exchange Commission.
10.3 Second Amended and Restated Credit Agreement dated as of December 24,
1997, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
10.4 Amended and Restated credit Agreement dated as of February 20, 1997,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.5 Re-capitalization and Stock Purchase Agreement among the Registrant,
Heller Equity Capital Corporation ("Heller"), M.F. Vukelich Co.,
Michael F. Vukelich, Jerry Halamuda, Gary E. Mariani, Steven J.
Bookspan, Richard E. George and KCSN Acquisition Company, L.P. dated
as of December 31, 1996, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.6 8%Subordinated Convertible Note issued to Heller, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

34
<PAGE>

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.7 Put/Call Option Agreement dated as of December 31, 1996, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.8 Stockholders Agreement dated as of December 31, 1996, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.9 Employee Stockholders Agreement dated as of June 1, 1997, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.10 Employment Agreement with Michael F. Vukelich dated as of December 31,
1996, incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.
10.11 Employment Agreement with Jerry L. Halamuda dated as of December 31,
1996. incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.
10.12 1996 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.13 1997 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.14 Special Stock Option Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.15 Form of Stock Purchase Option incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
10.16 Fee Agreement dated as of December 31, 1996 between Registrant and
Kohlberg Company, LLC incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.17 Merger Agreement dated as of February 20, 1997 for the acquisition of
Lone Star Growers Co. incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.18 Real Property Lease between M.F. Vukelich Co. and the Registrant dated
December 1, 1995, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.19 Real Property Lease between Michael F. Vukelich as Guardian for Trisha
Vukelich and the Registrant dated as of December 31, 1995,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.20 Asset Purchase Agreement dated as of March 14, 1997 between Color Spot
Christmas Trees, Inc. and Signature Trees, incorporated by reference
to the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.
10.21 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.22 Stockholders Repurchase Agreement dated as of December 31, 1996,
incorporated by reference to

35
<PAGE>

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.
10.23 Amended and Restated Employment Agreement dated as of July 30, 1998
with Boligala Raju, incorporated by reference to the Company's
quarterly report on Form 10-Q for the quarter ended March 25, 1999
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.
10.24 1998 Employees Stockholders Agreement incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25 Loan and Security Agreement dated as of October 15, 1998, with Fleet
Capital Corporation as agent, incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25.1 Waiver and Amendment to Debt Agreement dated as of September
28, 2000, with Fleet Capital Corporation.
10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Registrant, incorporated
by reference to the Company's Form 10-K for the year ended June 30,
1998 (SEC File No. 000-23483), as previously filed with the Securities
and Exchange Commission.
10.27 Employment Agreement with Richard E. Parker dated as of June 10,
1999, incorporated by reference to the Company's Form 10-K for the
year ended June 30, 1999 (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission.
10.28 Employment Agreement with Joseph P. O'Neill dated as of June 10,
1999, incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.29 Amendment to Employment Agreement with Michael F. Vukelich, dated June
10, 1999, incorporated by reference to the Company's Form 10-K for
the year ended June 30, 1999 (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission.
11.1 Computations of Earnings Per Share -- See Note 14 to the Notes to
Consolidated Financial Statements.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
27.1 Financial Data Schedule.
</TABLE>

36
<PAGE>

SIGNATURES

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

Date: October 16, 2000

COLOR SPOT NURSERIES, INC.
a Delaware corporation

By: /s/ Richard E. Parker
-----------------------------------------
Name: Richard E. Parker
Title: Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)

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

NAME TITLE DATE

<S> <C> <C>
/s/ RICHARD E. PARKER Chief Executive Officer and Director October 16, 2000
--------------------- (PRINCIPAL EXECUTIVE OFFICER)
Richard E. Parker

/s/ JOSEPH P. O'NEILL Executive Vice President and October 16, 2000
--------------------- Chief Financial Officer (PRINCIPAL
Joseph P. O'Neill FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)

/s/ MICHAEL F. VUKELICH Chairman of the Board October 16, 2000
-----------------------
Michael F. Vukelich

/s/ MARION ANTONINI Director October 16, 2000
-------------------
Marion Antonini

/s/ RANJIT S. BHONSLE Director October 16, 2000
---------------------
Ranjit S. Bhonsle

/s/ GEORGE T. BROPHY Director October 16, 2000
--------------------
George T. Brophy

/s/ WILLIAM F. DORDELMAN Director October 16, 2000
------------------------
William F. Dordelman

/s/ SAMUEL P. FRIEDER Director October 16, 2000
---------------------
Samuel P. Frieder

/s/ RICHARD E. GEORGE Director October 16, 2000
---------------------
Richard E. George

37
<PAGE>

/s/ JAMES A. KOHLBERG Director October 16, 2000
---------------------
James A. Kohlberg

/s/ GARY E. MARIANI Director October 16, 2000
-------------------
Gary E. Mariani

/s/ A. STEPHEN DIAMOND Director October 16, 2000
----------------------
A. Stephen Diamond

</TABLE>

38
<PAGE>

APPENDIX A

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Color Spot Nurseries, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of Color
Spot Nurseries, Inc. (a Delaware corporation) and Subsidiaries (the Company) as
of June 30, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
June 30, 2000, 1999 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Color Spot Nurseries, Inc. and Subsidiaries at June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years
ended June 30, 2000, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States.

As explained in Note 8 to the financial statements, effective July 1,
1998, the Company changed its method of accounting for organization costs in
accordance with the AICPA's Statement of Position 98-5, "Reporting on Costs of
Start-up Activities".

/s/ Arthur Andersen LLP

San Francisco, California
August 25, 2000

<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,739 $ 1,420
Accounts receivable, net of allowances of $1,199 and $1,854, respectively 19,449 19,956
Inventories, net 38,989 33,075
Prepaid expenses and other 429 723
------------ ------------
Total current assets 60,606 55,174

CHRISTMAS TREE INVENTORIES 7,205 4,749
PROPERTY, PLANT AND EQUIPMENT, net 49,772 50,199
ASSETS HELD FOR SALE 612 696
INTANGIBLE ASSETS, net 47,129 50,898
DEFERRED INCOME TAXES 19,476 18,788
NOTES RECEIVABLE AND OTHER ASSETS 966 1,250
Total assets $ 185,766 $ 181,754
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 11,549 $ 5,188
Accrued liabilities 19,462 16,176
Dividends payable to stockholders 301 257
Deferred income taxes 12,415 12,541
Current maturities of long-term debt 590 828
------------ ------------
Total current liabilities 44,317 34,990

LONG-TERM DEBT 124,690 123,413
------------ ------------
Total liabilities 169,007 158,403
------------ ------------

SERIES A PREFERRED STOCK, REDEEMABLE, $0.01 par value, 100,000 shares
authorized, 54,882 and 48,298 shares issued and outstanding, respectively 46,591 39,151
------------ ------------
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 shares
issued and outstanding 3,152 2,689
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value, 50,000,000 shares authorized,
5,805,258 and 5,811,468 shares issued and outstanding, respectively 12 12
Additional paid-in capital 51,668 51,358
Treasury stock, 6,226,649 and 6,220,439 shares, respectively (45,651) (45,633)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (47,263) (32,476)
------------ ------------
Total stockholders' deficit (32,984) (18,489)
------------ ------------
Total liabilities and stockholders' deficit $ 185,766 $ 181,754
============ ============
</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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 210,887 $ 206,076 $ 187,731
COST OF SALES 130,891 117,793 136,214
------------ ------------ ------------
Gross profit 79,996 88,283 51,517

SALES, MARKETING AND DELIVERY EXPENSES 50,362 46,252 50,033
GENERAL AND ADMINISTRATIVE EXPENSES 20,840 25,610 13,338
AMORTIZATION OF INTANGIBLE ASSETS 1,719 1,727 2,308
TERMINATION OF MANAGEMENT FEE AND OTHER -- -- 2,400
------------ ------------ ------------
Income (loss) from operations 7,075 14,694 (16,562)

INTEREST EXPENSE 15,962 16,464 13,405
OTHER (INCOME) EXPENSE, NET (1,260) 355 (285)
------------ ------------ ------------
Loss before income taxes, cumulative effect of change
in accounting principle and extraordinary loss (7,627) (2,125) (29,682)

INCOME TAX BENEFIT 791 727 10,514
------------ ------------ ------------
Loss before cumulative effect of change in accounting (6,836) (1,398) (19,168)
principle and extraordinary loss

CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax benefit -- 1,718 --

EXTRAORDINARY LOSS, net of tax benefit
------------ ------------ ------------
Net loss (6,836) (4,134) (21,960)

SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 7,951 7,102 3,148
------------ ------------ ------------
Net loss applicable to common stock $ (14,787) $ (11,236) $ (25,108)
============ ============ ============

Basic and diluted loss per common share:
Loss before cumulative effect of change in accounting $ (2.13) $ (1.22) $ (3.25)
principle and extraordinary loss
Cumulative effect of change in accounting principle $ $ (0.25) $ --
Extraordinary loss $ $ (0.15) $ (0.40)
------------ ------------ ------------
Total $ (2.13) $ (1.62) $ (3.65)
============ ============ ============
Shares used in per share calculation 6,950,238 6,941,022 6,874,416
============ ============ ============
</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)

Additional
Common Paid-In Treasury
Stock Capital Stock Warrants
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $ 162 $ 45,033 $ (45,228) $ --

Issuance of common stock:
Existing shareholders and management 7 5,123 -- --
Acquisition of businesses 1 625 -- --
Issuance of warrants -- -- -- 8,250
Purchase of redeemable common stock, net -- 36 (260) --
Accretion of redeemable common stock -- -- -- --
Accretion of Series A preferred stock -- - -- --
Par value adjustment (158) 158 -- --
Series A Preferred stock dividends -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------

Balance, June 30, 1998 12 50,975 (45,488) 8,250

Accretion of Series A preferred stock -- -- -- --
Accretion of redeemable common stock -- -- -- --
Exercise of stock options -- 54 -- --
Series A preferred stock dividends -- -- -- --
Other -- 329 (145) --
Net loss -- -- -- --
---------- ---------- ----------- ----------
Balance, June 30, 1999 12 51,358 (45,633) 8,250

Accretion of Series A preferred stock -- -- -- --
Accretion of redeemable common stock -- -- -- --
Exercise of stock options -- -- -- --
Series A preferred stock dividends -- -- -- --
Purchase of treasury stock 310 (18)
Net loss -- -- -- --
---------- ---------- ----------- ----------
Balance, June 30, 2000 $ 12 $ 51,668 $ (45,651) $ 8,250
========== ========== =========== ==========

Retained Total
Earnings Stockholders'
(Accumulated Equity Comprehensive
Deficit) (Deficit) Income/(Loss)
------------ ----------- -------------
<S> <C> <C> <C>
Balance, June 30, 1997 $ 4,108 $ 4,075 $ 2,840
=============
Issuance of common stock:
Existing shareholders and management -- 5,130 --
Acquisition of businesses -- 626 --
Issuance of warrants -- 8,250 --
Purchase of redeemable common stock, net -- (224) --
Accretion of redeemable common stock (240) (240) --
Accretion of Series A preferred stock (410) (410) --
Par value adjustment - -- --
Series A Preferred stock dividends (2,738) (2,738) --
Net loss (21,960) (21,960) (21,960)
------------ ----------- -------------

Balance, June 30, 1998 (21,240) (7,491) $ (21,960)
=============
Accretion of Series A preferred stock (833) (833) --
Accretion of redeemable common stock (443) (443) --
Exercise of stock options -- 54 --
Series A preferred stock dividends (5,826) (5,826) --
Other -- 184 --
Net loss (4,134) (4,134) (4,134)
------------ ----------- -------------
Balance, June 30, 1999 (32,476) (18,489) $ (4,134)
=============
Accretion of Series A preferred stock (855) (855) --
Accretion of redeemable common stock (463) (463) --
Exercise of stock options -- -- --
Series A preferred stock dividends (6,633) (6,633) --
Purchase of treasury stock 292 --
Net loss (6,836) (6,836) (6,836)
------------ ----------- -------------
Balance, June 30, 2000 $ (47,263) $ (32,984) $ (6,836)
============ ============ ==============
</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

(IN THOUSANDS)

<TABLE>
<CAPTION>
June 30, June 30, June 30,
2000 1999 1998
----------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,836) $ (4,134) $ (21,960)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 7,823 7,205 5,977
Gain on sale of assets (1,455) -- --
Interest paid in kind 700 660 602
Deferred income taxes (814) (2,141) (10,080)
Write-off of deferred financing costs - 2,612 --
Cumulative effect of change in accounting principle - 1,547 2,792
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 507 8,450 (1,039)
Decrease (increase) in inventories, net (5,914) 9,231 (2,717)
Decrease (increase) in prepaid expenses and other current assets 294 1,080 (819)
Increase in Christmas tree inventory (2,456) (1,142) (3,066)
Decrease in notes receivable and other 284 196 120
Increase (decrease) in accounts payable 6,361 (11,117) 3,482
Increase in accrued liabilities 9,454 2,769 843
---------- ---------- ----------
Net cash provided by (used in) operating activities 7,948 15,216 (25,865)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, net of cash acquired -- -- (40,539)
Purchases of fixed assets (6,089) (2,176) (13,508)
Proceeds from sale of fixed assets 1,940 -- --
---------- ---------- ----------
Net cash used in investing activities (4,149) (2,176) (54,047)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on cash overdraft (3,826) 824 (787)
Issuance of common stock -- -- 5,130
Purchase of treasury stock (18) (85) (260)
Financing and organizational costs 25 (2,087) (616)
Issuance of preferred stock and warrants -- -- 40,000
Proceeds from borrowings -- -- 136,803
Debt and stock issuance costs -- -- (8,051)
Net borrowings under revolving line of credit 1,214 19,783 42,280
Repayments on revolving line of credit -- (31,338) (30,347)
Repayments of long-term debt (875) (961) (104,758)
---------- ---------- ----------
Net cash provided by (used in) financing activities (3,480) (13,864) 79,394

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 319 (824) (518)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,420 2,244 2,762
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,739 $ 1,420 $ 2,244
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 15,923 $ 14,679 $ 11,725
========== ========== ==========
Income taxes $ 89 $ 34 $ --
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ -- $ -- $ 626
========== ========== ==========
Issuance of notes payable in connection with acquisition $ -- $ -- $ 1,000
========== ========== ==========
Series A Preferred Stock dividends/Stock accretion $ 7,951 $ 7,102 $ 2,738
========== ========== ==========
</TABLE>

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

4
<PAGE>

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION, OPERATIONS, AND SIGNIFICANT EVENTS

OPERATIONS

Color Spot Nurseries is a producer and distributor of packaged bedding
plants and flowers, groundcover, ornamental plants and shrubs, and Christmas
trees. As of June 30, 2000, we operate 17 production facilities located in 5
states. We also own or lease growing fields for Christmas trees in Oregon,
Michigan, North Carolina, and Tennessee. We sell primarily to general
merchandise stores, home improvement stores, retail garden stores and
commercial landscapers, located predominantly in California, Texas and other
western states.

Our fiscal 1998 operating results were adversely impacted by the severe
weather associated with El Nino, and inventory overproduction that resulted in
significant write-off of unsaleable excess product. Therefore, for the fiscal
year ended June 30, 1998, we 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, we were not in compliance with certain financial
covenants on our revolving credit facility at March 26, 1998 and June 30, 1998,
but a waiver was obtained from the banks for the violations.

In fiscal 1999, in order to improve our operating results we hired
several new executives with significant operating experience to bolster our
current management team. The new management team redesigned the organizational
structure and implemented measures designed to improve production, distribution
and selling efficiencies and reduce product returns and shrink. One of the
tactical initiatives implemented by management was 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 resulted
in lower write-off of unsaleable excess inventory. In connection with the new
management team's review of operations, we recorded a pre-tax charge of $3.7
million related to closure or modification to certain facilities, employee
severance and relocation and other consulting costs. This charge has been
recorded in general and administrative expense.

Management is currently reviewing its organizational structure,
production and distribution methodologies and sales organization in light of its
fiscal 2000 operating results. Such review could result in facility closures,
employee severance or other charges. Any charges will be taken in the period
definitive decisions are made by management (see Note 21 - Subsequent Events).

On October 15, 1998, we entered into a new three-year loan agreement
providing up to $70.0 million of availability. In connection with this loan
agreement, our existing credit facilities were repaid in full and terminated. We
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 the second fiscal quarter of 1999 (see Note 10 - Debt).
As of June 30, 2000, we were not in compliance with a certain financial covenant
of this new loan agreement, however, on August 10, 2000, a waiver curing the
noncompliance was obtained. On September 28, 2000, we received a waiver
and amendment to this loan agreement, waiving the covenant violation and
amending the agreement to reset the financial covenants for each four quarter
period beginning with the four quarters ending September 30, 2000 and to
reestablish the original seasonal line period.

5
<PAGE>

Although the accompanying financial statements were prepared
contemplating the realization of all recorded assets, including intangible
assets and deferred tax assets of $47.1 million and $19.5 million, respectively,
and the satisfaction of liabilities in the normal course of business, we must
generate sufficient cash flow to meet our obligations as they come due, comply
with the terms of our new credit facilities, including meeting our financial
covenants and successfully refinancing our three-year loan agreement, and
ultimately attain profitability and achieve other business objectives or there
will be a material adverse impact on our business, financial position and
results of operations. No assurance can be provided that we will be able to
attain profitability or achieve our business objectives.

LEVERAGE AND FINANCING

As of June 30, 1998, we had $135.0 million of consolidated long-term
indebtedness and an accumulated deficit of $21.2 million. Simultaneously with
the completion of the 1997 Offerings, we entered into a loan agreement for a
$110 million revolving loan facility with a number of banking institutions,
led by Credit Agricole Indosuez. As of June 30, 1998, we were in default on
this loan agreement and our ability to borrow under this loan agreement was
suspended indefinitely. On October 15, 1998, we entered into the Loan and
Security Agreement with Fleet Capital Corporation, as agent, and our prior
credit facility with Credit Agricole Indosuez was terminated and repaid in
full. Although we succeeded in refinancing the debt, there can be no
assurance that we will be able to generate sufficient cash flows and financial
goals to comply with debt covenants in the future.

As of June 30, 2000, we were not in compliance with a certain
financial covenant of our current loan agreement. On September 28, 2000, our
three-year loan agreement was amended waiving the covenant violation,
resetting the financial covenants and reestablishing the original seasonal
line period. There can be no assurance that our lenders will waive
noncompliance in the future and if they do not, we may be unable to obtain
sufficient alternative funding to continue operations in their present form.
We had $124.7 million of long-term indebtedness and an accumulated deficit of
$47.3 million. We are highly leveraged.

We may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments governing indebtedness and capital
stock. We have significant debt service obligations. Our debt service
obligations have important consequences to holders of the Senior Subordinated
Notes, Series A Preferred Stock, common stock and warrants (see Notes 10, 12,
and 13), including the following: (i) a substantial portion of our cash flow
from operations will be dedicated to the payment of principal and interest on
our indebtedness, thereby reducing the funds available for operations,
acquisitions, future business opportunities and other purposes and increasing
our vulnerability to adverse general economic and industry conditions; (ii) our
leveraged position may increase our vulnerability to competitive pressures;
(iii) the amended financial covenants and other restrictions contained in the
current loan agreement (see Note 10), the indenture and the certificate of
designation for the Series A Preferred Stock will require us to meet certain
financial tests and will restrict our 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.

Our ability to make scheduled principal and interest payments or to
refinance our indebtedness to pay dividends and make redemption payments on the
Series A Preferred Stock and to pay dividends on the Common Stock depends on
future performance, which to a certain extent is subject to economic,
financial, competitive and other factors beyond our control. There can be no
assurance that we will continue to generate sufficient cash flow from
operations in the future to service our debt, pay dividends, make redemption
payments and fund necessary capital expenditures. If unable to do so, we may be
required to refinance all or a portion of our existing debt including the
Notes, sell assets or obtain additional financing. There can be no assurance
that any such refinancing or that any such sale of assets or additional
financing would be possible on terms reasonably favorable to us, or at all. In
addition, unforeseen problems, delays, expenses and difficulties as well as
changes in economic and regulatory or competitive conditions may lead to cost
increases that would make our current cash flow and borrowings under the
current loan agreement insufficient to meet our capital needs.

6
<PAGE>

The current loan agreement restricts, among other things, our ability
to incur additional indebtedness, incur liens, pay or declare dividends, enter
into any transaction not in the usual course of business, guarantee or
otherwise become in any way liable with respect to the obligations of another
party or entity, merge or consolidate with another person, or sell or transfer
any collateral (except for the sale of inventory in the ordinary course of
business). A breach of any of these covenants could result in a default under
the current loan agreement. Upon the occurrence of an Event of Default (as
defined in the Fleet loan agreement), the lenders could elect to declare all
amounts outstanding under the current loan agreement, together with accrued
interest, to be immediately due and payable. If we were unable to pay those
amounts the lenders could proceed against the collateral granted to them to
secure that indebtedness. If the current loan agreement indebtedness were to be
accelerated, there can be no assurance that our assets would be sufficient to
repay the indebtedness in full or other indebtedness. Substantially all of our
assets are pledged as security under the current loan agreement. The
restrictions described above, in combination with our leveraged nature, may
limit our ability to obtain financing in the future or may otherwise restrict
corporate activities.

BASIS OF PRESENTATION AND RECAPTALIZATION

The consolidated balance sheets as of June 30, 2000 and 1999, and the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended June 30, 2000, 1999, and 1998, include the accounts of
Color Spot Nurseries, Inc., a Delaware corporation, and its wholly owned
subsidiaries. On December 31, 1996, KCSN Acquisition Corporation, L.P.
(Kohlberg), a partnership controlled by Kohlberg & Company, LLC and unrelated to
Color Spot, acquired control of Color Spot through a series of stock
transactions accounted for as a recapitalization. In connection with the
recapitalization, we borrowed $37.3 million, purchased 6,164,034 shares of our
common stock at $7.17 per share, including all shares owned by Heller, which
controlled Color Spot at the time, and certain shares owned by management, sold
3,566,173 shares of stock to KCSN Acquisition Corporation, L.P. and certain
members of management for $7.17 per share ($22.3 million) and repaid $14.1
million of our prior indebtedness.

OFFERINGS

In December 1997, we sold $100 million of 10 1/2% Senior Subordinated
Notes and 40,000 units each unit consisting of one share of 13% Series A
Cumulative Preferred Stock and warrants representing the right to purchase
20.625 shares of our common stock for $0.01 each. We raised $133.5 million net
of fees and expenses, from these offerings which we used to repay existing
indebtedness. Further information on the Notes and Series A Preferred Stock and
Warrants is discussed at Notes 10 and 13, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Color
Spot Nurseries, Inc. and its wholly owned subsidiaries. All material
intercompany amounts and transactions have been eliminated in consolidation.

7
<PAGE>

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash includes cash and cash equivalents that consist of highly liquid
investments having maturities of three months or less when acquired.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method. Tree inventories are stated at average
cost and are classified as long-term assets until they are harvested. Inventory
costs include material and labor and production costs directly associated with
the growing process. Direct costs associated with inventory shrink are charged
to cost of sales as a period expense. Reserves are recorded for excess
inventory.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment purchased in acquisitions are recorded at
fair value as prescribed by the purchase method of accounting. Subsequent
purchases of property, plant and equipment are recorded at cost. For assets held
financed under capital leases, the present value of the future minimum lease
payments is recorded at the date of acquisition as equipment, with a
corresponding amount recorded as a capital lease obligation.

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

ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Land Improvements 40 years
Buildings 15 to 20 years
Machinery and equipment 5 to 10 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 to 10 years
Leasehold improvements Life of lease
</TABLE>

Major renewals and improvements that extend the useful life of an asset
are capitalized; routine maintenance and repairs are expensed as incurred. Upon
sale or retirement of assets, the asset cost and related depreciation are
removed from the accounts and any related gain or loss is reflected in our
operating results.

SOFTWARE

Purchases of software, including internal and external development
costs, are capitalized and amortized over three years using the straight-line
method.

8
<PAGE>

INTANGIBLE ASSETS

Amortization of intangible assets is computed on a straight-line basis
over the shorter of estimated useful lives or contract periods. The following
useful lives are used for recognizing amortization expense:

INTANGIBLE CATEGORY ESTIMATED USEFUL LIFE
------------------- ---------------------
<S> <C>
Goodwill 40 years
Noncompete agreements 5 years
Financing costs 3 years
</TABLE>

Goodwill represents the excess of cost over the estimated fair value of
the net assets of acquired businesses. Should events or circumstances occur
subsequent to any business acquisition which bring into question the realizable
value or impairment of any component of goodwill, we will evaluate the remaining
useful life and balance of goodwill and make appropriate adjustments. Our
principal considerations in determining impairment include the strategic benefit
of our particular business related to the questioned component of goodwill as
measured by undiscounted current and expected future operating income levels of
that particular business and expected undiscounted future cash flows.

REDEEMABLE SERIES A PREFERRED STOCK AND WARRANTS

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

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

REDEEMABLE COMMON STOCK

We are required to repurchase shares of Common Stock from certain
management stockholders in the event of their termination due to their death or
permanent disability. Such repurchases are at fair market value as determined by
the Board of Directors. The Board of Directors will retain an independent
appraisal firm to assist them in determining the fair market value of the Common
Stock on a periodic basis. The difference between the carrying amount of the
redeemable Common Stock and its fair value is accreted over the life expectancy
of the management stockholders by charging "retained earnings." As a result of
the redemption feature, redeemable Common Stock is classified outside of
stockholders' equity (irrespective of voting rights of the stock).

FINANCIAL INSTRUMENTS

The carrying amounts for cash, receivables and accounts payable
approximate fair value due to the short-term nature of these instruments. Other
fair value disclosures are in the respective notes.

9
<PAGE>

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

REVENUE RECOGNITION

Revenue is recognized when products are shipped to the customer. Sales
returns and allowances are estimated and recorded as a charge against revenue in
the period in which the related sales are recognized.

OTHER (INCOME)/EXPENSE, NET

Other (income)/expense, net includes net gains on the sale of assets.

INCOME TAXES

Income taxes are recognized utilizing the asset and liability method
under which deferred income taxes are recognized for the consequences of
temporary differences by applying currently enacted statutory rates to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. A valuation allowance is provided for
deferred tax assets if their realizability is uncertain.

EARNINGS PER SHARE

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

PREFERRED STOCK DIVIDENDS/ACCRETION

Preferred stock dividends/accretion include dividends on the Company's
Series A Preferred Stock, and accretion to liquidation value of the Series A
Preferred Stock and Redeemable Common Stock.

ASSET IMPAIRMENT

Long-lived assets, certain identifiable intangible assets and goodwill
will be reviewed for impairment when expected future undiscounted cash flows are
less than the carrying value of the asset. No charges were recorded pursuant to
this statement in fiscal 2000, 1999 or 1998.

ACCOUNTING FOR STOCK-BASED COMPENSATION

We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees (APB 25)", and related interpretations
in accounting for our employee stock options. Under APB 25, when the exercise
price of employee stock options is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
We have adopted the disclosure-only provision of SFAS No. 123, "Accounting for
Stock Based Compensation".

10
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

In 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). In 1999, the FASB issued Statement of Financial Accounting Standards No.
137, deferring the effection date of SFAS No. 133. SFAS 133 establishes a new
accounting model for derivative instruments and hedging activities. We will
adopt SFAS 133 in fiscal year 2001. We believe adoption of SFAS 133 will not
significantly affect our financial position, results of operations or financial
statement presentation.

In 2000, the Emerging Issues Task Force tentatively concluded on EITF
00-10, "Accounting for Shipping and Handling Fees and Costs". Under the
tentative conclusion, all amounts billed to a customer in a sale transaction
related to shipping and handling should be classified as revenue, and also, any
costs incurred by the seller for shipping and handling should be classified as
costs of goods sold. The adoption of EITF 00-10 would require us to change our
income statement classification of such revenues and costs. There is currently
no proposed effective date.

RECLASSIFICATIONS

Certain prior year balances have been reclassified in order to conform
to the current year's presentation.

3. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject us to concentration of
credit risk consist primarily of trade accounts receivable. We sell primarily on
10-day and 30-day terms, perform credit evaluation procedures on our customers
and generally do not require collateral on our accounts receivable because the
majority of our customers are large, established retail customers with
operations throughout the United States. Most of our sales are in California and
Texas. We maintain an allowance for potential credit losses. For the periods
ended June 30, 2000, 1999, and 1998, sales to the eight largest customers
constituted 75%, 70%, and 71% of net sales, respectively. Sales to our largest
customer constituted 41%, 37%, and 35% of net sales in these respective periods.
Accounts receivable balances generally reflect the net sales percentages for our
largest customers. Because of the credit worthiness of our largest customers, we
believe our credit risk is mitigated. The loss of, or reduction in orders from,
any major retail customer could have a material adverse effect on us.

4. INVENTORIES

Inventories at June 30, 2000 and 1999, consisted of the following (in
thousands):

<TABLE>
<CAPTION>
2000 1999
------------------------------
<S> <C> <C>
Current:
Outdoor flowers and vegetable plants $39,792 $33,159
Raw materials and supplies 4,208 2,471
Inventory reserve (5,011) (2,555)
------------------------------
Total current inventories 38,989 33,075
Noncurrent:
Christmas tree inventories 7,205 4,749
------------------------------
Total inventories, net $46,194 $37,824
==============================
</TABLE>

11
<PAGE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of June 30, 2000 and 1999, consisted
of the following (in thousands):

2000 1999
------------------------------
<S> <C> <C>
Land and land improvements $ 9,206 $ 9,377
Greenhouses and buildings 24,892 24,817
Furniture and fixtures 6,012 5,045
Machinery and equipment 18,695 17,150
Leasehold improvements 6,765 5,713
Assets under capital leases 488 1,018
Construction in progress 2,703 -
------------------------------
68,761 63,120
Less: Accumulated depreciation (18,989) (12,921)
------------------------------
Total property, plant and equipment, net $ 49,772 $ 50,199
==============================

</TABLE>

Depreciation expense for the periods ended June 30, 2000, 1999 and 1998
was $6.1 million, $5.5 million and $3.7 million, respectively. At June 30, 2000
and 1999, greenhouses with an original cost of $7.9 million are in service on
property leased by us under operating lease agreements. Construction in progress
is primarily composed of upgrades or additions to our greenhouses and watering
systems.

6. ASSETS HELD FOR SALE

Assets held for sale as of June 30, 2000 consists of land at one
facility that we plan to dispose of during fiscal 2001. The land at this
location was identified during management's review of our operations as excess
capacity. The carrying value of this land is lower than the anticipated sales
price.

7. NOTES RECEIVABLE

Notes receivable primarily represent amounts due from third parties
relating to land and investment assets acquired and later sold in connection
with certain acquisitions. The notes require monthly principal and interest
payments ranging from $1,000 to $10,000 with interest rates ranging from 7.5% to
9.0%. Unpaid principal and interest are due between December 2001 and March 2007
and are secured by the underlying assets. The carrying amount of the notes
receivable approximates fair value.

12
<PAGE>

8. INTANGIBLE ASSETS

Intangible assets as of June 30, 2000 and 1999, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
2000 1999
------------------------------
<S> <C> <C>
Goodwill $47,517 $47,517
Financing costs 6,278 6,302
Noncompete agreements 1,694 1,694
Other 916 916
------------------------------
56,405 56,429
Less: Accumulated amortization (9,276) (5,531)
------------------------------
Total intangible assets, net $47,129 $50,898
==============================
</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. We adopted SOP 98-5 on July 1, 1998 and recognized a $2.6
million non-cash, pre-tax charge ($1.7 million after tax benefit), which was
accounted for as a change in accounting principle.

9. ACCRUED LIABILITIES

Accrued liabilities as of June 30, 2000 and 1999, consisted of the
following (in thousands):

<TABLE>
<CAPTION>
2000 1999
------------------------------
<S> <C> <C>
Compensation and benefits $ 3,963 $ 8,813
Cash overdraft 7,968 3,514
Accrued rebates 2,170 928
Accrued raw material purchases 1,851 352
Accrued interest 643 585
Other 2,867 1,984
------------------------------
Total accrued liabilities $19,462 $16,176
==============================
</TABLE>

10. DEBT

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

13
<PAGE>

Simultaneous with the completion of the offerings, we entered into a
new loan agreement with a syndicate of banks. The new agreement provided us with
a two-year acquisition term loan facility of $75.0 million, a five-year
revolving facility of $40.0 million and a five-year supplemental line of $35.0
million. The loan agreement required us to comply with certain financial and
non-financial covenants. At June 30, 1998, we had outstanding borrowings of
$24.0 million on the revolving credit facility and no borrowings on the
acquisition term loan or the supplemental line. At June 30, 1998, we were in
default of certain financial covenants relating to these loans. On August 7,
1998, the credit agreement was amended and the lender waived any default or
event of default caused by our failure to meet certain covenants at June 30,
1998. We were also out of compliance with certain financial covenants at March
26, 1998 and received a waiver of such default for the March 1998 test period.
The August amendment also halted borrowings under both the acquisition term loan
and the supplemental line.

On October 15, 1998, we entered into a new three year Loan and Security
Agreement with Fleet Capital Corporation, and terminated the acquisition term
loan, five-year revolving facility and five-year supplemental line. This loan
agreement provides a $70.0 million 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 $13.9 million of which is
available, without limitation, from October 1 through March 31 of each year, as
amended. This loan agreement restricts, among other things, our ability to incur
additional indebtedness, incur liens, pay or declare dividends, or enter into
certain transactions. In addition, the loan agreement requires us to meet
certain financial covenants. As of June 30, 2000, we were not in compliance with
a certain financial covenant, however, on August 10, 2000, a waiver curing
the noncompliance was obtained. On September 28, 2000, a waiver and amendment
under the Loan and Security Agreement was obtained waiving the covenant
violation, resetting the financial covenants for each four quarter period
beginning with the four quarters ending September 30, 2000 and reestablishing
the original seasonal line period. Our three-year revolving credit facility
expires on October 15, 2001. Management is working to extend the term of the
agreement. There can be no assurance that an extension will be granted and, if
not, that alternative financing will be available.

We 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 October
1998.

14
<PAGE>

Debt as of June 30, 2000 and 1999, consisted of the following (in
thousands):

2000 1999
------------------------
<S> <C> <C>
Senior Subordinated Notes redeemable, in whole or in part, at our option, at any
time on or after December 15, 2002 at specified redemption prices. Interest
accrues at 10 1/2% per annum and is payable semiannually on each June 15 and December
15. Unpaid principal and interest is due on December 15, 2007. $100,000 $100,000

Three-year revolving credit facility, as waived and amended (expiring on October
15, 2001), up to $70,000, $55,000 based on a percentage of eligible inventory and
eligible accounts receivable and $13,850 available, without limitation, from
October 1 through March 31 of each fiscal year. Advances under the line accrue
interest at our option, at a variable rate equal to Prime plus 1.0% or LIBOR plus
3.0%. In addition, to the extent that our borrowings exceed certain borrowing
base limitations during the period from October 1 through March 31, the interest
rates increase by an additional 0.5%. The line is secured by substantially all of
our assets. 13,697 12,483

Convertible note payable to a former majority owner in conjunction with the
recapitalization at December 31, 1996. The holder of the note may convert all or
any portion of the principal and accrued interest into non-voting common stock,
provided that if converted in connection with a public offering, the shares will
be converted to voting common stock. The conversion price is $20.09 per share and
is subject to adjustments. If not converted, the note requires full payment of
principle and all accrued and unpaid interest on December 31, 2004. The note
bears interest at 8%. At June 30, 2000, 1999 and 1998, the unpaid accrued
interest amount of $700, $651 and $602 respectively, was capitalized into the
original principal balance of $7,100. 9,337 8,637

Acquisition Subordinated Promissory Note with a principal amount of $1,000.
Interest at the rate of 9% per annum accrues daily and is payable monthly in
arrears. The note is due on August 31, 2004. The note is subject to mandatory
redemption prior to August 31, 2004 on the nine-month anniversary of the date on
which we complete an initial registered public offering of any class of common
stock. 1,000 1,000

Amounts due pursuant to non-compete agreements resulting from various
acquisitions. The individual agreements require monthly payments ranging from
$0.1 to $10.0 with all unpaid principal due on dates ranging from January 1, 2000
through April 4, 2002. 380 721

Other debt consists of equipment notes, bank loans and real estate notes. These
debts have varying payment terms (monthly or at maturity). Monthly principal
payments range from $0.5 to $8. One note is due in full in December 2001 in the
amount of $500. Interest rates on these debts range from 7.9% to 10.75%, with
maturity dates ranging from December 1998 through August 2002. 744 1,053

Various capital lease obligations were incurred in conjunction with the rental of
equipment. The leases require monthly principal payments ranging from $0.2 to
$13. Interest rates on the leases range from 6% to 17.9%. Maturity dates range
from December 1998 through September 2003. 122 347
------------------------

Total Debt 125,280 124,241
Less: Current maturities (590) (828)
------------------------
Long-term portion $124,690 $123,413
========================
</TABLE>

15
<PAGE>

Maturities of debt and capital lease obligations are as follows (in
thousands):

CAPITAL
DEBT LEASES TOTAL
---- ------ -----
<S> <C> <C> <C>
2001 $ 505 $ 85 $ 590
2002 119 35 154
2003 -- 2 2
2004 -- -- --
2005 -- -- --
Thereafter 124,534 -- 124,534
-------- -------- --------
$125,158 $ 122 $125,280
======== ======== ========
</TABLE>

The book value of long-term debt and current maturities, excluding
Senior Subordinated Notes, approximates fair value because all significant
amounts outstanding at June 30, 2000, were recently issued and are
representative of the terms and interest rates that would be available at June
30, 2000. The fair value of the Senior Subordinated Notes, based on current
market prices is $35.0 million. Since the Senior Subordinated Notes are not
actively traded, the fair value could change materially upon the sale or
purchase of a significant portion of the Notes.

11. INCOME TAXES

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

YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State and local -- -- --

Deferred:
Federal 2,458 652 9,935
State and local (1,667) 75 579
---------- ---------- ----------
$ 791 $ 727 $ 10,514
========== ========== ==========
</TABLE>

The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to our effective income tax rate is as
follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income tax rate, net of federal
Benefit 4.0% 4.2% 3.6%
Permanent items:
Limitation on state net operating
Losses - (0.6)% (1.7)%
Other (2.6)% (3.4)% (0.5)%
Valuation allowance (25.0)% -- --
------- ------ ------
10.4% 34.2% 35.4%
======= ====== ======
</TABLE>

16
<PAGE>

In accordance with current tax regulations, we file tax returns on a
cash basis in most jurisdictions. As a result, we have accumulated significant
net operating losses since inception. In the state of California, utilization of
net operating losses is limited to fifty percent of the loss generated; hence
the effective tax rate associated with the losses attributable to California are
benefited at a rate less than the statutory rate.

Deferred tax assets and liabilities are composed of the following at
June 30, 2000 and 1999 (in thousands):

2000 1999
--------------------------------------
<S> <C> <C>
Current deferred tax assets:
Accounts payable $ 4,535 $ 2,120
Accrued liabilities 5,805 6,161
--------------------------------------
Total current deferred tax assets 10,340 8,281
--------------------------------------
Noncurrent deferred tax assets:
Organization costs 998 998
Net operating loss carryforward 27,587 23,503
Other 1,290 --
--------------------------------------
Total noncurrent deferred tax assets 29,875 24,501
Valuation allowance (1,956) --
--------------------------------------
Total deferred tax assets $38,259 $32,782
======================================
Current deferred tax liabilities:
Receivables $7,136 $7,337
Inventory 15,555 13,310
Prepaids 63 175
--------------------------------------
Total current deferred tax liability 22,754 20,822
--------------------------------------
Non-current deferred tax liabilities:
Depreciation and amortization 5,558 3,877
Tree Inventory 2,466 1,836
Other 419 --
--------------------------------------
Total noncurrent deferred tax liability 8,443 5,713
--------------------------------------
Total deferred tax liabilities $31,197 $26,535
======================================
</TABLE>

At June 30, 2000 we have available federal and state net operating loss
carryforwards of approximately $75.4 million and $30.5 million, respectively.
The federal net operating losses expire beginning on June 30, 2011 and the state
net operating loss carryforwards expire beginning on June 30, 2001 and are
substantially gone by June 30,2003. These net operating losses may be limited in
use in any given year, subject to IRS Section 382, because there was an
ownership change during this fiscal year. In addition, significant taxable
income must be generated in order to realize these recorded benefits. Although
we have not provided a valuation allowance on the federal operating loss
carryforward, the realizability of the related assets is periodically evaluated.
If a significant valuation allowance is recorded in a future period, the tax
provision will be adversely impacted (see Note 1). We provided a valuation
allowance of $2.0 million during the year ended June 30, 2000, representing the
full deferred tax asset for state net operating loss carryforwards as a result
of the uncertainty of their realization.

17
<PAGE>

12. STOCKHOLDERS' EQUITY

COMMON STOCK AND REDEEMABLE COMMON STOCK

We have 50,000,000 authorized shares of $0.001 par value common stock
of which 6,948,597 shares were outstanding as of June 30, 2000. Holders of
common stock are entitled to one vote per share on all actions submitted to a
vote of stockholders.

We are required to repurchase shares of Common Stock from certain
management stockholders in the event of their termination due to their death or
permanent disability. Such repurchases are at fair market value as determined by
the Board of Directors. The Board of Directors will retain an independent
appraisal firm to assist them in determining the fair market value of the Common
Stock on a periodic basis. The difference between the carrying amount of the
redeemable Common Stock and its fair value is accreted over the life expectancy
of the management stockholders (on average 21 years) by charging "retained
earnings." The fair value of the redeemable Common Stock, as estimated by
management, at June 30, 2000 is approximately $3.4 million. In the event of an
initial public offering of the Common Stock, the requirement to repurchase
shares automatically terminates. As a result of the redemption feature,
redeemable Common Stock is classified outside of stockholders' equity
(irrespective of voting rights of the stock).

KCSN Acquisition Corporation , L.P., Heller and all of the management
stockholders (the "Stockholders") are parties to the Stockholders Agreement
which includes certain transfer restrictions, voting agreements and registration
rights which survive until December 31, 2006. The Stockholders have agreed to
(i) consent to any merger, consolidation or sales of all or substantially all of
our assets involving an independent third party and approved by a majority of
the shares of Common Stock held by KCSN and (ii) vote their shares of Common
Stock to elect two members of management, five KCSN designees and two
independent designees reasonably acceptable to KCSN as directors. Consequently,
the Stockholders (assuming the conversion of the Heller Note) will continue to
have significant influence over our policies and affairs and may be in a
position to determine the outcome of corporate actions requiring stockholder
approval, including adopting amendments to the Certificate of Incorporation,
electing directors and approving or disapproving mergers or sales of all or
substantially all of our assets.

PREFERRED STOCK

We have 4,900,000 shares authorized of $0.01 par value undesignated
preferred stock. The board of directors has authority, without any further vote
or action by stockholders, to provide for the issuance of preferred stock shares
in series, to establish the relative, participating, optional or other special
rights, qualifications or restrictions of the shares of each such series and to
determine the voting powers, if any, of such shares. No shares are outstanding
at June 30, 2000 and 1999.

18
<PAGE>

13. SERIES A PREFERRED STOCK AND WARRANTS

In December 1997, simultaneous with the issue of the Senior
Subordinated Notes, (see Note 10), we sold 40,000 shares of 13% Series A
Cumulative Preferred Stock and 825,000 warrants, each warrant representing the
right to purchase one share of our common stock for $0.01 each. The 13% Series A
Cumulative Preferred Stock and the warrants were sold for an aggregate cost of
$40.0 million. Dividends on the 13% Series A Cumulative Preferred Stock accrue
at a rate of 13% of the liquidation preference of $1,000 per share and are
payable quarterly on March 15, June 15, September 15 and December 15 commencing
on March 15, 1998. At our option, dividends may be paid by the issuance of
additional shares of 13% Series A Cumulative Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. During fiscal 2000
and 1999, we issued 6,584 and 5,794, respectively, additional shares of 13%
Series A Cumulative Preferred Stock and $7,195 and $6,438, respectively, in cash
as dividends on our 13% Series A Cumulative Preferred Stock. Through 2002, 13%
dividends are expected to continue to be paid in additional shares of Series A
Preferred Stock. In addition, our credit facilities and corollary agreements
associated with the 1997 Offerings restrict the payment of cash dividends on the
13% Series A Cumulative Preferred Stock (other than for payment of dividends
associated with fractional shares). On December 15, 2008, we are required to
redeem all outstanding shares of 13% Series A Cumulative Preferred Stock at a
price equal to the liquidation preference, plus accrued and unpaid dividends to
date, if any. The 13% Series A Cumulative Preferred Stock is redeemable, in
whole or in part, at our option, at any time on or after December 15, 2002 at
specified redemption prices. The liquidation preference as of June 30, 2000 is
$54.9 million. The 13% Series A Cumulative Preferred Stock ranks senior to all
other outstanding classes or series of capital stock with respect to dividends
and liquidation rights.

The warrants are exercisable on December 15, 2008. In the absence of an
exercise, the warrants will be automatically deemed to have been exercised
immediately on December 15, 2008 with payment of the Exercise Price on a
cash-less basis.

14. EARNINGS PER SHARE

Earnings per share is as follows:

FOR THE YEAR ENDED JUNE 30, 2000
------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic and diluted earnings per share:
Net loss $(6,836)
Preferred stock dividends/accretion (7,951)
Net loss applicable to common
Stock $(14,787) 6,950,238 $(2.13)
</TABLE>

19
<PAGE>

FOR THE YEAR ENDED JUNE 30, 1999
------------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic and diluted earnings per share:
Loss before cumulative effect of change in
accounting principle and extraordinary
loss $ (1,398)
Preferred stock dividends/accretion (7,102)
------------
Loss before cumulative effect of change
in accounting principle and
extraordinary loss $ (8,500) $(1.22)
Cumulative effect of change in
accounting principle (1,718) (0.25)
Extraordinary loss (1,018) (0.15)
------------- ----------
Net loss applicable to common
stock $(11,236) 6,941,022 $(1.62)

</TABLE>

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

Options to purchase 2,008,854, 2,111,954 and 1,829,853 common shares
were excluded from the computation of diluted earnings per share for the years
ended June 30, 2000, 1999 and 1998, respectively, as the shares were
antidilutive given our reported net loss. The note payable (see Note 10)
convertible to 464,766, 429,928 and 397,511 shares of common stock were excluded
from computation of diluted earnings per share for the years ended June 30,
2000, 1999 and 1998, respectively, as the conversion price was greater than the
fair market value of the common shares in the respective periods. Redeemable
common stock is considered equivalent to common stock for purposes of
calculating earnings per share.

15. STOCK OPTIONS

In July 1996, we adopted the 1996 Stock Incentive Plan under which
eligible employees, directors and consultants received options to purchase
shares of our common stock at a price generally not less than the fair value of
the common stock on the date of the grant. Under the 1996 Plan, 1,171,419
options were granted at $1.45 per share (fair value of the stock on the date of
grant was $1.45 as determined by the Board of Directors, such grants occurring
coincident with independent third party transactions). All options under the
1996 Stock Incentive Plan fully vested as a result of the recapitalization on
December 31, 1996, and 569,417 options were simultaneously exercised. A total of
395,609 options remain outstanding under the 1996 Stock Incentive Plan.

20
<PAGE>

On January 1, 1997, we adopted the 1997 Stock Option Plan, under which
eligible executives and key employees received options to purchase shares of
common stock at a price generally not less than the fair value of the common
stock on the date of grant. On January 1, 1997, 841,803 options were granted at
$7.17 or $7.19 per share (the fair value of the stock on the date of grant as
determined by the Board of Directors, such grants occurring coincident with
independent third party transactions). Options granted under the 1997 Stock
Option Plan are exercisable over a maximum term of ten years from the date of
grant and vest in equal annual installments over a four-year period. The options
immediately vest upon a change in control of Color Spot or an initial public
offering. No options have been exercised under the 1997 Stock Option Plan. In
January 1998, we granted an additional 252,300 options at $10 per share. During
fiscal 2000 and fiscal 1999, we granted an additional 50,000 and 540,000
options, respectively, at $3.00 or $4.00 per share. Pursuant to our 1998
Employee Stockholders' Agreement, the options granted after January 1, 1997 do
not vest immediately upon a change in control of Color Spot or an initial public
offering of common stock.

In February 1997, we adopted the Special Stock Option Plan, under which
eligible employees received options to purchase shares of common stock at a
price below the fair market value of the common stock on the date of grant.
Under the Special Stock Option Plan, 139,383 options were granted at $1.43 per
share. Options granted under the Special Stock Option Plan are exercisable over
a maximum term of ten years from the date of grant and vest in equal annual
installments over a four-year period. The options immediately vest upon a change
in control of Color Spot or an initial public offering. As these options are
compensatory, compensation expense is being recognized ratably over the vesting
period of the options for the difference between the fair market value at the
date of grant and the exercise price. We will recognize total compensation
expense of $0.8 million over the vesting period of the options.

Activity under the three plans is summarized as follows:

Weighted Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at July 1, 1996 --
Granted 2,153,295 $3.70
Exercised (569,417) 1.45
--------- -----
Outstanding at June 30, 1997 1,583,878 4.49

Granted 252,300 10.00
Exercised -- --
Forfeited (16,336) 7.19
--------- -----
Outstanding at June 30, 1998 1,819,842 5.26

Granted 540,000 3.42
Exercised (37,950) 1.43
Forfeited (209,938) 7.76
--------- -----
Outstanding at June 30, 1999 2,111,954 4.59

Granted 50,000 3.00
Exercised - -
Forfeited (566,482) 3.77
--------- -----
Outstanding at June 30, 2000 1,595,472 $4.59
========= =====

Options exercisable at year-end 1,027,072 $4.28
</TABLE>

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

21
<PAGE>

The following summarizes information about stock options outstanding at
June 30, 2000:

Weighted Average Weighted Average
Options Outstanding at Remaining Fair Value of
Exercise Price June 30, 2000 Contractual Life Options Granted
-------------- ------------- ---------------- ---------------
<S> <C> <C> <C>
$ 10.00 179,600 7.5 Years $ 3.11
7.17 or 7.19 431,253 6.5 Years 2.22
3.00 or 4.00 500,000 8.5 Years 0.62
1.45 395,609 6.1 Years 0.45
1.43 89,010 6.7 Years 6.19
------------- --------
$ 4.53 $ 1.60
============= ========
</TABLE>

Had compensation cost for the stock-based compensation plans been
determined based upon the fair value at grant dates for awards under those plans
consistent with the method prescribed by SFAS 123, net income would have been
reduced to the pro forma amounts indicated below (in thousands):

<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Income (loss):
As reported $(6,836) $(4,134) $(21,960)
Pro forma (7,431) (5,022) (23,319)
</TABLE>

The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes option-pricing model assuming an expected life of
six years, a risk-free interest rate of 6.22%, and no expected dividends.

16. RELATED-PARTY TRANSACTIONS

Our revolving lines of credit, term loans and acquisition line of
credit through fiscal 1998 were provided by Credit Agricole Indosuez, an
affiliated and limited partner in KCSN Acquisition Corporation, L.P. Credit
Agricole Indosuez was paid $1.3 million and $3.2 million in loan fees in fiscal
1998 and 1997 respectively. We incurred interest of $1.1 million and $4.1
million in connection with the amounts outstanding with Credit Agricole Indosuez
during fiscal 1998 and 1997 respectively. The facility was terminated on October
15, 1998.

We lease certain property and equipment that is owned directly or
indirectly by certain members of management. Payments pursuant to these
operating leases for the years ended June 30, 2000, 1999, and 1998 were $0.3
million.

Prior to December 1997, we paid Kohlberg a quarterly fee pursuant to a
Fee Agreement for certain management services. Under the Fee Agreement, Kohlberg
was paid $1,520,000 for services rendered in connection with the December 31,
1996 recapitalization (the "Transaction Fee") and is paid an annual management
fee equal to the greater of $0.3 million or 3% of earnings before interest,
taxes, depreciation and amortization, subject to a maximum annual payment of
$0.8 million. The total fees expensed for the period from December 31, 1996 to
June 30, 1997 was $0.4 million. In December 1997, Kohlberg was paid $2.0 million
and the annual management fee was terminated.

As part of the recapitalization transaction (see Note 1), we (1)
acquired 603,750 shares of common stock from M.F. Vukelich Co., an entity
controlled by the Chairman of the Board, for a purchase price of $4.3 million
and (2) purchased 20,211and 36,194 shares during the years ended June 30, 1999
and 1998, respectively from employees during the year at $7.17 per share.

22
<PAGE>

17. EMPLOYEE BENEFIT PLAN

We adopted a 401(k) plan for employees in September 1995. All employees
who meet certain service requirements are eligible to participate. Matching
contributions are at our discretion. We made no contributions to the 401(k) plan
during the periods ended June 30, 2000, 1999, and 1998.

18. EXTRAORDINARY LOSS

In connection with the refinancing in October 1998, we 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 Offerings of fiscal 1998, we incurred a $4.3
million non-cash pre-tax charge related to the write-off of deferred financing
fees. This charge is reported net of income tax benefit of $1.5 million in
extraordinary loss on the consolidated statements of operations.

19. COMMITMENTS AND CONTINGENT LIABILITIES

OPERATING LEASES

We lease certain nursery facilities consisting of land and improvements
under noncancellable operating leases expiring at various dates through 2018. We
also lease transportation equipment under operating leases expiring in various
years through 2002. Some of the leases have five-year renewal options and some
are subject to rental increases based on a change in the Consumer Price Index.

Total rent expense for the periods ended June 30, 2000, 1999 and 1998
was approximately $5.7 million, $5.2 million, and $4.8 million respectively.

At June 30, 2000, future minimum rental payments on non-cancellable
operating leases are as follows (in thousands):

<TABLE>

<S> <C>
2001 $4,331
2002 3,478
2003 3,057
2004 2,788
2005 2,627
Thereafter 5,674
-----------
Total minimum lease payments $21,955
===========
</TABLE>

23
<PAGE>

We have contracts to purchase Christmas trees from third-party growers.
Certain of these contracts require us to maintain the trees until they are
harvested. At June 30, 2000, future minimum purchase commitments under the
contracts are as follows (in thousands):

<TABLE>

<S> <C>
2001 $5,620
2002 857
2003 563
2004 519
2005 427
Thereafter 162
-------------
Total minimum purchase commitments $8,148
=============
</TABLE>
We have additional contracts to purchase Christmas trees whereby the
amounts payable are dependent upon the number of trees harvested and the year in
which they are harvested. Certain of the contracts may be canceled with proper
notice.

CONTINGENCIES

We are a party to various legal proceedings, claims and assessments
arising in the normal course of its business activities. Based upon information
presently available and in light of legal and other defenses and insurance
coverage, management does not expect these legal proceedings, claims and
assessments, individually or in the aggregate, to have a material adverse impact
on our consolidated financial position or operations.

EMPLOYMENT AGREEMENTS

We have entered into employment agreements with certain of our
executive officers, with remaining service periods ranging from one to five
years. The agreements provide for certain payments to each officer upon
termination of employment, other than as a result of death, disability in most
cases or justified cause, as defined. The aggregate estimated commitment under
these agreements was $0.9 million at June 30, 2000. The agreements also provide
for certain officers to receive guaranteed bonuses based on years of service
ranging from two to four years and the forgiveness of certain loans over a
five-year period, based on years of service. The aggregate estimated commitment
for bonuses and loan forgiveness under these agreements was approximately $1.7
million at June 30, 2000.

24
<PAGE>

20. QUARTERLY FINANCIAL DATA--(UNAUDITED)

Summarized quarterly financial information for the years ended June 30,
2000, 1999 and 1998 are as follows (in thousands):

Sept. 30, Dec. 30, March 30, June 30,
1999 1999 2000 2000
2000 Q1 Q2 Q3 Q4
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $26,723 $49,062 $47,451 $87,651
Gross profit 10,397 18,061 23,165 28,373
Operating income (loss) (3,610) (259) 6,121 4,823
Net income (loss) (4,442) (2,590) 1,203 (944)
Basic and diluted earnings per share:
Net loss (0.91) (0.65) (0.12) (0.43)

<CAPTION>
Sept. 24, Dec. 24, March 25, June 30,
1998 1998 1999 1999
1999 Q1 Q2 Q3 Q4
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $27,706 $47,921 $42,433 $88,016
Gross profit 8,320 15,796 22,139 42,028
Operating income (loss) (9,133) (1,406) 7,522 17,711
Cumulative effect of change in accounting principle,
Net of income taxes (Note 8) (1,687) -- -- (31)
Extraordinary loss, net of income taxes (Note 18) -- (999) -- (19)
Net income (loss) (10,421) (4,098) 1,975 8,410
Basic and diluted earnings per share:
Net income (loss) before extraordinary loss (1.48) (0.68) 0.04 0.89
Cumulative effect of change in accounting
Principle (0.24) -- -- (0.01)
Extraordinary loss (Note 18) -- (0.15) -- --
----------------------------------------------------
Net income (loss) (1.72) (0.83) 0.04 0.88

<CAPTION>
Sept. 25, Dec. 25, March 26, June 30,
1997 1997 1998 1998
1998 Q1 Q2 Q3 Q4
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $25,482 $38,708 $38,549 $84,992
Gross profit 7,464 13,206 11,758 19,089
Operating loss (4,218) (3,512) (1,993) (6,839)
Extraordinary loss, net of income taxes -- (2,162) -- (630)
Net loss (3,691) (5,201) (5,069) (7,999)
Basic and diluted earnings per share:
Net loss before extraordinary loss (0.55) (0.44) (0.95) (1.30)
Extraordinary loss (Note 18) -- (0.31) -- (0.09)
----------------------------------------------------
Net loss (0.55) (0.75) (0.95) (1.39)
</TABLE>

25
<PAGE>

21. SUBSEQUENT EVENT (UNAUDITED)

Subsequent to year-end, we decided to take excess capacity out of
production. The inventory at the Aurora, Sunol, Watsonville and Waco
facilities will be transferred to other facilities and production at those
facilities will cease. As demand returns, we will resume production at the
Aurora, Sunol and Waco facilities. The lease for the Watsonville facility
expires in fiscal 2001 and one of two leases at the Sunol facility has been
subleased. We will evaluate the possibility of extending the Watsonville
lease based on production requirements at the time of expiration. As of
June 30, 2000, we have $0.6 million net book value of assets at our
Watsonville facility and plan to use these assets at our other locations. We
have $6.0 million net book value of assets at our Aurora, Sunol and Waco
facilities. We plan to utilize some of these assets in our other facilities
and in these facilities when they reopen. If we decide to abandon any of
these assets, we will account for the abandonment in the period such decision
is made; such accounting could require us to take a material charge to our
income statement.

26
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II

To Color Spot Nurseries, Inc. and Subsidiaries:

We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Color Spot Nurseries,
Inc. and Subsidiaries included in this Form 10-K, and have issued our report
thereon dated August 25, 2000. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. Schedule II, "Valuation and
Qualifying Accounts," is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

San Francisco, California
August 25, 2000

<PAGE>

Schedule II
Valuation and Qualifying Accounts

Additions
Balance at Charged to
Beginning of Costs and Deduction from Balance at End
Period Expenses Reserves of Period
------ -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Valuation and qualifying accounts
deducted from the assets to which
they apply:

For the year ended June 30, 2000
Allowance for uncollectible accounts $1,854 $715 $1,370 $1,199

For the year ended June 30, 1999
Allowance for uncollectible accounts $3,084 $1,337 $2,567 $1,854

For the year ended June 30, 1998
Allowance for uncollectible accounts $1,661 $2,647 $1,224 $3,084

</TABLE>

<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 25, 1997
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.
3.2 Amendment to Certificate of Incorporation, incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 25, 1999 (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission.
3.3 Amended and Restated Bylaws, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
3.4 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
4.1 Form of Preferred Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
4.2 Indenture (including Form of Note), incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
4.3 Warrant Agreement (including Form of Warrant), incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 25, 1997 (SEC File No. 000-23483), as
previously filed with the Securities and Exchange Commission.
10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.
10.2 First Amendment and Waiver to Second Amended And Restated Credit
Agreement dated as of December 24, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 26, 1998 (SEC File No. 000-23483), as previously filed
with the Securities and Exchange Commission.
10.3 Second Amended and Restated Credit Agreement dated as of December 24,
1997, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
10.4 Amended and Restated credit Agreement dated as of February 20, 1997,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.5 Recapitalization and Stock Purchase Agreement among the Registrant,
Heller Equity Capital Corporation ("Heller"), M.F. Vukelich Co.,
Michael F. Vukelich, Jerry Halamuda, Gary E. Mariani, Steven J.
Bookspan, Richard E. George and KCSN Acquisition Company, L.P. dated
as of December 31, 1996, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.6 8% Subordinated Convertible Note issued to Heller, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.

<PAGE>

<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.7 Put/Call Option Agreement dated as of December 31, 1996, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.8 Stockholders Agreement dated as of December 31, 1996, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.9 Employee Stockholders Agreement dated as of June 1, 1997, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.10 Employment Agreement with Michael F. Vukelich dated as of December 31,
1996, incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.
10.11 Employment Agreement with Jerry L. Halamuda dated as of December 31,
1996. incorporated by reference to the Company's Registration
Statement on Form S-1 (SEC File No. 333-37335), as previously filed
with the Securities and Exchange Commission.
10.12 1996 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.13 1997 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.14 Special Stock Option Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.15 Form of Stock Purchase Option incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
10.16 Fee Agreement dated as of December 31, 1996 between Registrant and
Kohlberg Company, LLC incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.17 Merger Agreement dated as of February 20, 1997 for the acquisition of
Lone Star Growers Co. incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.18 Real Property Lease between M.F. Vukelich Co. and the Registrant dated
December 1, 1995, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.19 Real Property Lease between Michael F. Vukelich as Guardian for Trisha
Vukelich and the Registrant dated as of December 31, 1995,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.20 Asset Purchase Agreement dated as of March 14, 1997 between Color Spot
Christmas Trees, Inc. and Signature Trees, incorporated by reference
to the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.
10.21 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.22 Stockholders Repurchase Agreement dated as of December 31, 1996,
incorporated by reference to

<PAGE>

<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
the Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.

10.23 Amended and Restated Employment Agreement dated as of July 30, 1998
with Boligala Raju, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 25,
1999 (SEC File No. 000-23483) as previously filed with the Securities
& Exchange Commission.
10.24 1998 Employees Stockholders Agreement incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25 Loan and Security Agreement dated as of October 15, 1998, with Fleet
Capital Corporation as agent, incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25.1 Waiver and Amendment to Debt Agreement dated as of September 28,
2000, with Fleet Capital Corporation.
10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Registrant, incorporated
by reference to the Company's Form 10-K for the year ended June 30,
1998 (SEC File No. 000-23483), as previously filed with the Securities
and Exchange Commission.
10.27 Employment Agreement with Richard E. Parker dated as of June 10,
1999, incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.28 Employment Agreement with Joseph P. O'Neill dated as of June 10,
1999, incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.29 Amendment to Employment Agreement with Michael F. Vukelich, dated June
10, 1999, incorporated by reference to the Company's Form 10-K for
the year ended June 30, 1999 (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission.
11.1 Computations of Earnings Per Share -- See Note 14 to the Notes to
Consolidated Financial Statements.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
27.1 Financial Data Schedule.
</TABLE>