UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 30, 2000
-------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23483
COLOR SPOT NURSERIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 68-0363266
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 May 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 March 30, 2000 and June 30, 1999.....................1
Consolidated Statements of Operations for the Three and Nine Months
Ended March 30, 2000 and March 25, 1999................................................2
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Loss for the Nine Months Ended March 30, 2000............................3
Consolidated Statements of Cash Flow for the Nine Months
Ended March 30, 2000 and March 25, 1999................................................4
Condensed Notes to Consolidated Financial Statements as of
March 30, 2000 ........................................................................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.....................................................................14
Item 2. Changes in Securities and Use of Proceeds.............................................14
Item 3. Defaults Upon Senior Securities.......................................................14
Item 4. Submission of Matters to a Vote of Security Holders...................................14
Item 5. Other Information.....................................................................14
Item 6. Exhibits and Reports on Form 8-K......................................................14
Signatures.......................................................................................................15
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 30, June 30,
2000 1999
----------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 494 $ 1,420
Accounts receivable, net of allowances of $1,469 and $1,854, respectively 25,257 19,956
Inventories, net 62,784 33,075
Prepaid expenses and other 994 723
----------------- ---------------
Total current assets 89,529 55,174
CHRISTMAS TREE INVENTORIES 5,962 4,749
PROPERTY, PLANT AND EQUIPMENT, net 47,915 50,199
ASSETS HELD FOR SALE 696 696
INTANGIBLE ASSETS, net 48,058 50,898
DEFERRED INCOME TAXES 22,594 18,788
NOTES RECEIVABLE AND OTHER ASSETS 1,053 1,250
----------------- ---------------
Total assets $ 215,807 $ 181,754
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 11,200 $ 5,188
Accrued liabilities 25,025 16,176
Dividends payable to stockholders 290 257
Deferred income taxes 12,541 12,541
Current maturities of long-term debt 676 828
----------------- ---------------
Total current liabilities 49,732 34,990
LONG-TERM DEBT 148,376 123,413
----------------- ---------------
Total liabilities 198,108 158,403
----------------- ---------------
SERIES A PREFERRED STOCK, REDEEMABLE, $0.01 par value, 100,000 shares
authorized, 53,157 and 48,298 shares issued and outstanding, respectively 44,649 39,151
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 shares issued
and outstanding 3,036 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 51,590 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 (44,187) (32,476)
----------------- ---------------
Total stockholders' deficit (29,986) (18,489)
----------------- ---------------
Total liabilities and stockholders' deficit $ 215,807 $ 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 Nine Months Ended
March 30, March 25, March 30, March 25,
2000 1999 2000 1999
--------------- --------------- ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES $ 47,451 $ 42,433 $ 123,236 $ 118,060
COST OF SALES 24,286 20,294 71,613 71,805
--------------- --------------- ------------------ ------------------
Gross profit 23,165 22,139 51,623 46,255
SALES, MARKETING AND DELIVERY EXPENSES 11,007 9,023 30,291 30,182
GENERAL AND ADMINISTRATIVE EXPENSES 5,608 5,167 17,790 17,804
AMORTIZATION OF INTANGIBLE ASSETS 429 427 1,290 1,286
--------------- --------------- ------------------ ------------------
Income (loss) from operations 6,121 7,522 2,252 (3,017)
INTEREST EXPENSE 4,133 4,369 11,791 12,103
OTHER EXPENSE, NET - 96 97 146
--------------- --------------- ------------------ ------------------
Income (loss) before income taxes and
cumulative effect of change
in accounting principle 1,988 3,057 (9,636) (15,266)
INCOME TAX BENEFIT (PROVISION) (785) (1,082) 3,807 5,408
--------------- --------------- ------------------ ------------------
Income (loss) before cumulative effect of
change in accounting
principle and extraordinary loss 1,203 1,975 (5,829) (9,858)
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax benefit - - - 1,687
EXTRAORDINARY LOSS, net of tax benefit - - - 999
--------------- --------------- ------------------ ------------------
Net income (loss) 1,203 1,975 (5,829) (12,544)
SERIES A PREFERRED STOCK DIVIDENDS/STOCK ACCRETION 2,016 1,710 5,882 4,840
--------------- --------------- ------------------ ------------------
Net income (loss) applicable to common stock $ (813) $ 265 $ (11,711) $ (17,384)
=============== =============== ================== ==================
Basic income (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary loss $ (0.12) $ 0.04 $ (1.68) $ (2.12)
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.24)
Extraordinary loss $ -- $ -- $ -- $ (0.14)
--------------- --------------- ------------------ ------------------
Total $ (0.12) $ 0.04 $ (1.68) $ (2.51)
=============== =============== ================== ==================
Shares used in per share calculation 6,948,597 6,942,981 6,950,806 6,939,039
=============== =============== ================== ==================
Diluted income (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary loss $ (0.12) $ 0.03 $ (1.68) $ (2.12)
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.24)
Extraordinary loss $ -- $ -- $ -- $ (0.14)
----------------- ------------------ ------------------ --------------
Total $ (0.12) $ 0.03 $ (1.68) $ (2.51)
================= ================== ================== ==============
Shares used in per share calculation 6,948,597 8,144,239 6,950,806 6,939,039
================= ================== ================== ==============
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)
Additional
Common Common Paid-In Treasury
Shares Stock Capital Stock Warrants
--------------- ------------ ----------- ------------ ------------
Balance, June 30, 1999 5,811,468 12 51,358 (45,633) 8,250
Accretion of Series A preferred stock - - - - -
Accretion of redeemable common stock - - - - -
Exercise of stock options - - - - -
Series A preferred stock dividends - - - - -
Other (6,210) - 232 (18) -
Net loss - - - - -
--------------- ------------ ----------- ------------ ------------
Balance, March 30, 2000 (unaudited) 5,805,258 $ 12 $ 51,590 $(45,651) $ 8,250
=============== ============ =========== ============ ============
Retained Total
Earnings Stockholders'
(Accumulated Equity Comprehensive
Deficit) (Deficit) Income/(Loss)
----------------- -------------- ----------------
Balance, June 30, 1999 (32,476) (18,489) $ (4,134)
Accretion of Series A preferred stock (639) (639) -
Accretion of redeemable common stock (347) (347) -
Exercise of stock options - - -
Series A preferred stock dividends (4,896) (4,896) -
Other - 214 -
Net loss (5,829) (5,829) (5,829)
----------------- -------------- ----------------
Balance, March 30, 2000 (unaudited) $ (44,187) $ (29,986) $ (5,829)
================= ============== ================
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)
Nine Months Ended
March 30, March 25,
2000 1999
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,829) $ (12,544)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 5,865 5,553
Interest paid in kind 502 496
Deferred income taxes (3,806) (6,867)
Cumulative effect of change in accounting principle - 2,612
Write-off of deferred financing costs - 1,547
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (5,301) 4,589
Increase in inventories (29,709) (11,527)
Decrease (increase) in prepaid expenses and other current assets (271) 891
Decrease (increase) in Christmas tree inventory (1,213) 356
Decrease in notes receivable and other assets 197 366
Increase (decrease) in accounts payable 6,012 (5,643)
Increase in accrued liabilities 9,995 3,381
---------------- ----------------
Net cash used in operating activities (23,558) (16,790)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (2,293) (2,382)
---------------- ----------------
Net cash used in investing activities (2,293) (2,382)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on cash overdraft 634 96
Purchase of treasury stock (18) (85)
Financing costs - (1,983)
Net borrowings under revolving line of credit 24,999 21,176
Repayments of long-term debt (690) (712)
---------------- ----------------
Net cash provided by financing activities 24,925 18,492
NET DECREASE IN CASH AND CASH EQUIVALENTS (926) (680)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,420 2,244
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 494 $ 1,564
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,797 $ 8,061
================ ================
Income taxes $ 89 $ 26
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
4
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2000
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 March 30, 2000," relates to the period from
December 31, 1999, through March 30, 2000, the term "three months or quarter
ended March 25, 1999," relates to the period from December 25, 1998, through
March 25, 1999, the term "nine months ended March 30, 2000" relates to the
period from July 1, 1999 through March 30, 2000, and the term "nine months ended
March 25, 1999," relates to the period from July 1, 1998 through March 25, 1999.
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 March 30, 2000, the Company operates 17 production
facilities located in five 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 nine months ended March 25, 1999, 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 nine months ended March 25, 1999 related to
closure or modification of certain facilities, employee severance and relocation
and other consulting costs.
As of March 30, 2000, the Company had $148.4 million of long-term
indebtedness and an accumulated deficit of $44.2 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 agreement,
the indenture for its outstanding senior subordinated notes and the certificate
of designation for the Series A Preferred Stock will require the Company to meet
certain financial tests and will restrict its
5
ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (iv) funds available
for working capital, capital expenditures, acquisitions and general corporate
purposes may be limited.
The accompanying financial statements have been prepared contemplating
the realization of all recorded assets, including intangible assets and deferred
tax assets and the satisfaction of liabilities in the normal course of business.
The Company must generate sufficient cash flow to meet its obligations as they
come due, comply with the terms of its new credit facility, and maintain
profitability or there will be a material adverse impact on the Company's
business, financial position and results of operations.
The consolidated financial statements as of March 30, 2000, and for the
three and nine months ended March 30, 2000, and March 25, 1999, 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 March 30, 2000 and June 30, 1999, consisted of the
following (in thousands):
MARCH 30, JUNE 30,
2000 1999
------------------ ------------------
(UNAUDITED)
Current:
Plants, shrubs and ground cover $ 61,120 $ 33,159
Raw materials and supplies 5,056 2,471
Inventory reserves (3,392) (2,555)
------------------ ------------------
Total current inventories 62,784 33,075
Non-current:
Christmas trees 5,962 4,749
------------------ ------------------
Total inventories $ 68,746 $ 37,824
================== ==================
6
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 30, 2000 and June 30, 1999,
consisted of the following (in thousands):
MARCH 30, JUNE 30,
2000 1999
------------------ ------------------
(UNAUDITED)
Land $ 9,461 $ 9,377
Greenhouses and buildings 24,879 24,817
Furniture and fixtures 5,400 5,045
Machinery and equipment 17,126 17,150
Leasehold improvements 7,534 5,713
Assets under capital leases 1,018 1,018
------------------ ------------------
65,418 63,120
Less: Accumulated depreciation (17,503) (12,921)
------------------ ------------------
Total property, plant and equipment $ 47,915 $ 50,199
================== ==================
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 30, 2000, and June 30, 1999, consisted of
the following (in thousands):
MARCH 30, JUNE 30,
2000 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 (8,347) (5,531)
----------------- ------------------
Total intangible assets $ 48,058 $ 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 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
NOTE 5 - DEBT
Debt at March 30, 2000, and June 30, 1999, consisted of the following
(in thousands):
MARCH 30, JUNE 30,
2000 1999
----------------------- ---------------------
(UNAUDITED)
Revolving line of credit $ 37,482 $ 12,483
Senior subordinated notes 100,000 100,000
Convertible note 9,158 8,637
Non-compete agreements 440 721
Other 1,972 2,400
----------------------- ---------------------
149,052 124,241
Less: Current maturities (676) (828)
----------------------- ---------------------
Long-term portion 148,376 123,413
======================= =====================
As of March 30, 2000, a total of $37.5 million was outstanding on the
Company's revolving line of credit and an additional $18.4 million was available
under this line of credit. As of March 30, 2000, 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 Nine Months Ended
MARCH 25, 2000 March 25, 2000
-------------- --------------
Income/ Per Share Income/ Per Share
(loss) Shares Amount (loss) Shares Amount
----------- ----------- ---------- ----------- ---------- -----------
(in (in
thousands) thousands)
BASIC AND DILUTED EARNINGS
PER SHARE:
Net loss $1,203 $ 0.17 $ (5,829) $ (0.84)
Preferred stock dividends/
stock accretion (2,016) (0.29) (5,882) (0.84)
----------- ---------- ----------- ---------
Net loss applicable to
to common stock $ (813) 6,948,597 $(0.12) $(11,711) 6,950,806 $(1.68)
=========== =========== =========== =========== =========== =========
8
Three Months Ended Nine Months Ended
March 25, 1999 March 25, 1999
-------------- --------------
Per
Income/ Share Income/ Per Share
(loss) Shares Amount (loss) Shares Amount
----------- ----------- ---------- ----------- ---------- -----------
(in (in
thousands) thousands)
BASIC EARNINGS PER SHARE:
Income (loss) before
cumulative effect of change
in accounting principle
and extraordinary loss $ 1,975 $ 0.29 $ (9,858) $ (1.42)
Preferred stock dividends/
stock accretion (1,710) (0.25) (4,840) (0.70)
----------- ---------- ----------- ---------
Income (loss) before
cumulative effect of change
in accounting principle
and extraordinary loss
(including preferred stock
dividends/stock accretion) $ 265 $ 0.04 $(14,698) $(2.12)
Cumulative effect of change
in accounting principle - - (1,687) (0.24)
Extraordinary loss - - (999) (0.15)
----------- ---------- ----------- ---------- -----------
Net income (loss) applicable
to common stock $ 265 6,942,981 $ 0.04 $(17,384) 6,939,039 $(2.51)
----------- ----------- ---------- ----------- ---------- -----------
DILUTED EARNINGS PER SHARE:
Convertible debt, options,
etc. 1,201,258 -
Net income (loss) applicable
to common stock $ 265 8,144,239 $ 0.03 $(17,384) 6,939,039 $ (2.51)
----------- ----------- ---------- ----------- ---------- -----------
For the three and nine months ended March 30, 2000 and the nine months
ended March 25, 1999, 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 nine months ended March 25, 1999, 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 nine months ended March 25, 1999
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 MARCH 30, 2000, AS COMPARED TO THE THREE MONTHS ENDED MARCH
25, 1999
NET SALES. Net sales increased $5.0 million, or 1.8%, to $47.5 million
for the three months ended March 30, 2000, from $42.4 million during the three
months ended March 25, 1999. This increase is primarily the result of increased
sales to existing general merchandise and home improvement store customers.
GROSS PROFIT. Gross profit increased $1.1 million to $23.2 million
for the three months ended March 30, 2000, from $22.1 million during the
three months ended March 25, 1999. Gross profit as a percentage of net sales
decreased to 48.8% for the three months ended March 30, 2000, from 52.1% for
the three months ended March 25, 1999. This decrease in gross profit as a
percent of sales is primarily due to inefficiencies at certain facilities in
addition to a shift in product mix.
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 $2.0 million
to $11.0 million for the three months ended March 30, 2000, from $9.0 million in
the three months ended March 25, 1999. As a percentage of net sales, sales,
marketing and delivery expense increased to 23.2% for the three months ended
March 30, 2000, from 21.3% for the three months ended March 25, 1999. This
increase is primarily the result of an increase of $1.0 million in delivery
expenses due to higher volume and increased fuel costs. Sales and marketing
expenses also increased $1.0 million, due to sales and merchandising personnel
added to provide expanded services to customers.
General and administrative expenses increased $0.4 million, to $5.6
million for the three months ended March 30, 2000, from $5.2 million for the
three months ended March 25, 1999. As a percentage of net sales, general and
administrative expenses decreased to 11.8% for the three months ended March 30,
2000, from 12.2% for the three months ended March 25, 1999. This increase in
expense 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 March 30, 2000, and the three months ended March 25, 1999.
10
INTEREST EXPENSE. Interest expense decreased $0.3 million to $4.1
million for the three months ended March 30, 2000, from $4.4 million in the
three months ended March 25, 1999, as a result of decreased levels of borrowing
offset slightly by higher interest rates.
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 March 30, 2000, from 35.4% for the three months ended March 25,
1999. This increase is primarily the result of the effect that the Company's
permanent book-tax differences have on income, which is projected for the
current year, as compared to the loss reported in the prior year.
NINE MONTHS ENDED MARCH 30, 2000, AS COMPARED TO THE NINE MONTHS ENDED MARCH 25,
1999
NET SALES. Net sales increased $5.1 million, or 4.4%, to $123.2 million
for the nine months ended March 30, 2000, from $118.1 million during the nine
months ended March 25, 1999. This increase is primarily the result of increased
sales to existing home improvement store 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.
GROSS PROFIT. Gross profit increased $5.3 million to $51.6 million for
the nine months ended March 30, 2000, from $46.3 million during the nine months
ended March 25, 1999. Gross profit as a percentage of net sales increased to
41.9% for the nine months ended March 30, 2000, from 39.2% for the nine months
ended March 25, 1999. 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 $0.1 million
to $30.3 million for the nine months ended March 30, 2000, from $30.2 million in
the nine months ended March 25, 1999. As a percentage of net sales, sales,
marketing and delivery expenses decreased to 24.6% for the nine months ended
March 30, 2000, from 25.6% for the nine months ended March 25, 1999. This
decrease as a percentage of net sales was primarily due to a $1.2 million
reduction in distribution expenses as the result of significantly improved
delivery efficiencies. As a percentage of net sales, delivery expenses decreased
to 12.9% for the nine months ended March 30, 2000, from 14.5% for the nine
months ended March 25, 1999. 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 during off-season. The efficiencies in
distribution were offset by increased volume and higher fuel costs. Sales and
marketing expense increased$1.3 million due to additions to the Company's sales
force in order to provide added services to its customers and increased hiring
in sales and marketing management.
General and administrative expense was unchanged at $17.8 million for
the nine months ended March 30, 2000, and March 25, 1999. As a percentage of net
sales, general and administrative expenses decreased to 14.4% for the nine
months ended March 30, 2000, from 15.1% for the nine months ended March 25,
1999. 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 of 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 $1.3 million for the
nine months ended March 30, 2000, and March 25, 1999.
INTEREST EXPENSE. Interest expense decreased $0.3 million to $11.8
million for the nine months ended March 30, 2000, from $12.1 million for the
nine months ended March 25, 1999. This decrease is mainly due to decreased
levels of borrowing offset slightly by 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.
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 nine
months ended March 30, 2000, from 35.4% for the nine months ended March 25,
1999. This increase is primarily the result of the effect that the Company's
permanent book-tax differences 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 nine months ended
March 30, 2000, 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 31 through April 30 each year, as amended in Amendment
No. 3 to Loan and Security Agreement. As of March 30, 2000, a total of $18.4
million was available under this line of credit.
During the nine months ended March 30, 2000, net cash used in operating
activities was $23.6 million primarily the result of seasonal operating losses
and seasonal increases in inventory. Net cash used in investing activities
during the nine months ended March 30, 2000, and March 25, 1999, was $2.3
million and $2.4 million, respectively, related to capital expenditures. The
Company plans to invest approximately $3.2 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 March 30, 2000, the Company has
$148.4 million of long-term indebtedness and an accumulated deficit of $44.2
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
April 27, 2000, a total of $35.9 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
12
to the Company for operations, acquisitions, future business opportunities and
other purposes and increasing the Company's vulnerability to adverse general
economic and industry conditions; (ii) the Company's leveraged position may
increase its vulnerability to competitive pressures; (iii) the financial
covenants and other restrictions contained in the Fleet Loan Agreement, the
indenture for the outstanding senior subordinated notes and the certificate of
designation for the Series A Preferred Stock will require the Company to meet
certain financial tests and will restrict its ability to borrow additional
funds, to dispose of assets or to pay cash dividends on, or repurchase,
preferred or common stock; and (iv) funds available for working capital, capital
expenditures, acquisitions and general corporate purposes may be limited,
especially if interest rates continue to increase.
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.
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 (by Fiscal Year)
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.
13
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.
14
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: MAY 15, 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)
15
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.
16