UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to ________
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.)
3478 BUSKIRK AVENUE
PLEASANT HILL, CALIFORNIA 94523
- --------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 934-4443
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- -------------------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
13% Series A Cumulative Preferred Stock
- -------------------------------------------------------------------------------
(Title of Class)
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held as
of September 1, 1999 by non-affiliates of the Registrant was $2,267,973. This
calculation assumes that certain parties may be affiliates of the Registrant
and that, therefore, 755,991 shares of voting stock are held by
non-affiliates. As of September 1, 1999, the Registrant had 6,954,807 shares
of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS UNDER THE CAPTIONS "ITEMS 1 AND 2. BUSINESS AND
PROPERTIES," "ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND ELSEWHERE THROUGHOUT THIS
ANNUAL REPORT ON FORM 10-K ("ANNUAL REPORT") OF COLOR SPOT NURSERIES, INC.
(THE "COMPANY") WHICH ARE NOT HISTORICAL IN NATURE ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING
STATEMENTS DEAL WITH THE CURRENT INTENTIONS, BELIEFS AND EXPECTATIONS OF
MANAGEMENT WITH RESPECT TO THE COMPANY'S BUSINESS AND ARE TYPICALLY
IDENTIFIED BY PHRASES SUCH AS "THE COMPANY PLANS," "MANAGEMENT BELIEVES" AND
OTHER PHRASES OF SIMILAR MEANING. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR THE INDUSTRY IN WHICH THE
COMPANY COMPETES TO DIFFER, PERHAPS MATERIALLY, FROM ANTICIPATED RESULTS.
THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS: THE COMPANY'S
SUBSTANTIAL LEVERAGE AND DEBT SERVICE; RESTRICTIONS IMPOSED BY DEBT COVENANTS
AND THE EFFECT OF A DEFAULT ON THE COMPANY'S OPERATIONS; THE ABILITY OF THE
COMPANY TO DEVELOP AND ACQUIRE ADDITIONAL PRODUCTION FACILITIES AND THE
SUCCESSFUL INTEGRATION OF SUCH FACILITIES INTO THE COMPANY'S NETWORK; THE
EFFECT OF GROWTH ON THE COMPANY'S RESOURCES; THE AVAILABILITY OF SUITABLE NEW
MARKETS AND SUITABLE LOCATIONS WITHIN SUCH MARKETS; CHANGES IN THE COMPANY'S
OPERATING OR EXPANSION STRATEGY AND THE DEPENDENCE ON ACQUISITIONS FOR FUTURE
GROWTH; FAILURE TO CONSUMMATE OR SUCCESSFULLY INTEGRATE PROPOSED DEVELOPMENTS
OR ACQUISITIONS; THE UNCERTAINTY OF ADDITIONAL FINANCING TO FUND DESIRED
GROWTH AND OTHER FUTURE CAPITAL NEEDS; WEATHER AND GENERAL AGRICULTURAL
RISKS; SEASONALITY AND THE VARIABILITY OF QUARTERLY RESULTS; THE COMPANY'S
DEPENDENCE ON MAJOR CUSTOMERS SUCH AS HOME DEPOT; REGULATORY CONSTRAINTS AND
CHANGES IN LAWS OR REGULATIONS CONCERNING THE GARDENING INDUSTRY; LABOR LAWS
AND CHANGES IN THE MINIMUM WAGE; THE COMPANY'S SHORT OPERATING HISTORY UNDER
CURRENT MANAGEMENT; SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS;
THE COMPANY'S DEPENDENCE ON LEASED FACILITIES; COMPETITION; LACK OF A MARKET
FOR THE COMPANY'S SECURITIES; PAYMENT OR NONPAYMENT OF DIVIDENDS AND CASH
OUTLAYS FOR INCOME TAXES; RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE AND
ESTIMATED COSTS ASSOCIATED WITH THE COMPANY'S AND ITS MAJOR CUSTOMERS' AND
SUPPLIERS' COMPLIANCE EFFORTS; TRENDS IN THE GARDENING INDUSTRY, THE SPECIFIC
MARKETS IN WHICH THE COMPANY'S PRODUCTION FACILITIES ARE LOCATED OR ARE
PROPOSED TO BE LOCATED, AND THE GENERAL ECONOMY OF THE UNITED STATES; AND
OTHER FACTORS AS MAY BE IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION OR IN THE COMPANY'S PRESS
RELEASES.
FOR A DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- CERTAIN BUSINESS FACTORS" OF THIS ANNUAL REPORT. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS MADE IN,
OR INCORPORATED BY REFERENCE INTO, THIS ANNUAL REPORT OR OTHER FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION, ANY DOCUMENT OR STATEMENT REFERRING
TO THIS ANNUAL REPORT OR THE COMPANY'S PRESS RELEASES.
ii
COLOR SPOT NURSERIES, INC.
INDEX TO FORM 10-K
PAGE
PART I............................................................................................................1
Items 1. and 2. Business and Properties.................................................................1
Item 3. Legal Proceedings..............................................................................9
Item 4. Submission of Matters to a Vote of Security Holders............................................9
PART II..........................................................................................................10
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.........................10
Item 6. Selected Consolidated Financial Data..........................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................26
Item 8. Financial Statements and Supplementary Data...................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........26
PART III.........................................................................................................27
Item 10. Directors and Executive Officers of the Registrant............................................27
Item 11. Executive Compensation........................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management................................34
Item 13. Certain Relationships and Related Transactions................................................35
PART IV..........................................................................................................36
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................36
iii
COLOR SPOT NURSERIES, INC.
ANNUAL REPORT ON
FORM 10-K
FOR YEAR ENDED JUNE 30, 1999
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
OVERVIEW
Color Spot Nurseries, Inc. and its consolidated subsidiaries ("Color
Spot" or the "Company") is one of the largest wholesale nurseries in the
United States, based on revenue and greenhouse square footage. The Company
provides a wide assortment of high quality plants as well as extensive
merchandising services primarily to leading home centers and mass merchants,
and to premium independent garden centers. Currently, the Company distributes
products to over 2,800 retail and 1,000 commercial customers, representing
over 10,000 locations, primarily in the western and southwestern regions of
the United States.
The Company believes it is one of the few wholesale nurseries that
has the scale and distribution capabilities necessary to provide large
volumes of high quality product to its retail customers on a multi-regional
basis. The Company currently produces over 2,500 varieties of live plants,
including bedding plants, shrubs, flowering potted plants, ground cover and
fresh cut Christmas trees. Through its sales force of approximately 270 sales
and merchandising personnel, Color Spot also provides its retail customers
with a broad array of value-added services, such as in-store merchandising,
product display and maintenance, promotional planning and product reordering.
The Company believes that providing these services differentiates it from its
competitors and helps to establish Color Spot as a preferred supplier in the
industry. Color Spot operates 17 nursery production facilities located in
California, Texas, Oregon and Washington and Christmas tree growing fields in
Oregon, Michigan, North Carolina and Tennessee.
HISTORY
Color Spot America, Inc., a predecessor to the Company ("Color Spot
America"), was founded in 1983 and has grown to become one of the largest
bedding plant producers in California. Between 1992 and 1995, net sales and
profitability of the business declined. In September 1995, an investor group
acquired the business. In December 1996, Kohlberg & Company, LLC
("Kohlberg"), acquired a majority interest in the Company. Since that time,
senior management has implemented a number of strategic and operational
programs designed to improve the Company's customer relationships and
financial results. These initiatives included revamping the Company's
merchandising programs, revising its pricing strategies, renewing its focus
on operating efficiencies and restructuring its sales organization. In June
1996, Color Spot embarked on an aggressive acquisition strategy and completed
13 acquisitions between October 1996 and September 1997. During fiscal 1999,
the Company recruited three new members of the senior management team. In
August 1998, Boligala Raju joined the Company as President and Chief
Operating Officer. Prior to joining Color Spot, Mr. Raju was a senior
executive with Sun Gro Horticulture, a division of Hines Horticulture, Inc.
and served as an operational executive with Imperial Nurseries. Mr. Raju has
over 20 years of experience in the nursery business. Richard E. Parker joined
Color Spot as its Chief Executive Officer in June 1999 after holding various
positions at ABT Building Products Corporation ("ABT"), most recently as
Chief Operating Officer. Joseph P. O'Neill joined the Company in June 1999 as
its Chief Financial Officer. Mr. O'Neill was also previously with ABT, most
recently serving as Chief Financial Officer.
1
The Company closed two production facilities in fiscal 1999 to
reduce excess capacity and improve financial performance. The following table
sets forth changes in the number of production facilities in the last three
fiscal years:
FISCAL YEAR
-----------
1997 1998 1999
---- ---- ----
Production facilities at beginning of the period 6 13 19
Production facilities acquired/(closed) 7 6 (2)
---- ---- ----
Production facilities at end of the period 13 19 17
---- ---- ----
---- ---- ----
1996 RECAPITALIZATION. In December 1996, the Company completed a
recapitalization in which KCSN Acquisition Company, L.P. ("KCSN"), an
affiliate of Kohlberg, acquired newly issued shares constituting a majority
interest in the Company and in which the Company repurchased shares of Common
Stock held by management and other shareholders (the "Recapitalization"). See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Certain Business Considerations" and "Item 13. Certain
Relationships and Related Transactions."
1997 OFFERINGS. In December 1997, the Company completed a public
offering (the "1997 Units Offering") of 40,000 Units (the "Units") at $1,000
per Unit, with each Unit consisting of one 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 (the "Common Stock"), of the Company for a total of
825,000 warrants. Concurrently, the Company completed a public offering (the
"1997 Notes Offering" and together with the 1997 Units Offering, the "1997
Offerings") of $100 million aggregate principal amount of 10 1/2% Senior
Subordinated Notes due 2007 (the "Notes"). The net proceeds of the Offering
of $133.5 million were used to repay debt.
INDUSTRY
Gardening is one of the most popular leisure activities in the
United States. According to the 1998-1999 National Gardening Survey conducted
by the Gallup Organization, Inc., 65% of the approximately 103 million U.S.
households participated in some form of gardening in 1998. The Company
believes that the popularity of gardening is likely to increase in coming
years. According to the National Gardening Survey, the demographic group that
spends the most money per capita on gardening is individuals age 50 and
older. This group will be the fastest growing demographic group through the
year 2010, according to the U.S. Census.
Nationwide, retail sales of live plants represented approximately
$20.1 billion of $79.1 billion total lawn and garden sales in 1998 according
to the February/March 1999 Nursery Retailer Magazine. In recent years, the
live plant market has demonstrated consistent growth. The live plant retail
distribution channel has consolidated significantly over the last 10 years,
with sales shifting from local independent nurseries to large home centers
and mass merchants, such as Home Depot, Home Base, Lowe's, Target, Wal-Mart
and Kmart. In 1998, the top 10 nursery retailers represented 16.1% of total
lawn and garden sales of $79.1 billion, according to Nursery Retailer
Magazine. Live plants are attractive product offerings for these retailers,
as each dollar of live plant sales typically generates four dollars of
gardening equipment and other complementary product sales, according to the
National Gardening Survey. Moreover, the relatively low price of most live
plants encourages impulse buying by consumers and makes these products
relatively resistant to economic downturns. Retail consolidation has altered
the nature of the wholesale demand for live plants. Given the sophistication,
size and geographic diversity of the national chains, retail customers prefer
suppliers that can meet demanding delivery schedules, fulfill large volume
requirements and provide a variety of value-added services.
Despite this retail consolidation, the wholesale nursery industry is
still highly fragmented, and is characterized by local, independent
nurseries. The wholesale nursery industry was approximately $8.3 billion in
1997 compared to $6.1 billion in 1992, according to the US Agriculture
Statistical Service -1997 Census of Agriculture, representing a compounded
annual growth rate of approximately 4%. In 1998, the 10 largest and 100
largest of the over 10,000 wholesale nurseries in the United States accounted
for approximately 9% and 18%,
2
respectively, of total wholesale production, according to Greenhouse Grower
and the US Agriculture Statistical Service - 1997 Census of Agriculture. Due
to the fragmented nature of the wholesale nursery industry, the Company
believes the opportunity for a branded, well capitalized and professionally
managed company to lead the consolidation of this industry continues to be
viable and attractive. The Company also competes in the fresh cut Christmas
tree market, a market that generated wholesale revenues nationwide of
approximately $442 million in 1997.
BUSINESS STRATEGY
The Company's long-term goals are to enhance its leadership position
in the wholesale nursery industry in its established markets and to become
the market share leader in targeted new regions nationwide. The Company's
business strategy is designed to meet the increasing demands of retail
customers and consumers, both of which are critical to the Company's success.
The Company's business strategy includes the following key elements:
OFFER BROAD SELECTION OF HIGH QUALITY PRODUCTS
Color Spot provides retail customers and consumers with a broad
selection of high quality live plants. Through frequent deliveries, careful
pre-delivery screening and regular plant maintenance, Color Spot is able to
provide consistently fresh and attractive products. The Company's products
include over 2,500 varieties of live plants, including bedding plants,
shrubs, flowering potted plants, ground cover and fresh cut Christmas trees.
In addition, the Company continually seeks to develop new products through
proprietary retail product lines and creative, easy-to-use packaging. Color
Spot believes it is one of the few wholesale nurseries that can consistently
provide the large volumes of high quality products desired by home centers,
mass merchants and premium independent garden centers.
PROVIDE SUPERIOR CUSTOMER SERVICE
The Company believes that its value-added services differentiate it
from its competitors and allow Color Spot to establish itself as a preferred
supplier to high-volume retail customers. The Company services its retail
customers through a sales force of approximately 270 sales and merchandising
personnel, which the Company believes is the largest service force in the
wholesale nursery industry. The Company's service philosophy encourages each
of its sales merchandisers to effectively function as a garden center
employee, working closely with retail store personnel to anticipate changing
customer demands and to react to local growing conditions. Color Spot
services includes in-store merchandising, product display, plant maintenance,
promotional planning and product reordering. The Company believes that due to
the perishable nature of its products, these services are critical to
maintaining attractive and fresh product displays and retail sales growth.
CAPITALIZE ON LARGE-SCALE AND MULTI-REGIONAL CAPABILITIES
Color Spot believes that home centers and mass merchants prefer to
buy from large wholesale nurseries that can consistently deliver high quality
products to a broad geographic area. Color Spot is one of the largest
wholesale nurseries in the United States and one of the few nurseries that
has the scale and distribution capabilities to support home centers and mass
merchants on a multi-regional basis. The Company's production facilities are
located in diverse geographic regions to attempt to increase distribution
efficiency, better serve customers and minimize the effects of adverse
weather conditions.
3
CONTINUE TO STRENGTHEN RELATIONSHIP WITH LARGE RETAIL CUSTOMERS
The Company has long-standing relationships with many leading home
centers and other mass merchants in the United States. The Company believes
it is the largest supplier of live plants for Home Depot, Home Base, Target,
Wal-Mart and Kmart in the western United States. The Company is involved in
its retail customers' sales and inventory planning processes, allowing Color
Spot to plan its production capacity more effectively to meet its retail
customers' demands. In addition, the Company works with a number of its
high-volume retail customers to develop proprietary products, new packaging
and sales and promotional programs.
GROWTH STRATEGY
The Company's goal is to enhance its leadership position in the
wholesale nursery industry. Color Spot's long-term growth strategy is to
expand its presence in its existing markets and continue to enter new
geographic markets through acquisitions. An important aspect of the Company's
growth strategy is to increase its penetration in targeted markets thereby
enabling the Company to better serve high-volume retail customers, enhancing
its brand name recognition and increasing operating efficiencies. The
Company's growth strategy includes the following three key elements:
EXISTING AND NEW CUSTOMER GROWTH
The Company plans to increase sales by growing with its existing
high-volume retail customers and seeking new relationships with other
high-volume retailers and premium independent garden centers. The Company
strives to increase the number of stores it serves for its existing retail
customers both through serving (i) a larger percentage of its retail
customers' stores and (ii) its retail customers' new stores as those
retailers expand.
ACQUISITIONS
Although the Company closed two production facilities in fiscal 1999
in order to improve financial performance, the Company's long-term goal is to
pursue new acquisitions which either allow the Company to establish a
platform in a new geographic area or "fill-in" the Company's product line and
production capacity in the Company's existing markets. Between October 1996
and September 1997, Color Spot completed 13 acquisitions, adding 13
production facilities, over 1,800 growing acres of production capacity and
over 8.4 million square feet of greenhouse space. The Company's acquisition
strategy is designed to (i) increase its penetration of its existing markets,
(ii) expand into targeted new geographical areas and (iii) add new product
lines. The Company's strategy in entering new geographic areas is to make a
strategic acquisition that can be used as a platform for future expansion in
these new areas. In 1997, the Company made platform acquisitions in the Texas
and Pacific Northwest markets, and believes that additional opportunities
exist to "fill-in" these markets.
PRODUCT LINE EXPANSION
The Company actively seeks new product opportunities, through both
acquisitions and internal development. By offering a greater variety of
products, the Company believes its retail customers are able to reduce their
number of live plant suppliers. Since June 30, 1996, the Company has expanded
its product line into new areas of the wholesale nursery industry, including
shrubs, flowering potted plants and ground cover. In 1997, the Company also
expanded into the fresh cut Christmas tree business in order to utilize
available sales and distribution capacity during the winter months.
4
ACQUISITION STRUCTURE
Contingent upon improvements in its financial performance, the
Company's long-term goal is to pursue new acquisitions which either allow the
Company to establish a platform in a new geographic area or "fill-in" the
Company's product line and production capacity in the Company's existing
markets. In 1997, the Company completed two platform acquisitions, one in
Texas and one in the Pacific Northwest. Following the Texas acquisition, the
Company consummated three fill-in acquisitions in Texas. The Company also
completed three fill-in acquisitions in California during this period. In
addition, the Company entered into the fresh cut Christmas tree business
through the acquisition of two Christmas tree companies in 1997. The
following table summarizes the Company's 13 acquisitions since October 1996.
Primary
Company Location Date Product Line
- ---------------------------------------------------------------------------------------------------
NAB Nurseries Arizona October 1996 Bedding Plants, Foliage
B&C Growers S. California October 1996 Bedding Plants, Ground
Cover
Sunrise Growers S. California November 1996 Bedding Plants
Sunnyside Plants N. California January 1997 Flowering Potted Plants
Lone Star Growers Co. Texas February 1997 Shrubs and Bedding Plants
Signature Trees Oregon March 1997 Christmas Trees
Hi-C Nursery N. California April 1997 Bedding Plants
Plants, Inc. Texas July 1997 Bedding Plants
Peters' Wholesale
Greenhouses, Inc. Texas July 1997 Bedding Plants
Wolfe Greenhouses, LLC Texas July 1997 Flowering Potted Plants
Cracon, Inc. Michigan August 1997 Christmas Trees
Summersun Greenhouse Co. Washington August 1997 Bedding Plants
Oda Nursery, Inc. S. California September 1997 Shrubs
Prior to consummating an acquisition, the Company conducts due
diligence on the targeted company, including legal, environmental, business
and accounting reviews by senior management, the Company's independent
auditors, and outside legal counsel and consultants. The Company typically
finances acquisitions through a combination of cash, promissory notes and, in
certain cases, Common Stock. The Company normally obtains non-compete and
confidentiality agreements from selling owners and may enter into employment
or consulting agreements with key personnel of the seller. The majority of
the Company's recent acquisitions have been consummated in less than 90 days
from the date a letter of intent is executed. There can be no assurance,
however, that the Company will be able to identify and acquire desirable
nursery businesses on terms favorable to the Company or in a timely manner in
the future. Over the near term, the Company does not anticipate pursuing
additional acquisitions but rather intends to focus on further strengthening
of the fundamentals of the Company
INTEGRATION OF ACQUIRED FACILITIES
The Company seeks to increase the sales and profitability of
acquired companies by implementing Color Spot's sales and merchandising
programs and by improving operating efficiencies of the acquired business.
Integration of a platform acquisition is more difficult because it usually
involves creating a new division to be managed by employees of the acquired
company. To maximize efficiencies, the Company centralizes many of the
acquired Company's "back office" functions, including purchasing, insurance,
benefits and most financial functions. Where market conditions dictate, an
acquired company may maintain the historical branch name and use the
Company's name during a transition period in order to minimize customer
disruption. Although the Company has initiated policies to make acquired
production facilities more efficient, there is no assurance that the Company
will be successful in its efforts. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation."
5
PROPERTIES AND FACILITIES
Color Spot currently operates 17 production facilities in five
states. Each production facility consists primarily of growing fields,
greenhouses, warehouse space and distribution areas. The Company leases the
majority of its facilities and believes that most of its leases can be
extended on acceptable terms. The profile of the Company's production
facilities is as follows:
TOTAL TOTAL GREENHOUSE
LOCATION ACREAGE SQUARE FOOTAGE OWNED/LEASED
- -------------------------------------------------------------------------------------------------------------
WESTERN:
Carson, CA 68 450,000 Leased
Chino, CA 41 395,000 Leased
Fallbrook, CA (1) 247 1,660,000 Owned/Leased
Lodi, CA (2) 102 1,073,000 Owned/Leased
Richmond, CA (3) 103 988,000 Leased
Salinas, CA 160 1,600,000 Leased
San Juan Capistrano, CA 243 908,000 Leased
Sunol, CA 57 480,000 Leased
Watsonville, CA (4) 53 392,000 Leased
Phoenix, AZ (5) 56 670,000 Owned/Leased
Mt. Vernon, WA 42 425,000 Leased
Aurora, OR 32 278,000 Leased
SOUTHWESTERN:
Huntsville, TX 52 442,000 Leased
San Antonio, TX 587 1,771,000 Owned
Waco, TX 99 675,000 Owned
Waller, TX 60 160,000 Leased
Walnut Springs, TX 195 693,000 Owned
----- ----------
TOTAL: 2,197 13,060,000
----- ----------
----- ----------
(1) The Fallbrook facility is comprised of five parcels, one of which is owned
and four of which are leased.
(2) The Lodi facility is comprised of three parcels, one of which is owned and
two of which are leased.
(3) The Richmond facility is comprised of five leased parcels.
(4) The Watsonville facility is comprised of three leased parcels.
(5) The Phoenix facility is comprised of two leased parcels, one of which is
owned and one of which is leased.
In addition to its production facilities, the Company also leases
growing fields for Christmas trees in Oregon, Michigan, North Carolina, and
Tennessee.
6
PRODUCTS
The Company is committed to providing its retail customers and
consumers with a broad selection of high quality live plant products. The
Company's products include over 2,500 varieties of plants, including a wide
selection of bedding plants, shrubs, flowering potted plants, ground cover
and fresh cut Christmas trees. Most of the Company's products are sold under
the Color Spot brand name, and include easy-to-read labels containing growing
instructions and a color picture of a mature plant. The Company's products
are sold in various containers and sizes, ranging from flats and packs
containing numerous small plants to single containers containing one plant.
The following is a summary of the Company's product lines:
% of Fiscal Typical Growing
Product 1999 Net Sales Time
- -----------------------------------------------------------------------------------------------------
Bedding Plants 63% 6 to 9 weeks
Flowering Potted Plants 9 8 to 14 weeks
Ground Cover 4 10 to 16 weeks
Shrubs 16 10 to 14 months
Christmas Trees 8 7 to 9 years
----
100%
----
----
Color Spot constantly strives for product innovations, such as new
packaging and "premium" potted flowers. In addition, Color Spot works closely
with its large retail customers to develop proprietary branded products.
CUSTOMERS
During fiscal year 1999 the Company sold products to over 2,800
retail customers as well as to over 1,000 commercial customers, representing
over 10,000 locations. In order to promote efficiency and improve
profitability, the Company anticipates continuing to reduce low-volume
purchasers from its customer base. The majority of the Company's products are
sold to large national retailers, and the Company has long-standing
relationships with many of these retail customers. Color Spot's retail
customer base includes home centers, mass merchants, drug and grocery stores
and premium independent nursery chains. Sales to national retail chains have
increased significantly as these retail customers continue to gain market
share. The following table sets forth a selected list of customers for each
major category of retail customers:
Home Centers Mass Merchants Drug & Grocery Chains Independent Nurseries
- ------------------------------------------------------------------------------------------------------------
Home Depot Fred Meyer Albertson's Cornelius Nurseries
Home Base Kmart H.E.B. Jenco Wholesale Nursery
Lowe's Target Kroger Navlets Nursery
Orchard Supply Hardware Wal-Mart Rite-Aid Drug Stores Star Nursery
Safeway
The Company believes that its ability to consistently provide high
quality products and value-added services on a multi-regional basis provides
significant competitive advantages in serving the retail channel. Color Spot
products typically account for over half of the live plant sales in stores
supplied by the Company. In each region, the Company's goal is to serve every
store operated by each of its retail customers. In fiscal 1999, the Company's
top eight retail customers accounted for approximately 70% of total net
sales. Sales to Home Depot represented 37% of total net sales.
The Company also serves commercial customers, such as landscapers,
golf courses, office parks and hotels. Approximately 5.9% of the Company's
fiscal 1999 net sales was derived from sales to commercial customers.
7
SALES AND SERVICES
The Company offers a broad range of value-added services to help its
retail customers maximize live plant sales and profitability. Color Spot
believes that a well-maintained product display increases sales volume and
encourages impulse buying by consumers. The average shelf life for a majority
of the Company's products is two to three weeks following delivery. Live
plant products, like fresh produce in a supermarket, are unlikely to sell if
they are not fresh and merchandised correctly. Due to the perishable nature
of its products, the Company believes that the services it provides to its
retail customers are critical to maintaining attractive and fresh product
displays. The Company services its retail customers through a sales force of
approximately 270 sales and merchandising personnel. Each sales merchandiser
covers an average of 10 to 12 stores, although sales merchandisers covering
large volume stores may be assigned as few as one to three locations. Each
sales merchandiser typically provides merchandising services to each of
his/her stores four to seven times per week, which may include:
- design and layout of garden shop area
- design and construct display tables and end caps
- create and install point of purchase signage
- implement Color Spot promotional and marketing programs
- clean and maintain fresh product displays
- reorder, receive delivery of and restock merchandise
- secure and maintain prominent floor space
- assist consumers with product and planting information.
The Company believes that its sales merchandisers can provide many
of these services more effectively than the retail customers themselves
because these sales merchandisers have extensive knowledge of, and focus
exclusively on, live plants. Furthermore, the Company's sales merchandisers
receive ongoing training and are compensated on a commission basis as a
percentage of net sales. Consumers often view Color Spot employees as
employees of the retailer, and rely on Color Spot sales merchandisers to
answer questions and give advice about selecting and planting live plants.
In addition to providing merchandising services at the store level,
Color Spot plays an important role in assisting retail customers with their
sales and inventory planning. Typically, a Color Spot senior sales executive
will meet periodically with its retail customer's senior representative to
plan sales of the Company's products based on that retail customer's
anticipated store growth and general product needs. In addition, Color Spot
sales executives meet frequently with retail customers' regional and
corporate buyers to more specifically plan seasonal product needs and sales
forecasts and to incorporate Color Spot's promotional events and pricing
strategies into their plans. At the store level, local Color Spot sales and
merchandising personnel work with in-store personnel to execute sales plans
and continually monitor sales and inventory.
8
COMPETITION
The wholesale nursery industry is highly competitive. Competition is
based principally on product quality, breadth of product offerings, customer
service and price. The Company believes it has differentiated itself from its
competitors through the breadth of its product offerings, multi-regional
capabilities and the value-added services it provides to retail customers.
The wholesale nursery industry is highly fragmented with over 10,000 small
and regional nurseries nationwide. In 1998, the 10 largest and 100 largest
wholesale nurseries in the United States accounted for approximately 9% and
18%, respectively, of total wholesale production. The Company currently
competes directly with a large number of western and southwestern producers.
On a multi-regional basis, the Company also competes with Hines Nurseries,
primarily in bedding plants and shrubs, and Monrovia Nursery Company,
primarily in shrubs. The fresh cut Christmas tree market is also highly
fragmented and, on a regional basis, the Company competes in this market with
Holiday Tree Farms and The Kirk Company.
EMPLOYEES
As of September 1, 1999, the Company had approximately 2,500
full-time employees. During the peak growing season, which runs from February
through June, Color Spot employs a substantial number of seasonal employees,
and total employment generally will grow to over 4,200 employees between
February and June. All of the Company's seasonal employees are paid on an
hourly basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes its relationship with its
employees is good.
GOVERNMENT REGULATION
Color Spot is subject to federal, state and local health, safety and
environmental laws and regulations regarding the production, storage and
transportation of certain of its products and the disposal of its waste.
Certain of the Company's operations and activities, such as water runoff from
its production facilities and the use of certain pesticides are subject to
regulation by the EPA and similar state and local agencies. These agencies
may regulate or prohibit the use of such products, procedures or operations,
thereby affecting the Company's operations and profitability. In addition,
the Company must comply with a broad range of environmental laws and
regulations. Additional or more stringent environmental laws and regulations
may be enacted in the future and such changes could have a material adverse
effect on the Company.
The Company uses reclamation water as one of the sources of water
supply for a few of its production facilities. The use and pricing of
reclamation water, including availability of subsidized water rates, is
governed by federal reclamation laws and regulations. Changes in the law
could have a material adverse effect on the Company.
TRADEMARKS AND TRADE NAMES
The Company is the registered owner of the COLOR SPOT(R) trademark
in the United States. A majority of the Company's products are sold under the
trademark. The Company is also the registered owner of various other
trademarks that are used by certain facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are from time to time subject to
various legal proceedings incidental to its business. Management believes
that the ultimate resolution of these proceedings will not have a material
adverse effect on the Company's financial position or results of operations,
taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK
There is no established trading market for the Company's Common
Stock. At September 1, 1999, the number of holders of record of the Common
Stock was 42.
The Company has not declared or paid dividends on its Common Stock
during the last two fiscal years. The Company plans to retain earnings to
finance future growth and does not anticipate paying dividends on its Common
Stock or any class of capital stock in the foreseeable future. The Company's
credit facilities and corollary agreements prohibit the payment of cash
dividends on Common Stock without the lender's consent. Any future credit
facilities are also likely to prohibit the payment of dividends. Future
declaration or payment of dividends, if any, will be at the sole discretion
of the Board of Directors and will depend on the Company's then current
financial condition, results of operations, capital requirements and other
factors deemed relevant by the Board of Directors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources and - Certain Business Considerations."
WARRANTS
As part of the 1997 Offerings, the Company issued 825,000 warrants
to purchase Common Stock at $.01 per share, subject to certain adjustments.
None of the warrants have been exercised. The warrants are exercisable prior
to 5:00 p.m., New York City time, on December 15, 2008 (the "Expiration
Date"). In the absence of an exercise, the warrants will be automatically
deemed to have been exercised immediately prior to 5:00 p.m. on the
Expiration Date on a cash-less basis. Although the issuance of the warrants
was registered under the Securities Act of 1933, as amended (the "Securities
Act"), there is no established trading market for the warrants.
PREFERRED STOCK
As part of the 1997 Offerings, the Company issued 40,000 shares of
Series A Preferred Stock in December of 1997. Although the issuance of Series
A Preferred Stock was registered under the Securities Act, there is no
established trading market for the Series A Preferred Stock. Through 2002,
13% dividends on the Series A Preferred Stock have been and are expected to
be paid in additional shares of Series A Preferred Stock. In addition, the
Company's credit facilities and corollary agreements associated with the 1997
Offerings restrict the payment of cash dividends on the Series A Preferred
Stock (other than for payment of dividends associated with fractional
shares). Future declaration or payment of dividends, if any, will be at the
discretion of the Board of Directors and will depend on the Company's then
current financial condition, results of operations, capital requirements and
other factors deemed relevant by the Board of Directors. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" and "-Certain Business
Considerations."
10
RECENT SALES OF UNREGISTERED SECURITIES
In fiscal 1999, the Company issued stock options to purchase 540,000
shares of Common Stock under the 1997 Stock Option Plan, with a weighted
average exercise price of $3.42 per share. The options were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The Company commenced operations on September 8, 1995 through the
purchase of certain assets of its predecessor in a transaction accounted for
under the purchase method of accounting. The Company's predecessor commenced
operations on March 1, 1993 through the purchase of certain assets in a
transaction accounted for under the purchase method of accounting. On
December 31, 1996, KCSN acquired control of the Company through a series of
stock transactions accounted for as a recapitalization. As a result of the
recapitalization and several acquisitions made by the Company, the financial
information presented below is not comparable in certain respects.
The financial information of the Company presented below as of June
30, 1999, 1998 and 1997 and for the fiscal year then ended is derived from
the audited financial statements of the Company appearing elsewhere in this
Form 10-K. The financial information of the Company's predecessor as of
September 8, 1995 and December 31, 1994 and for the period from January 1,
1995 through September 8, 1995 and the year ended December 31, 1994, is
derived from the audited financial statements of the Company's predecessor.
The financial information as of December 31, 1993 and for the period from
February 28, 1993 through December 31, 1993 is derived from the underlying
records of the Company's predecessor, which in the opinion of management,
contains all adjustments (including those of a normal recurring nature)
necessary to present fairly the financial position and results of operations
of the Company's predecessor as of and for the periods presented.
11
THE COMPANY PREDECESSOR
---------------------------------------------- ------------------------------------------
9/8/95 1/1/95
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH THROUGH YEAR ENDED
6/30/99 6/30/98(3) 6/30/97(2) 6/30/96(1) 9/8/95 12/31/94
---------------------------------------------- ------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales............................ $206,076 $187,731 $113,400 $51,995 $28,991 $39,411
Gross profit ........................ 88,283 51,517 49,374 24,310 11,491 14,995
Sales, marketing and delivery expenses 46,252 50,033 31,168 15,495 10,488 13,459
General and administrative expenses.. 25,610 13,338 7,300 2,886 3,659 3,986
Amortization of intangible assets.... 1,727 2,308 990 94 291 424
Termination of Management fee - 2,400 - - - -
Income (loss) from operations ....... 14,694 (16,562) 9,916 5,835 (2,947) (2,874)
Interest expense..................... 16,464 13,405 4,179 687 2,576 3,170
Other expense (income), net.......... 355 (285) (148) 91 (38) (97)
Income tax provision (benefit)....... (727) (10,514) 2,830 2,269
Income before extraordinary gain
(loss)........................... (1,398) (19,168) 3,055 2,788 (5,485) (5,947)
Cumulative effect of change in
accounting principles............ (1,718) - - - - -
Extraordinary gain (loss)............ (1,018) (2,792) (215)
------ ------- ----- -------- --------- --------
Net income (loss).................... $(4,134) $(21,960) $2,840 $2,788 $(5,485) $(5,947)
------ ------- ----- -------- --------- --------
------ ------- ----- -------- --------- --------
Per share amounts (4)
Income (loss) before cumulative
effect of change in accounting
principles and extraordinary
loss-basic......................... $(1.22) $(3.25) $0.49 $0.50 - -
------ ------- ----- -------- --------- --------
------ ------- ----- -------- --------- --------
Income (loss) before cumulative effect
of change in accounting principles
and extraordinary loss-
basic diluted..................... $(1.22) $(3.25) $0.45 $0.50 - -
------ ------- ----- -------- --------- --------
------ ------- ----- -------- --------- --------
Dividends per share.................. - - $0.22 - - -
------ ------- ----- -------- --------- --------
------ ------- ----- -------- --------- --------
OPERATING DATA:
EBITDA(5)............................ $21,899 $(10,585) $13,357 $6,433 $(2,022) $(1,619)
Cash flows from operating
activities......................... 15,216 (25,865) (4,093) (3,485) (5,220) (2,720)
Cash flows from investing
activities......................... (2,176) (54,047) (58,234) (9,660) (260) (609)
Cash flows from financing
activities......................... (13,864) 79,394 64,388 13,846 5,587 3,715
Depreciation and amortization........ 7,205 5,977 3,441 598 925 1,255
Capital expenditures................. 2,176 13,508 6,181 1,529 260 668
Ratio of earnings to fixed
charges (6)........................ - - 2.10 4.68 - -
Number of production
facilities (7)..................... 17 19 13 6 6 6
BALANCE SHEET DATA (END OF PERIOD):
Working capital...................... $20,184 $26,809 $14,161 $6,136 $(29,722) $(21,435)
Total assets......................... 181,754 210,350 133,417 33,219 22,695 24,554
Long-term debt, excluding current
portion............................ 123,413 135,044 83,408 6,785 1,430 4,249
Stockholders' equity (deficit)....... (18,489) (7,491) 4,075 12,535 (16,090) (10,605)
- ------------------------
(1) Includes the financial results of Barcelo's Plant Growers from March 1996.
(2) Includes the financial results of NAB Nursery and B&C Growers from October
1996, Sunrise Growers from November 1996, Sunnyside Plants from January
1997, Lone Star Growers Co. from February 1997, Signature Trees from March
1997 and Hi-C Nursery from April 1997.
(3) Includes the financial results of Plants, Inc., Peters' Wholesale
Greenhouses, Inc. and Wolfe Greenhouses, LLC from July 1997, Cracon, Inc.
and Summersun Greenhouse Co. from August 1997 and Oda Nursery, Inc. from
September 1997. -
(4) Per share amounts exclude extraordinary loss which would decrease the basic
diluted share amounts by $0.15, $0.40 and $0.03 for the years ended June
30, 1999, 1998 and 1997, respectively.
(5) EBITDA represents income before interest expense, depreciation and
amortization expense, the provision for income taxes, other (income)
expense, changes in accounting principles and extraordinary items. While
EBITDA is not intended to represent cash flow from operations as defined by
GAAP and should not be considered as an indicator of operating performance
or an alternative to cash flow (as measured by GAAP) as a measure of
liquidity, it is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Other companies may
define EBITDA differently, and as a result, those measures may not be
comparable to the Company's EBITDA. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." EBITDA for the
year ended June 30, 1998 includes $2,400,000 of non-recurring charges.
(6) For purposes of computing a ratio of earnings to fixed charges, "earnings"
consist of income (loss) before provision for income taxes plus fixed
charges. "Fixed charges" consist of interest on all indebtedness,
amortization of deferred debt financing costs and one-third of rental
expenses (the portion deemed representative of the interest factor).
Earnings were insufficient to cover fixed charges by $5,947,000,
$5,485,000, $29,682,000 and $2,125,000 for the year ended December 31,
1994, the period from January 1, 1995 through September 8, 1995, and the
years ended June 30, 1998 and 1999, respectively.
(7) Facilities include owned and leased properties as of the end of each
period, excluding Christmas tree fields.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere
in this Annual Report. This Annual Report contains forward-looking
statements. Discussions containing such forward-looking statements may be
found in the material set forth below and under Items 1 and 2. "Business and
Properties," as well as in this Annual Report generally. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation the risk factors set forth in this Item 7 under the heading
"Certain Business Considerations."
OVERVIEW
The Company is one of the largest wholesale nurseries in the United
States, based on revenue and greenhouse square footage. The Company sells a
wide assortment of high quality bedding plants, shrubs, flowering potted
plants, ground cover and Christmas trees as well as provides extensive
merchandising services primarily to leading home centers and mass merchants.
The Company has grown rapidly, primarily through acquisitions completed prior
to September 1997, generating net sales of $206.1 million in fiscal 1999, as
compared to $187.7 million in fiscal 1998 and $113.4 million in fiscal 1997.
The percentage distribution of net sales in fiscal 1999, fiscal 1998 and
fiscal 1997 by product category was as follows:
Fiscal Year Ended June 30,
1999 1998 1997
--------------------------------
Bedding Plants 63% 63% 67%
Flowering Potted Plants 9% 12% 12%
Shrubs 16% 15% 13%
Ground Cover 4% 4% 2%
Christmas Trees 8% 6% 6%
The Company commenced operations on September 8, 1995 after
purchasing certain assets of its predecessor. Management of the Company
immediately implemented a number of strategic and operational programs
designed to improve the Company's customer relationships and financial
results. These initiatives included revamping the Company's merchandising
programs, decentralizing its operations, revising its pricing strategies,
renewing its focus on operating efficiencies and restructuring its sales
organization.
After these strategic initiatives began to impact the Company's
operating results, Color Spot embarked on an aggressive acquisition strategy.
In fiscal 1997 and in the first quarter of fiscal 1998, the Company completed
13 acquisitions. These acquisitions resulted in the Company's expansion into
several states, including Texas, Washington, Oregon and Michigan, and the
Company's entry into the fresh cut Christmas tree business. The Company paid
for these acquisitions through a combination of cash, promissory notes and
common stock.
The Company has implemented several initiatives to improve its
operating results and strengthen its financial position in fiscal 1999. The
Company hired new executives to bolster the current management team,
implemented a more conservative sales and production plan, and adjusted its
production process to better match supply and demand while maintaining high
quality customer service. In fiscal 1999, the Company's sales increased to
$206 million and it generated income from operations of $14.7 million. The
Company also increased its focus on facility capacity optimization and
corking capital management. As a result of these efforts, as of June 30,
1999, the Company's operating income improved by $31.3 million, its working
capital decreased by $6.6 million and its cash provided by operating
activities increased by $41.1 million as compared to prior year.
13
The Company's business is highly seasonal and the Company has
historically reported operating losses in its first and second 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 recognized an operating loss of $16.6 million during
fiscal 1998 primarily due to the effects of the severe weather conditions
associated with the weather phenomena known as "El Nino", overproduction in
the Company's western division, acquisition integration difficulties, and
certain nonrecurring charges. Sales of the Company's products are highly
dependent upon general weather conditions. Cold and wet weather, particularly
on weekends, tends to curtail gardening activities and results in a reduction
in demand for the Company's products. As a result of "El Nino", seasonal
rainfall amounts in the Company's key selling regions ranged from 150 to 200%
of normal levels. The severity of the weather particularly in the Company's
western division from January through April was greater than the Company's
expectations, which resulted in high levels of product shrinkage and returns.
Also, the Company increased production in anticipation that sales in May and
June would be higher than normal due to promotional sales programs with its
key customers and a delay in the start of the peak gardening season. Sales in
May and June of 1998 fell significantly short of expectations for the
Company's western division resulting again in high levels of shrinkage and
returns. The severe impact of weather and overproduction was isolated in the
Company's western division which primarily sells bedding products that have
shorter growing periods and shelf lives and consequently are more subject to
weather related production and selling risks. In addition, during fiscal
1998, the Company incurred a $4.3 million non-cash pre-tax extraordinary
charge related to the write-off of deferred financing fees, 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.
Color Spot's designation as an agricultural company provides
favorable tax treatment for a majority of its operations. While the Company's
financial statements include tax expense, the Company has historically not
paid income taxes. Agricultural companies are generally permitted to
calculate taxable income on a cash basis. As a result of the Company's
growth, this treatment has caused the Company to generate significant net
operating losses since its inception and accumulate a large net operating
loss carry-forward. The Company's effective tax rate was 34.2% in fiscal
1999, 35.4% in fiscal 1998 and 48.0% in fiscal 1997 which was higher than the
U.S. statutory rate of 34% due to state tax provisions and other California
tax limitations on the use of net operating loss carry-forwards. As of June
30, 1999, the Company had a net operating loss carry-forward of approximately
$65 million for federal income tax purposes and $25 million for state income
tax purposes.
14
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
consolidated income statement items as a percentage of net sales:
Fiscal Year Fiscal Year Fiscal Year
Ended ended ended
6/30/99 6/30/98 6/30/97
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 57.2 72.6 56.5
Gross profit 42.8 27.4 43.5
Sales, marketing and delivery expenses 22.4 26.7 27.5
General and administrative expenses 12.4 7.1 6.4
Amortization of intangible assets 0.8 1.2 0.9
Termination of management fee and other 0.0 1.3 0.0
Income (loss) from operations 7.1 (8.8) 8.7
Interest expense 8.0 7.1 3.7
Other expense (income), net 0.1 (0.2) (0.1)
Income (loss) before income tax benefit, cumulative effect (1.0) (15.7) 5.2
of change in accounting principle and extraordinary loss
Income tax benefit 0.3 5.6 2.5
Income (loss) before cumulative effect of change in accounting
principle and extraordinary loss 0.7 (10.1) 2.7
Cumulative effect of change in accounting principle 0.8 0.0 0.0
Extraordinary loss 0.5 1.5 0.2
Net Income (loss) (2.0)% (11.6)% 2.5%
---------------------------------
FISCAL YEAR ENDED JUNE 30, 1999 ("FISCAL 1999") AS COMPARED TO FISCAL YEAR
ENDED JUNE 30, 1998 ("FISCAL 1998")
NET SALES. Net sales increased $18.4 million, or 9.8%, to $206.1
million in fiscal 1999 from $187.7 million in fiscal 1998. This increase was
primarily attributable to more accurately matching supply and demand,
resulting in fewer returns. The Company also experienced changes in product
pricing during the year representing approximately 2.1% of the increase.
GROSS PROFIT. Gross profit increased $36.8 million to $88.3 million
in fiscal 1999 from $51.5 million in fiscal 1998. Gross profit as a
percentage of net sales increased to 42.8% in fiscal 1999 from 27.4% in
fiscal 1998. The significant increase in gross profit percentage was the
result of a substantial decrease in the write-off of excess inventory, lower
production labor costs due to headcount reductions, and a $7.0 million
decrease in product returns. These decreases were accomplished through
improved production planning and control combined with management's
initiatives to better match supply with demand.
OPERATING EXPENSES. Sales, marketing and delivery expenses decreased
$3.7 million to $46.3 million in fiscal 1999 from $50.0 million in fiscal
1998. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 22.5% in fiscal 1999 from 26.7% in fiscal 1998. This decrease as
a percentage of net sales was primarily due to a $3.4 million reduction in
distribution expenses as a result of improved delivery efficiencies. These
efficiencies were generated by reducing the movement of inventory between
facilities, increasing the minimum order size, optimizing cubing, better
management of truck maintenance, and a change in the fleet structure whereby
more trucks are rented rather than leased resulting in reduced trucks and
employees. These initiatives were offset by an increase in expense related to
volume increases. General and administrative expenses increased $12.3
million, or 92.5%, to $25.6 million
15
in fiscal 1999 from $13.3 million in fiscal 1998. As a percentage of net
sales, general and administrative expenses increased to 12.4% in fiscal 1999
from 7.1% in fiscal 1998. This increase is primarily the result of increased
hiring and a revised compensation structure for key management and other
employees to support the Company's operations, as well as a $3.7 million
pre-tax charge related to closure or modification to certain facilities,
employee severance and relocation, and other consulting costs associated with
the new management team's ongoing review of the Company's operations.
Amortization of intangible assets decreased $0.6 million to $1.7
million in fiscal 1999 from $2.3 million in fiscal 1998 due to the write-off
of unamortized organization costs during the Company's first fiscal quarter.
The termination of management fees in fiscal 1998 related to the termination
of a Fee Agreement for certain management services.
INTEREST EXPENSE. Interest expense increased $3.1 million to $16.5
million in fiscal 1999 from $13.4 million in fiscal 1998 as a result of
higher average levels of borrowings throughout fiscal 1999 that were required
to fund operating losses incurred in fiscal 1998 and the first two fiscal
quarters of fiscal 1999.
TAXES. While the Company's financial statements include tax expense
or benefit, the Company has historically not paid income taxes. Agricultural
companies are generally 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 different than the U.S. statutory rate
of 34%. The difference between the Company's effective tax rate and the U.S.
statutory rate is due to state tax provisions and other California tax
limitations on the use of net operating loss carryforwards. The Company's
effective tax benefit decreased to 34.2% in fiscal 1999 from a provision rate
of 35.4% in fiscal 1998, primarily as a result of the impact of permanent
items on lower pretax loss.
FISCAL YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") AS COMPARED TO FISCAL YEAR
ENDED JUNE 30, 1997 ("FISCAL 1997")
NET SALES. Net sales increased $74.3 million, or 65.5%, to $187.7
million in fiscal 1998 from $113.4 million in fiscal 1997. This increase was
primarily attributable to increased sales volume resulting from the
acquisition of seven companies in fiscal 1997 and six companies in fiscal
1998.
GROSS PROFIT. Gross profit increased $2.1 million to $51.5 million
in fiscal 1998 from $49.4 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 27.4% in fiscal 1998 from 43.5% in
fiscal 1997. The significant reduction in gross profit percentage was the
result of higher production costs and high product shrinkage and return rates
due to below planned sales. Gross profit percentage was adversely affected by
the impact of over-production combined with the adverse weather conditions of
"El Nino." Additionally, gross profit percentage declined due to higher
production labor costs as a result of the statutory increase in the minimum
wage and higher costs resulting from difficulties faced in fully integrating
the operations of acquired companies. Finally, management believes that its
return policy was applied too liberally in fiscal 1998, resulting in credits
that were either issued prematurely or for traditionally non-returnable items.
OPERATING EXPENSES. Sales, marketing and delivery expenses increased
$18.9 million to $50.0 million in fiscal 1998 from $31.2 million in fiscal
1997. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 26.7% in fiscal 1998 from 27.5% in fiscal 1997. This decrease as
a percentage of net sales was primarily due to lower per unit distribution
costs associated with newly acquired product lines. General and
administrative expenses increased $6.0 million, or 82.7%, to $13.3 million in
fiscal 1998 from $7.3 million in fiscal 1997. As a percentage of net sales,
general and administrative expenses increased to 7.1% in fiscal 1998 from
6.4% in fiscal 1997. This increase is the result of additional general and
administrative resources needed to support the Company's growth combined with
certain operating inefficiencies as a result of difficulties in fully
integrating the operations of acquired businesses. Amortization of intangible
assets increased $1.3 million to $2.3 million in fiscal 1998 from $1.0
million in fiscal 1997 due to the Company's acquisitions in fiscal 1997 and
fiscal 1998.
16
INTEREST EXPENSE. Interest expense increased $9.2 million to $13.4
million in fiscal 1998 from $4.2 million in fiscal 1997. This increase
resulted from increased levels of debt required to fund acquisitions, capital
expenditures and operating losses.
TAXES. The effective tax benefit decreased to a rate of 35.4% in
fiscal 1998 from a provision rate of 48.0% in fiscal 1997, primarily as a
result of the Company conducting more business outside of the State of
California, where the Company has state tax limitations on the use of its net
operating loss carryforwards.
FISCAL 1997 AS COMPARED TO THE PERIOD FROM SEPTEMBER 8, 1995 THROUGH JUNE 30,
1996 ("FISCAL 1996")
NET SALES. Net sales increased $61.4 million, or 118.1%, to $113.4
million in fiscal 1997 from $52.0 million in fiscal 1996. This increase was
primarily attributable to increased sales volume with existing customers,
sales to new retailers, new product introductions, the acquisition of seven
companies in fiscal 1997 and the fact that fiscal 1997 was 70 days longer
than fiscal 1996. Net sales increased $56.7 million, or 100.0%, in fiscal
1997 over net sales for the 12 months ended June 30, 1996 for the Company and
its predecessor.
GROSS PROFIT. Gross profit increased $25.1 million to $49.4 million
in fiscal 1997 from $24.3 million in fiscal 1996. Gross profit as a
percentage of net sales decreased to 43.5% in fiscal 1997 from 46.8% in
fiscal 1996. This decrease reflects the fact that fiscal 1997 was 70 days
longer than fiscal 1996. The 70 days not included in fiscal 1996 include the
months of July and August in which the Company has historically generated
lower net sales and gross margins. The Company believes that gross margins
for fiscal 1997 were comparable to the gross margins for the 12 month period
ended June 30, 1996.
OPERATING EXPENSES. Sales, marketing and delivery expenses increased
$15.7 million to $31.2 million in fiscal 1997 from $15.5 million in fiscal
1996. As a percentage of net sales, sales, marketing and delivery expenses
decreased to 27.5% in fiscal 1997 from 29.8% in fiscal 1996. This decrease as
a percentage of net sales was primarily due to lower per unit distribution
costs associated with newly acquired product lines. General and
administrative expenses increased $4.4 million, or 152.9%, to $7.3 million in
fiscal 1997 from $2.9 million in fiscal 1996. As a percentage of net sales,
general and administrative expenses increased to 6.4% in fiscal 1997 from
5.6% in fiscal 1996. This increase is primarily attributable to the fact that
fiscal 1997 was 70 days longer than fiscal 1996 and to increased costs
relating to supporting the Company's growth, including an increase in
corporate personnel. In fiscal 1998, the Company paid $2.0 million related to
the termination of a Fee Agreement for certain management services provided
by Kohlberg Amortization of intangible assets increased $0.9 million to $1.0
million in fiscal 1997 from $0.1 million in fiscal 1996 primarily as a result
of the Company's acquisitions in fiscal 1997.
INTEREST EXPENSE. Interest expense increased $3.5 million to $4.2
million in fiscal 1997 from $0.7 million in fiscal 1996. This increase
resulted primarily from increased borrowings made to fund acquisitions and to
effect the re-capitalization on December 31, 1996.
TAXES. The effective tax rate increased to 48.0% in fiscal 1997 from
44.8% in fiscal 1996, primarily as a result of a greater impact of the state
tax limitations on the use of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999, fiscal 1998, and fiscal 1997, net cash provided
by (used in) operations was $15.2 million, $(25.9) million and $(4.1)
million, respectively. The improvement in fiscal 1999 is the result of
improved operating performance and significantly reduced working capital
requirements. Net cash used to purchase businesses during fiscal 1998 and
fiscal 1997 was $40.5 million and $52.1 million, respectively. The Company
made $2.2 million, $13.5 million and $6.2 million in capital expenditures in
fiscal 1999, fiscal 1998, and fiscal 1997, respectively. Approximately $0.2
million and $8.3 million of the expenditures during fiscal 1999 and fiscal
1998, respectively, were for capital expansion projects. Capital expansion
projects increase the productive capabilities of the Company and typically
include grading
17
of new land, purchasing and building new greenhouses and related
improvements, such as the installation of ventilation and irrigation systems.
Fiscal 1999. On October 15, 1998, the Company entered into a Loan
and Security Agreement with Fleet Capital Corporation, as agent (the "Fleet
Loan Agreement"), and the Company's prior credit facility was terminated and
repaid in full. The Fleet Loan Agreement provides a $70 million revolving
credit facility, which is subject to certain borrowing base limitations based
on a percentage of eligible inventory and eligible accounts receivable. The
Fleet Loan Agreement is secured by substantially all of Color Spot's assets.
At June 30, 1999, the Company had borrowed $12.5 million under the Fleet Loan
Agreement and had $25.2 million of remaining availability. Interest under the
Fleet Loan Agreement accrues at a variable rate equal to Prime plus 1.00% or
LIBOR plus 3.00%. In addition, to the extent that Color Spot's borrowings
exceed certain borrowing base limitations during the period from November 1
through April 30, the interest rates increase by an additional 0.50%. The
Fleet Loan Agreement terminates on October 15, 2001. The Company believes
that the cash available from operations and the Fleet Loan Agreement will be
sufficient to finance working capital requirements and capital expenditures
over the next 12 months.
Fiscal 1998. On December 24, 1997, the Company raised $133.5
million, net of fees and expenses from the sales of 10 1/2% Senior
Subordinated Notes (the "Notes"), 13% Series A Preferred Stock and warrants
which it used to repay existing indebtedness (See Notes 10 and 13 to 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 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, and June 15, 1998 the Company issued
1,153 shares and 1,351 shares, respectively, of Series A Preferred Stock as
payment of such dividends.
Also on December 24, 1997, the Company entered into a loan agreement
with Credit Agricole Indosuez and a syndicate of banks, which provided 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. Borrowings under
the Indosuez Loan Agreement were secured by substantially all of the
Company's assets. On June 30, 1998 the Company had borrowed $24.0 million
under the Indosuez Loan Agreement and had not yet borrowed under the
acquisition term loan facility or supplemental line. At June 30, 1998, the
Company had $45.1 million of total remaining credit availability under the
revolving credit facility and supplemental lines. At March 26, 1998, and June
30, 1998, the Company was in default of certain of its financial covenants
but received a waiver of such non-compliance for the March 1998 and June 1998
test periods. The facility was terminated by the Company on October 15, 1998.
Fiscal 1997. On December 31, 1996, in connection with the
recapitalization (See Note 1 to Notes to Consolidated Financial Statements),
the Company entered into a loan agreement with Credit Agricole Indosuez and a
syndicate of banks. The Company borrowed $37.3 million under the loan
agreement and purchased approximately 6.1 million shares of common stock for
$37.1 million in cash and a note payable in the original principal amount of
$7.1 million. In addition, the Company sold approximately 3.6 million shares
of newly issued common stock for an aggregate purchase price of $22.3 million
and repaid $14.1 million of indebtedness. The Company also declared a
dividend of approximately $1.5 million to its stockholders immediately prior
to the recapitalization.
Following the recapitalization and during fiscal 1997, the Company
sold an additional 1.7 million shares of common stock for an aggregate
purchase price of $12.1 million.
YEAR 2000 COMPLIANCE PROGRAM
YEAR 2000 PROBLEM
The Year 2000 problem is the result of computer programs being
written using two digits (rather that four) to define the applicable year.
Any of the Company's programs that have time-sensitive software or equipment
that has time-sensitive embedded components may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The Company also may be vulnerable to
other companies' Year 2000
18
issues. The Company's current estimates of the impact of the Year 2000
problem on its operations and financial results do not include costs and time
that may be incurred as a result of any vendors' or customers' failure to
become Year 2000 compliant on a timely basis. See "-- Certain Business
Considerations -- Year 2000."
STATE OF READINESS
During fiscal 1998, Color Spot developed and began to implement a
Year 2000 compliance plan to ensure that its business is not interrupted by
the year 2000 problem. In its compliance plan, the Company identified seven
basic operational areas that have been and will continue to be examined:
-- financial systems, such as general ledger, accounts receivable
and payable, inventory, order entry, sales force automation and
purchasing
-- computer hardware, including major hardware to operate the
financial systems and related operating software
-- operational and support systems, such as telephone equipment,
greenhouse automation and watering systems
-- secondary computer systems, including custom built software
-- customers' compliance efforts, including identifying whether the
Company's high-volume customers are Year 2000 compliant
-- suppliers' compliance efforts, including whether significant
suppliers are Year 2000 compliant
-- service vendors' compliance efforts, including identifying
significant service vendors and whether they are Year 2000
compliant.
The Company tested its primary financial systems and hardware and
determined that they are Year 2000 compliant. The Company has completed
program changes related to the Year 2000 on its divisional financial systems
and certain of its operational and support systems and secondary systems and
will continue testing these systems through the end of the year. See "--Cost
of Compliance and Risks of Non-Compliance." With respect to its customers,
the Company has contacted, or has been contacted by, its major customers and
determined that such customers are Year 2000 compliant.
COST OF COMPLIANCE AND RISKS OF NON-COMPLIANCE
Color Spot believes that the cost of ensuring Year 2000 compliance
for its own financial systems, computer hardware, operational and support
systems and secondary computer systems will be less than $50,000 ($25,000 of
which was incurred in fiscal 1999 and $20,000 of which was incurred in fiscal
1998). Such costs have been expensed as incurred. The Company continues to
bear some risk, however, related to the Year 2000 issue and could be
adversely affected if other entities affiliated with the Company do not
appropriately address their own Year 2000 compliance issues. Although the
Company believes that its major customers are Year 2000 compliant, the
Company is still in the process of reviewing the compliance programs of
suppliers and service vendors. The Company's current estimates of the impact
of the Year 2000 problem on its operations and financial results do not
include costs and time that may be incurred as a result of other companies'
failure to become Year 2000 compliant on a timely basis. There can be no
assurance that such other companies will achieve Year 2000 compliance or that
any conversions by such companies to become Year 2000 compliant will be
compatible with the Company's computer system. The inability of the Company
or any of its principal vendors or customers to become Year 2000 compliant in
a timely manner could have a material adverse effect on the Company's
financial condition or results of operation.
19
CONTINGENCY PLANS
If the Company's suppliers and service vendors are not Year 2000
compliant, the Company may have to arrange for alternative sources of supply
and stockpiling raw materials in the fall of 1999 in preparation for the Year
2000 growing season. Because most of the Company's raw material purchases are
made prior to year-end, the Company does not expect that its contingency
plans will have a material effect on cash flows.
CERTAIN BUSINESS CONSIDERATIONS
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
On October 15, 1998, the Company entered into the Fleet Loan
Agreement and the Indosuez Loan Agreement was terminated and repaid in full.
The Fleet Loan Agreement provides a $70.0 million revolving credit facility.
There can be no assurance that the Company will be able to generate
sufficient cash flows and financial goals to comply with debt covenants in
the future. As of June 30, 1999, the Company had $123.4 million of
consolidated long-term indebtedness. The Company is highly leveraged.
The Company and its subsidiaries may incur additional indebtedness
in the future, subject to certain limitations contained in the instruments
governing its indebtedness and capital stock. Accordingly, the Company has
significant debt service obligations. The Company's debt service obligations
will have important consequences to holders of the Notes, the Series A
Preferred Stock, the Common Stock and the Warrants, including the following:
(i) a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for operations,
acquisitions, future business opportunities and other purposes and increasing
the Company's vulnerability to adverse general economic and industry
conditions; (ii) the Company's leveraged position may increase its
vulnerability to competitive pressures; (iii) the financial covenants and
other restrictions contained in the Fleet Loan Agreement, the Indenture and
the Certificate of Designation for the Series A Preferred Stock will require
the Company to meet certain financial tests and will restrict its ability to
borrow additional funds, to dispose of assets or to pay cash dividends on, or
repurchase, preferred or common stock; and (iv) funds available for working
capital, capital expenditures, acquisitions and general corporate purposes
may be limited.
The Company's ability to make scheduled principal and interest
payments or to refinance its indebtedness to pay dividends and make
redemption payments on the Series A Preferred Stock and to pay dividends on
the Common Stock depends on future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. There can be no assurance, however, that the Company's business will
continue to generate sufficient cash flow from operations in the future to
service its debt, pay dividends, make redemption payments and fund necessary
capital expenditures. See "Liquidity and Capital Resources" in this Item 7.
If unable to do so, the Company may be required to refinance all or a portion
of its existing debt, including the Notes, sell assets or obtain additional
financing. There can be no assurance that any such refinancing or that any
such sale of assets or additional financing would be possible on terms
reasonably favorable to the Company, or at all. In addition, unforeseen
problems, delays, expenses and difficulties as well as changes in economic
and regulatory or competitive conditions may lead to cost increases that
would make the Company's current cash flow and borrowings under the Fleet
Loan Agreement insufficient to meet the Company's capital needs. See
"--Future Capital Needs; Uncertainty of Additional Financing."
RESTRICTIONS IMPOSED BY FLEET LOAN AGREEMENT AND EFFECT OF DEFAULT
The Fleet Loan Agreement restricts, among other things, the
Company's ability to incur additional indebtedness, incur liens, pay or
declare dividends, enter into any transaction not in its usual course of
business, guarantee or otherwise become in any way liable with respect to the
obligations of another party or entity, merge or consolidate with another
person or sell or transfer any collateral (except for the sale of inventory
in the ordinary course of the Company's business). A breach of any of these
covenants could result in a default under the Fleet Loan Agreement. Upon the
occurrence of an Event of Default (as defined in the Fleet Loan Agreement),
the lenders could elect to declare all
20
amounts outstanding under the Fleet Loan Agreement, together with accrued
interest, to be immediately due and payable. If the Company were unable to
pay those amounts, the lenders could proceed against the collateral granted
to them to secure that indebtedness. If the Fleet Loan Agreement indebtedness
were to be accelerated, there can be no assurance that the assets of the
Company would be sufficient to repay the indebtedness in full and other
indebtedness of the Company. Substantially all of the assets of the Company
have been pledged as security under the Fleet Loan Agreement. The
restrictions described above, in combination with the leveraged nature of the
Company, may limit the Company's ability to obtain financing in the future or
may otherwise restrict corporate activities.
ENCUMBRANCES ON ASSETS TO SECURE THE FLEET LOAN AGREEMENT
In addition to being subordinated to all existing and future Senior
Debt of the Company, the Notes are not secured by any of the Company's
assets. The Company's obligations under the Fleet Loan Agreement are secured
by substantially all of the assets of the Company. If the Company becomes
insolvent or is liquidated, or if payment under the Indosuez Loan Agreement
is accelerated, the lenders under the Fleet Loan Agreement will be entitled
to exercise the remedies available to a secured lender under applicable law.
ABILITY TO INTEGRATE ACQUISITIONS
There can be no assurance that the Company will be able to integrate
its acquisitions or successfully implement its business model in a timely
manner without substantial costs, delays or other problems. Once integrated
and operating according to the Company's business model, these acquisitions
may not achieve sales, profitability and productivity commensurate with the
Company's historical operating results. In addition, there can be no
assurance that the Company's management and financial controls, personnel,
computer systems and other corporate support systems will be adequate to
manage the increase in the size and scope of the Company's operations as a
result of its acquisitions. Additionally, there can be no assurances that the
acquired businesses will enhance the Company's business or financial
performance.
EFFECT OF GROWTH ON COMPANY RESOURCES
The recent growth and expansion of the Company's business have
placed a significant strain on the Company's management, operational and
financial resources. Continued growth will require an increase in Company
personnel who possess the training and experience necessary to operate the
Company's facilities. There can be no assurance that the Company will be able
to continue to attract, develop and retain the personnel necessary to pursue
its growth strategy. Moreover, as the Company continues to grow, it will need
to expand its production, warehouse and distribution facilities and may
require additional facilities to support such growth. In addition, the
Company's rapid growth may place significant pressure on its financial
controls and inventory management systems. Any failure by the Company to
manage its growth effectively could have a material adverse effect on the
Company.
DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH
Contingent upon improvement in its financial performance, the
Company intends to pursue the acquisition of other companies. See
"Business--Growth Strategy." Acquisitions involve a number of risks,
including effects on the Company's reported operating results, the diversion
of management's attention, the dependence on hiring, training and retaining
key personnel and risks associated with unanticipated problems or legal
liabilities, some or all of which could have a material adverse effect on the
Company. Historically, the Company has financed acquisitions by incurring
additional debt and the issuance of Company stock. See "-Substantial Leverage
and Debt Service." The Company completed one acquisition in fiscal 1996,
seven acquisitions in fiscal 1997 and six acquisitions in fiscal 1998. The
Company anticipates one or more potential acquisition opportunities,
including those that would be material, may become available in the near
future. No assurance can be given that an acquisition by the Company will
occur, or, if an acquisition does occur, that it will not have a material
adverse effect on the Company, that any such acquisition will be successful
in enhancing the Company's business or that any such acquisition can be
successfully integrated into the Company's business. See "--Future Capital
Needs; Uncertainty of Additional Financing."
21
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
There can be no assurance that borrowings under the Fleet Loan
Agreement and funds from operations will be sufficient to meet the Company's
anticipated working capital, capital expenditure and acquisition financing
requirements. The Company may need to raise additional funds through the
issuance of public or private debt or equity securities in order to take
advantage of unanticipated opportunities, including acquisitions of
complementary businesses, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all.
WEATHER; GENERAL AGRICULTURAL RISKS
Inclement weather or production difficulties occurring at a time of
peak production or sales (in the second half of the Company's fiscal year),
particularly on weekends during the peak gardening season, could cause
declines in net sales and operating income that could have a material adverse
effect on the Company. In the event of severe weather conditions, the Company
does not have sufficient facilities to preserve and protect all of its
products. During fiscal 1998, the severe weather phenomenon known as "El
Nino," materially and adversely impacted the demand for the Company's
products. The Company intends to expand into new markets that typically have
greater weather variability than the Company's historic markets. Failure by
the Company to adequately manage this variability could have a material
adverse effect on the Company. The Company's operations also may be
materially affected by disease, pests or other natural hazards. Agricultural
production is highly dependent upon the availability of water. The Company
has not installed, and is not required to install, water reclamation systems
at the majority of its production facilities. The loss of access to water at
any of the Company's facilities would have a material adverse effect on the
Company. Given the perishable nature of the Company's products, if sales do
not materialize as expected, the Company could experience a significant
decline in profitability.
SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHARGES
The Company's business is highly seasonal. In fiscal 1999,
approximately 63.3% of net sales occurred in the second half of the fiscal
year. The Company has historically reported operating losses in its first and
second fiscal quarters. The Company has experienced and expects to continue
to experience variability in net sales, operating income and net income on a
quarterly basis. Factors that may contribute to this variability include: (i)
weather conditions during peak growing and gardening seasons; (ii) shifts in
demand for live plant products; (iii) changes in product mix, service levels
and pricing by the Company and its competitors; (iv) the effect of
acquisitions; (v) the economic stability of the Company's retail customers;
and (vi) the Company's relationship with each of its retail customers.
CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT
The Company is highly dependent on the purchases of its top eight
retail customers, which together accounted for 70% and 71% of the Company's
net sales in fiscal 1999 and fiscal 1998, respectively. The Company's largest
customer, Home Depot, accounted for approximately 37% and 35% of the
Company's net sales in fiscal 1999 and fiscal 1998, respectively. The Company
expects that a small number of customers will continue to account for a
substantial portion of its net sales for the foreseeable future. The Company
does not have long-term contracts with any of its retail customers, and there
can be no assurance that they will continue to purchase the Company's
products. The loss of or significant adverse change in, the relationship
between the Company and Home Depot or any other major customer could have a
material adverse effect on the Company. The loss of, or reduction in orders
from, any significant retail customers, losses arising from retail customers'
disputes regarding shipments, fees, merchandise condition or related matters,
or the Company's inability to collect accounts receivable from any major
retail customer could have a material adverse effect on the Company. In
addition, there can be no assurance that revenue from customers that have
accounted for significant revenue in past periods, individually or as a
group, will continue, or if continued, will reach or exceed historical levels
in any period.
22
GOVERNMENTAL REGULATIONS; MINIMUM WAGE
The Company is subject to certain federal, state and local health,
safety and environmental laws and regulations regarding the production,
storage and transportation of certain of its products and the disposal of its
waste. Certain of the Company's operations and activities, such as water
runoff from its production facilities and the use of certain pesticides, are
subject to regulation by the United States Environmental Protection Agency
(the "EPA") and similar state and local agencies. These agencies may regulate
or prohibit the use of such products, procedures or operations, thereby
affecting the Company's operations and profitability. In addition, the
Company must comply with a broad range of environmental laws and regulations.
Additional or more stringent environmental laws and regulations may be
enacted in the future and such changes could have a material adverse effect
on the Company. The Company uses reclamation water as one of the sources of
water supply for a few of its production facilities. The use and pricing of
reclamation water, including availability of subsidized water rates, is
governed by federal reclamation laws and regulations. Changes in the law
could have a material adverse effect on the Company.
In addition, the Company is subject to the Fair Labor Standards Act
as well as various federal, state and local regulations that govern such
matters as minimum wage requirements, overtime and working conditions. A
large number of the Company's employees are paid at or just above the federal
minimum wage level and, accordingly, changes in laws, regulations or
ordinances could have a material adverse effect on the Company by increasing
the Company's costs.
SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT
Color Spot America, which was managed by certain of the Company's
current management, was incorporated and commenced operations in 1983.
Following a change of control in 1991, Mr. Vukelich left the Company and new
management was installed. In September 1995, an investor group including Mr.
Vukelich formed the Company and acquired business. See "Item 1.
Business--Company History." In August 1998, Boligala Raju joined the Company
as its President and Chief Operating Officer and in June 1999, Richard E.
Parker and Joseph P. O'Neill joined the Company as its Chief Executive
Officer and Chief Financial Officer, respectively. Accordingly, the Company,
under its current management team, has only a limited operating history upon
which investors may evaluate its performance. There can be no assurance that
the Company will be able to continue to achieve or sustain revenue growth or
profitability.
COMPARABILITY OF OPERATING RESULTS
In fiscal 1999, the Company incurred (i) a $2.6 million non-cash
pre-tax extraordinary charge to write off organization costs in
early-adopting Statement of Position 98-5 "Reporting on Costs of Start-Up
Activities" ("SOP 98-5"), which was accounted for as a change in accounting
principle, (ii) a $1.5 million non-cash pre-tax extraordinary charge related
to the write-off of unamortized financing costs associated with the
terminated credit facilities in connection with the refinancing in the second
fiscal quarter, and (iii) a $3.7 million pre-tax special charge during the
first fiscal quarter related to the closure or leasehold modification at
certain facilities, employee severance and relocation, and consulting costs
associated with the new management team's ongoing review of the Company's
operations. In fiscal 1998, the Company incurred (i) a $4.3 million non-cash
pre-tax extraordinary charge related to the write-off of deferred financing
fees, (ii) a $2.0 million pre-tax charge related to the termination of an
annual management fee; and (iii) a $0.4 million pre-tax charge related to the
payment of bonuses to certain members of management.
Due to the foregoing factors, the Company believes that
period-to-period comparisons of its operating results cannot be relied upon
as indicators of future performance. In the event that the Company's
operating results in any future period fall below the expectations of
securities analysts and investors, the trading price of the Common Stock
would likely be materially and adversely affected.
23
SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS
The Company and its competitors are vulnerable to price increases
for raw materials. For fiscal 1999, raw material costs accounted for
approximately 17.6% of the Company's net sales. The Company does not have
long-term contracts with the majority of its raw material suppliers.
Increases in the cost of raw materials essential to the operations of the
Company, including seed, plastic, chemicals and fertilizer, would increase
the Company's costs of production. Significant increases in the price of
petrochemicals or a scarcity of raw materials essential to plant propagation
could have a material adverse effect on the Company. There can be no
assurance that any such price increases can be passed on to the Company's
customers in the form of higher prices for the Company's products.
CONTROL BY SIGNIFICANT STOCKHOLDERS AND MANAGEMENT
KCSN owns 69.0% of the outstanding Common Stock (61.7% assuming
exercise in full of the Warrants). In addition, officers and directors own
16.4% of the outstanding Common Stock (14.7% assuming exercise in full of the
Warrants). Heller Equity Capital Corporation ("Heller") is the holder of an
8.0% Subordinated Convertible Note (the "Heller Note"), which is convertible
into approximately 6.2% of the outstanding Common Stock (approximately 5.5%
assuming exercise in full of the Warrants). Heller also owns 2.6% of the
outstanding Common Stock (approximately 2.3% assuming exercise in full of the
Warrants). KCSN, Heller and the management stockholders are parties to a
Stockholders Agreement, which provides that the parties to the Stockholders
Agreement shall (i) consent to any merger, consolidation or sale of all or
substantially all of the Company's assets involving an independent third
party and approved by a majority of KCSN's shares and (ii) vote their shares
to elect certain specified persons as directors of the Company. Subject to
the terms of the Stockholders Agreement and the Certificate of Designation,
KCSN is able to elect all of the Company's directors and can determine the
outcome of corporate actions requiring stockholder approval, including
adopting amendments to the Company's Certificate of Incorporation (as
defined) and approving or disapproving mergers or sales of all or
substantially all of the Company's assets.
CHANGE OF CONTROL
The Indenture and Certificate of Designation Agreements which the
Company entered pursuant to the 1997 Offerings, provide that, upon the
occurrence of a Change of Control (as defined) the Company must make an offer
to purchase all or any part of the Notes at a price in cash equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase and all or any part of the Series A Preferred
Stock at a price in cash equal to 101% of the aggregate liquidation
preference thereof plus accrued and unpaid dividends to the date of purchase.
The Fleet Loan Agreement prohibits the Company from repurchasing any Notes or
Series A Preferred Stock, except with certain proceeds of one or more Public
Equity Offerings (as defined). The Fleet Loan Agreement also provides that
certain change of control events with respect to the Company would constitute
a default thereunder. Any future credit agreements or other agreements
relating to Senior Debt to which the Company becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs
at a time when the Company is prohibited from purchasing the Notes or Series
A Preferred Stock, or if the Company is required to make an Asset Sale Offer
(as defined) pursuant to the terms of the Notes, the Company could seek the
consent of its lenders to purchase the Notes or Series A Preferred Stock or
could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or refinance such borrowings, the
Company would remain prohibited from purchasing the Notes or Series A
Preferred Stock. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default (as defined) under the Indenture.
If, as a result thereof, a default occurs with respect to any Senior Debt,
the subordination provisions in the Indenture would likely restrict payments
to the holders of the Notes. The Indenture will provide that the Company may
not offer to repurchase any Series A Preferred Stock upon the occurrence of a
Change of Control until the Company has completed its offer to purchase the
Notes. There can be no assurance that the Company will have sufficient funds
to repurchase the Notes or the Series A Preferred Stock after a Change of
Control. The provisions relating to a Change of Control included in the
Indenture and the Certificate of Designation may increase the difficulty of a
potential acquirer obtaining control of the Company.
24
DEPENDENCE ON LEASED FACILITIES
The majority of the Company's production facilities are leased.
These leases expire at varying times over the next two to 15 years and
certain leases are month-to-month. Although the Company believes that it can
extend most of its leases on acceptable terms, failure to do so would require
the Company to establish new production facilities. No assurance can be given
that any such leases can be extended on acceptable terms or, if not so
extended, that suitable replacement production facilities can be established.
Failure to extend the terms of any of these leases could have a material
adverse effect on the Company.
COMPETITION
The wholesale nursery industry is highly competitive. Competition is
based principally on product quality, breadth of product offerings, customer
service and price. The wholesale nursery industry is highly fragmented with
over 10,000 small and regional nurseries nationwide. In 1998, the 10 largest
and 100 largest wholesale nurseries in the United States accounted for
approximately 9% and 18%, respectively, of total wholesale production. The
Company currently competes directly with a large number of western and
southwestern wholesale nursery companies. On a multi-regional basis, the
Company competes with Hines Nurseries primarily in bedding plants and shrubs
and Monrovia Nursery Company primarily in shrubs. The fresh cut Christmas
tree market is also highly fragmented and, on a regional basis, the Company
competes in this market with Holiday Tree Farms and The Kirk Company.
LACK OF MARKET FOR COMMON STOCK AND SERIES A PREFERRED STOCK
There is currently no public market for the Company's Common Stock
and Series A Preferred Stock (together the "Capital Stock"). The Company has
no present plan to list the Capital Stock on a national securities exchange
or to include the Capital Stock for quotation through an inter-dealer
quotation system. There can be no assurance that such a market will develop
or, if such a market develops, as to the liquidity of such market.
LACK OF PRIOR MARKET FOR THE NOTES
There is currently no public market for the Notes and the Company
has no present plan to list the Notes on a national securities exchange or to
include the Notes for quotation through an interdealer quotation system.
There can be no assurance that such a market will develop or, if such a
market develops, as to the liquidity of such market. Although the
underwriters in the 1997 Notes Offering advised the Company that they
intended to make a market in the Notes after consummation of the Notes
Offering, the underwriters are not obligated to do so and any such market
making activities may be discontinued at any time without notice.
YEAR 2000
The Company has conducted a review of and is continuing to monitor
its respective computer systems to identify the systems that could be
affected by the "Year 2000" issue. While some upgrades will be necessary, the
Company presently believes that the Year 2000 problem will not pose
significant operational problems for the Company's computer systems.
Additionally, the Year 2000 problem is not expected to have a material effect
on the cost of operations for the Company. However, the Company may be
vulnerable to other companies' Year 2000 issues. The Company's current
estimates of the impact of the Year 2000 problem on its operations and
financial results do not include costs and time that may be incurred as a
result of any customers', vendors' or service vendors' failure to become Year
2000 compliant on a timely basis. Although the Company has completed a review
of major customers' compliance efforts, the Company is still in the process
of contacting its significant suppliers and service vendors with respect to
the efficacy and status of their Year 2000 compliance programs. There can be
no assurance that such other companies will achieve Year 2000 compliance or
that any conversions by such companies to become Year 2000 compliant will be
compatible with the Company's computer systems. The inability of the Company
or any of its principal vendors or customers to become Year 2000 compliant in
a timely manner could have a material adverse effect on the Company's
financial condition or results of operation. "See"-- Year 2000 Compliance
Program."
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's liabilities consist primarily of a revolving line of
credit, senior subordinated notes and other notes and accounts payable. The
Company has also issued Series A Preferred Stock and Redeemable Common Stock.
Such liabilities and stockholders' equity have varying levels of sensitivity
to changes in market interest rates. Interest rate risk results when, due to
different maturity dates and re-pricing intervals, interest rate indices for
interest-bearing liabilities increase relative to income earning assets,
thereby creating a risk of decreased net earnings and cash flow. The Company
does not have any derivative financial instruments as of June 30, 1999.
The following table provides information about the Company's market
sensitive liabilities, categorized by maturity, and constitutes a
"forward-looking statement." For more information, please refer to Appendix A
"Financial Statements and Notes to Consolidated Financial Statements."
June 30, 1999
Expected Maturities
There-
Long-term liabilities 2000 2001 2002 2003 2004 after total
-------- -------- --------- -------- -------- ----- -----
(dollars in millions)
Fixed Rate:
Series A Preferred Stock - - - $2.6 $5.2 $89.4 $97.2
Average Interest Rate 13% 13% 13% 13% 13% 13%
Senior Subordinated Notes $10.5 $10.5 $10.5 $10.5 $10.5 $131.5 $184.0
Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%
Heller Note - - - - - $12.2 $12.2
Average Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
ODA Note $0.1 $0.1 $0.1 $0.1 $0.1 $1.0 $1.5
Average Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Variable Rate:
Fleet Loan Agreement $70.0 (1) $70.0
-------------------------------------------------------------------------
Average Interest Rate Base Rate, as defined, plus 1.0% or LIBOR, as defined,
plus 3.0%
(1) On October 15, 1998, the Company entered into the Fleet Loan Agreement,
borrowed approximately $32 million, and repaid in full amounts due under the
Indosuez Loan Agreement. The Fleet Loan Agreement terminates in October 2001
(fiscal 2002). See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources and Note 11
to the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Appendix A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information concerning each of the
directors, executive officers and key employees of the Company. All directors
shall serve until their successors are duly elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Officers are appointed by and serve at the discretion of the
Board of Directors.
NAME AGE POSITION
---- --- --------
Richard E. Parker(1) 58 Chief Executive Officer, Director, Chairman of the
Executive Committee
Joseph P. O'Neill 41 Executive Vice President and Chief Financial Officer and
Secretary
Michael F. Vukelich 49 Chairman of the Board
Boligala Raju(1) 49 President, Chief Operating Officer and Director
Jerry L. Halamuda 49 Director
Marion Antonini 69 Director
Ranjit S. Bhonsle(1)(2)(3) 30 Director
George T. Brophy 64 Director
William F. Dordelman 58 Director
Samuel P. Frieder(1)(2)(3) 35 Director
Richard E. George(3) 60 Director
James A. Kohlberg 41 Director
Gary E. Mariani(2) 54 Director
A. Stephen Diamond 52 Director
- ----------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee
MR. PARKER was appointed Chief Executive Officer in June 1999. From
October 1992 through April 1999, Mr. Parker held various positions at ABT
Building Products Corporation ("ABT"), most recently as Chief Operating
Officer.
MR. O'NEILL was appointed Chief Financial Officer in June 1999. From
January 1993 to May 1999, Mr. O'Neill was an executive of ABT, serving as
Chief Financial Officer from January 1998 through May 1999.
MR. VUKELICH has been the Company's Chairman of the Board since
September 1995. From September 1995 through June 1999, Mr. Vukelich was also
the Company's Chief Executive Officer. From 1992 through August 1995, Mr.
Vukelich was President and Chief Executive Officer of M.F. Vukelich Co. He is
the founder of Color Spot America, a predecessor of the Company, and was
President and Chief Executive Officer of Color Spot America from its
inception in 1983 to 1991. Mr. Vukelich has 28 years of experience in the
nursery business.
27
MR. RAJU joined Color Spot as President and Chief Operating Officer
in August 1998. Prior to joining Color Spot, Mr. Raju was a senior executive
with Sun Gro Horticulture, a division of Hines Horticulture, Inc. from 1997
to 1998. From 1994 to 1997, Mr. Raju was with Hines Nurseries, Inc. Prior to
that time, he served as an operational executive with Imperial Nurseries. Mr.
Raju has over 20 years experience in the nursery business.
MR. HALAMUDA joined Color Spot in September 1995, serving as
President of the Company until July 1998. Prior to joining Color Spot, Mr.
Halamuda was Vice President of Color King Nursery from 1992 through August
1995. Mr. Halamuda has 27 years experience in the nursery industry, including
six years as an executive of Color Spot America from 1984 through 1990.
MR. ANTONINI joined Printing Arts America, Inc. in August 1999 as
its Chief Executive Officer and has been a Principal at Kohlberg since March
1998. Prior to that time, Mr. Antonini was Chief Executive Officer of Welbilt.
MR. BHONSLE joined Kohlberg in 1993 and was named Principal in 1998.
MR. BROPHY was Chairman, President and Chief Executive Officer of
ABT from October 1992 to April 1999. From 1983 to 1988, Mr. Brophy was
President, Chief Executive Officer and a Director of Morgan Products, Ltd., a
building products company, and was a private business consultant from 1988 to
1992. Mr. Brophy is also a Director of Banta Corporation, a printing company.
MR. DORDELMAN has been a Principal at Kohlberg since September 1998.
Prior to that time, Mr. Dordelman was Chairman of the Board and Chief
Executive Officer of Colorado Prime Corporation.
MR. FRIEDER joined Kohlberg in 1989 and was named a Principal in
1995.
MR. GEORGE has been the President of R.G. Trends, an independent
consulting firm since June 1996. From 1995 through June 1996, Mr. George was
President and Chief Executive Officer of Handy Andy Home Improvement Centers,
Inc. From September 1994 through January 1995, Mr. George was an independent
business consultant. From August 1989 to September 1994, Mr. George served as
Chairman and Chief Executive Officer of Ulta(3) Cosmetics & Salon Inc., a
company that he founded.
MR. KOHLBERG has been a Principal of Kohlberg since 1987. Mr.
Kohlberg is also a Director of Northwestern Steel and Wire Company.
MR. MARIANI has been Chief Executive Officer of WinnDevon Art Group,
Inc., an art publisher, since 1994. From 1992 through 1993, Mr. Mariani was
Chief Executive Officer of The Garden Counsel, a national nursery
association. Prior to that time, Mr. Mariani was the President of the Nursery
Product Division of Weyerhaeuser Company.
MR. DIAMOND currently serves as President and CEO of United
Signature Foods, LLC. Previously he was President World Wide of the
Foodservice Company's Group and Executive Vice President of The Quaker Oats
Company; President of Quaker Beverages Europe; President of Pillsbury Europe;
President of Pillsbury Baked Goods, Breakfast Products and Specialty Products
Division; President and CEO of Home Delivery Services, Inc. and Vice
President, Marketing for All-American Gourmet. Mr. Diamond also spent 17
years with Procter & Gamble in manufacturing, marketing, and general
management roles.
DIRECTORS' MEETINGS AND COMMITTEES
The entire Board of Directors met 4 times during the fiscal year
ended June 30, 1999, including 30 actions by unanimous consent. Each
incumbent director attended 100% of the board meetings. The Company's Board
of Directors has appointed an Audit Committee, a Compensation Committee and
an Executive Committee.
28
AUDIT COMMITTEE. The primary responsibilities of the Audit Committee
are to recommend an independent public accountant to audit the annual
financial statements of the Company and to review internal and external
audits, internal accounting controls, annual financial statements and, at its
discretion, compliance with corporate policies and codes of conduct. The
Audit Committee is comprised of outside directors. The current members of the
Audit Committee are Messrs. Bhonsle, Frieder, and Mariani. The Audit
Committee met 3 times in the fiscal year ended June 30, 1999.
COMPENSATION COMMITTEE. The Compensation Committee determines
officers' salaries and bonuses and administers the grant of stock options and
other awards pursuant to the Company's 1996 Stock Option Incentive Plan, 1997
Stock Option Plan and Special Stock Option Plan. The Compensation Committee
is comprised of outside directors. The current members of the Compensation
Committee are Messrs. Bhonsle, Frieder and George. The Compensation Committee
met 1 time in the fiscal year ended June 30, 1999.
EXECUTIVE COMMITTEE. The primary responsibilities of the Executive
Committee are to deal with day to day issues at the Company prior to meetings
of the full Board of Directors. The Executive Committee met 12 times in the
fiscal year ended June 30, 1999. The current members of the Executive
Committee are Messrs. Parker, Raju, Bhonsle, and Frieder.
NOMINATING COMMITTEE. The Board of Directors has no standing
Nominating Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that each person who is or was a director or officer
of the Company shall be indemnified and held harmless by the Company against
all expense, liability and loss to the fullest extent allowable under the
Delaware General Corporation Law (the "DGCL"). In addition, the Certificate
provides, to the fullest extent allowable under the DGCL, that no director
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. Under the DGCL, liability
of a director may not be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases or (iv) for any transaction from which the
director derives an improper personal benefit. The effect of this provision
in the Certificate is to eliminate the rights of the Company and its
stockholders, either directly or through a stockholders' derivative suit
brought on behalf of the Company, to recover monetary damages from a director
for breach of the fiduciary duty of care as a director except in those
instances described under the DGCL.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION
The following table sets forth a summary of certain information
regarding compensation paid or accrued by the Company to the Company's Chief
Executive Officers during fiscal 1999 and each of the four other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 during fiscal year ended June 30, 1999 (collectively, the "Named
Executives").
29
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- ------ ----- -------------- ------- ------------
Michael F. Vukelich, Chairman of the
Board $192,308 $400,000 $5,800 0 0
Richard E. Parker, Chief Executive Officer
and Director 2,000 0 450 0 0
Boligala Raju, President, Chief Operating
Officer and Director 220,126 750,000 92,835 0 0
Thomas H. Dickerson, Southwest Division
President 187,692 745,000 5,850 0 0
Carlos R. Plaza, Vice President 129,808 150,000 49,322 0 0
- ------------------
(1) Represents car allowance, relocation and loan forgiveness.
OPTION GRANTS DURING FISCAL 1999. The following table summarizes the options
granted during fiscal 1999 to the Named Executives. Except as otherwise
indicated, all of these options were granted under the Company's 1997 Stock
Option Plan described below. No stock appreciation rights were granted to the
Named Executives during such fiscal year.
Individual Grants
---------------------------------------------------------
Potential realizable
value at assumed
Percent of annual rates of stock
Number of total options price appreciation for
securities granted to Per Share option term(2)
underlying employees in Exercise Expiration -----------------------
NAME options granted fiscal 1999 price(1) date 5% 10%
---- --------------- ----------- -------- ---- --- ----
Michael F. Vukelich - - - - - -
Richard E. Parker 150,000 30.6 $4.00 6/10/09 133,033 567,184
Boligala Raju 100,000 20.4 $3.00 7/30/08 188,668 478,123
Thomas H. Dickerson 30,000 6.1 $3.00 7/30/08 56,601 143,437
Carlos R. Plaza 25,000 5.1 $3.00 8/1/08 47,167 119,531
(1) The exercise price of each option was the estimated fair value of the Common
Stock on the date of grant.
(2) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective annual
rates of stock appreciation shown. Potential gains are net of the exercise price
but before taxes and other expenses associated with the exercise. The 5% and 10%
assumed annual rates of compounded stock appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Common Stock. Actual gains, if
any, on stock option exercises are dependent on the future financial performance
of the Company, the future performance of the Company's Common Stock and overall
market conditions. The actual value realized may be greater or less than the
potential realizable value set forth in the table.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES. The
following table sets forth certain information regarding options exercised and
the number and value of unexercised options held by the Named Executives at June
30, 1999.
30
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OUTSTANDING IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1999 AT JUNE 30, 1999(1)
----------------------------- ---------------------------
SHARES
ACQUIRED
ON VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISEABLE EXERCISABLE UNEXERCISEABLE
---- ----------- -------- ----------- -------------- ----------- --------------
Michael F. Vukelich 0 0 499,109 103,500 613,194 0
Richard E. Parker 0 0 0 150,000 0 0
Boligala Raju 0 0 0 100,000 0 0
Tom Dickerson 0 0 13,800 43,800 21,666 21,666
Carlos R. Plaza 0 0 0 25,000 0 0
- ---------------
(1) Represents the value of the shares of Common Stock subject to outstanding
options, based on a fair market value of $3.00 share, less the aggregate option
exercise price.
EMPLOYMENT AGREEMENTS
As part of the Recapitalization, the Company entered into an
employment agreement with Michael F. Vukelich, the Company's Chairman of the
Board. The agreement expires December 31, 2000 and will be automatically
renewed for successive one-year periods unless Mr. Vukelich or the Company
gives 90 days notice of non-renewal. As of July 1, 1999, Mr. Vukelich is paid
an annual base salary of $200,000, which is increased annually based on
increases in the consumer price index, and is eligible to participate in the
Company's annual bonus program pursuant to the terms of the agreement. The
employment agreement continues in effect an option to purchase 395,609 shares
of the Company's Common Stock for $1.45 per share and provides that the
Company grant Mr. Vukelich an option to purchase 207,000 shares of the
Company's Common Stock at $7.17 per share, which options were granted in
fiscal 1997. The agreement terminates upon the earlier to occur of (i)
non-renewal by the Company or Mr. Vukelich, (ii) death or disability, (iii)
termination for Cause (as defined in the agreement) or (iv) termination
without Cause. In the event that the Company does not renew the employment
agreement, the Company is obligated to continue to pay Mr. Vukelich his base
salary through June 30, 2000. In the event that the employment agreement is
terminated without Cause, the Company is obligated to pay Mr. Vukelich his
base salary through the remaining term of the employment agreement plus his
pro rata portion of the bonus paid to Mr. Vukelich in the year prior to
termination. In the event of Mr. Vukelich's death or disability, the Company
is obligated to continue to pay to Mr. Vukelich or his estate his base salary
for one year following his termination. The employment agreement entitles Mr.
Vukelich to be nominated to a seat on the Company's board of directors so
long as he owns 10% of the Common Stock.
As part of the employment agreement, Mr. Vukelich has agreed not to
compete with the Company in certain specified counties and states for the
longer of one year following termination or one year following the receipt of
any severance from the Company; provided that Mr. Vukelich may elect to waive
the payment of severance, in which event the non-competition covenant expires
one year following termination.
31
The Company entered an employment agreement with Boligala Raju, the
Company's President and Chief Operating Officer, effective as of August 12,
1998. The agreement has no fixed term. Under the terms of the agreement, Mr.
Raju is currently paid an annual base salary of $250,000, and is eligible to
receive an annual bonus between 50% and 200% of his base salary based on the
achievement of certain performance targets. Mr. Raju is guaranteed a minimum
bonus for the first year of the agreement of $100,000, subject to his
continued employment with the Company. If Mr. Raju is terminated without
cause, he is entitled to receive an amount equal to one year's base salary,
payable over the following twelve month period, which amount is increased to
two year's base salary in certain circumstances. Mr. Raju was paid a starting
bonus of $250,000, and awarded 100,000 stock options to purchase Common Stock
at $3.00 per share, which options vest over a four-year period. The agreement
provides that if Mr. Raju is employed by Color Spot on August 12, 2000, he
will be awarded an additional $250,000 and an additional 50,000 stock options
to purchase Common Stock at the fair market value of a share of Common Stock
on such date. The Company also loaned to Mr. Raju on an interest free basis
an additional $275,000, which amount is deemed to be repaid on a monthly
basis at the rate of $55,000 per annum, subject to Mr. Raju's continued
employment with Color Spot. The employment agreement entitles Mr. Raju to be
nominated to the Board of Directors of Color Spot.
The Company entered into an employment agreement with Richard E.
Parker, the Company's Chief Executive Officer, effective June 10, 1999. Under
the terms of the agreement, Mr. Parker is paid an annual base salary of
$260,000, and is eligible to participate in the Company's bonus program as
established by the Board. If Mr. Parker is terminated without cause, he is
entitled, under certain conditions, to receive an amount equal to one year's
base salary, payable over the following twelve month period. Mr. Parker was
awarded 150,000 shares of common stock at $4.00 per share, which options vest
over a four-year period. The Company also loaned Mr. Parker $250,000 on an
interest free basis, which is deemed to be repaid on a monthly basis at the
rate of $50,000 per annum, subject to Mr. Parker's continued employment with
Color Spot. The employment agreement entitles Mr. Parker to be nominated to
the Board of Directors of Color Spot.
The Company entered into an employment agreement with Joseph P.
O'Neill, the Company's Chief Financial Officer, effective June 10, 1999.
Under the terms of the agreement, Mr. O'Neill is paid an annual base salary
of $175,000, and is eligible to participate in the Company's bonus program as
established by the Board. If Mr. O'Neill is terminated without cause, he is
entitled, under certain conditions, to receive an amount equal to one year's
base salary, payable over the following twelve month period. Mr. O'Neill was
awarded 75,000 shares of common stock at $4.00 per share, which options vest
over a four-year period.
STOCK OPTION PLANS
1996 STOCK OPTION INCENTIVE PLAN. In July 1996, the Board of
Directors authorized, and the stockholders of the Company approved, a stock
option plan, effective September 7, 1995, for directors, officers, employees
and consultants of the Company and its subsidiaries (the "1996 Option Plan").
Options to purchase a total of 1,171,419 shares of Common Stock at $1.45 per
share were granted under the 1996 Option Plan. As of June 30, 1999, options
to purchase 569,428 of these shares have been exercised, and 601,991
nonqualified stock options ("NQOs") are outstanding under the 1996 Option
Plan. No further options will be granted under the 1996 Stock Option Plan.
1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the
"1997 Stock Option Plan") was adopted by the Board of Directors and approved
by the stockholders on December 31, 1996 to attract, retain and provide
incentive to executives and key employees of the Company. Options granted
under the 1997 Stock Option Plan may be either incentive stock options
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or NQOs. A total of 1,409,223 shares of Common Stock have been
reserved for issuance under the 1997 Stock Option Plan.
32
The 1997 Stock Option Plan is administered by the Compensation
Committee of the Board of Directors which has the authority to determine the
terms of the options granted. Each option has a term specified in its option
agreement; provided, however, that no term can exceed ten years from the date
of grant. Each option is exercisable upon the fulfillment of certain
conditions, including agreement by the optionee to be bound by the
Stockholders Agreement. In the case of an ISO granted to an optionee who, at
the time the option is granted, owns stock representing more than 10% of the
voting power of all outstanding classes of stock of the Company (a "10%
Optionee"), the term of the option cannot exceed five years from the date of
grant. No option granted under the 1997 Stock Option Plan may be transferred
by the optionee other than by will or the laws of descent and distribution
and each option may be exercised, during the lifetime of the optionee, only
by such optionee. In the event that an optionee's employment terminates for
any reason other than for cause, any options held which have not yet vested
will expire and become unexerciseable. All of the optionee's options which
have vested shall expire and become unexerciseable on the earlier of the
expiration date stated in the option agreement or the date 90 days after the
termination of the optionee's employment. If an optionee is terminated for
cause prior to the later of January 1, 2000 or the third anniversary of the
date the optionee commences employment with the Company, all options held by
the optionee (whether or not vested) shall expire on the date of termination.
The number of shares under each option and the price of any shares under such
option may be adjusted in a manner consistent with any capital adjustment
resulting from a stock dividend, stock split, recapitalization,
reorganization or a combination or other change in the shares of Common Stock.
The exercise price for all ISOs granted under the 1997 Stock Option
Plan must be no less than 100% of the fair value per share on the date of
grant. With respect to a 10% Optionee, the exercise price of any option
granted must be no less than 110% of the fair market value on the date of
grant. Each option is designated in the written option agreement as either an
ISO or NQO. However, to the extent that the aggregate fair market value of
shares subject to an optionee's ISO, which become exercisable for the first
time during any year, exceeds $100,000, the excess options shall be treated
as NQOs.
As of June 30, 1999, under the 1997 Stock Option Plan, there were
414,000 stock options outstanding with an exercise price of $7.17 per share,
315,000 stock options outstanding with an exercise price of $3.00 per share,
247,023 stock options outstanding with an exercise price of $7.19 per share,
225,000 stock options outstanding with an exercise price of $4.00 per share
and 208,200 stock options outstanding with an exercise price of $10.00 per
share. The 1997 Stock Option Plan will expire in 2007 unless terminated at an
earlier date by the Board of Directors.
SPECIAL STOCK OPTION PLAN. In February 1997, the Board of Directors
authorized, and the stockholders of the Company approved, a stock option plan
for employees of Lone Star Growers, L.P., a wholly owned subsidiary of the
Company (the "Special Option Plan"). Options to purchase a total of 139,383
shares of Common Stock at $1.43 per share were issued under the Special
Option Plan. As of June 30, 1999, there were 100,740 stock options
outstanding. The purpose of the Special Option Plan was to provide incentives
to employees of Lone Star Growers, L.P. in connection with the acquisition of
Lone Star Growers Co., the predecessor to Lone Star Growers, L.P., by the
Company. No further awards will be made under the Special Option Plan. The
Special Option Plan is otherwise identical to the 1997 Stock Option Plan.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to
the beneficial ownership of the Company's Common Stock as of August 1, 1999,
by: (i) all persons known by the Company to be the beneficial owners of five
percent or more of the Common Stock; (ii) each director, (iii) each of the
executive officers, and (iv) all executive officers as a group. Unless
otherwise indicated, the address of each of the persons named below is in
care of the Company, 3478 Buskirk Avenue, Pleasant Hill, California 94523.
Name Shares Beneficially Owned(1) Percentage Ownership(2)
---- ---------------------------- -----------------------
KCSN Acquisition Company, L.P.(3) 4,797,716 61.7%
Heller Equity Capital Corporation(4) 608,310 7.8
Michael F. Vukelich(5) 1,286,600 16.5
Richard E. Parker 0 0
Joseph P. O'Neill 0 0
Boligala Raju(6) 25,000 *
Jerry L. Halamuda(7) 322,486 4.1
Ranjit S. Bhonsle(8) 0 0
William F. Dordelman(8) 0 0
Samuel P. Frieder(8) 0 0
James A. Kohlberg(8) 0 0
Marion Antonini(8)(11) 12,500 *
George T. Brophy(9) 17,424 *
Richard E. George(10) 77,542 1.0
Gary E. Mariani(10) 81,562 1.0
Total Officers and Directors as a Group (13 persons) 1,823,114 23.4
- -----------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting
and investment power with respect to shares, subject to applicable
community property laws. Shares of Common Stock subject to options or
warrants currently exercisable within 60 days of the date hereof are
deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(2) Assuming exercise in full of the Warrants.
(3) The address of KCSN is 111 Radio Circle, Mt. Kisco, NY 10549. KCSN is
an affiliate of Kohlberg. The ultimate general partner of KCSN is a
corporation owned 100% by James A. Kohlberg. See "Item 13. Certain
Relationships and Related Transactions--Relationship With Kohlberg."
(4) Includes 429,928 shares issuable upon conversion of the Heller Note.
The address of Heller Equity Capital Corporation is 500 West Monroe
Street, Chicago, IL 60661.
(5) Includes options to purchase 499,109 shares of Common Stock, which are
presently exercisable. Excludes shares held by Karla D. Vukelich.
(6) Includes options to purchase 25,000 shares of Common Stock, which are
presently exercisable.
(7) Includes options to purchase 309,882 shares of Common Stock, which are
presently exercisable.
(8) Excludes 4,797,715 shares held by KCSN. Such person disclaims
beneficial ownership of such shares.
(9) Includes options to purchase 17,424 shares of Common Stock, which are
presently exercisable.
(10) Includes options to purchase 5,175 shares of Common Stock, which are
presently exercisable.
(11) Includes options to purchase 12,500 shares of Common Stock, which are
presently exercisable.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH KOHLBERG
CONTROL BY KCSN. KCSN, an affiliate of Kohlberg, owns 4,797,716
shares of Common Stock or 69.0% of the outstanding Common Stock as of
September 1, 1999 (approximately 61.7% assuming exercise in full of the
Warrants).
Due to KCSN's stock ownership in the Company, KCSN is able to
control the Company, to elect its Board of Directors and to approve any
action requiring stockholder approval, including adopting amendments to the
Company's certificate of incorporation and approving or disapproving mergers
or sales of all or substantially all of the assets of the Company. As a
result of such control, KCSN is able to effectively control all of the
Company's policy decisions. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Certain Business
Considerations -- Control by Significant Stockholders and Management." As
long as the Stockholders Agreement is in effect, third parties may not be
able to obtain control of the Company through purchases of Common Stock not
owned by parties to the Stockholders Agreement.
KOHLBERG FEE AGREEMENT. The Company paid to Kohlberg a fee of $2.0
million on January 2, 1998 to terminate its annual management fee obligations
under a Fee Agreement dated December 31, 1996.
OTHER TRANSACTIONS
The Company leases a portion of its Richmond, California facility
from M.F. Vukelich Co., which is wholly owned by Michael F. Vukelich. The
lease expires on August 31, 2005. The aggregate annual rental payment under
this lease for 1999 is $273,000. Under the term of the lease, rent is
increased annually by 3%. The Company believes that this rent is at fair
market value for the property.
The Company also leases a building from the daughter of Michael F.
Vukelich. The aggregate annual rental payment on this lease is $14,400. The
Company believes that this rent is at fair market value for the building.
The Company has entered into loan agreements with certain employees
(see Item 11. Executive Compensation - Employment Agreements).
All future transactions among the Company and its officers,
directors and principal stockholders and their affiliates will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested directors.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements, Financial Statement Schedules
and Exhibits
(1) Financial Statements:
The following consolidated financial statements of the Company are
included in Appendix A.
Consolidated Statements of Operations -
Years ended June 30, 1999, 1998, 1997
Consolidated Balance Sheets -
June 30, 1999 and 1998
Consolidated Statements of Cash Flows -
Years ended June 30, 1999, 1998, 1997
Consolidated Statements of Shareholders' Equity -
Years ended June 30, 1999, 1998, 1997
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
The following financial statement schedule is included in Exhibit B.
II - Valuation and Qualifying Accounts -
Years ended June 30, 1999, 1998, 1997
Inasmuch as Registrant is primarily a holding company and all
subsidiaries are wholly-owned, only consolidated statements are being filed.
Schedules other than those listed above are omitted because of the absence of
the conditions under which they are required or because the information is
included in the financial statements or notes to the financial statements.
(b) Reports on Form 8-K: Not applicable.
(c) Exhibits:
36
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
3.2 Amendment to Certificate of Incorporation, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 25, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
3.3 Amended and Restated Bylaws, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
3.4 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
4.1 Form of Preferred Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
4.2 Indenture (including Form of Note), incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
4.3 Warrant Agreement (including Form of Warrant), incorporated by
reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended December 25, 1997
(SEC File No. 000-23483), as previously filed with the Securities and
Exchange Commission.
10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.
10.2 First Amendment and Waiver to Second Amended And Restated Credit
Agreement dated as of December 24, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 26, 1998 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.3 Second Amended and Restated Credit Agreement dated as of December 24,
1997, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
10.4 Amended and Restated credit Agreement dated as of February 20, 1997,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.5 Re-capitalization and Stock Purchase Agreement among the Registrant,
Heller Equity Capital Corporation ("Heller"), M.F. Vukelich Co.,
Michael F. Vukelich, Jerry Halamuda, Gary E. Mariani, Steven J.
Bookspan, Richard E. George and KCSN Acquisition Company, L.P. dated as
of December 31, 1996, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.6 8% Subordinated Convertible Note issued to Heller, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC File
No. 333-37335), as previously filed with the Securities and Exchange
Commission.
10.7 Put/Call Option Agreement dated as of December 31, 1996, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
37
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
10.8 Stockholders Agreement dated as of December 31, 1996, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC File
No. 333-37335), as previously filed with the Securities and Exchange
Commission.
10.9 Employee Stockholders Agreement dated as of June 1, 1997, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.10 Employment Agreement with Michael F. Vukelich dated as of December 31,
1996, incorporated by reference to the Company's Registration Statement
on Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.11 Employment Agreement with Jerry L. Halamuda dated as of December 31,
1996. incorporated by reference to the Company's Registration Statement
on Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.12 1996 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.13 1997 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.14 Special Stock Option Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.15 Form of Stock Purchase Option incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
10.16 Fee Agreement dated as of December 31, 1996 between Registrant and
Kohlberg Company, LLC incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.17 Merger Agreement dated as of February 20, 1997 for the acquisition of
Lone Star Growers Co. incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.18 Real Property Lease between M.F. Vukelich Co. and the Registrant dated
December 1, 1995, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.19 Real Property Lease between Michael F. Vukelich as Guardian for Trisha
Vukelich and the Registrant dated as of December 31, 1995, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.20 Asset Purchase Agreement dated as of March 14, 1997 between Color Spot
Christmas Trees, Inc. and Signature Trees, incorporated by reference to
the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.
10.21 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.22 Stockholders Repurchase Agreement dated as of December 31, 1996,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.23 Amended and Restated Employment Agreement dated as of July 30, 1998
with Boligala Raju, incorporated by reference to the Company's
quarterly report on Form 10-Q for the quarter ended
38
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
March 25, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.24 1998 Employees Stockholders Agreement incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25 Loan and Security Agreement dated as of October 15, 1998, with Fleet
Capital Corporation as agent, incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Registrant, incorporated
by reference to the Company's Form 10-K for the year ended June 30,
1998 (SEC File No. 000-23483), as previously filed with the Securities
and Exchange Commission.
10.27 Employment Agreement with Richard E. Parker dated as of June 10, 1999.
10.28 Employment Agreement with Joseph P. O'Neill dated as of June 10, 1999.
10.29 Amendment to Employment Agreement with Michael F. Vukelich, dated June
10, 1999.
11.1 Computations of Earnings Per Share -- See Note 15 to the Notes to
Consolidated Financial Statements.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
27.1 Financial Data Schedule.
39
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: September 27, 1999
COLOR SPOT NURSERIES, INC.
a Delaware corporation
By: /s/ Richard E. Parker
-----------------------------------------
Name: Richard E. Parker
Title: Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons of the Registrant and
in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ Richard E. Parker Chief Executive Officer and Director September 27, 1999
--------------------- (PRINCIPAL EXECUTIVE OFFICER)
Richard E. Parker
/s/ Joseph P. O'Neill Executive Vice President and September 27, 1999
--------------------- Chief Financial Officer (PRINCIPAL
Joseph P. O'Neill FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
/s/ Michael F. Vukelich Chairman of the Board September 27, 1999
-----------------------
Michael F. Vukelich
/s/ Boligala Raju President, Chief Operating Officer September 27, 1999
----------------- and Director
Boligala Raju
/s/ Jerry L. Halamuda Director September 27, 1999
---------------------
Jerry L. Halamuda
/s/ Marion Antonini Director September 27, 1999
---------------------
Marion Antonini
/s/ Ranjit S. Bhonsle Director September 27, 1999
---------------------
Ranjit S. Bhonsle
/s/ George T. Brophy Director September 27, 1999
--------------------
George T. Brophy
/s/ William F. Dordelman Director September 27, 1999
------------------------
William F. Dordelman
40
/s/ Samuel P. Frieder Director September 27, 1999
---------------------
Samuel P. Frieder
/s/ Richard E. George Director September 27, 1999
---------------------
Richard E. George
/s/ James A. Kohlberg Director September 27, 1999
----------------------
James A. Kohlberg
/s/ Gary E. Mariani Director September 27, 1999
-------------------
Gary E. Mariani
/s/ A. Stephen Diamond Director September 27, 1999
----------------------
A. Stephen Diamond
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
3.2 Amendment to Certificate of Incorporation, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 25, 1999 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
3.3 Amended and Restated Bylaws, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
3.4 Form of Certificate of Designation of the Series A Preferred Stock,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 25, 1997 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
4.1 Form of Preferred Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
4.2 Indenture (including Form of Note), incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
4.3 Warrant Agreement (including Form of Warrant), incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended December 25, 1997 (SEC File No. 000-23483), as
previously filed with the Securities and Exchange Commission.
10.1 Amendment No. 2 to Second Amended and Restated Credit Agreement dated
as of December 24, 1997, incorporated by reference to the Company's
Current Report on Form 8-K (SEC File No. 000-23483), as previously
filed with the Securities and Exchange Commission on August 14, 1998.
10.2 First Amendment and Waiver to Second Amended And Restated Credit
Agreement dated as of December 24, 1997, incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 26, 1998 (SEC File No. 000-23483), as previously filed with
the Securities and Exchange Commission.
10.3 Second Amended and Restated Credit Agreement dated as of December 24,
1997, incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended December 25, 1997 (SEC File
No. 000-23483), as previously filed with the Securities and Exchange
Commission.
10.4 Amended and Restated credit Agreement dated as of February 20, 1997,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.5 Recapitalization and Stock Purchase Agreement among the Registrant,
Heller Equity Capital Corporation ("Heller"), M.F. Vukelich Co.,
Michael F. Vukelich, Jerry Halamuda, Gary E. Mariani, Steven J.
Bookspan, Richard E. George and KCSN Acquisition Company, L.P. dated as
of December 31, 1996, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.6 8% Subordinated Convertible Note issued to Heller, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC File
No. 333-37335), as previously filed with the Securities and Exchange
Commission.
10.7 Put/Call Option Agreement dated as of December 31, 1996, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
42
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.8 Stockholders Agreement dated as of December 31, 1996, incorporated by
reference to the Company's Registration Statement on Form S-1 (SEC File
No. 333-37335), as previously filed with the Securities and Exchange
Commission.
10.9 Employee Stockholders Agreement dated as of June 1, 1997, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.10 Employment Agreement with Michael F. Vukelich dated as of December 31,
1996, incorporated by reference to the Company's Registration Statement
on Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.11 Employment Agreement with Jerry L. Halamuda dated as of December 31,
1996. incorporated by reference to the Company's Registration Statement
on Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.12 1996 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.13 1997 Stock Incentive Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.14 Special Stock Option Plan incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.15 Form of Stock Purchase Option incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
10.16 Fee Agreement dated as of December 31, 1996 between Registrant and
Kohlberg Company, LLC incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.17 Merger Agreement dated as of February 20, 1997 for the acquisition of
Lone Star Growers Co. incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.18 Real Property Lease between M.F. Vukelich Co. and the Registrant dated
December 1, 1995, incorporated by reference to the Company's
Registration Statement on Form S-1 (SEC File No. 333-37335), as
previously filed with the Securities and Exchange Commission.
10.19 Real Property Lease between Michael F. Vukelich as Guardian for Trisha
Vukelich and the Registrant dated as of December 31, 1995, incorporated
by reference to the Company's Registration Statement on Form S-1 (SEC
File No. 333-37335), as previously filed with the Securities and
Exchange Commission.
10.20 Asset Purchase Agreement dated as of March 14, 1997 between Color Spot
Christmas Trees, Inc. and Signature Trees, incorporated by reference to
the Company's Registration Statement on Form S-1 (SEC File No.
333-37335), as previously filed with the Securities and Exchange
Commission.
10.21 9% Subordinated Promissory Note issued to Oda Nursery, Inc.
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.22 Stockholders Repurchase Agreement dated as of December 31, 1996,
incorporated by reference to the Company's Registration Statement on
Form S-1 (SEC File No. 333-37335), as previously filed with the
Securities and Exchange Commission.
10.23 Amended and Restated Employment Agreement dated as of July 30, 1998
with Boligala Raju, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
43
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
ended March 25, 1999 (SEC File No. 000-23483) as previously filed
with the Securities & Exchange Commission.
10.24 1998 Employees Stockholders Agreement incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.25 Loan and Security Agreement dated as of October 15, 1998, with Fleet
Capital Corporation as agent, incorporated by reference to the
Company's Form 10-K for the year ended June 30, 1998 (SEC File No.
000-23483), as previously filed with the Securities and Exchange
Commission.
10.26 Subordination Agreement dated as of October 15, 1998, between Heller,
Fleet Capital Corporation, as agent, and the Registrant, incorporated
by reference to the Company's Form 10-K for the year ended June 30,
1998 (SEC File No. 000-23483), as previously filed with the Securities
and Exchange Commission.
10.27 Employment Agreement with Richard E. Parker dated as of June 10, 1999.
10.28 Employment Agreement with Joseph P. O'Neill dated as of June 10, 1999.
10.29 Amendment to Employment Agreement with Michael F. Vukelich, dated June
10, 1999.
11.1 Computations of Earnings Per Share -- See Note 15 to the Notes to
Consolidated Financial Statements.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant incorporated by reference to the
Company's Registration Statement on Form S-1 (SEC File No. 333-37335),
as previously filed with the Securities and Exchange Commission.
27.1 Financial Data Schedule.
44
Appendix A
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Color Spot Nurseries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Color
Spot Nurseries, Inc. (a Delaware corporation) and Subsidiaries (the Company)
as of June 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
June 30, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Color Spot Nurseries, Inc. and Subsidiaries at June 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for the
years ended June 30, 1999, 1998 and 1997 in conformity with generally
accepted accounting principles.
As explained in Note 8 to the financial statements, effective July 1,
1998, the Company changed its method of accounting for organization costs in
accordance with the AICPA's Statement of Position 98-5, "Reporting on Costs
of Start-up Activities".
/s/ Arthur Andersen LLP
San Francisco, California
August 23, 1999
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, June 30,
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash $ 1,420 $ 2,244
Accounts receivable, net of allowances of $1,854 and $3,084,
respectively 19,956 28,463
Inventories, net 33,075 42,306
Prepaid expenses and other 723 1,803
-------- --------
Total current assets 55,174 74,816
CHRISTMAS TREE INVENTORIES 4,749 3,607
PROPERTY, PLANT AND EQUIPMENT, net 50,199 54,197
ASSETS HELD FOR SALE 696 -
INTANGIBLE ASSETS, net 50,898 56,117
DEFERRED INCOME TAXES 18,788 20,167
NOTES RECEIVABLE AND OTHER ASSETS 1,250 1,446
-------- --------
Total assets $181,754 $210,350
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 5,188 $ 16,305
Accrued liabilities 16,176 14,404
Dividends payable to stockholders 257 232
Deferred income taxes 12,541 16,013
Current maturities of long-term debt 828 1,053
-------- --------
Total current liabilities 34,990 48,007
LONG-TERM DEBT 123,413 135,044
-------- --------
Total liabilities 158,403 183,051
-------- --------
SERIES A PREFERRED STOCK, REDEEMABLE, $0.01 par value, 100,000 shares
authorized, 48,298 and 42,504 shares issued and outstanding,
respectively 39,151 32,524
REDEEMABLE COMMON STOCK, $0.001 par value, 1,143,339 and 1,163,550
shares issued and outstanding, respectively 2,689 2,266
STOCKHOLDERS' EQUITY (DEFICIT):
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,
5,811,468 and 5,773,518 shares issued and outstanding, respectively 12 12
Additional paid-in capital 51,358 50,975
Treasury stock, 6,220,439 and 6,200,228 shares, respectively (45,633) (45,488)
Warrants, 825,000 exercisable at $0.01 per share 8,250 8,250
Accumulated deficit (32,476) (21,240)
-------- --------
Total stockholders' deficit (18,489) (7,491)
-------- --------
Total liabilities and stockholders' deficit $181,754 $210,350
-------- --------
-------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
1
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
1999 1998 1997
---------- ---------- ----------
NET SALES $ 206,076 $ 187,731 $ 113,400
COST OF SALES 117,793 136,214 64,026
---------- ---------- ----------
Gross profit 88,283 51,517 49,374
SALES, MARKETING AND DELIVERY EXPENSES 46,252 50,033 31,168
GENERAL AND ADMINISTRATIVE EXPENSES 25,610 13,338 7,300
AMORTIZATION OF INTANGIBLE ASSETS 1,727 2,308 990
TERMINATION OF MANAGEMENT FEE AND OTHER - 2,400 -
---------- ---------- ----------
Income (loss) from operations 14,694 (16,562) 9,916
INTEREST EXPENSE 16,464 13,405 4,179
OTHER (INCOME) EXPENSE, NET 355 (285) (148)
---------- ---------- ----------
Income (loss) before income taxes, cumulative effect
of change in accounting principle and extraordinary
loss (2,125) (29,682) 5,885
INCOME TAX (PROVISION) BENEFIT 727 10,514 (2,830)
---------- ---------- ----------
Income (loss) before cumulative effect of change in
accounting principle and extraordinary loss (1,398) (19,168) 3,055
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net
of tax benefit 1,718 - -
EXTRAORDINARY LOSS, net of tax benefit 1,018 2,792 215
---------- ---------- ----------
Net income (loss) (4,134) (21,960) 2,840
SERIES A PREFERRED STOCK DIVIDENDS/ACCRETION 7,102 3,148 -
---------- ---------- ----------
Net income (loss) applicable to common stock $ (11,236) $ (25,108) $ 2,840
---------- ---------- ----------
---------- ---------- ----------
Basic income (loss) per common share:
Income (loss) before cumulative effect of change in
accounting principle and extraordinary loss $ (1.22) $ (3.25) $ 0.49
Cumulative effect of change in accounting principle $ (0.25) $ - -
Extraordinary loss $ (0.15) $ (0.40) (0.03)
---------- ---------- ----------
Total $ (1.62) $ (3.65) $ 0.46
---------- ---------- ----------
---------- ---------- ----------
Shares used in per share calculation 6,941,022 6,874,416 6,208,735
---------- ---------- ----------
---------- ---------- ----------
Diluted income (loss) per common share:
Income (loss) before cumulative effect of change in
accounting principle and extraordinary loss $ (1.22) $ (3.25) $ 0.45
Cumulative effect of change in accounting principle $ (0.25) $ - -
Extraordinary loss $ (0.15) $ (0.40) (0.03)
---------- ---------- ----------
Total $ (1.62) $ (3.65) $ 0.42
---------- ---------- ----------
---------- ---------- ----------
Shares used in per share calculation 6,941,022 6,874,416 6,818,031
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of
these consolidated financial statements.
2
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT COMMON SHARES)
Retained Total
Additional Earnings Stockholders'
Common Common Paid-In Treasury (Accumulated Equity Comprehensive
Shares Stock Capital Stock Warrants Deficit) (Deficit) Income/(Loss)
---------- ------ ---------- -------- -------- ------------ ------------- -------------
Balance, June 30, 1996 6,725,350 $ 97 $ 9,650 $ - $ - $ 2,788 $ 12,535 $ -
Recapitalization:
Issuance of common stock 3,566,173 52 22,273 - - - 22,325 -
Repurchase of common stock (6,164,034) - - (45,228) - - (45,228) -
Dividends - - - - - (1,520) (1,520) -
Transfer to redeemable
common stock (1,199,744) (17) (2,045) - - - (2,062) -
Issuance of common stock:
Existing shareholders and
management 1,741,602 25 12,075 - - - 12,100 -
Acquisition of businesses 351,771 5 2,519 - - - 2,524 -
Tax benefit from exercise of
stock options - - 561 - - - 561 -
Net income - - - - - 2,840 2,840 2,840
---------- ----- ------- -------- ------ -------- -------- --------
Balance, June 30, 1997 5,021,118 162 45,033 (45,228) - 4,108 4,075 $ 2,840
--------
--------
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, net - - 36 (260) - - (224) -
Accretion of redeemable common
stock - - - - - (240) (240) -
Accretion of Series A
preferred stock - - - - - (410) (410) -
Par value adjustment - (158) 158 - - - - -
Series A Preferred stock
dividends - - - - - (2,738) (2,738) -
Net loss - - - - - (21,960) (21,960) (21,960)
---------- ----- ------- -------- ------ -------- -------- --------
Balance, June 30, 1998 5,773,518 12 50,975 (45,488) 8,250 (21,240) (7,491) $(21,960)
--------
--------
Accretion of Series A
preferred stock - - - - - (833) (833) -
Accretion of redeemable
common stock - - - - - (443) (443) -
Exercise of stock options 37,950 - 54 - - - 54 -
Series A preferred stock
dividends - - - - - (5,826) (5,826) -
Other - - 329 (145) - - 184 -
Net loss - - - - - (4,134) (4,134) (4,134)
---------- ----- ------- -------- ------ -------- -------- --------
Balance, June 30, 1999 5,811,468 $ 12 $51,358 $(45,633) $8,250 $(32,476) $(18,489) $ (4,134)
---------- ----- ------- -------- ------ -------- -------- --------
---------- ----- ------- -------- ------ -------- -------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
3
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
June 30, June 30, June 30,
1999 1998 1997
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,134) $ (21,960) $ 2,840
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation and amortization 7,205 5,977 3,441
Interest paid in kind 660 602 284
Deferred income taxes (2,141) (10,080) 2,631
Cumulative effect of change in accounting
principle 2,612 - -
Write-off of unamortized financing costs 1,547 2,792 -
Changes in operating assets and liabilities,
net of effect of acquired businesses:
Decrease (increase) in accounts receivable 8,646 (984) (9,435)
Decrease (increase) in inventories 9,231 (2,717) (4,273)
Decrease (increase) in prepaid expenses and
other current assets 1,080 (819) (260)
Increase in noncurrent Christmas tree
inventory (1,142) (3,066) (372)
Decrease (increase) in other long-term assets - 65 (396)
Increase (decrease) in accounts payable (11,117) 3,482 596
Increase in accrued liabilities 2,769 843 1,670
Decrease in other liabilities - - (819)
-------- --------- --------
Net cash provided by (used in) operating
activities 15,216 (25,865) (4,093)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business acquisitions, net of cash
acquired - (40,539) (52,069)
Purchases of fixed assets (2,176) (13,508) (6,181)
Proceeds from sale of fixed assets - - 16
-------- --------- --------
Net cash used in investing activities (2,176) (54,047) (58,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on cash overdraft 824 (787) 3,520
Issuance of common stock - 5,130 34,439
Purchase of treasury stock (85) (260) (37,124)
Financing and organizational costs (2,087) (616) (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 - (8,051) -
Net borrowings under revolving line of credit 19,783 42,280 3,598
Repayments on revolving line of credit (31,338) (30,347) -
Repayments of long-term debt (961) (104,758) (31,882)
-------- --------- --------
Net cash provided by (used in) financing
activities (13,864) 79,394 64,388
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (824) (518) 2,061
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,244 2,762 701
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,420 $ 2,244 $ 2,762
-------- --------- --------
-------- --------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 14,679 $ 11,725 $ 3,876
-------- --------- --------
-------- --------- --------
Income taxes $ 34 $ - $ -
-------- --------- --------
-------- --------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock issued for acquisitions $ - $ 626 $ 2,524
-------- --------- --------
-------- --------- --------
Issuance of notes payable in connection with
acquisition $ - $ 1,000 $ -
-------- --------- --------
-------- --------- --------
Issuance of notes receivable in connection with
asset sale $ - $ - $ 1,170
-------- --------- --------
-------- --------- --------
Issuance of notes payable in connection with
treasury stock purchase $ - $ - $ 7,100
-------- --------- --------
-------- --------- --------
Series A Preferred Stock dividends/Stock accretion $ 7,102 $ 2,738 $ -
-------- --------- --------
-------- --------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
4
COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, OPERATIONS, AND SIGNIFICANT EVENTS
OPERATIONS
The Company is a producer and distributor of packaged bedding plants
and flowers, groundcover, ornamental plants and shrubs, and commencing in
1997, Christmas trees. As of June 30, 1999, the Company operates 17 production
facilities located in 5 states. In addition, the Company owns or leases
growing fields for Christmas trees in Oregon, Michigan, North Carolina, and
Tennessee. The Company sells primarily to general merchandise stores, home
improvement stores, retail garden stores and commercial landscapers, located
predominantly in California, Texas and other western states.
In fiscal 1999, in order to improve its operating results the
Company hired several new executives with significant operating experience to
bolster its current management team. The new management team redesigned the
Company's organizational structure and quickly implemented measures designed
to improve production, distribution and selling efficiencies and reduce
product returns and shrink. One of the tactical initiatives implemented by
management has been to adjust the production planning process to better match
supply and demand and limit excess inventory while maintaining high quality
customer service. This production change has resulted in reduced strategic
overproduction and consequently, less shrink (i.e., write-off of unsaleable
excess inventory). In connection with the new management team's review of the
Company's operations, the Company recorded a pre-tax charge of $3.7 million
related to closure or modification to certain facilities, employee severance
and relocation and other consulting costs. This charge has been recorded in
general and administrative expense.
The Company's fiscal 1998 operating results were adversely impacted
by the severe weather associated with El Nino, and inventory overproduction
that resulted in significant write-off of unsaleable excess product. As a
result, for the fiscal year ended June 30, 1998, the Company reported a net
loss before income taxes and extraordinary items of $29.7 million and used
$25.9 million of cash in operating activities. Consequently, the Company was
not in compliance with certain financial covenants on its revolving credit
facility at March 26, 1998 and June 30, 1998, but a waiver was obtained from
the banks for the violations.
On October 15, 1998, the Company entered into a new three-year loan
agreement providing up to $70.0 million of availability. In connection with
this loan agreement, the Company's existing revolving credit facility was
repaid in full and the revolving credit facility, the associated acquisition
term loan facility and supplemental line were terminated. The Company
recorded a $1.0 million non-cash extraordinary charge, net of tax benefit,
related to the write-off of unamortized financing costs associated with the
terminated facilities in its second fiscal quarter of 1999 (see Note 11 -
Debt).
Although the accompanying financial statements have been prepared
contemplating the realization of all recorded assets, including intangible
assets and deferred tax assets of $50.9 million and $18.8 million,
respectively, and the satisfaction of liabilities in the normal course of
business, the Company must generate sufficient cash flow to meet its
obligations as they come due, comply with the terms of its new credit
facilities, including attaining its financial covenants, and ultimately
attain profitability and achieve its other business objectives or there will
be a material adverse impact on the Company's business, financial position
and results of operations. No assurance can be provided that the Company will
be able to attain profitability or achieve its business objectives.
5
LEVERAGE AND FINANCING
As of June 30, 1998, the Company had $135.0 million of consolidated
long-term indebtedness and an accumulated deficit of $7.5 million.
Simultaneously with the completion of the 1997 Offerings, the Company entered
into a new loan agreement with a number of banking institutions, led by
Credit Agricole Indosuez. As of June 30, 1998, the Company was in default on
the new loan agreement and its ability to borrow an additional $110 million
under the new loan agreement was suspended indefinitely. Although the Company
succeeded in refinancing the debt on October 15, 1998, there can be no
assurance that the Company will be able to generate sufficient cash flows and
financial goals to comply with debt covenants in the future. As of June 30,
1999, the Company had $123.4 million of long-term indebtedness and an
accumulated deficit of $18.5 million. The Company is highly leveraged.
The Company may incur additional indebtedness in the future, subject
to certain limitations contained in the instruments governing its
indebtedness and capital stock. Accordingly, the Company has significant debt
service obligations. The Company's debt service obligations will have
important consequences to holders of the Notes, the Series A Preferred Stock,
the Common Stock and the Warrants (see Notes 11, 13, and 14), including the
following: (i) a substantial portion of the Company's cash flow from
operations will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for
operations, acquisitions, future business opportunities and other purposes
and increasing the Company's vulnerability to adverse general economic and
industry conditions; (ii) the Company's leveraged position may increase its
vulnerability to competitive pressures; (iii) the financial covenants and
other restrictions contained in the new loan agreement (see Note 11), the
indenture and the certificate of designation for the Series A Preferred Stock
will require the Company to meet certain financial tests and will restrict
its ability to borrow additional funds, to dispose of assets or to pay cash
dividends on, or repurchase, preferred or common stock; and (iv) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes may be limited.
The Company's ability to make scheduled principal and interest
payments or to refinance its indebtedness to pay dividends and make
redemption payments on the Series A Preferred Stock and to pay dividends on
the Common Stock depends on future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. There can be no assurance that the Company's business will continue
to generate sufficient cash flow from operations in the future to service
its debt, pay dividends, make redemption payments and fund necessary capital
expenditures. If unable to do so, the Company may be required to refinance
all or a portion of its existing debt including the Notes, sell assets or
obtain additional financing. There can be no assurance that any such
refinancing or that any such sale of assets or additional financing would be
possible on terms reasonably favorable to the Company, or at all. In
addition, unforeseen problems, delays, expenses and difficulties as well as
changes in economic and regulatory or competitive conditions may lead to
cost increases that would make the Company's current cash flow and
borrowings under the new loan agreement insufficient to meet the Company'
capital needs.
The new loan agreement restricts, among other things, the Company's
ability to incur additional indebtedness, incur liens, pay or declare
dividends, enter into any transaction not in its usual course of business,
guarantee or otherwise become in any way liable with respect to the
obligations of another party or entity, merge or consolidate with another
person, or sell or transfer any collateral (except for the sale of inventory
in the ordinary course of the Company's business). A breach of any of these
covenants could result in a default under the new loan agreement. Upon the
occurrence of an Event of Default (as defined in the new loan agreement),
the lenders could elect to declare all amounts outstanding under the new
loan agreement, together with accrued interest, to be immediately due and
payable. If the Company were unable to pay those amounts the lenders could
proceed against the collateral granted to them to secure that indebtedness.
If the new loan agreement indebtedness were to be accelerated, there can be
no assurance that the assets of the Company would be sufficient to repay the
indebtedness in full and other indebtedness of the Company. Substantially
all of the assets of the Company have been pledged as security under the new
loan agreement. The restrictions described above, in combination with the
leveraged nature of the Company, may limit the Company's ability to obtain
financing in the future or may otherwise restrict corporate activities.
6
BASIS OF PRESENTATION AND RECAPTALIZATION
The consolidated balance sheets as of June 30, 1999 and 1998, and
the consolidated statements of operations, stockholders' equity (deficit) and
cash flows for the years ended June 30, 1999, 1998 and 1997, include the
accounts of Color Spot Nurseries, Inc., a Delaware corporation ("Color
Spot"), and its wholly owned subsidiaries (collectively referred to as the
"Company"). On December 31, 1996, KCSN Acquisition Corporation, L.P.
("KCSN"), a partnership controlled by Kohlberg & Company, LLC ("Kohlberg")
and unrelated to the Company, acquired control of the Company through a
series of stock transactions accounted for as a recapitalization. In
connection with the recapitalization, CSN borrowed $37.3 million, purchased
6,164,034 shares of its common stock at $7.17 per share, including all shares
owned by Heller, which controlled the Company at the time, and certain shares
owned by management ($37.1 million in cash and a $7.1 million, 8.0%
subordinated convertible note), sold 3,566,173 shares of stock to KCSN and
certain members of management for $7.17 per share ($22.3 million) and repaid
$14.1 million of its prior indebtedness. In addition, transaction fees of
$2.9 million were paid and recorded as a reduction of capital, $1 million of
financing fees were paid and recorded as loan fees on the balance sheet, an
aggregate dividend to stockholders of record prior to the recapitalization of
$1.5 million was declared to the existing stockholders immediately prior to
the recapitalization and a prepayment penalty of $415,000 was incurred in
connection with the early extinguishment of debt.
OFFERINGS
In December 1997, the Company sold $100 million of 10 1/2% Senior
Subordinated Notes and 40,000 units each consisting of one share of 13%
Series A Cumulative Preferred Stock and 825,000 warrants each representing
the right to purchase one share of the Company's common stock for $0.01 each.
The Company raised $133.5 million net of fees and expenses, from these
offerings which it used to repay existing indebtedness. Further information
on the Notes and Series A Preferred Stock and Warrants is discussed at Notes 11
and 14, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Color
Spot and its wholly owned subsidiaries. All material intercompany amounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
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 and
disclosure of contingent 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.
CASH AND CASH EQUIVALENTS
Cash includes cash and cash equivalents that consist of highly
liquid investments having maturities of three months or less when acquired.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method. Tree inventories are stated at
average cost and are classified as long-term assets until they are harvested.
Inventory costs include material and labor and production costs directly
associated with the growing process. Direct costs associated with inventory
shrink are charged to cost of sales as a period expense. Reserves are
recorded for inventory quantities in excess of projected sales.
7
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment purchased in acquisitions are recorded
at fair value as prescribed by the purchase method of accounting. Subsequent
purchases of property, plant and equipment are recorded at cost. For assets
held financed under capital leases, the present value of the future minimum
lease payments is recorded at the date of acquisition as equipment, with a
corresponding amount recorded as a capital lease obligation.
Depreciation is computed on a straight-line basis over the following
estimated useful lives:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
Land Improvements 40 years
Buildings 15 to 20 years
Machinery and equipment 5 to 10 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 to 10 years
Leasehold improvements 5 years
Major renewals and improvements that extend the useful life of an
asset are capitalized; routine maintenance and repairs are expensed as
incurred. Upon sale or retirement of assets, the asset cost and related
depreciation are removed from the accounts and any related gain or loss is
reflected in the company's operating results.
SOFTWARE
Purchases of software, including internal and external development
costs, are capitalized and amortized over three years using the straight-line
method.
INTANGIBLE ASSETS
Amortization is computed on a straight-line basis over the shorter
of estimated useful lives or contract periods. The following useful lives are
used for recognizing amortization expense:
INTANGIBLE CATEGORY ESTIMATED USEFUL LIFE
------------------- ---------------------
Goodwill 40 years
Noncompete agreements 5 years
Financing costs 3 years
Goodwill represents the excess of cost over the estimated fair value
of the net assets of acquired businesses. Should events or circumstances
occur subsequent to any business acquisition which bring into question the
realizable value or impairment of any component of goodwill, the Company will
evaluate the remaining useful life and balance of goodwill and make
appropriate adjustments. The Company's principal considerations in
determining impairment include the strategic benefit to the Company of the
particular business related to the questioned component of goodwill as
measured by undiscounted current and expected future operating income levels
of that particular business and expected undiscounted future cash flows.
8
REDEEMABLE SERIES A PREFERRED STOCK AND WARRANTS
The Company is required to redeem all outstanding shares of Series A
Preferred Stock at a price equal to the liquidation preference (see Note 14),
plus accrued and unpaid dividends, if any, at December 15, 2008. The Series A
Preferred Stock may be redeemable in whole or in part, at the Company's
option on or after December 15, 2002 at specified redemption prices. The
difference between the carrying amount and redemption amount is accreted over
eleven years (the period from the date of issuance to the date of mandatory
redemption). As a result of the mandatory redemption feature, redeemable
Preferred Stock is classified outside of stockholders' equity.
Warrants are recorded at their estimate of fair value on the date of
issuance.
REDEEMABLE COMMON STOCK
The Company is required to repurchase shares of Common Stock from
certain management stockholders in the event of their termination due to
their death or permanent disability. Such repurchases are at fair market
value as determined by the Board of Directors. The Board of Directors will
retain an independent appraisal firm to assist them in determining the fair
market value of the Common Stock on a periodic basis. The difference between
the carrying amount of the redeemable Common Stock and its fair value is
accreted over the life expectancy of the management stockholders by charging
"retained earnings." As a result of the redemption feature, redeemable Common
Stock is classified outside of stockholders' equity (irrespective of voting
rights of the stock).
FINANCIAL INSTRUMENTS
The carrying amounts for cash, receivables and accounts payable
approximate fair value due to the short-term nature of these instruments.
Other fair value disclosures are in the respective notes.
In order to decrease its exposure to unfavorable interest rate
movements, the Company may from time to time, purchase interest rate
protection agreements to cap the interest rates on its floating rate
obligations. The purchase price of the interest rate protection agreements is
capitalized and amortized over the life of the agreement. Amortization of the
purchase price is charged to interest expense. Subsequent to purchase, the
Company does not have any cash requirements related to its interest rate cap
agreements. If interest rates exceed the interest rate on the interest rate
protection agreement, the Company's counterparty will pay the Company the
differential between the interest due on a floating basis and the interest
due on the fixed basis. Payments made by the Company's counterparties are
recorded as a reduction of interest expense in the period earned (see Note 11).
REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer.
Sales returns and allowances are estimated and recorded as a charge against
revenue in the period in which the related sales are recognized.
INCOME TAXES
Income taxes are recognized utilizing the asset and liability method
under which deferred income taxes are recognized for the consequences of
temporary differences by applying currently enacted statutory rates to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
9
EARNINGS PER SHARE
Basic earnings per share was calculated by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share include the impact of common stock
options, warrants outstanding and other convertible securities, if dilutive.
Earnings per share and all share data for all periods presented reflect the
Company's 0.69-for-one reverse stock split, which occurred in December 1997.
ASSET IMPAIRMENT
Long-lived assets, certain identifiable intangible assets and
goodwill will be reviewed for impairment when expected future undiscounted
cash flows are less than the carrying value of the asset. No charges were
recorded pursuant to this statement in fiscal 1999, 1998 or 1997, (see Note 1).
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS 123, and
as permitted by the provisions therein continues to measure compensation
costs related to stock option activities in accordance with APB 25.
COMPREHENSIVE INCOME AND SEGMENTS
In 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). In 1998, the
FASB issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). In 1999, the
FASB issued Statement of Financial Accounting Standards No. 137, deferring
the effection date of SFAS No. 133. SFAS 130 establishes standards to measure
all changes in equity that result from transactions and other economic events
other than transactions with owners. Comprehensive income is the total of net
income and all other non-owner changes in equity. SFAS 131 introduces a new
model for segment reporting, called the "management approach." The management
approach is based on the manner in which management organizes segments within
a company for making operating decisions and assessing performance. The
management approach replaces the notion of industry and geographic segments.
The Company adopted SFAS 130 in fiscal 1999 and has concluded that it
operates in one segment. SFAS 133 establishes a new accounting model for
derivative instruments and hedging activities. The Company will adopt SFAS 133
in fiscal year 2002. The Company believes adoption of SFAS 133 will not
significantly affect the Company's financial position, results of operations
or financial statement presentation.
3. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of trade accounts receivable.
The Company sells primarily on 10-day and 30-day terms, performs credit
evaluation procedures on its customers and generally does not require
collateral on its accounts receivable because the majority of its customers
are large, established retail customers with operations throughout the United
States. Most of the Company's sales are in California and Texas. The Company
maintains an allowance for potential credit losses. For the periods ended
June 30, 1999, 1998, and 1997, sales to the eight largest customers
constituted 70%, 71%, and 75% of net sales, respectively. Sales to the
Company's largest customer constituted 37%, 35%, and 39% of net sales in
these respective periods. Accounts receivable balances generally reflect the
net sales percentages for the Company's largest customers. Because of the
credit worthiness of its largest customers, the Company believes its credit
risk is mitigated. The loss of, or reduction in orders from, any major retail
customer could have a material adverse effect on the Company.
10
4. INVENTORIES
Inventories at June 30, 1999 and 1998, consisted of the following
(in thousands):
1999 1998
-------------------------
Current:
Outdoor flowers and vegetable plants $33,159 $39,764
Raw materials and supplies 2,471 7,565
Inventory reserve (2,555) (5,023)
-------------------------
Total current inventories 33,075 42,306
Noncurrent:
Christmas tree inventories 4,749 3,607
-------------------------
Total inventories, net $37,824 $45,913
-------------------------
-------------------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1999 and 1998, consisted
of the following (in thousands):
1999 1998
-------------------------
Land and land improvements $ 9,377 $10,047
Greenhouses and buildings 24,817 21,157
Furniture and fixtures 5,045 4,593
Machinery and equipment 17,150 16,333
Leasehold improvements 5,713 5,356
Assets under capital leases 1,018 1,068
Construction in progress - 2,721
-------------------------
63,120 61,275
Less: Accumulated depreciation (12,921) (7,078)
-------------------------
Total property, plant and equipment, net $ 50,199 $ 54,197
-------------------------
-------------------------
Depreciation expense for the periods ended June 30, 1999, 1998 and
1997 was $5.5 million, $3.7 million and $2.3 million, respectively.
Greenhouses with an original cost of $7.9 million and $7.7 million at June 30,
1999 and 1998, respectively, are in service on property leased by the Company
under operating lease agreements.
6. ASSETS HELD FOR SALE
Assets held for sale as of June 30, 1999 consists of land at two
facilities that the Company plans to dispose of during fiscal 2000. The land
at these two locations was identified during the new management team's review
of the Company's operations as excess capacity. The carrying value of this
land is lower than the anticipated sales price.
7. NOTES RECEIVABLE
Notes receivable primarily represent amounts due from third parties
relating to land and investment assets acquired and later sold in connection
with certain acquisitions. The assets were sold at their carrying values,
therefore no gain or loss was recognized on the dispositions. The notes
require monthly principal and interest payments ranging from $1,000 to
$10,000 with interest rates ranging from 7.5% to 9.0%. Unpaid principal and
interest are due between December 2001 and March 2007 and are secured by the
underlying assets. The carrying amount of the notes receivable approximates
fair value.
11
8. INTANGIBLE ASSETS
Intangible assets as of June 30, 1999 and 1998, consisted of the
following (in thousands):
1999 1998
-------------------------
Goodwill $47,517 $47,517
Organization costs - 3,578
Financing costs 6,302 5,911
Noncompete agreements 1,694 1,694
Other 916 911
-------------------------
56,429 59,611
Less: Accumulated amortization (5,531) (3,494)
-------------------------
Total intangible assets, net $50,898 $56,117
-------------------------
-------------------------
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. The Company adopted SOP 98-5 on July 1, 1998 and
recognized a $2.6 million non-cash, pre-tax charge ($1.7 million after tax
benefit), which was accounted for as a change in accounting principle.
9. ACQUISITIONS
During the years ended June 30, 1998 and 1997, the Company effected
the following acquisitions:
ENTITY DATE OF ACQUISITION
------ -------------------
NAB Nursery, Inc. October 1, 1996
B&C Growers October 28, 1996
Sunrise Growers, Inc. November 18, 1996
Sunnyside Plants, Inc. January 21, 1997
Lone Star Growers Co. February 20, 1997
Signature Trees March 14, 1997
Hi-C Nursery April 4, 1997
Plants, Inc. July 31, 1997
Peters' Wholesale Greenhouses, Inc. July 31, 1997
Wolfe Greenhouses, LLC July 31, 1997
Cracon, Inc. August 5, 1997
Summersun Greenhouse Co. August 11, 1997
Oda Nursery, Inc. September 3, 1997
The entities acquired are growers and distributors of live plants,
except for Signature Trees and Cracon, Inc., which grow, broker and
distribute Christmas trees. Financial results of the entities acquired are
included in the results of operations of the Company subsequent to the date
of acquisition.
The purchase price, certain costs related to the acquisitions and
the allocation of the purchase price to the underlying net assets acquired in
the acquisitions during years ended June 30, 1998 and 1997 were as follows
(in thousands):
12
1997
--------------------------------------------------------------------------------------------------------
NAB Sunrise Sunnyside Lone Star
Nursery, B&C Growers, Plants, Growers Signature Hi-C
Inc. Growers Inc. Inc. Co. Trees Co. Nursery Total
--------- --------- --------- ---------- ---------- --------- --------- --------
Purchase price 1,782 935 2,416 3,270 37,305 3,175 3,536 52,419
Organization and
financing costs 120 210 565 123 1,328 108 159 2,613
--------- --------- --------- ---------- ---------- --------- --------- --------
Total purchase price 1,902 1,145 2,981 3,393 38,633 3,283 3,695 55,032
Less: Value assigned
to assets and
liabilities
Current assets 973 569 963 2,611 14,266 747 1,975 22,104
Long-term assets 785 693 2,212 932 14,763 288 2,028 21,701
Current liabilities (783) (146) (194) (761) (4,656) (48) (1,593) (8,181)
Long-term liabilities - - - - - - - -
Debt - (181) - - (5,000) (137) - (5,318)
--------- --------- --------- ---------- ---------- --------- --------- --------
975 935 2,981 2,782 19,373 850 2,410 30,306
--------- --------- --------- ---------- ---------- --------- --------- --------
Goodwill 927 210 - 611 19,260 2,433 1,285 24,726
--------- --------- --------- ---------- ---------- --------- --------- --------
1998
----------------------------------------------------------------------------------------------------
Peters'
Wholesale Wolfe Summersun
Plants, Greenhouses, Greenhouses Cracon, Greenhouse ODA
Inc. Inc. LLC Inc. Company Nurseries Total
--------- ------------ ------------ --------- ------------ ---------- ----------
Purchase price 4,088 5,698 6,161 1,954 7,546 16,052 41,499
Organization and
financing costs 223 394 413 91 286 479 1,886
--------- ------------ ------------ --------- ------------ ---------- ----------
Total purchase price 4,311 6,092 6,574 2,045 7,832 16,531 43,385
Less: Value assigned
to assets and
liabilities
Current assets 994 1,434 1,355 - 1,693 7,356 12,832
Long-term assets 3,623 3,226 4,242 276 1,520 3,566 16,453
Current liabilities (321) (1,155) (644) - (952) (2,941) (6,013)
Long-term liabilities - (1,241) - - - - (1,241)
Debt (307) - - - - (491) (798)
--------- ------------ ------------ --------- ------------ ---------- ----------
3,989 2,264 4,953 276 2,261 7,490 21,233
--------- ------------ ------------ --------- ------------ ---------- ----------
Goodwill 322 3,828 1,621 1,769 5,571 9,041 22,152
--------- ------------ ------------ --------- ------------ ---------- ----------
13
The Company accounted for all of these acquisitions under the
purchase method of accounting. In connection with certain acquisitions
occurring in fiscal 1998, the Company issued 39,204 shares of common stock,
which were valued at $15.94 per share. In connection with the fiscal 1997
acquisitions of Lone Star Growers Co., Signature Trees and the other
acquisitions, the Company issued 278,940, 55,788 and 17,434 shares of common
stock, respectively, which were valued at $7.17 per share, a price negotiated
between the parties. A Vice-Chairman of the Company at the date of the
acquisition is a 20% partner of Signature Trees. In connection with the
acquisition of Signature Trees, he received $600,000.
Results of operations of the acquired entities subsequent to the
purchase date (all of which occurred prior to fiscal 1999) are included in
the consolidated financial statements. Pro forma operating results of the
Company, assuming the fiscal 1997 and fiscal 1998 acquisitions occurred on
July 1, 1997, are presented below (in thousands, except share data).
Year Ended
June 30, 1998
-------------
(unaudited)
Net sales $ 189,594
Income (loss) before extraordinary loss (19,815)
Preferred stock dividends/accretion (3,148)
----------
Loss applicable to common share holders $(22,963)
Loss per share before extraordinary loss:
Basic and diluted loss per share (3.34)
Shares used in per share calculation 6,877,983
Shares issued in connection with the Company's acquisitions have
been included in the calculations as if they were outstanding for all periods
presented.
10. ACCRUED LIABILITIES
Accrued liabilities as of June 30, 1999 and 1998, consisted of the
following (in thousands):
1999 1998
----------------------------
Compensation and benefits $ 8,813 $ 6,832
Cash overdraft 3,514 2,733
Accrued rebates 928 618
Accrued interest 585 532
Environmental reserve 600 600
Other 1,736 3,089
----------------------------
Total accrued liabilities $16,176 $14,404
----------------------------
----------------------------
11. DEBT
In December 1997, simultaneous with the Series A Preferred Stock and
Warrants offering, (See Note 14), the Company sold $100 million of 10 1/2%
Senior Subordinated Notes (the "Notes"). The Company raised, net of fees and
expenses, $133.5 million from the Notes and Series A Preferred Stock and
Warrants offerings (the "Offerings"). The Company used the proceeds from the
Offerings to extinguish existing debt. As a result of the early
extinguishment of debt, the Company recognized an extraordinary loss on the
write-off of deferred financing costs of $2.8 million, net of tax, (See
Note 19).
Simultaneous with the completion of the Offerings, the Company
entered into a new loan agreement with a syndicate of banks. The new
agreement provided the Company with a two-year acquisition term loan facility
of $75.0 million, a five-year revolving facility of $40.0 million and a
five-year supplemental line of $35.0 million. The loan agreement required the
Company to comply with certain
14
financial and non-financial covenants. At June 30, 1998, the Company had
outstanding borrowings of $24.0 million on the revolving credit facility and
no borrowings on the acquisition term loan or the supplemental line. At
June 30, 1998, the Company was in default of certain financial covenants
relating to these loans. On August 7, 1998, the credit agreement was amended
and the lender waived any default or event of default caused by the Company's
failure to meet certain covenants at June 30, 1998. The Company also was out
of compliance with certain financial covenants at March 26, 1998 and received
a waiver of such default for the March 1998 test period. The August amendment
also halted borrowings under both the acquisition term loan and the
supplemental line.
On October 15, 1998, the Company entered into a Loan and Security
Agreement with Fleet Capital Corporation (the "Fleet Loan Agreement"), and
terminated its acquisition term loan, five-year revolving facility and
five-year supplemental line. The Fleet Loan Agreement provides a $70.0 million
credit facility, $55.0 million of which is subject to certain borrowing base
limitations based on a percentage of eligible inventory and eligible accounts
receivable and $15.0 million of which is available, without limitation, from
November 1 through April 30 of each year. The Fleet Loan Agreement restricts,
among other things, the Company's ability to incur additional indebtedness,
incur liens, pay or declare dividends, or enter into certain transactions. In
addition, the Fleet Loan Agreement requires the Company to meet certain
financial covenants. As of June 30, 1999, the Company was in compliance with
these covenants.
The Company recorded a $1.0 million non-cash extraordinary charge,
net of tax benefit, related to the write-off of unamortized financing costs
associated with the terminated credit facility in connection with the
refinancing in October 1998.
15
Debt as of June 30, 1999 and 1998, consisted of the following (in thousands):
1999 1998
--------------------------
Senior Subordinated Notes 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. Interest accrues at 10 1/2% per annum and is payable semiannually on each
June 15 and December 15. Unpaid principal and interest is due on December 15, 2007. $100,000 $100,000
Three-year revolving credit facility (expiring on October 15, 2001) up to $70,000,
$55,000 based on a percentage of eligible inventory and eligible accounts
receivable and $15,000 available, without limitation, from November 1 through
April 30 of each fiscal year. Advances under the line accrue interest at the
Company's option, at a variable rate equal to Prime plus 1.0% or LIBOR plus 3.0%.
In addition, to the extent that the Company's borrowings exceed certain borrowing
base limitations during the period from November 1 through April 30, the interest
rates increase by an additional 0.5%. The line is secured by substantially all of
the Company's assets. 12,483 -
Five-year revolving credit facility up to $40,000 based on eligible accounts
receivable and inventory. Advances under the line accrue interest at the
Company's option, at the prime rate plus 1.25% (9.75% at June 30, 1998) or LIBOR
plus 2.75% (ranging from 8.41% to 8.44% at June 30, 1998). The line is secured by
substantially all the Company's assets. This credit facility must be reduced
annually below $15,000 for a 30-day period between the months of July through
September (such requirement was waived for the period ended September 30, 1998).
Terminated on October 15, 1998. - 24,038
Convertible note payable to the former majority owner of the Company in
conjunction with the recapitalization at December 31, 1996. The holder of the
note may convert all or any portion of the principal and accrued interest into
non-voting common stock, provided that if converted in connection with a public
offering, the shares will be converted to voting common stock. The conversion
price is $20.09 per share and is subject to adjustments. If not converted, the
note requires full payment of principle and all accrued and unpaid interest on
December 31, 2004. The note bears interest at 8%. At June 30, 1999, 1998 and
1997, the unpaid accrued interest amount of $651, $602 and $284 respectively, was
capitalized into the original principal balance of $7,100. 8,637 7,986
Acquisition Subordinated Promissory Note with a principal amount of $1,000 due on
September 3, 1997. Interest at the rate of 9% per annum accrues daily and is
payable monthly in arrears. The note is due on August 31, 2004. The note is
subject to mandatory redemption prior to August 31, 2004 on the nine-month
anniversary of the date on which the Company completes an initial registered
public offering of any class of common stock. 1,000 1,000
Amounts due pursuant to non-compete agreements resulting from various acquisitions
by the Company. The individual agreements require monthly payments ranging from
$0.1 to $10.0 with all unpaid principal due on dates ranging from January 1, 2000
through April 4, 2002. 721 1,073
Other debt consists of equipment notes, bank loans and real estate notes. These
debts have varying payment terms (monthly or at maturity). Monthly principal
payments range from $0.5 to $8. One note is due in full in December 2001 in the
amount of $500. Interest rates on these debts range from 7.9% to 10.75%, with
maturity dates ranging from December 1998 through August 2002. 1,053 1,391
Various capital lease obligations were incurred in conjunction with the rental of
equipment. The leases require monthly principal payments ranging from $0.2 to
$13. Interest rates on the leases range from 6% to 17.9%. Maturity dates range
from December 1998 through September 2003. 347 609
--------------------------
Total Debt 124,241 136,097
Less: Current maturities (828) (1,053)
--------------------------
Long-term portion $123,413 $135,044
--------------------------
--------------------------
16
The Company has entered into interest rate protection agreements to
cap the interest rate on certain outstanding loans. The principal protected
at June 30, 1999 and 1998 is approximately $32.7 million and $35.1 million,
respectively, with interest rate caps ranging from 9.75% to 8.5% in 1999 and
1998. The Company is paid to the extent that the three month LIBOR exceeds
the cap rates. In 1999 and 1998 the carrying amount of the interest rate
protection agreement is $24,000 and $62,000, respectively. The interest rate
protection agreements were purchased by the Company in order to decrease its
exposure to unfavorable interest rate movements. The Company is exposed to
credit losses in the event of counterparty nonperformance, but does not
currently anticipate any such losses because the counterparties are
established, reputable financial institutions. The agreements expire on
March 31, 2000. As of June 30, 1999 and 1998, the agreements were not
in-the-money for any period presented.
Maturities of debt and capital lease obligations are as follows (in
thousands):
CAPITAL
DEBT LEASES TOTAL
---- ------ -----
2000 635 248 883
2001 375 85 460
2002 13,181 10 13,191
2003 66 4 70
2004 -- -- --
Thereafter 109,637 -- 109,637
-------- ---- --------
$123,894 $347 $124,241
-------- ---- --------
-------- ---- --------
The net book value of the assets held under capital lease
obligations was $639,000 and $834,000 at June 30, 1999 and 1998, respectively.
The book value of long-term debt and current maturities, excluding
Senior Subordinated Notes, approximates fair value because all significant
amounts outstanding at June 30, 1999, were recently issued and are
representative of the terms and interest rates that would be available to the
Company at June 30, 1999. The fair value of the Senior Subordinated Notes,
based on current market prices is $83.0 million. Since the Senior
Subordinated Notes are not actively traded, the fair value could change
materially upon the sale or purchase of a significant portion of the Notes.
12. INCOME TAXES
The (provision) benefit for income taxes from continuing operations
consists of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
Current:
Federal $-- $-- $--
State and local -- -- --
-- -- --
Deferred:
Federal 652 9,935 (1,611)
State and local 75 579 (1,219)
---- ------- --------
$727 $10,514 ($2,830)
---- ------- --------
---- ------- --------
17
The reconciliation of income tax from continuing operations computed
at the U.S. federal statutory tax rate to the Company's effective income tax
rate is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- -------------
Federal statutory income tax rate 34.0% 34.0% (34.0%)
State income tax rate, net of federal
benefit 4.2% 3.6% (4.9%)
Permanent items:
Limitation on state net operating
losses (0.6)% (1.7)% (8.2%)
Other (3.4)% (0.5)% (0.9%)
Valuation allowance -- -- --
------ ------ -------
34.2% 35.4% (48.0%)
------ ------ -------
------ ------ -------
In accordance with current tax regulations, the Company files its
tax returns on a cash basis in most jurisdictions. As a result, the Company
has accumulated significant net operating losses since inception. In the
state of California, utilization of net operating losses is limited to fifty
percent of the loss generated; hence the effective tax rate associated with
the losses attributable to California are benefited at a rate less than the
statutory rate.
Deferred tax assets and liabilities are composed of the following
at June 30, 1999 and 1998 (in thousands):
1999 1998
------------------------------------------
Current deferred tax assets:
Accounts payable $ 2,120 $ 6,366
Accrued liabilities 6,161 5,989
------------------------------------------
Total current deferred tax assets 8,281 12,355
------------------------------------------
Noncurrent deferred tax assets:
Organization costs 998 -
Net operating loss carryforward 23,503 23,080
------------------------------------------
Total noncurrent deferred tax assets 24,501 23,080
------------------------------------------
Total deferred tax assets $32,782 $35,435
------------------------------------------
------------------------------------------
1999 1998
------------------------------------------
Current deferred tax liabilities:
Receivables $ 7,337 $11,173
Inventory 13,310 16,837
Prepaids 175 358
------------------------------------------
Total current deferred tax liability 20,822 28,368
------------------------------------------
Non-current deferred tax liabilities:
Depreciation and amortization 3,877 2,284
Tree Inventory 1,836 629
------------------------------------------
Total noncurrent deferred tax liability 5,713 2,913
------------------------------------------
Total deferred tax liabilities $26,535 $31,281
------------------------------------------
------------------------------------------
At June 30, 1999 the Company has available federal and state net
operating loss carryforwards of approximately $65 million and $25 million,
respectively. The federal net operating losses expire beginning on June 30,
2011 and the state net operating loss carryforwards expire beginning on
June 30, 2001. The Company must generate significant taxable income in order
to realize the recorded benefits. Although the Company has not provided a
valuation allowance on the operating loss carryforward, the realizability of
the related assets is periodically evaluated. If a significant valuation
allowance is recorded in a future period, the tax provision will be adversely
impacted (see Note 1).
18
13. STOCKHOLDERS' EQUITY
COMMON STOCK AND REDEEMABLE COMMON STOCK
The Company has 50,000,000 authorized shares of $0.001 par value
common stock of which 6,954,807 shares were outstanding as of June 30, 1999.
Holders of common stock are entitled to one vote per share on all actions
submitted to a vote of stockholders.
The Company is required to repurchase shares of Common Stock from
certain management stockholders in the event of their termination due to
their death or permanent disability. Such repurchases are at fair market
value as determined by the Board of Directors. The Board of Directors will
retain an independent appraisal firm to assist them in determining the fair
market value of the Common Stock on a periodic basis. The difference between
the carrying amount of the redeemable Common Stock and its fair value is
accreted over the life expectancy of the management stockholders (on average
21 years) by charging "retained earnings." The fair value of the redeemable
Common Stock, as estimated by management, at June 30, 1999 is approximately
$3.4 million. In the event of an initial public offering of the Common Stock,
the requirement to repurchase shares automatically terminates. As a result of
the redemption feature, redeemable Common Stock is classified outside of
stockholders' equity (irrespective of voting rights of the stock).
In addition to the shares issued in connection with the
recapitalization (Note 1), and the shares issued to effect the acquisitions
(Note 9), the company issued 713,196 shares of common stock to existing
shareholders and management in July and August 1997. The Company also issued
1,741,602 shares of common stock to existing stockholders in February 1997 in
order to raise capital to complete the acquisition of Lone Star Growers Co.
In both instances, the shares were valued at $7.17 per share, management's
estimate of the fair value of the shares on the date of issuance. In
September 1995, 4,803,838 shares were issued at $1.45 per share in connection
with the formation of the Company. Subsequently, in March 1996, 1,921,512
shares were issued in order to raise capital to complete the acquisition of
Barcelo's Plant Growers and in June 1996, 541,572 shares were issued to raise
capital for general corporate purposes. The March and June 1996 issuances
were at $1.45 per share, management's estimate of the fair value of the
shares on the issue dates. All shares were issued for cash.
KCSN, Heller and all of the management stockholders (the
"Stockholders") are parties to the Stockholders Agreement which includes
certain transfer restrictions, voting agreements and registration rights
which survive until December 31, 2006.
The Stockholders have agreed to (i) consent to any merger,
consolidation or sales of all or substantially all of the Company's assets
involving an independent third party and approved by a majority of the shares
of Common Stock held by KCSN and (ii) vote their shares of Common Stock to
elect two members of management, five KCSN designees and two independent
designees reasonably acceptable to KCSN as directors of the Company.
Consequently, the Stockholders (assuming the conversion of the Heller Note)
will continue to have significant influence over the policies and affairs of
the Company and may be in a position to determine the outcome of corporate
actions requiring stockholder approval, including adopting amendments to the
Certificate of Incorporation, electing directors and approving or
disapproving mergers or sales of all or substantially all of the Company's
assets.
With the consummation of the Offerings, the Company effected a
0.69-for-one reverse stock split. This reverse stock split was reflected
retroactively for all financial statements presented.
19
PREFERRED STOCK
The Company has 4,900,000 shares authorized of $0.01 par value
undesignated preferred stock. The board of directors has authority, without
any further vote or action by stockholders, to provide for the issuance of
preferred stock shares in series, to establish the relative, participating,
optional or other special rights, qualifications or restrictions of the
shares of each such series and to determine the voting powers, if any, of
such shares. No shares are outstanding at June 30, 1999 and 1998.
14. SERIES A PREFERRED STOCK AND WARRANTS
In December 1997, simultaneous with the issue of the Notes, (see
Note 11), the Company sold 40,000 shares of 13% Series A Cumulative Preferred
Stock (the "Series A Preferred Stock") and 825,000 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. 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.
During fiscal 1998 and 1999, the Company issued 2,504 and 5,794,
respectively, additional shares of Series A Preferred Stock and $3,930 and
$6,438, respectively, in cash as dividends on its Series A Preferred Stock.
Through 2002, 13% dividends are expected to continue to be paid in additional
shares of Series A Preferred Stock. In addition, the Company's credit
facilities and corollary agreements associated with the 1997 Offerings
restrict the payment of cash dividends on the Series A Preferred Stock (other
than for payment of dividends associated with fractional shares). On
December 15, 2008, the Company is required to redeem all outstanding shares
of Series A Preferred Stock at a price equal to the liquidation preference,
plus accrued and unpaid dividends to date, if any. 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.
The Warrants are exercisable on December 15, 2008 (the "Expiration
Date"). In the absence of an exercise, the Warrants will be automatically
deemed to have been exercised immediately on the Expiration Date with payment
of the Exercise Price on a cash-less basis.
15. EARNINGS PER SHARE
Earnings per share is as follows:
FOR THE YEAR ENDED JUNE 30, 1999
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
-------------- --------- ---------
(in thousands)
Basic and diluted earnings per share:
Loss before cumulative effect of change in
accounting principle and extraordinary
loss $ (1,398)
Preferred stock dividends/accretion (7,102)
----------
Loss before cumulative effect of change
in accounting principle and
extraordinary loss $ (8,500) $(1.22)
Cumulative effect of change in
accounting principle (1,718) (0.25)
Extraordinary loss (1,018) (0.15)
---------- ------
Net income loss applicable to
common stock $ (11,236) 6,941,022 $(1.62)
20
FOR THE YEAR ENDED JUNE 30, 1998
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
-------------- --------- ---------
(in thousands)
Basic and diluted earnings per share:
Loss before extraordinary loss $(19,168)
Preferred stock dividends/accretion (3,148)
--------
Loss before extraordinary loss $(22,316) $(3.25)
Extraordinary loss (2,792) (0.40)
-------- ------
Net income loss applicable to
common stock $(25,108) 6,874,416 $(3.65)
FOR THE YEAR ENDED JUNE 30, 1997
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
-------------- --------- ---------
(in thousands)
Basic earnings per share:
Income before extraordinary loss $3,055 $ 0.49
Extraordinary loss (215) (0.03)
------ ------
Net income $2,840 6,208,735 $ 0.46
Options issued to employees 609,296
Diluted earnings per share:
Income before extraordinary loss $3,055 $ 0.45
Extraordinary loss (215) (0.03)
------ ------
Net income $2,840 6,818,031 $ 0.42
Options to purchase 2,111,954 and 1,829,853 common shares were
excluded from the computation of diluted earnings per share for the year
ended June 30, 1999 and 1998, respectively, as the shares were antidilutive
given the Company's reported net loss. Options to purchase 974,582 common
shares were excluded from the computation of diluted earnings per share for
the year ended June 30, 1997 as the options' exercise price was greater than
the market price of the common shares. The note payable (see Note 11)
convertible to 429,928, 397,511 and 367,546 shares of common stock were
excluded from computation of diluted earnings per share for the years ended
June 30, 1999, 1998 and 1997, respectively, as the conversion price was
greater than the fair market value of the common shares in the respective
periods.
16. STOCK OPTIONS
In July 1996, the Company adopted the 1996 Stock Incentive Plan (the
"1996 Plan") under which eligible employees, directors and consultants of the
Company received options to purchase shares of the Company's common stock at
a price generally not less than the fair value of the common stock on the
date of the grant. Under the 1996 Plan, 1,171,419 options were granted at
$1.45 per share (fair value of the stock on the date of grant was $1.45 as
determined by the Board of Directors, such grants occurring coincident with
independent third party transactions). All options under the 1996 Plan fully
vested as a result of the recapitalization of the Company on December 31,
1996, and 569,417 options were simultaneously exercised. A total of 601,991
options remain outstanding under the 1996 Plan.
21
On January 1, 1997, the Company adopted the 1997 Stock Option Plan
(the "1997 Plan"), under which eligible executives and key employees of the
Company received options to purchase shares of the Company's common stock at
a price generally not less than the fair value of the common stock on the
date of grant. On January 1, 1997, 841,803 options were granted at $7.17 or
$7.19 per share (the fair value of the stock on the date of grant as
determined by the Board of Directors, such grants occurring coincident with
independent third party transactions). Options granted under the 1997 Plan
are exercisable over a maximum term of ten years from the date of grant and
vest in equal annual installments over a four-year period. The options
immediately vest upon a change in control of the Company or an initial public
offering. No options have been exercised under the 1997 Plan. In January
1998, the Company granted an additional 252,300 options at $10 per share.
During fiscal 1999, the Company granted an additional 540,000 options at
$3.00 or $4.00 per share. However, pursuant to the Company's 1998 Employees
Stockholders' agreement, the options granted in fiscal 1998 and 1999 do not
vest immediately upon a change in control of the Company or an initial public
offering of common stock.
In February 1997, the Company adopted the Special Stock Option Plan
(the "Special Plan"), under which eligible employees of the Company received
options to purchase shares of the Company's common stock at a price below the
fair market value of the common stock on the date of grant. Under the Special
Plan, 139,383 options were granted at $1.43 per share. Options granted under
the Special Plan are exercisable over a maximum term of ten years from the
date of grant and vest in equal annual installments over a four-year period.
The options immediately vest upon a change in control of the Company or an
initial public offering. As these options are compensatory, compensation
expense is being recognized ratably over the vesting period of the options
for the difference between the fair market value at the date of grant and the
exercise price. The Company will recognize total compensation expense of
$0.8 million over the vesting period of the options.
Activity under the three plans is summarized as follows:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at July 1, 1996 -
Granted 2,153,295 $ 3.70
Exercised (569,417) 1.45
--------- ------
Outstanding at June 30, 1997 1,583,878 4.49
Granted 252,300 10.00
Exercised - -
Forfeited (16,336) 7.19
--------- ------
Outstanding at June 30, 1998 1,819,842 5.26
Granted 540,000 3.42
Exercised (37,950) 1.43
Forfeited (209,938) 7.76
--------- ------
Outstanding at June 30, 1999 2,111,954 $ 4.59
--------- ------
--------- ------
Options exercisable at year-end 1,035,268 $ 3.71
There were no forfeitures or expirations during the year ended June 30,
1997.
22
The following summarizes information about stock options outstanding at
June 30, 1999:
Weighted Average Weighted Average
Options Outstanding at Remaining Fair Value of
Exercise Price June 30, 1999 Contractual Life Options Granted
-------------- ------------- ---------------- ---------------
$ 10.00 208,200 8.6 Years $3.25
7.17 or 7.19 661,023 7.5 Years 2.32
3.00 or 4.00 540,000 9.5 Years 0.59
1.45 601,991 7.1 Years 0.47
1.43 100,740 7.7 Years 6.21
-------------- -----
$ 4.59 $2.14
-------------- -----
-------------- -----
The fair value of each option granted was estimated on the date of
the grant using the Black-Scholes option-pricing model assuming an expected
life of six years, a risk-free interest rate of 5.80%, and no expected
dividends.
Had compensation cost for the Company's stock-based compensation
plans been determined based upon the fair value at grant dates for awards
under those plans consistent with the method prescribed by SFAS 123, the
Company's net income would have been reduced to the pro forma amounts
indicated below (in thousands):
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Net Income (loss):
As reported $(4,134) $(21,960) $2,840
Pro forma (5,022) (23,319) 1,925
17. RELATED-PARTY TRANSACTIONS
The Company's revolving lines of credit, term loans and acquisition
line of credit through fiscal 1998 were provided by Credit Agricole Indosuez
("Indosuez"), an affiliated and limited partner in KCSN. Indosuez was paid
$1.3 million and $3.2 million in loan fees in fiscal 1998 and 1997
respectively. The Company incurred interest of $1.1 million, $4.1 million and
$3.9 million in connection with the amounts outstanding with Indosuez during
fiscal 1999, 1998 and 1997 respectively. The facility was terminated on
October 15, 1998.
The Company leases certain property that is owned directly or
indirectly by certain members of management. Payments pursuant to these
operating leases for the years ended June 30, 1999, 1998, and 1997 were
$0.3 million.
Prior to December 1997, the Company paid Kohlberg a quarterly fee
pursuant to a Fee Agreement for certain management services. Under the Fee
Agreement, Kohlberg was paid $1,520,000 for services rendered in connection
with the December 31, 1996 recapitalization (the "Transaction Fee") and is
paid an annual management fee equal to the greater of $0.3 million or 3% of
the Company's earnings before interest, taxes, depreciation and amortization,
subject to a maximum annual payment of $0.8 million. The total fees expensed
for the period from December 31, 1996 to June 30, 1997 was $0.4 million. In
December 1997, Kohlberg was paid $2.0 million and the annual management fee
was terminated.
As part of the recapitalization transaction (see Note 1), the
Company (1) acquired 603,750 shares of common stock from M.F. Vukelich Co.,
an entity controlled by the Company's Chairman of the Board, for a purchase
price of $4.3 million and (2) purchased 20,211, 36,194 and 730,284 shares
during the years ended June 30, 1999, 1998 and 1997, respectively from
employees during the year at $7.17 per share.
During the year ended June 30, 1997, the Company paid management
fees to Heller Investments, Inc. of $0.3 million.
23
18. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) plan (the "Plan") for employees in
September 1995. All employees who meet certain service requirements are
eligible to participate. Matching contributions are at the discretion of the
Company. The Company made no contributions to the Plan during the periods
ended June 30, 1999, 1998, and 1997.
19. EXTRAORDINARY LOSS
In connection with the refinancing in October 1998, the Company
recorded a $1.0 million non-cash extraordinary charge, net of tax benefit,
related to the write-off of unamortized financing costs associated with the
terminated credit facility.
In connection with the Offerings of fiscal 1998, 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
$1.5 million in extraordinary loss on the Company's consolidated statements
of operations.
In connection with the recapitalization of the Company on December 31,
1996, prepayment penalties of $0.4 million were paid in connection with the
early extinguishment of debt. This charge was reported net of income taxes,
as an extraordinary loss on the consolidated statements of operations in the
amount of $0.2 million.
20. COMMITMENTS AND CONTINGENT LIABILITIES
OPERATING LEASES
The Company leases certain nursery facilities consisting of land and
improvements under noncancellable operating leases expiring at various dates
through 2018. The Company also leases transportation equipment under
operating leases expiring in various years through 2002. Some of the leases
have five-year renewal options and some are subject to rental increases based
on a change in the Consumer Price Index.
Total rent expense for the periods ended June 30, 1999, 1998 and
1997 was approximately $5.2 million, $4.8 million, and $3.5 million
respectively.
At June 30, 1999, future minimum rental payments on non-cancellable
operating leases are as follows (in thousands):
2000 $ 4,360
2001 3,933
2002 3,580
2003 3,303
2004 3,072
Thereafter 9,728
-------
Total minimum lease payments $27,976
-------
-------
24
The Company has contracts to purchase Christmas trees from
third-party growers. Certain of these contracts require the Company to
maintain the trees until they are harvested. At June 30, 1999, future minimum
purchase commitments under the contracts are as follows (in thousands):
2000 $3,422
2001 486
2002 304
2003 101
2004 93
Thereafter 238
------
Total minimum purchase commitments $4,644
------
------
The Company has additional contracts to purchase Christmas trees
whereby the amounts payable are dependent upon the number of trees harvested
and the year in which they are harvested. Certain of the contracts may be
canceled with proper notice.
CONTINGENCIES
The Company is a party to various legal proceedings, claims and
assessments arising in the normal course of its business activities. Based
upon information presently available and in light of legal and other defenses
and insurance coverage, management does not expect these legal proceedings,
claims and assessments, individually or in the aggregate, to have a material
adverse impact on the Company's consolidated financial position or operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of
its executive officers, with remaining service periods ranging from one to
five years. The agreements provide for certain payments to each officer upon
termination of employment, other than as a result of death, disability in
most cases or justified cause, as defined. The aggregate estimated commitment
under these agreements was $2.0 million at June 30, 1999. The agreements also
provide for certain officers to receive guaranteed bonuses based on years of
service ranging from two to four years and the forgiveness of certain loans
over a five-year period, based on years of service. The aggregate estimated
commitment for bonuses and loan forgiveness under these agreements was
approximately $2.9 million at June 30, 1999.
25
21. QUARTERLY FINANCIAL DATA--(UNAUDITED)
Summarized quarterly financial information for the years ended June 30,
1999, 1998 and 1997 are as follows (in thousands):
Sept. 24, Dec. 24, March 25, June 30,
1998 1998 1999 1999
1999 Q1 Q2 Q3 Q4
-----------------------------------------------
Net sales $ 27,706 $ 47,921 $42,433 $88,016
Gross profit 8,320 15,796 22,139 42,028
Operating income (loss) (9,133) (1,406) 7,522 17,711
Cumulative effect of change in accounting principle,
net of income taxes (Note 8) (1,687) - (31)
Extraordinary loss, net of income taxes (Note 19) - (999) - (19)
Net income (loss) (10,421) (4,098) 1,975 8,410
Basic and diluted earnings per share:
Net income (loss) before extraordinary loss (1.48) (0.68) 0.04 0.89
Cumulative effect of change in accounting
principle (0.24) - - (0.01)
Extraordinary loss (Note 19) - (0.15) - -
-----------------------------------------------
Net income (loss) (1.72) (0.83) 0.04 0.88
Sept. 25, Dec. 25, March 26, June 30,
1997 1997 1998 1998
1998 Q1 Q2 Q3 Q4
-----------------------------------------------
Net sales $ 25,482 $ 38,708 $ 38,549 $84,992
Gross profit 7,464 13,206 11,758 19,089
Operating loss (4,218) (3,512) (1,993) (6,839)
Extraordinary loss, net of income taxes - (2,162) - (630)
Net loss (3,691) (5,201) (5,069) (7,999)
Basic and diluted earnings per share:
Net loss before extraordinary loss (0.55) (0.44) (0.95) (1.30)
Extraordinary loss (Note 19) - (0.31) - (0.09)
-----------------------------------------------
Net loss (0.55) (0.75) (0.95) (1.39)
26