10-Q 1 a2064524z10-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 29, 2001 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, SUITE 260, 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 30, 2001, the Registrant had 6,948,597 shares of its common stock outstanding. 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 the Company's business and are typically identified by phrases such as "the Company plans" or "Management believes" and other phrases of similar meaning. These statements involve known and unknown risks and other factors that may cause actual results, levels of activity, performance or achievements to differ, perhaps materially, from anticipated results. These risks and uncertainties include, among others: o the Company's substantial leverage and debt service; o restrictions imposed by debt covenants; o the uncertainty of additional financing to fund future operating and capital needs; o weather and general agricultural risks; o seasonality and the variability of quarterly results; o dependence on major customers such as Home Depot; o regulatory constraints and changes in laws or regulations concerning the gardening industry; o labor laws and changes in the minimum wage; o the short operating history under current management; o sensitivity to price increases of certain raw materials, fuel and utilities; o the Company's dependence on leased facilities; o lack of a market for the Company's securities; and o other factors as may be identified from time to time in the Company's filings with the Securities and Exchange Commission or in press releases. For a discussion of these factors and others, please see "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Certain Business Considerations" of the Company's Transition Report on Form 10-K for the period ended December 31, 2000 (as filed with the Securities and Exchange Commission on April 2, 2001). 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 press releases. COLOR SPOT NURSERIES, INC. INDEX

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

1 COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

2 COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT COMMON SHARES)

3 COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS)

4 COLOR SPOT NURSERIES, INC. AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 2001 NOTE 1 - BASIS OF PRESENTATION, OPERATIONS AND LIQUIDITY The consolidated financial statements of Color Spot Nurseries, Inc. (the "Company") as of September 29, 2001, and for the three and nine months ended September 29, 2001 and September 30, 2000 are unaudited. However, in the opinion of management, these financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The Company's operations are highly seasonal and the results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. The information contained in the following notes to the consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements. Accordingly, these financial statements should be read in conjunction with the Company's financial statements for the six-month transition period ended December 31, 2000, contained in its Transition Report on Form 10-K. The Company's Transition Report was filed with the Securities and Exchange Commission on April 2, 2001. 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, including packaged bedding plants, flowering potted plants, groundcover, ornamental plants and shrubs and fresh-cut Christmas trees. As of September 29, 2001, the Company operated 13 production facilities located in four states. The Company also owns or leases growing fields for Christmas trees in Oregon, Michigan, North Carolina and Tennessee. The Company sells primarily to leading home centers and mass merchants, and to independent garden centers and commercial landscapers, located predominantly in California, Texas and other western states. The Company conducts its operations through one reportable segment. As of September 29, 2001, the Company had $137.2 million of debt and an accumulated deficit of $71.5 million. The Company is highly leveraged and has significant debt service obligations. The Company's debt service obligations have important consequences to holders of its debt, stock and 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 for operations, acquisitions, future business opportunities and other purposes and increasing its vulnerability to adverse general economic and industry conditions; (ii) its leveraged position may increase its vulnerability to competitive pressures; (iii) the amended financial covenants and other restrictions contained in the Company's subsequently amended and restated Loan and Security Agreement with Fleet Capital Corporation, as agent (the "Amended Loan Agreement"), the indenture for the 13% notes and the certificates of designation for the Series A Preferred Stock and Series B Preferred Stock (issued in November 2001) 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. On November 20, 2001, the Company reached an agreement with its creditors to substantially restructure its debt. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a description of the November 2001 debt restructuring. 5 NOTE 2 - INVENTORIES Inventories at September 29, 2001 and December 31, 2000, consisted of the following (in thousands):

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 29, 2001 and December 31, 2000, consisted of the following (in thousands):

6 NOTE 4 - INTANGIBLE ASSETS Intangible assets at September 29, 2001 and December 31, 2000, consisted of the following (in thousands):

NOTE 5 - DEBT Debt at September 29, 2001 and December 31, 2000, consisted of the following (in thousands):

The revolving line of credit represents borrowings under the Company's Amended Loan Agreement which provides up to $55.0 million of credit, of which a minimum of $10.0 million is available without limitation from October 1, 2001 through April 30, 2001, with the remainder subject to certain borrowing base limitations based upon a percentage of eligible inventory and eligible accounts receivable. The Amended Loan Agreement also includes a $5.0 million letter of credit facility. As of September 29, 2001 a total of $25.2 million was outstanding and an additional $0.9 million was available under this line of credit. On November 21, 2001, the Company reached an agreement with its Creditors to substantially restructure its debt. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a description of the November 2001 debt restructuring. NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Accounting Standards 142, "Accounting for Goodwill" ("SFAS 142"). SFAS 141 requires that all business combinations be accounted for using the purchase method of accounting. Use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. The Company does not expect that SFAS 141 will have a material impact on its consolidated financial statements. SFAS 142 establishes accounting standards for existing goodwill related to purchase business combinations. SFAS 142 requires the Company to discontinue the periodic amortization of goodwill effective January 1, 2002. Additionally, SFAS 142 requires the Company to evaluate all unamortized goodwill for 7 possible impairment within the first six months of fiscal 2002 based on new valuation criteria set forth in SFAS 142. All provisions of SFAS 142 must be applied for the fiscal year beginning January 1, 2002 to all of the Company's goodwill and other intangible assets, regardless of when those assets were initially recognized. At this time, the Company cannot estimate the impact of this statement on its consolidated financial statements, however, the effect may be material. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is one of the largest wholesale nurseries in the United States, based on annual revenue and greenhouse square footage. The Company sells a wide assortment of high quality bedding plants, shrubs, potted flowering plants, ground cover and Christmas trees, as well as extensive merchandising services, primarily to leading home centers and mass merchants. The Company's business is highly seasonal with a peak-selling season from March through June. THREE MONTHS ENDED SEPTEMBER 29, 2001 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 NET SALES. Net sales decreased approximately $0.3 million, or 1.2%, to $27.3 million for the three months ended September 29, 2001, from $27.7 million during the three months ended September 30, 2000. This decrease is primarily the result of lower sales to lower volume customers, offset by higher sales to larger, higher volume customers. GROSS PROFIT. Gross profit increased approximately $1.8 million to $9.8 million for the three months ended September 29, 2001, from $7.9 million during the three months ended September 30, 2000. Gross profit as a percentage of net sales increased to 35.7% for the three months ended September 29, 2001, from 28.6% for the three months ended September 30, 2000. The increase in gross profit as a percentage of net sales in 2001 was primarily the result of improved pricing strategies, tighter cost controls and reduced excess production, partially offset by higher utility rates. SALES, MARKETING AND DELIVERY EXPENSES. Sales, marketing and delivery expenses increased $0.5 million to $8.7 million for the three months ended September 29, 2001, from $8.2 million in the three months ended September 30, 2000. Sales, marketing and delivery expenses, as a percentage of net sales, increased to 31.7% for the three months ended September 29, 2001, from 29.5% for the three months ended September 29, 2000. The increase, as a percentage of net sales, was primarily the result of three factors: increased distribution costs due to longer travel routes; higher lease costs; and increased use of merchandisers. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the three months ended September 29, 2001, remained relatively flat as compared to the three months ended September 30, 2000. INTEREST EXPENSE. Interest expense for the three months ended September 29, 2001, remained relatively flat as compared to the three months ended September 30, 2000. Higher borrowing levels were offset by lower interest rates. TAXES. The effective tax rate decreased to 22.6% for the three months ended September 29, 2001, from 30.0% for the three months ended September 29, 2000, primarily due to the impact of permanent items on a lower projected pre-tax loss. The Company's California state net operating loss carryforwards expire beginning on June 30, 2001 and are fully reserved. Although the Company has not provided a valuation allowance against its federal net operating loss carryforwards, the realizability of the related assets is periodically evaluated. The federal net operating losses expire beginning on June 30, 2011. NINE MONTHS ENDED SEPTEMBER 29, 2001 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 NET SALES. Net sales decreased $10.0 million, or 6.1%, to $152.8 million for the nine months ended September 29, 2001, from $162.8 million during the nine months ended September 30, 2000. This decrease is primarily the result of the Company's strategic plan to reduce sales to low volume customers and to customers in less profitable outlying markets such as Colorado, Tennessee and Idaho. In addition, same store sales for the Company's larger accounts declined from the comparable period of the prior year reflecting the general economic slowdown in its retail markets. GROSS PROFIT. Gross profit increased $4.4 million to $63.9 million for the nine months ended September 29, 2001, from $59.5 million during the nine months ended September 30, 2000. Gross profit as a percentage of net sales increased to 41.8% for the nine months ended September 29, 2001, from 36.5% for the nine months ended September 30, 2000. The increase in gross profit as a percentage of net sales in 2001 was primarily the result of improved pricing strategies, tighter cost controls and reduced excess production, partially offset by higher utility rates. 8 SALES, MARKETING AND DELIVERY EXPENSES. Sales, marketing and delivery expenses decreased $3.3 million to $35.9 million for the nine months ended September 29, 2001, from $39.2 million in the nine months ended September 30, 2000. Sales, marketing and delivery expenses, as a percentage of net sales, decreased to 23.5% for the nine months ended September 29, 2001, from 24.1% for the nine months ended September 30, 2000. The decrease, as a percentage of net sales, was the result of the Company achieving its strategic initiative during the first six months of the fiscal year to lower distribution costs by reducing sales and deliveries to outlying markets. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $2.4 million, to $15.3 million for the nine months ended September 29, 2001, from $13.0 million in the nine months ended September 30, 2000. This increase is primarily due to a reversal of management bonuses recorded during the nine months ended September 29, 2000 that were accrued in calendar 2000 before the change in the Company's fiscal year end. INTEREST EXPENSE. Interest expense increased to $13.0 million for the nine months ended September 29, 2001, from $12.4 million in the nine months ended September 30, 2000, as a result of higher average borrowing levels during the nine months ended September 29, 2001. TAXES. The Company recorded a net benefit of $0.5 million or 29.0% on its pre-tax loss for the nine months ended September 29, 2001 as compared to a net provision of $1.0 million on its pre-tax loss for the nine months ended September 30, 2000. The provision recorded during the nine months ended September 30, 2000 was due to cumulative rate adjustments recorded as a result of weaker than expected performance and the effect of permanent book-tax differences on pre-tax losses. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements are primarily to fund its seasonal working capital needs and capital expenditures. The Company's primary source of funds is through borrowings under its revolving line of credit. During the nine months ended September 29, 2001, the Company's operating activities provided $16.0 million in cash, an improvement of $4.6 million from $11.4 million provided during the nine months ended September 30, 2000. The increase in cash provided from operating activities was the result of improved performance and increases in accounts payable partially offset by higher levels of accounts receivable and inventories. The Company also invested $3.8 million and $7.1 million during the nine months ended September 29, 2001 and September 30, 2000, respectively, for necessary production and computer equipment and facility infrastructure repairs and improvements, as well as required capital projects to meet environmental requirements. As a result of greater cash provided by operating activities and lower purchases of fixed assets, the Company was able to reduce its revolver borrowings by $10.4 million during the nine months ended September 29, 2001 compared to an increase in such borrowings of $1.7 million during the nine months ended September 30, 2000. NOVEMBER 2001 RESTRUCTURING OF COMPANY DEBT On November 20, 2001, the Company reached an agreement with its creditors to restructure its debt. The following summarizes the background and effect of the debt restructuring. The accounting consequences of the debt restructuring will be recorded in the quarter ending December 31, 2001. BACKGROUND OF THE RESTRUCTURING As previously reported, the Company had been in default on various financial covenants on its prior loan agreement with Fleet Capital Corporation and certain other lenders ("Fleet") at various times since June 30, 2000. The Company also was not in compliance with its financial covenants as of September 29, 2001, however, it received a waiver of this violation in connection with the restructuring. As a result of the defaults and pending expiration of the prior loan agreement, the Company entered into ongoing discussions with Fleet regarding a new credit facility. In the second quarter of 2001, Fleet informed the Company that it would use the subordination provisions in the prior loan agreement to block the Company's payment of interest due on the Company's 10.5% Senior Subordinated Notes (the "Old Notes"). Thus, the Company also entered into negotiations with holders of a majority of the Old Notes in an attempt to renegotiate the terms of the Old Notes. These negotiations eventually led to a complete restructuring of the Company's debt, which included the prior loan agreement, the Catalyst Note (as defined below), the Old Notes and the Heller Note. Each of these transactions was consummated on November 20, 2001. 9 TERMS OF THE AMENDED LOAN AGREEMENT The Amended Loan Agreement with Fleet, which expires on September 15, 2003, provides the Company with up to $55.0 million of credit and is subject to certain borrowing base limitations based on a percentage of eligible inventory and eligible accounts receivable. The Amended Loan Agreement includes a seasonal advance provision that allows the Company to borrow additional funds above the borrowing base limitations during the seven-month period beginning on October 1st and ending on April 30th. The Company will be entitled to seasonal advances of up to $10 million from October 1, 2001 through April 30, 2002, and up to $8 million from October 1, 2002 through April 30, 2003. These seasonal maximums are subject to decrease, depending on the value of the Company's real estate, machinery and equipment. The Amended Loan Agreement also includes a $5.0 million letter of credit facility, but the total amount available under the Amended Loan Agreement will be reduced by the face amount of any outstanding letters of credit. Borrowings under the Amended Loan Agreement bear interest, at the Company's option, at the prime rate plus 1.0% or the London interbank offer rate ("LIBOR") plus 3.0%. Seasonal advances under the Amended Loan Agreement bear interest, at the Company's option, at prime rate plus 1.5% or LIBOR plus 3.5%. The Amended Loan Agreement contains various covenants, including, without limitation covenants prohibiting or limiting the Company's ability to incur additional indebtedness, grant liens, make guarantees, enter into mergers or acquisitions, make capital expenditures, and pay dividends and other distributions. The Amended Loan Agreement also contains financial covenants and information reporting requirements. The Amended Loan Agreement contains various events of default, the occurrence and continuance of which would entitle the lenders to accelerate the maturity of all loans and terminate their revolving credit and letter of credit commitment. Events of default include: (i) failure to pay any principal, interest, fees or other amounts; (ii) breaches of representations and warranties; (iii) violations of covenants; (iv) bankruptcy or insolvency; (v) unsatisfied judgments in excess of certain thresholds; (vi) certain events giving rise to liability under the Employee Retirement Income Security Act; (vii) change of ownership of the Company; (viii) defaults under certain other agreements; (ix) the occurrence of certain uninsured losses; (x) business disruption or condemnation; (xi) a challenge to the enforceability of any loan document or obligation under the Amended Loan Agreement or the perfection or priority of any lien granted to Fleet; (xii) a revocation, attempted revocation, repudiation or default under the terms of any subsidiary guaranty; and (xiii) the departure of either the current Chief Executive Officer or Chief Financial Officer from the Company unless replaced with an individual satisfactory to the lenders or the departure of both the current Chief Executive Officer or Chief Financial Officer within a 6 month period even if the lenders approve of the replacements for such individuals. Events of default will also give the lenders the right to possess and sell the collateral security to obtain funds to satisfy outstanding obligations to the lenders. The obligations under the Amended Loan Agreement are secured by substantially all of the Company's assets. In addition, the lenders may refuse to advance funds upon request if there has been a material adverse change in the Company's operations. Certain of the lenders obtained the right to acquire up to 34% of the Company's common stock as an inducement to enter into the Amended Loan Agreement. The exact amount of common stock which may be acquired will depend on Fleet's ability to syndicate the loans under the Amended Loan Agreement on or before February 18, 2002. This obligation may be satisfied either by the Company or by the transfer of common stock from the existing common stockholders. TERMS OF THE NEW CATALYST NOTE As part of the restructuring, the Company entered into a Securities Purchase Agreement with Catalyst Equity Fund L.P. ("Catalyst"), pursuant to which the Company sold to Catalyst $12.0 million in senior subordinated secured notes (the "Catalyst Note"). The Catalyst Note is junior and subordinated to the Amended Loan Agreement and senior to the New Notes (as defined below) and all other indebtedness of the Company. The proceeds from the Catalyst Note were used to refinance a portion of the Company's obligations under the Amended Loan Agreement, to pay interest due on the Old Notes, and to pay expenses associated with restructuring the Company's debt. The Catalyst Note is secured by substantially all of the Company's assets, subject only to outstanding liens under the Amended Loan Agreement. The Catalyst Note bears interest at the rate of 15% per annum, payable monthly, and also bears a 5% annual renewal fee and a 5% fee upon repayment. The Catalyst Note is payable in full on October 1, 2003 and cannot be repaid 10 prior to that date unless there is a change in control. If a change in control occurs prior to the first anniversary of the closing of the Catalyst Note, the Catalyst Note is subject to mandatory redemption at 110% of the principal amount (including all accrued and unpaid interest). If a change in control occurs after the first anniversary of the closing, the Catalyst Note is subject to mandatory redemption at 105% of the principal amount (including all accrued and unpaid interest). The Catalyst Note contains various covenants, including, without limitation, covenants prohibiting or limiting the Company's ability to incur additional indebtedness, grant liens, make guarantees, enter into mergers or acquisitions, make capital expenditures, and pay dividends and other distributions. The Catalyst Note also contains financial covenants and information reporting requirements. The Catalyst Note contains various events of default, the occurrence and continuance of which would entitle Catalyst to accelerate the maturity of the Catalyst Note. Events of default include: (i) failure to pay any principal, interest, fees or other amounts; (ii) breaches of representations and warranties; (iii) violations of covenants; (iv) bankruptcy or insolvency; (v) unsatisfied judgments in excess of certain thresholds; (vi) certain events giving rise to liability under the Employee Retirement Income Security Act; (vii) change of ownership of the Company; (viii) payment defaults under certain other agreements; (ix) the occurrence of certain uninsured losses; (x) business disruption or condemnation; (xi) a challenge to the enforceability of any loan document executed in connection with the Catalyst Note or obligation under the Catalyst Note or the perfection or priority of any lien granted to Catalyst; (xii) a default under the terms of any subsidiary guaranty; (xiii) the termination of the Amended Loan Agreement or other agreements entered into in connection therewith or termination of the commitments under the Amended Loan Agreement; and (xiv) the departure of either the current Chief Executive Officer or Chief Financial Officer from the Company unless replaced with an individual satisfactory to Catalyst or the departure of both the current Chief Executive Officer and Chief Financial Officer within a 6 month period even if Catalyst approves of the replacements for such individuals. Events of default will also give Catalyst the right to possess and sell the collateral security to obtain funds to satisfy outstanding obligations to the lenders, subject to the terms of the subordination agreement between Fleet and Catalyst. The obligations under the Catalyst Note are secured by substantially all of the Company's assets, which security interest is subordinate to the security interest granted to Fleet under the Amended Loan Agreement. EXCHANGE OF OLD NOTES FOR NEW SENIOR SUBORDINATED NOTES AND SERIES B PREFERRED STOCK As part of the Company's recapitalization, the Company exchanged each $1,000 in principal amount of Old Notes for the following (the "Exchange Offer"): o $500 principal amount of new 13% Senior Subordinated Notes due 2005; o additional principal amount of new 13% Senior Subordinated Notes due 2005 equal to the interest that would have accrued on the $500 principal amount of the new notes described above for the period from June 16, 2001 to the closing date of the Exchange Offer (as if such new notes had been outstanding on June 16, 2001) (together with the $500 principal amount of new notes described above, the "New Notes"); o an additional cash payment equal to the sum of interest due on the tendered Old Notes on June 15, 2001 (equal to $52.50 per $1,000 principal amount held); o six (6) shares of 13% Series B Cumulative Preferred Stock, with a liquidation preference of $100 per share ("Series B Preferred Stock"); and o additional shares of Series B Preferred Stock equal to the dividend that would have accrued on the Series B Preferred Stock described above for the period from June 16, 2001 to the closing date of the Exchange Offer (as if the Series B Preferred Stock had been outstanding on June 16, 2001). Holders of 100% of Old Notes tendered their Old Notes in the Exchange Offer. The following represents a summary of the key terms of the New Notes and the Series B Preferred Stock. 11 TERMS OF THE NEW NOTES SECURITIES OFFERED $500 principal amount of new 13% Senior Subordinated Notes due 2005 and additional principal amount of new 13% Senior Subordinated Notes due 2005 equal to the interest that would have accrued on the New Notes for the period from June 16, 2001 to the closing date of the Exchange Offer (as if the New Notes had been outstanding on June 16, 2001). MATURITY DATE December 15, 2005. INTEREST; INTEREST Interest on the New Notes will accrue at a rate of 13% per PAYMENT DATES annum and will be payable quarterly in cash on each March 15, June 15, September 15 and December 15 commencing on December 15, 2001, except that on or prior to June 15, 2003, interest may be paid, at the Company's option, by (i) the cash payment of accrued interest at the annual rate equal to 11% and (ii) the issuance of additional New Notes with a principal amount equal to the interest accrued to such date at an annual rate equal to 2%. Interest on the New Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. MANDATORY The New Notes are not entitled to the benefit of any REDEMPTION mandatory sinking fund. OPTIONAL REDEMPTION The New Notes are redeemable, at the Company's option, in whole at any time or in part from time to time, on and after December 15, 2002 upon not less than 30 nor more than 60 days' prior written notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on December 15 of the year set forth below, plus in each case, accrued and unpaid interest thereon, if any, to the date of redemption: ~~2002 105.25% 2003 103.50% 2004 101.75%~~

Notwithstanding the foregoing, in connection with a refinancing of the entire outstanding principal amount of the New Notes, within six months of the issue date, the New Notes are redeemable with no premium at the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption. CHANGE OF CONTROL Upon the occurrence of a change of control of the Company, each holder of New Notes will have the right to require the Company to repurchase such holder's New Notes at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. In the event of a change of control of the Company, there can be no assurance that the Company will have sufficient cash to fulfill such repurchase obligation. RANKING The New Notes will be unsecured and subordinated in right of payment to all existing and future senior debt of the Company, including the obligations under the Amended Loan Agreement and the Catalyst Note. The New Notes will rank PARI PASSU with any future senior subordinated indebtedness of the Company and will rank senior to all other subordinated debt of the Company. The New Notes Indenture permits the Company to incur additional indebtedness, including up to $85.0 million of senior debt available under the Company's credit facilities, subject to certain limitations. CERTAIN COVENANTS The indenture for the New Notes (the "New Notes Indenture") contains covenants 12 that will, subject to certain exceptions, limit, among other things, the ability of the Company and its subsidiaries to (i) pay dividends or make certain other restricted payments or investments; (ii) incur additional indebtedness and issue disqualified stock and preferred stock; (iii) create liens on assets; (iv) merge, consolidate, or sell all or substantially all of their assets; (v) enter into certain transactions with affiliates; and (vi) create restrictions on dividends or other payments by subsidiaries to the Company. TERMS OF THE SERIES B PREFERRED STOCK SECURITIES OFFERED Six (6) shares of the Company's 13% Series B Cumulative Preferred Stock, par value $.01 per share, for each $1,000 principal amount of Old Notes, plus additional shares of Series B Preferred Stock equal to the dividend that would have accrued on the Series B Preferred Stock for the period from June 16, 2001 to the closing date of the Exchange Offer (as if the Series B Preferred Stock had been outstanding on June 16, 2001). LIQUIDATION $100 per share. PREFERENCE DIVIDENDS The Series B Preferred Stock pays dividends at a rate per annum of 13% of the liquidation preference of $100 per share (subject to increase as set forth below). Dividends will accumulate from the date of issuance and will be payable quarterly on each March 15, June 15, September 15 and December 15 commencing on December 15, 2001. Upon certain events of default by the Company described in the Certificate of Designation for the Series B Preferred Stock, the dividends on the Series B Preferred Stock will accrue at a rate of 18% per annum of the liquidation preference thereof until such event of default is cured. Dividends will be payable in cash, except that on or prior to June 15, 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of Series B Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. RANKING The Series B Preferred Stock ranks senior in right of payment to all other classes or series of capital stock of the Company as to dividends and upon liquidation, dissolution or winding up of the Company. MANDATORY The Company is required, subject to certain conditions, to REDEMPTION redeem all of the shares of Series B Preferred Stock outstanding on December 15, 2005 at a redemption price in cash equal to the liquidation preference thereof, plus accrued and unpaid dividends, if any, to the date of redemption. OPTIONAL The Series B Preferred Stock is redeemable, at the Company's REDEMPTION option, in whole at any time or in part from time to time, on and after December 15, 2002 at the following redemption prices (expressed as percentages of the liquidation preference thereof), in each case, together with accrued and unpaid dividends, if any, to the date of redemption, upon not less than 30 nor more than 60 days' prior written notice, if redeemed during the 12-month period commencing on December 15 of each of the years set forth below: ~~2002 105.25% 2003 103.50% 2004 101.75%~~

CHANGE OF CONTROL In the event of a change of control the Company will, subject to certain conditions, be required to offer to repurchase all or any part of such holder's Series B Preferred 13 Stock at an offer price in cash equal to 101% of the aggregate liquidation preference thereof plus accrued and unpaid dividends, if any, thereon to the date of purchase. In the event of a change of control of the Company, there can be no assurance that the Company will have sufficient cash to fulfill such repurchase obligations. VOTING The Series B Preferred Stock will be non-voting, except as otherwise required by law and except in certain circumstances described in the Certificate of Designation for the Series B Preferred Stock, including (i) amending certain rights of the holders of Series B Preferred Stock, (ii) the issuance of any new class of equity securities that ranks PARI PASSU with or senior to the Series B Preferred Stock, (iii) effecting a merger, consolidation, sale of all or substantially all of the Company's assets, and (iv) making certain asset acquisitions. In addition, in the event (i) the Company fails to pay cash dividends on the Series B Preferred Stock when due, (ii) subject to certain exceptions, the Company fails to pay cash interest on the New Notes when due, or (iii) the Company is under protection of Title 11 of the United States Code pursuant to a case commenced after September 15, 2003 or, subject to certain conditions, pursuant to a voluntary case commenced prior to September 15, 2003, the holders of the Series B Preferred Stock shall have the right to elect a majority of the Board of Directors, the Series B Preferred Stock shall vote with the common stock, together as a class, on all other matters on which the common stock is entitled to vote other than election of the Company's Board of Directors, and each share of Series B Preferred Stock shall have a number of votes per share such that the Series B Preferred Stock controls a majority of the votes of the combined class. CERTAIN RESTRICTIVE The Certificate of Designation for the Series B Preferred PROVISIONS Stock contains certain restrictive provisions that, among other things, limit the ability of the Company and its subsidiaries to pay dividends or make certain other restricted payments, incur additional indebtedness or enter into certain transactions with affiliates. AMENDMENTS TO SERIES A PREFERRED STOCK The Company also amended the terms of its Series A Preferred Stock to provide (i) that dividends may be paid at the option of the Company by the issuance of additional shares of Series A Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends through December 15, 2005, (ii) the holders of a majority of the outstanding shares of Series A Preferred Stock the right to elect 1 member of the Board of Directors of the Company (which number shall be increased to 2 at such time as there have been six full quarterly unpaid dividends (whether or not consecutive) and designate one person as a non-voting observer to all meetings of the Board of Directors, and (iii) to conform the definition of "change of control" to the definition contained in the Series B Preferred Stock. The holders of the Series A Preferred Stock obtained the right to acquire 15% of the Company's common stock as an inducement to agree to amend the Series A Preferred Stock. Such stock will be issued on or before December 31, 2001 by the Company or by the transfer of common stock from the existing stockholders of the Company. EXCHANGE OF OLD HELLER NOTE FOR NEW HELLER NOTE AND SERIES B-1 PREFERRED STOCK The Company also exchanged its 8.0% Subordinated Convertible Note issued to Heller Equity Capital Corporation (the "Old Heller Note") with an aggregate principal amount of $10.4 million on November 20, 2001, for a new 8.0% Subordinated Convertible Note (the "New Heller Note") and 12% Series B-1 Cumulative Preferred Stock (the "Series B-1 Preferred Stock"). The New Heller Note is due on December 15, 2005 and has a principal balance of $4.7 million on November 20, 2001, representing 45% of the balance due on the Old Heller Note. The newly issued Series B-1 Preferred Stock has an outstanding principal balance of $5.7 million, representing 5.5 shares of Series B-1 Preferred Stock per $1,000 outstanding under the Old Heller Note on the closing date. The change of control provisions in the New Heller Note conform to the change of control provisions of the New Notes. 14 The New Heller Note accrues interest daily at the rate of 8.0% per annum and is payable on December 15, 2005. Interest is payable semi-annually in cash or, at the option of the Company, interest may be capitalized and added to the principal amount of the New Heller Note. The New Heller Note is subject to mandatory redemption prior to December 15, 2005 upon: o a sale or issuance of capital stock of the Company which results in any person or group of affiliated persons (other than KCSN Acquisition Company, L.P. and its affiliates) possessing the voting power to elect a majority of the Company's Board of Directors; and o a sale or transfer of more than 50% of the Company's consolidated assets or a merger or consolidation in which the holders of the capital stock of the Company prior to such merger or consolidation do not have the power to elect a majority of the Board of Directors of the surviving entity following such merger or consolidation. The New Heller Note is also subject to acceleration in the event of: (a) failure to pay principal or interest; (b) certain unremedied covenant breaches; (c) bankruptcy or insolvency of the Company; (d) an individual final judgment in excess of $250,000 or in the aggregate, judgments in excess of $1.0 million; (e) the acceleration of other indebtedness of $1.0 million individually or $2.5 million in the aggregate prior to its stated maturity; or (f) failure by the Company to make a mandatory redemption of the New Heller Note. The New Heller Note is subordinate to the Company's obligations under the Amended Loan Agreement and the Catalyst Note and PARI PASSU with the New Notes that are outstanding. The New Heller Note is redeemable in whole or in part by the Company upon 45 days notice to Heller. Prior to any redemption, Heller may convert the New Heller Note into that number of shares of common stock computed by dividing the principal amount to be converted, plus capitalized interest accrued on such principal amount, by the conversion price then in effect (currently $20.09 per share). The terms of the newly issued Series B-1 Preferred Stock are substantially identical to those of the Series B Preferred Stock, which are discussed above, with the exception that (a) dividends accrue at the rate of 12% of the liquidation preference of $100 per share per annum, (b) the Series B-1 Preferred Stock is convertible, at the option of the holder, into the number of shares of non-voting common stock (voting common stock if the conversion is effected in connection with a public offering) computed by dividing the aggregate liquidation preference of the shares to be converted by the conversion price then in effect (currently $20.09 per share) and (c) the holders of the Series B Preferred Stock have certain voting rights that the holders of the Series B-1 Preferred Stock do not have. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's liabilities consist primarily of a revolving line of credit, senior subordinated notes, other notes and accounts payable. The Company has also issued Series A Preferred Stock, Series B and B-1 Preferred Stock, redeemable common stock and 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 following table reflects the debt restructuring that occurred on November 20, 2001 and provides information about the Company's market sensitive liabilities, categorized by scheduled maturity subject to various accelerations, and constitutes a "forward-looking statement." For more information, please refer to "Item 1. Financial Statements and Condensed Notes to Consolidated Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."

16 PART II. - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is 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 its 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 Previously reported in the Company's Quarterly Report on Form 10-Q for the six months ended June 30, 2001 and on Form 8-K filed October 23, 2001. The defaults led to the recapitalization transactions discussed under the caption "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation - November 2001 Restructuring of Company Debt." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS By written consent, the common stockholders and holders of Series A Preferred Stock approved the amendment to the Certificate of Designation for the Series A Preferred Stock. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS.

(b) REPORTS ON FORM 8-K. None. 17 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: December 14, 2001. COLOR SPOT NURSERIES, INC. a Delaware corporation By: /s/ David J. Barrett ------------------------------------ Name: David J. Barrett Title: Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER By: /s/ Charles A. Ferer ------------------------------------ Name: David J. Barrett Title: Chief Financial Officer (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER) 18

COLOR SPOT NURSERIES INC 10-Q