UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 1999
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-23483
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COLOR SPOT NURSERIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 68-0363266
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3478 BUSKIRK AVENUE, PLEASANT HILL, CA 94523
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (925) 934-4443
-------------------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of February 1, 2000 the Registrant had outstanding 6,948,597
shares of Common Stock, par value $0.001 per share.
COLOR SPOT NURSERIES, INC.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTIONS "ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND ELSEWHERE
THROUGHOUT THIS QUARTERLY REPORT ON FORM 10-Q ("QUARTERLY REPORT") OF COLOR
SPOT NURSERIES, INC. (THE "COMPANY") WHICH ARE NOT HISTORICAL IN NATURE ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. FORWARD-LOOKING STATEMENTS DEAL WITH THE CURRENT INTENTIONS, BELIEFS
AND EXPECTATIONS OF MANAGEMENT WITH RESPECT TO THE COMPANY'S BUSINESS AND ARE
TYPICALLY IDENTIFIED BY PHRASES SUCH AS "THE COMPANY PLANS," "MANAGEMENT
BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS,
LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR THE
INDUSTRY IN WHICH THE COMPANY COMPETES TO DIFFER, PERHAPS MATERIALLY, FROM
ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS: THE
COMPANY'S SUBSTANTIAL LEVERAGE AND DEBT SERVICE; RESTRICTIONS IMPOSED BY DEBT
COVENANTS; THE EFFECT OF GROWTH ON THE COMPANY'S RESOURCES; THE AVAILABILITY
OF SUITABLE NEW MARKETS AND SUITABLE LOCATIONS WITHIN SUCH MARKETS; CHANGES
IN THE COMPANY'S OPERATING OR EXPANSION STRATEGY AND THE DEPENDENCE ON
ACQUISITIONS FOR FUTURE GROWTH; FAILURE TO CONSUMMATE OR SUCCESSFULLY
INTEGRATE PROPOSED DEVELOPMENTS OR ACQUISITIONS; THE UNCERTAINTY OF
ADDITIONAL FINANCING TO FUND DESIRED GROWTH AND OTHER FUTURE CAPITAL NEEDS;
WEATHER AND GENERAL AGRICULTURAL RISKS; SEASONALITY AND THE VARIABILITY OF
QUARTERLY RESULTS; THE COMPANY'S DEPENDENCE ON MAJOR CUSTOMERS SUCH AS HOME
DEPOT; REGULATORY CONSTRAINTS AND CHANGES IN LAWS OR REGULATIONS CONCERNING
THE GARDENING INDUSTRY; LABOR LAWS AND CHANGES IN THE MINIMUM WAGE; THE
COMPANY'S SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT; SENSITIVITY TO
PRICE INCREASES OF CERTAIN RAW MATERIALS; THE COMPANY'S DEPENDENCE ON LEASED
FACILITIES; COMPETITION; LACK OF A MARKET FOR THE COMPANY'S SECURITIES;
PAYMENT OR NONPAYMENT OF DIVIDENDS AND CASH OUTLAYS FOR INCOME TAXES; RISKS
ASSOCIATED WITH YEAR 2000 COMPLIANCE AND ESTIMATED COSTS ASSOCIATED WITH THE
COMPANY'S AND ITS MAJOR CUSTOMERS' AND SUPPLIERS' COMPLIANCE EFFORTS; TRENDS
IN THE GARDENING INDUSTRY, THE SPECIFIC MARKETS IN WHICH THE COMPANY'S
PRODUCTION FACILITIES ARE LOCATED OR ARE PROPOSED TO BE LOCATED, AND THE
GENERAL ECONOMY OF THE UNITED STATES; AND OTHER FACTORS AS MAY BE IDENTIFIED
FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION OR IN THE COMPANY'S PRESS RELEASES.
FOR A DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE THE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- CERTAIN BUSINESS FACTORS" OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 (AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999). READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS MADE IN,
OR INCORPORATED BY REFERENCE INTO, THIS QUARTERLY REPORT OR OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION, ANY DOCUMENT OR STATEMENT
REFERRING TO THIS QUARTERLY REPORT OR THE COMPANY'S PRESS RELEASES.
COLOR SPOT NURSERIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of December 30, 1999 and
June 30, 1999..........................................................................1
Consolidated Statements of Operations for the Three and Six Months
Ended December 30, 1999 and December 24, 1998..........................................2
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Loss for the Six Months Ended December 30, 1999..........................3
Consolidated Statements of Cash Flow for the Six Months
Ended December 30, 1999 and December 24, 1998..........................................4
Condensed Notes to Consolidated Financial Statements as of
December 30, 1999 .....................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................................10
Item 3. Quantitative and Qualitative Disclosure About
Market Risk...........................................................................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................15
Item 2. Changes in Securities and Use of Proceeds.............................................15
Item 3. Defaults Upon Senior Securities.......................................................15
Item 4. Submission of Matters to a Vote of Security Holders...................................15
Item 5. Other Information.....................................................................15
Item 6. Exhibits and Reports on Form 8-K......................................................15
Signatures.......................................................................................................16
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 30, June 30,
1999 1999
----------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 598 $ 1,420
Accounts receivable, net of allowances of $1,393 and $1,854, respectively 18,662 19,956
Inventories, net 46,818 33,075
Prepaid expenses and other 1,310 723
----------------- ---------------
Total current assets 67,388 55,174
CHRISTMAS TREE INVENTORIES 5,463 4,749
PROPERTY, PLANT AND EQUIPMENT, net 47,818 50,199
ASSETS HELD FOR SALE 696 696
INTANGIBLE ASSETS, net 48,997 50,898
DEFERRED INCOME TAXES 23,380 18,788
NOTES RECEIVABLE AND OTHER ASSETS 1,130 1,250
----------------- ---------------
Total assets $ 194,872 $ 181,754
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 8,884 $ 5,188
Accrued liabilities 23,534 16,176
Dividends payable to stockholders 280 257
Deferred income taxes 12,541 12,541
Current maturities of long-term debt 795 828
----------------- ---------------
Total current liabilities 46,034 34,990
LONG-TERM DEBT 132,408 123,413
----------------- ---------------
Total liabilities 178,442 158,403
----------------- ---------------
SERIES A PREFERRED STOCK, REDEEMABLE, $0.01 par value, 100,000 shares
authorized, 51,485 and 48,298 shares issued and outstanding, respectively 42,760 39,151
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 shares issued
and outstanding 2,920 2,689
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value, 50,000,000 shares authorized,
5,805,258 and 5,811,468 shares issued and outstanding, respectively 12 12
Additional paid-in capital 51,513 51,358
Treasury stock, 6,226,649 and 6,220,439 shares, respectively (45,651) (45,633)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (43,374) (32,476)
----------------- ---------------
Total stockholders' deficit (29,250) (18,489)
----------------- ---------------
Total liabilities and stockholders' deficit $ 194,872 $ 181,754
================= ===============
The accompanying notes are an integral part of these
consolidated financial statements.
1
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
December 30, December 24, December 30, December 24,
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 49,062 $ 47,921 $ 75,785 $ 75,627
COST OF SALES 31,001 32,125 47,327 51,511
------------------ ------------------ ------------------ ------------------
Gross profit 18,061 15,796 28,458 24,116
SALES, MARKETING AND DELIVERY EXPENSES 11,547 11,266 19,284 21,159
GENERAL AND ADMINISTRATIVE EXPENSES 6,344 5,506 12,182 12,637
AMORTIZATION OF INTANGIBLE ASSETS 429 430 861 859
------------------ ------------------ ------------------ ------------------
Loss from operations (259) (1,406) (3,869) (10,539)
INTEREST EXPENSE 3,964 3,717 7,658 7,734
OTHER (INCOME) EXPENSE, NET 59 (325) 97 50
------------------ ------------------ ------------------ ------------------
Loss before income taxes and cumulative
effect of change in accounting principle (4,282) (4,798) (11,624) (18,323)
INCOME TAX BENEFIT 1,692 1,699 4,592 6,490
------------------ ------------------ ------------------ ------------------
Loss before cumulative effect of change in (2,590) (3,099) (7,032) (11,833)
accounting principle and extraordinary loss
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax benefit - - - 1,687
EXTRAORDINARY LOSS, net of tax benefit - 999 - 999
------------------ ------------------ ------------------ ------------------
Net loss (2,590) (4,098) (7,032) (14,519)
SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 1,956 1,631 3,866 3,130
------------------ ------------------ ------------------ ------------------
Net loss applicable to common stock $ (4,546) $ (5,729) $ (10,898) $ (17,649)
================== ================== ================== ==================
Basic and diluted loss per common share:
Loss before cumulative effect of change $ (0.65) $ (0.68) $ (1.57) $ (2.16)
in accounting principle
Cumulative effect of change in accounting $ - $ - $ - $ (0.24)
principle
Extraordinary loss $ - $ (0.15) $ - $ (0.14)
------------------ ------------------ ------------------ ------------------
Total $ (0.65) $ (0.83) $ (1.57) $ (2.54)
================== ================== ================== ==================
Shares used in per share calculation 6,950,136 6,937,068 6,951,904 6,937,068
================== ================== ================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
2
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT COMMON SHARES)
Retained Total
Additional Earnings Stockholders'
Common Common Paid-In Treasury (Accumulated Equity Comprehensive
Shares Stock Capital Stock Warrants Deficit) (Deficit) Income/(Loss)
----------- ------- ---------- --------- --------- ------------ ------------- -------------
Balance, June 30, 1999 5,811,468 12 51,358 (45,633) 8,250 (32,476) (18,489) $ (4,134)
Accretion of Series A preferred stock - - - - - (422) (422) -
Accretion of redeemable common stock - - - - - (231) (231) -
Exercise of stock options - - - - - - - -
Series A preferred stock dividends - - - - - (3,213) (3,213) -
Other (6,210) - 155 (18) - - 137 -
Net loss - - - - - (7,032) (7,032) (7,032)
----------- ------- ---------- --------- --------- ------------ ---------- ----------------
Balance, December 30, 1999 (unaudited) 5,805,258 $ 12 $ 51,513 $(45,651) $ 8,250 $ (43,374) $ (29,250) $ (7,032)
=========== ======= ========== ========= ========= ============ ========== ================
The accompanying notes are an integral part of these
consolidated financial statements.
3
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
Six Months Ended
December 30, December 24,
1999 1998
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,032) $ (14,519)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 3,900 3,633
Interest paid in kind 336 322
Deferred income taxes (4,592) (7,980)
Cumulative effect of change in accounting principle - 2,612
Write-off of deferred financing costs - 1,547
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,294 2,653
Increase in inventories (13,743) (7,525)
Decrease (increase) in prepaid expenses and other current assets (587) 1,571
Increase in Christmas tree inventory (714) (816)
Decrease in notes receivable and other assets 120 351
Increase (decrease) in accounts payable 3,696 (4,660)
Increase in accrued liabilities 7,911 5,509
---------------- ----------------
Net cash used in operating activities (9,411) (17,302)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (661) (2,310)
---------------- ----------------
Net cash used in investing activities (661) (2,310)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on cash overdraft 642 (762)
Purchase of treasury stock (18) -
Financing costs - (1,869)
Net borrowings under revolving line of credit 9,078 21,935
Repayments of long-term debt (452) (437)
---------------- ----------------
Net cash provided by financing activities 9,250 18,867
NET DECREASE IN CASH AND CASH EQUIVALENTS (822) (745)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,420 2,244
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 598 $ 1,499
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,438 $ 7,019
================ ================
Income taxes $ 26 $ 3
================ ================
The accompanying notes are an integral part of these
consolidated financial statements.
4
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION AND OPERATIONS
The information contained in the following notes to the consolidated
financial statements of Color Spot Nurseries, Inc. (the "Company") is
condensed from that which would appear in the annual consolidated financial
statements. Accordingly, these financial statements should be read in
conjunction with the Company's annual financial statements for its fiscal
year ended June 30, 1999, contained in its Annual Report on Form 10-K filed
with the Securities and Exchange Commission. For purposes of this quarterly
report on Form 10-Q, the term "three months or quarter ended December 30,
1999," relates to the period from October 1, 1999, through December 30, 1999,
the term "three months or quarter ended December 24, 1998," relates to the
period from September 25, 1998, through December 24, 1998, the term "six
months ended December 30, 1999" relates to the period from July 1, 1999
through December 30, 1999, and the term "six months ended December 24, 1998,"
relates to the period from July 1, 1998 through December 24, 1998.
The Company is a producer and distributor of packaged bedding plants
and flowers, groundcover, ornamental plants and shrubs, and commencing in
1997, Christmas trees. As of December 30, 1999, the Company operates 17
production facilities located in 5 states. In addition, the Company owns or
leases growing fields for Christmas trees in Oregon, Michigan, North
Carolina, and Tennessee. The Company sells primarily to general merchandise
stores, home improvement stores, premium independent garden centers and
commercial landscapers, located predominantly in California, Texas and other
western states.
During the six months ended December 24, 1998, the Company hired
several new executives with significant operating experience to bolster its
current management team. The new management team redesigned the Company's
organizational structure and quickly implemented measures designed to improve
production, distribution and selling efficiencies and reduce product returns
and inventory write-offs. One of the tactical initiatives implemented by
management has been to adjust the production planning process to better match
supply and demand and limit excess inventory while maintaining high quality
customer service. This production change has resulted in reduced
overproduction and consequently, less inventory shrinkage (i.e. write-off of
unsaleable excess inventory). The Company recorded a $3.7 million
non-recurring special charge to general and administrative expense during the
six months ended December 24, 1998 related to closure or modification to
certain facilities, employee severance and relocation and other consulting
costs.
As of December 30, 1999, the Company had $132.4 million of long-term
indebtedness and an accumulated deficit of $43.4 million. The Company is
highly leveraged and has significant debt service obligations. The Company's
debt service obligations will have important consequences to holders of its
debt, preferred stock, warrants and common stock including the following: (i)
a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for operations,
acquisitions, future business opportunities and other purposes and increasing
the Company's vulnerability to adverse general economic and industry
conditions; (ii) the Company's leveraged position may increase its
vulnerability to competitive pressures; (iii) the financial covenants and
other restrictions contained in the new loan
5
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1999
agreement, the indenture for its outstanding senior subordinated notes and
the certificate of designation for the Series A Preferred Stock will require
the Company to meet certain financial tests and will restrict its ability to
borrow additional funds, to dispose of assets or to pay cash dividends on, or
repurchase, preferred or common stock; and (iv) funds available for working
capital, capital expenditures, acquisitions and general corporate purposes
may be limited.
The accompanying financial statements have been prepared contemplating
the realization of all recorded assets, including intangible assets and deferred
tax assets and the satisfaction of liabilities in the normal course of business.
The Company must generate sufficient cash flow to meet its obligations as they
come due, comply with the terms of its new credit facility, and maintain
profitability or there will be a material adverse impact on the Company's
business, financial position and results of operations.
The consolidated financial statements as of December 30, 1999, and for
the six months ended December 30, 1999, and December 24, 1998, are unaudited.
However, in the opinion of management, these financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the interim periods. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The Company's operations
are highly seasonal and the results of operations for the interim periods are
not necessarily indicative of the results to be expected for the entire year.
NOTE 2 - INVENTORIES
Inventories at December 30, 1999 and June 30, 1999, consisted of the
following (in thousands):
DECEMBER 30, JUNE 30,
1999 1999
----------------- ---------------
(UNAUDITED)
Current:
Plants, shrubs and ground cover $ 46,161 $ 33,159
Raw materials and supplies 3,977 2,471
Inventory reserves (3,320) (2,555)
----------------- ---------------
Total current inventories 46,818 33,075
Non-current:
Christmas trees 5,463 4,749
----------------- ---------------
Total inventories $ 52,281 $ 37,824
================= ===============
6
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1999
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 30, 1999 and June 30, 1999,
consisted of the following (in thousands):
DECEMBER 30, JUNE 30,
1999 1999
----------------- ---------------
(UNAUDITED)
Land $ 9,461 $ 9,377
Greenhouses and buildings 24,856 24,817
Furniture and fixtures 5,399 5,045
Machinery and equipment 16,964 17,150
Leasehold improvements 6,084 5,713
Assets under capital leases 1,018 1,018
----------------- ---------------
63,782 63,120
Less: Accumulated depreciation (15,964) (12,921)
----------------- ---------------
Total property, plant and equipment $ 47,818 $ 50,199
----------------- ---------------
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at December 30, 1999, and June 30, 1999, consisted of
the following (in thousands):
DECEMBER 30, JUNE 30,
1999 1999
----------------- ------------------
(UNAUDITED)
Goodwill $ 47,517 $ 47,517
Financing costs 6,277 6,302
Non-compete agreements 1,694 1,694
Other 917 916
----------------- ------------------
56,405 56,429
Less: Accumulated amortization (7,408) (5,531)
----------------- ------------------
Total intangible assets $ 48,997 $ 50,898
================= ==================
In April 1998, the AICPA issued Statement of Position 98-5
"Reporting on Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
non-governmental entities to expense start-up costs, including organization
costs, as incurred. During the first quarter of fiscal 1999, the Company
adopted SOP 98-5 on July 1, 1998 and recognized a $2.5 million pre-tax charge
($1.7 million after tax benefit), which was accounted for as a change in
accounting principle.
7
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1999
NOTE 5 - DEBT
Debt at December 30, 1999, and June 30, 1999, consisted of the
following (in thousands):
DECEMBER 30, JUNE 30,
1999 1999
----------------------- ---------------------
(UNAUDITED)
Revolving line of credit $ 21,561 $ 12,483
Senior subordinated notes 100,000 100,000
Convertible note 8,986 8,637
Non-compete agreements 545 721
Other 2,111 2,400
----------------------- ---------------------
133,203 124,241
Less: Current maturities (795) (828)
----------------------- ---------------------
Long-term portion 132,408 123,413
======================= =====================
As of December 30, 1999, a total of $21.6 million was outstanding on
the Company's revolving line of credit and an additional $26.6 million was
available under this line of credit. As of December 30, 1999, the Company was
in compliance with its loan covenants.
NOTE 6 -- EARNINGS PER SHARE
Basic and diluted earnings per share is as follows:
Three Months Ended Six Months Ended
December 30, 1999 December 30, 1999
----------------- -----------------
Per Share Per Share
Income/(loss) Shares Amount Income/(loss) Shares Amount
-------------- ----------- ----------- -------------- ---------- ----------
(in thousands) (in thousands)
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss $ (2,590) $ (0.37) $ (7,032) $ (1.01)
Preferred stock
dividends/accretion (1,956) (0.28) (3,866) (0.56)
----------- ----------- ----------- -----------
Net loss applicable to
common stock $ (4,546) 6,950,136 $ (0.65) $ (10,898) 6,951,904 $ (1.57)
----------- ----------- ----------- ------------
8
Three Months Ended Six Months Ended
December 24, 1998 December 24, 1998
----------------- -----------------
Per Share Per Share
Income/(loss) Shares Amount Income/(loss) Shares Amount
-------------- ----------- ----------- -------------- ----------- ----------
(in thousands) (in thousands)
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before cumulative
effect of change in
accounting principle
and extraordinary loss $ (3,099) $ (0.44) $ (11,833) $ (1.71)
Preferred stock
dividends/accretion (1,631) (0.24) (3,130) (0.45)
----------- ------------ ----------- ------------
Loss before cumulative
effect of change in
accounting principle
and extraordinary loss
(including preferred
stock dividends/accretion) (4,730) $ (0.68) (14,963) $ (2.16)
Cumulative effect of
change in accounting
principle - - (1,687) (0.24)
Extraordinary loss (999) (0.15) (999) (0.14)
----------- ------------ ----------- ------------
Net loss applicable to
common stock $ (5,729) 6,937,068 $ (0.83) $ (17,649) 6,937,068 $ (2.54)
----------- ------------ ----------- ------------
For the three and six months ended December 30, 1999 and December 24,
1998, the effect of options, warrants and convertible securities was
antidilutive and is therefore excluded from the computation of earnings per
share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is one of the largest wholesale nurseries in the United
States, based on annual revenue and greenhouse square footage. The Company
sells a wide assortment of high-quality bedding plants, shrubs, potted
flowering plants, ground cover and Christmas trees as well as provides
extensive merchandising services primarily to leading home centers and mass
merchants. The Company's business is highly seasonal with a peak selling
season in the spring generally from March through June (during the Company's
third and fourth fiscal quarters). Consequently, the Company has historically
reported losses and lower revenues during its first and second fiscal
quarters.
During the six months ended December 24, 1998, the Company hired
several new executives with significant operating experience to bolster its
current management team. The new management team quickly implemented measures
designed to improve production and distribution efficiencies and reduce
product returns and excess inventory. One of the tactical initiatives
implemented by management has been to adjust the production planning process
to better match supply and demand and limit excess inventory while
maintaining high quality customer service. This production change has
resulted in reduced strategic overproduction and reduced inventory shrink
(i.e., write-off of unsaleable excess inventory). The Company recorded a $3.7
million pre-tax, non-recurring special charge to general and administrative
expense during the six months ended December 24, 1998 related to closure or
modification to certain facilities, employee severance and relocation and
other non-recurring consulting costs associated with actions taken by the new
management team.
THREE MONTHS ENDED DECEMBER 30, 1999, AS COMPARED TO THE THREE MONTHS ENDED
DECEMBER 24, 1998
NET SALES. Net sales increased $1.2 million, or 2.4%, to $49.1
million for the three months ended December 30, 1999, from $47.9 million
during the three months ended December 24, 1998. This increase is primarily
the result of increased sales to existing customers as well as a slight
increase in the Company's Christmas tree sales.
GROSS PROFIT. Gross profit increased $2.3 million to $18.1 million
for the three months ended December 30, 1999, from $15.8 million during the
three months ended December 24, 1998. Gross profit as a percentage of net
sales increased to 36.8% for the three months ended December 30, 1999, from
33.0% for the three months ended December 24, 1998. The increase in gross
profit percentage was primarily the result of decreases in product returns
and write-offs of excess inventory, which were accomplished through improved
production planning and control combined with management's initiatives to
better match supply with demand. These improvements were partially offset by
an increase in brokered Christmas trees, which carry a higher cost than grown
trees.
OPERATING EXPENSES. Operating expenses include sales, marketing and
delivery expenses, general and administrative expenses, and amortization of
intangible assets. Sales, marketing and delivery expenses increased $0.2
million to $11.5 million for the three months ended December 30, 1999, from
$11.3 million in the three months ended December 24, 1998. As a percentage of
net sales, sales, marketing and delivery expense is 23.5% for the three
months ended December 30, 1999, and December 24, 1998.
General and administrative expenses increased $0.8 million, to $6.3
million for the three months ended December 30, 1999, from $5.5 million in
the three months ended December 24, 1998. As a percentage of net sales,
general and administrative expenses increased to 12.9% for the three months
ended December 30, 1999, from 11.5% for the three months ended December 24,
1998. This increase is the result of increased hiring and a revised
compensation structure for key management and other employees to support the
Company's operations.
Amortization of intangible assets was unchanged at $0.4 million for
the three months ended December 30, 1999, and the three months ended December
24,1998.
10
INTEREST EXPENSE. Interest expense increased $0.3 million to $4.0
million for the three months ended December 30, 1999, from $3.7 million in
the three months ended December 24, 1998, as a result of slightly higher
interest rates and increased amortization of loan fees due to the Company's
refinancing which was finalized during the three months ended December 24,
1998. These increases are offset by decreased levels of borrowing.
TAXES. The Company has historically not paid income taxes.
Agricultural companies are permitted to calculate taxable income on a cash
basis. As a result of the Company's growth, this tax treatment has enabled
the Company to generate significant net operating losses since its inception
and to accumulate a large net operating loss carryforward. In addition, the
Company's effective tax rate has been different than the U.S. statutory rate
of 34%. The difference between the Company's effective tax rate and the U.S.
statutory rate is due to state tax provisions and other California tax
limitations on the use of net operating loss carryforwards. The Company's
effective tax rate increased to 39.5% for the three months ended December 30,
1999, from 35.4% for the three months ended December 24, 1998. This increase
is primarily the result of the effect that the Company's permanent items have
on income, which is projected for the current year, as compared to the loss
reported in the prior year.
SIX MONTHS ENDED DECEMBER 30, 1999, AS COMPARED TO THE SIX MONTHS ENDED
DECEMBER 24, 1998
NET SALES. Net sales increased $0.2 million, or 0.2%, to $75.8
million for the six months ended December 30, 1999, from $75.6 million during
the six months ended December 24, 1998. This increase is primarily the result
of increased sales to existing customers as well as a slight increase in the
Company's Christmas tree sales, offset by the impact of more conservative
store level inventory management, the strategic reduction of unconditional
sales programs and less participation in seasonal bedding plant programs.
GROSS PROFIT. Gross profit increased $4.4 million to $28.5 million
for the six months ended December 30, 1999, from $24.1 million during the six
months ended December 24, 1998. Gross profit as a percentage of net sales
increased to 37.6% for the six months ended December 30, 1999, from 31.2% for
the six months ended December 24, 1998. The increase in gross profit
percentage was primarily the result of decreases in product returns and
write-offs of excess inventory, which were accomplished through improved
production planning and control combined with management's initiatives to
better match supply with demand. These improvements were partially offset by
an increase in brokered Christmas trees, which carry a higher cost than grown
trees.
OPERATING EXPENSES. Operating expenses include sales, marketing and
delivery expenses, general and administrative expenses, and amortization of
intangible assets. Sales, marketing and delivery expenses decreased $1.9
million to $19.3 million for the six months ended December 30, 1999, from
$21.2 million in the six months ended December 24, 1998. As a percentage of
net sales, sales, marketing and delivery expenses decreased to 25.5% for the
six months ended December 30, 1999, from 28.0% for the six months ended
December 24, 1998. This decrease as a percentage of net sales was primarily
due to a $2.2 million reduction in distribution expenses as the result of
significantly improved delivery efficiencies. As a percentage of net sales,
delivery expenses decreased to 13.9% for the six months ended December 30,
1999, from 16.8% for the six months ended December 24, 1998. These
efficiencies were generated by reducing the movement of inventory between
facilities, increasing the minimum order size, optimizing cubing, better
management of truck maintenance, and a change in the fleet structure whereby
more trucks are rented rather than leased long-term, resulting in reduced
trucks and employees.
General and administrative expenses decreased $0.4 million, to $12.2
million for the six months ended December 30, 1999, from $12.6 million in the
six months ended December 24, 1998. As a percentage of net sales, general and
administrative expenses decreased to 16.1% for the six months ended December
30, 1999, from 16.7% for the six months ended December 24, 1998. This
decrease is primarily the result of a $3.7 million pre-tax, non-recurring
charge during the three months ended September 24, 1998, related to closure
or modification to certain facilities, employee severance and relocation and
other consulting costs offset by increased hiring and a revised compensation
structure for key management and other employees to support the Company's
operations.
11
Amortization of intangible assets was unchanged at $0.9 million for
the six months ended December 30, 1999, and December 24, 1998.
INTEREST EXPENSE. Interest expense was unchanged at $7.7 million
for the six months ended December 30, 1999, and December 24, 1998.
TAXES. The Company has historically not paid income taxes.
Agricultural companies are permitted to calculate taxable income on a cash
basis. As a result of the Company's growth, this tax treatment has enabled
the Company to generate significant net operating losses since its inception
and to accumulate a large net operating loss carryforward. In addition, the
Company's effective tax rate has been different than the U.S. statutory rate
of 34%. The difference between the Company's effective tax rate and the U.S.
statutory rate is due to state tax provisions and other California tax
limitations on the use of net operating loss carryforwards. The Company's
effective tax rate increased to 39.5% for the six months ended December 30,
1999, from 35.4% for the six months ended December 24, 1998. This increase is
primarily the result of the effect that the Company's permanent items have on
income, which is projected for the current year, as compared to the loss
reported in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily to fund seasonal working
capital requirements and capital expenditures. During the three and six
months ended December 30, 1999, the Company's primary source of capital was a
revolving line of credit.
On October 15, 1998, the Company entered into a Loan and Security
Agreement with Fleet Capital Corporation (the "Fleet Loan Agreement"), and
repaid in full its prior credit facility. The Fleet Loan Agreement provides a
$70.0 million revolving credit facility, $55.0 of which is subject to certain
borrowing base limitations based on a percentage of eligible inventory and
eligible accounts receivable and $15.0 million of which is available without
limitation from October 1 through March 31 each year, as amended in Amendment
No. 2 to Loan and Security Agreement. As of December 30, 1999, a total of
$26.6 million was available under this line of credit.
During the six months ended December 30, 1999, net cash used in
operating activities was $9.4 million primarily the result of seasonal
operating losses and seasonal increases in inventory. Net cash used in
investing activities during the six months ended December 30, 1999, and
December 24, 1998, was $0.7 million and $2.3 million, respectively, related
to capital expenditures. The Company plans to invest approximately $4.0
million during the remainder of fiscal year 2000 to improve its systems and
infrastructure as well as add additional capacity, on a limited basis, at
certain of its production facilities.
The Company is highly leveraged. As of December 30, 1999, the
Company has $132.4 million of long-term indebtedness and an accumulated
deficit of $43.4 million. Although the Company believes that the cash
available from the Fleet Loan Agreement and operations will be sufficient to
finance working capital requirements and capital expenditures for the next 12
months, there is no assurance that the Company will be able to generate
sufficient cash flows or meet its financial goals and comply with its debt
covenants in the future. As of February 9, 2000, a total of $27.9 million was
outstanding under the Fleet Loan Agreement. As interest payments on the Fleet
Loan Agreement float with the market, the Company's liquidity and ability to
finance seasonal inventory requirements may be adversely affected by an
increase in interest rates.
The Company may incur additional indebtedness in the future, subject
to certain limitations contained in the instruments governing its
indebtedness and capital stock. The Company's debt service obligations have
important consequences to holders of its debt, preferred stock, warrants and
common stock including the following: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds
available to the Company for operations, acquisitions, future business
opportunities and other purposes and increasing the Company's vulnerability
to adverse general economic and industry conditions; (ii) the Company's
leveraged position may increase its vulnerability to competitive pressures;
(iii) the financial covenants and
12
other restrictions contained in the Fleet Loan Agreement, the indenture for
the outstanding senior subordinated notes and the certificate of designation
for the Series A Preferred Stock will require the Company to meet certain
financial tests and will restrict its ability to borrow additional funds, to
dispose of assets or to pay cash dividends on, or repurchase, preferred or
common stock; and (iv) funds available for working capital, capital
expenditures, acquisitions and general corporate purposes may be limited,
especially if interest rates continue to increase.
YEAR 2000 COMPLIANCE PROGRAM
YEAR 2000 PROBLEM
The Year 2000 problem is the result of computer programs that use
two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software or equipment that has
time-sensitive embedded components could recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a major system
failure or in miscalculations. Although the Company has not experienced any
system-related problems to date either internally or with any third parties,
we remain concerned about the potential for problems throughout the year.
COST OF COMPLIANCE
The cost of ensuring Year 2000 compliance for its own financial
systems, computer hardware, operational and support systems and secondary
computer systems was approximately $50,000. Such costs were expensed as
incurred.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's liabilities consist primarily of a revolving line of
credit, senior subordinated notes, other notes and accounts payable. The
Company has also issued Series A Preferred Stock and Redeemable Common Stock.
Such liabilities and stockholders' equity have varying levels of sensitivity
to changes in market interest rates. Interest rate risk results when, due to
different maturity dates and repricing intervals, interest rate indices for
interest-bearing liabilities increase relative to income earning assets,
thereby creating a risk of decreased net earnings and cash flow. The Fleet
Loan Agreement is the Company's only current source of financing subject to a
floating interest rate. If interest rates continue to increase, the Company's
capital and profitability could be adversely affected.
13
The following table provides information about the Company's market
sensitive liabilities, categorized by maturity, and constitutes a
"forward-looking statement." For more information, please refer to Item 1.
"Financial Statements and Notes to Consolidated Financial Statements."
Expected Maturities
There-
Long-term Liabilities: 2000 2001 2002 2003 2004 after Total
--------- ---------- ----------- ---------- -------- ------------ -------------
(dollars in millions)
Fixed Rate:
Series A Preferred Stock - - - $2.6 $5.2 $89.4 $97.2
Average Interest Rate 13% 13% 13% 13% 13% 13%
Senior Subordinated Notes $10.5 $10.5 $10.5 $10.5 $10.5 $131.5 $184.0
Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Convertible Note - - - - - $12.2 $12.2
Average Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Non-compete Agreements $0.1 $0.1 $0.1 $0.1 $0.1 $1.0 $1.5
Average Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Variable Rate:
Fleet Loan Agreement $70.0(1) $70.0
(1) On October 15, 1998, the Company entered into the Fleet Loan Agreement,
borrowed approximately $32 million, and repaid in full amounts due under its
existing credit facility. The Fleet Loan Agreement terminates in October 2001
(fiscal 2002). See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
5 to the Notes to Consolidated Financial Statements. The average interest rate
is the Base Rate plus 1.0% or LIBOR plus 3.0%, as defined in the Fleet Loan
Agreement.
14
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time subject to various
legal proceedings incidental to its business. Management believes that the
ultimate resolution of these proceedings will not have a material adverse effect
on the Company's financial position or results of operations, taken as a whole.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
11.1 Computations of Earnings Per Share -- See Note 6 to the Notes to Consolidated Financial Statements.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
None.
15
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: February 10, 2000
-------------------------
COLOR SPOT NURSERIES, INC.
a Delaware corporation
By: /S/ RICHARD E. PARKER
--------------------------------------
Name: Richard E. Parker
Title: Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
By: /S/ JOSEPH P. O'NEILL
--------------------------------------
Name: Joseph P.O'Neill
Title: Executive Vice President and Chief
Financial Officer (PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING OFFICER)
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
11.1 Computations of Earnings Per Share-- See Note 6 to the Notes to Consolidated Financial Statements.
27.1 Financial Data Schedule.
17