1
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 26, 1998
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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
478 BUSKIRK AVENUE, PLEASANT HILL, CA 94523
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (510) 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 April 30, 1998, the Registrant had outstanding 6,937,068 shares
of Common Stock, par value $.001 per share.
2
COLOR SPOT NURSERIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 26, 1998 and
June 30, 1997....................................................................................1
Consolidated Statements of Operations for the Three and Nine Months
Ended March 26, 1998 and March 27, 1997..........................................................2
Consolidated Statement of Changes in Stockholders' Equity as of
March 26, 1998...................................................................................3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 26, 1998 and March 27, 1997..........................................................4
Condensed Notes to Consolidated Financial Statements as of
March 26, 1998 ..................................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................................................10
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
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COLOR SPOT NURSERIES, INC.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-Q
(AND ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE) CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 (THE
"1933 ACT") AND SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934 (THE
"1934 ACT"). THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE
TYPICALLY IDENTIFIED BY THEIR INCLUSION OF PHRASES SUCH AS "THE COMPANY PLANS,"
"MANAGEMENT BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. SUCH FACTORS
INCLUDE, AMONG OTHERS, THE COMPANY'S SUBSTANTIAL LEVERAGE AND DEBT SERVICE; THE
COMPANY'S DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH; THE EFFECT OF GROWTH ON
COMPANY RESOURCES; THE COMPANY'S SHORT OPERATING HISTORY UNDER CURRENT
MANAGEMENT; THE COMPANY'S CUSTOMER CONCENTRATION AND ITS DEPENDENCE ON HOME
DEPOT; SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES;
RESTRICTIONS IMPOSED BY, AND ENCUMBRANCE ON ASSETS TO SECURE, THE COMPANY'S NEW
LOAN AGREEMENT; CERTAIN EFFECTS OF A CHANGE OF CONTROL OF THE COMPANY; FUTURE
CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING; WEATHER AND GENERAL
AGRICULTURAL RISKS; DEPENDENCE ON LEASED FACILITIES; SENSITIVITY TO PRICE
INCREASES OF CERTAIN RAW MATERIALS; COMPETITION; GOVERNMENT REGULATIONS AND THE
MINIMUM WAGE; CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT; AND OTHER
FACTORS REFERENCED IN THIS FORM 10-Q. AS A RESULT OF THE FOREGOING AND OTHER
FACTORS, NO ASSURANCE CAN BE GIVEN AS TO FUTURE RESULTS, LEVELS OF ACTIVITY
AND/OR ACHIEVEMENTS, AND NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES
RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THESE STATEMENTS.
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ITEM 1.
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 26, June 30,
1998 1997
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 657 $ 2,762
Accounts receivable, net of allowances of $1,721 and $1,661, respectively 28,838 25,524
Inventories 67,785 28,854
Prepaid expenses and other 1,316 893
--------- ---------
Total current assets 98,596 58,033
TREE INVENTORIES 2,451 541
PROPERTY, PLANT AND EQUIPMENT, net 53,262 31,774
INTANGIBLE ASSETS, net 56,888 31,383
DEFERRED INCOME TAXES 20,269 10,120
NOTES RECEIVABLE AND OTHER ASSETS 1,887 1,566
--------- ---------
Total assets $ 233,353 $ 133,417
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 22,822 $ 9,815
Accrued liabilities 14,471 12,395
Dividends payable to stockholders 1,046 906
Deferred income taxes 18,434 14,056
Current maturities of long-term debt 15,279 6,700
--------- ---------
Total current liabilities 72,052 43,872
LONG-TERM DEBT 125,935 83,408
--------- ---------
Total liabilities 197,987 127,280
--------- ---------
SERIES A PREFERRED STOCK, $0.01 par value, 100,000 shares authorized,
41,153 shares issued and outstanding at March 26, 1998 30,968 --
REDEEMABLE COMMON STOCK, $0.001 par value, 1,163,550
and 1,199,744 shares issued and outstanding, respectively 2,186 2,062
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 4,900,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,773,518
and 5,021,118 issued and outstanding, respectively 12 162
Additional paid-in capital 50,975 45,033
Treasury stock, 6,200,228 and 6,164,034 shares, respectively (45,488) (45,228)
Warrants, 825,000 exercisable at $0.01 per share 8,250 --
Retained earnings (accumulated deficit) (11,537) 4,108
--------- ---------
Total stockholders' equity 2,212 4,075
--------- ---------
Total liabilities and stockholders' equity $ 233,353 $ 133,417
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
1
5
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
March 26, March 27, March 26, March 27,
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET SALES $ 38,549 $ 31,049 $ 102,739 $ 57,651
COST OF SALES 26,791 17,333 70,438 34,436
----------- ----------- ----------- -----------
Gross profit 11,758 13,716 32,301 23,215
SALES, MARKETING AND
DELIVERY EXPENSES 10,196 7,722 29,695 17,573
GENERAL AND ADMINISTRATIVE
EXPENSES 2,941 1,977 8,233 3,902
AMORTIZATION OF INTANGIBLE
ASSETS 614 146 1,588 397
TERMINATION OF MANAGEMENT
FEE AND OTHER -- -- 2,400 --
----------- ----------- ----------- -----------
Income (loss) from operations (1,993) 3,871 (9,615) 1,343
INTEREST EXPENSE 3,556 1,600 9,361 2,077
OTHER EXPENSE (INCOME), net (63) 61 (30) 63
----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary loss (5,486) 2,210 (18,946) (797)
INCOME TAX BENEFIT (EXPENSE) 417 (1,063) 7,579 384
----------- ----------- ----------- -----------
Income (loss) before extraordinary loss (5,069) 1,147 (11,367) (413)
EXTRAORDINARY LOSS, net of tax benefit -- 215 2,594 215
----------- ----------- ----------- -----------
Net income (loss) (5,069) 932 (13,961) (628)
PREFERRED STOCK DIVIDENDS 1,319 -- 1,319 --
Net income (loss) applicable to
common stock $ (6,388) $ 932 $ (15,280) $ (628)
=========== =========== =========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary loss $ (0.95) $ 0.22 $ (1.88) $ (0.07)
Extraordinary loss -- (0.04) (0.38) (0.03)
----------- ----------- ----------- -----------
Total $ (0.95) $ 0.18 $ (2.26) $ (0.10)
=========== =========== =========== ===========
Shares used in per share calculation 6,937,068 5,052,614 6,852,057 6,204,959
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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6
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT COMMON SHARES)
Additional Retained Total
Common Common Paid-In Treasury Earnings Stockholders'
Shares Stock Capital Stock Warrants (Deficit) Equity
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 5,021,118 $ 162 $ 45,033 $ (45,228) $ -- $ 4,108 $ 4,075
Issuance of common stock:
Existing shareholders and management 713,196 7 5,123 -- -- -- 5,130
Acquisition of businesses 39,204 1 625 -- -- -- 626
Issuance of warrants -- -- -- -- 8,250 -- 8,250
Purchase of redeemable common stock -- -- 36 (260) -- -- (224)
Accretion of redeemable common stock -- -- -- -- -- (160) (160)
Accretion of Series A preferred stock -- -- -- -- -- (205) (205)
Par value adjustment -- (158) 158 -- -- -- --
Preferred stock dividends -- -- -- -- -- (1,319) (1,319)
Net loss -- -- -- -- -- (13,961) (13,961)
--------- --------- --------- --------- --------- --------- ---------
Balance, March 26, 1998 (unaudited) 5,773,518 $ 12 $ 50,975 $ (45,488) $ 8,250 $ (11,537) $ 2,212
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
7
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
March 26, March 27,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,961) $ (628)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 5,484 1,844
Deferred income taxes (9,309) (583)
Write-off of deferred financing costs 4,324 --
Changes in operating assets and liabilities, net of effect of acquired
businesses:
Increase in accounts receivable (1,548) (10,731)
Increase in inventories (31,334) (8,607)
Increase in prepaid expenses and other current assets (332) (623)
Increase in accounts payable 9,999 7,135
Increase (decrease) in accrued liabilities 838 (3,128)
--------- ---------
Net cash used in operating activities (35,839) (15,321)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less cash acquired (40,539) (48,513)
Purchases of fixed assets (11,240) (4,564)
--------- ---------
Net cash used in investing activities (51,779) (53,077)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 5,130 34,439
Purchase of treasury stock (260) (37,124)
Financing and organizational costs (756) (5,584)
Issuance of preferred stock and warrants 40,000 --
Dividends paid -- (614)
Proceeds from borrowings 136,803 98,035
Debt and stock issuance costs (7,848) --
Net borrowings under revolving line of credit 16,933 9,545
Repayments of long-term debt (104,489) (30,467)
--------- ---------
Net cash provided by financing activities 85,513 68,230
NET DECREASE IN CASH (2,105) (168)
CASH AT BEGINNING OF PERIOD 2,762 701
--------- ---------
CASH AT END OF PERIOD $ 657 $ 533
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,337 $ 1,197
========= =========
Income taxes $ 3 $ 2
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ 625 $ 2,400
========= =========
Issuance of notes receivable in connection with asset sale $ -- $ 1,170
========= =========
Issuance of notes payable in connection with treasury stock purchase $ -- $ 7,100
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
8
COLORSPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1998
NOTE 1 - BASIS OF PRESENTATION
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, 1997
contained in its registration statement on Form S-1 filed with the Securities
and Exchange Commission dated December 22, 1997 (No.
333-37335).
The consolidated financial statements as of March 26, 1998, and the
three and nine months ended March 26, 1998 and March 27, 1997 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 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 26, 1998 and June 30, 1997, consisted of the
following (in thousands):
MARCH 26, JUNE 30,
1998 1997
------- -------
Current: (UNAUDITED)
Plants, shrubs and ground cover $60,095 $24,385
Raw materials and supplies 7,690 3,374
Christmas trees -- 1,095
------- -------
Total current inventories 67,785 28,854
Noncurrent:
Christmas trees 2,451 541
------- -------
Total inventories $70,236 $29,395
======= =======
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COLORSPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1998
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 26, 1998 and June 30, 1997
consisted of the following (in thousands):
MARCH 26, JUNE 30,
1998 1997
-------- --------
(UNAUDITED)
Land $ 9,480 $ 8,621
Greenhouses and buildings 20,192 9,029
Furniture and fixtures 4,191 2,108
Machinery and equipment 16,487 10,929
Leasehold improvements 4,759 2,587
Other 3,862 1,302
-------- --------
58,971 34,576
Less: Accumulated depreciation (5,709) (2,802)
-------- --------
Total property, plant and equipment $ 53,262 $ 31,774
======== ========
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 26, 1998 and June 30, 1997 consisted of
the following (in thousands):
MARCH 26, JUNE 30,
1998 1997
-------- --------
(UNAUDITED)
Goodwill $ 47,558 $ 23,971
Organization costs 3,605 1,670
Financing costs 5,708 4,352
Non-compete agreements 1,695 1,731
Other 911 856
-------- --------
59,477 32,580
Less: Accumulated amortization (2,589) (1,197)
-------- --------
Total intangible assets $ 56,888 $ 31,383
======== ========
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. SOP 98-5 is effective for financial statements for periods
beginning after December 15, 1998 (the Company's fiscal year beginning July 1,
1999). When adopted, all capitalized start-up costs must be expensed and
recorded as a change in accounting principle. The Company has approximately
$3.6 million of capitalized organization costs recorded on its balance sheet
as of March 26, 1998. The Company is studying the potential impacts of the SOP
98-5 and has not decided when it will adopt the new standard.
NOTE 5 - ACQUISITIONS
Between October 1, 1996 and June 30, 1997, the Company effected seven
business acquisitions. Between July 31, 1997 and September 3, 1997, the Company
effected six business acquisitions. The Company accounted for all of these
acquisitions using the purchase method of accounting. The allocation of the
purchase price to the underlying net assets acquired is based upon preliminary
estimates of the fair value of the net assets, which may be revised at a later
date. It is anticipated that any purchase price allocation adjustments will be
made within one year from the date of acquisition. Management does not believe
that the final allocations of the purchase prices will have a material effect of
the Company's financial position or results of operations. Results of operations
of the acquired entities subsequent to the purchase date are included in the
consolidated financial statements.
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10
COLORSPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1998
Pro forma operating results of the Company, assuming all the above
acquisitions occurred on July 1, 1996 are presented below (in thousands, except
per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 26, MARCH 27, MARCH 26, MARCH 27,
1998 1997 1998 1997
---------- -------------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $ 38,549 $ 44,517 $ 104,602 $ 105,340
Income (loss) before
extraordinary loss (5,069) 1,125 (12,075) (3,053)
Income (loss) per share before
extraordinary loss:
Basic (0.95) 0.18 (1.98) (0.38)
Diluted (0.95) 0.17 (1.98) (0.38)
Shares used in per share calculation:
Basic 6,937,068 6,260,066 6,856,897 7,987,327
Diluted 6,937,068 6,650,530 6,856,897 7,987,327
NOTE 6 - SALES OF SECURITIES, REFINANCING AND EXTRAORDINARY LOSS
On December 24, 1997, the Company sold $100 million of its 10 1/2%
Senior Subordinated Notes (the "Notes") and 40,000 units each consisting of one
share of 13% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock") and 20.625 warrants each representing the right to purchase one share of
the Company's common stock for $0.01 each (the "Warrants"). The Series A
Preferred Stock and Warrants were sold for an aggregate cost of $40.0 million.
The sale of the Notes, Series A Preferred Stock and Warrants are hereto referred
to as the "Offerings". The Company raised $133.5 million, net of fees and
expenses, from the Offerings which it used to repay existing indebtedness.
Interest on the Notes is payable semiannually on June 15 and December 15 of each
year, commencing on June 15, 1998. The Notes are redeemable, in whole or in
part, at the option of the Company, at any time on or after December 15, 2002 at
specified redemption prices. Dividends on the Series A Preferred Stock accrue at
a rate of 13% of the liquidation preference of $1,000 per share and are payable
quarterly on March 15, June 15, September 15 and December 15 commencing on March
15, 1998. At the Company's option, through December 15, 2002, dividends may be
paid by the issuance of additional shares of Series A Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. The
Series A Preferred Stock is redeemable, in whole or in part, at the option of
the Company, at any time on or after December 15, 2002 at specified redemption
prices. The Series A Preferred Stock ranks senior to all other outstanding
classes or series of capital stock with respect to dividends and liquidation
rights.
Simultaneous with the completion of the Offerings, the Company
entered into a new loan agreement with Credit Agricole Indosuez and a syndicate
of banks (the "New Loan Agreement"). The New Loan Agreement provides the Company
with a two year acquisition term loan facility of $75.0 million, a five year
revolving credit facility of $40.0 million and a five year supplemental line of
$35.0 million which may be used either for acquisitions or working capital.
Interest on amounts borrowed under the New Loan Agreement bear interest, at the
Company's option, at floating rates based on the prime rate or the London
interbank offer rate ("LIBOR"), plus a margin which ranges from 0% to 1.25% for
prime rate loans and 1% to 2.75% for LIBOR loans depending on certain financial
performance targets. The New Loan Agreement contains various
7
11
COLORSPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1998
covenants, including covenants prohibiting or limiting the incurrence of
additional indebtedness, the granting of liens, sales of assets, as well as
certain financial covenants. At March 26, 1998, the Company was in default of
certain of its financial covenants but has received a waiver of such default for
the March 1998 test period. The financial covenants were also amended through
March 31, 1999. Borrowings under the New Loan Agreement are secured by
substantially all of the Company's assets. Borrowings under the revolving credit
facility and the portion of the supplemental line used for working capital are
subject to certain borrowing base limitations generally based on a percentage of
eligible inventory and eligible accounts receivable. On March 26, 1998, the
Company had borrowed $29.0 million under the new revolving credit loan and had
not yet borrowed under the acquisition term loan facility or supplemental line.
At March 26, 1998, the Company had $51.8 million of total credit availability
under the revolving credit facility and supplemental lines. Additionally, the
revolving credit facility and the portion of the supplemental line used for
working capital must be reduced annually below $15.0 million for a 30-day period
between the months of July through September.
In connection with these transactions, the Company incurred a $4.3
million non-cash pre-tax charge related to the write-off of deferred financing
fees. This charge is reported net of income tax benefit of $2.6 million in
extraordinary loss on the Company's consolidated statements of operations. Also,
in December 1997, the Company incurred a $2.0 million pre-tax charge related to
the termination of an annual management fee and a $0.4 million pre-tax charge
related to the payment of bonuses to certain members of management. These
charges are reported in termination of management fee and other on the Company's
consolidated statements of operations.
Also, at the time of the Offerings, the Company increased the
aggregate authorized number of shares of preferred stock from 1,000,000 to
5,000,000, changed the par value of its common stock from $0.01 to $0.001 per
share and effected a 0.69-for-one reverse stock split of its common stock. The
reverse stock split has been reflected retroactively in these financial
statements.
NOTE 7 - DEBT
Debt at March 26, 1998 and June 30, 1997 consisted of the following
(in thousands):
MARCH 26, JUNE 30,
1998 1997
--------- ---------
(UNAUDITED)
Revolving line of credit $ 29,038 $ 12,105
Senior subordinated notes 100,000 --
Term and acquisition loans -- 66,977
Convertible note 7,833 7,384
Non-compete agreements 1,178 1,395
Other 3,165 2,247
--------- ---------
141,214 90,108
Less: Current maturities (15,279) (6,700)
--------- ---------
Long-term portion $ 125,935 $ 83,408
========= =========
8
12
COLORSPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1998
NOTE 8 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 replaces primary
earnings per share with basic earnings per share. Basic earnings per share
excludes the effect of any dilutive common equivalent shares. Fully diluted
earnings per share, now called diluted earnings per share, is still required.
Diluted earnings per share is computed by dividing net income by the weighted
average number of all common and dilutive common equivalent shares outstanding
during the period. For all periods presented other than for the three months
ended March 27, 1997, the effect of common equivalent shares upon earnings per
share was antidilutive and were therefore excluded from the calculations.
Diluted earnings per common share and shares used in the computation of diluted
earnings per common share for the three months ended March 27, 1997 was
as follows:
THREE MONTHS
ENDED
MARCH 27, 1997
------------
(UNAUDITED)
Income before extraordinary loss 0.21
Extraordinary loss (0,04)
------------
Total
0.17
============
Shares used in per share calculation 5,443,078
============
9
13
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is the largest wholesale nursery in the United States,
based on 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.
As a result of both acquisitions and internal expansion, the
Company's operations have grown rapidly during the first nine months of its
current fiscal year as compared to the comparable period of the prior year.
Since June 30, 1996, the Company has completed 13 acquisitions, making it the
leading consolidator in the wholesale nursery industry. Six of these
acquisitions occurred during the nine months ended March 27, 1997, one occurred
during the fourth quarter of fiscal 1997 and six occurred during the first
quarter of fiscal 1998. These acquisitions resulted in the Company's expansion
into several states, including Texas, Washington, Oregon and Michigan and into
new product lines such as shrubs and Christmas trees. The Company has made
substantial progress in significantly integrating these acquisitions into its
operations and plans to continue to focus its efforts over the next three fiscal
quarters to more fully integrate these acquisitions.
The Company's business is highly seasonal with a peak selling season
in the spring generally from March through June. Consequently, the Company has
historically reported losses during its first and second fiscal quarters and
higher revenues during its third and fourth fiscal quarters. The Company has
recently sought to reduce the effects of seasonality with sales that are
counter-seasonal to its historic products with the acquisition of Christmas tree
operations. The Company plans to continue to expand its Christmas tree
operations to further reduce the effects of seasonality on its operating
results.
Sales of the Company's products are highly dependent upon general
weather conditions throughout the western and southwestern United States. Cold
and wet weather, particularly on weekends, tends to curtail gardening activities
and results in a reduction in demand for the Company's products. Extreme weather
conditions associated with the weather phenomena known as "El Nino" existed
during the Company's fiscal quarter ended March 26, 1998 which resulted in a
delay to the start of the peak gardening season in the Company's principal
markets. Seasonal rainfall amounts were in excess of twice normal levels
throughout most of California, Arizona and Nevada. Rainfall amounts in Texas was
in excess of one and a half times normal levels as well. As a result of the poor
weather, the Company experienced lower than anticipated levels of sales and
higher product shrinkage and returns during the three months ended March 26,
1998. Consequently, the Company experienced a significant reduction in gross
profit percentage and recognized an operating loss of $2.0 million for the
quarter ended March 26, 1998.
THREE MONTHS ENDED MARCH 26, 1998 AS COMPARED TO THE THREE MONTHS ENDED MARCH
27, 1997
Net Sales. Net sales increased $7.5 million, or 24.2%, to $38.5
million for the three months ended March 26, 1998 from $31.0 million during the
three months ended March 27, 1997. This increase is the result of business
acquisitions partially offset by reductions in sales as a result of poor
weather conditions.
Gross Profit. Gross profit decreased $2.0 million, or 14.3%, to $11.8
million for the three months ended March 26, 1998 from $13.7 million during the
three months ended March 27, 1997. Gross profit as a percentage of net sales
decreased to 30.5% for the three months ended March 26, 1998 from 44.2% for the
three months ended March 27, 1997. The reduction in gross profit percentage was
the result of higher production costs and higher shrinkage and return rates due
to below planned sales resulting from poor weather
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conditions. Additionally, gross profit was adversely effected by higher
production labor costs as a result of the statutory increase in the minimum wage
and an aggressive sales/production plan which resulted in excess product at the
Company's facilities and customers' stores which was ultimately destroyed.
Finally, management believes that its return policy was applied too liberally by
its sales force whereby credits were either issued prematurely or for
traditionally non-returnable items. To address these return problems, the
Company changed its commission policy in March to include targeted levels of
returns in addition to sales for its sales force.
Operating Expenses. Operating expenses includes sales, marketing and
delivery expenses, general and administrative expenses, and amortization of
intangible assets. Sales, marketing and delivery expenses increased $2.5
million, or 32.0%, to $10.2 million for the three months ended March 26, 1998
from $7.7 million in the three months ended March 27, 1997. As a percentage of
net sales, sales, marketing and delivery expenses increased to 26.4% for the
three months ended March 26, 1998 from 24.9% for the three months ended March
27, 1997. This increase as a percentage of net sales was the result of fixed
costs associated with growth of the Company's sales force in anticipation of
higher sales combined with lower than anticipated sales due to poor weather
conditions. General and administrative expenses increased $1.0 million, to $2.9
million for the three months ended March 26, 1998 from $2.0 million in the three
months ended March 27, 1997. As a percentage of net sales, general and
administrative expenses increased to 7.6% for the three months ended March 26,
1998 from 6.4% for the three months ended March 27, 1997. This increase as a
percentage of net sales is primarily the result of additional general and
administrative resources needed to support the Company's current and anticipated
future growth combined with lower than anticipated sales due to poor weather
conditions. Amortization of intangible assets increased $0.5 million to $0.6
million for the three months ended March 26, 1998 due to the acquisition of four
companies during the third and fourth quarters of fiscal 1997 and the
acquisition of six companies during the first quarter of fiscal 1998.
Interest Expense. Interest expense increased $2.0 million to $3.6
million for the three months ended March 26, 1998 from $1.6 million in three
months ended March 27, 1997 as a result of significantly higher levels of
borrowings required to fund acquisitions, operating losses and the Company's
growing working capital requirements.
Taxes. While the Company's financial statements include tax expense,
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 treatment has enabled the Company to generate significant
net operating losses since its inception and accumulate a large net operating
loss carryforward. In addition, the Company's effective tax rate has been higher
than the U.S. statutory rate of 34%. The difference between the Company's
effective tax rate and the U.S. statutory rate was due to state tax provisions
and other California tax limitations on the use of net operating loss
carryforwards. The Company's effective tax rate decreased to 7.6% for the three
months ended March 26, 1998 from 48.1% for the three months ended March 27,
1997. This decrease was primarily the result of adjustments necessary to record
income taxes at the current projected effective tax rate of 40% for the fiscal
year ending June 30, 1998.
NINE MONTHS ENDED MARCH 26, 1998 AS COMPARED TO THE NINE MONTHS ENDED MARCH 27,
1997
Net Sales. Net sales increased $45.1 million, or 78.2%, to $102.7
million for the nine months ended March 26, 1998 from $57.7 million during the
nine months ended March 27, 1997. This increase is the result of the acquisition
of thirteen businesses plus growth of the Company's previously existing business
partially offset by reductions in sales primarily during the Company's third
fiscal quarter as a result of poor weather conditions.
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Gross Profit. Gross profit increased $9.1 million, or 39.1%, to $32.3 million
for the nine months ended March 26, 1998 from $23.2 million in the nine months
ended March 27, 1997. Gross profit as a percentage of net sales decreased to
31.4% for the nine months ended March 26, 1998 from 40.3% for the nine months
ended March 27, 1997. The reduction in gross profit percentage was the result of
higher production costs and higher shrinkage and return rates due to below
planned sales resulting from poor weather conditions. Additionally, gross profit
was adversely effected by higher production labor costs as a result of the
statutory increase in the minimum wage and an aggressive sales/production plan
which resulted in excess product at the Company's facilities and customers'
stores which was ultimately destroyed. Finally, management believes that its
return policy was applied too liberally by its sales force whereby credits were
either issued prematurely or for traditionally non-returnable items.
Operating Expenses. Operating expenses includes sales, marketing and
delivery expenses, general and administrative expenses, amortization of
intangible assets and termination of management fee and other. Sales, marketing
and delivery expenses increased $12.1 million, or 69.0%, to $29.7 million for
the nine months ended March 26, 1998 from $17.6 million in the nine months ended
March 27, 1997. As a percentage of net sales, sales, marketing and delivery
expenses decreased to 28.9% for the nine months ended March 26, 1998 from 30.5%
for the nine months ended March 27, 1997. This decrease as a percentage of net
sales was the result of the addition of the Company's Southwest division which
generally experiences lower delivery expenses as a percentage of net sales
because the mix of products sold by the Southwest division generally has a
higher per unit sales price. This decrease was partially offset by higher fixed
costs associated with growth of the Company's sales force in anticipation of
higher sales combined with lower than anticipated sales due to poor weather
conditions. General and administrative expenses increased $4.3 million, or
111.0%, to $8.2 million for the nine months ended March 26, 1998 from $3.9
million in the nine months ended March 27, 1997. As a percentage of net sales,
general and administrative expenses increased to 8.0% for the nine months ended
March 26, 1998 from 6.8% for the nine months ended March 27, 1997. This increase
as a percentage of net sales is primarily the result of additional general and
administrative resources needed to support the Company's current and anticipated
future growth. Amortization of intangible assets increased $1.2 million to $1.6
million for the nine months ended March 26, 1998 from $0.4 million in nine
months ended March 27, 1997 due to the acquisition of seven companies during
fiscal 1997 and the acquisition of six companies during the first quarter of
fiscal 1998. Additionally, during the nine months ended March 26, 1998, the
Company incurred a $2.0 million charge related to the termination of an annual
management fee and a $0.4 million charge related to the payment of bonuses to
certain members of management.
Interest Expense. Interest expense increased $7.3 million to $9.4
million for the nine months ended March 26, 1998 from $2.1 million in nine
months ended March 27, 1997 as a result of significantly higher levels of
borrowings required to fund acquisitions, operating losses and the Company's
growing working capital requirements.
Taxes. The Company's effective tax rate decreased to 40.0% for the
nine months ended March 26, 1998 from 48.2% for the nine months ended March 27,
1997. This decrease was primarily the result of the effect of revised
projections of earnings and financial position for the fiscal year ending
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily to fund seasonal working
capital requirements, capital expenditures and acquisitions.
During the nine months ended March 27, 1997, the Company's primary
sources of capital were a revolving line of credit, various term and acquisition
loans and the issuance of debt and common stock.
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16
On December 24, 1997, the Company raised $133.5 million, net of fees
and expenses from the sale of Notes, Series A Preferred Stock and Warrants which
it used to repay existing indebtedness (See Note 6 to Condensed Notes to
Consolidated Financial Statements). Interest on the Notes is due semiannually on
June 15 and December 15 commencing June 15, 1998. Dividends on the 13% Series A
Preferred Stock are payable quarterly in cash or shares of Series A Preferred
Stock through December 15, 2002 on March 15, June 15, September 15 and December
15. On March 15, 1998, the Company issued 1,153 shares of Series A Preferred
Stock as payment of such dividends.
In connection with the Offerings, the Company entered into a New Loan
Agreement, which provides an acquisition term loan facility of $75.0 million, a
revolving credit facility of $40.0 million, and a supplemental line of $35.0
million which may be used either for acquisitions or working capital. Borrowings
under the New Loan Agreement are secured by substantially all of the Company's
assets. On March 26, 1998, the Company had borrowed $29.0 million under the new
revolving credit loan and had not yet borrowed under the acquisition term loan
facility or supplemental line. Borrowings under the revolving credit facility
and the portion of the supplemental line used for working capital are subject to
certain borrowing base limitations generally based on a percentage of eligible
inventory and eligible accounts receivable. At March 26, 1998, the Company had
$51.8 million of total credit availability under the revolving credit facility
and supplemental lines. The New Loan Agreement contains various covenants,
including covenants prohibiting or limiting the incurrence of additional
indebtedness, the granting of liens, sales of assets, as well as certain
financial covenants. At March 26, 1998, the Company was in default of certain of
its financial covenants but has received a waiver of such default for the March
1998 test period. The financial covenants were also amended through March 31,
1999. Additionally, the revolving line and the portion of the supplemental line
used for working capital must be reduced below $15.0 million for a 30-day period
between the months of July through September ("Clean-down Requirement"). The
Company believes that sufficient cash will be generated from operating
activities to meet this Clean-down Requirement.
During the nine months ended March 26, 1998, net cash used in
operating activities was $35.8 million primarily as a result of operating losses
and increases in inventory in advance of the peak fourth quarter selling season.
During the nine months ended March 27, 1997, net cash used in operating
activities was $15.3 million primarily as a result of increases in inventory in
advance of the peak fourth quarter selling season plus increases in accounts
receivable due primarily to higher sales in the month of March. Net cash used in
investing activities during the nine months ended March 26, 1998 and March 27,
1997 was $51.8 million and $53.1 million, respectively. The Company used cash to
acquire six businesses during the nine months ended March 26, 1998 and six
businesses during the nine months ended March 27, 1997. Additionally, the
Company spent $11.2 million and $4.6 million on capital expenditures during the
nine months ended March 26, 1998 and March 27, 1997, respectively. The Company
anticipates that it will spend a total of $11.6 million during the year ended
June 30, 1998, of which approximately $8.0 million is expected to be used for
expansion capital expenditures. Expansion capital expenditures represent
expenditures for capital which increases the Company's productive capabilities
and typically includes grading of new land, purchasing and building new
greenhouses and related improvements, such as the installation of ventilation
and irrigation systems.
The Company believes that the cash generated from operations and
available borrowings under the New Loan Agreement, will be sufficient to finance
working capital, capital expenditures and planned acquisitions for at least the
next 12 months.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation arising in the
ordinary course of its business. None of the pending litigation, in the opinion
of the Company, is likely to have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At March 26, 1998, the Company was in default of certain of its financial
covenants under its loan agreement with Credit Agricole Indosuez and a syndicate
of banks and was therefore in default under section 8.03(a) of the agreement.
The Company, however, has subsequently received a waiver of such default and
the financial covenants were amended through March 31, 1999.
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) EXHIBIT DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.**
3.2 Amended and Restated Bylaws of the Registrant.*
3.3 Certificate of Designation of the Series A Preferred
Stock.**
4.1 Form of Preferred Stock certificate.*
4.2 Indenture (including form of Note).**
4.3 Warrant Agreement (including form of Warrant).**
10.1 Second Amended and Restated Credit Agreement dated as
of December 24, 1997.**
10.2 First Amendment and Waiver to Second Amended and
Restated Credit Agreement dated December 24, 1997.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
---------------------------------------------------------------
* Filed with the Company's Registration Statement, No.
333-37335, filed with the Securities and Exchange
Commission ("SEC") and incorporated herein by
reference.
** Filed with the Company's quarterly report on form
10-Q for the quarter ended January 22, 1998 with the
SEC and incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements 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.
COLOR SPOT NURSERIES, INC.
Dated: May 11, 1998
By: /s/ Michael F. Vukelich
-------------------------------------
Chairman of the Board and Chief
Executive Officer
By: /s/ Paul Yeager
-------------------------------------
Executive Vice President and Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.**
3.2 Amended and Restated Bylaws of the Registrant.*
3.3 Certificate of Designation of the Series A Preferred Stock.**
4.1 Form of Preferred Stock certificate.*
4.2 Indenture (including form of Note).**
4.3 Warrant Agreement (including form of Warrant).**
10.1 Second Amended and Restated Credit Agreement dated as of December
24, 1997.**
10.2 First Amendment and Waiver to Second Amended and Restated Credit
Agreement dated December 24, 1997.
11.1 Computation of Earnings Per Share.
27.1 Financial Data Schedule.
-----------------------------------------------------------------------------
* Filed with the Company's Registration Statement, No. 333-37335,
filed with the Securities and Exchange Commission ("SEC") and
incorporated herein by reference.
** Filed with the Company's quarterly report on form 10-Q for the
quarter ended January 22, 1998 with the SEC and incorporated herein
by reference.
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