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 December 25, 1997
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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 (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 No X
----- -----
As of January 30, 1998, the Registrant had outstanding 6,937,068 shares of
Common Stock, par value $.001 per share.
COLOR SPOT NURSERIES, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 25, 1997 and
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the Three and Six
Months Ended December 25, 1997 and December 26, 1996. . . . . 2
Consolidated Statement of Changes in Stockholders' Equity
as of December 25, 1997 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Three and
Six Months Ended December 25, 1997 and December 26, 1996. . . 4
Condensed Notes to Consolidated Financial Statements as of
December 25, 1997 . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
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.
ITEM 1.
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 25, June 30,
1997 1997
------------ --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 352 $ 2,762
Accounts receivable, net of allowances
of $1,721 and $1,661, respectively 25,254 25,524
Inventories 54,135 28,854
Prepaid expenses and other 1,105 893
------------ --------
Total current assets 80,846 58,033
TREE INVENTORIES 2,364 541
PROPERTY, PLANT AND EQUIPMENT, net 50,461 31,774
INTANGIBLE ASSETS, net 57,644 31,383
DEFERRED INCOME TAXES 19,014 10,120
NOTES RECEIVABLE AND OTHER ASSETS 1,651 1,566
------------ --------
Total assets $211,980 $133,417
------------ --------
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,840 $ 9,815
Accrued liabilities 19,510 12,395
Dividends payable to stockholders 882 906
Deferred income taxes 17,596 14,056
Current maturities of long-term debt 1,273 6,700
------------ --------
Total current liabilities 58,101 43,872
LONG-TERM DEBT 113,287 83,408
------------ --------
Total liabilities 171,388 127,280
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SERIES A PREFERRED STOCK, $0.01 par value, 100,000
shares authorized, 40,000 shares issued and
outstanding at December 25, 1997 29,610 -
REDEEMABLE COMMON STOCK, $0.001 par value, 1,163,550
and 1,199,744 shares issued and outstanding,
respectively 2,106 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 50,966 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) (4,864) 4,108
------------ --------
Total stockholders' equity 8,876 4,075
------------ --------
Total liabilities and stockholders' equity $211,980 $133,417
------------ --------
------------ --------
The accompanying notes are an integral part of these consolidated
financial statements.
1
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
December 25, December 26, December 25, December 26,
1997 1996 1997 1996
------------ ------------ ------------ ------------
NET SALES $ 38,708 $ 13,165 $ 64,190 $ 26,602
COST OF SALES 25,502 8,245 43,647 17,103
------------ ------------ ------------ ------------
Gross profit 13,206 4,920 20,543 9,499
SALES, MARKETING AND
DELIVERY EXPENSES 11,095 5,088 19,499 9,851
GENERAL AND ADMINISTRATIVE
EXPENSES 2,594 721 5,292 1,925
AMORTIZATION OF INTANGIBLE
ASSETS 629 170 974 251
TERMINATION OF MANAGEMENT
FEE AND OTHER 2,400 - 2,400 -
------------ ------------ ------------ ------------
Loss from operations (3,512) (1,059) (7,622) (2,528)
INTEREST EXPENSE 3,305 344 5,805 477
OTHER EXPENSE (INCOME), net (69) 23 33 2
------------ ------------ ------------ ------------
Loss before income tax benefit
and extraordinary loss (6,748) (1,426) (13,460) (3,007)
INCOME TAX BENEFIT 3,709 686 6,730 1,447
------------ ------------ ------------ ------------
Loss before extraordinary loss (3,039) (740) (6,730) (1,560)
EXTRAORDINARY LOSS, net of tax benefit 2,162 - 2,162 -
------------ ------------ ------------ ------------
Net loss $ (5,201) $ (740) $ (8,892) $ (1,560)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted loss per share:
Loss before extraordinary loss $ (0.44) $ (0.11) $ (0.97) $ (0.22)
Extraordinary loss (0.31) - (0.31) -
------------ ------------ ------------ ------------
Total $ (0.75) $ (0.11) $ (1.28) $ (0.22)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in per share calculation 6,937,068 6,967,668 6,932,805 6,970,162
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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
(IN THOUSANDS, EXCEPT COMMON SHARES)
Additional Total
Common Common Paid-In Treasury Retained Stockholders'
Shares Stock Capital Stock Warrants Earnings 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 5,114 - - - 5,121
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 - - - - - (80) (80)
Par value adjustment - (158) 158 - - - -
Net loss - - - - - (8,892) (8,892)
--------- ------- ---------- -------- -------- -------- -------------
Balance, December 25, 1997 (unaudited) 5,773,518 $ 12 $ 50,966 $(45,488) $ 8,250 $(4,864) $ 8,876
--------- ------- ---------- -------- -------- -------- -------------
--------- ------- ---------- -------- -------- -------- -------------
The accompanying notes are an integral part of these consolidated
financial statements.
3
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
December 25, December 26,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,892) $ (1,560)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation an amortization 2,952 564
Deferred income taxes (8,892) (1,447)
Write-off of deferred financing costs 4,324 -
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Decrease in accounts receivable 2,357 6,277
Increase in inventories (17,597) (6,031)
Increase in prepaid expenses and other
current assets (206) (229)
Increase in accounts payable 6,017 4,016
Increase (decrease) in accrued liabilities 5,960 (1,717)
------------ ------------
Net cash used in operating activities (13,977) (127)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, less
cash acquired (40,539) (5,556)
Purchases of fixed assets (7,309) (3,245)
------------ ------------
Net cash used in investing activities (47,848) (8,801)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 5,121 100
Purchase of treasury stock (260) -
Financing and organizational costs (743) (75)
Issuance of preferred stock and warrants 40,000 -
Proceeds from borrowings 136,803 2,598
Debt and stock issuance costs (7,848) -
Net borrowings under revolving line of credit (9,386) 6,429
Repayments of long-term debt (104,272) (563)
------------ ------------
Net cash provided by financing activities 59,415 8,489
NET DECREASE IN CASH (2,410) (439)
CASH AT BEGINNING OF PERIOD 2,762 701
------------ ------------
CASH AT END OF PERIOD $ 352 $ 262
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,207 $ 493
------------ ------------
------------ ------------
Income taxes $ 3 $ 2
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ 625 $ -
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated
financial statements.
4
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1997
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.
The consolidated financial statements as of December 25, 1997, and the
three and six months ended December 25, 1997 and December 26, 1996 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. Certain
reclassifications have been made to the results of operations for the three
months ended September 25, 1997 included in the results of operations for the
six months ended December 25, 1997 to be in conformity with the three months
ended December 25, 1997.
NOTE 2 - INVENTORIES
Inventories at December 25, 1997 and June 30, 1997, consisted of the
following (in thousands):
DECEMBER 25, JUNE 30,
1997 1997
------------ --------
(UNAUDITED)
Current:
Plants, shrubs and ground cover $ 46,644 $ 24,385
Raw materials and supplies 7,441 3,374
Christmas trees 50 1,095
------------ --------
Total current inventories 54,135 28,854
Noncurrent:
Christmas trees 2,364 541
------------ --------
Total inventories $ 56,499 $ 29,395
------------ --------
------------ --------
5
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1997
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 25, 1997 and June 30, 1997
consisted of the following (in thousands):
DECEMBER 25, JUNE 30,
1997 1997
------------ --------
(UNAUDITED)
Land $ 9,272 $ 8,621
Greenhouses and buildings 16,243 9,029
Furniture and fixtures 3,696 2,108
Machinery and equipment 16,733 10,929
Leasehold improvements 4,173 2,587
Other 4,827 1,302
------------ --------
54,944 34,576
Less: Accumulated depreciation (4,483) (2,802)
------------ --------
Total property, plant and equipment $ 50,461 $ 31,774
------------ --------
------------ --------
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at December 25, 1997 and June 30, 1997 consisted of
the following (in thousands):
DECEMBER 25, JUNE 30,
1997 1997
------------ --------
(UNAUDITED)
Goodwill $ 47,517 $ 23,971
Organization costs 3,645 1,670
Financing costs 5,708 4,352
Noncompete agreements 1,694 1,731
Other 911 856
------------ --------
59,475 32,580
Less: Accumulated amortization (1,831) (1,197)
------------ --------
Total intangible assets $ 57,644 $ 31,383
------------ --------
------------ --------
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.
6
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1997
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 SIX MONTHS ENDED
DECEMBER 25, DECEMBER 26, DECEMBER 25, DECEMBER 26,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $ 38,708 $ 35,531 $ 66,053 $ 60,823
Loss before
extraordinary loss (3,039) (1,012) (7,319) (4,178)
Loss per share before
extraordinary loss:
Basic (0.44) (0.11) (1.05) (0.46)
Diluted (0.44) (0.11) (1.05) (0.46)
Shares used in per
share calculation:
Basic 6,937,068 9,031,244 6,940,119 9,033,738
Diluted 6,937,068 9,031,244 6,940,119 9,033,738
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, 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 seven 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
7
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1997
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. 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 December 25, 1997, the Company had borrowed
$2.7 million under the new revolving credit loan and had not yet borrowed
under the new acquisition loan or supplemental line. At December 25, 1997,
the Company had $38.3 million of credit availability under the revolving and
supplemental lines. Additionally, the revolving line 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 $2.2
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 December 25, 1997 and June 30, 1997 consisted of the following
(in thousands):
DECEMBER 25, JUNE 30,
1997 1997
------------ --------
(UNAUDITED)
Revolving line of credit $ 2,719 $ 12,105
Senior subordinated notes 100,000 -
Term and acquisition loans - 66,977
Convertible note 7,384 7,384
Non-compete agreements 1,250 1,395
Other 3,207 2,247
------------ --------
114,560 90,108
Less: Current maturities (1,273) (6,700)
------------ --------
Long-term portion $ 113,287 $ 83,408
------------ --------
------------ --------
8
COLOR SPOT NURSERIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1997
NOTE 8 - LOSS 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. The effect of common equivalent
shares upon earnings per share was antidilutive for all periods presented and
are therefore excluded from the calculations.
9
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 six 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. Three of these
acquisitions occurred during the three months ended December 26, 1996, four
occurred during the third and fourth quarters 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 plans to continue to enter new geographic markets through
acquisitions, expand its presence in existing markets and add new product
lines.
The Company's business is highly seasonal and as a result, the Company
has historically reported losses for the first six months of its fiscal year
and profits for the second six months of its fiscal year. The Company is
reporting higher operating losses during the three and six months ended
December 25, 1997 as compared to the same periods in fiscal 1997 primarily
due to the growth of the Company's operations combined with the inherent
seasonality of its business. 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.
In December 1997, the Company raised $133.5 million, net of fees and
expenses through the sale of additional senior subordinated debt, preferred
stock and warrants which it used to repay existing debt. In December 1997,
the Company also entered into a new loan agreement providing the Company with
$150.0 million in available credit. In connection with these transactions,
the Company incurred a $4.3 million non-cash pre-tax extraordinary charge
related to the write-off of deferred financing fees. 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.
THREE MONTHS ENDED DECEMBER 25, 1997 AS COMPARED TO THE THREE MONTHS ENDED
DECEMBER 26, 1996
NET SALES. Net sales increased $25.5 million, or 194.0%, to $38.7
million for the three months ended December 25, 1997 from $13.2 million
during the three months ended December 26, 1996. This increase is the result
of the acquisition of thirteen businesses plus growth of the Company's
previously existing business.
GROSS PROFIT. Gross profit increased $8.3 million, or 168.4%, to $13.2
million for the three months ended December 25, 1997 from $4.9 million during
the three months ended December 26, 1996. Gross profit as a percentage of
net sales decreased to 34.1% for the three months ended December 25, 1997
from 37.4% for the three months ended December 26, 1996. The reduction in
gross profit percentage was primarily the result of higher production costs
and higher shrinkage and return rates due to below planned sales plus higher
production labor costs as a result of the statutory increase in the minimum
wage.
10
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 $6.0 million, or 118.1%, to $11.1
million for the three months ended December 25, 1997 from $5.1 million in the
three months ended December 26, 1996. As a percentage of net sales, sales,
marketing and delivery expenses decreased to 28.7% for the three months ended
December 25, 1997 from 38.6% for the three months ended December 26, 1996.
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. General and
administrative expenses increased $1.9 million, to $2.6 million for the three
months ended December 25, 1997 from $0.7 million in the three months ended
December 26, 1996. As a percentage of net sales, general and administrative
expenses increased to 6.7% for the three months ended December 25, 1997 from
5.5% for the three months ended December 26, 1996. 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 $0.5
million to $0.6 million for the three months ended December 25, 1997 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. During the three months ended December 25, 1997, 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 $3.0 million to $3.3
million for the three months ended December 25, 1997 from $0.3 million in
three months ended December 26, 1996 as a result of significantly higher
levels of borrowings required to fund acquisitions 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 significantly 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 increased to 55.0% for the three months ended December 25, 1997 from
48.1% for the three months ended December 26, 1996. This increase was
primarily the result of the effect of permanent items due to reductions in
projected book income for the fiscal year ended June 30, 1998.
SIX MONTHS ENDED DECEMBER 25, 1997 AS COMPARED TO THE SIX MONTHS ENDED
DECEMBER 26, 1996 AND THE PRO FORMA SIX MONTHS ENDED DECEMBER 25, 1997
The financial information for the pro forma six months ended December
25, 1997 gives effect to the six acquisitions completed by the Company since
June 30, 1997 as if those acquisitions had been completed on July 1, 1997.
NET SALES. Net sales increased $37.6 million, or 141.3%, to $64.2
million for the six months ended December 25, 1997 from $26.6 million during
the six months ended December 26, 1996. This increase is the result of the
acquisition of thirteen businesses plus growth of the Company's previously
existing business. Net sales for the proforma six months ended December 25,
1997 totaled $66.1 million, representing an increase of $1.9 million ,or
2.9%, over the six months ended December 25, 1997.
11
GROSS PROFIT. Gross profit increased $11.0 million, or 116.3%, to $20.5
million for the six months ended December 25, 1997 from $9.5 million in the
six months ended December 26, 1996. Gross profit as a percentage of net
sales decreased to 32.0% for the six months ended December 25, 1997 from
35.7% for the six months ended December 26, 1996. The reduction in gross
profit percentage was primarily the result of higher production costs and
higher shrinkage and return rates due to below planned sales plus higher
production labor costs as a result of the statutory increase in the minimum
wage. Gross profit for the proforma six months ended December 25, 1997
totaled $20.9 million, representing and increase of $0.3 million, or 1.6%,
over the six months ended December 25, 1997. Gross profit as a percentage of
net sales decreased to 31.6% for the proforma six months ended December 25,
1997.
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 $9.6
million, or 97.9%, to $19.5 million for the six months ended December 25,
1997 from $9.9 million in the six months ended December 26, 1996. As a
percentage of net sales, sales, marketing and delivery expenses decreased to
30.4% for the six months ended December 25, 1997 from 37.0% for the six
months ended December 26, 1996. 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. Sales, marketing and delivery expenses for the
proforma six months ended December 25, 1997 totaled $20.0 million, an
increase of $0.5 million, or 2.5%, over the six months ended December 25,
1997. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 30.3% for the proforma six months ended December 25, 1997.
General and administrative expenses increased $3.4 million, or 174.9%, to
$5.3 million for the six months ended December 25, 1997 from $1.9 million in
the six months ended December 26, 1996. As a percentage of net sales,
general and administrative expenses increased to 8.2% for the six months
ended December 25, 1997 from 7.2% for the six months ended December 26, 1996.
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. General and administrative
expenses for the proforma six months ended December 25, 1997 totaled $5.8
million, an increase of $0.5 million, or 9.5%, over the six months ended
December 25, 1997. As a percentage of net sales, general and administrative
expenses increased to 8.8% for the proforma six months ended December 25,
1997. Amortization of intangible assets increased $0.7 million to $1.0
million for the six months ended December 25, 1997 from $0.3 million in six
months ended December 26, 1996 due to the acquisition of seven companies
during fiscal 1997 and the acquisition of six companies during the first
quarter of fiscal 1998. Amortization of intangible assets for the proforma
six months ended December 25, 1997 increased to $1.1 million. During the six
months ended December 25, 1997, 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 $5.3 million to $5.8
million for the six months ended December 25, 1997 from $0.5 million in six
months ended December 26, 1996 as a result of significantly higher levels of
borrowings required to fund acquisitions and the Company's growing working
capital requirements. Interest expense for the proforma six months ended
December 25, 1997 was $6.2 million.
TAXES. The Company's effective tax rate increased to 50.0% for the six
months ended December 25, 1997 and the proforma six months ended December 25,
1997 from 48.1% for the six months ended December 26, 1996. This increase
was primarily the result of the effect of permanent items due to reductions
in projected book income for the fiscal year ended June 30, 1998.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily to fund seasonal working capital
requirements, capital expenditures and acquisitions.
On December 24, 1997, the Company sold $100.0 million of Notes and $40.0
million of Series A Preferred Stock and Warrants (See Note 6 to Condensed
Notes to Consolidated Financial Statements). 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 due semiannually on June 15
and December 15 commencing June 15, 1998. Dividends on the 13% Series A
Preferred Stock are payable on March 15, June 15, September 15 and December
15 commencing March 15, 1998 and are payable, at the option of the Company,
in additional shares of Series A Preferred Stock.
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 December 25, 1997, the Company had borrowed $2.7
million under the new revolving credit loan and had not yet borrowed under
the new acquisition loan 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
December 25, 1997, the Company had $38.3 million of credit availability under
the revolving and supplemental lines. 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.
Prior to the Offerings, the Company's primary sources of capital were a
revolving line of credit, various term and acquisition loans and the issuance
of Company stock. During the six months ended December 25, 1997 and December
26, 1996, net cash used in operating activities was $14.0 million and $0.1
million, respectively primarily as a result of operating losses and increases
in inventory in advance of the spring selling season. Net cash used in
investing activities during the six months ended December 25, 1997 and
December 26, 1996 was $47.8 million and $8.8 million, respectively. These
amounts related primarily to cash used to acquire six businesses during the
six months ended December 25, 1997 and three businesses during the six months
ended December 26, 1996. The Company spent $7.3 million and $3.2 million on
capital expenditures during the six months ended December 25, 1997 and
December 26, 1996, respectively. The Company anticipates that it will spend
a total of $11.4 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 net proceeds from the Offerings, together
with 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.
13
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
Pursuant to a Registration Statement on Form S-1 (Registration No.
333-37335) that was declared effective December 22, 1997, the Company offered
for sale (the "Units Offering") 40,000 units (the "Units"), each Unit
consisting of 1 share of 13% Series A Cumulative Preferred Stock (the "Series
A Preferred Stock") and 20.625 warrants (the "Warrants"), each representing
the right to purchase one share of common stock, par value $0.001 per share
(the "Common Stock") of the Company, by means of a prospectus dated December
22, 1997. The Units were offered to the public at a price of $1,000 per Unit
and were sold for an aggregate offering price of $40 million. Pursuant to
the same Registration Statement and concurrently with the Units Offering, the
Company offered to the public (the "Notes Offering" and, together with the
Units Offering, the "Offerings") $100 million aggregate principal amount of
10 1/2% Senior Subordinated Notes due 2007 (the "Notes"), which were sold for
an aggregate offering price of $100 million. The aggregate underwriting
discount was $1.6 million for the Units Offering and $3.0 million for the
Notes Offering. Other expenses in connection with the Offerings were
reasonably estimated to be $1.9 million.
The net proceeds of the Offerings were reasonably estimated to be
applied as follows:
Repayment of Debt . . . . . . $133.5 million
Fees and Expenses . . . . . . $6.5 million
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Before the consummation of the Offerings, the sole stockholder of the
Company, CSN, Inc., approved the following actions by unanimous written
consent without a meeting pursuant to Section 228(a) of the Delaware General
Corporation Law on December 1, 1997: (1) approval of an agreement and plan of
merger to merge the Company with CSN, Inc., with the Company being the
surviving corporation; (2) approval of the amended and restated certificate
of incorporation; and (3) approval of the amended and restated bylaws. The
amended and restated certificate of incorporation and the amended and
restated bylaws were filed with the Commission as Exhibits 3.1 and 3.2,
respectively of the Registration Statement and are hereby incorporated by
reference.
14
ITEM 5. OTHER INFORMATION
See Part II, Item 2 for a description of the Company's offering to the
public of Notes, Series A Preferred Stock and Warrants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT DESCRIPTION OF DOCUMENT
1.1 Note Underwriting Agreement between the Registrant and
the Underwriters.
1.2 Unit Underwriting Agreement between the Registrant and
the Underwriters.
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.
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.
(b) REPORTS ON FORM 8-K.
None.
15
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: February 9, 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
16
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
1.1 Note Underwriting Agreement between the Registrant and
the Underwriters.
1.2 Unit Underwriting Agreement between the Registrant and
the Underwriters.
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.
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.
17