<PAGE>
As Filed With the Securities and Exchange Commission on November 12, 1998
Registration No. 333-57329
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under The Securities Act Of 1933
---------------
COLORADO GREENHOUSE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0182 84-1363625
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1490 West 121st Avenue, Suite 202
Westminster, Colorado 80234
(303) 457-7600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
James R. Rinella
Chief Executive Officer
1490 West 121st Avenue, Suite 202
Westminster, Colorado 80234
(303) 457-7600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
William R. Roberts Richard C. Tilghman, Jr.
Holme Roberts & Owen LLP Piper & Marbury L.L.P.
1401 Pearl Street, Suite 400 36 South Charles Street
Boulder, Colorado 80302 Baltimore, Maryland 21201
(303) 444-5955 (410) 539-2530
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________________.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement becomes+
+effective. This prospectus shall not constitute an offer to sell or the +
+solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Dated November 12, 1998
5,000,000 Shares
[LOGO OF COLORADO GREENHOUSE HOLDINGS,INC. APPEARS HERE]
COLORADO GREENHOUSE HOLDINGS, INC.
Common Stock
--------------
Of the 5,000,000 shares of Common Stock offered hereby, 3,500,000 shares are
being sold by Colorado Greenhouse Holdings, Inc. (the "Company") and 1,500,000
shares are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to list the Common Stock on the Nasdaq
National Market/sm/ under the symbol "CGHI."
--------------
The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 10.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to Proceeds to Selling
Public Commissions Company/(1)/ Stockholders
================================================================================
Per Share..... $ $ $ $
Total/(2)/.... $ $ $ $
================================================================================
(1) Before deducting estimated expenses of $825,000, all of which will be paid
by the Company.
(2) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to an additional 750,000 shares of Common Stock, solely to
cover over-allotments, if any. If this option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Selling Stockholders will be $______, $______ and $______, respectively.
See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, as stated
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to their right to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, New York, New York on or about , 1998.
BT. Alex Brown Hambrecht & Quist
The date of this prospectus is ____ __, 1998.
<PAGE>
ARTWORK
"Colorado Greenhouse Quality Hydroponic Produce," together with the circular
sunrise over snowcapped mountains design and "Colorado Greenhouse" are
registered trademarks of the Company. See "Business--Company Trademarks."
* * *
The Company intends to furnish its stockholders with annual reports containing
audited financial statements and with quarterly reports containing unaudited
financial information for each of the first three quarters of each year.
* * *
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. References to the Company refers to Colorado
Greenhouse Holdings, Inc., its consolidated subsidiaries and its predecessors.
See "--Company History and Recent Developments." Unless otherwise indicated, all
statements made in this Prospectus assume (i) exercise of all outstanding
warrants to purchase preferred stock and conversion of all of the Company's
outstanding preferred stock into shares of Common Stock and (ii) no exercise of
the Underwriters' over-allotment option.
The Company
Colorado Greenhouse is the largest U.S.-based producer and marketer of high-
quality greenhouse tomatoes in terms of net sales. The Company's branded
superpremium tomatoes are characterized by their excellent flavor, rich red
color and consistent blemish-free appearance. The Company currently operates six
hydroponic (grown without soil) greenhouses covering approximately 111
production acres in Colorado and New Mexico and is constructing a seventh 20-
acre hydroponic greenhouse in New Mexico. The Company plans to construct six
additional 20-acre hydroponic greenhouses over the next three years. The
Company's production sold was approximately 247,000 pounds per acre for the six
months ended June 30, 1998, which represents an approximately 13% increase from
the same period in 1996. The Company also has increased its acreage by
approximately 56% and increased its net sales by approximately 50% over the same
period. In May 1998, the Company acquired an approximately 25% equity interest
in an affiliated group of Mexican greenhouse companies ("Greenver") and obtained
the exclusive right to market in the United States, Canada and Europe all
export-quality tomatoes from Greenver's approximately 175 acres of non-
hydroponic greenhouses in Mexico, half of which are currently under construction
and expected to be in production by November 1998. The Company anticipates that
Greenver will provide it with up to 18 million pounds of tomatoes during
Greenver's November 1998 through April 1999 growing season.
The Company's production and distribution capabilities enable it to provide
its customers with a consistent, year-round supply of superpremium branded
tomatoes. The Company currently markets most of its tomatoes in ten states,
primarily to major supermarket chains, including Albertson's, Ingles, King
Soopers, Kroger, Lucky's, Meijer and Safeway, with the majority of sales
concentrated in California, Colorado, Michigan, North Carolina, Ohio, Tennessee
and Texas. The Company recently completed an extensive market and consumer study
and, based upon its findings, launched a marketing campaign for its newly
developed consumer brand in October 1998, emphasizing the consistent year-round
quality and superior taste of its tomatoes. A key component of the Company's
growth strategy is to market its tomatoes in selected new domestic markets and
establish relationships with additional major supermarket chains.
The Company engaged Monterey Bay Food Group ("Monterey"), a leading
independent market research firm that has extensive experience in the produce
industry, to prepare a study of the greenhouse tomato market. Monterey estimates
that greenhouse tomatoes accounted for only approximately 8% of the
approximately 5.4 billion pound ($1.8 billion) U.S. fresh tomato market in 1997.
Historically, U.S. fresh tomato consumption has decreased dramatically during
the winter months due to the lack of a consistent supply of quality tomatoes.
There is substantial year-round consumer demand, however, for higher quality,
fresh, superpremium food products, including tomatoes. Accordingly, Monterey
estimates that greenhouse tomatoes' share of the U.S. fresh tomato market will
increase significantly over the next five years. The Company believes that its
ability to offer a consistent, high-quality superpremium tomato on a year-round
basis and its greenhouse expansion plans will permit it to lead this growth
opportunity.
Company Strengths
The Company's key competitive strengths include:
. Consistent Quality Superpremium Tomatoes on a Year-Round Basis. The
Company has established a reputation as a consistent supplier of high
quality, branded superpremium tomatoes. The Company's greenhouse
locations in Colorado and New Mexico are characterized by an optimal
combination of direct sunlight and moderate summertime temperatures,
which provide it with the ability to grow high-quality tomatoes on a
year-round basis. Commencing in November 1998, the Company will begin
marketing Greenver's tomatoes. This
3
<PAGE>
will provide the Company with a greater supply of tomatoes from
November through April, when domestic supply is generally at its
lowest and prices are typically at their highest.
. Direct Relationships with Major Supermarket Chains. The Company
sells directly to several of the nation's largest supermarket chains,
including Albertson's, Ingles, King Soopers, Kroger, Lucky's, Meijer
and Safeway. These direct relationships enable the Company to: (i)
retain control over the distribution process; (ii) establish a "non-
commodity" consumer branding approach to marketing; (iii)
differentiate itself through superior customer service; and (iv)
improve margins by eliminating unnecessary middlemen.
. Technical Expertise. The Company's advanced growing techniques
enable it to produce consistently high-quality tomatoes on a year-
round basis. The Company's greenhouses are managed by teams of senior
growers, principally recruited from European countries, with expertise
in the latest greenhouse and hydroponic technology. These senior
growers train junior growers to assure that the Company will have the
expertise necessary for its planned expansion. Forty of the Company's
production acres have been constructed, and 20 acres are being
constructed, using a state-of-the-art model designed to enhance
growing conditions and improve production yield. The Company also
has installed an integrated management information system, which
allows it to monitor closely all aspects of the plant production,
packaging and selling process.
Growth Strategy
The Company's objective is to strengthen its position as the largest U.S.-
based producer and marketer of high quality greenhouse tomatoes and to increase
sales. Key elements of the Company's strategy to achieve this goal include:
. Aggressively Develop Consumer Brand Identity. To capitalize on the
regional success of the Company's branding strategy, in October 1998,
the Company introduced a marketing campaign targeting additional
domestic markets with its newly developed consumer brand. This
campaign will include both trade and consumer advertising and point-
of-sale promotions emphasizing the consistent year-round availability
and superior taste of the Company's tomatoes. The Company believes
that its branding strategy also may facilitate its future introduction
of other superpremium greenhouse produce.
. Expand Production Capacity. The Company's strategy is to expand
production capacity to meet the increased consumer demand for
consistent, high-quality tomatoes on a year-round basis. The Company
is currently constructing a 20-acre hydroponic greenhouse facility in
New Mexico and plans to construct six additional 20-acre hydroponic
greenhouses over the next three years at sites that provide optimal
micro-climatic conditions of sunlight and temperature. The Greenver
marketing arrangement will provide the Company with a greater supply
of tomatoes from November through April, when domestic supply is
generally at its lowest and prices are typically at their highest.
. Broaden Retail Distribution. Most major retailers seek a primary
supplier for each produce category that is capable of delivering both
uniform quality and consistent year-round supply. The Company
believes that by offering retailers and consumers a high quality
product with a consistent year-round supply, it can become the primary
year-round tomato supplier of choice for many major supermarket
chains. The Company's variety of product sizes and grades and
customized packaging capabilities also provide significant flexibility
to retail chains when offering tomato products to consumers. The
Company's expertise in conducting marketing programs can assist these
retailers in developing consumer awareness and brand loyalty.
See "Risk Factors - Risks Related to Growth Strategy."
Company History and Recent Developments
Organizational History. The Company's business arose from the need for
developers of cogeneration electric power plants to obtain secondary users
("heat hosts") of heat generated by the power plants. In the 1980's, the
developers of four Colorado cogeneration plants (two in Brush and one each in
Fort Lupton and Rifle) selected greenhouses as heat hosts because Colorado's
micro-climatic conditions are favorable to greenhouse production. Tomatoes were
chosen as the crop for these greenhouses based on their revenue producing
potential. Prior to January 1,1994, the greenhouses at
4
<PAGE>
the Brush #1, Brush #2 and Fort Lupton #1 power plants were operated separately
under the supervision of a common management committee. On January 1, 1994, the
Company's predecessor, Colorado Greenhouse, LLC (the "LLC"), began to operate
the Brush #1, Brush #2 and Fort Lupton #1 greenhouses, and Rifle was added on
January 1, 1996. Integrating these operations allowed the Company to market more
efficiently its products, reduce production costs and coordinate growing
schedules. Construction of the Estancia and Fort Lupton #2 greenhouses was
completed by the Company in August 1997 and January 1998, respectively. The
Estancia and Fort Lupton #2 greenhouses are not part of a cogeneration project.
1997 Production Problems. During 1997, the Company experienced mechanical
problems, pest and disease infestations and a flood that significantly reduced
production during parts of the year in three of the Company's greenhouses. In
the Brush #1 greenhouse, a root disease reduced tomato production by
approximately 18.9% during the first and second quarters of 1997. This was
followed in the third quarter by an invasion of thrips (an insect) through the
greenhouse's unscreened ventilation system, which carried a virus from adjacent
agricultural field crops. This virus reduced plant populations as well as
tomato volumes and size, resulting in a decline in the Company's average sales
price per pound. During the third quarter of 1997, Brush #2 was also affected
negatively by the same root disease that affected Brush #1 and was infested with
a large population of whiteflies. This led to the Company's decision to pull
out its entire existing crop at Brush #2 and disinfect the greenhouse at the
beginning of the fourth quarter of 1997. At the end of the first quarter of
1997, the Fort Lupton #1 greenhouse experienced a mechanical failure in its
irrigation system, followed by a flood at the end of July that required the
Company to pull out the entire crop to avoid an outbreak of root rot common in
water damaged crops. As a result of all of these problems, the Company
experienced approximately a 13% decline in total production sold in 1997
compared to 1996, despite the addition of production from the 20-acre Estancia
greenhouse in October 1997. The Company believes it has remedied the problems
that lead to mechanical malfunctions and has used the experiences to update its
existing greenhouses and better design future greenhouses. The Company hired a
new senior management team that has implemented various initiatives and quality
control measures to reduce the likelihood of similar problems occurring in the
future and obtained improved insurance coverage. See "Risk Factors--Risk of
Loss to Crop from Pests or Mechanical Failures" and "Business--Greenhouse
Production--Quality Control Programs."
1998 Weather Event. In May 1998, the Company's Brush #1 and Brush #2
greenhouses were damaged by a hail storm coupled with severe winds. The Brush
#2 greenhouse suffered significant damage to its glass and related crop as a
result of the hail, and the Company decided to pull out the entire crop. The
hail also punctured some of the plastic at the Brush #1 greenhouse although most
of the crop in Brush #1 was salvaged. As a result of the hail storm, the
Company expects to lose a total of approximately $3.5 million in net sales
during the second and third quarters of 1998. For the six months ended June 30,
1998, the Company has recorded a receivable for an insurance advance of $2.0
million related to property and business interruption coverage, of which $1.6
million has been recognized on the Company's statement of operations, offset by
the recognition of a $1.7 million loss from hail damage, resulting in a $0.1
million charge to operations. The Company has filed insurance claims for
property and business interruption damages incurred in the hail storm totaling
$3.1 million less deductibles of $50,000. With the processing of these claims,
additional proceeds may be available subject to the final determination of the
insurance company. See "Risk Factors--Risk of Catastrophic Loss of Crop and
Property Damage."
Greenver Transaction. In May 1998, the Company acquired a 25% equity interest
in Greenver for $4.0 million (the "Greenver Transaction"). Greenver has 88 acres
of non-hydroponic greenhouses under production in Baja, Mexico, which produce
tomatoes and some sweet peppers. The proceeds of the Company's investment in
Greenver are being used by Greenver to construct an additional 87 acres of non-
hydroponic greenhouse facilities, which are expected to be in production by
November 1998. As part of the Greenver Transaction, the Company obtained the
exclusive right to market in the United States, Canada and Europe all export-
quality tomatoes, sweet peppers and any other produce from Greenver, for which
the Company will receive a 10% commission. The Company estimates that the
Greenver Transaction will provide it with up to 18 million pounds of tomatoes
during Greenver's November 1998 through April 1999 growing season, the time of
year when domestic supply is generally at its lowest and prices are typically at
their highest. Although Greenver's tomatoes are of comparable quality to the
Company's tomatoes, the Company will provide Greenver with technical assistance
to increase Greenver's production yield and the Company intends to introduce
hydroponic growing techniques to at least some of Greenver's facilities. The
Greenver relationship provides the Company with the opportunity to conduct field
trials of and test market other produce. Greenver will conduct field trials of
sweet peppers, cherry tomatoes, cucumbers and eggplant during the November 1998
to April 1999 growing season
5
<PAGE>
on approximately 37 acres of its new greenhouse facilities. As a result of its
equity interest, the Company is entitled to 25% of all dividends, if any,
distributed by Greenver.
May 1998 Private Placement. In May 1998, the Company completed the sale of
$6.0 million of its Series C Convertible Preferred Stock at $5.50 per share.
Although the Board of Directors approved the sale of the Series C Convertible
Preferred Stock in February 1998 and a significant number of the Company's
shareholders indicated that they would approve of and participate in the
transaction at that time, the offering was not closed until May 1998 because the
Company's then existing Shareholders Agreement required at least a 60 day notice
period for the closing of any right offering. The proceeds were used to fund the
Greenver Transaction and a portion of the construction costs of the Company's
new greenhouse in Grants, New Mexico. The Series C Convertible Preferred Stock
was offered by the Company in two tranches solely to its existing preferred
stockholders or their related parties on a pro rata basis, with a right to
purchase any unsubscribed shares also on a pro rata basis. Substantially all of
the shares of Series C Preferred Stock were purchased by existing preferred
stockholders or their related parties. The Company entered into a Registration
Rights Agreement with the Series C Convertible Preferred Stock purchasers,
whereby the Company agreed to register the Common Stock issued upon conversion
of the Series C Convertible Preferred Stock in certain circumstances, at the
Company's expense. See "Certain Transactions and Relationships--Sale of Series C
Convertible Preferred Stock" and "Description of Capital Stock--Registration
Rights." Upon the closing of this offering, the Series C Convertible Preferred
Stock will be converted into 1,090,910 shares of Common Stock on a one share for
one share basis. Certain holders of the Company's Series C Convertible Preferred
Stock will be selling Common Stock received upon the conversion of Series C
Convertible Preferred Stock as part of this offering. See "Principal and Selling
Stockholders." Most of the selling stockholders, however, will be selling Common
Stock received upon the conversion of the Series A Preferred Stock or Series B
Convertible Preferred Stock issued in January 1997, rather than the Series C
Convertible Preferred Stock.
---------------
The Company was incorporated in Delaware in 1996. The Company's principal
executive offices are located at 1490 West 121st Avenue, Suite 202, Westminster,
Colorado 80234, and its telephone number is (303) 457-7600.
6
<PAGE>
The Offering
Common Stock offered by the Company....3,500,000 shares
Common Stock offered by the Selling
Stockholders...........................1,500,000 shares
Common Stock to be outstanding
after this offering....................13,998,361 shares (1)(2)
Use of proceeds........................To repay indebtedness, to fund a portion
of construction costs for two or three
greenhouses and for working capital.
Proposed Nasdaq National Market/sm/
Symbol.................................CGHI
Risk Factors...........................The Common Stock offered hereby involves
a high degree of risk. See "Risk
Factors."
- --------------------
(1) Assuming an initial public offering price of $10.00 per share, the Series B
Preferred Stock will convert automatically into 3,185,216 shares of Common
Stock. If the initial public offering price is higher than $10.00, the
Series B Preferred Stock will convert automatically into a fewer number of
shares of Common Stock. For example, if the initial public offering price
is $11.00 per share, the Series B Preferred Stock will convert automatically
into 3,030,680 shares of Common Stock. Each share of the Company's Series A
Preferred Stock, issued in January 1997, and Series C Preferred Stock,
issued in May 1998, will convert automatically into one share of Common
Stock upon consummation of this offering.
(2) Excludes 1,026,691 shares of Common Stock issuable upon the exercise of
currently outstanding options at a weighted average exercise price per share
of $2.65. See "Management--Stock Option Plan."
7
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Summary Financial and Operating Data
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Net sales....................... $ -- $13,938 $20,135 $27,407 $24,944 $13,298 $23,549
Cost of goods sold.............. -- 9,961 15,431 19,293 22,257 11,507 15,982
------ ------- ------- ------- ------- ------- -------
Gross profit.................... -- 3,977 4,704 8,114 2,687 1,791 7,567
Operating expenses (2).......... 156 2,207 2,502 4,434 4,609 2,255 4,204
------ ------- ------- ------- ------- ------- -------
Operating income (loss)......... (156) 1,770 2,202 3,680 (1,922) (464) 3,363
Interest and other income
(expense), net................. 54 (33) 329 63 193 261 (290)
------ ------- ------- ------- ------- ------- -------
Income (loss) before
income tax provision........... (102) 1,737 2,531 3,743 (1,729) (203) 3,073
Provision (benefit) for
income taxes................... -- -- -- -- (653) (76) 1,168
------ ------- ------- ------- ------- ------- -------
Net income (loss)............... (102) 1,737 2,531 3,743 (1,076) (127) 1,905
Accretion of preferred
stock (3)...................... -- -- -- -- -- -- (2,242)
------ ------- ------- ------- ------- ------- -------
Net income (loss) available to
common stockholders............ (102) 1,737 2,531 3,743 (1,076) (127) (337)
Pro forma tax provision
(benefit) (4).................. (39) 659 962 1,422 -- -- --
------ ------- ------- ------- ------- ------- -------
Pro forma net income
(loss) (4)..................... $ (63) $ 1,078 $ 1,569 $ 2,321 $(1,076) $ (127) $ (337)
====== ======= ======= ======= ======= ======= =======
Historical basic earnings (loss)
per share (5).................. -- -- -- -- -- -- (29.77)
Basic weighted average
shares outstanding............. -- -- -- -- -- -- 11
Historical diluted
earnings (loss) per share...... $(0.02) $ 0.28 $ 0.41 $ 0.59 $ (0.11) $ (0.01) $ (0.03)
Diluted weighted average
shares outstanding............. 6,200 6,200 6,200 6,356 9,261 9,448 10,158
Pro forma diluted
earnings (loss) per share...... $(0.01) $ 0.17 $ 0.25 $ 0.37 $ (0.11) $ (0.01) $ (0.01)
Pro forma diluted weighted
average shares outstanding..... 6,200 6,200 6,200 6,356 10,160 9,511 11,545
Operating Data:
Greenhouses in operation
(at end of period)............ -- 3 3 4 5 4 6
Acres in production
(at end of period)............. -- 53 53 71 91 71 111
Total pounds of product sold
(in thousands)................ -- 17,417 24,371 30,018 26,167 13,550 25,795
Average yield sold per acre
(in thousands of pounds)(6).... -- 329 460 423 350 191 247
Average sale price per pound.... -- $ 0.80 $ 0.83 $ 0.91 $ 0.95 $ 0.98 $ 0.91
<CAPTION>
June 30, 1998
-------------------------
As
Actual Adjusted(7)
---------- ------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................................................................... $ 4,375 $21,123
Working capital.................................................................................... 6,744 25,223
Total assets....................................................................................... 50,629 67,377
Long-term debt, including current maturities....................................................... 14,992 290
Mandatorily redeemable convertible securities..................................................... 19,852 --
Stockholders' equity............................................................................... 9,044 60,346
</TABLE>
- -------------------
(1) The Company was organized in 1993 to operate three greenhouses and incurred
marketing expenses in anticipation of these operations. Effective January
1, 1994, the Company began to operate three greenhouses (Brush #1, Brush #2
and Fort Lupton #1). Effective January 1, 1996, the Company began to
operate a fourth greenhouse (Rifle). In October 1997, the Company began
production from its fifth greenhouse (Estancia), and in March 1998, the
Company began production from its sixth greenhouse (Fort Lupton #2).
8
<PAGE>
(2) Operating expenses for 1997 have been reduced to reflect insurance proceeds
of $802,000 from the flood in July 1997 at Fort Lupton #1. Operating
expenses for the six months ended June 30, 1998, include (i) a loss of
$1,700,000 resulting from the hail storm in May 1998 at Brush #1 and Brush
#2 and have been reduced to reflect insurance proceeds of $1,608,000, and
(ii) a one-time, non-cash compensation charge totaling approximately
$1,214,000 related to the grant of options to the Company's directors and
the sale of Series C Preferred Stock to the Company's directors and Chief
Executive Officer.
(3) Accretion of preferred stock includes (i) $152,000 in amortization of
issuance costs associated with the sales of Series B Preferred Stock and
Series C Preferred Stock, and (ii) a $2,090,000 one-time, non-cash
adjustment to reflect the excess of the fair market value of the Series C
Preferred Stock over the purchase price of the Series C Preferred Stock
charged to the existing stockholders except for those stockholders on the
Board of Directors and the Chief Executive Officer. Under generally accepted
accounting principles, this adjustment is reflected as a reduction in
retained earnings with a corresponding increase in the Series C Preferred
Stock.
(4) Prior to January 1997, the Company was operated as a limited liability
company and was not subject to federal or state income taxes. As a result,
the provision (benefit) for income taxes and net income (loss) for the
years 1993 to 1996 are presented on a pro forma basis as if the Company were
subject to federal and state corporate income taxes, assuming an effective
tax rate of 38%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(5) As a result of the exercise of certain stock options, there were
approximately 11,000 shares of Common Stock outstanding on a weighted
average basis as of June 30, 1998. The historical basic loss per share of
($29.77) for the six months ended June 30, 1998, reflects the net loss
available to the holders of the Common Stock divided by the weighted average
number of shares of Common Stock outstanding.
(6) Average yield sold per acre on an annual basis is calculated by dividing the
total number of pounds sold by the total number of acres in production.
Average yield sold per acre for 1997 is a weighted average of 76 acres based
on the increase of total acres in production during the year as a result of
the Estancia greenhouse, which began production in October 1997. Management
believes that average yield per acre sold is an important measure of
greenhouse productivity.
(7) Adjusted to give effect to the sale of the 3,500,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price
of $10.00 per share), application of a portion of the net proceeds to reduce
outstanding indebtedness, the cashless exercise of a warrant to purchase
9,743 shares of Series B Convertible Preferred Stock (at an assumed initial
public offering price of $10.00 per share) and the automatic conversion of
all outstanding shares of preferred stock to Common Stock and See "Use of
Proceeds" and "Description of Capital Stock--Warrants."
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RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. Prospective
investors should consider carefully, in addition to the other information set
forth in this Prospectus, the following risk factors before purchasing the
shares of Common Stock offered hereby.
Limited Operating History
Prior to 1994, the greenhouses at the Brush #1, Brush #2, and Fort Lupton #1
sites were operated separately under the supervision of a common management
committee. On January 1, 1994, the Company began to operate the Brush #1, Brush
#2 and Fort Lupton #1 greenhouses, and Rifle was added on January 1, 1996. Two
additional greenhouses were constructed by the Company in August 1997 and
January 1998, respectively. Accordingly, the Company has only a limited
operating history upon which prospective investors can evaluate the Company's
business and prospects.
Risk of Catastrophic Loss of Crop and Property Damage
As in any agricultural business, there is an unquantifiable risk of a weather-
related catastrophe that causes substantial damage to, or total failure of, the
Company's or Greenver's crop at one or more greenhouses and severely damages or
destroys the greenhouse or greenhouses. Potential catastrophes include floods,
tornadoes, hail storms, severe wind and rain or in the case of Greenver,
hurricanes. The Company's greenhouses in Brush and Fort Lupton, Colorado are
located in areas that have a high frequency of severe weather, particularly hail
storms and tornadoes. The Fort Lupton #1 greenhouse crop was destroyed by a
flash flood in July 1997. The Brush #1 and #2 greenhouses were damaged by a
hail storm in May 1998. This forced the Company to pull out the entire crop
from the Brush #2 greenhouse, and although much of the crop in the Brush #1
greenhouse has been salvaged, there was some damage to the crop that may result
in a decrease in production. It is likely that one or more of the Company's
greenhouses and crops will suffer damage from weather in the future. Because
the Company currently operates only a few greenhouses, any damage to a
greenhouse and resulting lost tomato production is likely to have a greater
adverse effect on the Company's production and results of operations than if the
Company operated more greenhouses. Furthermore, the Company has two greenhouses
each in Brush and Fort Lupton, which increases the likelihood that a weather-
related catastrophe in either of these two locations will more adversely affect
the Company than if its greenhouses were more geographically dispersed. See
"Business--Facilities."
The Company has obtained insurance intended to cover property damage, crop
loss and consequential losses (such as lost profits) caused by weather events.
The Company cannot predict, however, whether this insurance coverage will be
sufficient to cover all of the Company's weather-related losses. The Company's
insurance coverage in 1997 was not sufficient to cover all of its losses from
the flood at the Fort Lupton #1 greenhouse and, as a result, the Company
obtained new insurance policies in December 1997, which are intended to provide
better coverage for consequential losses. The Company has filed claims for
damages sustained during the May 1998 hail storm at its facilities in Brush and
although no final determination on these claims has been made by the Company's
insurance carrier, to date, the Company has received a $2.0 million advance on
these claims. Under the terms of its current insurance coverage, for business
interruption and property damage the Company's policy limits of $33.0 million
are limited to $5.0 million per occurrence. The Company cannot predict whether
it will be able to obtain adequate insurance coverage in the future at
acceptable premium costs and deductible amounts. See "Business--Risk
Management; Insurance; Legal Proceedings."
Risk of Loss to Crop from Pests or Mechanical Failures
Plant diseases, such as root rot, or pest infestations, such as whiteflies,
can destroy all or a significant portion of the Company's or Greenver's tomato
plants in a greenhouse and could eliminate or significantly reduce production
from that greenhouse until the Company or Greenver is able to disinfect the
greenhouse and grow replacement tomato plants. The Company does not carry
insurance for crop damage from disease or pest infestations and does not believe
it can obtain this type of coverage. See "Business--Risk Management; Insurance;
Legal Proceedings." The Company has experienced crop disease and pest
infestations in the past.
In 1997, the Company experienced root disease originating from soil-born
contaminants in the Company's nursery operations in its Brush #1 greenhouse,
which resulted in an approximately 18.9% reduction in that greenhouse's tomato
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production over the first and second quarters of 1997. This was followed in the
third quarter by an invasion of thrips (an insect) through the greenhouse's
unscreened ventilation system, which carried a virus from adjacent agricultural
field crops. This virus reduced plant populations as well as tomato volumes and
size, resulting in a decline in the Company's average sales price per pound.
During the third quarter of 1997, Brush #2 was also affected negatively by the
same root disease that affected Brush #1 and was infested with a large
population of whiteflies. This led to the Company's decision to pull out its
entire existing crop at Brush #2 and disinfect the greenhouse at the beginning
of the fourth quarter of 1997. Also during 1997, the Company's Fort Lupton #1
greenhouse experienced a mechanical failure in its irrigation system in the
first quarter, which, in conjunction with the flood experienced in July 1997,
destroyed a portion of the tomato crop in the greenhouse. The Company's
management decided to pull out the entire crop to avoid an outbreak of root rot
common in water damaged crops. There can be no assurance that the Company or
Greenver will not suffer loss to its tomato crop at one or more of its
greenhouses as a result of disease, pest infestation or mechanical failures.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Greenhouse Production--Steps Taken to Combat 1997
Production Problems."
Construction Risks
The Company plans to construct six new hydroponic greenhouse facilities over
the next three years in addition to the 20-acre facility in Grants, New Mexico
currently under construction. Construction of greenhouses requires skilled
construction personnel. There can be no assurance that the Company will be able
to locate the required personnel or that construction of the greenhouses will be
completed within the Company's anticipated time frame or budget. Construction
projects are subject to cost overruns and delays not within the control of the
Company or its subcontractors, such as those caused by acts of governmental
entities, financing delays or bad weather. Delays can also arise from design
changes and material equipment shortages or delays in delivery. The Company's
inability to construct the Grants, New Mexico greenhouse or any future
greenhouse in a timely fashion and within the projected construction budget
could have a material adverse effect on the Company's anticipated financial
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Perishable Crop
The Company's and Greenver's tomatoes are subject to all the risks of any
perishable food, including spoilage. Tomatoes generally are salable for
approximately 10 to 14 days after harvesting. The Company and Greenver must
transport many of its tomatoes long distances from its greenhouses to its pack
houses and then to its customers from its pack houses or its cross-docking
facility near San Diego (used for Greenver's tomatoes). Accordingly, any delay
in shipment of the Company's or Greenver's tomatoes could result in the loss of
the shipment due to spoilage. See "Business--Customers and Product
Distribution."
Inherent Seasonality in Supply of Tomatoes
The Company's business is seasonal, and its quarterly results of operations
reflect trends resulting from seasonal variations in production yields and
prevailing prices for tomatoes. Price fluctuations and tomato availability have
a direct effect on the Company's financial results. Typically, in the winter
months, the reduced supply of tomatoes (due primarily to the lack of field-grown
tomatoes) results in higher market prices. Through the spring and summer
months, the supply of field-grown tomatoes increases, resulting in lower market
prices. As a result, the Company historically has experienced lower total
revenues but higher profit margins in the first and second quarters. Although
the Company's production in the first quarter is lower due to fewer hours of
direct sunlight, prevailing prices are higher, and in the second quarter, the
Company's production increases although prevailing prices are lower.
Thereafter, although revenues increase, profits typically have declined in the
third quarter as the Company experiences planned decreases in production to
coincide with expected lower market price periods. In the fourth quarter,
revenues increase and profits typically have increased also as the Company's
production remains steady but higher market prices return. Greenver produces
tomatoes in its Mexican greenhouses only from November through May. As a result
of the Greenver marketing agreement commencing in the fall of 1998, the
Company's supply of tomatoes during these months should increase significantly
from 1997 and prior years' supplies during the same months. Accordingly, the
Company expects that its revenues and profitability will continue to be subject
to large seasonal variations, and the Company's results of operations for any
particular quarter are not expected to be indicative of results for subsequent
quarters or the full year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality; Quarterly Results."
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Lack of Control over Tomato Prices and Fixed Operating Costs
The Company's profitability is dependent upon the price at which it is able to
sell its and Greenver's tomatoes. The Company has virtually no control over the
price at which it is able to sell tomatoes because tomato prices move in
response to market supply. The greater supply of tomatoes in the summer months
as a result of the harvesting of field-grown tomatoes pushes prices downward.
Conversely, the reduced supply of tomatoes in the winter months pushes tomato
prices upward. To the extent prevailing market prices for tomatoes are lower
than anticipated by the Company, the Company's profitability will be negatively
affected. Variations in the Company's production of tomatoes also will have a
significant effect on the Company's profitability due to the fact that many of
the Company's operating costs are fixed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality;
Quarterly Results."
Dependence on Sufficient Water and Heat for Crops
The Company's crops must be irrigated regularly to maintain plant growth and
optimal tomato production. The Company obtains water for irrigation for each of
its greenhouses either from one or more wells or the municipal water supply and
has only limited ability to store and recirculate water for its irrigation
systems. As a result, any interruption in the water supply lasting longer than
a few days to a particular greenhouse is likely to result in a decline in the
Company's tomato production at that greenhouse. The Company experienced a
mechanical failure in the irrigation system at one of its greenhouses in 1997
and could experience another failure in the future, which, if not quickly
repaired, also could result in a decrease in tomato production. During the
colder months, the Company's greenhouses must be heated to maintain adequate
temperature levels to protect the tomato plants. The Company normally heats
four of its greenhouses with hot water from neighboring electric cogeneration
facilities. The Company also has backup boilers at each facility. The
cogeneration facilities' inability to provide the greenhouses with adequate hot
water, whether as a result of an event within or beyond the cogeneration
facilities' control, coupled with a failure of the greenhouse's backup heating
system, also is likely to result in a decrease in the Company's tomato
production. See "Business--Greenhouse Production."
Availability of Labor
The maintenance of the Company's tomato crops and harvesting of tomatoes is
labor intensive. Industry participants, including the Company, experience high
turnover rates among hourly workers. Some of the Company's employees do not
work 40 hour weeks or leave the Company's employment without notice, forcing the
Company to hire and train additional employees to maintain and harvest its
tomato plants. To the extent the Company experiences higher turnover rates, it
will encounter higher than expected recruiting, training and other employment
costs. Immigrants comprise a large portion of the Company's workforce. Any
change to existing U.S. immigration policy that restricts the ability of
immigrant workers to obtain employment in the United States is likely to
contribute to a shortage of available labor and increase the Company's operating
costs. Immigration laws require the Company to confirm the legal status of its
immigrant labor force. From time to time, the Company may unknowingly employ
illegal immigrants. The Company, as a significant employer of immigrant
laborers, is subject to periodic, random searches by the Immigration and
Naturalization Service ("INS"). If the INS finds illegally employed immigrants,
the Company would suffer the loss of a portion of its labor force and could be
subject to fines, some of which could be substantial in amount. See "Business--
Employees and Training" and "Business--Government Regulation."
Sensitivity to Price Increases in Raw Materials
In 1997, raw material costs accounted for approximately 27.4% of the Company's
cost of goods sold. Increases in the cost of raw materials essential to the
Company's operations, particularly tomato plant seedlings, bees, rockwool,
carbon dioxide, fertilizer, insecticides and packaging materials, would increase
the Company's costs of production, which the Company may be unable to recoup
through higher prices for its tomatoes. A scarcity of these raw materials could
require the Company to curtail production, which also would have a material
adverse effect on the Company's results of operations. The Company generally
does not enter into agreements for the supply of any raw materials for longer
than one year. The Company currently obtains its tomato plant seedlings from a
single source. Loss of this source could result in a decrease in the Company's
tomato production during the time in which this supplier is being replaced. See
"Business--Greenhouse Production--Raw Materials Used in Production."
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Risks Related to Greenver Investment; Risks Inherent in Foreign Investment
The Company has invested $4.0 million in Greenver. The Company's strategy is
to use production from Greenver's facilities to offer a more consistent supply
of tomatoes for the Company's U.S. customers from November through April. The
Company anticipates that approximately one-third of its winter production will
come from Greenver's facilities. Greenver's failure to meet these production
expectations will have a material adverse effect on the Company's projected
results of operations. Greenver's facilities currently are not growing tomatoes
hydroponically. As a result, there can be no assurance the tomatoes grown at
the Greenver greenhouses will not suffer from soil-born contaminants that could
effect their quality. Within the next 18 months, the Company intends to assist
Greenver in converting a portion of its facilities to hydroponic production.
There can be no assurance that the Company will be able to implement
successfully these hydroponic systems or that, once implemented, Greenver will
be able to continue to produce tomatoes of superpremium quality. Any failure by
Greenver to produce the quality of tomatoes anticipated by the Company could
have a material adverse effect on the Company's projected results of operations.
As part of its arrangement with Greenver, the Company will receive 25% of all
distributions made by Greenver to its stockholders. There can be no assurance,
however, that Greenver will be profitable or that it actually will make cash
distributions of its profits, if any, in the future. See "Business--Greenver
Transaction and Marketing Agreement."
The Company may be affected by economic, political and social conditions in
Mexico. Mexico has experienced political, economic and social uncertainty in
recent years, including an economic crisis characterized by exchange rate
instability and peso devaluation, increased inflation, high domestic interest
rates, negative economic growth, reduced consumer purchasing power and high
unemployment. Under its current leadership, the Mexican government has been
pursuing economic reform policies, including the encouragement of foreign trade
and investment and an exchange rate policy of free market flotation. No
assurance can be given, however, that the Mexican government will continue to
pursue these policies, that these policies will be successful if pursued or that
these policies will not be significantly altered. A decline in the Mexican
economy, political or social problems or a reversal of Mexico's foreign
investment policy is likely to have an adverse effect on the market price of the
Common Stock and may adversely affect the Company's results of operations and
financial condition.
While the Company transacts business with Greenver in U.S. dollars and sales
of Greenver's tomatoes are made in U.S. dollars, all of Greenver's production
and related expenses are denominated in pesos. Accordingly, inflation in Mexico
may lead to higher wages and salaries for the Greenver's employees in Mexico and
increase the cost of the raw materials used in the production of Greenver's
products, which would adversely affect Greenver's profitability and the level of
distributions, if any, to the Company based on its equity ownership in Greenver.
Risks inherent in foreign operations include nationalization, war, terrorism
and other political risks and risks of increases in foreign taxes or U.S. tax
treatment of foreign taxes paid and the imposition of foreign government
royalties and fees.
Loss of Greenhouse Leases; Dependence on Cogeneration Facility Contracts
The Company currently leases four of its greenhouses, Rifle, Brush #1, Brush
#2 and Fort Lupton #1, which account in the aggregate for 71 of the 111 acres
the Company currently has under production. The Company also leases the land on
which the Grants greenhouse is being constructed. Each of the Company's four
leased greenhouses is operated pursuant to an Operating and Management Agreement
that has a term coincidental with the term of the underlying greenhouse lease.
The remaining terms of these greenhouse leases are four, six, 11 and 21 years
for the Rifle, Brush #1, Brush #2 and Fort Lupton #1 greenhouses, respectively.
The remaining term of the land site lease for Grants is 60 years. There can be
no assurance that these leases can be renewed at rents and other terms that are
as favorable to the Company as the existing terms. The failure by the Company
to renew these leases, or the renewal of these leases on less favorable terms to
the Company, could force the Company to seek new greenhouse facilities and could
have a material adverse effect on the Company.
The Company's four leased greenhouses serve as collateral for the lenders to
the cogeneration power plants next to which they are located. For three of
these greenhouses, Brush #1, Brush #2 and Rifle, an event of default by the
borrower could result in the lender's foreclosing on these facilities and
canceling the Operating and Management Agreement, notwithstanding the fact that
the greenhouse lease, and related Operating and Management Agreement, are
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not in default. Any foreclosure and cancellation of the Operating and Management
Agreement is likely to result in a loss of the Company's right to operate the
related greenhouse, which would adversely affect the Company's results of
operations and projected growth. See "Business--Facilities."
Reliance on Growers
The Company's hydroponic operations require the skill of senior growers who
monitor the progress of the crops, as well as incidents of infestation or root
disease. These senior growers must be experts in hydroponic and greenhouse
growing techniques. The Company's failure to attract and retain an adequate
number of skilled growers is likely to effect adversely the quality and
production of its tomatoes and, therefore, its results of operations. Further,
only one of the Company's six senior growers is a U.S. citizen. As a result, if
senior growers have difficulty retaining visas or obtaining U.S. citizenship,
the Company would be forced to recruit replacement growers, most likely in
Europe. See "Business--Employees and Training."
Substantial Competition
The market for the Company's tomatoes is highly competitive and subject to
rapid change. The Company competes in the tomato market both with other
hydroponic greenhouse tomato producers and with commercial producers of field-
grown tomatoes, both gas green (in which the tomatoes are picked green and
colored via ethylene gas during shipping) and vine ripened. During 1997, field-
grown tomatoes accounted for approximately 92% of total U.S. fresh tomato
production, while hydroponic greenhouse tomatoes, both domestic and imported,
accounted for the remaining approximately 8%. Most field-grown tomatoes are sold
at wholesale at approximately one-half the price of the Company's greenhouse
grown tomatoes. During the local growing season, typically late summer, the
Company also competes with home- and locally-grown tomatoes. Field-grown tomato
competitors include numerous local and regional growers as well as a number of
major grower-shippers in the United States and Mexico, including DiMare (Florida
and California), Gargiulo (Florida and California), R&B Packing (Mexico) and
Meyers (Mexico). These major grower-shippers ship substantially more tomatoes
than the Company, have longer standing relationships with various retailers and
wholesalers and have greater financial resources than the Company. The Company's
competition in the hydroponic greenhouse tomato market comes from various
domestic and foreign hydroponic greenhouse tomato producers and cooperatives,
including domestic producers Eurofresh (with greenhouses in Arizona), Village
Farms (with greenhouses in New York, Pennsylvania, Texas, and Virginia) and BC
Hothouse (with greenhouses in California). The Company estimates that worldwide,
hydroponic greenhouse tomatoes currently originate from approximately 700 acres
in the United States (including the approximately 111 acres owned by the
Company), approximately 900 acres in Canada and an estimated aggregate of more
than 5,000 acres in Belgium, France, Israel, Morocco, The Netherlands and Spain.
Some portion of the foreign produced hydroponic tomatoes are sold in the United
States. Most of these sources produce high-quality tomatoes superior in taste,
texture and appearance to most field-grown tomatoes and generally comparable in
quality to the Company's tomatoes. The Company cannot predict if or when these
competitors or others may construct additional greenhouses and whether any
additional greenhouses will be constructed in the regions in which the Company
currently competes. There can be no assurance that the Company can maintain its
competitive position against current and potential competitors, especially those
with financial, marketing, personnel and other resources greater than the
Company's. See "Business--Competition."
Customer Concentration
During 1997, 79.0% of the Company's net sales were to its ten largest
customers. In particular, sales to Safeway, Meijer and King Soopers represented
23.5%, 15.3% and 14.0% of the Company's total net sales, respectively. The
Company expects that a small number of large supermarket chains will continue to
account for a substantial portion of its net sales for the foreseeable future.
There can be no assurance that the Company's principal customers will continue
to purchase products from the Company at current levels, if at all. The
Company's loss of even one of these large customers due to production
shortfalls, quality concerns or otherwise is likely to adversely affect the
Company's results of operations and could affect the Company's planned growth.
Consistent with industry practice, the Company does not operate under long-term
supply contracts with any of its customers. The loss of, or a significant
reduction in orders from, any one of these large customers, losses arising from
disputes between the Company and any one of these large customers regarding
shipments, fees, tomato condition or related matters, or the Company's inability
to collect accounts receivable
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from any major retail customer could have a material adverse effect on the
Company. See "Business--Customers and Product Distribution."
Government Regulation
The manufacture, processing, packaging, storage, distribution and labeling of
food products are subject to extensive federal, state and foreign laws and
regulations. In the United States, the Company's business is subject to
regulation by the Food and Drug Administration ("FDA"), the United States
Department of Agriculture ("USDA") and various state and local agricultural and
public health authorities. The FDA and USDA regulators charged with enforcing
these laws and regulations have broad powers to protect public health, including
the power to inspect produce and the Company's facilities, to order the shut
down of a facility or the suspension of delivery of the Company's produce, as
well as the power to impose substantial fines. The Company also is subject to
various federal and state regulations relating to workplace safety and worker
health, including the Fair Labor Standards Act, Occupational Safety and Health
Act and laws and regulations governing such matters as minimum wages, overtime
and working conditions. The Company is subject to various federal, state and
local environmental regulations.
The Company may become subject to additional laws or regulations administered
by the FDA, the USDA or other federal, state, foreign or local regulatory
authorities, the repeal of laws or regulations or more stringent interpretations
of current laws or regulations. The Company cannot predict the nature of any
new laws, regulations or interpretations, or what effect they might have on its
business. Changes in these laws could require the reconfiguration of the
Company's production, processing and transportation methods or increased
compliance costs, and could require the Company to make significant capital
expenditures or incur higher operating costs. Any failure by the Company to
comply with applicable laws and regulations could subject the Company to civil
penalties, including fines, injunctions, greenhouse or pack house closings,
recalls or seizures, as well as potential criminal sanctions, any of which could
have a material adverse effect on the Company. See "Business--Government
Regulation."
Risks Related to Growth Strategy
The Company is planning substantial growth in its production capabilities over
the next several years, which will place greater demands on its operating,
administrative and financial resources. Future growth will depend on a number
of factors, including the timely construction of additional greenhouses, the
Company's ability to maintain the quality of the tomatoes it produces and the
recruitment and retention of qualified personnel. Sustaining profitable growth
will also require the implementation of enhancements to the Company's operating
and financial systems and will require additional management, operating and
financial personnel. There can be no assurance that the Company will be able to
manage its expanding operations effectively or that it will be able to implement
its growth plan, and any failure to do so is likely to have a materially adverse
effect on the Company's business, results of operations and financial condition.
See "Business--Growth Strategy."
Dependence on Key Personnel; Short Operating History Under Current Management
The Company's continued success will depend largely on the skills and
abilities of its officers, key employees and directors. Specifically, the
Company is highly dependent upon its Chief Executive Officer, James R. Rinella,
its Executive Vice President of Production, Matthew B. Cook, its Vice President
of Finance, Alan R. Fine and its Director of Agricultural Production, Ludo van
Boxem. The loss of any one of these persons could have a material adverse
effect on the Company. In addition, Mr. Rinella and Mr. Fine both joined the
Company in the fall of 1997. Accordingly, the Company has only a limited
history of operation under its current management team upon which investors may
evaluate its performance. There can be no assurance that the Company's new
management team will be able to achieve or sustain revenue growth or
profitability. See "Management."
The Company's success depends also on its ability to attract, retain and
motivate highly qualified growers and marketing, sales and other management
personnel. Failure to continue to attract and retain a sufficient number of
these personnel could have a material adverse effect on the Company's results of
operations and planned growth. There is intense competition for qualified
personnel and there can be no assurance that the Company will be able to attract
and retain the qualified personnel necessary for the successful operation of its
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Employees and Training."
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Control by Existing Stockholders
Upon completion of this offering, the Company's officers, directors and
existing principal stockholders will beneficially own an aggregate of
approximately 50% of the outstanding shares of Common Stock. If these persons
were to act together, they would be able to elect all of the Company's directors
and determine the outcome of all corporate actions requiring approval by the
stockholders, thus controlling the business affairs and policies of the Company.
This control could have the effect of delaying or preventing a change in control
of the Company and consequently, may adversely affect the market price of the
Common Stock. See "Principal Stockholders."
No Prior Market; Determination of Offering Price; Volatility of Stock Price
Prior to this offering, there has been no public market for the Common Stock.
Although application has been made to list the Common Stock on the Nasdaq
National Market/sm/, there can be no assurance that an active trading market
will develop or be sustained, and no assurance that the price at which the
Common Stock may trade in the public market after this offering will exceed the
initial public offering price. The initial public offering price will be
determined by negotiations between the Company and the Representatives of the
Underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in the Company's operating results, material
announcements by the Company, governmental regulatory action, general conditions
in the fresh produce industry or other events or factors, many of which are
beyond the control of the Company. In addition, the Company's future operating
results may be below the expectations of securities analysts and investors. In
such event, the price of the Common Stock would likely decline, possibly
substantially.
Shares Eligible for Future Sale
Upon consummation of this offering, the Company will have outstanding
13,998,361 shares of Common Stock. Of these shares, the 5,000,000 shares sold
in this offering will be freely tradable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in SEC Rule 144. All of the remaining 8,998,361 shares of Common Stock
are "restricted securities" within the meaning of Rule 144 and may be sold in
the public market only if registered or if sold under an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Approximately 7,918,032 shares of these restricted securities have been
held for more than one year and will be immediately saleable under Rule 144,
subject to the Underwriters' lock-up and the volume limitations imposed by Rule
144. In addition, some of the Company's existing stockholders have the right to
require the Company to register their Common Stock from time to time. See
"Description of Capital Stock--Registration Rights" and "Shares Eligible for
Future Sale."
Sales of substantial amounts of the Common Stock in the public market, or the
perception that such sales could occur, may adversely affect the market price of
the Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. The Company is unable to predict
the effect, if any, that future sales of Common Stock or the availability of
Common Stock for sale may have on the market price of the Common Stock
prevailing from time to time.
Certain Anti-Takeover Provisions
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation (the "Charter") and Amended and Restated Bylaws
(the "Bylaws") may have the effect of delaying, deterring or preventing a future
takeover or change in control of the Company unless such takeover or change in
control is approved by the Company's Board of Directors. These provisions also
may render the removal of directors and management more difficult and could
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. These provisions of Delaware law and the
Company's Charter and Bylaws may also have the effect of discouraging or
preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. See
"Description of Capital Stock--Anti-Takeover Provisions."
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Immediate and Substantial Dilution
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution of $5.69 in the net tangible book value per share of the
Common Stock. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $31.7 million (assuming an initial public
offering price of $10.00 per share), after deducting underwriting discounts and
commissions and estimated offering expenses. The Company intends to use the net
proceeds as follows: (i) approximately $15.0 million to repay a portion of its
existing indebtedness (including prepayment penalties of approximately
$550,000); (ii) approximately $10.0 million to finance a portion of the cost of
construction of two or three of the six planned 20-acre hydroponic greenhouse
facilities; and (iii) the balance for working capital to support the Company's
marketing agreement with Greenver and its planned growth.
The indebtedness to be repaid was incurred under a (i) a $15.0 million term
loan (the "Term Loan") and (ii) a $7.5 million construction loan (the "Grants
Loan"), all with the Farm Credit Services of the Mountain Plains, PCA ("Farm
Credit"). The proceeds of the Term Loan were used for the construction of the
Estancia and Fort Lupton #2 greenhouses, and the proceeds of the Grants Loan are
being used for the construction of the Grants greenhouse. The Term Loan has an
interest rate of 8.19% per annum and matures in May 2007, and the Grants Loan
bears interest at the prime rate plus 0.5% and matures upon completion of
construction. At June 1, 1998, the prime rate was 8.5%.
The Company currently intends to construct up to six additional 20-acre
hydroponic greenhouse facilities, two of which are expected to be adjacent to
the existing, or under construction, facilities in Estancia and Grants, New
Mexico. The Company estimates that the current cost to construct a 20-acre
hydroponic greenhouse facility is approximately $13.0 million and the cost to
construct two adjacent 20-acre hydroponic greenhouse facilities is approximately
$25.0 million. The Company has had preliminary discussions with four commercial
lenders and believes that a substantial portion of the construction costs of
these new greenhouse facilities can be financed by one or more of these
commercial lenders. The Company currently anticipates that construction of at
least two of these facilities will commence by mid-1999. See "Business--
Facilities."
Pending application of the net proceeds as described above, the Company will
invest them in short-term interest bearing, investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock although during
1996, the Company paid distributions of approximately $1.7 million to cover the
LLC's members' tax obligations. The Company currently intends to retain
earnings, if any, to finance the growth and development of its business and does
not anticipate paying cash dividends in the foreseeable future. In addition,
the Company's credit facilities with Farm Credit currently prohibit the payment
of cash dividends. Any payments of cash dividends in the future, if permitted
by the Company's credit facilities, will be at the discretion of the Board of
Directors after taking into account various factors, including the Company's
financial condition, results of operations, cash flows from operations, current
and anticipated cash needs and expansion plans, income tax laws then in effect
and requirements of Delaware law.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, (i) on an actual basis and (ii) as adjusted for the cashless exercise
of a warrant for 9,743 shares of Series B Convertible Preferred Stock (the
"Warrant") upon consummation of this offering (at an assumed initial offering
price of $10.00 per share), the automatic conversion of all outstanding shares
of preferred stock to Common Stock and the sale by the Company of the 3,500,000
shares of Common Stock offered by it hereby (at an assumed initial public
offering price of $10.00 per share) and the application of a portion of the
estimated net proceeds of this offering to repay indebtedness as described in
"Use of Proceeds." The table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of June 30, 1998
---------------------------
As
Actual Adjusted
------------ ------------
(In thousands)
<S> <C> <C>
Long-term debt, including current maturities....... $14,992 $ 290
------- -------
Mandatorily Redeemable Securities:
Series B Convertible Preferred Stock ($.001
par value); 1,894,000 and no shares
authorized; 1,875,000 and no shares issued
and outstanding (1).............................. $13,939 $ --
Series C Convertible Preferred Stock ($.001
par value); 1,275,000 and no shares
authorized; 1,091,000 and 0 shares issued
and outstanding.................................. 5,873 --
Warrant; exercisable for 18,500 shares of
Series B Convertible Preferred Stock............. 40 --
------- -------
Total Mandatorily Redeemable Securities........ $19,852 $ --
======= =======
Stockholders' equity:
Series A Convertible Preferred Stock ($.001
par value); 6,200,000 and no shares
authorized; 6,200,000 and no shares issued
and outstanding................................... $ 6 $ --
Common Stock ($.001 par value); 55,000,000
shares authorized, 53,000 and 14,029,000
shares issued; 22,000 and 13,998,000 shares
outstanding (2)................................... -- 14
Treasury Stock; 31,000 shares of Common Stock..... (130) (130)
Additional paid-in capital........................ 4,639 56,483
Retained earnings................................. 4,529 3,979
------- -------
Total stockholders' equity...................... 9,044 60,346
------- -------
Total capitalization........................... $43,888 $60,636
======= =======
</TABLE>
- ------------------
(1) Assuming an initial public offering price of $10.00 per share, the Series B
Preferred Stock will convert automatically into 3,185,216 shares of Common
Stock. If the initial public offering price is higher than $10.00, the
Series B Preferred Stock will convert automatically into a fewer number of
shares of Common Stock. For example, if the initial public offering price
is $11.00 per share, the Series B Preferred Stock will convert automatically
into 3,030,680 shares of Common Stock.
(2) Excludes 1,026,691 shares of Common Stock issuable upon the exercise of
currently outstanding options at a weighted average exercise price per share
of $2.65. See "Management--Stock Option Plan."
19
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1998, as adjusted
for the conversion of all outstanding preferred stock and the cashless exercise
of the Warrant, was approximately $28.9 million or $2.75 per share. Net
tangible book value per share is determined by subtracting the Company's total
liabilities from its total tangible assets and dividing the remainder by the
number of shares of Common Stock outstanding assuming the conversion of all
outstanding preferred stock and the Warrant. After giving further effect to the
sale by the Company of 3,500,000 shares of Common Stock in this offering (at an
assumed initial public offering price of $10.00 per share) and application of
the estimated net proceeds therefrom, the net tangible book value of the Company
as of June 30, 1998 would have been $60.3 million or $4.31 per share. This
represents an immediate increase in net tangible book value of $1.56 per share
to existing stockholders and an immediate dilution in net tangible book value of
$5.69 per share to purchasers of Common Stock in this offering. The following
table illustrates this dilution in net tangible book value per share to new
investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................. $10.00
Net tangible book value per share..................$2.75
Increase per share attributable to new investors... 1.56
-----
Net tangible book value per share after offering......... $ 4.31
------
Dilution per share purchased by new investors............ $ 5.69
======
</TABLE>
The following table sets forth as of June 30, 1998, as adjusted for conversion
of all outstanding preferred stock and exercise of the Warrant, the number of
shares of Common Stock purchased from the Company, the total cash paid to the
Company and the average price paid per share by existing stockholders and by the
purchasers of the shares offered by the Company hereby (at an assumed initial
public offering price of $10.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- -------------------------- Average Price
Number Percent Amount Percent per Share
---------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).. 10,498,361 75.0% $21,039,000 37.5% $ 2.00
New investors.............. 3,500,000 25.0 35,000,000 62.5 10.00
---------- ----- ----------- -----
Total......... 13,998,361 100.0% $56,039,000 100.0%
========== ===== =========== =====
</TABLE>
- -------------------
(1) Assuming an initial public offering price of $10.00 per share, the Series B
Preferred Stock will convert automatically into 3,185,216 shares of Common
Stock. If the initial public offering price is higher than $10.00, the
Series B Preferred Stock will convert automatically into a fewer number of
shares of Common Stock. For example, if the initial public offering price
is $11.00 per share, the Series B Preferred Stock will convert automatically
into 3,030,680 shares of Common Stock.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial data for the years ended
December 31, 1994 through 1997, and as of December 31, 1994 through 1997, have
been derived from the Company's consolidated financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data for the year ended December 31, 1993, and for
the six month periods ended June 30, 1997 and 1998, and as of December 31, 1993,
June 30, 1997 and 1998, have been derived from the Company's unaudited financial
statements that, in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial data for such periods and as of such dates. The data set forth below
are qualified by reference to and should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Results of operations for the six months
ended June 30, 1998, are not necessarily indicative of results that may be
expected for the full year.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Net sales............................. $ -- $13,938 $20,135 $27,407 $24,944 $13,298 $23,549
Cost of goods sold.................... -- 9,961 15,431 19,293 22,257 11,507 15,982
------ ------- ------- ------- ------- ------- -------
Gross profit.......................... -- 3,977 4,704 8,114 2,687 1,791 7,567
Operating expenses(2)................. 156 2,207 2,502 4,434 4,609 2,255 4,204
------ ------- ------- ------- ------- ------- -------
Operating income (loss)............... (156) 1,770 2,202 3,680 (1,922) (464) 3,363
Interest and other income
(expense), net....................... 54 (33) 329 63 193 261 (290)
------ ------- ------- ------- ------- ------- -------
Income (loss) before income tax
provision............................ (102) 1,737 2,531 3,743 (1,729) (203) 3,073
Provision (benefit) for income
taxes................................ -- -- -- -- (653) (76) 1,168
------ ------- ------- ------- ------- ------- -------
Net income (loss)..................... (102) 1,737 2,531 3,743 (1,076) (127) 1,905
Accretion of preferred stock (3)...... -- -- -- -- -- -- (2,242)
------ ------- ------- ------- ------- ------- -------
Net income (loss) available to common
stockholders......................... (102) 1,737 2,531 3,743 (1,076) (127) (337)
Pro forma tax provision
(benefit) (4)........................ (39) 659 962 1,422 -- -- --
------ ------- ------- ------- ------- ------- -------
Pro forma net income (loss) (4)....... $ (63) $ 1,078 $ 1,569 $ 2,321 $(1,076) $ (127) $ (337)
====== ======= ======= ======= ======= ======= =======
Historical basic earnings (loss)
per share (5)........................ -- -- -- -- -- -- $(29.77)
Basic weighted average shares
outstanding.......................... -- -- -- -- -- -- 11
Historical diluted earnings (loss)
per share............................ $(0.02) $ 0.28 $ 0.41 $ 0.59 $ (0.11) $ (0.01) $ (0.03)
Diluted weighted average shares
outstanding.......................... 6,200 6,200 6,200 6,356 9,261 9,448 10,158
Pro forma basic earnings (loss)
per share............................ $(0.01) $ 0.17 $ 0.25 $ 0.37 $ (0.11) $ (0.01) $ (0.01)
Pro forma diluted earnings (loss)
per share............................ $(0.01) $ 0.17 $ 0.25 $ 0.37 $ (0.11) $ (0.01) $ (0.01)
Pro forma basic weighted average
shares outstanding................... 6,200 6,200 6,200 6,200 9,733 9,082 11,134
Pro forma diluted weighted
average shares outstanding........... 6,200 6,200 6,200 6,356 10,160 9,511 11,545
Operating Data:
Number of greenhouses operated
(at end of period)................... -- 3 3 4 5 4 6
Acres in production
(at end of period)................... -- 53 53 71 91 71 111
Total pounds of product sold
(in thousands)....................... -- 17,417 24,371 30,018 26,167 13,550 25,795
Average yield sold per acre
(in thousands of pounds) (6)......... -- 329 460 423 350 191 247
Average sale price per pound.......... -- $ 0.80 $ 0.83 $ 0.91 $ 0.95 $ 0.98 $ 0.91
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (7).................. $ (426) $ 2,106 $ 2,736 $ 2,237 $ 3,034 $ 5,071 $ 6,744
Total assets......................... 451 5,883 8,532 9,966 37,869 28,335 50,629
Long-term debt, including
current maturities.................. -- -- -- -- 10,972 1,156 14,992
Mandatorily redeemable
convertible securities............. -- -- -- -- 13,829 13,681 19,852
Stockholders' equity (deficit)...... (102) 1,636 4,168 6,945 6,127 6,852 9,044
</TABLE>
- -----------------
(1) The Company was organized in 1993 to operate three greenhouses and
incurred marketing expenses in anticipation of these operations. Effective
January 1, 1994, the Company began to operate three greenhouses (Brush #1,
Brush #2 and Fort Lupton #1). Effective January 1, 1996, the Company began
to operate a fourth greenhouse (Rifle). During October 1997, the Company
began production from its fifth greenhouse (Estancia), and in March 1998,
the Company began production from its sixth greenhouse (Fort Lupton #2).
(2) Operating expenses for 1997 have been reduced to reflect insurance proceeds
of $802,000 from the flood in July 1997 at Fort Lupton #1. Operating
expenses for the six months ended June 30, 1998, include (i) a loss of
$1,700,000 resulting from the hail storm in May 1998 at Brush #1 and Brush
#2 and have been reduced to reflect insurance proceeds of $1,608,000, and
(ii) a one-time, non-cash compensation charge totaling approximately
$1,214,000 related to the grant of options to the Company's directors and
the sale of Series C Preferred Stock to the Company's directors and Chief
Executive Officer.
(3) Accretion of preferred stock includes (i) $152,000 in amortization of
issuance costs associated with the sales of Series B Preferred Stock and
Series C Preferred Stock, and (ii) a $2,090,000 one-time, non-cash
adjustment to reflect the excess of the fair market value of the Series C
Preferred Stock over the purchase price of the Series C Preferred Stock
charged to the existing stockholders except for those stockholders on the
Board of Directors and the Chief Executive Officer. Under generally accepted
accounting principles, this adjustment is reflected as a reduction in
retained earnings with a corresponding increase in the Series C Preferred
Stock.
(4) Prior to January 1997, the Company was operated as a limited liability
company and was not subject to federal or state income taxes. As a result,
the provision (benefit) for income taxes and net income (loss) for the years
1993 to 1996 are presented on a pro forma basis as if the Company were
subject to federal and state corporate income taxes, assuming an effective
tax rate of 38%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Introduction."
(5) As a result of the exercise of certain stock options, there were
approximately 11,000 shares of Common Stock outstanding on a weighted
average basis as of June 30, 1998. The historical basic loss per share of
($29.77) for the six months ended June 30, 1998, reflects the net loss
available to the holders of the Common Stock divided by the weighted average
number of shares of Common Stock outstanding.
(6) Average yield sold per acre on a annual basis is calculated by dividing the
total number of pounds sold by the total number of acres in production.
Average yield sold per acre for 1997 is a weighted average of 76 acres based
on the increase of total acres in production during the year as a result of
the Estancia greenhouse, which began production in October 1997. Management
believes that average yield per acre sold is an important measure of
greenhouse productivity.
(7) Working capital as of June 30, 1997, includes the net proceeds from the
issuance of the Series B Convertible Preferred Stock, less amounts expended
through that date.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
Introduction
The Company currently operates six hydroponic greenhouses covering
approximately 111 production acres in Colorado and New Mexico and is
constructing a seventh 20-acre hydroponic greenhouse in New Mexico. The Company
plans to construct six additional 20-acre hydroponic greenhouses over the next
three years. The Company's production sold was approximately 247,000 pounds per
acre for the six months ended June 30, 1998, which represents an approximately
13% increase from the same period in 1996 and an approximately 29% increase from
the same period in 1997, during which the Company experienced production
problems as described below. The Company also has increased its acreage as of
June 30, 1998, by approximately 56% over its acreage as of June 30, 1996 and
1997. The Company's net sales for the six month period ended June 30, 1998,
increased by approximately 50% and 77% over the same six month periods in 1996
and 1997, respectively. In May 1998, the Company acquired the exclusive right to
market in the United States, Canada and Europe all export-quality tomatoes,
sweet peppers and any other produce from Greenver's approximately 175 acres of
non-hydroponic greenhouses in Mexico, half of which are currently under
construction and expected to be in production by November 1998. The Company
anticipates that Greenver will provide it with up to 18 million pounds of
tomatoes during Greenver's November 1998 through April 1999 growing season.
The Company's tomatoes are sold directly to both national supermarket chains
and regional wholesalers. Sales are recognized at the time of shipment and are
presented net of approved credits and allowances. Cost of goods sold consists
of direct and indirect costs. Direct costs are recorded at the time related
revenues are recognized while indirect costs are recorded systematically over
the year. The principal components of direct costs are greenhouse, pack house
and related management payroll, growing expenses, packing materials and freight
costs. Throughout the year, greenhouse payroll remains relatively stable
because the crops require constant inspection and maintenance. Indirect costs
include rent and depreciation expense associated with the greenhouses and pack
houses.
Operating expenses consist primarily of payroll expense for administrative
personnel, stock-based compensation, marketing and promotional program costs,
insurance expenses, professional fees and other administrative costs. In 1996,
the Company granted stock options at an exercise price of $0.74 per share, which
resulted in stock-based compensation. This stock-based compensation, determined
as the excess of the fair market value of the stock over the stock option's
exercise price, is being expensed over the vesting period of the option. The
Company incurred $715,000 and $540,000 of stock-based compensation expense in
1996 and 1997, respectively. The Company has incurred $1,255,000 of stock-based
compensation expense through June 30, 1998, primarily due to the sale of the
Series C Preferred Stock to the directors and Chief Executive Officer.
The Company will account for its 25% equity investment in Greenver using the
equity method of accounting. The Company and Greenver have agreed to make an
annual determination regarding the amount, if any, of distributions to
Greenver's shareholders. Any distributions are expected to be made in the third
quarter of each year. The Company expects Greenver to distribute all profits
remaining after funding Greenver's reserve account to an agreed amount. The
marketing agreement for the sale of Greenver's tomatoes will generate net
commission income to the Company, consisting of the Company's 10% commission
less marketing expenses associated with the sale of Greenver's tomatoes.
Effective January 1, 1997, the Company became a C Corporation for federal and
state income tax purposes. Prior thereto, the Company was a limited liability
company ("LLC") and, therefore, did not pay corporate or state income taxes.
The pro forma provision for income taxes for years prior to 1997 assumes the
Company was subject to federal and state income taxes applicable to C
Corporations and has been calculated using an effective rate of 38%.
During 1997, the Company experienced mechanical problems, pest and disease
infestations and a flood that significantly reduced production during parts of
the year in three of the Company's greenhouses. In the Brush #1 greenhouse, a
root disease reduced tomato production by approximately 18.9% during the first
and second quarters of 1997. This was followed in the third quarter by an
invasion of thrips (an insect) through the greenhouse's unscreened ventilation
system, which carried a virus from adjacent agricultural field crops. This
virus reduced plant populations as well as tomato volumes and size, resulting in
a decline in the Company's average sales price per pound. During the third
quarter of 1997, Brush #2 was also affected negatively by the same root disease
that affected Brush #1 and was infested with a large population of whiteflies.
This led to the Company's decision to pull out its entire existing crop at Brush
#2
23
<PAGE>
and disinfect the greenhouse at the beginning of the fourth quarter of 1997.
At the end of the first quarter of 1997, the Fort Lupton #1 greenhouse
experienced a mechanical failure in its irrigation system, followed by a flood
at the end of July that required the Company to pull out the entire crop to
avoid an outbreak of root rot common in water damaged crops. As a result of all
of these problems, the Company experienced approximately a 13% decline in total
production sold in 1997 compared to 1996, despite the addition of production
from the 20-acre Estancia greenhouse in October 1997.
The Company believes it has remedied the problems that lead to mechanical
malfunctions and has used the experiences to update its existing greenhouses and
better design future greenhouses. The Company hired a new senior management
team that has implemented various initiatives and quality control measures to
reduce the likelihood of similar problems occurring in the future and obtained
improved insurance coverage. The Company had direct damage insurance covering
both property damage to its greenhouses and lost profits and was able to recover
$802,000 as a result of the damage from the flood. This recovery represented
approximately one-half of the lost sales that resulted from the flood, which
subsequently caused management to obtain new insurance coverage. Management
believes that its new insurance policy will more adequately protect it in the
event of a catastrophic loss, such as the May 1998 hail storm described below.
As a result of the 1997 production problems, the Company generated a net
operating loss ("NOL") carry forward for both federal and state income tax
reporting purposes of approximately $2.3 million. The Company expects that a
majority, if not all, of the NOL will be used in 1998. Accordingly, the Company
recorded an income tax benefit of approximately $653,000 during 1997. The
Company expects to recognize income tax expense for financial reporting purposes
at an effective rate of approximately 38%.
The Company maintains business interruption insurance and property damage
policies with aggregate limits of coverage of $33 million, limited to $5.0
million per occurrence. The Company has received an advance of $2.0 million for
its claims from the hail damage incurred at the Brush #1 and Brush #2
greenhouses to fund the cost of cleanup, building repair, miscellaneous fixed
expenses and re-establishing the crop. Due to the nature of the business
interruption claims, final settlement will not be possible until such time as
the Company has returned to normal operations, which is anticipated to be by
December 1, 1998. See "Risk Factors--Risk of Catastrophic Loss of Crop and
Other Property Damage."
Results of Operations
The following table sets forth for the periods indicated, statement of
operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Percentage of Net Sales
---------------------------------------
Six Months
Ended
Year Ended December 31, June 30,
----------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......... 76.6 70.4 89.2 86.5 67.9
----- ----- ----- ----- -----
Gross profit............... 23.4 29.6 10.8 13.5 32.1
Operating expenses (1)..... 12.4 16.2 18.5 17.0 17.8
----- ----- ----- ----- -----
Operating income (loss).... 11.0 13.4 (7.7) (3.5) 14.3
Interest and other income
(expense), net............ 1.6 0.2 0.8 2.0 (1.2)
----- ----- ----- ----- -----
Income (loss) before
income tax provision...... 12.6 13.6 (6.9) (1.5) 13.1
Provision (benefit) for
income taxes (2).......... 4.8 5.2 (2.6) (0.6) 5.0
----- ----- ----- ----- -----
Net income (loss)(2)....... 7.8% 8.4% (4.3)% (0.9)% 8.1%
===== ===== ===== ===== =====
</TABLE>
- --------------------
24
<PAGE>
(1) Operating expenses for 1997 have been reduced to reflect insurance proceeds
of $802,000 from the flood in July 1997 at Fort Lupton #1. Operating
expenses for the six months ended June 30, 1998, include (i) a loss of
$1,700,000 resulting from the hail storm in May 1998 at Brush #1 and Brush
#2 and have been reduced to reflect insurance proceeds of $1,608,000, and
(ii) a one-time, non-cash compensation charge totaling approximately
$1,214,000 related to the grant of options to the Company's directors and
the sale of Series C Preferred Stock to the Company's directors and Chief
Executive Officer.
(2) Prior to January 1997, the Company was operated as a limited liability
company and was not subject to federal or state income taxes. As a result,
the net income (loss) for the years 1995 to 1996 are presented on a pro
forma basis as if the Company were subject to federal and state corporate
income taxes, assuming an effective tax rate of 38%.
Six Months Ended June 30, 1998 and 1997
Net Sales. Net sales increased by $10.2 million, or 77.1%, to $23.5 million on
sales of 25.8 million pounds of tomatoes for the six months ended June 30, 1998,
compared to net sales of $13.3 million on sales of 13.6 million pounds of
tomatoes for the same period in 1997. These increases were due primarily to the
addition of the 20-acre Estancia greenhouse, which came into production in
October 1997, and the 20-acre Fort Lupton #2 greenhouse, which came into
production in March 1998. In addition, the Company increased its production
yield by approximately 29.3% to 247,000 pounds per acre in the first half of
1998 from 191,000 pounds per acre in the comparable period of 1997. This
increase in yield was attributable to management's increased focus on production
and to changes in production methods in response to the production problems
experienced at the Fort Lupton #1 greenhouse in 1997. Higher production in 1998
was partially offset by a lower sale price per pound as prevailing market prices
during the first quarter of 1997 were higher than in 1998 due to adverse weather
conditions that impaired the field-grown tomato supply in early 1997. As a
result, the Company realized a $0.98 average sale price per pound of tomatoes
during the first half of 1997, compared to $0.91 for the comparable period in
1998.
Gross Profit. The Company's gross profit for the six months ended June 30,
1998 was $7.6 million, or 32.1% of net sales, compared to $1.8 million, or 13.5%
of net sales, for the six months ended June 30, 1997. This dollar increase in
gross profit was due to the increase in total pounds of tomatoes sold, resulting
from the additional 40 acres of greenhouse facilities and the increase in yield
per acre, despite the lower average sale price per pound. The 1997 production
problems and higher than expected greenhouse labor costs resulted in a lower
than expected gross profit in the first half of 1997. Greenhouse labor costs in
the first half of 1997 were higher than normal as a result of training expenses
for additional greenhouse personnel to staff the Estancia greenhouse in October
1997. The Company expects that it will continue to incur higher than normal
greenhouse labor costs as a result of training expenses for additional
greenhouse personnel in those quarters in which it adds additional greenhouse
facilities.
Operating Expenses. During the six months ended June 30, 1998, operating
expenses were $4.2 million, or 17.8% of net sales, compared to $2.3 million, or
17.0% of net sales, for the six months ended June 30, 1997. The components of
the dollar increase were: (i) a $0.5 million increase in general and
administrative expenses due to the additions to senior management, higher
incentive bonus accruals and higher professional fees; (ii) a $1.2 million
increase in general and administrative expenses due to a one-time, non-cash,
stock-based compensation expense related to the grant of options to the
Company's directors and the sale of the Series C Preferred Stock to the
Company's directors and Chief Executive Officer; and (iii) a $0.2 million
increase in sales and marketing expenses due to the Company's new marketing
program that began in the fall of 1998. Management expects that operating
expenses may increase during the next several years as the Company implements
its consumer branding strategy, implements the Greenver marketing agreement and
becomes a public company.
Operating Income (Loss). The Company generated operating income of $3.4
million, or 14.3% of net sales, for the six months ended June 30, 1998, compared
to operating loss of $0.5 million, or (3.5%) of net sales, for the comparable
period in 1997. This improvement resulted from the 77.1% increase in net sales
and the higher gross margin in the first half of 1998.
Interest and Other Income (Expense), Net. The Company incurred interest and
other expense of $0.3 million for the six months ended June 30, 1998, compared
to interest and other income of $0.2 million for the six months ended June 30,
1997. This increase was due to interest expense on debt incurred to finance
construction of the Estancia and Fort Lupton #2 greenhouses.
Net Income (Loss). The Company generated net income of $1.9 million, or 8.1%
of net sales, for the six months ended June 30, 1998, compared to a net loss of
$0.1 million, or (0.9%) of net sales, for the comparable period in 1997. The
Company's provision for income taxes was $1.2 million and ($0.1) million for the
six months ended June 30, 1998 and 1997, respectively, representing an effective
tax rate of 38% in both periods.
25
<PAGE>
1997 Compared to 1996
Net Sales. Net sales decreased by $2.5 million, or 9.1%, to $24.9 million on
sales of 26.2 million pounds of tomatoes in 1997, compared to net sales of $27.4
million on sales of 30.0 million pounds of tomatoes in 1996. This decrease in
net sales was due to production shortfalls that resulted from the problems
experienced by the Company at three of its greenhouses at various times during
1997, partially offset by the addition of production at the Estancia greenhouse
in October 1997. The Company realized a 4.4% increase in the average sale
price per pound of tomatoes to $0.95 in 1997 from $0.91 in 1996.
Gross Profit. The Company's gross profit for 1997 was $2.7 million, or 10.8%
of net sales, compared to $8.1 million, or 29.6% of net sales, in 1996. The
dollar decrease resulted from the mechanical problems, pest and disease
infestation and flood that significantly reduced production and the number of
pounds sold in 1997. The decline in the gross profit margin was attributable to
the fact that a significant portion of greenhouse operating expenses are fixed.
Operating Expenses. During 1997, operating expenses were $4.6 million, or
18.5% of net sales, compared to $4.4 million, or 16.2% of net sales, in 1996.
The principal components of the dollar increase were: (i) a $0.4 million
increase in administrative payroll and related expenses, (ii) a $0.4 million
increase in computer-related expenses and (iii) a $0.2 million increase in
travel expenses. These increases were partially offset by the $0.8 million
insurance recovery from the flood at Fort Lupton #1.
Operating Income (Loss). The Company generated an operating loss of $1.9
million for 1997, compared to operating income of $3.7 million, or 13.4% of net
sales, for 1996. The difference was attributable to the factors discussed
above.
Net Income (Loss). The Company recognized a net loss of $1.1 million for
1997, compared to net income of $2.3 million, or 8.4% of net sales, for 1996,
presented on a pro forma basis to reflect pro forma income taxes calculated at
an effective tax rate of 38%.
1996 Compared to 1995
Net Sales. Net sales increased by $7.3 million, or 36.3%, to $27.4 million on
sales of 30.0 million pounds of tomatoes for 1996, compared to net sales of
$20.1 million on sales of 24.4 million pounds of tomatoes for 1995. Of this
increase in net sales, approximately two-thirds was attributable to the addition
of the Rifle greenhouse on January 1, 1996, and approximately one-third was
attributable to a 9.6% increase in the average sale price per pound of tomatoes
to $0.91 in 1996 from $0.83 in 1995.
Gross Profit. The Company's gross profit for 1996 was $8.1 million, or 29.6%
of net sales, compared to $4.7 million, or 23.4% of net sales, for 1995. This
dollar increase was attributable primarily to the increase in production from
the addition of the Rifle greenhouse, as well as the $0.08 per pound increase in
the average sales price for 1996. The improvement in the gross profit margin was
primarily attributable to the fact that a significant portion of greenhouse
operating expenses are fixed.
Operating Expenses. During 1996, operating expenses were $4.4 million, or
16.2% of net sales, compared to $2.5 million, or 12.4% of net sales, for 1995.
The principal components of the dollar increase were: (i) $1.2 million of higher
payroll and related costs (including stock-based compensation of $0.7 million),
(ii) $0.2 million of Rifle greenhouse expenses, and (iii) a $0.2 million
increase of professional fees and insurance costs.
Operating Income (Loss). The Company generated operating income of $3.7
million, or 13.4% of net sales, for 1996, compared to $2.2 million, or 11.0% of
net sales, for 1995. These increases were the result of the increased
production and higher margins discussed above.
Net Income (Loss). The Company generated pro forma net income of $2.3
million, or 8.4% of net sales, in 1996, compared to $1.6 million, or 7.8% of
net sales, for 1995. These amounts have been presented on a pro forma basis to
reflect income taxes calculated at an effective tax rate of 38%.
26
<PAGE>
Liquidity and Capital Resources
The Company's working capital was $3.0 million and $6.3 million at December
31, 1997 and June 30, 1998, respectively. The Company's primary sources of
liquidity have been cash flows from operations, a $1.5 million revolving credit
facility with Farm Credit and the occasional sale of preferred stock. Primary
uses of cash have been greenhouse operations and construction of the Estancia,
Fort Lupton #2 and Grants greenhouses. The following table sets forth a summary
of the Company's cash flows for the periods presented:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------- ------------------
1995 1996 1997 1997 1998
----------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.. $2,675 $ 1,264 $ (382) $ 3,707 $ 1,497
Net cash provided by (used in) investing activities.. (590) (1,032) (23,592) (11,462) (8,092)
Net cash provided by (used in) financing activities.. (157) (1,748) 24,507 14,353 8,915
------ ------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents. $1,928 $(1,516) $ 533 $ 6,598 $ 2,320
====== ======= ======== ======== =======
</TABLE>
The $2.2 million decrease in net cash flows from operations from the six
months ended June 30, 1997, to the six months ended June 30, 1998, was due
primarily to a $3.0 million decrease in construction payables and the
recognition of a $2.0 million insurance receivable related to the hail loss,
offset by a $2.8 million increase in net income. The $1.7 million decrease in
net cash flows from operations from 1996 to 1997 was due primarily to the
production problems previously discussed, the start-up of two new greenhouses
and an increase in trade and other receivables, partially offset by an increase
in construction payables. The $1.4 million decrease in net cash flows from
operations from 1995 to 1996 was due primarily to the required funding of rent
reserves equal to one year's rent at three of the Company's four leased
greenhouses.
The $3.4 million decrease in net cash flows used in investing activities from
the six months ended June 30, 1998, to the six months ended June 30, 1997, was
attributable to a $4.0 million investment in Greenver and $4.1 million of
greenhouse construction related to the completion of the Estancia and Fort
Lupton #2 greenhouses in 1998, compared to $11.4 million of greenhouse
construction in 1997. The $22.6 million increase in net cash used in investing
activities from 1996 to 1997 was attributable to $21.8 million for the
construction of the two greenhouses and the balance for the acquisition of a new
computer system. These capital expenditures were financed by $13.5 million of
net proceeds from the sale of Series B Convertible Preferred Stock in January
1997 and $11.0 million in construction financing from Farm Credit.
The $5.4 million decrease in net cash flows provided by financing activities
from the six months ended June 30, 1998, to the six months ended June 30, 1997,
was primarily attributable to $5.9 million of net proceeds from the sale of
Series C Convertible Preferred Stock in May 1998 and $4.0 million of proceeds
drawn against construction loans in 1998, compared to $13.5 million of net
proceeds from the sale of Series B Convertible Preferred Stock in January 1997
and $0.8 million of construction loan advances in 1997. The $26.3 million
increase in net cash flows provided by financing activities from 1996 to 1997
was primarily attributable to the $13.5 million of net proceeds from the sale of
the Series B Convertible Preferred Stock and the $11.0 million of construction
financing from Farm Credit in 1997, compared to the $1.7 million distribution
made by the Company to cover the LLC members' income tax obligations on the
Company's taxable income in 1996.
In January 1997, the Company and Farm Credit entered into a Master Loan
Agreement ("MLA") that included a $15.0 million construction loan to finance
construction of the Estancia and Fort Lupton #2 greenhouses and a working
capital revolving line of credit of up to $1.5 million that bears interest at a
variable rate equal to 0.25% below the prime rate. Borrowings under the MLA are
secured by substantially all of the Company's assets. This construction loan
was converted to a term loan in May 1998, bearing interest at 8.19% per annum
and payable in 104 equal monthly payments that resulted in a loan balance of
$14.7 million as of June 30, 1998. At December 31, 1997, the balance on the
construction loan was approximately $11.1 million.
Under the Greenver marketing agreement, the Company must reimburse Greenver
weekly for Greenver's production and transportation costs for tomatoes the
Company received during the previous week. In addition, the Company must
27
<PAGE>
remit to Greenver monthly the amount of sales of Greenver tomatoes, less costs
incurred during the month by the Company, the Company's sales commissions and
any transportation costs incurred by the Company from San Diego to its
customers. The Company anticipates that this will require additional working
capital because the Company's customers typically do not pay sales invoices in
less than 30 days. This additional working capital requirement of up to $6.0
million will be funded from the net proceeds from this offering. The Company
believes that cash flow from the operations of its greenhouses will be higher in
1998 than 1997 because of the addition of two new greenhouses, barring any other
adverse weather events or production problems.
The Company plans to construct up to six new 20-acre greenhouses over the next
three years, in addition to the Grants greenhouse currently under construction.
The Company expects to finance partially the construction of these greenhouses
from the net proceeds of this offering and any cash flow from operations.
Additional construction financing will be required, however, for each new
greenhouse. Farm Credit has provided construction financing of up to $7.5
million, or 60%, of the anticipated cost of constructing the Grants greenhouse,
estimated at $12.5 million. The Company has not obtained financing commitments
for the other six greenhouses but believes that several sources of debt
financing will be available on acceptable terms, including from one or more of
the four commercial lenders with whom the Company has had preliminary
discussions. If the Company were unable to obtain debt financing on satisfactory
terms, it might be forced to delay the construction of one or more of the six
planned greenhouses.
Seasonality; Quarterly Results
The Company's business is seasonal, and its quarterly results of operations
reflect trends resulting from seasonal variations in production yields and
prevailing prices for tomatoes. Price fluctuations and tomato availability have
a direct effect on the Company's financial results. Typically, in the winter
months, the reduced supply of tomatoes (due primarily to the lack of field-grown
tomatoes) results in higher market prices. Through the spring and summer
months, the supply of field-grown tomatoes increases, resulting in lower market
prices. As a result, the Company historically has experienced higher profits in
the first and second quarters. Although the Company's production in the first
quarter is lower due to fewer hours of direct sunlight, prevailing prices are
higher, and in the second quarter, the Company's production increases although
prevailing prices are lower. Thereafter, profits typically have declined in the
third quarter as the Company experiences planned decreases in production to
coincide with expected lower market price periods. In the fourth quarter,
profits typically have increased as the Company's production remains steady but
higher market prices return. Greenver produces tomatoes in its Mexican
greenhouses only from November through May. As a result of the Greenver
marketing agreement commencing in the fall of 1998, the Company's supply of
tomatoes during these months should increase significantly from 1997 and prior
years' supplies during the same months. Accordingly, the Company expects that
its profitability will continue to be subject to large seasonal variations, and
the Company's results of operations for any particular quarter are not expected
to be indicative of results for subsequent quarters or the full year.
The following table sets forth financial and operating data for the Company
for the quarters indicated:
28
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
1996 1997(1)
------------------------------------------- ------------------------------------------
Statement of Operations Data: Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $4,943 $ 8,154 $4,936 $9,374 $5,809 $7,489 $ 5,083 $6,563
Gross profit (1).................. 1,773 2,331 1,410 2,600 1,601 190 (619) 1,515
Operating expenses (2)............ 859 1,135 1,297 1,143 1,094 1,161 1,239 1,115
Operating income (loss)........... 914 1,196 113 1,457 507 (971) (1,858) 400
Net income (loss) (3)............. 580 164 342 1,235 345 (472) (1,128) 179
Accretion of preferred stock (4).. -- -- -- -- -- -- -- --
Net income (loss) available to
common stockholders.............. $ 580 $ 164 $ 342 $1,235 $ 345 $ (472) $(1,128) $ 179
Operating Data:
Number of greenhouses
operated (at end of period)...... 4 4 4 4 4 4 4 5
Acres in production (at
end of period)................... 71 71 71 71 71 71 71 91
Total pounds sold (in thousands).. 4,499 11,011 7,821 6,687 4,228 9,322 6,593 6,024
Average yield sold per
acre (in thousands of pounds).... 63 155 110 94 60 131 93 66
Average sale price per pound...... $1.10 $0.74 $0.63 $1.40 $1.37 $0.80 $0.77 $1.09
</TABLE>
<TABLE>
-------------------
1998
-------------------
Statement of Operations Data: Mar. 31 June 30
-------- -------
<S> <C> <C>
Net sales....................... $10,070 $13,479
Gross profit (1)................ 4,399 3,168
Operating expenses (2).......... 1,799 2,405
Operating income (loss)......... 2,600 763
Net income (loss) (3)........... 1,526 379
Accretion of preferred stock (4) (75) (2,167)
Net income (loss) available to
common stockholders............ $ 1,451 $(1,788)
Operating Data:
Number of greenhouses
operated (at end of period).... 6 6
Acres in production (at
end of period)................. 111 111
Total pounds sold (in thousands). 8,312 17,483
Average yield sold per
acre (in thousands of pounds).. 75 158
Average sale price per pound.... $1.21 $0.77
</TABLE>
- ---------------------
(1) Gross profit in the quarter ended June 30, 1997, was significantly impacted
by a root disease in the Brush #1 greenhouse that reduced tomato production
by approximately 18.9%. Gross profit in the quarter ended September 30,
1997, was significantly impacted by a flood in July 1997 that destroyed
production at Fort Lupton #1 and a root disease at Brush #2.
(2) Operating expenses for the quarter ended September 30, 1997 have been
reduced to reflect insurance proceeds of $802,000 from the flood in July
1997 at Fort Lupton #1. Operating expenses for the quarter ended June 30,
1998, include (i) a loss of $1.7 million resulting from the hail storm in
May 1998 at the Brush #2 greenhouse, offset by the attributable portion
($1.6 million) of the $2.0 million advance on insurance proceeds received by
the Company, and (ii) a one-time, non-cash compensation charge totaling
approximately $1,214,000 related to the grant of options to the Company's
directors and the sale of Series C Preferred Stock to the Company's
directors and Chief Executive Officer. See "--Introduction."
(3) Prior to January 1997, the Company was operated as a limited liability
company and was not subject to federal or state income taxes. As a result,
the net income (loss) for the years 1993 to 1996 are presented on a pro
forma basis as if the Company were subject to federal and state corporate
income taxes, assuming an effective tax rate of 38%. See "--Introduction."
(4) Accretion of preferred stock includes (i) $152,000 in amortization of
issuance costs associated with the sales of Series B Preferred Stock and
Series C Preferred Stock, and (ii) a $2,090,000 one-time, non-cash
adjustment to reflect the excess of the fair market value of the Series C
Preferred Stock over the purchase price of the Series C Preferred Stock
charged to the existing stockholders except for those stockholders on the
Board of Directors and the Chief Executive Officer. Under generally accepted
accounting principles, this adjustment is reflected as a reduction in
retained earnings with a corresponding increase in the Series C Preferred
Stock.
Year 2000 Compliance
Although the Company has not completed its testing, it believes that its
software and hardware systems can be made year 2000 compliant at minimal cost so
that they will recognize data fields beyond 1999. As of June 30, 1998, the
Company has spent approximately $20,000 on its Year 2000 compliance issues and
expects to spend at least an additional $10,000 in completing its Year 2000
compliance issues. All of these Year 2000 compliance expenses will be paid from
the Company's working capital reserves. The Company does not believe that the
cost of Year 2000 compliance for its own hardware and software systems is
material. The Company expects that it will be Year 2000 compliant by the end of
1998.
The Company also is in the process of determining whether its major suppliers,
service providers and customers are, or will be, year 2000 compliant in a timely
fashion. If the Company's major suppliers, service providers and customers do
not become Year 2000 compliant in a timely fashion, the Company is not certain
of the impact, if any, that this may have on its future financial condition or
results of operations. The Company has not completed a contingency plan with
respect to its major suppliers, service providers and customers that are not
Year 2000 compliant. The Company intends to develop a contingency plan by the
middle of 1999 if it determines that some of its major suppliers, service
providers and customers will not become Year 2000 compliant in a timely fashion.
29
<PAGE>
BUSINESS
Overview
Colorado Greenhouse is the largest U.S.-based producer and marketer of high-
quality greenhouse tomatoes in terms of net sales. The Company's branded
superpremium tomatoes are characterized by their excellent flavor, rich red
color and consistent blemish-free appearance. The Company currently operates six
hydroponic greenhouses covering approximately 111 production acres in Colorado
and New Mexico and is constructing a seventh 20-acre hydroponic greenhouse in
New Mexico. The Company plans to construct six additional 20-acre hydroponic
greenhouses over the next three years. The Company's production sold was
approximately 247,000 pounds per acre for the six months ended June 30, 1998,
which represents an approximately 29% increase from the same period in 1996. The
Company also has increased its acreage by approximately 56% and increased its
net sales by approximately 77% over the same period. In May 1998, the Company
acquired an approximately 25% equity interest in Greenver and obtained the
exclusive right to market in the United States, Canada and Europe all export-
quality tomatoes and other produce from Greenver's approximately 175 acres of
non-hydroponic greenhouses in Mexico, half of which are currently under
construction and expected to be in production by November 1998. The Company
anticipates that Greenver will provide it with up to 18 million pounds of
tomatoes during Greenver's November 1998 through April 1999 growing season.
The Company's production and distribution capabilities enable it to provide
its customers with a consistent, year-round supply of superpremium branded
tomatoes. The Company currently markets most of its tomatoes in ten states,
primarily to major supermarket chains, including Albertson's, Ingles, King
Soopers, Kroger, Lucky's, Meijer and Safeway, with the majority of sales
concentrated in California, Colorado, Michigan, North Carolina, Ohio, Tennessee
and Texas. The Company recently completed an extensive market and consumer study
and, based upon its findings, launched a marketing campaign for its newly
developed consumer brand in October 1998, emphasizing the consistent year-round
quality and superior taste of its tomatoes. A key component of the Company's
growth strategy is to market its tomatoes in selected new domestic markets and
establish relationships with additional major supermarket chains.
The Company is organized as a holding company and owns all of the outstanding
capital stock of (i) CG Member, Inc., the entity that indirectly operates the
Brush #1, Brush #2, Fort Lupton #1 and Rifle greenhouses, which are the
greenhouses held by the LLC, (ii) Colorado Greenhouse, Inc., the entity that
operates the Estancia and Fort Lupton #2 greenhouses and will operate the Grants
greenhouse upon completion of construction and (iii) CGH Sales, Inc., the entity
that will perform the Company's obligations under the Marketing Agreements
entered into in connection with the Greenver transaction. See "Prospectus
Summary--Company History and Recent Developments--Organizational History" and
"Certain Transactions and Relationships."
Tomato Industry Overview and Consumer Trends
According to a United States Department of Agriculture report, U.S.
consumption of fresh tomatoes was approximately 19 pounds per person in 1997, or
a total of approximately 5.4 billion pounds. At an average wholesale price of
$0.33 per pound, the total U.S. fresh tomato market exceeded $1.8 billion at
wholesale. In 1997, field-grown tomatoes accounted for approximately 92% of
total U.S. tomato market. The Company believes that a majority of these
tomatoes were "gas green tomatoes" (i.e., picked green and colored via ethylene
gas treatment during shipping), while the remainder were "vine ripe" (i.e., at
least partially ripened in the field before picking). Greenhouse production,
both domestic and imported and hydroponic and non-hydroponic, accounted for the
remaining approximately 8% of the total U.S. tomato market in 1997.
Field-grown tomatoes, particularly gas greens, often exhibit poor taste,
texture and appearance and vary widely in quality. In addition, as unbranded
commodity products, most tomatoes offer no basis for building consumer awareness
or loyalty. Supermarket chains also typically experience an unpredictable
supply of tomatoes from a fragmented group of wholesalers and brokers and a lack
of merchandising and promotional support.
Field tomato growers, particularly in California and Mexico, have attempted to
address the quality gap in recent years by partially ripening tomatoes on the
vine before picking. The Company believes that although these vine ripe
tomatoes are often superior to gas green products, they still suffer from
substantial inconsistency in quality and supply. Greenhouse producers have
generally succeeded in supplying a better tasting tomato to the market, but to
date are
30
<PAGE>
producing in relatively small quantities with limited distribution. In addition,
most hydroponic tomato greenhouses, many of which are located outside the United
States, operate only nine months of the year primarily due to either too few
hours of direct sunlight in the winter or too high daytime temperatures in the
summer.
According to a produce industry trade journal, chain supermarkets account for
approximately 62% of all grocery store sales and tomatoes are one of the top
five items in sales volume in grocery store produce departments. According to
Monterey, consumers would purchase tomatoes more often if they were of higher
quality.
Supermarket produce departments, similar to most other departments,
increasingly have adopted category management with the goal of maximizing
overall profitability for the department based on a better understanding of
sales patterns and margins by individual items. This has encouraged produce
managers to ally themselves with suppliers capable of offering both high
quality, year-round supply of produce and branded products, where possible, to
build consumer loyalty, command premium prices on a consistent basis and be
tracked by the supermarket's scanning and inventory systems.
The past two decades have witnessed widespread growth in consumer demand for
higher quality foods. This trend has resulted in the emergence of natural,
minimally-processed and preservative-free alternatives in most major food
categories, the growth of the specialty and natural foods retail sector and the
emergence of higher priced, superpremium segments in many categories, including
juice, beer, ice cream and coffee. In the produce sector, this trend has
resulted in a demand for increased freshness, better taste and more variety and
has led to consumer demand for high-quality branded produce, such as packaged
salads and pre-cut vegetables. As a result, the Company believes that the
potential market for superpremium branded tomatoes is very broad because
substantial numbers of consumers are willing to pay a premium over the price of
field-grown tomatoes, especially in the winter months, for the improved taste,
appearance, consistency and quality of greenhouse tomatoes.
Company Strengths
The Company believes that it is uniquely positioned to address the quality and
supply issues of both consumers and the retail trade with a superpremium branded
tomato developed through an integrated hydroponic greenhouse production model
that yields a consistent high quality product with a year-round supply. The
Company's key competitive strengths include:
Consistent Quality Superpremium Tomatoes on a Year-Round Basis. The Company
has established a reputation as a consistent supplier of high quality, branded
superpremium tomatoes. The Company's greenhouse locations in Colorado and New
Mexico are characterized by an optimal combination of direct sunlight and
moderate summertime temperatures, which provide it with the ability to grow
high-quality tomatoes on a year-round basis. Commencing in November 1998, the
Company will begin marketing Greenver's tomatoes. This will provide the Company
with a greater supply of tomatoes from November through April, when domestic
supply is generally at its lowest and prices are typically at their highest.
Direct Relationships with Major Supermarket Chains. The Company sells
directly to several of the nation's largest supermarket chains, including
Albertson's, Ingles, King Soopers, Kroger, Lucky's, Meijer and Safeway. These
direct relationships enable the Company to: (i) retain control over the
distribution process; (ii) establish a "non-commodity" consumer branding
approach to marketing; (iii) differentiate itself through superior customer
service; and (iv) improve margins by eliminating unnecessary middlemen.
Technical Expertise. The Company's advanced growing techniques enable it to
produce consistently high-quality tomatoes on a year-round basis. The Company's
greenhouses are managed by teams of senior growers, principally recruited from
European countries, with expertise in the latest greenhouse and hydroponic
technology. These senior growers train junior growers to assure that the
Company will have the expertise necessary for its planned expansion. Forty of
the Company's production acres have been constructed, and 20 acres are being
constructed, using a state-of-the-art model designed to enhance growing
conditions and improve production yield. The Company also has installed an
integrated management information system, which allows it to monitor closely all
aspects of the plant production, packaging and selling process.
31
<PAGE>
Growth Strategy
The Company's objective is to strengthen its position as the largest U.S.-
based producer and marketer of high quality greenhouse tomatoes and to increase
sales. Key elements of the Company's strategy to achieve this goal include:
Aggressively Develop Consumer Brand Identity. To capitalize on the regional
success of the Company's branding strategy, in October 1998, the Company
introduced a marketing campaign targeting additional domestic markets with its
newly developed consumer brand. This campaign will include both trade and
consumer advertising and point-of-sale promotions emphasizing the consistent
year-round availability and superior taste of the Company's tomatoes. The
Company believes that its branding strategy also may facilitate its future
introduction of other superpremium greenhouse produce.
Expand Production Capacity. The Company's strategy is to expand production
capacity to meet the increased consumer demand for consistent, high-quality
tomatoes on a year-round basis. The Company is currently constructing a 20-acre
hydroponic greenhouse facility in New Mexico and plans to construct six
additional 20-acre hydroponic greenhouses over the next three years at sites
that provide optimal micro-climatic conditions of sunlight and temperature. The
Greenver marketing arrangement will provide the Company with a greater supply of
tomatoes from November through April, when domestic supply is generally at its
lowest and prices are typically at their highest.
Broaden Retail Distribution. Most major retailers seek a primary supplier for
each produce category that is capable of delivering both uniform quality and
consistent year-round supply. The Company believes that by offering retailers
and consumers a high quality product with a consistent year-round supply, it can
become the primary year-round tomato supplier of choice for many major
supermarket chains. The Company's variety of product sizes and grades and
customized packaging capabilities also provide significant flexibility to retail
chains when offering tomato products to consumers. The Company's expertise in
conducting marketing programs can assist these retailers in developing consumer
awareness and brand loyalty. See "--Marketing and Sales."
Products
The Company's current product line consists of traditional beefsteak tomatoes
of both the Truss and Bliss varieties and Tradero vine-cluster tomatoes. These
tomatoes are distinguished by their superior taste over most field-grown
tomatoes, and their appearance, texture and nutritional value. The Company
believes that by using greenhouse technology to regulate and enhance
environmental conditions, it achieves consistent quality tomatoes and minimizes
production seasonality. Currently, the Company's tomatoes are sold in display
pack singles, consumer pre-packs and on-the-vine packages.
Superpremium display pack singles. The Company hand selects its largest
superpremium beefsteak tomatoes, sorts them into three sizes, Large,
ExtraLarge and MaxiXLarge, and ships them to supermarket customers in
specially packaged black display trays for individual sale. Each tray weighs
15 pounds and contains between 18 and 45 tomatoes, depending on their size.
To increase consumer brand awareness, each tomato is labeled with the
Company's name and logo.
Consumer pre-pack. The Company packages its smaller superpremium tomatoes in
groups of three, four or six. The Company's pre-packs feature a distinctive
consumer package, which can be customized to meet the requirements of
individual supermarket customers.
On-the-vine. The Company's Vine Cluster Gourmet Tomatoes are of the Tradero
variety and consist of at least three blemish-free tomatoes attached to the
vine and packaged in a mesh bag. The Company ships the mesh bags of on-the-
vine tomatoes in trays that weigh 11 pounds. The Company generally is able to
price this product at a 30% premium to its other superpremium tomatoes.
Standard grade display pack singles. Most of the Company's standard grade
tomatoes are USDA #1 quality or better, but less than the Company's
superpremium grade. These tomatoes are shipped to customers in specially
packaged 15 pound white display trays for individual sale. The Company also
ships a small number of USDA #2 quality tomatoes, which are of a lesser
quality than USDA #1 but are sold by some retail chains.
32
<PAGE>
The Company grades all of its tomatoes as either superpremium or standard
grade based on its own specifications. The Company defines superpremium tomatoes
as those that are free from all scars, cuts, bruises, blotchy ripening and
translucent or soft conditions, are round with a smooth shoulder, have no flat
spots or indentations, have a well formed, smooth blossom end with an
indentation of no more that 1/16", with the calyx (the stem) still in place and
with no more than minor "russeting" (the micro cracking of the skin around the
calyx). Standard tomatoes are those tomatoes that vary from the superpremium
specifications for the calyx, scarring, blemishes and russeting. The Company
permits only a small number of tomatoes with these minor defects per tray of
standard tomatoes. Because a tomato's color identifies its level of development
and ripeness, both superpremium and standard tomatoes are sorted based on color
so that all tomatoes from the same box will ripen uniformly.
The following table sets forth information concerning the Company's products
during the first quarters of 1997 and 1998.
<TABLE>
<CAPTION>
Percentage of Total Sales Avg. Wholesale Price Per Pound
------------------------- ------------------------------
Six Months Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Superpremium display pack singles....... 56.9% 67.2% $ 1.02 $ 1.00
Pre-pack................................ 11.5 10.0 .87 0.98
On-the-vine............................. 13.8 9.8 1.20 1.31
Standard grade display pack singles:
USDA #1 or better..................... 12.1 9.9 1.01 0.72
USDA #2............................... 5.7 3.1 0.65 0.54
----- -----
Total/average wholesale price (1)... 100.0% 100.0% $ 0.98 $ 0.96
===== =====
</TABLE>
(1) Prevailing market prices for tomatoes are highly seasonal, and typically are
at their highest levels in the first quarter. Accordingly, the Company's
results of operations for any particular quarter are not expected to be
indicative of results for subsequent quarters or the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality; Quarterly Results."
The Greenver relationship will provide the Company with the opportunity to
conduct field trials of and test market other produce. Greenver will conduct
field trials of sweet peppers, cherry tomatoes, cucumbers and eggplant during
the November 1998 to April 1999 growing season on approximately 37 acres of its
new greenhouse facilities.
Marketing and Sales
The Company markets most of its tomatoes directly to its supermarket chain
customers. These direct relationships enable the Company to retain control over
the distribution process, establish a "non-commodity" consumer branding approach
to marketing, differentiate itself through superior customer service and improve
margins by eliminating unnecessary middlemen. The Company's marketing strategy
has been to create awareness of the Company's tomatoes by supermarket chains on
a regional basis and thereby gain shelf space. The Company actively
participates in trade shows and advertises in various trade publications to
reach supermarket chains. In marketing to potential supermarket customers, the
Company emphasizes its high-quality tomatoes and consistent supply, with the
objective of becoming that customer's primary year-round tomato supplier of
choice. The Company also offers its customers consumer awareness programs, such
as in-store product demonstrations, media advertising and cooperative
promotional programs.
When a supermarket chain first decides to carry the Company's products, the
Company develops a marketing program with the supermarket chain. The marketing
program sets forth the amount and type of the Company's products the supermarket
chain will carry and provides for various forms of marketing support by the
Company in that customer's market including assistance with point-of-sale
presentation such as arranging for in-store demonstrations and providing
recipes, sale promotion assistance and print and media advertising support.
After the marketing program is in place, each week a Company sales
representative quotes the customer prices for the following week and ensures the
customer's marketing program is satisfied on a weekly basis. This permits the
customer to keep the freshest tomatoes in stock and gives sufficient lead time
to enable the Company to fill orders. The sales staff works closely with the
Company's production group to help anticipate and accommodate customer
requirements. Each tomato or consumer package is labeled with a Price Look Up
("PLU") sticker to facilitate category management by the customer.
The Company maintains a sales and marketing staff of six employees at its Fort
Lupton, Colorado headquarters. The Company expects to add several regional sales
offices over the next two years, including one in California in connection with
marketing Greenver's produce. When Greenver's tomatoes first become available
in November 1998, the Company intends to include them into its standard
marketing activities. The Company will test market Greenver's sweet peppers,
cucumbers, cherry tomatoes and eggplant through the same distribution
channels.
33
<PAGE>
Brand Development
To strengthen its position as the leading U.S.-based producer and marketer of
superpremium greenhouse tomatoes, the Company will concentrate on promoting
brand recognition and loyalty among consumers by introducing a marketing
campaign in the fall of 1998. This campaign will target additional markets and
focus on the Company's newly developed consumer brand. The campaign will
include both trade and consumer advertising and point-of-sale promotions
emphasizing the consistent year-round availability and superior taste of the
Company's tomatoes. The Company intends also to provide point-of-sale materials
such as product literature and recipes to help consumers distinguish its product
from unbranded tomatoes, as well as discount coupons. The Company believes that
its branding strategy also may facilitate its introduction of other superpremium
greenhouse products.
Customers and Product Distribution
The Company's principal customers are ten major supermarket chains, which
collectively accounted for approximately 79.0% of the Company's net sales in
1997. The Company's remaining customers are selected regional wholesalers and
brokers who purchase in truckload quantities and distribute to natural food
stores, smaller grocery chains and independent grocers.
The Company's retail and wholesale customers are concentrated in Colorado,
California, Michigan, North Carolina, Ohio, Tennessee and Texas. The Company's
leading supermarket chain customers are Safeway (in Colorado), Meijer (in
Michigan), King Soopers (in Colorado), Kroger (in Ohio and Texas), Albertson's
(in California and Colorado), Ingles (in North Carolina and Tennessee) and
Lucky's (in California). During 1997, sales to Safeway, Meijer and King Soopers
represented 23.5%, 15.3% and 14.0% of the Company's total net sales,
respectively. No other customer accounted for more than 6.2% of the Company's
total net sales in 1997. Because a high concentration of the Company's sales
are to a relatively few customers, the loss of one or more major customers could
have a material adverse effect on the Company's results of operations.
The Company arranges for the delivery of all of its products to its customers
by truck. The Company owns three and leases two other temperature controlled
tractor-trailers, which it uses for delivery of its products within Colorado.
The Company contracts on a per load basis with independent trucking companies
for deliveries outside Colorado. The Company will take delivery of Greenver's
produce at a third party cross-docking facility in or near San Diego,
California, from which the produce will be delivered to the Company's customers
by independent trucking companies.
34
<PAGE>
Greenhouse Production
Current Greenhouse Production. The following table sets forth information
regarding the Company's existing greenhouses.
<TABLE>
<CAPTION>
Year Constructed Acreage Greenhouse Type
---------------- ------- ---------------
Colorado
<S> <C> <C> <C>
Rifle(1)................... 1986 13.5 Plastic
Brush #1(1)................ 1990 18.0 Plastic
Brush #2(1)................ 1993 19.7 Glass
Fort Lupton #1 (1)......... 1993 20.0 Glass
Fort Lupton #2 (2)......... 1998 20.0 Glass
New Mexico
Estancia (3)............... 1997 20.0 Glass
Grants (4)................. 1998 20.0 Glass
-----
Total................... 131.2
=====
</TABLE>
- -----------------
(1) These greenhouses are currently leased by the Company. See "--Facilities."
(2) The Fort Lupton #2 greenhouse was completed in January 1998 and began
production in March 1998.
(3) The Estancia greenhouse was completed in August 1997 and began production in
October 1997.
(4) This greenhouse, which is currently under construction, is expected to be
completed by November 1998.
Site Selection Criteria. The Company selects sites for new greenhouse
facilities based on their optimal micro-climatic conditions of sunlight and
temperature, sufficient water supply and a low cost supply of natural gas for
heating. All of the Company's greenhouses are located in Colorado and New Mexico
because these states provide over 250 days of sunshine per year, including ample
sunlight during the winter months, and a moderate summertime high temperature
that permits production during the summer months and reduces greenhouse cooling
costs. As a result, the Company is able to produce tomatoes on a year-round
basis, unlike greenhouses located in areas where the summer months are very hot
or the winter months do not have sufficient sunlight.
Design Features of the Company's Greenhouse Model. The Company's greenhouse
model has been developed and refined over a number of years through the
experience learned in each successive facility. The first of the Company's
greenhouses that was constructed, Rifle, is only approximately 13.5 acres in
size, is constructed of plastic overlaying a steel truss structure and contains
a non-direct forced air heating system. Brush #1 is an 18.0 acre plastic
facility, and Brush #2 is a 19.7 acre glass facility. The Company's three other
greenhouses are 20-acre units, constructed of glass, which has better light
transmission characteristics than plastic, and use direct radiation heating
techniques through hot water pipes directly below the growing canopy. This
permits the Company to control better the amount of heat necessary for optimal
plant growth. The Company's newer greenhouses, Estancia, Fort Lupton #2 and the
Grants greenhouse currently under construction, use an improved glass design in
which there are fewer steel trusses to block the light, a roof that is
approximately three feet higher to allow for more heat retention and glass that
is positioned to permit better light transmission.
The Company believes that its model 20-acre facility provides it with the
optimal balance between the economies of scale that come with a large facility
and a facility of manageable size. Starting with the Fort Lupton greenhouses,
the Company has constructed two adjacent unitized 20-acre facilities, thus
increasing the economies of scale by permitting shared greenhouse supply areas,
boiler and pump houses, as well as combined packing facilities, while at the
same time retaining the manageability that comes with a 20-acre facility. The
Company has designed both the Estancia facility and the Grants facility to
permit the construction of adjacent 20-acre facilities, and all future
facilities are expected to use this unitized 20-acre facility model.
Integrated Hydroponic Greenhouse Production Model. All of the Company's
greenhouses (other than the Greenver facilities) use the Company's integrated
hydroponic production model. Hydroponics is the cultivation of plants in liquid
nutrient solutions. The Company's plants are cultivated in rockwool, a porous
substrate material made from volcanic-based rock, which provides significantly
more control over the root environment and allows the Company to manage better
the balance of nutrients required for healthy plant cultivation. This closely
monitored environment allows tomatoes to receive the benefits from sunlight,
with the additional advantage of computer-controlled temperature and humidity
required for strong, healthy
35
<PAGE>
plants. Although a tomato does not have to be grown hydroponically to be a
superpremium tomato, hydroponic production minimizes the variables that cause
inconsistency in product and yield and isolates the plants from soil-born pests
and diseases.
The development cycle of a tomato plant is approximately three months from
seed to the first harvest of fruit. Thereafter, the Company's plants usually
yield tomatoes for a period of four to five months. Propagation, the tomatoes'
nursery stage, begins at a separate third-party greenhouse. After approximately
six weeks at the propagation center and approximately three or four days prior
to the appearance of the first flowers, the plants are shipped to the Company's
greenhouses.
Upon arrival at the greenhouse, plants are placed in their permanent location
on rockwool mats. Most greenhouse environments result in downtime of
approximately three months between the final harvest of the old crop and the
first harvest of the new crop. To ensure continuous year-round production of
tomatoes without wasting greenhouse space, the Company places young plants
adjacent to mature tomato plants nearing the end of their production. This
process, called "interplanting," uses techniques refined by the Company. As a
result, the Company's first harvest from the new plants usually occurs within
one to three weeks after the prior crop's final harvest.
Each plant is isolated initially from the rockwool mats using a styrofoam tray
in order to prevent the roots from penetrating the mats prematurely. An
individual dripper hose is inserted into each rockwool block, and the plants are
attached to strings to maintain upward growth of the vines. At the same time,
bumble bees are introduced into the newly planted areas for pollination
purposes. Hives, which contain nectar for the bees, are placed on shelves at
the end of the greenhouse rows. Two weeks after introduction to the greenhouse,
the styrofoam trays are removed and the dripper hoses are run through the blocks
into the mat itself, allowing each plant's root system to spread throughout the
mat.
Regular plant maintenance includes clipping and pruning, adding truss
supports, cluster pruning to maintain the desired number of tomatoes per truss
and regular "deleafing," a process in which leaves are removed from the bottom
of the plants as they grow taller to direct the energy upward toward the
producing part of the plants. As the plants grow, they are periodically lowered
by unwinding string from reels attached above each vine to keep the top of the
plants at the optimum height for plant growth and to provide easier access to
the producing part of the vines. As a result of the Company's production
process, only about 5% of the tomatoes grown by the Company are discarded.
These discarded tomatoes are either sold to local farmers as animal feed or
thrown away.
The Company's computer system monitors every aspect of the plant's life,
including acidity and salt solution percentages. The climate in the greenhouse
is also precisely controlled for temperature, CO\\2\\ content and humidity. The
greenhouses have a daytime growing temperature of between 70 and 80 degrees
Fahrenheit and a humidity level of 70%. At night, the temperature is dropped to
between 55 and 60 degrees Fahrenheit. During the summer months, the greenhouses
are ventilated by interior or exterior evaporative cooling. In cooler months,
hot water is circulated throughout the greenhouse through pipes between each row
of plants. These pipes also serve as rails for the picking carts. The Company
obtains the heat for the Brush #1, Brush #2, Fort Lupton #1 and Rifle
greenhouses from the adjacent cogeneration plants and has backup boilers in the
event of a shut-down of the power plants. Stand-alone boilers employing natural
gas are used to provide hot water at the Fort Lupton #2 greenhouse and the New
Mexico facilities. The air quality of each greenhouse also is constantly
monitored and, when necessary, CO\\2\\ is released into the greenhouse
environment because CO\\2 \\is essential for plant growth. In the stand-alone
facilities, CO\\2\\ is obtained from the water heating process, and in the
cogeneration greenhouses, the Company purchases CO\\2\\. The Company also
monitors the outside environment, including temperature, solar radiation, wind
speed and wind direction, to help gauge the heating requirements of the
greenhouse and the amount of sunlight each greenhouse receives.
Harvesting and Packing. Ripe tomatoes are picked by hand and placed onto
carts. The distance to market determines at what stage of ripeness tomatoes
will be harvested. Each individual harvester enters information about the
number of trays of tomatoes picked in each row into a key pad linked to the
Company's computer. The trays are loaded onto pallets and transported to a
sorting, packing and shipping facility (the "pack houses"). The Company
currently has pack houses at Brush and Fort Lupton. The Brush pack house
handles most of the tomatoes from the two Brush greenhouses. The Fort Lupton
pack house packs the remaining tomatoes from Brush, as well as the tomatoes from
the Estancia, Rifle and the two Fort Lupton greenhouses. The Company has
constructed a pack house at its Estancia greenhouse and intends to commence
operation of this pack house upon completion of the Grants greenhouse. The
Estancia pack house initially will pack all of the Company's tomatoes grown in
New Mexico.
36
<PAGE>
After being washed and dried, the tomatoes are hand sorted according to size.
About 80% of the tomatoes produced by the Company are in the MaxiXLarge or
ExtraLarge categories, and all superpremium tomatoes of these sizes are packed
by hand into 15 pound, single-layer trays according to color stage or ripeness
and size. Each superpremium tomato is labeled with the PLU sticker, and each
tray is marked with a code indicating the site where the product was grown and
the date of packing. Approximately 11% of the Company's tomatoes are standard
grade display pack singles, which are packed by hand into 15 pound trays. All
remaining tomatoes not sold as display pack singles are sent by conveyor belt to
a pre-pack system where they are packaged into three, four or six-count retail
packs. The Company's on-the-vine tomatoes are packaged in net bags of three to
five tomatoes with the vine still attached and shipped in 11 pound trays. After
packing, the tomatoes are loaded onto trucks for shipment.
Quality Control Programs. Managing the health of the Company's tomato plants
is critical to maintaining the required production levels. Following the
Company's pest and disease related production problems in 1997, the Company
instituted a number of quality control monitoring systems to provide an early
warning against pest and disease problems. The growers in each greenhouse
complete a "cultural table" regarding the condition of the plants on a weekly
basis. The cultural table is based on evaluations of sample plants throughout
each greenhouse and measures plant development, including the number and width
of the leaves, the number of flowers per plant, the diameter of the plant stem,
the number of tomatoes per stem and the size development of the tomatoes.
Sample leaves are sent to laboratories weekly for leaf analysis to determine the
nutrient content and identify any deficiencies. Any suspect plants are also
leaf sampled for disease identification. These data give the Company's senior
growers information that should indicate early deficiencies in the plant
production cycle and the opportunity to compare the current crop to historical
data from previous crops.
The Company also monitors the rooting environment of its plants by testing
water quality on a daily basis and determines the quantity of water used by
measuring the volume of water for each row of plants and the volume of water
that drains off each row. Irrigation drainage water is also monitored to
determine the plant's chemical and nutrient intake, is then sterilized by ultra-
violet light, with any necessary nutrients added, and is recirculated to the
plants, thereby conserving valuable materials and water. By monitoring
irrigation water, senior growers can determine whether each row of plants is
receiving and utilizing the proper volume of water and nutrients.
The Company instituted a number of safeguards against pests following the 1997
production problems. These include pest trap monitoring cards throughout the
greenhouses that allow employees to count the number and variety of insects in
each facility, as well as visual crop monitoring for pests. The Company
utilizes a biological pest control management system, whereby plant-friendly
predator insects who feed upon the unwanted pests are used to control common
greenhouse insects. As a result, some level of harmful pests, such as
whiteflies, will be found in the greenhouses in order to feed the beneficial
pest population. In addition, pollination is performed by bumble bees that
require an insect friendly environment. If it is determined that biological
controls are not adequate to maintain the health of the plants, chemicals may be
applied to maintain the proper balance between these beneficial and harmful
pests. Because of the bees, however, the use of deleterious chemicals must be
minimal.
The Company believes that these quality control programs will provide it with
sufficient early warning signs to enable it to react to most production threats
in a timely fashion, thereby minimizing the risk of a recurrence of the problems
that the Company experienced in 1997. There can be no assurance, however, that
these programs will be sufficient to control all possible disease or pest
problems.
Steps Taken to Combat 1997 Production Problems. During 1997, the Company
experienced mechanical problems, pest and disease infestations and a flood that
significantly reduced production during parts of the year in three of the
Company's greenhouses. In the Brush #1 greenhouse, a root disease reduced
tomato production by approximately 18.9% during the first and second quarters of
1997. This was followed in the third quarter by an invasion of thrips (an
insect) through the greenhouse's unscreened ventilation system, which carried a
virus from adjacent agricultural field crops. This virus reduced plant
populations as well as tomato volumes and size, resulting in a decline in the
Company's average sales price per pound. During the third quarter of 1997,
Brush #2 was also affected negatively by the same root disease that affected
Brush #1 and was infested with a large population of whiteflies. This led to
the Company's decision to pull out its entire existing crop at Brush #2 and
disinfect the greenhouse at the beginning of the fourth quarter of 1997. At the
end of the first quarter of 1997, the Fort Lupton #1 greenhouse experienced a
mechanical failure in its irrigation system, followed by a flood at the end of
July that required the Company to pull out the entire crop to avoid an outbreak
of root rot common in water damaged crops. As a result of all of these
problems, the Company experienced
37
<PAGE>
approximately a 13% decline in total production sold in 1997 compared to 1996,
despite the addition of production from the 20-acre Estancia greenhouse in
October 1997.
Following the production shortfalls of 1997, a complete review of the
Company's management structure, experience, operating procedures and expertise
was undertaken and significant changes were made. The Company believes it has
remedied the problems that lead to mechanical malfunctions and has used the
experiences to update its existing greenhouses and better design future
greenhouses. The Company hired a new senior management team that implemented
various initiatives and quality control measures to reduce the likelihood of
similar problems occurring in the future and obtained improved insurance
coverage. The Company has direct damage insurance covering both property damage
to its greenhouses and lost profits and was able to recover $802,000 as a result
of the damage from the flood. This recovery represented approximately one-half
of the lost sales that resulted from the flood, which subsequently caused
management to obtain new insurance coverage. Management believes that its new
insurance policy will more adequately protect it in the event of a catastrophic
loss. In addition, because the Company had two of its four greenhouses out of
production during the fourth quarter of 1997 due to various pest and mechanical
problems, the Company was able to modify its packing operations to consolidate
pack houses. To effect this consolidation, the pack house at Fort Lupton was
enlarged and new flow-through racking was installed to permit the packing of
tomatoes from the Fort Lupton #2 greenhouse as well as some of tomatoes from the
Brush greenhouses.
Raw Materials Used in Production. The Company obtains the raw materials
necessary for the production of its tomatoes, including rockwool, tomato
seedlings, CO\\2\\, bees, fertilizer, insecticides and packaging materials from
various suppliers. These suppliers include Grodania A/S (rockwool), Cherry
Creek Growers, Inc. (tomato plant seedlings), Praxair, Inc. (CO\\2\\), Koppert
Biological Systems, Inc. (bumble bees), Van Waters and Rogers, Inc. (fertilizer
and insecticide) and Willamette Industries, Inc. (packaging materials).
Whenever possible, the Company enters into annual agreements for these raw
materials that set the price for the year and then orders materials on an as
needed basis. The Company currently obtains its seedlings from a single source.
Loss of this source could result in a decrease in the Company's tomato
production until this supplier can be replaced. With respect to its other raw
material suppliers, the Company believes that its relationship with these
suppliers generally is good. If the Company were to lose any one or more of
these raw material suppliers, the Company could contract for its raw materials
with several other suppliers on terms the Company believes would be comparable.
Greenver Transaction and Marketing Agreement
In May 1998, the Company acquired a 25% equity interest in Greenver for $4.0
million. Greenver has 88 acres of non-hydroponic greenhouses under production
in Baja, Mexico, growing tomatoes and some sweet peppers. The proceeds of the
Company's investment in Greenver are being used by Greenver to construct an
additional 87 acres of non-hydroponic greenhouse facilities, which are expected
to commence production by November 1998. Although Greenver's tomatoes are of
comparable quality to the Company's tomatoes, the Company will provide Greenver
with technical assistance to increase Greenver's production yield and the
Company intends to introduce hydroponic growing techniques to at least some of
Greenver's facilities. As a result of its equity interest, the Company is
entitled to 25% of all dividends, if any, distributed by Greenver.
As part of the Greenver Transaction, the Company entered into an exclusive
marketing agreement (the "Marketing Agreement"), whereby the Company obtained
the exclusive right, but not the obligation, to market in the United States,
Canada and Europe all export-quality tomatoes, sweet peppers and any other
produce from Greenver, for which the Company will receive a 10% commission on
total sales revenue less transportation costs from San Diego to the point of
destination. The Company intends to exercise this right for all of Greenver's
produce that is of a quality and grade consistent with the Company's domestic
tomatoes. The Company intends to have a representative present at Greenver's
facilities to select the products to be sold under the Marketing Agreement. The
agreement prohibits Greenver from selling its export-quality products in the
United States, Canada or Europe except through the Company. Because of the
favorable growing conditions during the winter months in Baja, Mexico, as well
as improved growing techniques the Company is introducing to the Greenver
facilities, the Company anticipates that the Greenver Transaction will provide
it with up to 18 million pounds of tomatoes during the November 1998 through
April 1999 growing season, a time of year in which production from the Company's
existing facilities declines. During these months, the Company has historically
received the highest prices for its tomatoes. The Company's estimate of up to 18
million pounds of tomatoes is based on the planned number of acres of the
Greenver facilities that will be used to grow tomatoes multiplied by a per acre
non-hydroponic production yield that is less than 50% of the per acre production
yield of non-hydroponic greenhouses currently producing in Europe. The Company
believes that this is an appropriate estimated yield based on its review of the
Greenver facilities and growing climate.
Under the Marketing Agreement, the Company will never take title to the
produce but has the right to determine the manner and terms of sales, so long as
the price is not less than the Company receives for tomatoes of equivalent
quality
38
<PAGE>
grown by the Company. The agreement has a term of ten years, subject to
termination by Greenver at the end of five years if certain criteria related to
the Company's marketing of Greenver's tomatoes have not been met. If the
agreement is then terminated, the Company has the option (i) to require the
other Greenver shareholders to repurchase the Company's equity in Greenver for
the higher of market value at the time of repurchase or $4.0 million, or (ii)
the right to acquire a 50% equity interest in any company formed by Greenver to
market its products in the United States, Canada or Europe.
Under the Marketing Agreement, the Company must reimburse Greenver weekly for
Greenver's production and transportation costs for tomatoes the Company received
in the previous week. In addition, the Company must remit to Greenver monthly
the amount of sales of Greenver tomatoes less costs previously borne by the
Company, the Company's sales commission and any transportation costs from San
Diego incurred by the Company. The Company is responsible for all advertising,
marketing and promotion expenses and the third party cross-docking facility
fees, and bears the risk of uncollectible accounts receivable. All products
sold under the Marketing Agreement will be packaged in cartons and labels
approved by the Company and will be marketed with the Company's tomatoes. The
Company has not yet determined whether it will market Greenver's tomatoes under
its own trademarks. Greenver will warrant to the Company all products sold
under the Marketing Agreement to be in good and marketable condition and
harvested, handled, packed and shipped in accordance with standards set by the
Company and U.S. regulatory agencies.
Research and Development
The Company is engaged in ongoing testing at its Brush, Fort Lupton and Rifle
greenhouses of various varieties of tomatoes to determine if they could improve
the Company's production yields. The Company tests these tomato varieties for
their maturation period, resistance to disease, the size and quality of the
tomatoes and the tomatoes' shelf life, taste and adaptability to seasonal
changes in light. The Company's growers conduct these tests initially as
varietal trials, where a few plants of several different varieties are placed
throughout a greenhouse and observed. If a new variety shows promising
characteristics, the Company conducts a commercial trial where the new variety
is planted on a larger scale, with performance results compared to the Company's
existing tomato varieties. To date, the Company has selected two of these new
varieties of tomatoes for regular production on a seasonal basis, a Grace
variety for winter production and an as yet unnamed variety for summer
production. To date, the Company's research and development expenditures have
not been material.
The Company currently devotes a total of approximately 10 acres at its Brush,
Fort Lupton and Rifle greenhouses to research and development. During the
November 1998 through April 1999 growing season, the Company and Greenver will
conduct field trials of and test market sweet peppers, cucumbers, cherry
tomatoes and eggplant. There are, however, a limited number of vegetables that
can be grown economically in the greenhouse environment. During 1999, the
Company will analyze the results of these field trials and determine whether
any of the Company's planned greenhouses will be used to grow crops other than
tomatoes.
Management Information System
The Company operates an integrated management information system with real-
time software that connects its corporate facility with its greenhouses through
a wide area network, augmented by a local area network at each greenhouse. This
system enables the Company to monitor every aspect of its operations, including
tomato plant production and forecasting, employee productivity, inventory
management and customer information. The Company has installed computer hookups
at various locations throughout each greenhouse that allow the greenhouse
employees to enter information about the maintenance and harvesting activities
for a particular row of tomatoes. This allows the Company to monitor the output
of each individual worker and the crop, as well as the workers in the pack
houses. The system also provides the Company with daily inventory control
information, such as the number of pounds of tomatoes harvested. With these
data, the Company is able to update its eight week production forecasts on a
weekly basis so that its sales staff knows how much inventory will become
available. The management information system also provides the Company with the
number of pounds of tomatoes that have been packaged and palletized for
shipping, which allows the Company to compile a daily shipping schedule to track
when each box was packed and the age of the Company's inventory, thus limiting
product spoilage. During 1999, the Company expects to implement an electronic
data interchange system for use with its supermarket customers.
All of the Company's accounting information and information regarding
materials usage and purchase orders are included in the system, as well as all
information about the Company's sales orders. The Company is then able to
prepare and track customer information regarding the amount and type of tomatoes
purchased on a weekly and monthly basis.
39
<PAGE>
The Company believes that its management information system has allowed it to
increase productivity and efficiency by providing management with the essential
information in a concise format. The Company believes that its management
information system has sufficient expansion capacity for the Company's planned
growth for at least the next two to three years.
Competition
The Company believes that the principal competitive factors affecting its
market include product consistency, quality and price, effectiveness of sales
and marketing efforts and company reputation. The Company competes in the
tomato market both with other hydroponic greenhouse tomato producers and with
commercial producers of field-grown tomatoes, both gas green (in which the
tomatoes are picked green and colored via ethylene gas during shipping) and vine
ripened. Field-grown tomatoes originate primarily from Florida, California or
Mexico, depending on the season. During 1997, field-grown tomatoes accounted
for approximately 92% of total U.S. fresh tomato production, while hydroponic
greenhouse tomatoes, both domestic and imported, accounted for the remaining
approximately 8%. Most field-grown tomatoes are sold at wholesale at
approximately one-half the price of the Company's greenhouse grown tomatoes.
During the local growing season, typically late summer, the Company also
competes with home- and locally-grown tomatoes. The Company competes with
field-grown tomatoes on the basis of overall quality, including taste, texture
and appearance, brand recognition and point-of-sale presentation. Field-grown
tomato competitors include numerous local and regional growers as well as a
number of major grower-shippers in the United States and Mexico, including
DiMare (Florida and California), Gargiulo (Florida and California), R&B Packing
(Mexico) and Meyers (Mexico). These major grower-shippers ship substantially
more tomatoes than the Company, have longer standing relationships with various
retailers and wholesalers and have greater financial resources than the Company.
The Company's competition in the hydroponic greenhouse tomato market comes
from various domestic and foreign hydroponic greenhouse tomato producers and
cooperatives, including domestic producers Eurofresh (with greenhouses in
Arizona), Village Farms (with greenhouses in New York, Pennsylvania, Texas and
Virginia) and BC Hothouse (with greenhouses in California). The Company
estimates that worldwide, hydroponic greenhouse tomatoes currently originate
from approximately 700 acres in the United States (including the approximately
111 acres owned by the Company), approximately 900 acres in Canada and an
estimated aggregate of more than 5,000 acres in Belgium, France, Israel,
Morocco, The Netherlands and Spain. Some portion of the foreign produced
hydroponic tomatoes are sold in the United States. Most of these sources produce
high-quality tomatoes superior in taste, texture and appearance to most field-
grown tomatoes and generally comparable in quality to the Company's
tomatoes.
Facilities
The Company owns the Estancia and Fort Lupton #2 greenhouses and will own the
facility but not the land under the Grants greenhouse. The Company operates the
Brush #1, Brush #2, Fort Lupton #1 and Rifle greenhouses pursuant to Operating
and Management Agreements, which are functionally equivalent to subleases. Each
of these four leased greenhouses was constructed as part of a cogeneration power
plant that is a "Qualifying Facility" under the terms of the Public Utility
Regulatory Policy Act of 1978. Each of these cogeneration facilities was
financed using a "project financing" structure that utilizes one single-purpose
entity to own the power plant and another to act as lessee of the greenhouse
from the first entity. Each greenhouse lessee in turn acts as sublessor to the
Company under an Operating and Management Agreement.
The Estancia, Fort Lupton #2 and Grants greenhouses are located on parcels of
160, 26.72 and 70 acres, respectively. The Company's four leased greenhouses
cover an aggregate of approximately 71 acres, and each is operated as part of a
cogeneration project, with the greenhouses using the surplus heat from the power
plants to heat the water used to heat the greenhouses. The Company's owned
greenhouses, Estancia and Fort Lupton #2, are, and all future facilities,
including the Grants greenhouse currently under construction, are expected to
be, stand-alone facilities with their own natural gas-fired boilers for heat
generation. Non-cogeneration greenhouses typically have higher costs to
generate heat but lower CO\\2\\ costs because the CO\\2\\ can be extracted from
the combustion process that generates the heat.
The remaining terms of the Operating and Management Agreements are four, six,
11 and 21 years for the Rifle, Brush #1, Brush #2 and Fort Lupton #1
greenhouses, respectively. Annual rent incurred during 1997 was $500,000 for
Rifle, $853,099 for Brush #1, $1,042,191 for Brush #2 and $1,033,802 for Fort
Lupton #1. The Company is required to maintain rent reserves with the owners of
the greenhouses (which are in turn pledged by the owners to their lenders)
40
<PAGE>
of one year's rent for the Fort Lupton #1 and Brush #2 greenhouses and one-half
year's rent for the Brush #1 greenhouse. Of the leased facilities, the Company
has to pay for its heat requirements only for Fort Lupton #1, which totaled
approximately $154,000 in 1997.
The Company currently has pack houses at Brush and Fort Lupton. The Brush
pack house handles most of the tomatoes from the two Brush greenhouses. The
Fort Lupton pack house packs the remaining tomatoes from Brush, as well as the
tomatoes from the Estancia, Rifle and the two Fort Lupton greenhouses. The
Company has constructed a pack house at its Estancia greenhouse and intends to
commence operation of this pack house upon completion of the Grants greenhouse.
The Estancia pack house will pack all of the Company's tomatoes grown in New
Mexico.
In May 1998, the Company commenced construction of the 20-acre greenhouse
facility in Grants, New Mexico on a site leased from the City of Grants pursuant
to a 60-year ground lease (the "Grants Lease"). Construction is expected to be
completed by November 1998. The Company's equity portion of the construction
cost is expected to be approximately $5.0 million, with the remaining cost
financed under a construction loan with Farm Credit, which will be converted to
a 10-year term loan upon completion of construction. The Grants Lease requires
that in lieu of rent, the Company must employ approximately 60 full-time people
from the twelfth through the sixtieth month and approximately 110 people
thereafter. The Company anticipates that it will be able to meet the 60
employee requirement with the proposed 20-acre facility and the 110 employee
requirement with an additional 20-acre greenhouse facility expected to be
constructed and in operation prior to the sixtieth month.
The Company intends to use a portion of the net proceeds of this offering to
fund some or all of the cost of constructing up to six additional 20-acre
greenhouse facilities, one of which is expected to be adjacent to the greenhouse
in Estancia and a second adjacent to the greenhouse in Grants. The Company
currently anticipates that construction of two of these facilities will commence
by mid-1999. These locations have been chosen because of the high number of
sunny days, particularly during the winter months, and the relatively high
elevation, which provides cooler summer temperatures, both of which are
climatological factors beneficial to greenhouse tomato production. The Company
believes that these sites have access to sufficient quantities of water and
natural gas for the new facilities. These facilities, and all future facilities,
are expected to incorporate the Company's unitized 20-acre integrated hydroponic
greenhouse production model. No sites have been selected for the remaining four
facilities, but the Company will select only those sites that provide micro-
climatic conditions of sunlight and temperature similar to those of its existing
greenhouses.
Employees and Training
As of June 30, 1998, the Company had 635 employees, all of whom were full
time, including 566 in growing and packaging, six in marketing and sales and 69
in administration. Each 20-acre greenhouse requires approximately 60 production
and pack house employees. The Company believes its relationship with its
employees is good. None of its work force is currently unionized.
Each 20-acre greenhouse is operated under the direction of a senior grower,
assisted by two junior growers, each responsible for a 10-acre section, and two
assistant growers, each responsible for five acres. As the junior and assistant
growers gain experience, they are given responsibility over more acreage. All
senior growers participate in a weekly conference call to discuss production
issues at the greenhouses, and meet once a month to walk through a different
greenhouse. The Company believes that these meetings provide a quality check on
each greenhouse's operation as the senior growers provide critiques of the
greenhouse being reviewed. The Company's team of senior, junior and assistant
growers is intended to provide the Company with a sufficient number of qualified
growers to staff properly the planned additional greenhouses, as well as to
assure that each greenhouse's plants receive the necessary inspection on a
regular basis. To date, turnover among the Company's growers has not been
significant. In 1997, the Company began to grant stock options to its senior
growers as an added incentive.
All other greenhouse and pack house employees are trained by the Company. To
date, the Company has been able to employ a sufficient number of people to staff
its operations. While there is some seasonal fluctuation in the Company's
employment levels for its non-administrative positions, the Company offers year
round employment to most of its agricultural workers. The Company believes that
this, coupled with an average starting wage of $6.00 per hour, gives it an
advantage in attracting and retaining capable and loyal agricultural workers.
41
<PAGE>
Risk Management; Insurance; Legal Proceedings
The Company is subject to various risks in operating its business, including
catastrophes such as floods, tornadoes, hail storms, severe winds or rain or
other adverse weather events, as well as other risks related to its production,
such as the loss of water or heat to the greenhouses or a mechanical failure in
the heating, ventilation or irrigation system. To mitigate against these risks,
the Company has direct property damage and business interruption insurance
coverage. The Company's prior insurance policy only covered a loss that resulted
from direct damage to the tomato plants and did not cover indirect damage or
consequential losses. Because the flood that occurred in 1997 at Ft. Lupton #1
was not deemed to have directly damaged all of the plants, the loss of the
plants was not totally covered and none of the Company's consequential losses
were covered. In December 1997, the Company obtained new insurance policies
covering both direct and indirect damage to the tomato plants and consequential
losses. The deductibles for this policy vary between $5,000 and $50,000 per
incident. The Company also maintains insurance including workers compensation,
accidental product contamination and product tampering, third-party damage,
liability and bodily injury coverage.
The Company is also subject to uninsured risks related to plant diseases and
pest infestations. See "Risk Factors--Risk of Loss to Crop from Pests or
Mechanical Failures." To protect against a number of production risks, the
Company has established early warning systems to alert it to the possibility of
events that could result in a loss of production. The early warning systems
include a 24-hour electronic monitoring system of the temperature, humidity,
CO\\2\\ and water quality in each greenhouse, with alarms for growers and
maintenance personnel in their homes that sound whenever one of these factors
reaches a critical level, pest trap cards that permit the Company to monitor the
number and type of pests that circulate throughout the greenhouse and weekly
leaf analysis to test for viral or bacterial contamination of the tomato plants.
To protect against a loss of heat or water to a greenhouse, the Company has
backup systems at each greenhouse that can utilize either natural gas or diesel
fuel, as well as short term water storage capabilities.
The Company currently is not a party to any material legal proceedings, nor is
it currently aware of any threatened material legal proceedings. From time to
time, the Company may become involved in litigation relating to claims arising
out of its operations in the normal course of its business.
Government Regulation
The manufacture, processing, packaging, storage, distribution and labeling of
food products are subject to extensive federal, state and foreign laws and
regulations. In the United States, the Company's business is subject to
regulation by the Food and Drug Administration ("FDA"), the United States
Department of Agriculture ("USDA") and various state and local agricultural and
public health authorities. Under the Federal Food, Drug and Cosmetic Act,
administered by the FDA, the Company is subject to a comprehensive regulatory
scheme governing labeling, packaging and food safety. This includes regulations
concerning the packaging process, quality assurance programs and claims of
health benefits of food products. In addition, the FDA enforces the Public
Health Services Act, which authorizes regulatory activity necessary to prevent
the introduction, transmission or spread of communicable diseases. The FDA and
USDA regulators charged with enforcing these laws and regulations have broad
powers to protect public health, including the power to inspect produce and the
Company's facilities, to order the shut down of a facility or the suspension of
delivery of the Company's produce, as well as the power to impose substantial
fines.
The U. S. Immigration and Naturalization Service ("INS") conducts periodic,
random inspections of the Company's greenhouses to ensure that all immigrant
employees have proper documentation. The Company attempts to confirm the legal
status of all applicants as part of its normal hiring procedures. The INS has
the power to impose substantial fines on the Company if it finds any
undocumented employees and require the Company to discharge such employees, in
which case the Company would suffer the loss of a portion of its labor force.
The Company also is subject to various federal and state regulations relating to
workplace safety and worker health, including the Fair Labor Standards Act,
Occupational Safety and Health Act and laws and regulations governing such
matters as minimum wages, overtime and working conditions.
The Company is subject to various federal, state and local environmental
regulations. These include the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended; the Resource Conservation
and Recovery Act, as amended; the Federal Water Pollution Control Act; the Clean
Air Act; the Hazardous Materials Transportation Act; the Toxic Substances
Control Act; and their state and local counterparts and equivalents.
42
<PAGE>
Most of the Company's greenhouses discharge wastewater effluent into municipal
waste treatment facilities, in some cases at levels that may require the Company
to pay wastewater surcharges to municipal water treatment authorities. Some of
these authorities have the contractual right to require the Company to limit the
level of discharges, construct pretreatment facilities or take other action to
reduce effluent discharges in the future. The Company and its operations are
also subject to state and local regulation through such measures as zoning,
water quality standards emissions, and building codes.
The Company also is subject to Canadian labeling laws for products sold in
British Columbia, Ontario and Quebec. The Greenver produce to be marketed by the
Company is subject to Mexican public health and environmental laws and
regulations.
The Company may become subject to additional laws or regulations administered
by the FDA, the USDA or other federal, state, foreign or local regulatory
authorities, the repeal of laws or regulations or more stringent interpretations
of current laws or regulations. The Company cannot predict the nature of any
new laws, regulations or interpretations, or what effect they might have on its
business. Changes in these laws could require the reconfiguration of the
Company's production, processing and transportation methods or increased
compliance costs, and could require the Company to make significant capital
expenditures or incur higher operating costs. Any failure by the Company to
comply with applicable laws and regulations could subject the Company to civil
penalties, including fines, injunctions, greenhouse or pack house closings,
recalls or seizures, as well as potential criminal sanctions, any of which could
have a material adverse effect on the Company.
The Company has never received notice of alleged violation of any of these
laws or regulations. To date, the Company's regulatory compliance costs have
not been significant although there can be no assurance that the Company will
not experience significant compliance costs in the future.
Company Trademarks
The Company or the LLC has used the trademark consisting of the words
"Colorado Greenhouse Quality Hydroponic Produce," together with the circular
sunrise over snowcapped mountains design (the "Design Mark") and the trademark
"Colorado Greenhouse" (collectively, the "Marks") to identify its produce since
at least September 1993, each of which has been registered in the United States.
The Marks are placed directly on produce as well as on packaging and promotional
materials. The Company has also filed a Canadian trademark application covering
the "Colorado Greenhouse" trademark in Canada.
In connection with the Company's new marketing campaign that began in October
1998, the Company has designed new trademarks for its products. The Company has
filed an intent to use trademark application for these new marks in the United
States.
43
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The directors, executive officers and key employees of the Company are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James R. Rinella 64 Chief Executive Officer, President
and Director
Matthew B. Cook 46 Executive Vice President of Production
Alan R. Fine 45 Vice President of Finance, Secretary
and Treasurer
Ludo van Boxem 36 Director of Agricultural Production
R.C. Mercure, Jr. 67 Chairman of the Board
Charles A. Hurth, Jr. 62 Director
Craig H. Sakin 38 Director
Edward J. Wetherbee 40 Director
</TABLE>
James R. Rinella has served as the Company's Chief Executive Officer since
October 1997 and has been a director and the President of the Company since May
1998. From 1992 to 1997, Mr. Rinella was President of James Rinella &
Associates, an agri-business consulting company, providing consulting services
to several U.S. based agri-businesses and assisting with projects to export
produce from the Middle East to Europe. From 1986 to 1992, Mr. Rinella served
as President, Chief Operating Officer and a director of Sun World International,
a large privately-owned grower, packer and marketer of fresh fruits and
vegetables located in California.
Matthew B. Cook became the Company's Executive Vice President of Production
in October 1997. He served as the Company's General Manager from 1993 to 1995
and as its Chief Operating Officer from 1995 to October 1997. Mr. Cook also
served as a director of the Company from its inception until September 1997.
Prior to joining the Company, Mr. Cook served in a variety of operations
management positions in the United States and England, including three years as
General Manager of Eurofresh Van Heyningen Brothers, a hydroponic greenhouse
producer of tomatoes in Pennsylvania, and two years as General Manager for Van
Heyningen Brothers, U.K., one of England's largest producers of hydroponic
greenhouse tomatoes.
Alan R. Fine has served as the Company's Vice President of Finance, Secretary
and Treasurer since October 1997. Prior to joining the Company as a consultant
in August 1997, Mr. Fine was the Chief Financial Officer of Gold Coast Beverage
Distributors, one of the largest beer distributors in the United States, from
1994 to 1997. During 1994, Mr. Fine worked for a small public accounting firm,
and from 1990 to 1993, Mr. Fine was a controller at American Potomac
Distributing Company. Mr. Fine is a Certified Public Accountant.
Ludo van Boxem has served as the Company's Director of Agricultural Production
since October 1997. From 1988 until joining the Company, Mr. van Boxem served
as the director of his own consulting firm, providing consulting services to the
Company and to other greenhouse companies growing hydroponic tomatoes in
Belgium, France and The Netherlands.
R.C. Mercure, Jr., Ph.D., has served as Chairman of the Board since May 1998
and has been a director of the Company since its inception. Since January 1996,
Dr. Mercure has been Chairman and Chief Executive Officer of CDM Optics, Inc.,
an optical image processing technology company. From 1988 to 1996, Dr. Mercure
was a Professor of Engineering Management at the University of Colorado at
Boulder. During that time, he was the Managing Director of the University of
Colorado at Boulder's Optoelectronic Computing Systems Center (a National
Science Foundation
44
<PAGE>
engineering research center) (from 1988 to 1993), a Director of its Masters in
Engineering Management Program (from 1988 to 1996) and Director of Technology
Transfer of the University of Colorado System (from 1991 to 1993). From 1957 to
1980, he held various positions at Ball Corporation, a manufacturer of
containers and an aerospace technology company, including Vice President,
Corporate Development, Group Vice President, CEO of Tally Corporation (a Ball
affiliate) and President of Ball Brothers Research Corporation. He is currently
a Director of Applied Magnetics Corporation and Ball Corporation.
Charles A. Hurth, Jr. has been a director of the Company since September 1997.
Mr. Hurth is of counsel to the law firm of Hurth Yeager & Sisk and until 1987,
was a partner in that firm. Since 1995, Mr. Hurth has been the President of
Northeast Consortium for Engineering Education, Inc., a consortium of colleges
and universities. From 1988 until its sale in 1996, Mr. Hurth was the
controlling stockholder and a member of the board of directors of Financial
Holdings, Inc., a bank holding company.
Craig H. Sakin has been a director of the Company since January 1997. Since
1995, Mr. Sakin has been a Managing Director of Catterton-Simon Partners, Inc.,
a private equity investment firm that specializes in investments in consumer
product and service companies and that led the purchase of the Series B
Convertible Preferred Stock from the Company in January 1997. From 1992 to
1996, Mr. Sakin served as Chairman of Gold Coast Beverage Distributors, one of
the largest beer distributors in the United States. Mr. Sakin brings senior
level operating experience to the Company, specifically in the area of
operational turnarounds, as well as over ten years in merchant banking and
investment banking. Mr. Sakin also serves on the boards of directors of several
private companies.
Edward J. Wetherbee has been a director of the Company since its inception.
From November 1996 until October 1997, Mr. Wetherbee served as the Company's
Chief Executive Officer and until May 1998, served as the Company's Chairman of
the Board. From 1988 until 1998, he served as a member of the Management
Committee of Brush Greenhouse Partners ("BGP"), the entity that entered into the
Brush #1 greenhouse Operating and Management Agreement with the Company, was a
former member of the LLC prior to January 1, 1997 and stockholder of the
Company. From 1992 until 1998, Mr. Wetherbee also served as one of the managers
of Brush Greenhouse Partners II, LLC ("BGPII"), which is also a former member of
the LLC and stockholder of the Company. From 1984 to 1998, Mr. Wetherbee
served in various capacities at Colorado Venture Management, a seed-stage
venture capital firm, most recently as its Executive Vice President.
Board Committees
The Board of Directors has a Compensation Committee, the current members of
which are Messrs. Hurth, Mercure and Sakin, and an Audit Committee, the current
members of which are Messrs. Wetherbee and Sakin. The Compensation Committee
reviews and makes recommendations to the Board regarding the Company's
compensation policies and all forms of compensation to be provided to executive
officers and directors of the Company. The Compensation Committee also reviews
bonus and stock compensation arrangements for all other employees of the Company
and administers the Company's 1996 Stock Option Plan. The Audit Committee
reviews and monitors the Company's financial reporting and its external audits.
The Audit Committee also consults with management and the Company's independent
auditors and recommends the appointment of the Company's independent auditors.
Compensation of Directors
In February 1998, each member of the Company's Board of Directors was granted
non-qualified stock options to purchase 10,000 shares of Common Stock for past
services rendered to the Company. These options were fully vested at the time of
grant, expire seven years from the date of grant and have an exercise price of
$4.25 per share. Commencing in September 1998, each director will be paid
$16,000 per year, plus an additional $1,000 for each meeting of the Board of
Directors attended, and each director of the Company serving at the time of each
annual meeting of the Board of Directors, beginning with the 1999 annual
meeting, will be granted a fully vested non-qualified stock option to purchase
10,000 shares of Common Stock at its then market value.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors currently consists of
Messrs. Hurth, Mercure and Sakin. No interlocking relationship exists between
any member of the Company's Board of Directors or the Compensation
45
<PAGE>
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
Executive Compensation
The following table sets forth the 1997 compensation for the Company's current
and former chief executive officer and the two other highest compensated
executive officers (the "Named Executive Officers"). No other employee earned
more than $100,000 in compensation from the Company in 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Awards(1)
-------------
Annual Compensation
------------------- Securities All Other
Underlying Compen-
Name and Principal Position Salary Bonus Options(#) sation(2)
- --------------------------- ---------- ------- ------------- ------------
<S> <C> <C> <C> <C>
James R. Rinella(3)............................... $ 38,462 $ -- 250,000 $17,657
Chief Executive Officer, President and Director
Edward J. Wetherbee(4)............................ 120,000 -- -- 2,031
Director
Matthew B. Cook................................... 120,000 15,000 -- 9,512
Executive Vice President of Production
Alan R. Fine(5)................................... 46,269 -- 100,000 13,500
Vice President of Finance,
Secretary and Treasurer
</TABLE>
- --------------------
(1) Consist of options to purchase shares of Common Stock granted under the
Company's 1996 Stock Option Plan.
(2) Consists of: (i) reimbursement paid to Mr. Rinella for moving expenses and
an automobile allowance, (ii) matching employer contributions under the
Company's Employee 401(k) Plan for Mr. Wetherbee, (iii) matching employer
contributions under the Company's Employee 401(k) Plan and an automobile
allowance for Mr. Cook, and (iv) reimbursement paid to Mr. Fine for moving
expenses.
(3) Mr. Rinella became the Chief Executive Officer of the Company on October 20,
1997 at an initial base salary of $200,000.
(4) Mr. Wetherbee resigned as the Company's Chief Executive Officer on October
20, 1997 and is no longer an employee of the Company.
(5) Mr. Fine served as a consultant to the Company from August 1997 to September
1997 and became an officer and employee of the Company on October 1, 1997 at
an initial base salary of $105,000, which was increased to $125,000 on
January 12, 1998.
The following table sets forth information concerning options to purchase
shares of the Company's Common Stock granted to the Named Executive Officers
during the year ended December 31, 1997. No executive officer exercised any
options during 1997.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------ Potential Realized Value at
Number of Assumed Annual Rates of
Securities Percentage of Stock Price Appreciation
Underlying Total Options Exercise For Option Term(2)
Options Granted to Price Expiration ---------------------------
Name Granted (#) Employees Per Share Date 5% 10%
---- ----------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James R. Rinella (1)... 250,000 51.0% $4.25 10/31/04 $432,500 $1,007,500
Alan R. Fine (1)....... 100,000 20.4% $4.25 9/31/04 173,000 403,000
</TABLE>
- --------------------
(1) Of Mr. Rinella's 250,000 options, 94,116 are incentive options and 155,884
are non-qualified options. All of Mr. Fine's 100,000 options are incentive
options. All of Messrs. Rinella's and Fine's stock options become
exercisable upon consummation of this offering.
(2) The 5% and 10% assumed rates of appreciation are prescribed by the rules and
regulations of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of the future trading prices of its
Common Stock. There can be no assurance that any of the values reflected in
this table will be achieved.
46
<PAGE>
Aggregated Options Exercised in
Last Fiscal Year and Option Values
The following table sets forth information with respect to the Named Executive
Officers concerning unexercised options held as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Options Value of Unexercised
at Fiscal Year-End (#) In-the-Money Options (1)
------------------------------ --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Rinella............ 23,529 226,471 $ 135,292 $1,302,208
Alan R. Fine................ 23,529 76,471 135,292 439,708
Matthew B. Cook............. 101,363 101,362 938,621 938,612
Edward J. Wetherbee......... 212,725 -- 1,934,734 --
</TABLE>
- -----------------------
(1) Represents the difference between the fair market value of the shares of
Common Stock as of the date hereof (based on an assumed initial public
offering price of $10.00) and the exercise price of the options ($4.25 for
Messrs. Rinella and Fine and 10,000 of Mr Wetherbee's options and $0.74 for
Mr. Cook and the remainder of Mr. Wetherbee's options).
Agreements with Executive Officers
The Company has a five-year employment agreement with Mr. Rinella that expires
on December 31, 2002. Under his employment agreement, Mr. Rinella receives an
initial base salary of $200,000, subject to periodic reviews for potential
salary increases, and is eligible for an annual bonus of up to 50% of his base
salary if the Company achieves milestones to be established annually by the
Compensation Committee. Mr. Rinella also receives an annual automobile
allowance. Mr. Rinella's employment agreement also contains a non-competition
clause for a period of 18 months following termination of employment. If Mr.
Rinella is terminated prior to the expiration of his employment agreement, other
than for cause, including termination as a result of a change in control of the
Company, or in the event of his disability, Mr. Rinella is entitled to one
year's annual salary, payable in 12 equal monthly payments.
The Company has an employment agreement with Mr. Cook, with automatic one-
year renewal periods unless either the Company or Mr. Cook provides notice of
non-renewal at least 90 days prior to the end of the term or any renewal
thereof. Mr. Cook's agreement was renewed automatically for 1998. Mr. Cook's
agreement provides for an initial base salary of $120,000, which was increased
to $135,000 on January 12, 1998, and is subject to periodic adjustments. Mr.
Cook also receives an annual vehicle allowance. If Mr. Cook's agreement is
terminated by the Company without cause, Mr. Cook is entitled to a lump-sum
severance payment equal to his then annual salary. Mr. Cook's employment
agreement also contains a non-competition clause for a period of 18 months
following termination of employment.
The Company has a one-year employment agreement with Mr. Fine that expires on
September 30, 1998, with automatic one-year renewal periods unless either the
Company or Mr. Fine provides notice of non-renewal at least 60 days prior to the
end of the term or any renewal thereof. Mr. Fine's employment agreement
provides for an initial base salary of $105,000, which was increased to $125,000
on January 12, 1998, and is subject to periodic adjustments. He is eligible for
annual bonuses of up to 30% of his base salary if the Company achieves
milestones to be established annually by the Compensation Committee. If Mr.
Fine's employment agreement is terminated by the Company without cause, he is
entitled to a lump-sum severance payment equal to his then annual salary. Mr.
Fine's employment agreement also contains a non-competition clause for a period
of 18 months following termination of employment.
The Company entered into a Separation Agreement and Release with Mr. Wetherbee
upon his resignation as Chief Executive Officer in October 1997, under which Mr.
Wetherbee continued to receive his annual salary and continued to participate in
the Company's 401(k) program until the end of 1997. Mr. Wetherbee's unvested
stock options also vested immediately. Under his agreement, Mr. Wetherbee
received a severance payment of $120,000, paid as a $40,000 lump sum payment on
January 2, 1998 and the balance in 12 equal monthly installments.
Stock Option Plan
The Company's Board of Directors and stockholders adopted the 1996 Stock
Option Plan, effective November 19, 1996. The Stock Option Plan permits the
grant of non-qualified options ("NQOs") and incentive stock options ("ISOs") to
employees, directors and consultants of the Company or any affiliated companies.
The plan expires on November 1,
47
<PAGE>
2006. A total of 1,580,135 shares of Common Stock have been reserved for awards
under the plan, and as of May 31, 1998, options to purchase 1,117,495 shares
have been granted, 1,026,691 shares of which remain outstanding. Options
covering 52,794 shares of Common Stock have been exercised at a price per share
of $0.74. The Stock Option Plan is administered by the Compensation Committee of
the Board of Directors (the "Committee"). The Committee has the discretion to
determine the employees and consultants to whom options may be granted under the
Stock Option Plan and the manner in which such options will vest. The maximum
number of shares subject to one or more awards that can be granted during the
term of the Stock Option Plan to any employee, consultant or director is 450,000
shares of Common Stock, and ISOs may be granted only to employees. ISOs must
have an exercise price equal to the fair market value of the Common Stock on the
date of grant (110% in the case of an ISO granted to an employee who owns Common
Stock having more than 10% of the total voting power of the Company). Options
granted under the Stock Option Plan are not transferable other than by will or
by the laws of descent and distribution.
Upon (i) the reorganization (other than a bankruptcy reorganization), merger
or consolidation of the Company (except where the Company is the continuing
company and there is no change in the terms of the outstanding shares of Common
Stock), (ii) the sale of all or substantially all of the assets of the Company
(except where the Company continues as a holding company of an entity that
conducts the business formerly conducted by the Company), or (iii) the
dissolution or liquidation of the Company, all outstanding options will
terminate automatically when the event occurs if the Company gives the option
holders 30 days' prior written notice of the event. Notice is not required for
a merger or consolidation or for a sale if the Company, the successor or the
purchaser makes adequate provision for assumption of all outstanding options or
the substitution of new options on terms comparable to the outstanding options.
The Committee may, in its sole discretion, accelerate the vesting of any option,
in whole or in part, under the foregoing circumstances.
Limitation of Liability and Indemnification Matters
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") and Amended and Restated Bylaws (the "Bylaws") provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted by Delaware law. The Company's Charter also eliminates to the fullest
extent permitted by Delaware law, liability of a director to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director. As
a result of this provision, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The LLC was organized in 1993 to take over operations of the Brush #1, Brush
#2 and Fort Lupton #1 greenhouses. Effective January 1, 1996, the LLC assumed
operation of the Rifle greenhouse. The LLC has entered into Operating and
Management Agreements with the following entities (with the respective
greenhouse indicated): BGP (Brush #1), BGPII (Brush #2), Rocky Mountain Produce
LLC (Fort Lupton #1) and Wolf Creek Rifle LLC (Rifle).
Effective January 1, 1997, the Company and the LLC effected a reorganization,
by which the membership interests in the LLC held by BGP and BGPII were
exchanged for a total of 6,200,000 shares of the Company's Series A Preferred
Stock. Colorado Power Partners ("CPP") and Brush Cogeneration Partners ("BCP")
own the Brush #1 and Brush #2 power projects and are under common control with
entities that own and control the related greenhouse lessee. Cogen Technology,
Inc. ("CTI") owns controlling interests in CPP and BCP. American Atlas #1 L.P.
("AA#1"), an entity that has substantially the same equity ownership as CTI, is
the operator of the Rifle power plant, the sublessor of the Rifle greenhouse,
and controls Wolf Creek Rifle LLC. The Company incurred rent expense for the
Brush #1 greenhouse of $853,099 in 1995, $853,094 in 1996 and $853,099 for 1997.
The Company incurred rent expense for the Brush #2 greenhouse of $853,099 in
1995, $900,378 in 1996 and $1,042,191 in 1997. The Company incurred rent
expense for the Rifle greenhouse of $500,000 in 1996 and $500,000 in 1997.
The following persons are involved in the management of these entities or the
parties involved in the development of the power projects: R.C. Mercure, Jr. is
a limited partner of AA#1, owns 6.91% of the outstanding capital stock of CTI
and is the Company's Chairman of the Board. Charles A. Hurth, Jr. is a limited
partner of AA#1, owns 4.24% of the outstanding capital stock of CTI and is a
director of the Company. Edward J. Wetherbee owns 0.17% of the
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outstanding capital stock of CTI and is a director of the Company. Each of these
persons also is a beneficial owner of shares of the Company's Series A Preferred
Stock as a result of the reorganization of the LLC and the Company. See
"Principal Stockholders."
Sale of Series B Convertible Preferred Stock
In January 1997, the Company completed the $15 million sale of its Series B
Convertible Preferred Stock at $8.00 per share to Catterton-Simon Partners III,
L.P. (875,000 shares), BCI Growth IV, L.P. (875,000 shares), Catterton-CGH
Partners, L.L.C. (31,250 shares) and H&Q Colorado Greenhouse Investors, LLC
(93,750 shares), an affiliate of one of the Representatives of the Underwriters
(together, the "Purchasers"). Craig H. Sakin, a director of the Company, is a
manager of the entity that is the general partner of Catterton-Simon Partners
III, L.P. and is the manager of the entity that is the managing member of
Catterton-CGH Partners, LLC. In connection with the sale of the Series B
Convertible Preferred Stock, the Company and the Purchasers entered into a
Registration Rights Agreement, whereby the Company agreed to register the Common
Stock issued upon conversion of the Series B Convertible Preferred Stock in
certain circumstances, at the Company's expense. See "Description Of Capital
Stock--Registration Rights." Initially, the Series B Convertible Preferred
Stock was convertible into Common Stock on a one share for one share basis. In
September 1997, the conversion rate of the Series B Convertible Preferred Stock
was reduced to 1.88235 shares of Common Stock for each Series B share, or an
effective conversion price of $4.25 per share. This reduction was part of a
negotiated agreement with the Series B stockholders as a result of the Company's
production problems in 1997. Based on the terms of the Series B Preferred
Stock, the conversion rate will increase to approximately 1.69 shares of Common
Stock for each Series B share, based on an assumed initial public offering price
of $10.00 per share. If the initial public offering price is higher than
$10.00, the Series B Preferred Stock will convert automatically into a fewer
number of shares of Common Stock. For example, if the initial public offering
price is $11.00 per share, the Series B Preferred Stock will convert
automatically into 3,030,680 shares of Common Stock.
Sale of Series C Convertible Preferred Stock
In May 1998, the Company completed the sale of $6.0 million of its Series C
Convertible Preferred Stock at $5.50 per share. The Series C Convertible
Preferred Stock was offered by the Company in two tranches solely to its
existing preferred stockholders or their related parties on a pro rata basis.
Messrs. Mercure (29,471 shares), Hurth (20,754 shares) and Wetherbee (5,658
shares), all directors of the Company, were among the existing stockholders who
purchased shares of the Series C Convertible Preferred Stock. The Company also
sold 5,891 shares of Series C Convertible Preferred Stock to Mr. Rinella, the
Company's Chief Executive Officer, although he was not a stockholder at the
time. The Company determined the $5.50 per share offering price in February 1998
based on the arms' length $4.25 price set in September 1997, increased by the
maximum additional price per share that the Company believed appropriate.
Although the Board of Directors approved the sale of the Series C Convertible
Preferred Stock in February 1998 and a significant number of the Company's
shareholders indicated that they would approve of and participate in the
transaction at that time, the offering was not closed until May 1998 because the
Company's then existing shareholders Agreement required at least a 60 day notice
period for the closing of any rights offering. The Company entered into a
Registration Rights Agreement with the Series C Convertible Preferred Stock
purchasers, whereby the Company agreed to register the Common Stock issued upon
conversion of the Series C Convertible Preferred Stock in certain circumstances,
at the Company's expense. See "Description of Capital Stock--Registration
Rights." The Series C Convertible Preferred Stock converts into Common Stock on
a one share for one share basis, subject to adjustment for stock splits, stock
dividends, recapitalizations, dilutive issuances and similar matters.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of the Company's Common Stock as of May 31, 1998, assuming conversion of all
outstanding preferred stock to Common Stock upon consummation of this offering
and as adjusted to reflect the sale of the Common Stock offered hereby and the
accelerated vesting of some options, for (i) each director and each Named
Executive Officer of the Company, (ii) all directors and Named Executive
Officers of the Company as a group, (iii) each person known by the Company to
own beneficially 5% or more of the outstanding shares of Common Stock and (iv)
each Selling Stockholder. All beneficial ownership is sole and direct unless
otherwise indicated.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering After Offering (2)
-------------------- Number of Shares ----------------------
Name of Beneficial Owner (1) Number Percent Being Offered (2) Number Percent
- ---------------------------- --------- --------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
James R. Rinella (3)............ 255,891 2.2% -- 255,891 1.7%
Matthew B. Cook................. 152,043 1.3 -- 152,043 1.0
Alan R. Fine (4)................ 100,000 * -- 100,000 *
R.C. Mercure, Jr................ 71,196 * -- 71,196 *
Charles A. Hurth, Jr............ 53,830 * -- 53,830 *
Craig H. Sakin (5).............. 1,738,916 15.2 450,000 1,288,916 8.6
Edward J. Wetherbee............. 260,879 2.3 -- 260,879 1.7
All directors and Named
Executive Officers as a
group (7 persons).............. 903,839 7.9 -- 903,839 6.0
Cogen Technology, Inc. (6)...... 3,686,877 32.2 370,262 3,316,615 22.2
Catterton (7)................... 1,728,916 15.1 450,000 1,278,916 8.5
BCI Growth IV, L.P. (8)......... 1,669,297 14.6 450,000 1,219,297 8.1
Vernon J. Twombly (9)........... 1,191,293 10.4 107,232 1,084,061 7.2
Robert and Sally Hunt (10) (11). 361,997 3.2 32,304 329,693 2.2
Nicholas G. Muller, Inc......... 157,384 1.4 15,806 141,578 *
Gregory L. Twombly, Inc......... 155,639 1.4 13,889 141,750 *
George W. Holbrook, Jr. (12).... 148,491 1.3 14,912 133,579 *
Eric Jacobson (11).............. 64,915 * 6,519 58,396 *
Paul F. Glenn (11) (13)......... 60,125 * 6,039 54,086 *
Barbara A. Brenton.............. 42,474 * 3,790 38,684 *
Marian Jacobson................. 40,370 * 4,054 36,316 *
Ronald D. Bloomer............... 40,158 * 4,033 36,125 *
Louis J. DellaCava (11) (14).... 39,789 * 3,996 35,793 *
Marian H. Kent.................. 37,982 * 3,814 34,168 *
Elizabeth A. Bower.............. 24,320 * 2,442 21,878 *
James R. McGoogan (15).......... 23,875 * 2,398 21,477 *
Thomas P. Brock................. 16,667 * 1,674 14,993 *
Edwin H. Morgens................ 16,021 * 1,609 14,412 *
Boyd R. and Eva J. West......... 15,959 * 1,424 14,535 *
J. Allen Mactier................ 10,515 * 1,056 9,459 *
NJ Hackstock Cogen, Inc......... 7,750 * 778 6,972 *
M.E.C. Dean..................... 6,543 * 657 5,886 *
Jana Jacobson and John Frenz
(11)........................... 3,884 * 390 3,494 *
Joyce A. Edwards................ 3,690 * 371 3,319 *
T. Kim and Brian J. Kenney...... 3,369 * 338 3,031 *
C.A. Carroll.................... 3,272 * 329 2,943 *
</TABLE>
- ---------------------
* Less than 1%
(1) The address for Messrs. Rinella, Cook, Fine, Mercure, Hurth, Sakin and
Wetherbee is c/o Colorado Greenhouse Holdings, Inc., 1490 West 121st Street,
Suite 202, Westminster, Colorado 80234. The addresses of the other
beneficial owners of 5% or more of the Company's outstanding Common Stock
are as follows: Cogen Technology, Inc., 4845 Pearl East Circle, Boulder,
Colorado 80302; Catterton-Simon Partners III, L.P. and Catterton-CGH
Partners, L.L.C., c/o Catterton Partners, Inc., 9 Greenwich Office Park,
Greenwich, Connecticut 06830; BCI Growth IV, L.P. , c/o BCI Advisors, Inc.,
Glenpointe Center West, Teaneck, New Jersey 07666; and Vernon J. Twombly,
Inc. and Twombly, LLC, 642 Sinclair Road, Snowmass Village, Colorado 81615.
(2) Certain of the Selling Stockholders have granted the Underwriters an over-
allotment option. If this option is exercised in full, the following
persons or entities will sell the following additional amounts of Common
Stock in this offering: Cogen Technology, Inc. (464,029 shares),Vernon J.
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<PAGE>
Twombly, Inc. (134,388 shares), Robert and Sally Hunt. (40,381 shares, of
which 36,309 shares of Common Stock are being offered by MWH, Inc. and
4,072 shares of Common Stock are being offered by The Mitchell-Hunt Trust),
Nicholas G. Muller, Inc. (19,808 shares), Gregory L. Twombly, Inc. (17,361
shares), George W. Holbrook, Jr. (18,543 shares, of which 9,347 shares of
Common Stock are being offered by George W. Holbrook, Jr., 5,387 shares of
Common Stock are being offered by Holbrook & Company, 3,809 shares of
Common Stock are being offered by Holbrook Partners and 146 shares of
Common Stock are being offered by Brush Flower & Power Corporation), Eric
Jacobson (8,170 shares), Paul F. Glenn (7,576 shares, of which 4,877 shares
of Common Stock are being offered by Paul F. Glenn and 2,690 shares of
Common Stock are being offered by The Paul F. Glenn Revocable Trust),
Barbara A. Brenton (4,738 shares), Marian Jacobson (5,081 shares), Ronald
D. Bloomer (5,054 shares), Marian H. Kent (4,780 shares), Elizabeth A.
Bower (3,061 shares), James R. McGoogan (3,005 shares, of which 2,859
shares are being offered by James R. McGoogan and 146 shares of Common
Stock are being offered by Brush Flower & Power Corporation), Thomas P.
Brock (2,098 shares), Edwin H. Morgens (2,016 shares), J. Allan Mactier
(1,323 shares), NJ Hackstock Cogen, Inc. (975 shares), M.E.C. Dean (823
shares), Louis J. DellaCava (5,008 shares, of which 519 shares of Common
Stock are being offered by Mr. DellaCava and 4,489 shares of Common Stock
are being offered by L.J.D. Enterprises Profit Sharing P&T), Jana Jacobson
and John Frenz (489 shares), Joyce A. Edwards (464 shares), T. Kim and
Brian J. Kenney (424 shares) and C.A. Carroll (412 shares). The numbers of
shares and percents in the table above assume no exercise of the
(3) Underwriters' over-allotment option. Consists of 250,000 shares of
Common Stock issuable upon exercise of options that become exercisable upon
consummation of this offering and 5,891 shares owned by Mr. Rinella.
(4) Consists of 100,000 shares of Common Stock issuable upon exercise of
options that become exercisable upon consummation of this offering.
(5) Includes 1,669,297 shares of Common Stock owned by Catterton-Simon Partners
III, L.P. and 59,619 shares of Common Stock owned by Catterton-CGH
Partners, L.L.C. Mr. Sakin is an officer of the general partners of these
entities. He disclaims beneficial ownership of all the shares held by such
entities.
(6) Cogen Technology, Inc.'s ("CTI") board of directors has voting power and
investment power over these shares. The following individuals are members
of CTI's board of directors: Julie Boston, William E. Coleman, A. Kit
Jackson and Eric Jacobson. These directors also individually own shares of
Common Stock. The directors disclaim beneficial ownership of all of the
shares held by CTI.
(7) Represents 1,669,297 shares of Common Stock owned by Catterton-Simon
Partners III, L.P. and 59,619 shares of Common Stock owned by Catterton-CGH
Partners, L.L.C. (together, "Catterton"). Catterton-Simon Partners III,
L.P. is selling 434,475 shares in the offering and Catterton-CGH Partners,
L.L.C. is selling 15,525 shares in the offering. Catterton-Simon Managing
Partner III, L.L.C. is the general partner of Catterton-Simon Partners III,
L.P. and has voting and investment power over the shares held by it. The
voting and investment decisions for Catterton-Simon Managing Partner III,
L.L.C. require the unanimous vote of Craig H. Sakin, Michael Chu, Frank
Vest, Peter Simon and J.B. Bolduck. Catterton Partners Management Company,
L.L.C. is the managing member of Catterton-CGH Partners, L.L.C. and has
voting and investment power over the shares held by it. The voting and
investment decisions for Catterton Partners Management Company, L.L.C.
require the unanimous vote of Craig H. Sakin, Michael Chu and Frank Vest.
Messrs. Sakin, Chu, Vest, Simon and Bolduck disclaim beneficial ownership
of all of the shares held by Catterton.
(8) The managing members of Glenpointe Associates LLC, the general partner of
BCI Growth IV, L.P. ("BCI"), have voting power and investment power over
these shares. The managing members are Steve Eley, Hoyt Goodrich, Bart
Goodwin, Matt Gormly, Mark Hastings, Ted Horton, Don Remey and Peter
Wilde. The managing members disclaim beneficial ownership of the shares
held by BCI.
(9) Includes 1,067,764 shares and 123,529 shares of Common Stock owned by
Vernon J. Twombly, Inc. and Twombly LLC, respectively. Mr. Twombly is the
Chief Executive Officer and sole shareholder of Vernon J. Twombly, Inc. and
the Manager and sole member of Twombly LLC. Only Vernon J. Twombly, Inc. is
offering shares of Common Stock for sale in this offering.
(10) Represents 325,500 shares of Common Stock owned by MWH, Inc. and 36,497
shares of Common Stock owned by The Mitchell-Hunt Trust. The Mitchell-Hunt
Trust owns 100% of the capital stock of MWH, Inc. Robert and Sally Hunt
are the settlors, co-trustees and lifetime beneficiaries of The Mitchell-
Hunt Trust and the officers and directors of MWH, Inc.
(11) The number of shares being offered includes Common Stock to be received
upon the conversion of the Series C Convertible Preferred Stock.
(12) Represents 74,263 shares of Common Stock owned by George W. Holbrook, Jr.,
42,802 shares of Common Stock owned by Holbrook & Company, of which Mr.
Holbrook is the general partner, 30,264 shares of Common Stock owned by
Holbrook Partners, of which Mr. Holbrook is the general partner and 1,162
shares of Common Stock owned by Brush Flower & Power Corporation, of which
Mr. Holbrook owns 50% of the outstanding capital stock.
(13) Represents 38,750 shares of Common Stock owned by Paul F. Glenn and 21,375
shares of Common Stock owned by The Paul F. Glenn Revocable Trust, of which
Mr. Glenn is the trustee.
(14) Represents 4,126 shares of Common Stock owned by Louis J. DellaCava and
35,663 shares of Common Stock owned by LJD Enterprises Profit Sharing P&T,
of which Mr. DellaCava is the trustee.
(15) Represents 22,713 shares of Common Stock owned by James R. McGoogan and
1,162 shares of Common Stock owned by Brush Flower & Power Corporation, of
which Mr. McGoogan owns 50% of the outstanding capital stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the Company
will consist of 55,000,000 shares of Common Stock, par value $.001 per share,
and 3,000,000 shares of preferred stock, par value of $.001 per share. The
preferred stock may be designated as one or more separate series by the
Company's Board of Directors. The following summary of various provisions of
the Common Stock and preferred stock do not purport to be complete and are
subject to, and qualified by, the provisions of the Company's Certificate of
Incorporation.
Common Stock
Immediately prior to the consummation of this offering, there will be
10,498,361 shares of Common Stock outstanding, including 10,476,126 shares of as
a result of the automatic conversion of the Series A Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock and exercise
of the Warrant by Hambrecht & Quist, LLC ("H&Q"), one of the Representatives of
the Underwriters. There are also outstanding options to purchase 1,026,691
shares of Common Stock at a weighted average exercise price of $2.65 per share.
The holders of the Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Cumulative
voting is not permitted in the election of directors. Subject to any
preferences that may be applicable to any then outstanding series of preferred
stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of legally available funds. In the
event of a liquidation, dissolution or winding up of the Company, holders of the
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All shares of Common
Stock, when issued, are fully paid and non-assessable.
Preferred Stock
Upon completion of this offering, the Board of Directors will be authorized,
subject to limitations prescribed by law, without any further stockholder
approval, to issue from time to time up to 3,000,000 shares of preferred stock
in one or more series and to fix or alter the designations, rights, powers,
preferences, and any qualifications, limitations, or restrictions on the shares
of each such series thereof, including the consideration to be received
therefor, dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any series
or designation of such series. The availability of preferred stock may have the
effect of delaying, deferring or preventing a change of control of the Company.
The Board of Directors has no present intention to issue any preferred stock.
Warrants
In connection with services rendered in the placement of the Company's Series
B Convertible Preferred Stock, on January 21, 1997, the Company issued to H&Q
the Warrant for the purchase of 18,500 shares of the Series B Convertible
Preferred Stock. The Warrant has an exercise price of $8.00 per share. The
Warrant contains an automatic exercise provision triggered upon completion of
this offering and a net issue election, pursuant to which H&Q will be issued
9,743 shares of Series B Preferred Stock without any cash payment, based on an
assumed initial public offering price of $10.00. The Series B Convertible
Preferred Stock will be converted automatically into 16,466 shares of Common
Stock at 1.69 shares of Common Stock for each Series B share, based upon an
assumed initial public offering price of $10.00 per share.
Registration Rights
Holders of 7,840,041 shares of Common Stock (the "Registrable Securities") and
their permitted transferees have registration rights as a result of agreements
entered into by the Company in connection with the issuance of the Series A
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock.
The Series A Registration Rights Agreement grants certain holders of Series A
Preferred Stock (and the Common Stock issued upon conversion) demand and piggy
back registration rights. Subject to the rights of the holders of the
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Series B Convertible Preferred Stock to override any demand registration request
by the holders of the Series A Preferred Stock and certain minimums, the Series
A Registration Rights Agreement provides that holders representing at least 30%
of the issued and outstanding registrable securities as defined in the Series A
Registration Rights Agreement may initiate a demand registration on Form S-1,
and holders representing at least 20% of the outstanding shares of Series A
registrable securities may initiate a demand registration on Form S-3. In
addition, holders of the Series A Preferred Stock have the right to piggyback
their shares onto any registered offering of Common Stock, subject to customary
underwriter cutbacks and a cutback in the event the holders of Series B
Convertible Preferred Stock also elect to include shares in such offering.
The Series B Registration Rights Agreement grants certain holders of Series B
Convertible Preferred Stock (and the Common Stock issued upon conversion) demand
and piggyback registration rights, the ability to override any demand
registration request by the holders of the Series A Preferred Stock and a
priority over the Series A Preferred Stock in a piggyback registration in the
event of underwriter cutback. Subject to offering amount thresholds, the Series
B Registration Rights Agreement provides that holders representing at least 30%
of the outstanding shares of Series B Convertible Preferred Stock may initiate a
demand registration on Form S-1 and holders representing at least 25% of the
outstanding shares of Series B Convertible Preferred Stock may initiate an
demand registration on Form S-3. In addition, holders of the Series B
Convertible Preferred Stock have the right to piggyback onto any registered
offering of Common Stock, subject to customary underwriter cutback.
The Series C Registration Rights Agreement grants the holders of Series C
Convertible Preferred Stock (and the Common Stock issued upon conversion)
piggyback registration rights. The Series C Convertible Preferred Stock
piggyback registration rights are subject to customary underwriter cutback and
the priority rights of the holders of the Series B Convertible Preferred Stock.
Anti-Takeover Provisions
General. Various provisions of the Delaware General Corporation Law ("DGCL")
and the Company's Charter and Bylaws could have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless the takeover or change in control is approved by the Company's Board of
Directors, even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. These provisions also may render the removal of directors and management
more difficult.
Charter and Bylaws. Upon consummation of the offering, the Company's Charter
provides that all stockholder action must be effected at a duly called meeting
and not by written consent in lieu of a meeting. The Charter and Bylaws also
provide that special meetings of the stockholders may be called only by the
Secretary at the direction of the Board of Directors and that directors may only
be removed for cause. Any amendment of these provisions will require the
affirmative vote of at least 66 2/3% of the Company's outstanding voting stock.
DGCL. Section 203 of the DGCL ("Section 203") prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporations's outstanding voting stock) from engaging in a "business
combination" with a publicly-held Delaware corporation for a period of three
years following the date such person became an interested stockholder, unless:
(i) before such person became an interested stockholder, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares held by directors who are also officers or by employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) following the transaction in which such
person became an interested stockholder, the business combination is approved by
the board of directors and authorized at a meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to various
exceptions, any transaction that results in the issuance or transfer by the
corporation of any of its stock to the interested stockholder; (iv) any
transaction involving the
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corporation that has the effect of increasing the proportionate shares of stock
of any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
Transfer Agent and Registrar
The Company has selected American Securities Transfer & Trust as the transfer
agent and registrar of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock,
and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of Common Stock will have on the market price of
the Common Stock. Sales of substantial amounts of such shares in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through an offering of its equity securities.
Upon consummation of this offering, the Company will have outstanding
13,998,361 shares of Common Stock. Of these shares, the 5,000,000 shares sold
in this offering will be freely tradable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in SEC Rule 144. All of the remaining 8,998,361 shares of Common Stock
are "restricted securities" within the meaning of Rule 144 and may be sold in
the public market only if registered or if sold under an exemption from
registration under the Securities Act, including the exemption provided by Rule
144. Approximately 7,918,032 shares of these restricted securities have been
held for more than one year and will be immediately saleable under Rule 144,
subject to the Underwriters' lock-up and the volume limitations imposed by Rule
144.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted securities for at least one year (including the holding period
of any prior owner except an Affiliate) is entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding (approximately 139,998 shares
immediately after this offering); or (ii) the average weekly trading volume of
the Common Stock on the Nasdaq National Market/sm/ during the four calendar
weeks immediately preceding. Sales under Rule 144 are also subject to
requirements relating to manner of sale, notice and availability of current
public information about the Company. Under Rule 144(k), a person (or persons
whose shares are aggregated) who has not been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. In general, under Rule 701, any employee,
consultant or advisor of the Company who purchases shares from the Company
pursuant to Rule 701 in connection with a compensatory stock or option plan or
other written agreement is eligible to resell, unless contractually restricted,
such shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.
All of the Company's officers, directors, option holders and various
stockholders, who own in the aggregate 8,976,126 shares of Common Stock, have
agreed with the Underwriters that they will not offer for sale, sell or
otherwise dispose of any shares of Common Stock owned by them and will not
exercise any registration rights to which they are entitled for 180 days from
the date of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated.
The Company intends to file a registration statement on Form S-8 under
the Securities Act covering shares of Common Stock reserved for issuance under
the 1996 Stock Option Plan. See "Management--Stock Option Plan." The Company
expects to file this registration statement as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market, unless
such shares are subject to vesting requirements under the 1996 Stock Option Plan
or the lock-up agreements described above. As of May 31, 1998, options to
purchase 1,026,691 shares of Common Stock remain outstanding under the 1996
Stock Option Plan.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their representatives BT
Alex. Brown Incorporated and Hambrecht & Quist LLC (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholders the
following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
Underwriters Number of Shares
- ------------ ----------------
BT Alex. Brown Incorporated..................................
Hambrecht & Quist LLC........................................
----------------
Total................................................. 5,000,000
================
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to various conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any such shares are
purchased.
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $___ per share. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of $____ per share to certain other
dealers. After commencement of the initial public offering, the offering price
and other selling terms may be changed by the Representatives.
Certain Selling Stockholders have granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 750,000 additional shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise the
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by each of them in the above table bears to 5,000,000, and
these Selling Stockholders will be obligated, pursuant to the option, to sell
such shares to the Underwriters. The Underwriters may exercise the option only
to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms and those on which the 5,000,000 shares are being
offered.
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Selling Stockholders and the Company regarding
certain civil liabilities, including liabilities under the Securities Act.
To facilitate the offering of the Common Stock, the Underwriters may engage in
activities that stabilize, maintain or otherwise affect the market price for the
Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Sock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
such shares distributed by that Underwriter or dealer.
55
<PAGE>
The Company has agreed that it will not issue any shares of Common Stock or
options, rights or warrants to acquire Common Stock for a period of 180 days
after the date of this Prospectus, without the prior written consent of BT Alex.
Brown Incorporated, except for shares issued (i) in connection with acquisitions
and (ii) pursuant to the exercise of options granted under the Stock Option
Plan. All of the Company's officers, directors, option holders and various
stockholders, who own in the aggregate 8,976,126 shares of Common Stock, have
agreed with the Underwriters that they will not offer for sale, sell or
otherwise dispose of any shares of Common Stock owned by them and will not
exercise their demand registration rights for 180 days from the date of this
Prospectus without the prior written consent of BT Alex. Brown
Incorporated.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Hambrecht & Quist LLC, one of the Representatives of the Underwriters, served
as the placement agent for the Company in the sale of its Series B Convertible
Preferred Stock. In connection with this role, Hambrecht & Quist LLC was paid a
placement fee of $897,500 and was issued the Warrant on January 21, 1997 for the
purchase of up to 18,500 shares of the Series B Convertible Preferred Stock for
$8.00 per share. The Warrant contains an automatic exercise provision triggered
upon completion of this offering and a net issue election, pursuant to which
Hambrecht & Quist LLC will be issued 16,466 shares of Common Stock, assuming an
initial public offering price of $10.00 per share. An affiliate of Hambrecht &
Quist LLC, H&Q Colorado Greenhouse Investors, LLC, purchased 93,750 shares of
Series B Convertible Preferred Stock in January 1997 and 20,416 shares of Series
C Convertible Preferred Stock in the May 1998 Private Placement, which will
automatically convert into 158,438 and 20,416 shares of Common Stock,
respectively, upon consummation of this offering (assuming an initial public
offering price of $10.00 per share).
Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in such negotiations are prevailing market
conditions, the results of operations of the Company in recent periods, the
capital structure of the Company, the market capitalizations and stages of
development of other companies which the Company and the Representatives believe
to be comparable to the Company, estimates of the business potential of the
Company, the present state of the Company's development and other factors deemed
relevant by the Company and the Representatives.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Holme Roberts & Owen LLP, Boulder, Colorado. Certain legal matters
related to this offering will be passed upon for the Underwriters by Piper &
Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The Company's financial statements as of December 31, 1996 and 1997, and for
the years ended December 31, 1995, 1996 and 1997 included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-1
(together with all exhibits, schedules and amendments relating thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, filed as part of the Registration
Statement, does not contain all the information contained in the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement accurately describe the
56
<PAGE>
material provisions of such document and are qualified in their entirety by
reference to such exhibits for complete statements of their provisions. All of
these documents may be inspected without charge at the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies can
also be obtained from the Public Reference Section of the Commission at
prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Prior to filing the Registration Statement of which this Prospectus is a part,
the Company was not subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
effectiveness of the Registration Statement, the Company will become subject to
the informational and periodic reporting requirements of the Exchange Act, and
in accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the Public
Reference Section of the Commission.
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COLORADO GREENHOUSE HOLDINGS, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997,
and June 30, 1998 (unaudited and pro forma) F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1997 and 1998 (unaudited) F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1998 (unaudited) F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1997 and 1998 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado Greenhouse Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of COLORADO
GREENHOUSE HOLDINGS, INC. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Colorado Greenhouse
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 1998.
F-2
<PAGE>
COLORADO GREENHOUSE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, June 30, June 30,
--------------------
ASSETS 1996 1997 1998 1998
------ -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,522 $ 2,055 $ 4,375 $ 4,375
Accounts receivable, net of allowance of $237, $101, $483
and $483, respectively 1,661 2,508 3,106 3,106
Other receivables 67 956 2,111 2,111
Inventories 1,455 3,927 3,841 3,841
Deferred taxes, current (Note 8) -- 947 946 946
Other current assets 373 148 603 603
-------- -------- -------- --------
Total current assets 5,078 10,541 14,982 14,982
PROPERTY AND EQUIPMENT, net (Note 3) 2,136 25,024 28,661 28,661
DEPOSITS AND PREPAID RENT (Note 4) 2,655 1,882 2,591 2,591
INVESTMENT IN GREENVER (Note 14) -- -- 4,000 4,000
OTHER ASSETS, net (Note 5) 97 422 395 395
-------- -------- -------- --------
Total assets $ 9,966 $ 37,869 $ 50,629 $ 50,629
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ -- $ 500 $ -- $ --
Long-term debt, current (Note 6) -- 972 1,841 1,841
Obligation under capital leases, current 133 155 122 122
Accounts payable 789 3,994 3,014 3,014
Accrued rent 857 984 857 857
Other accrued expenses 1,062 902 2,396 2,396
Income taxes payable -- -- 8 8
-------- -------- -------- --------
Total current liabilities 2,841 7,507 8,238 8,238
LONG-TERM DEBT (Note 6) -- 10,000 13,151 13,151
CAPITAL LEASE OBLIGATION, non-current 180 112 50 50
DEFERRED TAXES, non-current (Note 8) -- 294 294 294
-------- -------- -------- --------
Total liabilities 3,021 17,913 21,733 21,733
-------- -------- -------- --------
COMMITMENTS (Notes 4, 7, 10 and 11)
MANDATORILY REDEEMABLE SERIES B CONVERTIBLE PREFERRED
STOCK; $.001 par value; 0, 1,894, 1,894 and 0 shares authorized,
0, 1,875, 1,875 and 0 shares issued and outstanding; $8 per share
redemption price -- 13,789 13,939 --
MANDATORILY REDEEMABLE SERIES C CONVERTIBLE PREFERRED
STOCK; $.001 par value; 0, 0, 1,275 and 0 shares authorized,
0, 0, 1,091 and 0 shares issued and outstanding; $5.50 per share
redemption price -- -- 5,873 --
WARRANT; convertible into 18.5 shares of mandatorily redeemable
Series B convertible preferred stock -- 40 40 --
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock; $.001 par value; 6,200,
6,200, 6,200 and 0 shares authorized, issued and outstanding;
liquidation preference of $18,600 6 6 6 --
Common stock, $.001 par value; 11,400 shares authorized;
0, 0, 53 and 10,529 shares issued; 0, 0, 22 and 10,498 shares
outstanding -- -- -- 11
Treasury stock, 0, 0, 31 and 31 shares of common stock at cost -- -- (130) (130)
Additional paid-in capital 715 1,255 4,639 24,486
Retained earnings 6,224 4,866 4,529 4,529
-------- -------- -------- --------
Total stockholders' equity 6,945 6,127 9,044 28,896
-------- -------- -------- --------
Total liabilities and stockholders' equity $ 9,966 $ 37,869 $ 50,629 $ 50,629
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
COLORADO GREENHOUSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 20,135 $ 27,407 $ 24,944 $ 13,298 $ 23,549
COST OF GOODS SOLD 15,431 19,293 22,257 11,507 15,982
-------- -------- -------- -------- --------
GROSS PROFIT 4,704 8,114 2,687 1,791 7,567
-------- -------- -------- -------- --------
OPERATING EXPENSES:
General and administrative 1,681 3,604 4,511 1,797 3,356
Sales and marketing 821 830 900 458 756
Loss from hail damage (Note 14) - - - - 1,700
Insurance proceeds (Notes 9 and 14) - - (802) - (1,608)
-------- -------- -------- -------- --------
2,502 4,434 4,609 2,255 4,204
-------- -------- -------- -------- --------
Income (loss) from operations 2,202 3,680 (1,922) (464) 3,363
-------- -------- -------- -------- --------
OTHER (INCOME) EXPENSE:
Interest expense 10 71 137 17 457
Interest income and other (339) (134) (330) (278) (167)
-------- -------- -------- -------- --------
(329) (63) (193) (261) 290
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,531 3,743 (1,729) (203) 3,073
INCOME TAX (BENEFIT) EXPENSE (Note 8) - - (653) (76) 1,168
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 2,531 $ 3,743 $ (1,076) $ (127) 1,905
======== ======== ======== ========
ACCRETION OF PREFERRED STOCK (2,242)
--------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS $ (337)
========
PRO FORMA INFORMATION:
Income tax expense (unaudited) $ 962 $ 1,422
-------- --------
Pro forma net income (unaudited) $ 1,569 $ 2,321
======== ========
PER SHARE INFORMATION:
Basic (loss) per share $ - $ - $ - $ - $ (29.77)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 0.41 $ 0.59 $ (0.11) $ (0.01) $ (0.03)
======== ======== ======== ======== ========
PRO FORMA PER SHARE INFORMATION:
Basic earnings (loss) per share $ 0.25 $ 0.37 $ (0.11) $ (0.01) $ (0.01)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 0.25 $ 0.37 $ (0.11) $ (0.01) $ (0.01)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COLORADO GREENHOUSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Series A Preferred Common Stock Treasury Stock
--------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 6,200 $6 - $ - - $ -
Net income - - - - - -
----- -- -- --- ---- ------
Balances at December 31, 1995 6,200 6 - - - -
Stock-based compensation - - - - - -
Distributions - - - - - -
Net income - - - - - -
----- -- -- --- ---- ------
Balances at December 31, 1996 6,200 6 - - - -
Accretion of Series B preferred stock - - - - - -
Stock-based compensation - - - - - -
Net loss - - - - - -
----- -- -- --- ---- ------
Balances at December 31, 1997 6,200 6 - - - -
Unaudited:
Accretion of Series B and Series C preferred stock - - - - - -
Exercise of options to purchase common stock
for cash at $0.74 per share - - 53 - - -
Repurchase of common stock to be held in treasury
for cash at $4.25 per share - - - - (31) (130)
Stock-based compensation - - - - - -
Value of beneficial conversion feature of
Series C preferred stock - - - - - -
Accretion of discount on preferred stock - - - - - -
Net income - - - - - -
----- -- -- --- ---- ------
Balances at June 30, 1998 (unaudited) 6,200 $6 53 $ - (31) $ (130)
===== == == === ==== ======
<CAPTION>
Additional
Paid-in Retained
Capital Earnings Total
------------ ----------- ----------
<S> <C> <C> <C>
Balances at December 31, 1994 $ - $ 1,630 $ 1,636
Net income - 2,531 2,531
------ ------ ------
Balances at December 31, 1995 - 4,161 4,167
Stock-based compensation 715 - 715
Distributions - (1,680) (1,680)
Net income - 3,743 3,743
------ ------ ------
Balances at December 31, 1996 715 6,224 6,945
Accretion of Series B preferred stock - (282) (282)
Stock-based compensation 540 - 540
Net loss - (1,076) (1,076)
------ ------ ------
Balances at December 31, 1997 1,255 4,866 6,127
Unaudited:
Accretion of Series B and Series C preferred stock - (152) (152)
Exercise of options to purchase common stock
for cash at $0.74 per share 39 - 39
Repurchase of common stock to be held in treasury
for cash at $4.25 per share - - (130)
Stock-based compensation 1,255 - 1,255
Value of beneficial conversion feature of
Series C preferred stock 2,090 - 2,090
Accretion of discount on preferred stock - (2,090) (2,090)
Net income - 1,905 1,905
------ ------ ------
Balances at June 30, 1998 (unaudited) $4,639 $4,529 $9,044
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COLORADO GREENHOUSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,531 $ 3,743 $(1,076) $ (127) $ 1,905
Adjustments to reconcile net income (loss) to
net cash flow from operating activities:
Depreciation and amortization 230 338 805 215 772
Allowance for doubtful accounts - 139 (136) 42 382
Stock-based compensation expense - 715 540 166 1,255
Income tax benefit - - (653) (76) -
Changes in operating assets and liabilities-
Accounts receivable 329 678 (711) (714) (980)
Other receivables - (39) (889) (4) (1,155)
Inventories 9 (452) (2,472) 476 86
Other current assets 58 (332) 265 269 (454)
Deposits, prepaid rent and other assets (757) (1,897) 773 21 (709)
Accounts payable 387 (718) 3,205 3,683 (980)
Accrued expenses (112) (911) (33) (244) 1,367
Income taxes payable - - - - 8
------- ------- ------- ------ -------
Net cash flow from operating
activities 2,675 1,264 (382) 3,707 1,497
------- ------- ------- ------ -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (590) (1,032) (23,593) (11,462) (4,092)
Investment in Greenver - - - - (4,000)
------- ------- ------- ------ -------
Net cash flow from investing
activities (590) (1,032) (23,593) (11,462) (8,092)
------- ------- ------- ------ -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sale of Series B preferred stock - - 13,507 13,507 -
Net proceeds from sale of Series C preferred stock - - - - 5,871
Proceeds from options exercised - - - - 39
Payment to repurchase common stock - - - - (130)
Proceeds from line of credit - 1,586 500 500 -
Proceeds from long-term debt - - 10,972 792 4,018
Repayment of line of credit - (1,586) - - (500)
Deferred financing costs - - (425) (425) -
Payments on capital leases (157) (68) (46) (21) (95)
Payments on long-term debt - - - - (288)
Distributions to stockholders - (1,680) - - -
------- ------- ------- ------ -------
Net cash flow from financing
activities (157) (1,748) 24,508 14,353 8,915
------- ------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,928 (1,516) 533 6,598 2,320
CASH AND CASH EQUIVALENTS,
beginning of period 1,110 3,038 1,522 1,522 2,055
------- ------- ------- ------ -------
CASH AND CASH EQUIVALENTS, end of period $ 3,038 $ 1,522 $ 2,055 $ 8,120 $ 4,375
======= ======= ======= ====== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid, net of amounts capitalized $ 10 $ 45 $ 62 $ 17 $ 464
======= ======= ======= ====== =======
Income taxes paid $ - $ - $ - $ - $ 1,160
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COLORADO GREENHOUSE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) ORGANIZATION AND BUSINESS
-------------------------
Colorado Greenhouse Holdings, Inc. (the "Company") is a Delaware holding company
incorporated in 1996. Effective January 1, 1997, Colorado Greenhouse, LLC
("LLC"), a Colorado limited liability company, underwent a reorganization and,
together with the formation of Colorado Greenhouse, Inc. ("INC"), became
wholly-owned subsidiaries of the Company, for the purpose of operating and
managing greenhouse facilities utilizing environment enhancing greenhouses to
produce premium tomatoes for sale to national supermarket chain stores. To
facilitate the reorganization, the members of LLC exchanged their ownership
interests for 6,200,000 shares of the Company's Series A Preferred Stock. The
financial statements reflect the reorganization as if it had occurred at the
inception of LLC.
As of December 31, 1997, the Company owns one and leases four greenhouses in
Colorado, consisting of approximately 91 acres, including one 20-acre
greenhouse, which was constructed in 1997 and began production in 1998. In
addition, the Company owns and operates a 20-acre greenhouse in New Mexico,
which was constructed and began production in 1997.
On January 21, 1997, the Company sold 1,875,000 shares of Series B Preferred
Stock for a total of $15,000,000 in a private equity transaction to outside
investors, to fund in part, the construction of two greenhouses owned by INC.
The Company also incurred syndication costs of $1,493,000, which have been
netted against the proceeds of the Series B Preferred Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
-------------------------
For purposes of these consolidated financial statements, the Company considers
all highly-liquid investments with original maturities of three months or less
to be cash equivalents. The carrying amount approximates fair value because of
the short maturities of those instruments.
F-7
<PAGE>
Inventories
-----------
Inventories are stated at the lower of FIFO cost (first-in, first-out) or
market. All direct and allocated indirect costs incurred in connection with the
production of the crop are capitalized to inventory. Direct and allocated
indirect costs include among other things, propagation costs, utilities, labor,
property taxes and equipment maintenance. Inventories consist of the following
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
--------------------
1996 1997 1998
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Raw materials $ 382 $ 942 $ 936
Crop inventory 979 2,957 2,853
Finished goods 94 28 52
------ ------ ------
Total $1,455 $3,927 $3,841
====== ====== ======
</TABLE>
Property and Equipment
----------------------
Property and equipment are recorded at cost, including construction period
interest and other costs incurred on self-constructed assets. Property and
equipment and accumulated depreciation are relieved upon retirement or sale and
the gain or loss is recorded as income or expense. Major betterments and
renewals are capitalized while replacements, maintenance and repairs which do
not improve or extend the lives of the respective assets are charged to expense
as incurred. All property and equipment are depreciated on the straight-line
method over their estimated useful lives ranging from 3 to 25 years (see Note
3). Depreciation expense was $182,000, $290,000 and $705,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and is included in cost of goods
sold in the accompanying consolidated statements of operations. Capitalized
interest for the year ended December 31, 1997, was $305,000 with no such amounts
capitalized in 1995 and 1996.
Computer Software
-----------------
The Company has adopted Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
provides guidance on when costs related to software developed or obtained for
internal use should be capitalized or expensed. SOP 98-1 divides the development
of internal-use computer software into three stages: (1) the preliminary project
stage, during which conceptual formulation and evaluation of alternatives takes
place, (2) the application development stage, during which design, coding,
installation and testing takes place, and (3) the operations stage, during which
training and maintenance takes place. Costs incurred during the preliminary
project stage and the operations stage are expensed by the Company as incurred.
Costs incurred during the application development stage are capitalized. Process
reengineering activities are also expensed as incurred.
During the year ended December 31, 1997, the Company capitalized approximately
$1.1 million related to the design, coding, installation and testing of computer
software developed for internal
F-8
<PAGE>
use. These amounts are included in computer equipment (Note 3) and are amortized
using the straight-line method over 5 years. The Company evaluates impairment of
the computer software in accordance with Statement of Financial Accounting
Standards No. 121, as explained below. No impairment expense has been recognized
during the year ended December 31, 1997.
Other Assets
------------
Other assets represent organizational costs and deferred financing costs, net of
amortization (Note 5). Organizational costs are being amortized over five years
on a straight-line basis. Deferred financing costs, which consist of commitment
and legal fees incurred in connection with financing arrangements to fund
greenhouse construction are being amortized over eight years. Amortization
expense for the years ended December 31, 1995, 1996 and 1997, was $48,000,
$48,000 and $100,000, respectively. For the year ended December 31, 1997,
$53,000 of amortization is included in interest expense.
Pervasiveness 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.
Advertising
-----------
The Company expenses advertising costs as they are incurred. Advertising costs
were approximately $438,000, $416,000 and $290,000 for the years ended December
31, 1995, 1996 and 1997, respectively, and is included in sales and marketing
expense in the accompanying consolidated statements of operations.
Asset Impairment
----------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company reviews its assets for impairment whenever events
of changes in circumstances indicate that the carrying value of an asset may not
be recoverable. For assets which are held and used in operations, the asset
would be impaired if the undiscounted future cash flows related to the asset did
not exceed the net book value.
Significant Customers and Concentration of Credit Risk
------------------------------------------------------
The Company had three customers in 1995 which accounted for approximately 13%,
11% and 10% of the Company's revenues and two customers in 1996 which accounted
for approximately 19% and 16% of the Company's revenues. The Company had three
customers in 1997 which accounted for approximately 24%, 15% and 14% of the
Company's revenues.
F-9
<PAGE>
The trade receivables potentially subject the Company to a high concentration of
credit risk. The Company currently markets its tomatoes in ten states, primarily
to major supermarket chains. The majority of the Company's sales are
concentrated in California, Colorado, Michigan, Ohio, Tennessee and Texas. The
Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and other
information.
Income Taxes
------------
Deferred taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings per Share
------------------
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," by retroactively restating per share amounts for all
periods presented. "Basic earnings (loss) per share" is determined by dividing
net income (loss), or net income available to common stockholders, when
applicable, by the weighted average number of common shares outstanding during
each period. "Diluted earnings (loss) per share" includes the effects of
potentially issuable common stock, but only if dilutive (i.e., a loss per share
is never reduced). The treasury stock method, using the average price of the
Company's common stock for the period, is applied to determine dilution from
options and warrants. The if-converted method is used for convertible
securities. A potentially dilutive warrant convertible into 18,500 shares of
mandatorily redeemable Series B Preferred Stock was excluded from the
calculation of diluted earnings per share because its effect is antidilutive.
A reconciliation of the numerator and denominators used in computing per share
amounts is as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
NUMERATOR FOR BASIC AND DILUTED
PER SHARE INFORMATION:
Net income (loss) $ 2,531,000 $3,743,000 $(1,076,000) $ (127,000) $ 1,905,000
=========== ========== =========== ==========
Accretion of preferred stock (2,242,000)
-----------
Net loss available to common
stockholders $ (337,000)
===========
DENOMINATOR FOR BASIC
PER SHARE INFORMATION:
Weighted average common shares
outstanding - - - - 11,302
=========== ========== =========== ========== ===========
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
DENOMINATOR FOR DILUTED
PER SHARE INFORMATION:
Series A Convertible Preferred Stock 6,200,000 6,200,000 6,200,000 6,200,000 6,200,000
Mandatorily Redeemable Series B
Convertible Preferred Stock - - 2,995,120 2,818,612 3,168,750
Mandatorily Redeemable Series C
Convertible Preferred Stock - - - - 367,655
Weighted average common shares
outstanding - - - - 11,302
Options issued to directors, officers
and employees - 156,174 426,810 429,772 410,336
--------- --------- --------- --------- ----------
6,200,000 6,356,174 9,621,930 9,448,384 10,158,043
========= ========= ========= ========= ==========
</TABLE>
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires that all items recognized as comprehensive income be
reported in the financial statements. Comprehensive income items include
unrealized holding gains/losses on securities classified as available for sale,
foreign currency translation adjustments and minimum pension liability
adjustments which will be shown as an increase or decrease to net income or loss
to arrive at comprehensive income. The Company adopted SFAS 130 in the first
quarter of 1998, however, the Company did not have any transactions which would
require additional disclosure under SFAS 130.
The FASB has also issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluation of segment performance and deciding how to allocate
resources to segments. The Company adopted SFAS 131 in the first quarter of
1998, however, the Company does not separate operating results internally by
segment.
In addition, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosure About Pension and Other Postretirement Benefits"
("SFAS 132"). SFAS 132 revises disclosure requirements for pension and other
postretirement benefits. The Company does not currently have any postretirement
benefit plans and, therefore, this new standard will not have an impact on the
Company's financial statements.
The FASB also issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under SFAS 133, accounting for
changes in fair value of a derivative depends on its intended use and
designation. The Company is currently assessing the effect of this new standard.
F-11
<PAGE>
The American Institute of Certified Public Accountants has issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP
98-5 requires that all non-governmental entities expense the costs of start-up
activities, including organization costs, as those costs are incurred, and is
effective for fiscal years beginning after December 15, 1998. The Company has
reviewed the provisions of SOP 98-5 and does not believe adoption of this
standard will have a material effect upon its results of operations, financial
position or cash flows.
Unaudited Pro Forma Earnings Per Share
--------------------------------------
The Company's historical capital structure is not indicative of its prospective
structure due to the automatic conversion of all shares of convertible preferred
stock and outstanding warrant into common stock concurrent with the closing of
the Company's anticipated initial public offering ("IPO").
Pro forma earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period assuming the conversion of
convertible preferred stock issued into common stock as of the date of issuance.
In a prospectus covering the sale of common shares, whenever the proceeds of the
sale are to be used to retire long-term debt, disclosure of pro forma earnings
per share is required. Accordingly, the Company has assumed the sale of an
adequate number of shares of common stock such that the proceeds therefrom shall
be adequate to retire all long-term debt and the interest expense related to the
retired debt has been excluded from net income (loss).
Unaudited Pro Forma Information
-------------------------------
Upon closing of the Company's IPO, all of the outstanding shares of Series A, B
and C Preferred Stock, including the warrant convertible into Series B Preferred
Stock, will be automatically converted into shares of common stock (see Notes 7,
13 and 14 for conversion terms). The unaudited pro forma consolidated balance
sheet as of June 30, 1998, reflects the conversion of approximately 9,176,000
shares of Preferred Stock into approximately 10,476,000 shares of common stock.
Pro forma basic (loss) earnings per share for the year ended December 31, 1997,
and for the six months ended June 30, 1998, giving effect to the conversion of
all outstanding shares of Preferred Stock into shares of common stock, are
$(0.12) and $(0.03), respectively. Pro forma diluted (loss) earnings per share
for the year ended December 31, 1997, and for the six months ended June 30,
1998, are $(0.12) and $(0.03), respectively.
The unaudited pro forma information on the accompanying consolidated statements
of operations for the years ended December 31, 1995 and 1996, is presented for
the purpose of showing the impact on net income had the Company been a taxable
entity in those years at an effective tax rate of 38%.
Unaudited Interim Financial Statements
--------------------------------------
The financial statements as of June 30, 1998, and for the six months ended June
30, 1997 and 1998, are unaudited and include all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the results for such interim periods.
F-12
<PAGE>
Due to the seasonal nature of the operations of the Company, the results of
operations for the six months ended June 30, 1998, are not necessarily
indicative of the results to be expected for the entire year.
Reclassifications
-----------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Useful December 31,
Lives --------------------- June 30,
(in years) 1996 1997 1998
---------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Land and improvements $ - $ 880 $ 1,165
Buildings and improvements 25 461 10,972 22,986
Machinery and equipment 3-7 1,539 3,281 4,536
Furniture and fixtures 5-7 25 104 115
Computer equipment 5-7 659 1,436 1,567
Construction in progress - 9,604 290
----- ------ ------
2,684 26,277 30,659
Less accumulated depreciation (548) (1,253) (1,998)
----- ------ ------
Total $ 2,136 $ 25,024 $ 28,661
===== ====== ======
</TABLE>
Included in machinery and equipment and computer equipment above is equipment
held under capital lease with net book values of $89,000 and $206,000,
respectively, at December 31, 1997. Amortization expense related to this
equipment was $18,000, $18,000 and $54,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
(4) DEPOSITS AND PREPAID RENT
-------------------------
Under operation and management agreements ("O&M") at its greenhouses (Note 10),
LLC is required to pay primary fees, essentially rent, on a quarterly basis.
Terms of the O&M agreements grant LLC the right to defer quarterly payments if a
cash deficiency is projected in the following quarter and correspondingly
require LLC to maintain refundable deposits with the lessors in escrow accounts
to fund such deferrals totaling approximately $2,314,000. As a result of a flood
(Note 9) in July 1997, LLC elected to defer third quarter 1997 rent payments and
the lessors exercised their rights to withdraw the appropriate funds from the
escrow accounts creating an obligation on the Company to replenish these
accounts. At December 31, 1996 and 1997, and June 30, 1998, the deposits were
approximately $2,314,000, $1,583,000 and $2,314,000, respectively.
F-13
<PAGE>
In addition, under one of the O&M agreements, the Company has prepaid rent in
the amount of $427,000, which is being amortized over the life of the lease on a
straight-line basis. The unamortized amount of the prepaid rent as of December
31, 1996 and 1997, was $341,000 and $299,000, respectively.
(5) OTHER ASSETS
------------
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
------------------
1996 1997 1998
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Organization costs $ 239 $ 239 $ 239
Deferred financing costs - 425 425
---- ---- ----
239 664 664
Less accumulated amortization (142) (242) (269)
---- ---- ----
Total $ 97 $ 422 $ 395
==== ==== ====
</TABLE>
(6) LONG-TERM DEBT
--------------
Long-term debt consists of the following as of December 31, 1997 (in thousands):
Construction loan payable to Farm Credit Services;
interest accrues at Prime; converts to a term note
on May 1, 1998, principal payable in equal monthly
installments plus interest through April 2006;
secured by substantially all real and personal
property of the Company. $10,972
Less current portion (972)
------
Long-term debt, net of current portion $10,000
======
F-14
<PAGE>
At December 31, 1997, the aggregate amounts of long-term debt principal
repayments are as follows (in thousands):
Year ending December 31-
1998 $ 972
1999 1,667
2000 1,667
2001 1,667
2002 1,667
Thereafter 3,332
------
Total $10,972
======
Effective January 24, 1997, INC executed a master loan agreement with Colorado
Springs Credit Association, a federally chartered association of the Farm Credit
System, to secure construction loans totaling $15,000,000, and a working capital
line with a cap of $1,500,000. Proceeds derived from the line of credit have
been made available to LLC by a loan supplement executed of even date. Advances
under the line of credit bear interest at the prime rate less .25% (8.25% at
December 31, 1997) and are secured by eligible accounts receivable and
inventories, as defined. As of December 31, 1997, proceeds drawn against the
line of credit were $500,000.
The commitment for the construction loans had an expiration date of September
30, 1997. As a result of construction delays, the Company had requested and Farm
Credit Services has approved extensions to move the expiration date to May 31,
1998. Effective May 1, 1998, the loans will be converted to a term note with 108
equal principal payments plus interest. Under the terms of the master loan, the
Company may elect to be charged interest (at a variable rate) at the average
prime lending rate published in the Wall Street Journal or at a fixed rate equal
to the U.S. Treasury Rate plus 2.5%. Under the Treasury Rate Option, individual
amounts may be fixed for periods ranging from one year to maturity with the
minimum amount that may be fixed at any one time for a single period of
$1,000,000.
As part of the master loan agreement, the construction loan and line of credit
are cross-collateralized by substantially all of the assets of the Company and
its subsidiaries. Additionally, the Company must meet certain financial
covenants, including a minimum debt service ratio, current ratio and net worth
as well as other negative covenants. As of December 31, 1997, the Company was
not in compliance with the minimum debt service ratio and the capital
expenditure limitations. Noncompliance with the minimum debt service ratio was
waived until March 31, 1998, at which point the Company was in compliance.
Noncompliance with the capital expenditure limitations has been waived until
December 31, 1998, at which point the Company expects to be in compliance.
The carrying value of the Company's long-term debt approximates fair value due
to the variable nature of the interest rates.
F-15
<PAGE>
(7) CAPITAL STOCK
-------------
Series B Preferred Stock
------------------------
The Company has 1,875,000 shares outstanding of its Series B Preferred Stock
with a liquidation preference of $8 per share. The Series B Preferred Stock is
convertible into shares of common stock, at the option of the holders, at a
conversion ratio of 1.33 to 1.88 shares of common per each share of Series B
Preferred Stock, based upon future operating results. However, the Series B
Preferred Stock will convert automatically upon the closing of an IPO, assuming
the aggregate proceeds and per-share amounts exceed certain thresholds. The
holders of the Series B Preferred Stock have the option to require the Company
to redeem, at $8 per share, up to 50% of the outstanding shares, or $7,500,000,
in January 2002 and the remaining 50%, or $7,500,000, in January 2003.
Series A Preferred Stock
------------------------
The Company has 6,200,000 shares of Series A Preferred Stock outstanding with a
liquidation preference of $3 per share. The Series A Preferred Stock is
convertible into shares of common stock, at the options of the holders, on a
one-for-one basis. The Series A Preferred Stock will convert automatically upon
the closing of an IPO, assuming the aggregate proceeds and per-share amounts
exceed certain thresholds.
(8) INCOME TAXES
------------
The Company files a consolidated return for both Federal and State income taxes.
Prior to 1997, the Company was a Limited Liability Company and, as such, the
taxable income or loss passed through to the individual members. Effective
January 1, 1997, the Company became a C corporation due to the reorganization
discussed in Note 1. As a result, the cumulative effect of the Company's
temporary differences were recorded on January 1, 1997, and the corresponding
income tax benefit was not material. The income tax benefit for the year ended
December 31, 1997, consists of the following (in thousands):
Current income tax benefit:
Federal $(727)
State (112)
----
(839)
----
Deferred income tax expense:
Federal 169
State 17
----
186
----
Total income tax benefit $(653)
====
F-16
<PAGE>
A reconciliation of the statutory U.S. income tax rates and the effective tax
rates follows (dollars in thousands):
<TABLE>
<S> <C> <C>
Tax benefit computed using Federal statutory tax rate $(588) 34.00%
State income taxes, net of Federal tax benefit (63) 3.62%
Other (2) 0.11%
---- -----
Total income tax benefit $(653) 37.73%
==== =====
</TABLE>
The tax effects of significant temporary differences representing deferred tax
assets and liabilities as of December 31, 1997, are as follows (in thousands):
Current Non-Current
--------- -------------
Deferred income tax assets:
Vacation accrual $ 32 $ -
Capitalized inventory costs 19 -
Other accruals 37 -
Accounts receivable allowance 23 -
Operating loss carryforward 839 -
Stock-based compensation expense - 468
--- ---
950 468
--- ---
Deferred income tax liabilities:
Other expenses 4 -
Deprecation and amortization - 488
Prepaid rent and deposits - 274
--- ---
4 762
--- ---
Net deferred income tax assets (liabilities) $946 $(294)
=== ====
As of December 31, 1997, the Company has a net operating loss carryforward of
approximately $2,249,000 which will expire in 2012.
(9) FLOOD LOSS
----------
In July 1997, the Company experienced a flash flood that destroyed the crop at
the Company's 20-acre greenhouse at Ft. Lupton. The estimated economic loss was
$2,000,000 and included the expense to replace the crop and the loss of income
related thereto. Subsequently, an insurance claim was filed and, in January
1998, insurance proceeds, net of deductibles, were recovered in the amount of
$802,000, which is reflected in other receivables in the consolidated balance
sheet as of December 31, 1997.
F-17
<PAGE>
(10) COMMITMENTS
-----------
The Company has four greenhouses which are located adjacent to electrical
cogeneration facilities, (three owned by related parties) for which it has
entered into separate O&M agreements. The related party O&M agreements were
effective January 1, 1994, and expire at various dates through 2019; the
remaining O&M agreement was effective January 1, 1996, with an expiration date
in 2002. During the term of these agreements, LLC is required to pay to each
facility a primary fee for rent. Primary fees for the years ended December 31,
1995, 1996 and 1997 were approximately $2,740,000, $3,287,000 and $3,429,000,
respectively, and are included in cost of goods sold in the accompanying
consolidated statements of operations. The annual primary fees shall not exceed
the greater of 100% of the LLC's net sales, as defined in the O&M agreements, or
$3,429,000.
The Company will pay future primary fees to the greenhouse facilities, not to
exceed the following amounts (in thousands):
Related
Parties Other Total
--------- --------- ----------
Year ending December 31-
1998 $ 2,929 $ 500 $ 3,429
1999 2,929 500 3,429
2000 2,929 500 3,429
2001 2,929 500 3,429
2002 2,929 500 3,429
Thereafter 27,429 - 27,429
------ ----- ------
Total $42,074 $2,500 $44,574
====== ===== ======
(11) LEASES
------
The Company has several non-cancelable operating equipment leases which expire
at varying dates through September 2006. Many of these leases require
supplemental payments based on utilization rates. Total monthly payments under
these leases aggregate to $14,000.
The Company funds the purchase of various equipment through capital leases. The
corresponding monthly leases have payments aggregating $16,000 and expire at
varying dates through March 2000.
F-18
<PAGE>
Future minimum lease payments as of December 31, 1997, are as follows (in
thousands):
Capital Operating Total
--------- ----------- ------
Year ending December 31,
1998 $168 $233 $401
1999 107 192 299
2000 6 84 90
2001 - 45 45
2002 - 37 37
Thereafter - 41 41
--- ---- ---
Total 281 $632 $913
==== ===
Less imputed interest (14)
---
Present value of net minimum
lease payment $267
===
(12) EMPLOYEE BENEFIT PLAN
---------------------
The Company provides a defined contribution profit sharing plan for its
employees. The Company matches employee contributions by a predetermined
percentage of the contributions, as approved by the Board of Directors.
Contributions relating to the plan were approximately $15,000, $25,000 and
$41,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
(13) STOCK OPTIONS AND WARRANT
-------------------------
Stock Option Plan
-----------------
The Company has a stock option plan (the "Plan") to which it allocated a reserve
of common stock not to exceed 1,580,135 shares. As of December 31, 1996 and
1997, the Company had granted options totaling 557,495 and 1,009,485 shares,
respectively, representing 5.61% and 9.67%, respectively, ownership interest in
the Company on a pro forma basis.
F-19
<PAGE>
A summary of stock options granted under the Plan is as follows:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------
Weighted
Officers and Employees Average
Directors and Others Exercise Price
------------- ----------- ---------------
<S> <C> <C> <C>
Balances, December 31, 1995 - - $ -
Granted 405,450 152,045 $0.74
------- ------- ----
Balances, December 31, 1996 405,450 152,045 $0.74
------- ------- ----
Granted 350,000 140,000 $4.25
Canceled - (38,010) $0.74
------- ------- ----
Balances, December 31, 1997 755,450 254,035 $2.44
------- ------- ----
Granted (unaudited) 70,000 - $4.25
Exercised (unaudited) - (52,794) $0.74
------- ------- ----
Balances, June 30, 1998
(unaudited) 825,450 201,241 $2.65
======= ======= ====
Exercisable at December 31, 1996 185,838 38,012 $0.74
======= ======= ====
Exercisable at December 31, 1997 351,145 135,361 $1.42
======= ======= ====
Exercisable at June 30, 1998
(unaudited) 471,827 95,237 $1.75
======= ======= ====
</TABLE>
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
----------------------------------------------------------------
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value based
method of accounting for employee stock options or similar equity instruments.
However, SFAS 123 allows the continued measurement of compensation cost for such
plans using the intrinsic value based method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
provided that pro forma disclosures are made of net income or loss, assuming the
fair value based method of SFAS 123 has been applied. The Company has elected to
account for its stock-based compensation under APB 25, recognizing $715,000 and
$540,000, in 1996 and 1997, respectively. Accordingly, for purposes of the pro
forma disclosures presented below, the Company has computed the fair values of
all options granted during 1996 and 1997, using the Black-Scholes pricing model
and the following weighted average assumptions.
F-20
<PAGE>
Year Ended Year Ended
December 31, December 31,
1996 1997
----------------- -----------------
Risk-free interest rate 6.47% 5.70%
Dividend rate 0% 0%
Expected volatility 37% 37%
Expected life 2.64 years 3 years
To estimate expected lives of options for this valuation, it was assumed options
will be exercised within one year of becoming fully vested. All options are
initially assumed to vest. Cumulative compensation cost recognized in pro forma
net income or loss with respect to options that are forfeited prior to vesting
is adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. Because the Company's common stock is not yet publicly traded, the
expected market volatility was estimated using the estimated average volatility
of two publicly held companies which the Company believes to be similar with
respect to the markets in which they compete. Actual volatility of the Company's
stock may vary. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of the options granted.
Using these assumptions, the fair value of the stock options granted in 1996 and
1997 was approximately $1,449,000 and $658,000, respectively, or approximately
$2.60 and $1.34, respectively, per common share, which would be amortized as
compensation expense over the vesting period of the options. Had compensation
costs been determined consistent with SFAS 123, utilizing the assumptions
detailed above, the Company's net income (loss) would have been the following on
a pro forma basis (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Net income (loss):
As reported $3,743 $(1,076)
===== =======
Pro forma $3,878 $(1,056)
===== =======
Basic earnings per share:
As reported $ - $ -
===== =======
Pro forma $ - $ -
===== =======
Diluted earnings (loss) per share:
As reported $ 0.59 $ (0.11)
===== =======
Pro forma $ 0.61 $ (0.11)
===== =======
</TABLE>
F-21
<PAGE>
The weighted average exercise prices and weighted average estimated fair values
(as calculated under SFAS 123) of options granted during the years ended
December 31, 1996 and 1997, and the six months ended June 30, 1998, were as
follows.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1997
---------------------------------- -----------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number of Estimated Exercise Number of Estimated Exercise
Options Fair Value Price Options Fair Value Price
--------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exercise price less
than estimated
fair value 557,495 $3.23 $0.74 - $ - $ -
Exercise price equal to
estimated fair value- - - - 490,000 4.25 4.25
------- ----- ----- ------- ----- -----
557,495 $3.23 $0.74 490,000 $4.25 $4.25
======= ===== ===== ======= ===== =====
<CAPTION>
Six Months Ended June 30, 1998
--------------------------------------
(unaudited)
Weighted Weighted
Average Average
Number of Estimated Exercise
Options Fair Value Price
--------- ----------- ---------
<S> <C> <C> <C>
Exercise price less
than estimated
fair value 70,000 $8.27 $4.25
Exercise price equal to
estimated fair value- - - -
------ ----- -----
70,000 $8.27 $4.25
====== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------
Number of Weighted Number of
Options Average Weighted Options Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1997 Life in Years Price 1997 Price
--------------- -------------- ------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.74 519,485 8.61 $0.74 392,782 $0.74
$4.25 490,000 9.77 $4.25 93,725 $4.25
</TABLE>
Warrant
-------
In January 1997, in connection with the issuance of the Series B Preferred
Stock, the Company issued a warrant that entitles the holder to purchase 18,500
shares of Series B Preferred Stock of the Company at $8 per share. The warrant
automatically exercises prior to the sale of the Company or an IPO or
immediately prior to expiration, January 31, 2002. The estimated fair market
value of the warrant was recorded and determined using the Black-Scholes pricing
model.
(14) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT
----------------------------------------
PUBLIC ACCOUNTANTS REPORT (UNAUDITED)
-------------------------------------
During May 1998, the Company issued approximately 1,091,000 shares of
mandatorily redeemable Series C Preferred Stock predominantly to existing Series
A and B Preferred Stock shareholders for $6,000,000. The Series C Preferred
Stock has a liquidation preference of $5.50 per share and is convertible into
shares of common stock, at the option of the holders, on a one-for-one basis.
The Series C Preferred Stock will convert automatically upon closing of an IPO,
assuming the aggregate proceeds and per-share amounts exceed certain thresholds.
The holders of the Series C Preferred Stock have the option to require the
Company to redeem, at $5.50 per share, up to 50% of the outstanding shares, or
$3,000,000, in January 2004 and the remaining 50%, or $3,000,000, in January
2005.
F-22
<PAGE>
In connection with the issuance, the Company recorded a beneficial
conversion dividend of $2,090,000 and a compensation expense charge of
$932,000 resulting from the offering price of the Series C Preferred Stock being
less than the determined fair market value at the date the price was established
in February 1998.
During May 1998, the Company acquired a 25% equity interest in a group of
Mexican greenhouse companies ("Greenver") for $4,000,000 cash. Greenver
currently has 88 acres of non-hydroponic greenhouses in Baja, Mexico, primarily
growing tomatoes. The Company also received exclusive rights to market all of
the produce from Greenver and earn a 10% sales commission upon such sales. The
Company must remit to Greenver monthly the amount of sales of Greenver tomatoes,
less commissions to the Company. The Company anticipates that this will require
additional working capital because the Company's customers typically do not pay
sales invoices within thirty days. The Company will account for its investment
in Greenver using the equity method of accounting.
During May 1998, the Company experienced hail damage to its two greenhouses in
Brush, Colorado. The resultant effect was to remove the entire crop at one
greenhouse and a decrease in production volumes at the second greenhouse with
replacement of glass and plastic where needed. For the period ended June 30,
1998, the Company recorded a loss from the hail damage of approximately
$1,700,000. A majority of this loss resulted from property replacement costs of
approximately $750,000 and inventory losses of approximately $625,000. During
June 1998, the Company was notified that its insurance carrier would advance $2
million in partial settlement of the estimated losses and the Company was paid
in early July 1998. For the period ended June 30, 1998, the Company has
recognized insurance proceeds of $1,608,000. The remaining $392,000 will be
recognized over the remaining estimated period of "business interruption." The
Company also anticipates that it will receive additional settlement amounts
relative to business interruption from the insurance company, but cannot
estimate those amounts at this time.
F-23
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offering covered by this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or any underwriter. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy any of the securities offered hereby
to any person or by anyone in any jurisdiction in which it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
---------------------------
TABLE OF CONTENTS
Page
Prospectus Summary..................................................... 3
Risk Factors........................................................... 10
Use of Proceeds........................................................ 18
Dividend Policy........................................................ 18
Capitalization......................................................... 19
Dilution............................................................... 20
Selected Consolidated Financial and Operating Data..................... 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 23
Business............................................................... 30
Management............................................................. 44
Certain Transactions and Relationships................................. 48
Principal Stockholders................................................. 50
Description of Capital Stock........................................... 52
Shares Eligible for Future Sale........................................ 54
Underwriting........................................................... 55
Legal Matters.......................................................... 56
Experts................................................................ 56
Available Information.................................................. 56
Index to Financial Statements.......................................... F-1
---------------------------
Until _________________, 1998, (25 days after the date hereof), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
5,000,000 SHARES
[logo]
COLORADO GREENHOUSE
HOLDINGS, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
BT ALEX. BROWN
Hambrecht & Quist
________________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the Prospectus contained in this Registration Statement.
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities registered hereby, all of which
expenses, except for the Commission registration fee and NASD fees, are
estimated:
Securities and Exchange Commission registration fee ........ $ 20,355
NASD fees.................................................... 7,400
Nasdaq listing fees.......................................... 87,000
Printing and engraving expenses.............................. 150,000
Accounting fees.............................................. 275,000
Legal fees and expenses .................................... 275,000
Miscellaneous ............................................... 10,245
-------
Total .............................................. $825,000
=======
- --------------
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Issuer*
3.2 Bylaws of the Issuer*
4.1 Form of Stock Certificate for Common Stock
4.2 Form of Amended and Restated Certificate of Incorporation of the
Issuer, to be effective upon closing of the offering.
4.3 Form of Amended and Restated Bylaws of the Issuer, to be effective
upon closing of the offering.
5.1 Opinion of Holme Roberts & Owen LLP*
10.1 Greenhouse Lease dated June 8, 1989, between Colorado Power Partners
("CPP") and Brush Greenhouse Partners ("BGP")*
10.2 Amendment to Greenhouse Lease Agreement dated December 29, 1994,
between CPP and BGP*
10.3 Second Amendment to Greenhouse Lease Agreement dated December 29,
1994, between CPP and BGP*
10.4 Greenhouse Operation and Management Agreement dated December 29,
1994, between Colorado Greenhouse, LLC ("LLC") and BGP*
10.5 First Amendment to Operation and Management Agreement dated April
30, 1996, between LLC and BGP*
II-1
<PAGE>
10.6 Second Amendment to Operation and Management Agreement dated
September 1996, between LLC and BGP*
10.7 Amended and Restated Cogeneration Greenhouse Lease dated June 1,
1992, between Brush Cogeneration Partners ("BCP") and Brush
Greenhouse Partners II, LLC ("BGP II")*
10.8 Amendment to Amended and Restated Cogeneration Greenhouse Lease
dated December 29, 1994, between BCP and BGP II*
10.9 First Amendment to Amended and Restated Cogeneration and Greenhouse
Lease Agreement dated May 1996, between BCP and BGP II*
10.10 Greenhouse Operation and Management Agreement dated December 29,
1994, between LLC and BGP II*
10.11 First Amendment to Operation and Management Agreement dated
September 1996, between LLC and BGP II*
10.12 Thermal Supply Lease Agreement dated March 22, 1993, between
Thermo Cogeneration Partnership ("Thermo") and Rocky Mountain
Produce, LLC ("RMP")*
10.13 Supplemental Agreement and Consent to Assignment dated April 7,
1993, between Thermo and RMP*
10.14 Amendment No. 1 to Thermal Supply Lease Agreement dated December 29,
1994, between Thermo and RMP*
10.15 Amendment No. 2 to Thermal Supply Lease Agreement dated February
28, 1995, between Thermo and RMP*
10.16 Amendment No. 3 to Thermal Supply Lease Agreement dated February
28, 1995, between Thermo and RMP*
10.17 Greenhouse Operation and Management Agreement dated December 29,
1994, between LLC and RMP*
10.18 First Amendment to Operation and Management Agreement dated
September 1996, between LLC and RMP*
10.19 Service Supply Agreement dated June 10, 1997, between Colorado
Greenhouse, Inc. and Thermo*
10.20 Greenhouse Lease dated April 15, 1993, between American Atlas #1,
Ltd. and Wolf Creek Rifle, LLC*
10.21 Greenhouse Operation and Management Agreement dated July 31, 1996,
between LLC and Wolf Creek Rifle, LLC*
10.22 Subscription Agreement dated May 12, 1998, between Colorado
Greenhouse Holdings, Inc. ("CGHI"), Greenver, S.A. de C.V.
("Greenver"), Invernaderos La Pequena Joya, S.A. de C.V.
("Invernaderos"), certain individual shareholders, and Grupo Batiz
CGH, S.A. de C.V. ("Grupo")*
10.23 Shareholders Agreement dated May 12, 1998 between Grupo, Greenver
and Invernaderos*
10.24 Marketing Agreement dated May 12, 1998, between CGH Sales, Inc.
("Sales") and Greenver*
10.25 Marketing Agreement dated May 12, 1998, between Sales and
Invernaderos*
10.26 Lease and Project Participation Agreement dated May 14, 1998,
between the City of Grants, a New Mexico municipal corporation, and
Colorado Greenhouse, Inc. ("CGI")*
II-2
<PAGE>
10.27 Master Loan Agreement dated January 24, 1997, between Colorado
Springs Production Credit Association ("Farm Credit") and CGI*
10.28 Colorado Greenhouse LLC Loan Supplement dated January 24, 1997,
between Farm Credit and CGI*
10.29 Construction Loan Supplement dated January 24, 1997, between Farm
Credit and CGI*
10.30 Secured Continuing Guarantee of Payment dated January 24, 1997, by
CGI for the benefit of Farm Credit*
10.31 Pledge Agreement dated January 24, 1997, by CGHI for the benefit of
Farm Credit*
10.32 Pledge Agreement dated January 24, 1997, by CG Member, Inc. for the
benefit of Farm Credit*
10.33 Line of Credit Agreement dated January 24, 1997, between CTI and
LLC*
10.34 Stock Purchase Agreement dated January 21, 1997, between CGHI,
Catterton-Simon Partners III, LP, BCI Growth IV, LP, and other
Co-Investors*
10.35 Amendment to Stock Purchase Agreement dated September 29, 1997,
between CGHI, Catterton-Simon Partners III, LP, BCI Growth IV, LP,
H&Q Colorado Greenhouse Investors, L.P., and Catterton-CGH Partners,
LLC*
10.36 CGHI Series B Registration Rights Agreement dated January 21, 1997,
between CGHI and certain holders of the Series B Convertible
Preferred Stock*
10.37 CGHI Series A Registration Rights Agreement dated January 21, 1997,
between CGHI and certain holders of the Series A Preferred Stock*
10.38 CGHI Series C Registration Rights Agreement dated May 8, 1998,
between CGHI and certain holders of the Series C Convertible
Preferred Stock*
10.39 Colorado Greenhouse, Inc. 1996 Stock Option Plan dated November 19,
1996*
10.40 CGHI Stock Option Certificate dated October 15, 1997, granted to
James R. Rinella*
10.41 CGHI Stock Option Certificate dated October 15, 1997, granted to
James R. Rinella*
10.42 CGHI Stock Option Certificate dated September 15, 1997, granted to
Alan Fine*
10.43 CGHI Stock Option Certificate dated November 19, 1996, granted to Ed
Wetherbee*
10.44 CGHI Stock Option Certificate dated November 19, 1996, granted to
Matthew Cook*
10.45 CGHI Stock Option Certificate dated September 15, 1997, granted to
Ludo Van Boxem*
10.46 Second Amendment to 1996 Stock Option Plan dated May 28, 1998
10.47 Severance and Noncompete Agreement dated December 31, 1996, between
CGHI and Matthew Brian Cook*
10.48 Employment Agreement dated September 1997, between CGHI and Alan
Fine*
10.49 Employment Agreement dated October 15, 1997, between CGHI and James
R. Rinella*
10.50 Separation Agreement and Release dated October 20, 1997, between
CGHI and Ed Wetherbee*
21.1 List of Subsidiaries*
23.1 Consent of Independent Public Accountants - Arthur Andersen LLP
II-3
<PAGE>
23.2 The consent of Holme Roberts & Owen LLP will be included in Exhibit
5.1.*
23.3 Consent of Monterey Bay Food Group
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
- --------------
* Previously filed.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boulder, State of Colorado, on this 12th day of
November, 1998.
COLORADO GREENHOUSE HOLDINGS, INC.,
A DELAWARE CORPORATION
By: /s/ James R. Rinella
------------------------------------------
James R. Rinella, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title/Position Held
Signature With the Registrant Date
--------- ------------------- ----
<S> <C> <C>
* Chairman of the Board November 12, 1998
- ---------------------------------------
R.C. Mercure, Jr.
/s/ James R. Rinella Chief Executive Officer, November 12, 1998
- --------------------------------------- President and Director
James R. Rinella
* Vice President of Finance November 12, 1998
- --------------------------------------- (acting chief financial officer
Alan R. Fine and chief accounting officer)
* Director November 12, 1998
- ---------------------------------------
Charles A. Hurth, Jr.
* Director November 12, 1998
- ---------------------------------------
Craig H. Sakin
* Director November 12, 1998
- ---------------------------------------
Edward J. Wetherbee
*By: /s/ James R. Rinella
-----------------------------------
James R. Rinella, attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT 1.1
5,000,000 Shares
COLORADO GREENHOUSE HOLDINGS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
_____________, 1998
BT Alex. Brown Incorporated
Hambrecht & Quist LLC
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Gentlemen:
Colorado Greenhouse Holdings, Inc., a Delaware corporation (the "Company")
and certain shareholders of the Company (the "Selling Shareholders"), propose to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives (the "Representatives") an aggregate
of 5,000,000 shares of the Company's Common Stock, $.001 par value (the "Firm
Shares"), of which 3,500,000 shares will be sold by the Company and 1,500,000
shares will be sold by the Selling Shareholders. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be sold
by the Selling Shareholders are set forth opposite their names in Schedule II
hereto. Certain Selling Shareholders named in Schedule III hereto also propose
to sell at the Underwriters' option an aggregate of up to 750,000 additional
shares of the Company's Common Stock (the "Option Shares") as set forth below.
The Company and the Selling Shareholders are sometimes referred to herein
collectively as the "Sellers."
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in
-1-
<PAGE>
part for the accounts of the several Underwriters. The Firm Shares and
the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDERS.
--------------------------------------------------------------------------
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries
of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries")
has been duly organized and is validly existing as a corporation or limited
liability company in good standing under the laws of the jurisdiction of its
incorporation or formation, with corporate or other power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement. The Subsidiaries are the only subsidiaries, direct or
indirect, of the Company. The Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification. The outstanding shares of capital
stock or membership interests of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and,
-2-
<PAGE>
except to the extent shown in Exhibit A hereto, are owned by the Company or
another Subsidiary free and clear of all liens, encumbrances and equities and
claims; and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable (subject to
consummation of the transactions contemplated by this Agreement in the case of
shares of Common Stock issuable upon automatic conversion of the outstanding
shares of the Company's Preferred Stock); the portion of the Shares to be issued
and sold by the Company have been duly authorized and when issued and paid for
as contemplated herein will be validly issued, fully paid and non-assessable; no
preemptive rights of stockholders exist with respect to any of the Shares or the
issue and sale thereof; and all shares of Common Stock of the Company to be
issued upon conversion of all outstanding shares of the Company's Preferred
Stock as described in the Registration Statement have been duly authorized and,
upon conversion of such Preferred Stock, will be validly issued, fully paid and
non-assessable. Neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock. On the Closing Date
(as hereinafter defined), all then outstanding shares of the Company's Preferred
Stock will be automatically converted into shares of the Company's Common Stock,
in the manner and in the amounts set forth in the Registration Statement; and
the Company has provided all notices, or obtained all waivers of notice, and
taken all other action, necessary to effect such automatic conversion.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
-3-
<PAGE>
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use in the
preparation thereof.
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the results of
operations and cash flows of the Company and the consolidated Subsidiaries, at
the indicated dates and for the indicated periods. Such financial statements
and related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included in the Registration Statement present fairly the
information shown therein, and such data have been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company.
(vii) Arthur Andersen, LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
described above (or as described in the Registration Statement), subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received by
them or any of them to the extent that such taxes have become due. All tax
liabilities have been adequately provided for in the financial statements of the
Company.
-4-
<PAGE>
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws or Articles of Organization, as
applicable, or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any of its
properties, is bound and which default is of material significance in respect of
the condition, financial or otherwise of the Company and its Subsidiaries taken
as a whole or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
material terms or provisions of, or constitute a material default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of any of the terms or provisions of
the Charter or By-Laws or Articles of Organization of the Company or any of the
Subsidiaries, as applicable, or any order, rule or regulation applicable to the
Company or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(xiv) The Company and each of the Subsidiaries hold all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses as described in the Registration
Statement; and neither the Company nor any of the Subsidiaries has infringed any
patents, patent rights, trade names, trademarks or copyrights, which
infringement is material to the business of the Company and the Subsidiaries
taken as a
-5-
<PAGE>
whole. The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or licensed to the
Company.
(xv) Neither the Company, nor to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares. The
Company acknowledges that the Underwriters may engage in passive market making
transactions in the Shares on The Nasdaq Stock Market in accordance with Rule
103 under Regulation M of the Exchange Act.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to financial assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xviii) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xix) The Company and each of its Subsidiaries is in compliance in
all material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"), except that Forms 5500 for the Company's
401(k) Plan were filed incorrectly for the years 1992 and 1993, and the Company
is in the process of taking appropriate remedial action; no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any liability; the Company
has not incurred and does not expect to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
-6-
<PAGE>
(xx) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of doing Business with Cuba, and the Company
- ---------------------------------------------------------
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(xxi) The Company and each of its Subsidiaries is in compliance in
all material respects with: (i) all laws governing the production, labeling,
packaging and sale of fresh vegetables and all rules and regulations of the
United States Department of Agriculture, the United States Food and Drug
Administration and state and local governmental agencies relative to enforcement
and administration of such laws; and (ii) all federal laws governing the
employment of immigrants into the United States and all rules and regulations of
the United States Immigration and Naturalization Service relative to enforcement
and administration of such laws.
(b) Each of the Selling Shareholders severally represents and warrants
as follows:
(i) Such Selling Shareholder now has and at the Closing Date and
the Option Closing Date, as the case may be (as such dates are hereinafter
defined), will have good and marketable title to the Firm Shares and the Option
Shares (or to the shares of the Company's Preferred Stock which will be
automatically converted into such Firm Shares or Option Shares on the Closing
Date) to be sold by such Selling Shareholder on such date, free and clear of any
liens, encumbrances, equities and claims, and full right, power and authority to
effect the sale and delivery of such Firm Shares and Option Shares; and upon the
delivery of, against payment for, such Firm Shares and Option Shares pursuant to
this Agreement, the Underwriters will acquire good and marketable title thereto,
free and clear of any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has placed in custody under a custody
agreement (the "Custodian Agreement" and, together with all other similar
agreements executed by the other Selling Shareholders, the "Custody Agreements")
with [Trust Co.], as custodian (the "Custodian"), for delivery under this
Agreement, certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in the United
States or a member firm of the New York or American Stock Exchanges)
representing the Firm Shares and the Option Shares to be sold by the Selling
Shareholder hereunder.
(iii) Such Selling Shareholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney") and, together with all
other similar agreements executed by the other Selling Shareholders, the "Powers
of Attorney") appointing the Custodian, as attorney-in-fact, with full power of
substitution, and with full authority to execute and deliver
-7-
<PAGE>
this Agreement and to take such other action as may be necessary or desirable to
carry out the provisions hereof on behalf of the Selling Shareholder.
(iv) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney and the Custodian
Agreement and to perform its obligations under such Agreements. The execution
and delivery of this Agreement, the Power of Attorney, the Custodian Agreement
and the consummation by such Selling Shareholder of the transactions herein and
therein contemplated and the fulfillment by such Selling Shareholder of the
terms hereof and thereof will not require any consent, approval, authorization,
or other order of any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act, state securities
laws or Blue Sky laws) and will not result in a breach of any of the terms and
provisions of, or constitute a default under, organizational documents of such
Selling Shareholder, if not an individual, or any indenture, mortgage, deed of
trust or other agreement or instrument to which such Selling Shareholder is a
party, or of any order, rule or regulation applicable to such Selling
Shareholder of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
(v) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Shareholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
(vi) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement, such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1 are
not true and correct, is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed in the
Registration Statement which has adversely affected or may adversely affect the
business of the Company or any of the Subsidiaries; and the sale of the Firm
Shares and the Option Shares by such Selling Shareholder pursuant hereto is not
prompted by any information concerning the Company or any of the Subsidiaries
which is not set forth in the Registration Statement. The information pertaining
to such Selling Shareholder in the Prospectus is complete and accurate in all
material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, each of the Sellers
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
-8-
<PAGE>
(b) Each of the Selling Shareholders specifically agrees that the Firm
Shares and Option Shares represented by the certificates held in custody for the
Selling Shareholders under the Custodian Agreement are subject to the interests
of the Underwriters hereunder, that the arrangements made by the Selling
Shareholders for such custody are to that extent irrevocable, and that the
obligations of the Selling Shareholders hereunder shall not be terminable by any
act or deed of the Selling Shareholders (or by any other person, firm or
corporation including the Company, the Custodian or the Underwriters) or by
operation of law (including the death of an individual Selling Shareholder or
the dissolution of a corporate Selling Shareholder) or by the occurrence of any
other event or events, except as set forth in the Custodian Agreement. If any
such event should occur prior to the delivery to the Underwriters of the Firm
Shares or the Option Shares hereunder, certificates for the Firm Shares or the
Option Shares, as the case may be, shall be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such event had
not occurred. The Custodian is authorized to receive and acknowledge receipt of
the proceeds of sale of the Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made in same
day funds via wire transfer to the order of the Company for the Shares to be
sold by it and to the order of [Trust Co.], "as custodian" for the Shares to be
sold by the Selling Shareholders, in each case, against delivery of certificates
therefor to the Representatives for the several accounts of the Underwriters.
Such payment and delivery are to be made at the offices of BT Alex. Brown
Incorporated, One Bankers Trust Plaza, 130 Liberty Street, New York, New York
10006, at 10:00 a.m., Baltimore time, on the third business day after the date
of this Agreement or at such other time and date not later than five business
days thereafter as you and the Company shall agree upon, such time and date
being herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representatives
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representatives
at least one business day prior to the Closing Date.
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Selling
Shareholders listed on Schedule III hereto hereby grant an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares
to be sold by the Selling Shareholders is set forth opposite their respective
names on Schedule III hereto. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the Closing
Date and (ii) only once thereafter within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Attorney-in-Fact, and the Custodian, with a copy to the Company, setting forth
the number of Option Shares as to which the several Underwriters are exercising
the option, the names and denominations in which the Option Shares are to be
registered and the time and date at which
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<PAGE>
such certificates are to be delivered. If the option granted hereby is exercised
in part, the respective number of Option Shares to be sold by each of the
Selling Shareholders listed in Schedule III hereto shall be determined on a pro
rata basis in accordance with the percentages set forth opposite their names on
Schedule III hereto, adjusted by you in such manner as to avoid fractional
shares. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Attorney-in-Fact, with a copy to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the Option
Closing Date in same day funds via wire transfer to the order of "[Trust Co.],
as Custodian" for the Option Shares to be sold by the Selling Shareholders
against delivery of certificates therefor at the offices of BT Alex. Brown
Incorporated, One Bankers Trust Plaza, 130 Liberty Street, New York, New York
10006.
(e) If on the Closing Date or Option Closing Date, as the case may be, any
Selling Shareholder fails to sell the Firm Shares or Option Shares which such
Selling Shareholder has agreed to sell on such date as set forth in Schedule II
-----------
and Schedule III hereto, the Company agrees that it will sell or arrange for the
------------
sale by one or more of the Selling Shareholders of that number of shares of
Common Stock to the Underwriters which represents the Firm Shares or Option
Shares which such Selling Shareholder has failed to so sell, or such lesser
number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public upon the terms
and conditions and at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
-10-
<PAGE>
4. Covenants of the Company and the Selling Shareholders.
-----------------------------------------------------
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(ii) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its reasonable best efforts
to prevent the issuance of any such stop order preventing or suspending the use
of the Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, four signed copies of the Registration Statement and
all amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of conformed copies of the Registration
Statement (including such number of copies of the exhibits filed therewith
-11-
<PAGE>
that may reasonably be requested), and of all amendments thereto, as the
Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act") and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) The Company will, for a period of three years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended.
(viii) No offering, sale, short sale or other disposition (or
agreement for such) of any shares of Common Stock of the Company or other
securities convertible into or exchangeable or exercisable for shares of Common
Stock or derivative of Common Stock will be made for a period of 180 days after
the date of this Agreement, directly or indirectly, by the Company otherwise
than hereunder or with the prior written consent of BT Alex. Brown Incorporated,
except that the foregoing shall not apply to: (i) shares issued in any
acquisition by the Company, (ii) the Shares and shares or other securities
issued pursuant to employee benefit plans, stock options plans or other employee
compensation plans existing on the date hereof or pursuant to currently
outstanding options, warrants or rights and (iii) shares issued upon exercise of
options granted under the Company's stock option plan described in the
Prospectus.
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<PAGE>
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on The Nasdaq Stock Market (National Market).
(x) The Company has caused each officer, director and Selling
Shareholder to furnish to you, on or prior to the date of this agreement, a
letter or letters, in form and substance satisfactory to the Underwriters,
pursuant to which each such person shall agree not to offer, sell, sell short or
otherwise dispose of any shares of Common Stock of the Company or other capital
stock of the Company, or any other securities convertible, exchangeable or
exercisable for Common Shares or derivative of Common Stock owned by such person
or request the registration for the offer or sale of any of the foregoing (or
as to which such person has the right to direct the disposition of) for a period
of 180 days after the date of this Agreement, directly or indirectly, except
with the prior written consent of BT Alex. Brown Incorporated ("Lockup
Agreements"); provided, however, that transfers pursuant to applicable laws of
--------
descent and distribution and transfers within the person's Family Group (where,
"Family Group") means spouse, siblings and descendants (whether natural or
adopted) and any of such descendant's spouses), to any trust which at the time
of such transfer and at all times thereafter is and remains solely for the
benefit of such person or such person's Family Group, or to any family
partnership, the partners of which consists solely of such person, such person's
Family Group and/or such trusts, shall not be prohibited so long as such
transferee or transferees shall first have executed a letter or letters
containing the prohibitions on transfer referred to above in this paragraph (x).
(xi) The Company shall apply the net proceeds of the sale of the
Firm Shares as set forth in the Prospectus.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the Company or
other securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by the Selling Shareholder or request the
registration for the offer or sale of any of the foregoing (or as to which the
Selling Shareholder has the right to direct the disposition of) will be made for
a
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<PAGE>
period of 180 days after the date of this Agreement, directly or indirectly,
by such Selling Shareholder otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated, except to the extent permitted by
paragraph (a)(x) of this Section.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with
respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(iii) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. COSTS AND EXPENSES.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company and
the Selling Shareholders; the cost of printing and delivering to, or as
reasonably requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters'
Invitation Letter, the Listing Application, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fee of the NASD relative to its review of the terms of the sale of the Shares by
the Underwriters; the Listing Fee of the Nasdaq Stock Market. Each Selling
Shareholder shall be responsible for the underwriting discounts and commissions
applicable to the Shares being sold by such Selling Shareholder, and, to the
extent, if at all, that any of the Selling Shareholders engage special legal
counsel to represent them in connection with this offering, the fees and
expenses of such counsel shall be borne by such Selling Shareholder. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Sellers pro rata. The Sellers shall not, however, be
required to pay for any of the Underwriter's expenses (other than those related
to qualification under NASD regulations); except that, if this Agreement shall
not be consummated because the conditions in Section 6 hereof are not satisfied,
or because this Agreement is terminated by the Representatives pursuant to
Section 11 hereof, or by reason of any failure, refusal or inability on the part
of the Company or the Selling Shareholders to perform any undertaking or satisfy
any condition of this Agreement or to comply with any of the terms hereof on
their part to be performed, unless such failure to satisfy said condition or to
comply with said terms be due to the default or omission of any Underwriter,
then the Company shall reimburse the several Underwriters for their reasonable
out-of-pocket expenses, including fees and disbursements of counsel, reasonably
incurred in connection with investigating, marketing and proposing to market the
Shares or in contemplation of performing their obligations hereunder; but the
Company and the Selling Shareholders shall not in any event
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<PAGE>
be liable to any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Shareholders contained herein, and to the performance by the Company and
the Selling Shareholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Shareholders, shall be
contemplated by the Commission, and no injunction, restraining order, or order
of any nature by a Federal or state court of competent jurisdiction shall have
been issued as of the Closing Date which would prevent the issuance of the
Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Holme Roberts & Owen
LLP, counsel for the Company, dated the Closing Date or the Option Closing Date,
as the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each of the Subsidiaries
has been duly organized and is validly existing as a corporation or limited
liability company in good standing under the laws of the jurisdiction of its
incorporation or formation, with corporate or other power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement; the Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification, or in which the failure to qualify
would have a materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital stock or
membership interests of each of the Subsidiaries have been duly authorized and
validly issued and are fully paid and non-assessable and are owned by the
Company or a Subsidiary; and, to the best of such counsel's knowledge, the
outstanding shares of capital stock or membership interests of each of the
Subsidiaries is owned by the Company free and clear of all liens, encumbrances
and equities and claims (except those
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<PAGE>
liens and encumbrances shown on Exhibit A hereto), and, to the knowledge of such
counsel, no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into any shares
of capital stock or membership interests or of ownership interests in the
Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock, including the Option Shares to be sold by
the Selling Shareholders, have been duly and validly issued and are fully paid
and non-assessable (subject to consummation of the transactions contemplated by
the Underwriting Agreement in the case of shares of Common Stock issuable upon
automatic conversion of the outstanding shares of the Company's Preferred
Stock); all of the Shares conform to the description thereof contained in the
Prospectus; the certificates for the Shares, assuming they are in the form filed
with the Commission, are in due and proper form; the Shares to be sold by the
Company pursuant to this Agreement will be validly issued, fully paid and non-
assessable when issued and paid for as contemplated by this Agreement; no
preemptive rights of stockholders exist with respect to any of the Shares or the
issue or sale thereof; all shares of the Company's Common Stock to be issued
upon conversion of all outstanding shares of the Company's Preferred Stock as
described in the Registration Statement have been duly authorized and, upon
conversion of such shares of Preferred Stock, will be validly issued, fully paid
and non-assessable; and as of the consummation of the transactions contemplated
by the Underwriting Agreement, all such shares of Preferred Stock will be
automatically converted into shares of the Company's Common Stock, in the manner
and in the amounts set forth in the Registration Statement, assuming
consummation of the transactions herein contemplated.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company, and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
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(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules contained therein).
(vi) The statements under the captions "Business -- Company
Trademarks," "Management -- Agreements with Executive Officers," "Management --
Stock Option Plan," "Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with respect to
such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required under the Rules and Regulations to be filed as exhibits to the
Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required, and such contracts
and documents as are summarized in the Registration Statement or the Prospectus
are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws, as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
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In rendering such opinion, Holme Roberts & Owen LLP may rely as to matters
governed by the laws of states other than Colorado and the general corporation
law of the State of Delaware or Federal laws on local counsel in such
jurisdictions, provided that in each case Holme Roberts & Owen LLP shall state
that they believe that they and the Underwriters are justified in relying on
such other counsel. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A under the
Act) and as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, financial schedules and
statistical information therein). With respect to such statement, Holme Roberts
& Owen LLP may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(c) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinions of one or more counsel to
the Selling Shareholders, each dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that it may
be relied upon by counsel to the Underwriters) to the effect that:
(i) This Agreement has been duly authorized, executed and delivered
on behalf of the Selling Shareholders.
(ii) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
such Selling Shareholder.
(iii) The Custodian Agreement and the Power of Attorney executed and
delivered by each Selling Shareholder is valid and binding.
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(iv) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good and
marketable title to the Shares being sold by each Selling Shareholder on the
Option Closing Date free and clear of all liens, encumbrances, equities and
claims.
(d) The Representatives shall have received from Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of this Section 6,
subparagraph (i) of Paragraph (c) of this Section 6, and that the Company is a
duly organized and validly existing corporation under the laws of the State of
Delaware. In rendering such opinion, Piper & Marbury L.L.P. may rely as to all
matters governed other than by the laws of the State of Maryland or Delaware or
Federal laws on the opinions of counsel referred to in Paragraphs (b) and (c) of
this Section 6. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that (i) the Registration Statement, or
any amendment thereto, as of the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to Rule
430A under the Act) as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading, and (ii) the Prospectus, or any supplement thereto, on the date it
was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, financial schedules and statistical
information therein). With respect to such statement, Piper & Marbury L.L.P.
may state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
(e) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of Arthur Andersen, LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief
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Financial Officer of the Company to the effect that, as of the Closing Date or
the Option Closing Date, as the case may be, each of them severally represents
as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement and
the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct; and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are made,
not misleading; and since the effective date of the Registration Statement, no
event has occurred which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth in such supplement
or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(g) The Company and the Selling Shareholders shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq Stock Market (National
Market).
(i) The Lockup Agreements described in Section 4(x) shall be in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representatives and to Piper & Marbury
L.L.P., counsel for the Underwriters.
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If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
--------------------------------------------
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
---------------
(a) The Company and the Selling Shareholders, jointly and severally, agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act, against any losses,
claims, damages or liabilities to which such Underwriter or any such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading; and will
reimburse each Underwriter and each such controlling person upon demand for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage or liability, action or proceeding or in responding to a subpoena
or governmental inquiry related to the offering of the Shares, whether or not
such Underwriter or controlling person is a party to any action or proceeding;
provided, however, that the Company and the Selling Shareholders will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof; further provided, however, that the Company and the Selling
Shareholders will not be liable to any Underwriter that failed to deliver a
final prospectus within the time prescribed by the Securities Act if the claim
arises out of an untrue statement or omission in any preliminary Prospectus that
was corrected in the final Prospectus. In no event, however, shall the
liability of any Selling
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Shareholder for indemnification under this Section 8(a) exceed the proceeds
received by such Selling Shareholder from the Underwriters in the offering. This
indemnity agreement will be in addition to any liability which the Company or
the Selling Shareholders may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each person, if
any, who controls the Company or the Selling Shareholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, Selling Shareholder or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing,
the indemnifying party shall pay as incurred (or within 30 days
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of presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them or (iii) the indemnifying party shall have
failed to assume the defense and employ counsel acceptable to the indemnified
party within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees and expenses of more than one separate firm for all such
indemnified parties. Such firm shall be designated in writing by you in the case
of parties indemnified pursuant to Section 8(a) and by the Company and the
Selling Shareholders in the case of parties indemnified pursuant to Section
8(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but if settled with such consent
or if there be a final judgment for the plaintiff, the indemnifying party agrees
to indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. In addition, the indemnifying party will
not, without the prior written consent of the indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding of which indemnification may be sought hereunder
(whether or not any indemnified party is an actual or potential party to such
claim, action or proceeding) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholders on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholders bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
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relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(d)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
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(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers,
the Selling Shareholders or any persons controlling the Company or any of the
Selling Shareholders, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company or a Selling Shareholder),
you, as Representatives of the Underwriters, shall use your reasonable efforts
to procure within 36 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company and the Selling Shareholders such
amounts as may be agreed upon and upon the terms set forth herein, the Firm
Shares or Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case
may be, covered hereby, the Company and the Selling Shareholders or you as the
Representatives of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company or of the Selling Shareholders except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representatives, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter"
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includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
10. NOTICES.
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All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated,
One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006,
Attention: Daniel Hebert, Managing Director; with a copy to BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland 21202. Attention: General
Counsel; if to the Company or the Selling Shareholders, to Colorado Greenhouse
Holdings, Inc., 6811 Weld County Road 31, Fort Lupton, Colorado 80621,
Attention: James R. Rinella, Chief Executive Officer; with a copy to William R.
Roberts, Holme, Roberts & Owen LLP, 1401 Pearl Street, Suite 400, Boulder,
Colorado 80302.
11. TERMINATION.
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This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business; (ii) any outbreak or escalation of major hostilities or declaration
of war or national emergency or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment, make
it impracticable to market the Shares or to enforce contracts for the sale of
the Shares; (iii) trading generally shall have been suspended or materially
limited on or by, as the case may be, any of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq Stock Market, the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade; (iv)
the enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority which in
your reasonable opinion materially and adversely affects or may materially and
adversely affect the business or operations of the Company; (v) declaration of a
banking moratorium by United States or New York State authorities, (vi) the
suspension of trading of the Company's Common Stock on the Nasdaq Stock Market
(National Market), or (vii) the taking of any action by any governmental body or
agency
-26-
<PAGE>
in respect of its monetary or fiscal affairs which in your reasonable opinion
has or is likely to have a materially adverse effect on the securities markets
in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------
The Company, the Selling Shareholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page of the Prospectus (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
-------------
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the Company
or its directors or officers or by or on behalf of the Selling Shareholders, and
(c) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
-27-
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
COLORADO GREENHOUSE HOLDINGS, INC.
By
----------------------------------------
President
Selling Shareholders listed on Schedule II
By
----------------------------------------
[Trust Company]
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
HAMBRECHT & QUIST LLC
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
-------------------------
Authorized Officer
-28-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
- ----------- ---------------------
BT Alex. Brown Incorporated.....................
Hambrecht & Quist LLC...........................
---------
Total 5,000,000
=========
-29-
<PAGE>
SCHEDULE II
Schedule of Selling Shareholders
Number of Firm Shares
Selling Shareholder to be Sold
- ------------------- ---------------------
_________
Total 1,500,000
=========
-30-
<PAGE>
SCHEDULE III
SCHEDULE OF OPTION SHARES
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
- -------------- ---------------- ---------------
_______ ____
Total............ 750,000 100%
======= ====
-31-
<PAGE>
EXHIBIT A
MATERIAL SUBSIDIARIES
---------------------
<TABLE>
<CAPTION>
Subsidiary Foreign Qualifications Liens/Encumbrances
---------- ---------------------- ------------------
<S> <C> <C>
Colorado Greenhouse, Inc., a Colorado; New Mexico A lien on all assets was
Colorado corporation granted to Colorado Springs
Production Credit Association
("Farm Credit") together with
a pledge of 100% of its
capital stock
CGH Sales, Inc., a Delaware Colorado; California None
corporation
Colorado Greenhouse, LLC, a Colorado A lien on all assets was
Colorado limited liability granted to Colorado
company Greenhouse, Inc. together with
a pledge of 100% of its
membership interests; both the
lien and the pledge
subsequently have been
assigned to Farm Credit
</TABLE>
-32-
<PAGE>
EXHIBIT 4.1
Incorporated under the laws
of the State of Delaware
NUMBER SHARES
______ _____
COLORADO GREENHOUSE HOLDINGS, INC.
[Common Stock, $.001 Par Value Per Share]
THIS CERTIFIES THAT is
---------------------------------------------
the registered holder of Shares of
---------------------------------------------
COLORADO GREENHOUSE HOLDINGS, INC., Fully paid and non-
assessable
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate property endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate
to be signed by its duly authorized officers and its Corporate Seal to be
hereunto affixed
this day of A.D.
-------- --------------- ----
[SEAL]
- ----------------------------- ----------------------------
SECRETARY PRESIDENT/CEO
<PAGE>
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER UNTO
--------
- --------------------------------------------------------------------------------
SHARES REPRESENTED BY THE WITHIN CERTIFICATE,
- -------------------------------
AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
-------------------------------
ATTORNEY TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------
IN PRESENCE OF
-----------------------------------------
------------------------------
<PAGE>
EXHIBIT 4.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
COLORADO GREENHOUSE HOLDINGS, INC.
Colorado Greenhouse Holdings, Inc. (the "Corporation"), a corporation
organized and existing under the laws of the State of Delaware, hereby certifies
as follows:
1. The name of the corporation is Colorado Greenhouse Holdings, Inc. The
original name of the corporation was Colorado Greenhouse, Inc. The
corporation's name was changed in connection with a reorganization in January
1997 to Colorado Greenhouse Holdings, Inc. The original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
October 30, 1996. The Certificate of Incorporation of the corporation was
amended pursuant to the following: Amended and Restated Certificate of
Incorporation filed on January 17, 1997; Certificate of Designations of Series B
Convertible Preferred Stock filed on January 23, 1997; Certificate of Amendment
to the Certificate of Designations of Series B Convertible Preferred Stock filed
on October 21, 1997; Certificate of Amendment filed on October 21, 1997;
Certificate of Amendment filed on May 4, 1998; Certificate of Designations of
Series C Convertible Preferred Stock filed on May 4, 1998; and Restated
Certificate of Incorporation filed on June 1, 1998.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, the Amended and Restated Certificate of Incorporation was
adopted by the corporation's board of directors and stockholders, the
stockholders of the corporation having approved the Amended and Restated
Certificate of Incorporation by the written consent of the holders of at least
(i) a majority of the outstanding shares of the Common Stock, Series A Preferred
Stock, and Series C Preferred Stock voting as a single class in accordance with
Section 228 of the General Corporation Law and the Restated Certificate of
Incorporation, and (ii) 66 2/3% of the outstanding shares of Series B Preferred
Stock in accordance with the Restated Certificate of Incorporation, and written
notice having been given in accordance with the requirements of Section 228.
The Amended and Restated Certificate of Incorporation restates, integrates and
amends the provisions of the Certificate of Incorporation of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby restated and amended to read in its entirety as follows:
ARTICLE I
The name of the corporation is Colorado Greenhouse Holdings, Inc.
<PAGE>
ARTICLE II
The address of this corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle
19801. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or
activities for which a corporation may now or hereafter be organized under the
Delaware General Corporation Law.
ARTICLE IV
1. Classes of Stock. This corporation is authorized to issue two classes
----------------
of stock, denominated Common Stock and Preferred Stock. The Common Stock shall
have a par value of $0.001 per share and the Preferred Stock shall have a par
value of $0.001 per share. The total number of shares of Common Stock that the
corporation is authorized to issue is 55,000,000, and the total number of shares
of Preferred Stock that the corporation is authorized to issue is 3,000,000.
2. Issuance of Preferred Stock. The Preferred Stock authorized by this
---------------------------
Certificate of Incorporation may be issued from time to time in one or more
series. Subject to the limitations and restrictions set forth in this Article
IV, the board of directors or a committee of the board of directors, to the
extent permitted by law and the bylaws of the corporation or a resolution of the
board of directors, by resolution or resolutions, is authorized to create or
provide for any such series, and to fix the designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including, without limitation, the
authority to fix or alter the dividend rights, dividend rates, conversion
rights, exchange rights, voting rights, rights and terms of redemption
(including sinking and purchase fund provisions), the redemption price or
prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and the
number of shares constituting any such series, and the designation thereof, or
any of them and to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
There shall be no limitation or restriction on any variation between any of
the different series of Preferred Stock as to the designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof; and the several series of
Preferred Stock may, except as otherwise herein expressly provided, vary in any
and all respects as fixed and determined by the resolution or resolutions of the
board of directors,
2
<PAGE>
providing for the issuance of the various series; provided, however, that all
shares of any one series of Preferred Stock shall have the same designation,
preference and relative, participating, optional or other special rights and
qualifications, limitations and restrictions.
3. Rights, Preferences, Privileges and Restrictions of Common Stock. All
----------------------------------------------------------------
shares of Common Stock will be identical and will entitle the holders thereof to
the same rights and privileges.
(a) Dividend Rights. When, as and if dividends are declared thereon,
whether payable in cash, property or securities of the corporation, the holders
of Common Stock will be entitled to share equally in and receive, in accordance
with the number of shares of Common Stock held by each such holder, such
dividends. Dividends payable under this Section 3(a) shall be paid to the
holders of record of the outstanding Common Stock as their names shall appear on
the stock register of the corporation on the record date fixed by the board of
directors in advance of declaration and payment of each dividend. Any Common
Stock issued as a dividend pursuant to this Section 3(a) shall, when so issued,
be duly authorized, validly issued, fully paid and non-assessable, and free of
all liens and charges.
Notwithstanding anything contained herein to the contrary, no
dividends on Common Stock shall be declared by the corporation's board of
directors or paid or set apart for payment by the corporation at any time that
such declaration, payment, or setting apart is prohibited by applicable law.
(b) Redemption. The Common Stock is not redeemable upon demand of any
holder thereof or upon demand of this corporation.
(c) Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
(d) Other Rights. Except for and subject to those rights expressly
granted to the holders of Preferred Stock, or as otherwise provided herein, and
except as may be provided by the laws of the State of Delaware, the holders of
Common Stock shall have exclusively all other rights of stockholders, including,
without limitation, (i) the right to receive dividends, when, as and if declared
by the board of directors, out of assets lawfully available therefor, and (ii)
in the event of any distribution of assets upon a liquidation or otherwise, the
right to receive ratably and equally with all other holders of Common Stock all
of the assets and funds of the corporation remaining after the payment to the
holders of the Preferred Stock, of the specific amounts which they are entitled
to receive upon such liquidation.
ARTICLE V
3
<PAGE>
1. Number of Directors. The number of directors of the corporation shall
-------------------
not be less than five nor more than nine until changed by amendment of this
Certificate of Incorporation or the bylaws duly adopted by the vote of holders
of a majority of the outstanding shares or by the board of directors. The exact
number of directors shall be fixed from time to time, within the limits
specified in this Certificate of Incorporation or in the bylaws, by a bylaw or
amendment thereof duly adopted by the vote of a majority of the shares entitled
to vote represented at a duly held meeting at which a quorum is present, or by
the board of directors. Subject to the foregoing provisions for changing the
number of directors, the number of directors of the corporation has been fixed
at seven.
2. Written Ballot Not Required. Elections of directors need not be by
---------------------------
written ballot unless the bylaws of the corporation so provide.
3. Removal of Directors Solely for Cause. No director may be removed
-------------------------------------
from office except for cause and only by the affirmative vote of the holders of
a majority of the combined voting power of all outstanding shares of stock then
entitled to vote generally in the election of directors, voting as a single
class. Notwithstanding the foregoing, directors who shall have been elected by
the holders of a series or class of preferred stock, voting separately as a
class, shall be removed only pursuant to the provisions establishing the rights
of such series or class to elect such directors.
ARTICLE VI
1. Exculpation. No director shall be liable to the corporation or any of
-----------
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that the foregoing does not eliminate or limit any liability
that may exist with respect to (a) a breach of the director's duty of loyalty to
the corporation or its stockholders, (b) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c)
liability under Section 174 of the Delaware General Corporation Law or (d) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as in effect on the date hereof and as such Section may be amended after the
date hereof to the extent such amendment permits such liability to be further
eliminated or limited.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by Section 145 of the Delaware General Corporation Law (as in effect
on the date hereof and as such Section may be amended after the date hereof)
each person that such Section grants the corporation the power to indemnify.
3. Effect of Repeal or Modification. Any repeal or modification of any
--------------------------------
of the foregoing provisions of this Article VI shall be prospective and shall
not adversely affect any right or protection of a director, officer, agent or
other person existing at the time of, or increase
4
<PAGE>
the liability of any director of the corporation with respect to any acts or
omissions of such director occurring prior to, such repeal or modification.
ARTICLE VII
No holder of shares of stock of the corporation shall have any preemptive
or other right, except as such rights are expressly provided by contract, to
purchase or subscribe for or receive any shares of any class, or series thereof,
of stock of the corporation, whether now or hereafter authorized, or any
warrants, options, bonds, debentures or other securities convertible into,
exchangeable for or carrying any right to purchase any share of any class, or
series thereof, of stock; but such additional shares of stock and such warrants,
options, bonds, debentures or other securities convertible into, exchangeable
for or carrying any right to purchase any shares of any class, or series
thereof, of stock may be issued or disposed of by the board of directors to such
persons, and on such terms and for such lawful consideration as in its
discretion it shall deem advisable or as the corporation shall have by contract
agreed.
ARTICLE VIII
The corporation shall have a perpetual existence.
ARTICLE IX
Any action required or permitted to be taken by the stockholders of the
corporation must be taken at a duly called annual or special meeting of
stockholders of the corporation, and the ability of the stockholders to consent
in writing to the taking of any action is hereby specifically denied except as
fixed pursuant to the provisions of Section 2 of Article IV hereof relating to
the rights of the holders of Preferred Stock. Except as otherwise required by
law, special meetings of stockholders of the corporation may be called only by
the Secretary of the corporation at the request in writing of a majority of the
members of the board of directors.
ARTICLE X
In furtherance and not in limitation of the powers conferred upon it by the
laws of the State of Delaware, the board of directors shall have the power to
adopt, alter, amend, terminate or repeal the corporation's bylaws. The
affirmative vote of at least 66-2/3% of the entire board of directors shall be
required to adopt, alter, amend, terminate or repeal the corporation's By-laws.
ARTICLE XI
5
<PAGE>
The board of directors of the corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
the corporation, (b) merge or consolidate the corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the corporation, shall in connection with the
exercise of its judgment in determining what is in the best interests of the
corporation and its stockholders, give due consideration to (i) all relevant
factors including, without limitation, the social, legal, environmental and
economic effects on the employees, customers, suppliers and other affected
persons, firms and corporation and on the communities and geographical areas in
which the corporation and its subsidiaries operate or are located and on any of
the businesses and properties of the corporation or any of its subsidiaries, as
well as such other factors as the directors deem relevant, and (ii) not only the
consideration being offered, in relation to the then current market price for
the corporation's outstanding shares of capital stock, but also in relation to
the then current value of the corporation in a freely negotiated transaction and
in relation to the board of director's estimate of the future value of the
corporation (including the unrealized value of its properties and assets) as an
independent going concern.
ARTICLE XII
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation, provided, that any amendment, alteration, change or repeal of any
provision of this Certificate of Incorporation that will have the effect of
permitting circumvention of or modifying Article V, Section 2, Article IX,
Article X, Article XI and Article XII, shall require the favorable vote, at a
stockholders' meeting, of the holders of at least 66 2/3% of the then-
outstanding shares of stock of the corporation entitled to vote.
6
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed under the seal of the corporation as of this ____
day of __________, 1998.
COLORADO GREENHOUSE
HOLDINGS, INC. a Delaware corporation
By:___________________________________
James R. Rinella
Chief Executive Officer
Attest:
___________________________________
Alan R. Fine, Secretary
7
<PAGE>
EXHIBIT 4.3
AMENDED AND RESTATED
BYLAWS
OF
COLORADO GREENHOUSE HOLDINGS, INC.
ADOPTED TO BE EFFECTIVE AS OF _________ ___, 1998
<PAGE>
INDEX TO BYLAWS
OF
COLORADO GREENHOUSE HOLDINGS, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - OFFICES.................................................................... 1
Section 1.01 Business Offices......................................................... 1
Section 1.02 Registered Office........................................................ 1
ARTICLE II - STOCKHOLDERS.............................................................. 1
Section 2.01 Annual Meeting........................................................... 1
Section 2.02 Special Meetings......................................................... 1
Section 2.03 Place of Meeting......................................................... 2
Section 2.04 Notice of Meetings....................................................... 2
Section 2.05 Fixing Date for Determination of Stockholders of Record................. 2
Section 2.06 Voting List.............................................................. 3
Section 2.07 Proxies.................................................................. 3
Section 2.08 Quorum and Manner of Acting.............................................. 3
Section 2.09 Voting of Shares......................................................... 3
Section 2.10 Voting of Shares by Certain Holders...................................... 3
Section 2.11 Action Without a Meeting................................................. 4
ARTICLE III - BOARD OF DIRECTORS....................................................... 4
Section 3.01 General Powers........................................................... 4
Section 3.02 Number, Tenure and Qualifications........................................ 5
Section 3.03 Resignation.............................................................. 5
Section 3.04 Removal.................................................................. 5
Section 3.05 Vacancies................................................................ 5
Section 3.06 Regular Meetings......................................................... 5
Section 3.07 Special Meetings......................................................... 5
Section 3.08 Meetings by Telephone.................................................... 6
Section 3.09 Notice of Meetings....................................................... 6
Section 3.10 Quorum and Manner of Acting.............................................. 6
Section 3.11 Interested Directors..................................................... 6
Section 3.12 Action Without a Meeting................................................. 7
Section 3.13 Executive and Other Committees........................................... 7
Section 3.14 Compensation............................................................. 8
ARTICLE IV - OFFICERS.................................................................. 8
Section 4.01 Number and Qualifications................................................ 8
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.02 Election and Term of Office.............................................. 8
Section 4.03 Compensation............................................................. 8
Section 4.04 Resignation.............................................................. 8
Section 4.05 Removal.................................................................. 8
Section 4.06 Vacancies................................................................ 9
Section 4.07 Authority and Duties..................................................... 9
Section 4.08 Surety Bonds.............................................................10
ARTICLE V - STOCK......................................................................11
Section 5.01 Issuance of Shares.......................................................11
Section 5.02 Stock Certificates; Uncertificated Shares................................11
Section 5.03 Payment for Shares.......................................................11
Section 5.04 Lost Certificates........................................................12
Section 5.05 Transfer of Shares.......................................................12
Section 5.06 Registered Holders.......................................................12
Section 5.07 Transfer Agents, Registrars and Paying Agents............................12
ARTICLE VI - INDEMNIFICATION...........................................................13
Section 6.01 Indemnification of Officers and Directors................................13
Section 6.02 Indemnification of Employees and Other Agents............................13
Section 6.03 Good Faith...............................................................13
Section 6.04 Expenses.................................................................14
Section 6.05 Enforcement..............................................................14
Section 6.06 Nonexclusivity of Rights.................................................14
Section 6.07 Survival of Rights.......................................................14
Section 6.08 Insurance................................................................14
Section 6.09 Amendments...............................................................15
Section 6.10 Savings Clause...........................................................15
Section 6.11 Certain Definitions......................................................15
ARTICLE VII - MISCELLANEOUS...........................................................16
Section 7.01 Waivers of Notice........................................................16
Section 7.02 Presumption of Assent....................................................16
Section 7.03 Voting of Securities by the Corporation..................................16
Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of Employees
and Officers..........................................................................16
Section 7.05 Seal.....................................................................17
Section 7.06 Fiscal Year..............................................................17
Section 7.07 Amendments...............................................................17
</TABLE>
-ii-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
COLORADO GREENHOUSE HOLDINGS, INC.
ARTICLE I
Offices
Section 1.01 Business Offices. The corporation may have such
----------------
offices, either within or outside Delaware, as the board of directors may from
time to time determine or as the business of the corporation may require.
Section 1.02 Registered Office. The registered office of the
-----------------
corporation required by the Delaware General Corporation Law to be maintained in
Delaware shall be as set forth in the certificate of incorporation, unless
changed as provided by law.
ARTICLE II
Stockholders
Section 2.01 Annual Meeting. An annual meeting of the stockholders shall
--------------
be held on such date and at such time as the board of directors shall fix in the
notice of meeting, beginning with the year 1997, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday, such
meeting shall be held on the next succeeding business day. If the election of
directors shall not be held on the day designated herein for any annual meeting
of the stockholders, or at any adjournment thereof, the board of directors shall
cause the election to be held at a meeting of the stockholders as soon
thereafter as conveniently may be. Failure to hold an annual meeting as
required by these bylaws shall not invalidate any action taken by the board of
directors or officers of the corporation.
Section 2.02 Special Meetings. Except as otherwise required by law, a
----------------
special meeting of the stockholders of the corporation may be called only by the
secretary of the corporation at the request in writing of a majority of the
members of the board of directors.
<PAGE>
Section 2.03 Place of Meeting. Each meeting of the stockholders shall be
----------------
held at such place, either within or outside Delaware, as may be designated in
the notice of meeting, or, if no place is designated in the notice, at the
principal office of the corporation.
Section 2.04 Notice of Meetings. Except as otherwise required by law,
------------------
written notice of each meeting of the stockholders stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given, either personally
(including delivery by private courier) or by first class, certified or
registered mail, to each stockholder of record entitled to notice of such
meeting, not less than ten nor more than 60 days before the date of the meeting.
Such notice shall be deemed to be given, if personally delivered, when delivered
to the stockholder, and, if mailed, when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation, but if notice of two consecutive annual meetings and
all notices of meetings of or the taking of action by written consent without a
meeting to any stockholder during the period between such two consecutive annual
meetings, or all, and at least two, payments (if sent by first class mail) of
dividends or interest on securities during a 12-month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required until another address for such person is
delivered to the corporation. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting in accordance with the foregoing
provisions of this Section 2.04.
Section 2.05 Fixing Date for Determination of Stockholders of Record.
--------------------------------------------------------
For the purpose of determining stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for any other lawful action, the board of directors may fix, in
advance, a date as the record date for any such determination of stockholders,
which date shall be not more than 60 nor less than ten days before the date of
such meeting, and not more than 60 days prior to any other action. If no record
date is fixed for determining stockholders entitled to notice of or to vote at a
meeting of stockholders, then the record date shall be the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, the close of business on the day next preceding the day on which the
meeting is held, or, for determining stockholders for any other purpose, the
close of business on the day on which the board of directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of directors may
fix a new record date for the adjourned meeting.
-2-
<PAGE>
Section 2.06 Voting List. The officer who has charge of the stock books
-----------
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 2.07 Proxies. Each stockholder entitled to vote at a meeting of
-------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
Section 2.08 Quorum and Manner of Acting. At all meetings of
---------------------------
stockholders, 35% of the outstanding shares of the corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum. If a quorum is
present, the affirmative vote of a majority of the shares represented at a
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the vote of a greater proportion or number or voting by
classes is otherwise required by law, the certificate of incorporation or these
bylaws. In the absence of a quorum, a majority of the shares so represented may
adjourn the meeting from time to time in accordance with Section 2.04, until a
quorum shall be present or represented.
Section 2.09 Voting of Shares. Unless otherwise provided in the
----------------
certificate of incorporation and subject to the provisions of Section 2.05, each
stockholder entitled to vote shall have one vote for each outstanding share of
capital stock held of record by such stockholder on each matter submitted to a
vote of the stockholders either at a meeting thereof or pursuant to Section
2.11. In the election of directors each record holder of stock entitled to vote
at such election shall have the right to vote the number of shares owned by him
for as many persons as there are directors to be elected, and for whose election
he has the right to vote. Cumulative voting shall not be allowed. If a
separate vote by a class or classes is required, a majority of the outstanding
shares of such class or classes, present in person or represented by proxy,
shall constitute a quorum entitled to take action with respect to that vote on
that matter and the affirmative vote of the majority of shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class.
Section 2.10 Voting of Shares by Certain Holders.
-----------------------------------
(a) Fiduciaries; Pledgors. Persons holding stock in a fiduciary
---------------------
capacity shall be entitled to vote the shares so held. Persons whose stock is
pledged shall be entitled to vote, unless in the transfer by the pledgor on the
books of the corporation he has expressly empowered the pledgee to vote thereon,
in which case only the pledgee or his proxy may represent such shares and vote
thereon.
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(b) Joint Owners. If shares stand of record in the names of
------------
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship respecting the same shares,
unless the secretary of the corporation is given written notice to the contrary
and is furnished with a copy of the instrument or order appointing them or
creating the relationship wherein it is so provided, their acts with respect to
voting shall have the following effects: (i) if only one votes, his act binds
all; (ii) if more than one votes, the act of the majority so voting binds all;
and (iii) if more than one votes, but the vote is evenly split on any particular
matter, each faction may vote the shares in question proportionally, or any
person voting the shares, or a beneficiary, if any, may apply to any court
having jurisdiction to appoint an additional person to act with the persons so
voting the shares, in which case the shares shall then be voted as determined by
a majority of such persons. If the secretary of the corporation is given notice
and is furnished a copy of the instrument or order creating a tenancy held in
unequal interests, a majority or even split for the purpose of subparagraph
(iii) shall be a majority or even split in interest.
Section 2.11 Action Without a Meeting. Any action required or permitted
------------------------
to be taken by the stockholders of the corporation must be taken at a duly
called annual or special meeting of stockholders of the corporation, and the
ability of the stockholders to consent in writing to the taking of any action is
hereby specifically denied except as fixed pursuant to the provisions of Section
2 of Article IV of the certificate of incorporation relating to the rights of
the holders of preferred stock.
ARTICLE III
Board of Directors
Section 3.01 General Powers. The business and affairs of the corporation
--------------
shall be managed by or under the direction of its board of directors, except as
otherwise provided in the Delaware General Corporation Law or the certificate of
incorporation.
Section 3.02 Number, Tenure and Qualifications. The number of directors
---------------------------------
of the corporation shall not be less than five nor more than nine until changed
by amendment of the certificate of incorporation or these bylaws duly adopted by
the vote of holders of a majority of the outstanding shares or by the board of
directors. The exact number of directors shall be fixed from time to time,
within the limits specified in the certificate of incorporation or in these
bylaws, by a bylaw or amendment thereof duly adopted by the vote of a majority
of the shares entitled to vote represented at a duly held meeting at which a
quorum is present, or by the board of directors. Subject to the foregoing
provisions for changing the number of directors, the number of directors of the
corporation has been fixed at seven. Except as otherwise provided in Sections
2.01 and 3.05, directors shall be elected at each annual meeting of
stockholders, by a plurality of the votes present in person or represented by
proxy at the meeting and entitled to vote at the election of directors. Each
director shall hold office until his successor shall have been elected and
qualified or until his earlier death, resignation or removal. Directors need
not be residents of Delaware or stockholders of the corporation. Any reduction
in the authorized
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number of directors shall not have the effect of shortening the term of any
incumbent director unless such director is also removed from office in
accordance with Section 3.04.
Section 3.03 Resignation. Any director may resign at any time by giving
-----------
written notice to the corporation. A director's resignation shall take effect
at the time specified therein; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 3.04 Removal. No director may be removed from office except for
-------
cause and only by the affirmative vote of the holders of a majority of the
combined voting power of all outstanding shares of stock then entitled to vote
generally in the election of directors, voting as a single class.
Notwithstanding the foregoing, directors who shall have been elected by the
holders of a series or class of preferred stock, voting separately as a class,
shall be removed only pursuant to the provisions establishing the rights of such
series or class to elect such directors.
Section 3.05 Vacancies. Except as set forth below or unless otherwise
---------
provided in the certificate of incorporation, any vacancy or any newly created
directorship resulting from any increase in the authorized number of directors
may be filled by a majority of directors then in office, although less than a
quorum, or by a sole remaining director, or by the stockholders if there are no
directors remaining, and a director so chosen shall hold office until the next
annual election and until his successor is duly elected and qualified. When one
or more directors shall resign from the board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this Section for the filling
of other vacancies. Notwithstanding anything to the contrary contained in this
Section, in the event that the vacant office was held by a director elected by
the holders of a series or class of preferred stock, voting separately as a
class, the vacancy shall be filled by an election of the holders of the series
or class of preferred stock entitled to elect such director.
Section 3.06 Regular Meetings. A regular meeting of the board of
----------------
directors shall be held immediately after and at the same place as the annual
meeting of stockholders, or as soon thereafter as conveniently may be, at the
time and place, either within or without Delaware, determined by the board, for
the purpose of electing officers and for the transaction of such other business
as may come before the meeting. Failure to hold such a meeting, however, shall
not invalidate any action taken by any officer then or thereafter in office.
The board of directors may provide by resolution the time and place, either
within or outside Delaware, for the holding of additional regular meetings
without other notice than such resolution.
Section 3.07 Special Meetings. Special meetings of the board of
----------------
directors may be called by or at the request of the chief executive officer or
any director. The person authorized to call special meetings of the board of
directors may fix any convenient place, either within or outside Delaware, as
the place for holding any special meeting of the board of directors called by
him.
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Section 3.08 Meetings by Telephone. Unless otherwise restricted by the
---------------------
certificate of incorporation, members of the board of directors or any committee
thereof may participate in a meeting of such board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting in such manner shall constitute presence in person at the meeting.
Section 3.09 Notice of Meetings. Notice of each meeting of the board of
------------------
directors (except those regular meetings for which notice is not required)
stating the place, day and hour of the meeting shall be given to each director
at least five days prior thereto by the mailing of written notice by first class
mail, or at least three days prior thereto by personal delivery (including
delivery by courier) of written notice or by telephone, telegram, facsimile or
other similar form of communication, except that in the case of a meeting to be
held pursuant to Section 3.08 notice may be given by personal delivery or by
facsimile, telegram or telephone 24 hours prior thereto. The method of notice
need not be the same to each director. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, with postage thereon
prepaid, addressed to the director at his business or residence address. If
sent by telegram, facsimile or similar form of communication, such notice shall
be deemed to be given when sent by such method to the director during normal
business hours at the location of the recipient at the last address or facsimile
number of the director furnished by him to the corporation for such purpose. If
communicated by telephone, such notice shall be deemed to be given when
communicated directly to the director or to the person designated by the
director as a person authorized to receive such notice. Neither the business to
be transacted at nor the purpose of any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
Section 3.10 Quorum and Manner of Acting. Except as otherwise may be
---------------------------
required by law, the certificate of incorporation or these bylaws, a majority of
the number of directors fixed in accordance with these bylaws, present in
person, shall constitute a quorum for the transaction of business at any meeting
of the board of directors, and the vote of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the board of
directors. If less than a quorum is present at a meeting, the directors present
may adjourn the meeting from time to time without further notice other than
announcement at the meeting, until a quorum shall be present. No director may
vote or act by proxy or power of attorney at any meeting of the board of
directors.
Section 3.11 Interested Directors. No contract or transaction between
--------------------
the corporation and one or more of its directors or officers, or between a
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the board or committee which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if the material facts as to his relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or
transaction by the affirmative
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votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the shareholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the shareholders;
or the contract or transactions is fair as to the corporation as of the time it
is authorized, approved or ratified, by the board of directors, a committee or
the shareholders. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the board of directors or of a
committee that authorizes the contract or transaction.
Section 3.12 Action Without a Meeting. Unless otherwise restricted by
------------------------
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the board of directors or any committee thereof may be taken
without a meeting, without prior notice and without a vote, if all members of
the board or committee consent thereto in writing and the writing or writings
are filed with the minutes of the proceedings of the board or committee.
Section 3.13 Executive and Other Committees. The board of directors, by
------------------------------
resolution adopted by a majority of the whole board, may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to (a) amending the certificate of incorporation (except as permitted by the
Delaware General Corporation Law with respect to fixing the terms and conditions
of series of stock); (b) adopting an agreement of merger or consolidation; (c)
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets; (d) recommending to
the stockholders a dissolution of the corporation or a revocation of a
dissolution; (e) amending the bylaws of the corporation; and (f) unless the
resolution of the board expressly so provides, declaring a dividend, authorizing
the issuance of stock or adopting a certificate of ownership and merger. The
delegation of authority to any committee shall not operate to relieve the board
of directors or any member of the board form any responsibility imposed by law.
Subject to the foregoing, the board of directors may provide such powers,
limitations and procedures for such committees as the board deems advisable. To
the extent the board of directors does not establish other procedures, each
committee shall be governed by the procedures set forth in Sections 3.06 (except
as they relate to an annual meeting), 3.07 through 3.11 and 7.01 and 7.02 as if
the committee were the board of directors. Each committee shall keep regular
minutes of its meetings, which shall be reported to the board of directors when
required and submitted to the secretary of the corporation for inclusion in the
corporate records.
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Section 3.14 Compensation. Unless otherwise restricted by the
------------
certificate of incorporation, the board of directors shall have the authority to
fix the compensation of directors. The directors may be paid their expenses, if
any, of attendance at each meeting of the board of directors and each meeting of
any committee of the board of which he is a member and may be paid a fixed sum
for attendance at each such meeting or a stated salary or both a fixed sum and a
stated salary. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
Officers
Section 4.01 Number and Qualifications. The officers of the corporation
-------------------------
shall consist of a chairman of the board, a chief executive officer, a
president, a secretary and such other officers, including a chief operating
officer, one or more vice-presidents, a treasurer and a controller, as may from
time to time be elected or appointed by the board. In addition, the board of
directors or the chief executive officer may elect or appoint such assistant and
other subordinate officers including assistant vice-presidents, assistant
secretaries and assistant treasurers, as it or he shall deem necessary or
appropriate. Any number of offices may be held by the same person.
Section 4.02 Election and Term of Office. Except as provided in Sections
---------------------------
4.01 and 4.06, the officers of the corporation shall be elected by the board of
directors annually at the first meeting of the board held after each annual
meeting of the stockholders as provided in Section 3.06. If the election of
officers shall not be held as provided herein, such election shall be held as
soon thereafter as conveniently may be. Each officer shall hold office until
his successor shall have been duly elected and shall have qualified or until his
earlier death, resignation or removal.
Section 4.03 Compensation. Officers shall receive such compensation for
------------
their services as may be authorized or ratified by the board of directors and no
officer shall be prevented from receiving compensation by reason of the fact
that he is also a director of the corporation. Election or appointment as an
officer shall not of itself create a contract or other right to compensation for
services performed by such officer.
Section 4.04 Resignation. Any officer may resign at any time, subject to
-----------
any rights or obligations under any existing contracts between the officer and
the corporation, by giving written notice to the corporation. An officer's
resignation shall take effect at the time stated therein; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 4.05 Removal. Any officer may be removed at any time by the
-------
board of directors, or, in the case of assistant and other subordinate officers,
by the chief executive officer (whether or not such officer was appointed by the
chief executive officer), whenever in its or his
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judgment, as the case may be, the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
shall not in itself create contract rights.
Section 4.06 Vacancies. A vacancy occurring in any office by death,
---------
resignation, removal or otherwise may be filled by the board of directors, or,
if such office may be filled by the chief executive officer as provided in
Section 4.01, by the chief executive officer, for the unexpired portion of the
term.
Section 4.07 Authority and Duties. The officers of the corporation shall
--------------------
have the authority and shall exercise the powers and perform the duties
specified below, and as may be additionally specified by the chief executive
officer, the board of directors or these bylaws (and in all cases where the
duties of any officer are not prescribed by the bylaws or the board of
directors, such officer shall follow the orders and instructions of the chief
executive officer), except that in any event each officer shall exercise such
powers and perform such duties as may be required by law:
(a) Chairman of the Board. The chairman of the board, who
---------------------
shall be elected from among the directors, shall preside at all meetings of the
stockholders and directors of the corporation and shall have and may exercise
all such powers and perform such other duties as may be assigned to him from
time to time by the board of directors.
(b) Chief Executive Officer. The chief executive officer
-----------------------
shall, subject to the direction and supervision of the board of directors, (i)
have general and active control of its affairs and business and general
supervision of its officers, agents and employees; (ii) in the absence of the
chairman of the board, preside at all meetings of the stockholders and the board
of directors; (iii) see that all orders and resolutions of the board of
directors are carried into effect; and (iv) perform all other duties incident to
the office of chief executive officer and as from time to time may be assigned
to him by the board of directors.
(c) Chief Operating Officer. The chief operating officer,
-----------------------
if any, shall, subject to the direction and supervision of the board of
directors, (i) be the chief operating officer of the corporation and have
general and active control of its affairs and business and general supervision
of its officers, agents and employees; (ii) unless there is a chairman of the
board or chief executive officer, preside at all meetings of the shareholders
and the board of directors; (iii) see that all orders and resolutions of the
board of directors are carried into effect; and (iv) perform all other duties
incident to the office of chief operating officer and as from time to time may
be assigned to him by the board of directors.
(d) Treasurer. The treasurer shall: (i) be the principal
---------
financial officer of the corporation and have the care and custody of all its
funds, securities, evidences of indebtedness and other personal property and
deposit the same in accordance with the instructions of the board of directors;
(ii) receive and give receipts and acquittances for moneys paid in on account of
the corporation, and pay out of the funds on hand all bills, payrolls and other
just debts of the corporation of whatever nature upon maturity; (iii) unless
there is a
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controller, be the principal accounting officer of the corporation and as such
prescribe and maintain the methods and systems of accounting to be followed,
keep complete books and records of account, prepare and file all local, state
and federal tax returns, prescribe and maintain an adequate system of internal
audit and prepare and furnish to the chief executive officer and the board of
directors statements of account showing the financial position of the
corporation and the results of its operations; (iv) upon request of the board,
make such reports to it as may be required at any time; and (v) perform all
other duties incident to the office of treasurer and such other duties as from
time to time may be assigned to him by the board of directors or the chief
executive officer. Assistant treasurers, if any, shall have the same powers and
duties, subject to the supervision by the treasurer.
(e) Vice-Presidents. The vice-president, if any (or, if
---------------
there is more than one, then each vice-president), shall assist the president
and chief executive officer and shall perform such duties as may be assigned to
him by the president or chief executive officer or by the board of directors.
The vice-president, if there is one (or, if there is more than one, then the
vice-president designated by the board of directors, or, if there be no such
designation, then the vice-presidents in order of their election), shall, at the
request of the president or chief executive officer or, in his absence or
inability or refusal to act, perform the duties of the president or chief
executive officer and when so acting shall have all the powers of and be subject
to all the restrictions upon the president or chief executive officer. Assistant
vice-presidents, if any, shall have such powers and perform such duties as may
be assigned to them by the president or chief executive officer or by the board
of directors.
(f) Secretary. The secretary shall: (i) prepare and
---------
maintain the minutes of the proceedings of the shareholders, the board of
directors and any committees of the board; (ii) see that all notices are duly
given in accordance with the provisions of these bylaws or as required by law;
(iii) be custodian of the corporate records and of the seal of the corporation;
(iv) keep at the corporation's registered office or principal place of business
within or outside Colorado a record containing the names and addresses of all
shareholders and the number and class of shares held by each, unless such a
record shall be kept at the office of the corporation's transfer agent or
registrar; (v) have general charge of the stock books of the corporation, unless
the corporation has a transfer agent; (vi) authenticate records of the
corporation; and (vii) in general, perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the chief executive officer or by the board of directors. Assistant secretaries,
if any, shall have the same duties and powers, subject to supervision by the
secretary.
Section 4.08 Surety Bonds. The board of directors may require any
------------
officer or agent of the corporation to execute to the corporation a bond in such
sums and with such sureties as shall be satisfactory to the board, conditioned
upon the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
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ARTICLE V
Stock
Section 5.01 Issuance of Shares The issuance or sale by the corporation
------------------
of any shares of its authorized capital stock of any class, including treasury
shares, shall be made only upon authorization by the board of directors, except
as otherwise may be provided by law. Every issuance of shares shall be recorded
on the books of the corporation maintained for such purpose by or on behalf of
the corporation.
Section 5.02 Stock Certificates; Uncertificated Shares. The shares of
-----------------------------------------
stock of the corporation shall be represented by certificates, except that the
board of directors may, in accordance with applicable provisions of law,
authorize the issuance of some or all of any or all classes or series of stock
of the corporation without certificates. If shares are represented by
certificates (or if a holder of uncertificated shares requests his shares to be
represented by a certificate), each certificate shall be signed by or in the
name of the corporation by the chairman or a vice-chairman of the board of
directors, or the president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation, representing the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. Certificates of stock shall be in such
form consistent with law as shall be prescribed by the board of directors.
Section 5.03 Payment for Shares. Shares shall be issued for such
------------------
consideration (but not less than the par value thereof) as shall be determined
from time to time by the board of directors. Treasury shares shall be disposed
of for such consideration as may be determined from time to time by the board.
Such consideration shall be paid in such form and in such manner as the
directors shall determine. In the absence of actual fraud in the transaction,
the judgment of the directors as to the value of such consideration shall be
conclusive. The capital stock issued by the corporation shall be deemed to be
fully paid and non-assessable stock if: (a) the entire amount of the
consideration has been received by the corporation in the form of cash, services
rendered, personal property, real property, leases of real property or a
combination thereof; or (b) not less than the amount of the consideration
determined to be capital pursuant to statute has been received by the
corporation in such form and the corporation has received a binding obligation
of the subscriber or purchaser to pay the balance of the subscription or
purchase price; provided, however, nothing contained herein shall prevent the
board of directors from issuing partly paid shares pursuant to statute. The
directors may, from time to time, demand payment in respect of each share of
stock not fully paid in the manner prescribed by statute. In addition, when the
whole of the consideration payable for shares of a corporation has not been paid
in, and the assets shall be insufficient to satisfy the claims of its creditors,
each holder of or subscriber for such shares shall be bound to pay on each share
held or subscribed for by him the sum necessary to complete the amount of the
unpaid balance of the consideration for which such
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shares were issued or are to be issued by the corporation. No person becoming an
assignee or transferee of shares or of a subscription for shares in good faith
and without knowledge or notice that the full consideration therefor has not
been paid shall be personally liable for any unpaid portion of such
consideration, but the transferor shall remain liable therefor, and no person
holding shares in any corporation as collateral security shall be personally
liable as a stockholder but the person pledging such shares shall be considered
the holder thereof and shall be so liable. No executor, administrator, guardian,
trustee or other fiduciary shall be personally liable as a stockholder, but the
estate or funds held by such executor, administrator, guardian, trustee or other
fiduciary in such fiduciary capacity shall be liable.
Section 5.04 Lost Certificates. In case of the alleged loss, destruction
-----------------
or mutilation of a certificate of stock the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as it may prescribe. The board of directors may in its
discretion require a bond in such form and amount and with such surety as it may
determine before issuing a new certificate.
Section 5.05 Transfer of Shares. Upon presentation and surrender to the
------------------
corporation or to a transfer agent of the corporation of a certificate of stock
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, payment of all transfer taxes, if any, and the
satisfaction of any other requirements of law, including inquiry into and
discharge of any adverse claims of which the corporation has notice, the
corporation or the transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction on the
books maintained for such purpose by or on behalf of the corporation. No
transfer of shares shall be effective until it has been entered on such books.
The corporation or a transfer agent of the corporation may require a signature
guaranty or other reasonable evidence that any signature is genuine and
effective before making any transfer. Transfers of uncertificated shares shall
be made in accordance with applicable provisions of law.
Section 5.06 Registered Holders. The corporation shall be entitled to
------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
Section 5.07 Transfer Agents, Registrars and Paying Agents. The board of
---------------------------------------------
directors may at its discretion appoint one or more transfer agents, registrars
and agents for making payment upon any class of stock, bond, debenture or other
security of the corporation. Such agents and registrars may be located either
within or outside Delaware. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
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ARTICLE VI
Indemnification
Section 6.01 Indemnification of Directors and Officers The corporation
-----------------------------------------
shall indemnify its directors and officers to the fullest extent allowed under
the certificate of incorporation and not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation shall not be required
to indemnify any director or officer in connection with any proceeding (or part
thereof) initiated by such person or any proceeding by such person against the
corporation or its directors, officers, employees or other agents unless (i)
such indemnification is expressly required to be made by law, (ii) the
proceeding was authorized by the board of directors of the corporation or (iii)
such indemnification is provided by the corporation, in its sole discretion,
pursuant to the powers vested in the corporation under the Delaware General
Corporation Law.
Section 6.02 Indemnification of Employees and Other Agents. The
---------------------------------------------
corporation may indemnify its employees and other agents as permitted by the
Delaware General Corporation Law.
Section 6.03 Good Faith.
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(a) For purposes of any determination under this Article 6,
a director or officer shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his conduct was unlawful, if his action
is based on information, opinions, reports and statements, including financial
statements and other financial data, in each case prepared or presented by:
(i) one or more officers or employees of the corporation
whom the director or officer believed to be reliable and competent in the
matters presented;
(ii) counsel, independent accountants or other persons
as to matters which the director or officer believed to be within such person's
professional competence; and
(iii) with respect to a director, a committee of the
board upon which such director does not serve, as to matters within such
committee's designated authority, which committee the director believes to merit
confidence; so long as, in each case, the director acts without knowledge that
would cause such reliance to be unwarranted.
(b) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, that
he had reasonable cause to believe that his conduct was unlawful.
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<PAGE>
(c) The provisions of this Section 6.03 shall not be deemed
to be exclusive or to limit in any way the circumstances in which a person may
be deemed to have met the applicable standard of conduct set forth by the
Delaware General Corporation Law.
Section 6.04 Expenses. The corporation shall advance, prior to the final
--------
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any director or officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it should be determined ultimately that such person is not entitled to be
indemnified under this Article 6 or otherwise.
Section 6.05 Enforcement. Without the necessity of entering into an
-----------
express contract, all rights to indemnification and advances to directors and
officers under this Article 6 shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or officer. Any right to indemnification or
advances granted by this Article 6 to a director or officer shall be enforceable
by or on behalf of the person holding such right in any court of competent
jurisdiction if (i) the claim for indemnification or advances is denied, in
whole or in part, or (ii) no disposition of such claim is made within 90 days of
request therefor. The claimant in such enforcement action, if successful in
whole or in part, shall be entitled to be paid also the expense of prosecuting
his claim. The corporation shall be entitled to raise as a defense to any such
action that the claimant has not met the standards of conduct that make it
permissible under the Delaware General Corporation Law for the corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
corporation (including its board of directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the corporation
(including its board of directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
Section 6.06 Nonexclusivity of Rights. The rights conferred on any
------------------------
person by this Article 6 shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, these bylaws, agreements, votes of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
Section 6.07 Survival of Rights. The rights conferred on any person by
------------------
this Article 6 shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 6.08 Insurance. To the fullest extent permitted by the Delaware
---------
General Corporation Law, the corporation, upon approval by the board of
directors, may purchase
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<PAGE>
insurance on behalf of any person required or permitted to be indemnified
pursuant to this Article 6.
Section 6.09 Amendments. Any repeal or modification of this Article 6
----------
shall only be prospective and shall not affect the rights under this Article 6
in effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
Section 6.10 Saving Clause. If this Article 6 or any portion hereof
-------------
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director and officer to the
full extent not prohibited by any applicable portion of this Article 6 that
shall not have been invalidated, or by any other applicable law.
Section 6.11 Certain Definitions. For the purposes of this Article 6, the
-------------------
following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article 6 with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(d) References to a "director," "officer," "employee," or
"agent" of the corporation shall include, without limitation, situations where
such person is serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
(e) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include
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<PAGE>
any service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
6.
ARTICLE VII
Miscellaneous
Section 7.01 Waivers of Notice. Whenever notice is required to be given
-----------------
by law, by the certificate of incorporation or by these bylaws, a written waiver
thereof, signed by the person entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting or (in the case of a stockholder) by proxy shall constitute
a waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting need be specified in any written waiver of notice unless required by
these bylaws to be included in the notice of such meeting.
Section 7.02 Presumption of Assent. A director or stockholder of the
---------------------
corporation who is present at a meeting of the board of directors or
stockholders at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director or stockholder who voted in
favor of such action.
Section 7.03 Voting of Securities by the Corporation. Unless otherwise
---------------------------------------
provided by resolution of the board of directors, on behalf of the corporation
the chief executive officer or any vice-president shall attend in person or by
substitute appointed by him, or shall execute written instruments appointing a
proxy or proxies to represent the corporation at, all meetings of the
stockholders of any other corporation, association or other entity in which the
corporation holds any stock or other securities, and may execute written waivers
of notice with respect to any such meetings. At all such meetings and
otherwise, the chief executive officer or any vice-president, in person or by
substitute or proxy as aforesaid, may vote the stock or other securities so held
by the corporation and may execute written consents and any other instruments
with respect to such stock or securities and may exercise any and all rights and
powers incident to the ownership of said stock or securities, subject, however,
to the instructions, if any, of the board of directors.
Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of
-----------------------------------------------------------
Employees and Officers. The corporation may lend money to, or guarantee any
- ----------------------
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer
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<PAGE>
or employee who is director of the corporation or its subsidiary, whenever, in
the judgment of the directors, such loan, guaranty or assistance may reasonably
be expected to benefit the corporation. The loan, guaranty or other assistance
may be with or without interest, and may be unsecured, or secured in such manner
as the board of directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing contained in this section shall
be deemed to deny, limit or restrict the powers of guaranty or warranty of any
corporation at common law or under any statute.
Section 7.05 Seal. The corporate seal of the corporation shall be in
----
such form as adopted by the board of directors, and any officer of the
corporation may, when and as required, affix or impress the seal, or a facsimile
thereof, to or on any instrument or document of the corporation.
Section 7.06 Fiscal Year. The fiscal year of the corporation shall be as
-----------
established by the board of directors.
Section 7.07 Amendments. In furtherance and not in limitation of the
----------
powers conferred upon it by Delaware General Corporation Law, the board of
directors shall have the power to adopt, alter, amend, terminate or repeal the
corporation's bylaws. The affirmative vote of at least 66-2/3% of the entire
board of directors shall be required to adopt, alter, amend, terminate or repeal
these bylaws. The stockholders of the corporation shall have the power to
adopt, alter, amend, terminate or repeal the corporation's bylaws by the vote of
a majority of the stockholders entitled to vote.
(END)
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<PAGE>
EXHIBIT 10.46
COLORADO GREENHOUSE HOLDINGS, INC.
SECOND AMENDMENT
TO
1996 STOCK OPTION PLAN
This Second Amendment to 1996 Stock Option Plan (the "Amendment") was adopted by
the Board of Directors of Colorado Greenhouse Holdings, Inc. (the "Corporation")
and approved by its stockholders to be effective as of May 28, 1998.
RECITALS
--------
A. The Board of Directors adopted and the stockholders approved the 1996 Stock
Option Plan (the "Plan") to be effective as of November 19, 1996. Capitalized
terms used but not defined herein shall have the meanings given them in the
Plan. Section 4.1 of the Plan provided that the total number of Shares as to
which Options may be granted was 820,000.
B. The Board of Directors adopted and the stockholders approved an amendment
to the Plan to be effective as of January 21, 1997 whereby the number of Shares
as to which Options may be granted was increased to 1,580,135.
C. The Corporation issued 30,559 Shares under the Plan that were subsequently
repurchased and became treasury stock of the Corporation (the "Repurchased
Shares").
D. The Board of Directors, with the approval of the stockholders, desires to
further amend the Plan so that Repurchased Shares are available for issuance
under the Plan in accordance with the terms provided in this Amendment.
AMENDMENT
---------
1. The first three sentences of Section 4.1 of the Plan shall be deleted in
their entirety and replaced by the following:
"The total number of Shares as to which Options may be granted
pursuant to the Plan shall be 1,580,135 in the aggregate. Such number
shall be adjusted in accordance with the provisions of Section 4.2.
Shares issued upon the exercise of Options shall be applied to reduce
the maximum number of Shares remaining available for use under the
Plan except to the extent that (a) the Company reacquires such Shares,
and (b) the Board, with the approval of the stockholders, authorizes
the reissuance of such Shares pursuant to the terms of the Plan."
2. Except as expressly amended by Section 1 above, the terms and conditions of
the Plan are unmodified and remain in full force and effect.
<PAGE>
This Amendment has been adopted by the Board of Directors and approved by the
stockholders to be effective as of the date first written above.
COLORADO GREENHOUSE HOLDINGS, INC.
By:
--------------------------------------------
James R. Rinella, Chief Executive Officer
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and all references to our Firm) included in or made part of this
registration statement.
Arthur Andersen LLP
Denver, Colorado
November 12, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF MONTEREY BAY FOOD GROUP
The undersigned company hereby consents to all references to Monterey Bay
Food Group and its reports contained in the Registration Statement filed on Form
S-1, SEC File No. 333-57329, of Colorado Greenhouse Holdings, Inc.
MONTEREY BAY FOOD GROUP
Aptos, California
November 12, 1998
