10-Q 1 a2030729z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-23483 ------------------ COLOR SPOT NURSERIES, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 68-0363266 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 3478 BUSKIRK AVENUE, PLEASANT HILL, CA 94523 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (925) 934-4443 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 1, 2000, the Registrant had outstanding 6,948,597 shares of Common Stock, par value $0.001 per share. COLOR SPOT NURSERIES, INC. FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS UNDER THE CAPTIONS "ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND ELSEWHERE THROUGHOUT THIS QUARTERLY REPORT ON FORM 10-Q ("QUARTERLY REPORT") OF COLOR SPOT NURSERIES, INC. WHICH ARE NOT HISTORICAL IN NATURE ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS DEAL WITH THE CURRENT INTENTIONS, BELIEFS AND EXPECTATIONS OF MANAGEMENT WITH RESPECT TO OUR BUSINESS AND ARE TYPICALLY IDENTIFIED BY PHRASES SUCH AS "WE PLAN," "MANAGEMENT BELIEVES" AND OTHER PHRASES OF SIMILAR MEANING. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO DIFFER, PERHAPS MATERIALLY, FROM ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS: - OUR SUBSTANTIAL LEVERAGE AND DEBT SERVICE; - RESTRICTIONS IMPOSED BY DEBT COVENANTS AND THE EFFECT OF A DEFAULT ON OUR OPERATIONS; - OUR ABILITY TO INTEGRATE ACQUIRED FACILITIES INTO OUR NETWORK; - CHANGES IN OUR OPERATING STRATEGY; - THE UNCERTAINTY OF ADDITIONAL FINANCING TO FUND FUTURE CAPITAL NEEDS; - WEATHER AND GENERAL AGRICULTURAL RISKS; - SEASONALITY AND THE VARIABILITY OF QUARTERLY RESULTS; - OUR DEPENDENCE ON MAJOR CUSTOMERS SUCH AS HOME DEPOT; - REGULATORY CONSTRAINTS AND CHANGES IN LAWS OR REGULATIONS CONCERNING THE GARDENING INDUSTRY; - LABOR LAWS AND CHANGES IN THE MINIMUM WAGE; - OUR SHORT OPERATING HISTORY UNDER CURRENT MANAGEMENT; - SENSITIVITY TO PRICE INCREASES OF CERTAIN RAW MATERIALS; - OUR DEPENDENCE ON LEASED FACILITIES; - LACK OF A MARKET FOR OUR SECURITIES; - AND OTHER FACTORS AS MAY BE IDENTIFIED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND EXCHANGe COMMISSION OR IN OUR PRESS RELEASES. FOR A DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- CERTAIN BUSINESS FACTORS" OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2000 (AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 2000). READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS MADE IN, OR INCORPORATED BY REFERENCE INTO, THIS QUARTERLY REPORT OR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, ANY DOCUMENT OR STATEMENT REFERRING TO THIS QUARTERLY REPORT OR OUR PRESS RELEASES. COLOR SPOT NURSERIES, INC. INDEX

COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

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)

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)

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)

The accompanying notes are an integral part of these consolidated financial statements. 4 COLOR SPOT NURSERIES, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 NOTE 1 - BASIS OF PRESENTATION AND OPERATIONS The information contained in the following notes to the consolidated financial statements of Color Spot Nurseries, Inc. is condensed from that which would appear in the annual consolidated financial statements. Accordingly, these financial statements should be read in conjunction with our annual financial statements for the fiscal year ended June 30, 2000, contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. We produce and distribute packaged bedding plants and flowers, groundcover, ornamental plants and shrubs, and Christmas trees. As of September 30, 2000, we operate 15 production facilities located in 5 states. In addition, we own or lease growing fields for Christmas trees in Oregon, Michigan, North Carolina, and Tennessee. We sell primarily to general merchandise stores, home improvement stores, premium independent garden centers and commercial landscapers, located predominantly in California, Texas and other western states. As of September 30, 2000, we had $134.4 million of long-term indebtedness and an accumulated deficit of $55.8 million. We are highly leveraged and have significant debt service obligations. Our debt service obligations will have important consequences to holders of our debt, preferred stock, warrants and common stock including the following: (i) a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for operations, acquisitions, future business opportunities and other purposes and increasing our vulnerability to adverse general economic and industry conditions; (ii) our leveraged position may increase our vulnerability to competitive pressures; (iii) the financial covenants and other restrictions contained in the new loan agreement, the indenture for our outstanding senior subordinated notes and the certificate of designation for the Series A Preferred Stock will require us to meet certain financial tests and will restrict our ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, preferred or common stock; and (iv) funds available for working capital, capital expenditures, acquisitions and general corporate purposes may be limited. The accompanying financial statements have been prepared contemplating the realization of all recorded assets, including intangible assets and deferred tax assets and the satisfaction of liabilities in the normal course of business. We must generate sufficient cash flow to meet our obligations as they come due, comply with the terms of our credit facilities, and maintain profitability or there will be a material adverse impact on our business, financial position and results of operations. The consolidated financial statements as of September 30, 2000, and for the three months ended September 30, 2000 and 1999, are unaudited. However, in the opinion of management, these financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. Our operations are highly seasonal and the results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. 5 COLOR SPOT NURSERIES, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 NOTE 2 - INVENTORIES Inventories at September 30, 2000 and June 30, 2000, consisted of the following (in thousands):

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 2000 and June 30, 2000, consisted of the following (in thousands):

6 NOTE 4 - INTANGIBLE ASSETS Intangible assets at September 30, 2000, and June 30, 2000, consisted of the following (in thousands):

NOTE 5 - DEBT Debt at September 30, 2000, and June 30, 2000, consisted of the following (in thousands):

As of September 30, 2000, a total of $23.2 million was outstanding on our revolving line of credit and an additional $16.4 million was available under this line of credit. As of June 30, 2000, we were not in compliance with a certain financial covenant, however, on August 10, 2000, a waiver curing the noncompliance was obtained. On September 28, 2000, a waiver and amendment under the Loan and Security Agreement was obtained waiving the covenant violation, resetting the financial covenants for each four quarter period beginning with the four quarters ending September 30, 2000 and reestablishing the original seasonal line period. Our three-year revolving credit facility expires on October 15, 2001. Management is working to extend the term of the agreement. There can be no assurance that an extension will be granted and, if not, that alternative financing will be available. As of September 30, 2000, we were in compliance with our loan covenants. 7 NOTE 6 -- EARNINGS PER SHARE Basic and diluted earnings per share is as follows:

For the three months ended September 30, 2000 and 1999, the effect of options, warrants and convertible securities was antidilutive and is therefore excluded from the computation of earnings per share. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are one of the largest wholesale nurseries in the United States, based on annual revenue and greenhouse square footage. We sell a wide assortment of high-quality bedding plants, shrubs, potted flowering plants, ground cover and Christmas trees as well as provide extensive merchandising services primarily to leading home centers and mass merchants. Our business is highly seasonal with a peak selling season from March through June. Consequently, we have historically reported losses and lower revenues in the second half of the calendar year. On August 24, 2000, our Board of Directors adopted a resolution providing for a change in our fiscal year end from June 30 to December 31. We intend to file a Transition Report on Form 10-K for the six-month period from July 1, 2000 to December 31, 2000. This Quarterly Report on Form 10-Q covers the first three months of the six-month transition period. THREE MONTHS ENDED SEPTEMBER 30, 2000, AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES. Net sales increased $1.0 million, or 3.6%, to $27.7 million for the three months ended September 30, 2000, from $26.7 million during the three months ended September 30, 1999. This increase is primarily the result of additional sales to existing customers. GROSS PROFIT. Gross profit decreased $2.5 million to $7.9 million for the three months ended September 30, 2000, from $10.4 million during the three months ended September 30, 1999. Gross profit as a percentage of net sales decreased to 28.6% for the three months ended September 30, 2000, from 38.9% for the three months ended September 30, 1999. The decrease in gross profit as a percentage of net sales was primarily the result of inefficiencies in production and an increase in the write-off of excess inventory of $1.8 million. The increase in the write-off of excess inventory relates primarily to the facilities that have been taken out of production, as well as an improper mix of product available for customers. In addition, sales prices were reduced in order to sell certain products. SALES, MARKETING AND DELIVERY EXPENSES. Sales, marketing and delivery expenses increased $0.5 million to $8.2 million for the three months ended September 30, 2000, from $7.7 million in the three months ended September 30, 1999. As a percentage of net sales, sales, marketing and delivery expenses increased to 29.5% for the three months ended September 30, 2000, from 29.0% for the three months ended September 30, 1999, primarily due to increased delivery expenses. Delivery expenses increased by $0.6 million, primarily due to driver shortages requiring the use of more expensive common carriers and higher costs associated with the sale and movement of excess carryover product and inventory at four facilities that have been or are in the process of being taken out of production. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased $1.5 million, to $4.3 million for the three months ended September 30, 2000, from $5.8 million in the three months ended September 30, 1999. As a percentage of net sales, general and administrative expenses decreased to 15.6% for the three months ended September 30, 2000, from 21.8% for the three months ended September 30, 1999. This decrease as a percentage of net sales is primarily the result of a revised compensation structure for key management. INTEREST EXPENSE. Interest expense increased $0.4 million to $4.1 million for the three months ended September 30, 2000, from $3.7 million in the three months ended September 30, 1999, as a result of higher average levels of borrowings required to fund working capital requirements. TAXES. Our effective tax rate decreased to 30.0% for the three months ended September 30, 2000, from 39.5% for the three months ended September 30, 1999, primarily as a result of the impact of permanent 9 items on lower pretax loss and a valuation which was recorded against all state net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Our cash needs are primarily to fund seasonal working capital requirements and capital expenditures. During the three months ended September 30, 2000, our primary source of capital was a revolving line of credit. As of June 30, 2000, we were not in compliance with a certain financial covenant, however, on August 10, 2000, a waiver curing the noncompliance was obtained. On September 28, 2000, a waiver and amendment under the Loan and Security Agreement was obtained waiving the covenant violation, resetting the financial covenants for each four quarter period beginning with the four quarters ending September 30, 2000 and reestablishing the original seasonal line period. Our three-year revolving credit facility expires on October 15, 2001. Management is working to extend the term of the agreement. There can be no assurance that an extension will be granted and, if not, that alternative financing will be available. As of September 30, 2000, we were in compliance with our loan covenants. During the three months ended September 30, 2000, net cash used in operating activities was $6.0 million, primarily a result of accelerated payment of past due accounts and an increase in inventory offset by decreases in accounts receivable. Net cash used in investing activities during the three months ended September 30, 2000, and September 30, 1999, was $1.7 million and $0.2 million, respectively. The increase of $1.5 million is primarily related to the implementation of a new integrated financial system. We are highly leveraged. As of September 30, 2000, we have $134.4 million of long-term indebtedness and an accumulated deficit of $55.8 million. Although we believe that the cash available from the Fleet Loan Agreement and operations will be sufficient to finance working capital requirements and capital expenditures for the next 12 months, there is no assurance that we will be able to generate sufficient cash flows or meet our financial goals and comply with our debt covenants in the future. We may incur additional indebtedness in the future, subject to certain limitations contained in the instruments governing our indebtedness and capital stock. Our debt service obligations have important consequences to holders of our debt, preferred stock, warrants and common stock including the following: (i) a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for operations, acquisitions, future business opportunities and other purposes and increasing our vulnerability to adverse general economic and industry conditions; (ii) our leveraged position may increase our vulnerability to competitive pressures; (iii) the financial covenants and other restrictions contained in the Fleet Loan Agreement, the indenture for the outstanding senior subordinated notes and the certificate of designation for the Series A Preferred Stock will require us to meet certain financial tests and will restrict our ability to borrow additional funds, to dispose of assets or to pay cash dividends on, or repurchase, preferred or common stock; and (iv) funds available for working capital, capital expenditures, acquisitions and general corporate purposes may be limited. During the period ended September 30, 2000, we decided to take excess capacity out of production. The inventory at the Aurora, Sunol, Watsonville and Waco facilities will be transferred to other facilities and production at those facilities will cease or be substantially reduced. As demand returns, we will resume production at the Aurora, Sunol and Waco facilities. The lease for the Watsonville facility will expire in fiscal 2001 and one of two leases at the Sunol facility has been subleased. We will evaluate the possibility of extending the Watsonville lease based on production requirements at the time of expiration. As of September 30, 2000, we have approximately $0.5 million net book value of assets at our Watsonville facility and plan to use these assets at our other locations. We have approximately $6.0 million net book value of assets at our Aurora, Sunol and Waco facilities. We plan to utilize some of these assets in our other facilities and in these facilities when they reopen. If we decide to abandon any of these assets, we will account for the 10 abandonment in the period such decision is made; such accounting could require us to take a material charge to our income statement. Depreciation and lease expense will be charged to general and administrative expense for the period of time that these facilities are not in production. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our liabilities consist primarily of a revolving line of credit, senior subordinated notes, other notes and accounts payable. We have also issued Series A Preferred Stock and Redeemable Common Stock. Such liabilities and stockholders' equity have varying levels of sensitivity to changes in market interest rates. Interest rate risk results when, due to different maturity dates and repricing intervals, interest rate indices for interest-bearing liabilities increase relative to income earning assets, thereby creating a risk of decreased net earnings and cash flow. The following table provides information about our market sensitive liabilities, categorized by maturity, and constitutes a "forward-looking statement." For more information, please refer to Item 1. "Financial Statements and Notes to Consolidated Financial Statements."

(1) On October 15, 1998, we entered into the Fleet Loan Agreement, borrowed approximately $32 million, and repaid in full amounts due under our existing credit facility. The Fleet Loan Agreement terminates in October 2001. The Fleet Loan Agreement provides a $70.0 million revolving credit facility, $55.0 million of which is subject to certain borrowing base limitations and $13.9 million of which is available without limitation from November through the following April. As of September 30, 2000, the balance due on our line of credit was $23.2 million and a total of $16.4 million of additional capital remained available. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources" and Note 5 to the Notes to Consolidated Financial Statements. The average interest rate is the Base Rate plus 1.0% or LIBOR plus 3.0%, as defined in the Fleet Loan Agreement. 11 PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Color Spot Nurseries, Inc. and its subsidiaries are from time to time subject to various legal proceedings incidental to our business. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on our financial position or results of operations, taken as a whole. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS

12 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2000. COLOR SPOT NURSERIES, INC. a Delaware corporation By: /s/ Richard E. Parker ------------------------------------------- Name: Richard E. Parker Title: President, Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER) By: /s/ Joseph P. O'Neill ------------------------------------------- Name: Joseph P. O'Neill Title: Executive Vice President, Chief Operating Officer and Chief Financial Officer (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER)

13 EXHIBIT INDEX -------------

COLOR SPOT NURSERIES INC 10-Q