UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 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
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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 November 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. WHICH ARE NOT HISTORICAL IN NATURE ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS
DEAL WITH THE CURRENT INTENTIONS, BELIEFS AND EXPECTATIONS OF MANAGEMENT WITH
RESPECT TO OUR BUSINESS AND ARE TYPICALLY IDENTIFIED BY PHRASES SUCH AS "WE
PLAN," "MANAGEMENT BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. THESE
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE
ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO DIFFER,
PERHAPS MATERIALLY, FROM ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS:
- - OUR SUBSTANTIAL LEVERAGE AND DEBT SERVICE;
- - RESTRICTIONS IMPOSED BY DEBT COVENANTS AND THE EFFECT OF A DEFAULT ON OUR
OPERATIONS;
- - OUR ABILITY TO INTEGRATE ACQUIRED FACILITIES INTO OUR NETWORK;
- - CHANGES IN OUR OPERATING STRATEGY;
- - THE UNCERTAINTY OF ADDITIONAL FINANCING TO FUND FUTURE CAPITAL NEEDS;
- - WEATHER AND GENERAL AGRICULTURAL RISKS;
- - SEASONALITY AND THE VARIABILITY OF QUARTERLY RESULTS;
- - OUR DEPENDENCE ON MAJOR CUSTOMERS SUCH AS HOME DEPOT;
- - REGULATORY CONSTRAINTS AND CHANGES IN LAWS OR REGULATIONS CONCERNING THE
GARDENING INDUSTRY;
- - LABOR LAWS AND CHANGES IN THE MINIMUM WAGE;
- - OUR SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT;
- - SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS;
- - OUR DEPENDENCE ON LEASED FACILITIES;
- - LACK OF A MARKET FOR OUR SECURITIES;
- - AND OTHER FACTORS AS MAY BE IDENTIFIED FROM TIME TO TIME IN OUR
FILINGS WITH THE SECURITIES AND EXCHANGe COMMISSION OR IN OUR PRESS
RELEASES.
FOR A DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE THE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- CERTAIN BUSINESS FACTORS" OF OUR ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED JUNE 30, 2000 (AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 16, 2000). 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 OUR
PRESS RELEASES.
COLOR SPOT NURSERIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
June 30, 2000...........................................................1
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999.......................................2
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended September 30, 2000...........................3
Consolidated Statements of Cash Flow for the Three Months
Ended September 30, 2000 and 1999.......................................4
Condensed Notes to Consolidated Financial Statements as of
September 30, 2000 .....................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........................9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk............................................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................12
Item 2. Changes in Securities and Use of Proceeds..............................12
Item 3. Defaults Upon Senior Securities........................................12
Item 4. Submission of Matters to a Vote of Security Holders....................12
Item 5. Other Information......................................................12
Item 6. Exhibits and Reports on Form 8-K.......................................12
Signatures.................................................................................13
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 636 $ 1,739
Accounts receivable, net of allowances of $1,048 and $1,199, respectively 10,964 19,449
Inventories, net 41,201 38,989
Prepaid expenses and other 714 429
------------- --------
Total current assets 53,515 60,606
CHRISTMAS TREE INVENTORIES 9,194 7,205
PROPERTY, PLANT AND EQUIPMENT, net 49,868 49,772
ASSETS HELD FOR SALE 612 612
INTANGIBLE ASSETS, net 46,190 47,129
DEFERRED INCOME TAXES 22,241 19,476
NOTES RECEIVABLE AND OTHER ASSETS 899 966
------------- --------
Total assets $ 182,519 $185,766
============= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 6,528 $ 11,549
Accrued liabilities 18,080 19,462
Dividends payable to stockholders 310 301
Deferred income taxes 12,415 12,415
Current maturities of long-term debt 466 590
------------- --------
Total current liabilities 37,799 44,317
LONG-TERM DEBT 134,354 124,690
------------- --------
Total liabilities 172,153 169,007
------------- --------
SERIES A PREFERRED STOCK, REDEEMABLE, $0.01 par value, 100,000 shares
authorized, 56,663 and 54,882 shares issued and outstanding, respectively 48,589 46,591
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 shares issued
and outstanding 3,267 3,152
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,805,258
shares issued and outstanding 12 12
Additional paid-in capital 51,745 51,668
Treasury stock, 6,226,649 shares (45,651) (45,651)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (55,846) (47,263)
------------- --------
Total stockholders' deficit (41,490) (32,984)
------------- --------
Total liabilities and stockholders' deficit $ 182,519 $185,766
============= ========
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
September 30, September 30,
2000 1999
------------- -------------
(Unaudited) (Unaudited)
NET SALES $ 27,682 $ 26,723
COST OF SALES 19,759 16,326
------------- -------------
Gross profit 7,923 10,397
SALES, MARKETING AND DELIVERY EXPENSES 8,170 7,737
GENERAL AND ADMINISTRATIVE EXPENSES 4,328 5,838
AMORTIZATION OF INTANGIBLE ASSETS 430 432
------------- -------------
Loss from operations (5,005) (3,610)
INTEREST EXPENSE 4,114 3,694
OTHER EXPENSE, NET 108 38
------------- -------------
Loss before income taxes (9,227) (7,342)
INCOME TAX BENEFIT 2,768 2,900
------------- -------------
Net loss (6,459) (4,442)
SERIES A PREFERRED STOCK DIVIDENDS/STOCK ACCRETION 2,124 1,910
------------- -------------
Net loss applicable to common stock $ (8,583) $ (6,352)
============= =============
Basic and diluted loss per common share $ (1.24) $ (0.91)
============= =============
Shares used in per share calculation 6,948,597 6,954,807
============= =============
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
Shares Stock Capital Stock Warrants Deficit) (Deficit)
--------- ------ ---------- -------- -------- ------------ -------------
Balance, June 30, 2000 5,805,258 12 51,668 (45,651) 8,250 (47,263) (32,984)
Accretion of Series A preferred stock - - - - - (217) (217)
Accretion of redeemable common stock - - - - - (115) (115)
Exercise of stock options - - - - - - -
Series A preferred stock dividends - - - - - (1,792) (1,792)
Other - - 77 - - - 77
Net loss - - - - - (6,459) (6,459)
--------- ------ ---------- -------- -------- ------------ -------------
Balance, September 30, 2000 (unaudited) 5,805,258 $ 12 $ 51,745 $(45,651) $ 8,250 $ (55,846) $ (41,490)
========= ====== ========== ======== ======== ============ =============
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)
Three Months Ended
September 30, September 30
2000 1999
------------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,459) $ (4,442)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 2,014 1,948
Interest paid in kind 166 170
Deferred income taxes (2,765) (2,926)
Changes in operating assets and liabilities:
Decrease in accounts receivable 8,485 10,524
Increase in inventories (2,212) (6,650)
Increase in prepaid expenses and other current assets (285) (94)
Increase in Christmas tree inventory (1,989) (1,032)
Decrease in notes receivable and other assets 67 59
Increase (decrease) in accounts payable (5,021) 3,370
Increase in accrued liabilities 2,018 330
------------- ------------
Net cash provided by (used in) operating activities (5,981) 1,257
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (1,680) (172)
------------- ------------
Net cash used in investing activities (1,680) (172)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on cash overdraft (2,816) (2,380)
Purchase of treasury stock - (4)
Net borrowings under revolving line of credit 9,545 367
Repayments of long-term debt (171) (227)
------------- ------------
Net cash provided by (used in) financing activities 6,558 (2,244)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,103) (1,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,739 1,420
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 636 $ 261
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 738 $ 1,079
============= ============
Income taxes $ - $ 26
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. is condensed from that which
would appear in the annual consolidated financial statements. Accordingly, these
financial statements should be read in conjunction with our annual financial
statements for the fiscal year ended June 30, 2000, contained in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
We produce and distribute packaged bedding plants and flowers,
groundcover, ornamental plants and shrubs, and Christmas trees. As of
September 30, 2000, we operate 15 production facilities located in 5 states.
In addition, we own or lease growing fields for Christmas trees in Oregon,
Michigan, North Carolina, and Tennessee. We sell primarily to general
merchandise stores, home improvement stores, premium independent garden
centers and commercial landscapers, located predominantly in California,
Texas and other western states.
As of September 30, 2000, we had $134.4 million of long-term
indebtedness and an accumulated deficit of $55.8 million. We are highly
leveraged and have significant debt service obligations. Our debt service
obligations will have important consequences to holders of our debt, preferred
stock, warrants and common stock including the following: (i) a substantial
portion of our cash flow from operations will be dedicated to the payment of
principal and interest on our indebtedness, thereby reducing the funds available
to us for operations, acquisitions, future business opportunities and other
purposes and increasing our vulnerability to adverse general economic and
industry conditions; (ii) our leveraged position may increase our vulnerability
to competitive pressures; (iii) the financial covenants and other restrictions
contained in the new loan agreement, the indenture for our outstanding senior
subordinated notes and the certificate of designation for the Series A Preferred
Stock will require us to meet certain financial tests and will restrict
our ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (iv) funds available
for working capital, capital expenditures, acquisitions and general corporate
purposes may be limited.
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.
We must generate sufficient cash flow to meet our obligations as they
come due, comply with the terms of our credit facilities, and maintain
profitability or there will be a material adverse impact on our
business, financial position and results of operations.
The consolidated financial statements as of September 30, 2000, and
for the three months ended September 30, 2000 and 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 our 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. Our
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.
5
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 2 - INVENTORIES
Inventories at September 30, 2000 and June 30, 2000, consisted of the
following (in thousands):
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -------------
(UNAUDITED)
Current:
Plants, shrubs and ground cover $ 41,335 $ 39,792
Raw materials and supplies 4,400 4,208
Inventory reserves (4,534) (5,011)
------------- -------------
Total current inventories 41,201 38,989
Non-current:
Christmas trees 9,194 7,205
------------- -------------
Total inventories $ 50,395 $ 46,194
============= =============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2000 and June 30, 2000,
consisted of the following (in thousands):
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -------------
(UNAUDITED)
Land and land improvements $ 9,206 $ 9,206
Greenhouses and buildings 24,843 24,892
Furniture and fixtures 5,221 5,417
Machinery and equipment 19,791 19,290
Leasehold improvements 6,968 6,765
Assets under capital leases 488 488
Construction in progress 3,910 2,703
------------- -------------
70,427 68,761
Less: Accumulated depreciation (20,559) (18,989)
------------- -------------
Total property, plant and equipment 49,868 $ 49,772
============= =============
6
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at September 30, 2000, and June 30, 2000, consisted
of the following (in thousands):
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -------------
(UNAUDITED)
Goodwill $ 47,517 $ 47,517
Financing costs 6,278 6,278
Non-compete agreements 1,694 1,694
Other 916 916
------------- -------------
56,405 56,405
Less: Accumulated amortization (10,215) (9,276)
------------- -------------
Total intangible assets $ 46,190 $ 47,129
============= =============
NOTE 5 - DEBT
Debt at September 30, 2000, and June 30, 2000, consisted of the
following (in thousands):
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -------------
(UNAUDITED)
Revolving line of credit $ 23,242 $ 13,697
Senior subordinated notes 100,000 100,000
Convertible note 9,531 9,337
Non-compete agreements 319 380
Other 1,728 1,866
------------- -------------
134,820 125,280
Less: Current maturities (466) (590)
------------- -------------
Long-term portion 134,354 124,690
============= =============
As of September 30, 2000, a total of $23.2 million was outstanding on
our revolving line of credit and an additional $16.4 million was available under
this line of credit. As of June 30, 2000, we were not in compliance with a
certain financial covenant, however, on August 10, 2000, a waiver curing the
noncompliance was obtained. On September 28, 2000, a waiver and amendment under
the Loan and Security Agreement was obtained waiving the covenant violation,
resetting the financial covenants for each four quarter period beginning with
the four quarters ending September 30, 2000 and reestablishing the original
seasonal line period. Our three-year revolving credit facility expires on
October 15, 2001. Management is working to extend the term of the agreement.
There can be no assurance that an extension will be granted and, if not, that
alternative financing will be available. As of September 30, 2000, we were in
compliance with our loan covenants.
7
NOTE 6 -- EARNINGS PER SHARE
Basic and diluted earnings per share is as follows:
THREE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------------------------
INCOME/ PER SHARE
(LOSS) SHARES AMOUNT
---------- ------ ---------
(IN
THOUSANDS)
BASIC AND DILUTED
EARNINGS PER SHARE:
Net Loss $ (6,459)
Preferred stock
dividends/stock
accretion (2,124)
-----------
Net loss applicable to
Common stock $ (8,583) 6,948,597 $ (1.24)
=========== ============ ============
THREE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------------------------
INCOME/ PER SHARE
(LOSS) SHARES AMOUNT
---------- ------ ---------
(IN
THOUSANDS)
BASIC AND DILUTED
EARNINGS PER SHARE:
Net Loss $ (4,442)
Preferred stock
dividends/stock
accretion (1,910)
-----------
Net loss applicable to
Common stock $ (6,352) 6,954,807 $ (0.91)
=========== ============ ============
For the three months ended September 30, 2000 and 1999, the effect of
options, warrants and convertible securities was antidilutive and is therefore
excluded from the computation of earnings per share.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
We are one of the largest wholesale nurseries in the United States,
based on annual revenue and greenhouse square footage. We sell a wide assortment
of high-quality bedding plants, shrubs, potted flowering plants, ground cover
and Christmas trees as well as provide extensive merchandising services
primarily to leading home centers and mass merchants. Our business is highly
seasonal with a peak selling season from March through June. Consequently, we
have historically reported losses and lower revenues in the second half of the
calendar year.
On August 24, 2000, our Board of Directors adopted a resolution
providing for a change in our fiscal year end from June 30 to December 31. We
intend to file a Transition Report on Form 10-K for the six-month period from
July 1, 2000 to December 31, 2000. This Quarterly Report on Form 10-Q covers the
first three months of the six-month transition period.
THREE MONTHS ENDED SEPTEMBER 30, 2000, AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales increased $1.0 million, or 3.6%, to $27.7 million
for the three months ended September 30, 2000, from $26.7 million during the
three months ended September 30, 1999. This increase is primarily the result of
additional sales to existing customers.
GROSS PROFIT. Gross profit decreased $2.5 million to $7.9 million for
the three months ended September 30, 2000, from $10.4 million during the three
months ended September 30, 1999. Gross profit as a percentage of net sales
decreased to 28.6% for the three months ended September 30, 2000, from 38.9% for
the three months ended September 30, 1999. The decrease in gross profit as a
percentage of net sales was primarily the result of inefficiencies in production
and an increase in the write-off of excess inventory of $1.8 million. The
increase in the write-off of excess inventory relates primarily to the
facilities that have been taken out of production, as well as an improper mix of
product available for customers. In addition, sales prices were reduced in order
to sell certain products.
SALES, MARKETING AND DELIVERY EXPENSES. Sales, marketing and delivery
expenses increased $0.5 million to $8.2 million for the three months ended
September 30, 2000, from $7.7 million in the three months ended September 30,
1999. As a percentage of net sales, sales, marketing and delivery expenses
increased to 29.5% for the three months ended September 30, 2000, from 29.0% for
the three months ended September 30, 1999, primarily due to increased delivery
expenses. Delivery expenses increased by $0.6 million, primarily due to driver
shortages requiring the use of more expensive common carriers and higher costs
associated with the sale and movement of excess carryover product and inventory
at four facilities that have been or are in the process of being taken out of
production.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $1.5 million, to $4.3 million for the three months ended
September 30, 2000, from $5.8 million in the three months ended September 30,
1999. As a percentage of net sales, general and administrative expenses
decreased to 15.6% for the three months ended September 30, 2000, from 21.8% for
the three months ended September 30, 1999. This decrease as a percentage of net
sales is primarily the result of a revised compensation structure for key
management.
INTEREST EXPENSE. Interest expense increased $0.4 million to $4.1
million for the three months ended September 30, 2000, from $3.7 million in the
three months ended September 30, 1999, as a result of higher average levels of
borrowings required to fund working capital requirements.
TAXES. Our effective tax rate decreased to 30.0% for the three months
ended September 30, 2000, from 39.5% for the three months ended September 30,
1999, primarily as a result of the impact of permanent
9
items on lower pretax loss and a valuation which was recorded against all state
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Our cash needs are primarily to fund seasonal working capital
requirements and capital expenditures. During the three months ended September
30, 2000, our primary source of capital was a revolving line of credit. As of
June 30, 2000, we were not in compliance with a certain financial covenant,
however, on August 10, 2000, a waiver curing the noncompliance was obtained. On
September 28, 2000, a waiver and amendment under the Loan and Security Agreement
was obtained waiving the covenant violation, resetting the financial covenants
for each four quarter period beginning with the four quarters ending September
30, 2000 and reestablishing the original seasonal line period. Our three-year
revolving credit facility expires on October 15, 2001. Management is working to
extend the term of the agreement. There can be no assurance that an extension
will be granted and, if not, that alternative financing will be available. As of
September 30, 2000, we were in compliance with our loan covenants.
During the three months ended September 30, 2000, net cash used in
operating activities was $6.0 million, primarily a result of accelerated payment
of past due accounts and an increase in inventory offset by decreases in
accounts receivable. Net cash used in investing activities during the three
months ended September 30, 2000, and September 30, 1999, was $1.7 million and
$0.2 million, respectively. The increase of $1.5 million is primarily related to
the implementation of a new integrated financial system.
We are highly leveraged. As of September 30, 2000, we have $134.4
million of long-term indebtedness and an accumulated deficit of $55.8 million.
Although we believe 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 we will
be able to generate sufficient cash flows or meet our financial goals and comply
with our debt covenants in the future. We may incur additional indebtedness in
the future, subject to certain limitations contained in the instruments
governing our indebtedness and capital stock. Our debt service obligations have
important consequences to holders of our debt, preferred stock, warrants and
common stock including the following: (i) a substantial portion of our cash flow
from operations will be dedicated to the payment of principal and interest on
our indebtedness, thereby reducing the funds available to us for operations,
acquisitions, future business opportunities and other purposes and increasing
our vulnerability to adverse general economic and industry conditions; (ii) our
leveraged position may increase our vulnerability to competitive pressures;
(iii) the 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 us to
meet certain financial tests and will restrict our ability to borrow additional
funds, to dispose of assets or to pay cash dividends on, or repurchase,
preferred or common stock; and (iv) funds available for working capital, capital
expenditures, acquisitions and general corporate purposes may be limited.
During the period ended September 30, 2000, we decided to take excess
capacity out of production. The inventory at the Aurora, Sunol, Watsonville and
Waco facilities will be transferred to other facilities and production at those
facilities will cease or be substantially reduced. As demand returns, we will
resume production at the Aurora, Sunol and Waco facilities. The lease for the
Watsonville facility will expire in fiscal 2001 and one of two leases at the
Sunol facility has been subleased. We will evaluate the possibility of extending
the Watsonville lease based on production requirements at the time of
expiration. As of September 30, 2000, we have approximately $0.5 million net
book value of assets at our Watsonville facility and plan to use these assets at
our other locations. We have approximately $6.0 million net book value of assets
at our Aurora, Sunol and Waco facilities. We plan to utilize some of these
assets in our other facilities and in these facilities when they reopen. If we
decide to abandon any of these assets, we will account for the
10
abandonment in the period such decision is made; such accounting could
require us to take a material charge to our income statement. Depreciation
and lease expense will be charged to general and administrative expense for
the period of time that these facilities are not in production.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our liabilities consist primarily of a revolving line of credit, senior
subordinated notes, other notes and accounts payable. We have also issued Series
A Preferred Stock and Redeemable Common Stock. Such liabilities and
stockholders' equity have varying levels of sensitivity to changes in market
interest rates. Interest rate risk results when, due to different maturity dates
and repricing intervals, interest rate indices for interest-bearing liabilities
increase relative to income earning assets, thereby creating a risk of decreased
net earnings and cash flow.
The following table provides information about our 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: 2001 2002 2003 2004 2005 After Total
------ ------ ------ ------- -------- ------ ------
Fixed Rate:
Series A Preferred Stock - - $ 2.6 $ 5.2 $ 5.2 $ 84.2 $ 97.2
Average Interest 13% 13% 13% 13% 13% 13%
Senior Subordinated
Notes $10.5 $10.5 $10.5 $10.5 $10.5 $121.0 $173.5
Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Convertible Note - - - - - $ 12.2 $ 12.2
Average Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Non-compete Agreements $0.1 $0.1 $0.1 $0.1 $0.1 $0.9 $ 1.4
Average Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Variable Rate:
Fleet Loan Agreement $23.2(1) $ 23.2
(1) On October 15, 1998, we entered into the Fleet Loan Agreement, borrowed
approximately $32 million, and repaid in full amounts due under our existing
credit facility. The Fleet Loan Agreement terminates in October 2001. The
Fleet Loan Agreement provides a $70.0 million revolving credit facility,
$55.0 million of which is subject to certain borrowing base limitations and
$13.9 million of which is available without limitation from November through
the following April. As of September 30, 2000, the balance due on our line of
credit was $23.2 million and a total of $16.4 million of additional capital
remained available. See Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation -- 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.
11
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Color Spot Nurseries, Inc. and its subsidiaries are from time to time
subject to various legal proceedings incidental to our business. Management
believes that the ultimate resolution of these proceedings will not have a
material adverse effect on our financial position or results of operations,
taken as a whole.
ITEM 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.
On August 30, 2000, we filed a Current Report on Form 8-K to report
the following: (i) we were in default of the financial covenants
under the Loan and Security Agreement with Fleet Capital
Corporation dated as of October 15, 1998; (ii) the resignation of
Boligala C. Raju, President and Chief Operating Officer; and, (iii)
the adoption by its Board of Directors of a resolution providing
for a change of its fiscal year end from June 30 to December 31.
12
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: November 14, 2000.
COLOR SPOT NURSERIES, INC.
a Delaware corporation
By: /s/ Richard E. Parker
-------------------------------------------
Name: Richard E. Parker
Title: President, Chief Executive Officer and
Director (PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Joseph P. O'Neill
-------------------------------------------
Name: Joseph P. O'Neill
Title: Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
13
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.
14