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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] 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: 0-24439
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HINES HORTICULTURE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0803204
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12621 JEFFREY ROAD, IRVINE, CALIFORNIA 92620
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 559-4444
HTTP://WWW.HINESHORTICULTURE.COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
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. Yes [ ] No [X]
As of March 18, 2002, the aggregate market value of the registrant's
voting common stock held by non-affiliates of the registrant was approximately
$39.2 million.
As of March 18, 2002, there were 22,072,549 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement prepared in
connection with the Annual Meeting of Stockholders to be held in 2002 are
incorporated in Part III hereof by reference.
HINES HORTICULTURE, INC.
TABLE OF CONTENTS
PAGE
NO.
---
PART I
------
ITEM 1. BUSINESS..............................................................1
ITEM 2. PROPERTIES............................................................9
ITEM 3. LEGAL PROCEEDINGS....................................................11
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................11
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................12
ITEM 6. SELECTED YEARLY FINANCIAL DATA.......................................13
ITEM 6A. SELECTED QUARTERLY FINANCIAL DATA....................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................26
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................26
ITEM 11. EXECUTIVE COMPENSATION...............................................26
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................26
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....26
HINES HORTICULTURE, INC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. Hines Horticulture, Inc.
desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor with
respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of
Hines Horticulture, Inc. and could cause those results to differ materially from
those expressed in the forward-looking statements contained herein.
Hines Horticulture, Inc.'s estimated or anticipated future results,
products and service performance or other non-historical facts are
forward-looking and reflect the management's current perspective of existing
trends and information. These statements involve risks and uncertainties that
cannot be predicted or quantified and, consequently, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, among others, the continued ability of
Hines Horticulture, Inc. to access water, the impact of growing conditions,
risks associated with customer concentration, adverse weather conditions,
seasonality, government regulations, loss of key employees, general economic
conditions, future acquisitions and the ability to integrate such acquisitions
in a timely and cost effective manner, the ability to manage growth, the impact
of competition, the ability to obtain future financing or to satisfy payment
obligations under existing financing, limitations of Hines Horticulture, Inc.'s
substantial leverage and debt restrictions, government regulations and other
risks and uncertainties described from time to time in Hines Horticulture,
Inc.'s Securities and Exchange Commission filings.
Therefore, Hines Horticulture, Inc. wishes to caution each reader of this
report to consider carefully these factors as well as the specific factors
discussed with each forward-looking statement in this report and disclosed in
its filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of Hines Horticulture, Inc. to implement its business
strategy and may cause actual results to differ materially from those
contemplated by the statements expressed herein.
ITEM 1. BUSINESS
INTRODUCTION
Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware
corporation, currently produces and distributes horticultural products through
two operating divisions: (i) its Nursery division, and (ii) its Color division.
The Nursery division and Color division make up the green goods business. The
green goods business is conducted through Hines Nurseries, Inc. ("Hines
Nurseries"), a wholly owned subsidiary of Hines. Unless otherwise specified,
references to "Hines" or the "Company" refer to Hines Horticulture, Inc. and its
subsidiaries.
Hines Nurseries is a leading national supplier of ornamental shrubs, color
plants and container-grown plants with commercial nursery facilities located in
Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South
Carolina and Texas. Hines Nurseries markets its products to retail and
commercial customers throughout the United States. Hines Nurseries produces
approximately 4,100 varieties of ornamental shrubs and color plants through its
14 nursery facilities located in Arizona, California, Florida, Georgia, New
York, Oregon, Pennsylvania, South Carolina and Texas. Hines Nurseries sells to
more than 1,700 retail and commercial customers, representing more than 14,700
outlets throughout the United States and Canada.
1
RECENT DEVELOPMENTS
The Growing Media division is conducted through a wholly owned subsidiary
of Hines, Sun Gro Horticulture, Inc. and its wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. (collectively know as "Sun Gro"). Sun Gro produces and
markets sphagnum peat moss and peat and bark-based growing media horticultural
products for both professional and retail customers. During December 2001, the
Company's board of directors approved and authorized the Company's management to
proceed with a planned sale of Sun Gro Horticulture Canada Ltd. and the assets
of Sun Gro Horticulture, Inc., which together constituted the Company's Sun Gro
growing media business, to a Canadian income fund. Based on the facts and
circumstances at December 31, 2001, management believed that the sale was
probable and that the initial public offering of the units of the fund would be
consummated within twelve months of the end of the year.
On March 27, 2002, the Company closed the sale of its growing media
division to Sun Gro Horticulture Income Fund, a newly-established Canadian
income fund. The assets sold included 14 facilities located across Canada and
the United States and control of approximately 50,000 acres of peat bogs in
Canada. Hines will no longer harvest, produce or sell peat moss or have the
rights to the Sunshine, Parkland Fairway, Black Gold, Lakeland Grower, Alberta
Rose, Nature's and Gardener's Gold trade names. Hines received net proceeds of
approximately $120 million from the sale, the majority of which were used to pay
down outstanding bank debt.
In connection with the sale of the Sun Gro growing media business, Hines
entered into a supply agreement with the purchaser to purchase peat moss and
other growing media products to be used in the Company's nursery business.
The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as a "discontinued operation, held for sale."
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets", the Company's
consolidated financial statements have been restated to reflect the financial
position, results of operations and cash flows of the Sun Gro business as a
"discontinued operation, held for sale."
HISTORY
OWNERSHIP
Hines was founded in 1920 by James W. Hines Sr. in San Gabriel, California.
Hines was a family owned business until its acquisition by the Weyerhauser
Company in 1976. Hines was sold in 1990 to a private investment group and
certain members of management. In August 1995, Hines was acquired by Madison
Dearborn Capital Partners, L.P. ("MDCP"), a private equity investment firm and
certain members of management. On June 22, 1998, Hines completed an initial
public offering of 5.1 million shares of its common stock.
ACQUISITIONS
Hines has completed a number of acquisitions since 1993 to expand and
diversify its operations, which complement the Company's existing operations and
enhance its product offerings.
2
The following table sets forth information with respect to these acquisitions:
ACQUIRED
DATE COMPANY PURCHASE PRICE LOCATION PRINCIPAL PRODUCTS
- -----------------------------------------------------------------------------------------------------------------
March 2000 Lovell Farms $99.5 million Florida and Georgia Color bedding plants
January 2000 Willow Creek $20.5 million Arizona Color bedding plants
September 1999 Atlantic $30.1 million New York and Pennsylvania Flowering potted plants and
color bedding plants
August 1999 Pro Gro $17.1 million North and South Carolina Bark-based growing media (*)
August 1999 Strong Lite $13.4 million Illinois, Arkansas Bark-based growing media (*)
April 1998 Lakeland $22.4 million Canada, Oregon and Utah Sphagnum peat moss and
peat-based growing media (*)
December 1997 Bryfogle's $19.0 million Pennsylvania Color bedding plants
October 1997 Pacific Color $1.7 million California Color bedding plants
November 1996 Flynn $11.7 million California Ornamental plants and
flowering color plants
August 1996 Iverson $10.3 million South Carolina Perennial flowers and plants
January 1995 OGP $17.6 million Oregon Ornamental, cold-tolerant
plants and flowering color plants
June 1993 Sun Gro $48.9 million Canada, Michigan, Texas Sphagnum peat moss and
and Washington peat-based growing media (*)
- -----------------------------------------------------------------------------------------------------------------
(*) Indicates prior acquisitions related to the recent sale of Sun Gro in March 2002.
3
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 2001
There were no acquisitions during fiscal 2001.
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 2000
On January 14, 2000, the Company completed its acquisition of certain
assets (primarily land and buildings) and all of the outstanding capital stock
of Willow Creek Greenhouses, Inc. ("Willow Creek"), a producer of quality annual
bedding and holiday plants. The total acquisition price was approximately $18.8
million, which resulted in goodwill of approximately $9.7 million. In accordance
with the terms of the purchase agreement, and as a result of Willow Creek
achieving certain operating results relating to the year ended December 31,
2000, the Company made an additional purchase price payment of $0.8 million in
fiscal 2001. At December 31, 2000, the Company recorded this amount as goodwill.
In addition, contingent upon Willow Creek achieving certain operating results
for the year ended December 31, 2001, the Company is required to make additional
purchase price payments of up to $0.9 million in fiscal 2002. Accordingly, at
December 31, 2001, the Company recorded this amount as goodwill.
On March 3, 2000, the Company completed its acquisition of (i)
substantially all of the assets and certain liabilities of Lovell Farms, Inc.
and Botanical Farms, Inc.; (ii) the capital stock of Enviro-Safe Laboratories,
Inc. and (iii) the partnership interest of Lovell Properties (collectively
referred to as "Lovell"). Lovell is a producer of quality annual bedding and
holiday plants. The total acquisition price was approximately $92.0 million,
which resulted in goodwill of approximately $72.2 million. In accordance with
the terms of the purchase agreement, and as a result of Lovell achieving certain
operating results relating to the year ended December 31, 2000, the Company made
an additional purchase price payment of $7.5 million in fiscal 2001.
Accordingly, at December 31, 2000, the Company recorded this amount as goodwill.
BUSINESS OVERVIEW
Hines Nurseries is one of the largest commercial nursery operations in
North America, producing one of the broadest assortments of container-grown
plants in the industry. Hines Nurseries sells its nursery products primarily to
the retail segment which includes the premium independent garden centers, as
well as the leading home centers and mass merchandisers, such as Home Depot,
Lowe's, Wal-Mart, Kmart and Target. As a result of both internal expansion and
acquisitions, the Company has grown sales from approximately $50.0 million in
1992 to $327.0 million in 2001, representing a compound annual growth rate of
approximately 23.3%.
KEY BUSINESS STRATEGIES
WORKING CAPITAL. The Company plans to continue to implement the Business
Management Plan initiated in the late 2000. The main objective of the plan is to
focus specifically on maximizing cash flow and increasing liquidity. The
four-pronged program targets accounts receivable, accounts payable, inventory
and capital expenditures. Due to the increase in recent finance costs, the
Company has implemented a strict plan to monitor the debt revolver and the
overall debt of the Company. The Company has also tied a portion of the upper
management bonus program to these liquidity factors.
EXPAND PRODUCTION. The Company plans to continue expanding its nursery
acreage and greenhouse facilities in 2002 in order to increase production of key
product lines in both the color bedding plant categories and the ornamental
categories. The Company plans to continue to introduce new plant varieties to
its commercial customers. By expanding production at existing facilities, the
Company seeks not only to increase sales volume, but also to leverage its
established operating processes and management, thereby reducing unit costs.
INCREASE CUSTOMER PENETRATION AND EXPAND CUSTOMER BASE. With its
strategically located nurseries and its emphasis on customer service, the
Company has established a national customer base and distribution system for a
wide variety of ornamental plants. The Company is pursuing opportunities to
increase its volume with existing customers by (i) selling to newly opened
outlets of successful "big box" retailers and premium independent garden centers
and (ii) increasing same-store sales by capitalizing on its customers' continued
expansion of lawn and garden floor space with a broader variety of merchandise,
particularly in the color plant category. The Company also intends to pursue new
relationships with other high volume retailers and premium garden centers.
4
ACQUISITIONS. Although the Company does not currently anticipate any
acquisitions during the next 12 months, its long-term goal continues to be to
pursue strategic acquisitions that play an important role in expanding its
geographic presence and product offerings in the green goods business. For
example, since optimizing production and distribution of color plants such as
holiday crops, annual bedding plants and perennials requires regional growing
capacity, the Company believes that additional acquisitions of regional color
plant growers will expand its nursery network. In the meantime, the Company will
continue to apply its proprietary operating processes to recently acquired
businesses to facilitate integration and improve operating performance.
HINES' GREEN GOODS BUSINESS
Hines Nurseries produces and markets approximately 4,100 varieties of
ornamental, container-grown plants grown primarily for outdoor use, most of
which are sold under its Hines Nurseries(TM) and Iverson(TM) trade names. Most
of Hines Nurseries' revenues fall into the following variety categories for the
years ended December 31:
PRODUCT CATEGORY REPRESENTATIVE PRODUCTS 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Evergreens
Broadleafs Azalea, boxwood, camellia, euonymous, holly 20% 19% 28%
Conifers Pines, spruce, junipers 6% 7% 9%
Deciduous Plants Barberry, dogwood, forsythia, spirea 7% 6% 7%
Flowering Color Plants
Perennials Daylilies, clematis, ornamental grasses 11% 14% 25%
Annual bedding plants Marigolds, petunias 39% 40% 15%
Tropical flowering plants Bougainvillea, hibiscus 6% 4% 4%
Holiday plants Easter lilly, poinsettia 5% 3% 3%
Specialty / topiary plants Trellises, bonsai's 5% 6% 7%
Other Ferns, trees 1% 1% 2%
---------------------------------
100% 100% 100%
=================================
Since 1993, Hines Nurseries has added numerous plant varieties to its
product line. During the past years, Hines Nurseries has aggressively expanded
its offering of flowering color plants. Hines Nurseries has also successfully
developed patio-ready type products, which it markets under the names of Patio
Tropics(TM) and Festival Pots(TM). These products generally command premium
prices and improved profit margins compared with other plants offered by the
Company.
The Company sells its nursery products primarily to the retail segment
which includes premium independent garden centers, as well as the leading home
centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and
Target.
5
The following table sets forth the estimated percentage of Hines Nurseries' net
sales by customer type for the period indicated:
YEARS ENDED DECEMBER 31,
--------------------------
CUSTOMER TYPE 2001 2000 1999
------------- ---- ---- ----
Home centers............................... 60% 44% 41%
Mass merchandisers......................... 22 33 25
Independent garden centers................. 11 12 17
Garden center chains....................... 1 6 8
Re-wholesalers............................. 5 4 7
Landscapers and others..................... 1 1 2
------ ------ ------
Total........................... 100% 100% 100%
====== ====== ======
The Company believes sales to home centers and mass merchandisers have
increased significantly during the past several years as a result of the rapid
growth of this channel of distribution. Management believes the Company enjoys
competitive advantages in selling into this channel due to its ability to
provide a broad assortment of consistently high quality products in large
volumes, its nationwide distribution and its value-added services such as custom
labeling, bar-coding, full electronic data interchange and technical support.
Management expects to participate in the overall growth of this channel to a
greater extent than its competitors that do not offer such services. Hines
Nurseries' top ten customers accounted for approximately 74%, 70% and 68% of
Hines Nurseries' net sales in 2001, 2000 and 1999, respectively. Hines
Nurseries' largest customer, Home Depot, accounted for approximately 44%, 41%
and 30% of its net sales in 2001, 2000 and 1999, respectively.
RESEARCH AND DEVELOPMENT. Hines Nurseries' product sourcing and development
yield unique plant varieties, which are marketed under a trade name and patented
whenever possible. The Company applies for patents on plant varieties that are
significantly different from existing varieties. Differences among plant
varieties may include coloration, size at maturity or hardiness in drought or
cold conditions. These varieties command higher prices, provide higher unit
margins and enhance the Company's reputation as a product innovator.
SALES AND MARKETING. Most of Hines Nurseries' facilities have separate
sales forces, which include a sales manager, in-house customer service
representatives, direct sales consultants and various support personnel. As of
December 31, 2001, Hines Nurseries employed approximately 287 direct sales
consultants, key account managers, market area managers and merchandisers.
National accounts are serviced through "National Account Task Teams" comprised
of a senior management member and direct sales personnel from each nursery
supplying the account. Hines Nurseries also markets its products through trade
shows, print advertising in trade journals, direct mail promotion and
catalogues.
COMPETITION. Competition in the nursery products segment of the lawn and
garden industry is based principally on the breadth of product offering,
consistent product quality and availability, customer service and price. The
nursery products segment is highly fragmented. According to the 1997 Census of
Agriculture released by the USDA's National Agricultural Statistics Service, the
nursery business is comprised of approximately 30,000 primarily small and
regionally based growers, with the top 100 growers accounting for approximately
22% of the industry volume. Management believes Hines Nurseries is one of only
two growers able to serve every major regional market in North America; the
Company's only national competitor being Monrovia Nursery Company. In each of
its markets, Hines competes with regional growers such as Color Spot in the
West, Clinton Nurseries in the Northeast, Zelenka Nurseries in the Midwest,
Wight Nurseries in the South and many other smaller regional and local growers.
Hines Nurseries' key competitive advantages are its ability to provide
consistent, high quality products in large volumes, its nationwide distribution
and its value-added services.
6
SUN GRO GROWING MEDIA PRODUCTS BUSINESS
This section refers to the growing media division sold in March of 2002.
Sun Gro harvests and produces high quality, sphagnum peat moss and
professional bark-based growing mixes. Sphagnum peat moss is partially
decomposed sphagnum moss, a plant whose unique cellular structure consists of
large cavities with sponge-like absorption characteristics for air and water.
Because the optimal balance of air and water is essential for root development
and plant growth, organic sphagnum peat moss is generally considered the highest
quality growing medium available. While there are less expensive products on the
market that are used for similar purposes, such as top soil, manure, bark, mulch
and composts made from yard or sewage wastes, these products do not contain the
superior soil aeration and water and nutrient retention characteristics of peat
moss.
Sun Gro markets peat moss under the Sunshine(TM), Parkland(TM),
Fairway(TM), Black Gold(TM), Lakeland Grower(TM), Alberta Rose(TM), Nature's(TM)
and Gardener's Gold(TM) trade names to both the professional and retail markets
in four different grades: fine, medium, coarse and super coarse. Fine grade is
typically sold in the retail market, while the other grades, particularly coarse
grade, are sold to professional growers.
Capitalizing on its extensive peat reserves and manufacturing, Sun Gro has
become one of the leading North American suppliers of value-added, peat-based
growing media mixes used for specific professional applications such as seed
germination, cutting propagation and greenhouse crop production. With the
completion of the Strong Lite and Pro Gro acquisitions in 1999, Sun Gro has
expanded its leadership position by providing high quality bark-based growing
mixes to the professional market, as well as expanding its leading North
American presence by adding to its geographical reach and product lines. Sun
Gro's retail potting mixes use a similar blend of ingredients as its
professional growing mixes, but are specifically targeted to home gardeners. By
highlighting formulations for specific plant varieties, Sun Gro has expanded its
product offering to the retail customers.
Sun Gro's growing media products are sold directly to its customers and by
distributors throughout the United States and Canada. Sun Gro also markets its
products internationally through distributors who sell to Mexico and Japan and,
to a lesser extent, other countries in Asia and South America. Peat moss is sold
to both the professional and retail markets, while growing mixes are sold
exclusively to the professional market as potting mixes which are the resold the
retail market. Sun Gro's professional customers consist of greenhouse growers,
nursery growers and golf course developers. Sun Gro serves retail customers
primarily through co-packing partnerships.
The following table sets forth the estimated percentage of Sun Gro's net
sales by customer type for the periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------
CUSTOMER TYPE 2001 2000 1999
------------- ---- ---- ----
Professional:
Greenhouse growers and vegetable farmers.... 71% 72% 63%
International/others........................ 8 4 6
Golf course developers...................... 3 4 5
------- ------ ------
Total Professional..................... 82% 80% 74%
------- ------ ------
Retail:
Home centers and mass merchandisers......... 8% 6% 10%
Independent garden centers.................. 9 12 13
Garden center chains........................ 1 2 3
------- ------ ------
Total Retail........................... 18% 20% 26%
------- ------ ------
Total Professional and Retail...... 100% 100% 100%
======= ====== ======
Sun Gro's top ten customers accounted for approximately 22%, 25% and 25% of
Sun Gro's net sales in 2001, 2000 and 1999, respectively. No single Sun Gro
customer accounted for more than 5% of consolidated net sales in 2001, 2000 or
1999.
7
RESEARCH AND DEVELOPMENT. Sun Gro's research and development efforts have
resulted in commercial introduction of numerous custom blend mixes for specific
needs of customers. Sun Gro has introduced and received certification of
SUNSHINE ORGANIC MIX to serve the organic plant and food industry by the Organic
Material Review Institute ("OMRI"). Sun Gro is the first and the only growing
media producer to offer a product certified by OMRI. Sun Gro will continue to
focus on the creation and development of new value-added growing media mixes for
retail and professional customers. Such mixes often command higher prices and
provide higher profit margins than peat alone. Differences in growing media may
relate to differences in coarseness of peat and amounts of nutrient additives,
including limestone, and other mix constituents, such as perlite, vermiculite
and bark. Sun Gro's research and development efforts have resulted in the
commercial introduction of approximately 39 new growing media products since
1992.
SALES AND MARKETING. Sun Gro sells its products on a direct basis and
through a network of approximately 52 primary distributors located throughout
North America. As of December 31, 2001, Sun Gro's direct sales force was
comprised of approximately 31 employees who are highly trained in the technical
applications of its products. Approximately 37% of Sun Gro's sales are conducted
through significant distributor networks. Sun Gro's distributor network provides
broad market coverage, reduces credit exposure and distributes products to
smaller growers cost effectively.
COMPETITION. Competition in the growing media segment of the lawn and
garden industry is based principally upon product quality, distribution, service
and price. Management believes Sun Gro is one of the largest producers and
marketers of growing media in North America. Sun Gro's principal competition
comes from Premier Tech, Ltd., a Canadian producer of peat moss, Berger Group,
Ltd and Fafard Horticultural Products, Ltd., which compete mostly in the retail
growing mix and potting mix markets. Sun Gro's key competitive advantages are
its control over high quality peat moss reserves, its strong relationships
throughout its distributor network and its ability to provide significant
technical support.
FINANCIAL INFORMATION ON THE COMPANY'S FOREIGN OPERATIONS AND OPERATING SEGMENTS
See Notes 14 and 15 to the Company's consolidated financial statements,
which are included as a separate section of this Report beginning on page F-1.
SEASONALITY
The Company's green goods business is highly seasonal in nature, with most
of its sales typically occurring in the first half of the year. The table below
sets forth the Company's quarterly net sales, as a percentage of total year net
sales, during the year ended December 31, 2001:
Percentage of Total
Quarter 2001 Net Sales
-------------- -------------------
First Quarter 21%
Second Quarter 53
Third Quarter 13
Fourth Quarter 13
-------
100%
=======
PATENTS AND TRADEMARKS
The Company has registered numerous trademarks, service marks and logos
used in its businesses in the United States and Canada. In addition, the Company
has developed and continues to develop specialty plants for which it holds
patents registered with the U.S. Patent and Trademark Office. The Company
currently holds 37 patents, with 20 patent applications pending.
8
GOVERNMENT REGULATION
The Company is subject to certain United States and Canadian federal,
state, local and provincial health, safety and environmental laws and
regulations regarding the production, storage and transportation of certain
products and the disposal of its wastes. The EPA and similar state and local
agencies regulate the Company's operations and activities, including, but not
limited to, water runoff and the use of certain pesticides in its nursery
operations. The Company does not anticipate that future expenditures for
compliance with such environmental laws and regulations will have a material
adverse effect on the Company's financial position or results of operations. The
Company cannot give any assurance, however, that compliance with such laws and
regulations, or compliance with other environmental laws and regulations that
may be enacted in the future, will not have an adverse effect on the Company's
financial position.
Hines Nurseries obtains certain irrigation water supplied to local water
districts from facilities owned and operated by the United States acting through
the Department of Interior Bureau of Reclamation ("reclamation water"). The use
and price of reclamation water, including availability of subsidized water
rates, is governed by federal reclamation laws and regulations. Hines Nurseries
utilizes reclamation water as one of the water supplies for its Northern
California and Oregon facilities. While the Company believes that the nursery
operations are in compliance with applicable regulations and it maintains a
continuous compliance program, there can be no assurance that changes in law
will not reduce availability of, or increase the price of, reclamation water to
the Company.
EMPLOYEES
As of December 31, 2001, the Company employed approximately 5,450 persons,
including approximately 2,430 seasonal employees. Of this total, approximately
4,650 were employed by Hines Nurseries, including approximately 2,300 seasonal
employees (its peak seasonal employment). All of Hines Nurseries' employees are
non-union, and the Company's management believes that its labor relations are
good.
As of December 31, 2001, the Company's Sun Gro growing media business
employed approximately 800 persons, including approximately 130 seasonal
employees. As of December 31, 2001, approximately 335 of Sun Gro's employees
were employed in Canada. As of March 27, 2002, all of the Company's former Sun
Gro employees were transferred to the purchaser of the Company's growing media
business.
ITEM 2. PROPERTIES
At December 31, 2001, the Company owned approximately 4,360 acres related
to its nursery facilities. In addition, the Company leases approximately 1,110
acres related to its nursery facilities (including leases from Blooming Farm,
Inc., an affiliated entity). The Company's management believes that its owned
and leased facilities are sufficient to meet its operating requirements for the
foreseeable future.
In connection with the Company's March 27, 2002 sale of its Sun Gro growing
media business, 14 facilities and control of approximately 50,000 acres of peat
bogs in Canada were sold by the Company.
9
The Company's current facilities are identified in the table below:
LOCATION DESCRIPTION STATUS
-------- ----------- ------
Blairsville, Georgia................40 acre nursery Owned
Chino Valley, Arizona...............70 acre nursery Owned
Danville, Pennsylvania..............150 acre nursery Leased
Fallbrook, California...............256 acre nursery Owned/leased (a)
Forest Grove, Oregon................1,104 acre nursery Owned/leased (b)
Fulshear, Texas.....................450 acre nursery Owned
Irvine, California..................458 acre nursery and headquarters Leased
Miami, Florida......................351 acre nursery Owned/leased (c)
Newark, New York....................37 acre nursery Owned
Northern California (d).............1,389 acre nursery Owned
Pipersville, Pennsylvania...........60 acre nursery Owned/leased (e)
San Joaquin Valley, California (f)..59 acre nursery Owned/leased (g)
Trenton, South Carolina.............981 acre nursery Owned/leased (h)
Utica, New York.....................67 acre nursery Owned
The following facilities and properties were sold in March 2002:
LOCATION DESCRIPTION STATUS
-------- ----------- ------
Seba Beach, Alberta.................68,820 square foot processing and mixing facility Owned/leased (i)
and 8,003 acres of peat bogs
Vilna, Alberta......................78,800 square foot processing and mixing facility Owned/leased (i)
located on 295 acres and 1,676 acres of peat bogs
Wandering River, Alberta............5,097 acres of peat bogs Owned/leased (i)
Corrigall Lake, Mallaig, Lobstick,
Alberta.............................1,622 acres of peat bogs and 30 acres of vacant land Owned/leased (i)
Elma, Manitoba......................73,700 square foot processing and mixing Owned/leased (i)
facility and 20,259 acres of peat bogs
Julius, Manitoba....................38,200 square foot processing facility and Owned/leased (i)
5,862 acres of peat bogs
Lameque, New Brunswick..............78,700 square foot processing and mixing Owned/leased (i)
facility and 7,164 acres of peat bogs
Maisonnette, New Brunswick..........52,800 square foot processing facility Owned/leased (i)
and 1,336 acres of peat bogs
Quincy, Michigan....................83,700 square foot mixing facility Owned
Terrell, Texas......................55,800 square foot mixing facility Owned
Surrey, British Columbia............30,000 square foot depot/storage yard Leased
Iroquois Falls, Ontario.............29 acres of vacant land Owned
Matheson, Bingle Lake, Ontario......785 acres of peat bogs Owned/leased (i)
Niagara Falls, Ontario..............8,000 square foot depot/storage yard Owned
Montreal, Quebec....................33,000 square foot depot/storage yard Owned
Bellevue, Washington................10,000 square foot office (headquarters) Leased
Hubbard, Oregon.....................24,840 square foot mixing facility on 7 acres Owned
Fillmore, Utah .....................48,400 square foot mixing facility on 21 acres Owned
Seneca, Illinois ...................84,080 square foot mixing facility on 7.9 acres Owned
Pine Bluff, Arkansas ...............116,555 square foot mixing facility on 22.5 acres Owned
Elizabeth City, N. Carolina.........32,783 square foot mixing facility on 45.1 acres Owned/leased (j)
McCormick City, S. Carolina.........21,600 square foot mixing facility on 57.75 acres Owned
(a) The Company owns 244 acres and leases 12 acres at this nursery.
(b) The Company owns 744 acres and leases 360 acres at this nursery.
(c) The Company owns 321 acres and leases 30 acres at this nursery.
(d) The Northern California nursery consists of sites in Allendale,
Vacaville and Winters, California.
(e) The Company owns 31 acres and leases 29 acres at this nursery.
(f) The San Joaquin Valley nursery consists of sites in Chowchilla and
Madera, California.
(g) The Company owns 49 acres and leases 10 acres at this nursery.
(h) The Company owns 921 acres and leases 60 acres at this nursery.
10
(i) The Company leases all but 1,420 acres in the aggregate of these peat
bogs from Canadian provincial governments and various private parties.
The Company owns the Company's peat processing facilities however, the
Seba Beach, Elma, and Julius peat-processing facilities are situated on
land leased to the Company by Canadian provincial governments and
various private parties.
(j) The Company owns 21 acres and leases 24 acres at this mixing facility.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company's
financial position. Management believes, however, that the ultimate resolution
of such matters will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of Hines currently trades on The Nasdaq National Market
("Nasdaq") under the symbol "HORT." As of March 18, 2002, there were 87
registered holders of record of the Company's common stock. The following table
sets forth the quarterly high and low share price for the years ended December
31:
2001 High Low
- ---- --------------------------
1st quarter $4 7/16 $2 9/16
2nd quarter $4 3/16 $2 9/16
3rd quarter $4 1/8 $3 1/8
4th quarter $3 7/8 $3 5/16
2000 High Low
- ----- --------------------------
1st quarter $8 13/16 $7 3/8
2nd quarter $8 7/8 $5 1/8
3rd quarter $7 15/16 $3 7/8
4th quarter $5 3/8 $1 27/32
Hines has not paid dividends on its common stock in the past and does not
presently plan to pay dividends on the common stock. The payment of dividends is
restricted under the terms of the Company's senior credit agreement and senior
subordinated note indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
SALES OF UNREGISTERED SECURITIES
On November 28, 2000, the Company issued, in reliance on Section 4(2) of
the Securities Act of 1993, as amended, a warrant to Madison Dearborn Capital
Partners, L.P. ("MDCP"), its majority stockholder, to purchase 440,000 shares of
common stock at an exercise price of $3.50 per share valued at $.84 million, in
exchange for MDCP's guaranty of the Company's new $30.0 million revolver under
its senior credit facility. The warrant is exercisable at any time prior to
December 31, 2005.
12
ITEM 6. SELECTED YEARLY FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with the Consolidated Financial Statements and the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
The following table has been restated to reflect all the activity of the growing
media business as "Discontinued operations, held for sale."
For the Years Ended December 31, (a)
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
(In thousands, except share and per share amounts)
Statement of Operations Data:
Net sales $ 326,973 $ 304,202 $ 199,117 $ 168,535 $ 141,279
Cost of goods sold 156,490 143,262 93,403 78,198 64,175
Gross profit 170,483 160,940 105,714 90,337 77,104
Operating expenses 121,975 113,198 76,300 62,712 48,985
Unusual operating income (b) -- -- -- -- (1,194)
Operating income 48,508 47,742 29,414 27,625 29,313
Interest expense 38,188 29,071 13,853 17,010 18,670
Provision for income taxes 4,627 8,034 6,516 4,086 4,258
Income from continuing operations (a) 5,693 10,637 9,045 6,529 6,385
Income (loss) from discontinued operations, held for sale (2,268) 1,801 6,375 3,945 (608)
------------- ------------- ------------- ------------- -------------
Net Income $ 3,425 $ 12,438 $ 15,420 $ 10,474 $ 5,777
============= ============= ============= ============= =============
Income from continuing operations per common share: (c)
Basic & Diluted $ 0.26 $ 0.48 $ 0.41 $ 0.06 $ (0.04)
Income (loss) from discontinued operations, held for
sale per common share: (c)
Basic & Diluted $ (0.10) $ 0.08 $ 0.29 $ 0.26 $ (0.08)
------------- ------------- ------------- ------------- -------------
Total Net Income per common share $ 0.16 $ 0.56 $ 0.70 $ 0.32 $ (0.12)
============= ============= ============= ============= =============
Weighted average shares outstanding (d):
Basic 22,072,549 22,072,549 22,072,549 15,106,960 7,550,174
Diluted 22,091,208 22,072,549 22,072,549 15,353,016 7,550,174
Other Data:
Capital expenditures $ 18,178 $ 29,686 $ 15,895 $ 19,189 $ 10,130
Balance Sheet Data (at end of period):
Working capital $ (41,086) $ 14,898 $ 54,042 $ 51,757 $ 27,548
Short-term debt 143,159 97,696 43,419 32,916 38,631
Total assets 610,144 599,385 418,781 324,935 276,169
Long-term debt 209,639 251,823 149,775 126,633 152,856
Redeemable preferred stock -- -- -- -- 70,682
Shareholders' equity (deficit) 88,745 87,407 74,750 63,322 (71,751)
13
NOTES TO SELECTED CONSOLIDATED YEARLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) From January 1, 1997 through December 31, 2001, the Company acquired the
following eight companies: Pacific Color (October 20, 1997), Bryfogle's
(December 16, 1997), Lakeland (April 6, 1998), Strong Lite (August 2,
1999), Pro Gro (August 23, 1999), Atlantic (September 9, 1999), Willow
Creek (January 14, 2000) and Lovell (March 3, 2000). The financial results
include the operations of each acquisition since its respective acquisition
date.
On March 27, 2002, the Company closed the sale of its growing media
division to Sun Gro Horticulture Income Fund, a newly-established Canadian
income fund. The Company's Consolidated Financial Statements included in
this Annual Report on Form 10-K reflect the financial position, results of
operations and cash flows of the Sun Gro business as a "discontinued
operation, held for sale." In accordance with Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets", the Company's consolidated financial statements have
been restated to reflect the financial position, results of operations and
cash flows of the Sun Gro business as a "discontinued operation, held for
sale."
(b) Unusual operating expenses consist of a loss on an involuntary disposal of
fixed assets of $3,526 and other non-recurring costs related to the Seba
Beach fire of $514, net of the receipt of insurance proceeds of $2,500 in
2000 and certain severance and other restructuring costs of $1,537 and $830
in 1997 and 1996, respectively, net of a $1,194 gain from receipt of
insurance proceeds on an involuntary disposal of fixed assets in 1997.
(c) After deduction of the accrued preferred stock dividends of $5,609 and
$6,666 for the years ended December 31, 1998 and 1997, respectively.
(d) All shares and per share amounts reflect a 1.3611-for-one reverse stock
split effected on June 22, 1998.
14
ITEM 6A. SELECTED QUARTERLY FINANCIAL DATA
The following selected unaudited quarterly financial data should be read in
conjunction with the Consolidated Financial Statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The following
table has been restated to reflect all the activity of the growing media
business as "Discontinued operations, held for sale."
FOURTH THIRD SECOND FIRST
2001 QUARTER QUARTER QUARTER QUARTER
- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales, net (a) $ 42,012 $ 43,023 $174,181 $ 67,757
Gross profit 19,916 20,637 94,887 35,043
Income (loss) from continuing operations (4,787) (8,945) 20,315 (890)
Income (loss) from discontinued operations, held for sale (7,036) 919 1,757 2,092
Net Income (loss) (11,823) (8,026) 22,072 1,202
Income (loss) from continuing operations per common share:
Basic & Diluted $ (0.21) $ (0.41) $ 0.92 $ (0.04)
Income (loss) from discontinued operations, held for sale
per common share:
Basic & Diluted $ (0.32) $ 0.05 $ 0.08 $ 0.09
Total Net Income (loss) per common share: $ (0.53) $ (0.36) $ 1.00 $ 0.05
FOURTH THIRD SECOND FIRST
2000 QUARTER QUARTER QUARTER QUARTER
- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales, net (a) $ 43,290 $ 42,868 $165,041 $ 53,003
Gross profit 21,180 21,919 91,071 26,770
Income (loss) from continuing operations (6,155) (5,190) 21,570 412
Income (loss) from discontinued operations, held for sale (1,735) 96 1,522 1,918
Net Income (loss) (7,890) (5,094) 23,092 2,330
Income (loss) from continuing operations per common share:
Basic & Diluted $ (0.28) $ (0.24) $ 0.98 $ 0.02
Income (loss) from discontinued operations, held for sale
per common share:
Basic & Diluted $ (0.09) $ 0.01 $ 0.07 $ 0.09
Total Net Income (loss) per common share: $ (0.37) $ (0.23) $ 1.05 $ 0.11
15
NOTES TO SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) On March 27, 2002, the Company closed the sale of its growing media
division to Sun Gro Horticulture Income Fund, a newly-established Canadian
income fund. The Company's Consolidated Financial Statements included in
this Annual Report on Form 10-K reflect the financial position, results of
operations and cash flows of the Sun Gro business as a "discontinued
operation, held for sale." In accordance with Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets", the Company's consolidated financial statements have
been restated to reflect the financial position, results of operations and
cash flows of the Sun Gro business as a "discontinued operation, held for
sale."
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included in Item 8 of this
Annual Report on Form 10-K. This discussion contains trend analyses and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties are discussed at "Cautionary Statement for Purposes of the Safe
Harbor Provision of the Private Securities Litigation Reform Act of 1995" on
page 1 of this Annual Report on Form 10-K.
SALE OF SUN GRO BUSINESS
During December 2001, the Company's board of directors approved and
authorized the Company's management to proceed with a planned sale of the common
stock of Sun Gro Horticulture Canada Ltd. and the assets of Sun Gro
Horticulture, Inc., which together constituted the Company's Sun Gro growing
media business, to a Canadian income fund. Based on the facts and circumstances
at December 31, 2001, management believed that the sale was probable and that
the initial public offering of the units of the fund would be consummated within
twelve months of the end of the year.
On March 27, 2002, the Company completed the sale of its growing media
business to Sun Gro Horticulture Income Fund, a newly established Canadian
income fund. The assets sold included 14 facilities located across Canada and
the United States and control of approximately 50,000 acres of peat bogs in
Canada. Hines will no longer harvest, produce or sell peat moss or have the
rights to the Sunshine, Parkland Fairway, Black Gold, Lakeland Grower, Alberta
Rose, Nature's and Gardener's Gold trade names. Hines received net proceeds of
approximately $120 million from the sale, which were used to pay down
outstanding bank debt.
In connection with the sale of the Sun Gro growing media business, Hines
entered into a supply agreement with the purchaser to purchase peat moss and
other growing media products to be used in the Company's green goods business.
The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as a "discontinued operation, held for sale."
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets", the Company's
consolidated financial statements have been restated to reflect the financial
position, results of operations and cash flows of the Sun Gro business as a
"discontinued operations, held for sale."
OVERVIEW
GENERAL. Hines is one of the largest commercial nursery operations in North
America, producing one of the broadest assortments of container-grown plants in
the industry. The Company sells its nursery products primarily to the retail
segment, which includes premium independent garden centers, as well as leading
home centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart and
Target. The Company believes that sales of its nursery products have been
positively affected by societal and demographic trends, such as greater levels
of homeownership, the aging of the American population and the increasing
popularity of gardening. Recent trends in the retail distribution channel, such
as the expansion of large "big box" retailers and their growing emphasis on the
lawn and garden category, have increased consumer exposure to lawn and garden
products. Management believes these trends have favorably impacted the Company
and provide excellent opportunities for improved operating performance.
SEASONALITY. The Company's nursery business, like that of its competitors,
is highly seasonal. The Company has, and expects to continue to experience
significant variability in net sales, operating income and net income on a
quarterly basis.
17
RECENT DEVELOPMENTS
ACQUISITIONS. The Company completed a number of acquisitions to expand and
diversify its operations. In the three years ended December 31, 2001, the
Company's green goods business completed one acquisition in 1999 and two
acquisitions in 2000, all of which have been accounted for under the purchase
method. Accordingly, the purchase prices were allocated to certain assets and
liabilities based on their respective fair market values. The excess of the
purchase price over the estimated fair market value of the net assets acquired
relating to each transaction was accounted for as goodwill. Amounts allocated to
goodwill are being amortized on a straight-line basis over an estimated life of
thirty-five years. The funds used for the acquisitions were provided by the
Company's existing acquisition facility. The consolidated financial statements
include the operating results of each acquisition from the date of acquisition.
These acquisitions have and will continue to affect the period-to-period
comparability of the operating results discussed below.
TAX MATTERS. The Company derives significant benefits under the U.S.
federal tax code by qualifying to use the cash method of accounting for federal
income tax purposes. Under the cash method, sales are included in taxable income
when payments are received and expenses are deducted as they are paid. The
primary benefit the Company receives is the ability to deduct the cost of
inventory as it is incurred. As a result of the Company's ability to deduct its
growing costs under the farming exception, the Company has generally not been
required to pay cash income taxes and has generated net operating losses for
federal income tax purposes. In 2001, the Company has generated a taxable loss
for federal income tax purposes. During the same period, the Company has
continued to show a tax provision relating to the recording of deferred taxes.
At December 31, 2001, the Company had approximately $51.6 million in net
operating loss carryforwards for federal income tax reporting purposes.
CRITICAL ACCOUNTING POLICIES
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. Management
believes that the following areas represent its most critical accounting
policies related to actual results that may vary from those estimates.
SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by management using the following criteria:
past sales returns experience, current economic conditions, and other relevant
factors, and is re-evaluated on a quarterly basis. The allowance is increased by
provisions for sales discounts and allowances charged against income. The
Company records revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time of
revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When
Right of Return Exists."
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The allowance for bad debts is maintained
at a level believed adequate by management to reflect the probable losses in the
trade receivable due to customer default, insolvency, or bankruptcy. The
provision is established by management using the following criteria: customer
credit history, customer current credit rating, and other relevant factors, and
is re-evaluated on a quarterly basis. The allowance is increased by provisions
to bad debt expense charged against income. All recoveries on trade receivables
previously charged off are credited to the accounts receivable recovery account
charged against income, while direct charge-offs of trade receivables are
deducted from the allowance.
ACCOUNTING FOR GOODWILL IMPAIRMENT: Goodwill recorded in connection with
the Company's acquisitions is being amortized on a straight-line basis over an
estimated life of 35 years. At each balance sheet date, the Company reviews the
recoverability of goodwill by comparing projected operating income on an
undiscounted basis to the net book value of the related assets.
18
RESULTS OF OPERATIONS
The following discussion reflects only the results of operations from continuing
operations of the green goods business.
FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000.
NET SALES. Net sales of $327.0 million for the fiscal year ended December
31, 2001 increased $22.8 million, or 7.5%, from net sales of $304.2 million for
the comparable period in 2000. Sales from both the nursery and color divisions
had strong performances. The strong early sales performance this year proved to
be a significant competitive advantage in a challenging retail environment for
the lawn and garden industry. During this period, the effects of the soft
economy and increasingly aggressive inventory management programs by customers
were exacerbated by unfavorable weather conditions in May and June. Despite
these challenges, both the nursery and color divisions posted solid sales
results with outstanding results in their southern sun-belt markets.
GROSS PROFIT. Gross profit of $170.5 million for the year ended December
31, 2001 increased $9.6 million, or 5.9%, from gross profit of $160.9 million
for the comparable period in 2000. The increase was primarily attributable to
higher sales at the Company's green goods business as discussed above. As a
percent of net sales, gross margins decreased to 52.1% from 52.9% primarily due
to lower margins in the color business.
OPERATING EXPENSES. Operating expenses of $122.0 million for the year ended
December 31, 2001 increased $8.8 million, or 7.8%, from $113.2 million for the
comparable period in 2000. The increase was primarily attributable to the higher
sales. As a percentage of net sales operating expenses increased to 37.3% from
37.2% for the comparable period in 2000 due primarily to higher selling and
distribution expenses.
OPERATING INCOME. Operating income of $48.5 million for the year ended
December 31, 2001 increased $0.8 million, or 1.7%, from $47.7 million for the
comparable period in 2000 primarily as a result of the higher sales. As a
percentage of net sales, operating income decreased to 14.8% from 15.7% due
primarily to a decrease in gross margins and higher operating expenses, as
described above.
INTEREST EXPENSE. Interest expense of $38.2 million for the year ended
December 31, 2001 increased $9.1 million from $29.1 million for the comparable
period in 2000. The increase was primarily attributable to increased borrowing
levels due to acquisitions made in late fiscal 1999 and early fiscal 2000 and
increased borrowing rates in 2001.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
44.8% and 43.0% for the years ended December 31, 2001 and 2000, respectively.
NET INCOME FROM CONTINUING OPERATIONS. Net income from continuing
operations of $5.7 million for the year ended December 31, 2001 decreased $4.9
million, or 46.2%, from $10.6 million for the comparable period in 2000. The
decrease was primarily attributable to the lower gross margins, the higher
operating expenses and the increased interest expenses described above.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, HELD FOR SALE FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2000.
Net sales of the Company's growing media business decreased by 7.5% from
the comparable period in 2000. The growing media business has been subject to
the same economic and weather-related market phenomena as the green goods
businesses. For the growing media division, the impact of more aggressive
inventory management practices has become increasingly evident among
professional growers and in the Company's retail oriented businesses such as
co-packing. In addition, the growing media division continued to operate without
the use of its Seba Beach plant, which accounts for approximately 14% of its
growing media production capacity. Seba Beach is being rebuilt after having been
destroyed by fire in late 2000.
19
The net loss from discontinued operations, held for sale of $2.3 million
for the year ended December 31, 2001 decreased $4.1 million from the net income
of $1.8 million for the comparable period in 2000. The decrease was primarily
attributable to a deferred income tax expense of $8.1 million related to the
difference between the book and tax basis of the investment in Sun Gro-Canada by
Sun Gro-U.S. for the anticipated repatriation of foreign earnings in connection
with the sale of Sun Gro-Canada. Management had not previously provided for
deferred taxes due to their belief that the investment in Sun Gro-Canada was
previously expected to be permanent in nature.
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999.
NET SALES. Net sales of $304.2 million for the fiscal year ended December
31, 2000 increased $105.1 million, or 52.8%, from net sales of $199.1 million
for the comparable period in 1999. This increase was due to the performance of
the Company's recently acquired color businesses and significant internal growth
from its nursery businesses. The color businesses acquired were Lovell on March
3, 2000, Willow Creek on January 14, 2000 and Atlantic on September 9, 1999.
Sales from the Company's nursery operations increased 12.6% from the comparable
period in 1999 due in part to the increased penetration of the independent
garden sector. In addition, both the color and nursery businesses successfully
leveraged the continued expansion of the Company's store service programs. The
Company's sales to "big box" retailers continue to be driven in large part by
the growth and enhancement of its store service programs nationwide.
GROSS PROFIT. Gross profit of $160.9 million for the year ended December
31, 2000 increased $55.2 million, or 52.2%, from gross profit of $105.7 million
for the comparable period in 1999. The increase was primarily attributable to
higher sales at the Company's nursery and color operations as described above.
Gross margins decreased to 52.9% from 53.1% for the comparable period in 1999,
primarily due to the lower margins of some of the recently acquired businesses.
OPERATING EXPENSES. Operating expenses of $113.2 million for the year ended
December 31, 2000 increased $36.9 million, or 48.4%, from $76.3 million for the
comparable period in 1999. The increase was primarily attributable to the
acquisitions and the significant investment in sales and management
infrastructure required to support the Company's current and future growth.
Operating expenses as a percentage of net sales decreased to 37.2% from 38.3%
for the comparable period in 1999, primarily due to the Company's ability to
leverage operating expenses on higher sales volumes. Offsetting this, however,
were dramatic increases in distribution costs caused by significant increases in
fuel and freight expenses.
OPERATING INCOME. Operating income of $47.7 million for the year ended
December 31, 2000 increased $18.3 million, or 62.2%, from $29.4 million for the
comparable period in 1999 primarily as a result of sales and related gross
profit increases, offset somewhat by increases in operating expenses. As a
percentage of net sales, operating income increased to 15.7% from 14.8% due
primarily to the Company's ability to leverage operating expenses on higher
sales volumes, as described above.
INTEREST EXPENSE. Interest expense of $29.1 million for the year ended
December 31, 2000 increased $15.2 million from $13.9 million for the comparable
period in 1999. The increased was primarily attributable to increased borrowing
levels due to acquisitions made in late fiscal 1999 and early fiscal 2000 and
increased borrowing rates in 2000.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
43.0% and 41.9% for the years ended December 31, 2000 and 1999, respectively.
NET INCOME FROM CONTINUING OPERATIONS. Net income from continuing
operations of $10.6 million for the year ended December 31, 2000 increased $1.6
million, or 17.8%, from $9.0 million for the comparable period in 1999. The
increase was primarily attributable to the higher sales and higher operating
income, as described above.
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, HELD FOR SALE FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1999.
Net sales of the Company's growing media business increased by $19.4
million, or 18.9%, from the comparable period in 1999. Fiscal year 2000 sales
included a full year of sales from Strong Lite acquired on August 2, 1999 and
Pro-Gro acquired on August 23, 1999. Excluding these acquisitions, sales
increased 3.3% from the comparable period in 1999 from internally generated
20
growth, primarily led by sales of professional peat and mixes. The Company's
continued success in converting growers to value-added products has contributed
to the increasing popularity of the Company's professional mixes.
Net income from discontinued operations, held for sale of $1.8 million for
the year ended December 31, 2000 decreased $4.6 million, or 71.9%, from $6.4
million for the comparable period in 1999. The decrease was primarily
attributable to the lower gross margins, the incremental costs net of insurance
proceeds received relating to the Seba Beach fire and the write off of the
assets destroyed in the fire.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its working capital requirements
through operating cash flow and seasonal borrowings under its revolving credit
facilities. Due to the highly seasonal nature of its nursery operations, the
Company historically borrows under its revolving credit facilities to fund peak
needs.
On March 27, 2002, the Company completed the sale of the Sun Gro business
and received net proceeds of approximately $120.0 million, which were used to
pay down outstanding bank debt. In addition, in March of 2002, the Company
completed the sale of 22.5 acres of land and used the net proceeds of
approximately $2.9 million to pay down outstanding bank debt.
At December 31, 2001, prior to the application of the proceeds from the
sale of the Sun Gro business and the sale of land, the total amount outstanding
of long-term debt and working capital revolver was $289.9 million and $100.0
million, respectively. The Company used $107.9 million of the proceeds from the
sale of the Sun Gro business and the sale of land to reduce long-term debt with
the remaining amount of $15.0 million used to reduce the amount outstanding
under its working capital revolver.
Principal repayments due under the Company's various borrowings agreements,
after giving effect to the new payment schedule approved on February 1, 2002,
total $108.0 million in 2002 of which $107.9 is from the proceeds of the sale of
the Sun Gro business and the sale of land, $17.6 million in 2003, $85.0 million
in 2004 and $78.0 million in 2005.
In addition, under its Senior Subordinated Notes, the Company is obligated
to pay a premium at maturity equal to 5.00% of the principal amount of the
Senior Subordinated Notes to be repaid. The Company is accreting this premium
over the term of the maturity of the Notes. At December 31, 2001 the amount of
the premium was $1.0 million and, based on the $78.0 million of Notes
outstanding, is expected to be $3.9 million upon maturity.
In 1998, the Company entered into a senior credit facility (the "Senior
Credit Facility") which provided for a $50.0 million term loan and a $200.0
million revolving credit facility, comprised of a $100.0 million working capital
facility and a $100.0 million acquisition facility. The Senior Credit Facility,
which originally had a five-year term, was extended effective February 1, 2002,
to December 31, 2004. The revolving credit facility and all other obligations
under the Senior Credit Facility are collateralized by substantially all of the
assets and common stock of Hines Nurseries and Sun Gro-U.S. Effective February
1, 2002, the term loan and acquisition facility were combined into one term loan
facility, the ("New Term Loan"). The principal repayment schedule for the New
Term Loan is $60.1 million in March 2002 from the proceeds of the sale of the
Sun Gro business and the sale of land, $17.5 million in 2003 and the remaining
balance of $33.8 million in 2004.
In connection with the Lovell acquisition on March 3, 2000, the Company
obtained a first amendment to its Senior Credit Facility (the "Amended Senior
Credit Facility") to provide for a new $100.0 million ("Tranche B") term loan
and a $15.0 million increase in the Company's existing working capital revolving
credit facility. The principal repayment schedule for this Tranche B loan is
$47.9 million in March 2002 from the proceeds of the sale of the Sun Gro
business and the sale of land, and the remaining balance of $51.1 million in
2004.
The New Term Loan, the Tranche B term loan and revolving credit facility
interest rate is a percentage spread over the U.S. prime rate and the Eurodollar
rate, depending upon the Company's quarterly leverage and interest rate coverage
ratios as defined in the Amended Senior Credit Facility.
21
Effective November 28, 2000, the Company obtained a second amendment to its
Amended Senior Credit Facility to (i) provide the Company with additional
revolving loan commitments in the amount of $30.0 million guaranteed by its
majority shareholder, MDCP, which can only be borrowed and can only be
outstanding between March 15 and June 15 of 2001 and 2002, (ii) increase the
interest rate on all loans by 1/4% to 1/2%, (iii) reset the financial covenants
that establish minimum interest coverage ratios and net worth levels, and
maximum leverage ratios and capital expenditure amounts, (iv) add a minimum
EBITDA covenant, (v) amend the clean down requirement for working capital
revolving loans and (vi) provide for additional restrictions on the Company's
ability to make acquisitions and reinvest proceeds from asset sales. In
consideration for its guarantee on the additional revolving loan commitments,
MDCP received a fee of $0.6 million and warrants to purchase 440 thousand shares
of the common stock of Hines. These warrants are exercisable at any time prior
to December 31, 2005 at an exercise price of $3.50. All other significant terms
and conditions of the Amended Senior Credit Facility remain unchanged. If MDCP
is required to make any payment with respect to its guaranty of new revolver,
the Company would be required to issue to MDCP an additional warrant to purchase
a number of shares of the Company's common stock equal to the amount of such
payment divided by the then current market price of the Company's common stock.
In October 1995, Hines Nurseries issued $120.0 million in aggregate
principal amount of 11 3/4% senior subordinated notes due 2005 (the "Senior
Subordinated Notes") to refinance certain indebtedness incurred in connection
with the acquisition of Hines by MDCP and certain members of management. As of
December 31, 2001, $78.0 million in aggregate principal amount remains
outstanding. The indenture pursuant to which the Senior Subordinated Notes were
issued imposes a number of restrictions on Hines Nurseries and Sun Gro-U.S. The
indenture limits, among other things, their ability to incur additional
indebtedness, to make certain restricted payments (including dividends to
Hines), to make certain asset dispositions, to incur certain liens and to enter
into certain significant transactions. In addition, breach of a material term of
the indenture or any other material indebtedness that results in the
acceleration of such indebtedness would trigger an event of default under the
Senior Credit Facility, causing all amounts owing thereunder to become
immediately due and payable. The Senior Credit Facility imposes a number of
similar and certain additional restrictions (including financial covenants) on
Hines Nurseries and Sun Gro-U.S. and its subsidiaries.
Effective November 28, 2000, Hines Nurseries also received the approval of
its noteholders to amend the Indenture governing the Senior Subordinated Notes
due for the purpose of amending the definition of "Permitted Indebtedness"
within the Indenture to include (i) all indebtedness that may be incurred under
the Amended Senior Credit Facility in an aggregate principal amount to not
exceed $365.0 million (less the amount of all mandatory principal repayments and
required permanent reductions made thereunder) plus (ii) up to an additional
$35.0 million in indebtedness under the additional revolving loan commitments,
provided that such borrowings may only be borrowed and may only be outstanding
between March 15 and June 15 of 2001 and 2002. In consideration for the
amendment, Hines Nurseries agreed to (i) pay a fee of $35 per $1,000 of the
principal amount of Notes, (ii) increase the interest rate thereon from 11 3/4%
to 12 3/4% per annum, (iii) increase the optional redemption price to 106.00% of
the principal amount thereof, (iv) increase the purchase price upon a change of
control from 101.00% to 105.00% of the principal amount thereof and add to the
events that constitute a change of control and (v) pay a premium at maturity
equal to 5.00% of the principal amount to be repaid. All other terms of the
Notes remain unchanged.
Effective February 1, 2002 the Company's Amended Senior Credit Facility was
amended to:
(i) Permit the sale of the Sun Gro business upon receipt of a
minimum of net cash proceeds of $105.0 million,
(ii) To the extent net cash proceeds from the sale of the Sun Gro
business exceed $105.0 million, allow the Company to retain up
to $8.25 million for capital expenditure reinvestment over the
2002 fiscal year,
(iii) Permit the property sale of Minter Bridge and apply all the
net cash proceeds to the permanent prepayment of debt,
(iv) Amend the mandatory prepayment provisions of the existing
Amended Senior Credit Facility to allow the application of the
net proceeds from the sale of the Sun Gro business and the
sale of the Minter Bridge property to prepay amortization
payments under the Term Loans in direct (or forward) rather
than inverse order of maturities,
(v) Combine the post pay-down Acquisition Term Loan and the
Domestic Term Loan into one term loan facility, the New Term
Loan, and reset the amortization schedule,
22
(vi) Extend to December 31, 2004 maturities under the existing
Working Capital Revolving Loans and the New Term Loan, (vii)
Reset the financial covenants that establish minimum EBITDA
levels, minimum interest coverage ratios and net worth levels
and maximum leverage ratios and capital expenditure amounts,
(viii) Extend through June 15, 2004 the Company's ability to utilize
the additional revolving loan commitments in the amount of
$30.0 million guaranteed by its majority shareholder, MDCP,
and alter the availability period that it can only be borrowed
and can only be outstanding to the period between February 1
and June 15,
(ix) Increase the sub-limit for letters of credit that may be
issued under the Working Capital Revolver from $3.0 million to
$7.5 million,
(x) Amend and shorten the maturity of the Tranche B Term Loan to
December 31, 2004,
(xi) Increase the interest rate on the New Term Loan and Working
Capital Revolver by 1/2%, and
(xii) Pay amendment fees of 3/4% to extending lenders under the New
Term Loan, the Working Capital Revolver and the Seasonal
Revolver and 1/4% to the lenders under the Tranche B Term Loan
All other significant terms and conditions of the Amended Senior Credit
Facility remain unchanged. As a result of the requirement to record a deferred
income tax expense of $8.1 million related to the difference between the book
and tax basis of the investment in Sun Gro-Canada by Sun Gro-U.S. for the
anticipated repatriation of foreign earnings in connection with the sale of Sun
Gro-Canada which was completed on March 27, 2002, the Company was unable to
comply with the net worth covenant under its Amended Senior Credit Facility. The
Company requested and received a waiver from its senior lenders effective March
26, 2002.
Net cash provided by operating activities for the year ended December 31,
2001 of $26.6 million increased $23.8 million from $2.8 million for the
comparable period in 2000. The higher cash level generated was primarily due to
the lower level of accounts receivable and the higher levels of accounts
payables and accruals compared to the prior period in 2000. The seasonal nature
of the Company's operations results in a significant increase in certain
components of working capital (primarily accounts receivable and inventory)
during the growing and selling cycles. As a result, operating activities during
the first and fourth quarters of 2001 used significant amounts of cash, totaling
$26.6 million and $10.3 million, respectively. In contrast, the operating
activities for the second and third quarters generated substantial cash,
totaling $61.3 million and $2.2 million, respectively, as the Company shipped
inventory and collected accounts receivable.
Net cash used in investing activities during the year ended December 31,
2001 decreased $120.9 million to $28.9 million from $149.8 million for the
comparable period in 2000. The decrease was primarily due to the Company's prior
year's acquisitions of Willow Creek and Lovell and lower capital expenditures
during the year.
Net cash provided by financing activities during the year ended December
31, 2001 decreased $144.6 million to $2.3 million from $146.9 million for the
comparable period in 2000. The decrease was directly related to the prior year's
advances under the acquisition facility to finance the acquisitions completed
during the year and to lower borrowings under the Company's revolving line of
credit.
The Company typically draws under its revolving credit facilities in the
first and fourth quarters to fund its seasonal inventory buildup of green goods
products and seasonal operating expenses. Approximately 74% of the sales of
Hines Nurseries occur in the first half of the year, generally allowing the
Company to reduce borrowings under its revolving credit facilities in the second
and third quarters. Working capital requirements for the Company's growing media
operations are less seasonal in nature, with slight inventory buildups generally
occurring in the third and fourth quarters. On March 28, 2002, the Company had
fully utilized its $115 million of borrowing capacity under its working capital
revolver facility and had unused borrowing capacity of $24 million under the
additional seasonal $30.0 million revolving loan commitment within the Amended
Senior Credit Facility.
As a result of the Company's ability to deduct its growing costs under the
farming exception, the Company has generally not been required to pay cash
income taxes in recent years and has generated net operating losses for federal
income tax purposes. Even with the benefits of the farming exception, the
Company may nonetheless be required to pay cash income taxes in future years
after use, loss or expiration of its tax net operating loss carryforwards. Such
cash income taxes could also result from increased taxable income due to, among
other reasons: (i) any slowdown in, or elimination of, future growth in the
Company's inventory of growing plants or (ii) limits on the Company's ability to
use net operating loss carryforwards to offset all of its tax liability under
the alternative minimum tax system.
23
The Company's capital expenditures were approximately $18.2 million for the
year ended December 31, 2001. The capital expenditures for Hines Nurseries
related primarily to the purchase of land at our Fallbrook site, which the
Company had been obligated to acquire as part of that acquisition completed in
1996, the completion of acreage expansion plans, which the Company began in late
2000 at its South Carolina and Miami facilities, the continued implementation of
the ERP information system, which will standardize systems and processes
throughout the Company, and the purchase of nursery-related structures,
vehicles, machinery and equipment. The Company's capital expenditures for 2002
are expected to be approximately $8.0 to $9.0 million.
Management believes that cash generated by operations, cash generated from
the sale of the Sun Gro business and from borrowings available under the Amended
Senior Credit Facility will be sufficient to meet the Company's anticipated
working capital, capital expenditures and debt service requirements through
2002.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In October 2001, the FASB issued SFAS No. 144 (Accounting for the
Impairment or Disposal of Long-Lived Assets). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of), and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30 (Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions), for the disposal of a segment of a business. SFAS No. 144 shall
be effective for financial statements issued for fiscal year beginning after
December 15, 2001 but early adoption is encouraged. The Company has chosen to
early adopt SFAS No. 144. During the three months ended December 31, 2001, the
Company adopted a plan to sell the assets of Sun Gro Horticulture, Inc. and the
stock of Sun Gro Horticulture Canada, Ltd., (collectively refer to as "Sun
Gro"), its growing media division. Accordingly, the Company's consolidated
financial statements have been restated to reflect the financial position,
results of operations, and the cash flows of the Sun Gro business as a
discontinued operations, held for sale.
Effective January 1, 2001, Hines adopted the provisions of SFAS No. 133
(Accounting for Derivative Instruments and Hedging Activities), as amended. SFAS
No. 133 requires companies to record derivatives on the balance sheet as assets
and liabilities, measured at fair value. The accounting for the gain or loss due
to changes in fair value of the derivative instrument depends on whether the
derivative qualifies as a hedge. If the derivative instrument does not qualify
as a hedge, the gains or losses are reported in earnings when they occur. If the
derivative instrument qualifies as a hedge, the accounting varies based upon the
type of risk being hedged.
As of January 1, 2001, the Company held an interest rate cap and swap
agreement designed to convert the variable rate interest payments on certain
debt to fixed rate interest rate payments. This agreement had previously been
designated as a cash flow hedging relationship but did not qualify as a hedge
under SFAS No. 133. Adopting the provisions of SFAS No. 133 on January 1, 2001
resulted in a cumulative after-tax charge to Accumulated Other Comprehensive
Income as of January 1, 2001 of $2,334, representing the fair value of the
interest rate agreement, net of tax. This amount is being amortized as interest
rate agreement expense over the term of the debt.
For the twelve months ended December 31, 2001, the Company recognized a
pre-tax loss of $4,114 reported as Interest rate swap agreement expense in the
Consolidated Statements of Operations related to the change in the fair value of
the interest rate agreement.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements on
Financial Accounting Standards ("SFAS") No. 141 (Business Combinations) and SFAS
No. 142 (Goodwill and Other Intangible Assets). SFAS No. 141, among other
things, eliminates the use of the pooling of interests method of accounting for
business combinations. Under the provisions of SFAS No. 142, goodwill will no
longer be amortized, but will be subject to a periodic test for impairment based
upon fair values. During the years ended December 31, 2001 and 2000, the Company
reported goodwill amortization of $3.7 million and $3.1 million, respectively,
excluding discontinued operation, held for sale. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001. SFAS No. 142 will be
effective for the Company beginning January 1, 2002. As of December 31, 2001,
the Company had $121.4 million of Goodwill net of amortization. Given the recent
issuance of these standards, the Company has not yet quantified the impact to
the financial statements for fiscal 2002. The adoption of FAS 142 may have a
material impact on the financial statements.
24
In August 2001, Financial Accounting Standards Board ("FASB") issued SFAS
No. 143 (Accounting for Asset Retirement Obligations). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It would be effective for the Company beginning with its 2003 financial
statements. Given the recent issuance of these standards, the Company has not
yet quantified the impact to the financial statements for fiscal 2002.
Management believes the adoption of FAS 143 will not have a material impact on
the financial statements.
EFFECTS OF INFLATION
Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and its common stock price. The Company does not enter into
transactions designed to mitigate its market risks for trading or speculative
purposes.
In May 2000, the Company entered into an interest rate swap agreement to
hedge $75.0 million of its loan facility. The interest rate swap agreement
effectively changes the Company's exposure on its variable rate interest
payments to fixed rate interest payments (7.13%) based on the 3-month LIBOR rate
in effect at the beginning of each quarterly period, with a maximum rate of 8%.
The interest rate swap agreement matures in February 2005. The estimated fair
value of the interest rate swap agreement was $7.1 million at December 31, 2001.
The Company also manages its interest rate risk by balancing the amount of
its fixed and variable long-term debt. For fixed-rate debt, interest rate
changes affect the fair market value of such debt but do not impact earnings or
cash flows. Conversely, for variable rate debt, interest rate changes generally
do not affect the fair market value of such debt but do impact future earnings
and cash flows, assuming other factors are held constant. At December 31, 2001,
the carrying amount and estimated fair value of the Company's long-term debt for
continuing operations was $252.8 million and $251.2 million, respectively.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is submitted as a separate section
of this Report on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's 2002 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's 2002 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's 2002 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's 2002 Proxy Statement to be filed
with the Securities and Exchange Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements listed in "Index to
Financial Statements."
2. The exhibits listed in "Index to Exhibits."
26
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Acquisition Agreement dated as of July 20, 1995 by and among
the Company, MDCP and Macluan Capital (Nevada) Inc. as amended
by Amendment No. 1 to Acquisition Agreement dated as of August
4, 1995. (1)
3.1 Restated Certificate of Incorporation of the Company. (4)
3.2 Amended and Restated By-laws of the Company. (7)
4.1 Form of certificate representing Common Stock. (4)
4.2 Amended and Restated Credit Agreement dated June 26, 1998
among Hines Nurseries, Inc., Sun Gro Horticulture Canada,
Ltd., and Lakeland Canada Ltd., as borrowers, the lenders
listed therein, Bank of America N.T. & S.A., as syndication
agent, Harris Trust & Savings Bank, as documentation agent, BT
Bank of Canada, as Canadian agent, and Bankers Trust Company,
as administrative agent. (5)
4.3 First Amendment to Credit Agreement and Consent, dated as of
March 3, 2000, among Hines Nurseries, Inc., Sun Gro
Horticulture Canada Ltd., as Borrowers, and The Lenders Listed
therein, as Lenders, Bank of America National Trust and
Savings Association, as Syndication Agent, Harris Trust and
Savings Bank, as Documentation Agent, Deutsche Bank Canada, as
Canadian Agent, and Bankers Trust Company, as Administrative
Agent. (9)
4.4 Second Amendment to the Credit Agreement and Limited Waiver,
dated November 28, 2000, among the Borrowers, the lenders
listed therein, Bank of America, N.A., as Syndication Agent,
Harris Trust and Savings Bank, as Documentation Agent,
Deutsche Bank Canada, as Canadian Agent, and Bankers Trust
Company, as Administrative Agent. (10)
4.5 Guarantee Agreement, dated November 28, 2000, between Madison
Dearborn Capital Partners, L.P. and the Borrowers, the lenders
listed therein, Bank of America, N.A., as Syndication Agent,
Harris Trust and Savings Bank, as Documentation Agent,
Deutsche Bank Canada, as Canadian Agent, and Banker Trust
Company, as Administrative Agent. (10)
4.6 Indenture dated as of October 19, 1995 between Hines
Horticulture (the predecessor of Hines Nurseries, Inc.), the
Company and Sun Gro and IBJ Schroeder Bank & Trust Company, as
trustee (including the form of Exchange Note and Senior
Subordinated Guarantees). (1)
4.7 First Supplement to Indenture, dated June 26, 1998, by and
among Hines Nurseries, Inc., Hines Horticulture, Inc., Sun Gro
Horticulture Inc. and IBJ Schroder Bank & Trust Company, as
Trustee. (+)
4.8 Second Supplement to Indenture, dated November 28, 2000, by
and among Hines Nurseries, Inc., Hines Horticulture, Inc., Sun
Gro Horticulture Inc., Enviro-Safe Laboratories, Inc. and The
Bank of New York, as Trustee. (10)
4.9 Third Supplement to Indenture, dated November 28, 2000, by and
among Hines Nurseries, Inc., Hines Horticulture, Inc., Sun Gro
Horticulture, Inc., Enviro-Safe Laboratories, Inc. and The
Bank of New York, as Trustee. (10)
4.10 Registration Agreement dated as of June 11, 1998 by and
between Hines Holdings, Inc. and MDCP. (4)
27
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Stockholders Agreement dated as of August 4, 1995 by and among
the Company and the other parties signatory thereto. (1)
10.2 Amendment No. 1 to Stockholders Agreement dated as of November
27, 1996. (2)
10.3 Amendment No. 2 to Stockholders Agreement dated as of December
15, 1997. (5)
10.4 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Douglas D. Allen. (1)*
10.5 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Stephen P. Thigpen. (1)*
10.6 Sun Gro Horticulture Inc. U.S. Executive Supplemental
Retirement Plan. (1)*
10.7 Employment Agreement dated as of August 4, 1995 between Hines
Horticulture and Claudia M. Pieropan. (1)*
10.8 Hines Horticulture Nursery Division Vision 2000 Management
Variable Compensation Plan. (3)*
10.9 Sun Gro Division Management Variable Compensation Plan. (3)*
10.10 Management Stock Agreement dated as of September 29, 1997 by
and between the Company and Stephen P. Thigpen. (2)
10.11 Management Stock Pledge Agreement dated as of September 29,
1997 by and between the Company and Stephen P. Thigpen. (2)
10.12 Promissory Note dated as of September 29, 1997 from Stephen P.
Thigpen, as maker, to the Company. (2)
10.13 Purchase and Sale Agreement dated as of August 4, 1995 by and
between Oregon Garden Products, Inc., as seller, and Blooming
Farm, Inc., as buyer. (1)
10.14 Promissory Note dated August 4, 1995, from Blooming Farm,
Inc., as maker, to Oregon Garden Products, Inc., as seller,
and Blooming Farm, Inc., as buyer. (1)
10.15 Trust Deed, Security Agreement, Assignment of Leases and Rents
and Fixture Financing Statement dated August 4, 1995 from
Blooming Farm, Inc., as trustor, to Ticor Title Insurance
Company, as trustee, and Oregon Garden Products, Inc., as
beneficiary. (1)
10.16 Agricultural Lease dated as of June 26, 1998 between Blooming
Farm, Inc., as lessor, and Oregon Garden Products, Inc., as
lessee. (7)
10.17 Demand Note dated October 17, 1997 in the principal amount of
$2,500,000 from the Company, as maker, to MDCP. (2)
10.18 Purchase Agreement dated as of December 16, 1997 by and among
the Company, Abbott Capital 1330 Investors I, LP and MDCP. (2)
10.19 Stock Purchase Warrants of the Company dated as of December
16, 1997 in favor of MDCP. (2)
10.20 Amendment No. 1 to Purchase Agreement dated as of June 11,
1998, by and among Hines Holdings, Inc., MDCP and Abbott
Capital 1330 Investors I, LP. (4)
28
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.21 Securities Purchase Agreement dated as of February 5, 1998 by
and between the Company and MDCP. (2)
10.22 1998 Long-Term Equity Incentive Plan. (6)
10.23 Form of Incentive Stock Option Agreement. (4)
10.24 Stock Purchase Agreement dated September 9, 1999 between Hines
Nurseries, Inc. and those individuals whose names are set
forth on the Signature Page to Stock Purchase Agreement. (8)
10.25 Purchase Agreement by and among Hines Nurseries, Inc., Lovell
Farms, Inc., Botanical Farms, Inc., Warren W. Lovell III,
Jeffrey S. Lovell, Jenifer E. Moreno, as Trustee of the Trace
Lovell Family Investment Trust and Enrique A. Yanes, Dated as
of March 3, 2000. (9)
10.26 Warrant and Guarantee Agreement, dated November 28, 2000 by
and between Hines Horticulture, Inc., Hines Nurseries, Inc.
and Madison Dearborn Capital Partners, L.P. (10)
10.27 Warrant, dated November 28, 2000, issued by Hines
Horticulture, Inc. to Madison Dearborn Capital Partners, L.P.
(10)
10.28 Third Amendment to Credit Agreement and Consent dated February
1, 2002. (+)
10.29 Limited Waiver Regarding Financial Covenants dated March 22,
2002. (+)
21.1 Subsidiaries of the Company. (+)
23.1 Consent of Independent Accountants (+)
- ----------------
+ Filed herewith.
* Management contract or compensatory arrangement.
(1) Incorporated by reference to Hines Holdings, Inc.'s Registration
Statement on Form S-4, File No. 33-99452, filed on November 15, 1995
and amended on December 22, 1995 and January 8, 1996.
(2) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(4) Incorporated by reference to Hines Horticulture, Inc.'s Registration
Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and
amended on May 26 1998 and June 16, 1998.
(5) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(9) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on March 17, 2000.
(10) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on November 29, 2000.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on April 1, 2002.
HINES HORTICULTURE, INC.
By: /s/ Claudia M. Pieropan
-------------------------------
Claudia M. Pieropan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 2002.
SIGNATURE CAPACITY
/s/ Stephen P. Thigpen President, Chief Executive Officer and
- ------------------------------ Chairman of the Board
Stephen P. Thigpen (principal executive officer)
/s/ Claudia M. Pieropan Chief Financial Officer, Secretary and
- ------------------------------ Treasurer
Claudia M. Pieropan (principal financial and accounting officer)
/s/ Douglas D. Allen Director
- ------------------------------
Douglas D. Allen
/s/ Stan R. Fallis Director
- ------------------------------
Stan R. Fallis
/s/ James R. Tennant Director
- ------------------------------
James R. Tennant
/s/ G. Ronald Morris Director
- ------------------------------
G. Ronald Morris
/s/ Thomas R. Reusche Director
- ------------------------------
Thomas R. Reusche
/s/ Paul R. Wood Director
- ------------------------------
Paul R. Wood
30
HINES HORTICULTURE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
31
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of Hines Horticulture, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Hines Horticulture, Inc. and its subsidiaries at December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on March 27,
2002, the Company sold the assets of its wholly owned subsidiary Sun Gro
Horticulture, Inc.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, and
the provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Disposal of Long Lived Assets."
PRICEWATERHOUSECOOPERS LLP
Orange County, California
March 27, 2002
F-1
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS
------ DECEMBER 31,
-----------------------
2001 2000
---------- ----------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,303 and $1,528 28,182 26,754
Inventories 164,675 153,125
Prepaid expenses and other current assets 2,322 1,880
Assets of discontinued operations, held for sale 40,134 43,307
---------- ----------
Total current assets 235,313 225,066
---------- ----------
FIXED ASSETS, net of accumulated depreciation
and depletion of $30,106 and $21,656 142,387 132,659
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $8,291 and $3,549 8,317 12,085
ASSETS OF DISCONTINUED OPERATIONS, HELD FOR SALE 95,029 95,814
DEFERRED INCOME TAXES 7,727 9,565
GOODWILL, net of accumulated amortization
of $10,195 and $6,509 121,371 124,196
---------- ----------
$ 610,144 $ 599,385
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 12,824 $ 8,919
Accrued liabilities 8,450 13,151
Accrued payroll and benefits 7,091 7,339
Accrued interest 2,904 1,732
Long-term debt, current portion 43,159 18,196
Borrowings on revolving credit facility 100,000 79,500
Liabilities of discontinued operations, held for sale 37,097 17,899
Deferred income taxes 64,874 63,432
---------- ----------
Total current liabilities 276,399 210,168
---------- ----------
LONG-TERM DEBT 209,639 251,823
INTEREST RATE SWAP AGREEMENT 7,117 --
DEFERRED INCOME TAXES -- --
LIABILITIES OF DISCONTINUED OPERATIONS, HELD FOR SALE 28,244 49,987
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549
shares at December 31, 2001 and 2000 221 221
Additional paid-in capital 128,781 128,781
Notes receivable from stock sales -- (30)
Deficit (33,282) (36,707)
Cumulative foreign currency translation adjustments (5,200) (4,858)
Accumulated other comprehensive loss (1,775) --
---------- ----------
Total shareholders' equity 88,745 87,407
---------- ----------
$ 610,144 $ 599,385
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- -------------
Sales, net $ 326,973 $ 304,202 $ 199,117
Cost of goods sold 156,490 143,262 93,403
------------- ------------- -------------
Gross profit 170,483 160,940 105,714
------------- ------------- -------------
Selling and distribution expenses 94,082 85,046 57,771
General and administrative expenses 25,422 25,028 17,296
Amortization of goodwill 3,686 3,124 1,233
Other operating income (1,215) -- --
------------- ------------- -------------
Total operating expenses 121,975 113,198 76,300
------------- ------------- -------------
Operating income 48,508 47,742 29,414
Other expenses
Interest expense 29,332 27,441 13,103
Interest rate swap agreement expense 4,114 -- --
Amortization of deferred financing expense 4,742 1,630 750
------------- ------------- -------------
38,188 29,071 13,853
------------- ------------- -------------
Income before provision for income taxes 10,320 18,671 15,561
Income tax provision 4,627 8,034 6,516
------------- ------------- -------------
Net income from continuing operations 5,693 10,637 9,045
Net (loss) income from discontinued operations, held for sale,
net of tax of $11,316, ($4,225) and $2,128 (2,268) 1,801 6,375
------------- ------------- -------------
Net income $ 3,425 $ 12,438 $ 15,420
============= ============= =============
Basic and diluted earnings per share:
Net income per common share from
continuing operations $ 0.26 $ 0.48 $ 0.41
------------- ------------- -------------
Net (loss) income per common share from
discontinued operations, held for sale $ (0.10) $ 0.08 $ 0.29
------------- ------------- -------------
Total net income per common share $ 0.16 $ 0.56 $ 0.70
============= ============= =============
Weighted average shares outstanding-Basic 22,072,549 22,072,549 22,072,549
============= ============= =============
Weighted average shares outstanding-Diluted 22,091,208 22,072,549 22,072,549
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except share data)
COMMON STOCK ACCUMULATED
----------------------- ADDITIONAL NOTES REC. OTHER SHAREHOLDERS'
NUMBER OF PAID -IN STOCK COMPREHENSIVE EQUITY COMPREHENSIVE
SHARES AMOUNT CAPITAL SALES DEFICIT LOSS (DEFICIT) INCOME
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 22,072,549 $ 221 $ 127,992 $ (326) $ (64,565) $ -- $ 63,322
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income -- -- -- -- 15,420 -- 15,420 15,420
Cumulative foreign currency
translation adjustments -- -- -- -- -- (4,091) (4,091) (4,091)
Other -- -- (54) -- -- -- (54) --
Payments received on notes
receivable from stock sale -- -- -- 153 -- -- 153 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 22,072,549 221 127,938 (173) (49,145) (4,091) 74,750 $ 11,329
----------- ----------- ----------- ----------- ----------- ----------- ----------- ===========
Net income -- -- -- -- 12,438 -- 12,438 12,438
Cumulative foreign currency
translation adjustments -- -- -- -- -- (767) (767) (767)
Issuance of warrants -- -- 843 -- -- -- 843 --
Payments received on notes
receivable from stock sale -- -- -- 143 -- -- 143 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2000 22,072,549 221 128,781 (30) (36,707) (4,858) 87,407 $ 11,671
----------- ----------- ----------- ----------- ----------- ----------- ----------- ===========
Net income -- -- -- -- 3,425 -- 3,425 3,425
Cumulative foreign currency
translation adjustments -- -- -- -- -- (342) (342) (342)
Accumulated other
comprehensive loss -- -- -- -- -- (1,775) (1,775) (1,775)
Payments received on notes
receivable from stock sales -- -- -- 30 -- -- 30 --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2001 22,072,549 $ 221 $ 128,781 $ -- $ (33,282) $ (6,975) $ 88,745 $ 1,308
=========== =========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,425 $ 12,438 $ 15,420
Net loss (income) from discontinued operations, held for sale 2,268 (1,801) (6,375)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 12,436 10,582 6,709
Amortization of deferred financing costs 4,742 1,630 750
Interest rate swap agreement expenses 4,114 -- --
Deferred income taxes 4,508 8,034 8,245
Gain on sale of assets -- -- (24)
---------- ---------- ----------
31,493 30,883 24,725
Change in working capital accounts, net of acquisitions:
Accounts receivable (1,428) (6,959) (3,178)
Inventories (11,550) (15,804) (14,909)
Prepaid expenses and other current assets (442) 768 (1,010)
Accounts payable and accrued liabilities 8,478 (6,050) 9,065
---------- ---------- ----------
Net cash provided by operating activities 26,551 2,838 14,693
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (18,178) (29,686) (15,953)
Proceeds from sale of fixed assets -- -- 58
Purchase of fixed assets with insurance
claims proceeds
Acquisitions, net of cash acquired (9,211) (112,275) (30,630)
Net cash used by discontinued operations, held for sale (1,497) (7,800) (2,481)
---------- ---------- ----------
Net cash used in investing activities (28,886) (149,761) (49,006)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 139,800 196,680 99,633
Repayments on revolving line of credit (119,300) (151,930) (95,733)
Proceeds from the issuance of long-term debt -- 121,216 30,500
Repayments of long-term debt (18,195) (9,707) (755)
Deferred financing costs -- (9,479) --
Penalty on early payment of subordinated notes
Repayments of notes receivables from stock sales 30 143 153
---------- ---------- ----------
Net cash provided by financing activities 2,335 146,923 33,798
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents
---------- ---------- ----------
NET DECREASE IN CASH -- -- (515)
CASH, beginning of period -- -- 515
---------- ---------- ----------
CASH, end of period $ -- $ -- $ --
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest - Continuing Operations $ 31,710 $ 34,542 $ 10,683
Cash paid for interest - Discontinued Operations, held for sale $ 3,743 $ 5,221 $ 2,550
Cash paid for income taxes - Continuing Operations $ -- $ -- $ --
Cash paid for income taxes - Discontinued Operations, held for sale $ 727 $ 1,698 $ 134
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware
corporation, currently produces and distributes horticultural products through
two operating divisions: (i) its Nursery division, and (ii) its Color division.
The Nursery division and Color division make up the green goods business. The
green goods business is conducted through Hines Nurseries, Inc. ("Hines
Nurseries"), a wholly owned subsidiary of Hines. As of December 31, 2001, the
Company also had a third division, the Growing Media business. The Growing Media
business was conducted through Sun Gro Horticulture, Inc. ("Sun Gro-U.S."), a
wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly owned
subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun
Gro-Canada's direct and indirect Canadian subsidiaries. The green goods business
and the growing media business comprise the Company's two business segments. The
Company evaluates the performance of its segments based primarily on operating
income. Refer to Note 15 "Guarantor/ Non-guarantor Disclosures" for information
about the Company's segments for the three years ended December 31, 2001. Unless
otherwise specified, references to "Hines" or the "Company" refer to Hines
Horticulture, Inc. and its subsidiaries.
Hines Nurseries is a leading national supplier of ornamental shrubs, color
plants and container-grown plants with commercial nursery facilities located in
Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South
Carolina and Texas. Hines Nurseries markets its products to retail and
commercial customers throughout the United States.
Sun Gro produces and markets sphagnum peat moss and peat and bark-based
growing media horticulture products for both professional and retail customers.
Sun Gro markets its products in North America and various international markets
with 14 production facilities located in Canada and the United States.
The consolidated financial statements include the accounts of Hines and its
wholly owned subsidiaries after elimination of intercompany accounts and
transactions. The Company has early adopted the provisions of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), and accordingly, the Company's
consolidated financial statements have been restated to reflect the financial
position, results of operations and cash flows of the Sun Gro business as
"Discontinued Operations, held for sale." Refer to Note 15 "Guarantor/
Non-guarantor Disclosures" for information about the Company's guarantors and
segments for the three years ended December 31, 2001.
SALE OF GROWING MEDIA BUSINESS
------------------------------
During December 2001, the Company's Board of Directors approved and
authorized management to proceed with a planned sale of Sun Gro Horticulture
Canada, Ltd. and the assets of Sun Gro Horticulture, Inc. to a Canadian income
fund (the "Fund"). The sale was subject to the completion by the Fund of an
initial public offering of units of the Fund in Canada. Based on the facts and
circumstances at December 31, 2001, management believed that the sale was
probable and that the initial public offering of the units of the Fund would be
consummated within twelve months of the end of the year. On March 27, 2002, the
Company sold the assets of Sun Gro Horticulture, Inc. and the stock of Sun Gro
Horticulture Canada Ltd., its growing media division, to the Sun Gro
Horticulture Income Fund, a newly established Canadian income fund.
F-6
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
ACCOUNTING PRONOUNCEMENTS ADOPTED
---------------------------------
In October 2001, the FASB issued SFAS No. 144 (Accounting for the
Impairment or Disposal of Long-Lived Assets). SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of), and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30 (Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions), for the disposal of a segment of a business. SFAS No. 144 shall
be effective for financial statements issued for fiscal year beginning after
December 15, 2001, but early adoption is encouraged. The Company has chosen to
early adopt SFAS No. 144.
Effective January 1, 2001, Hines adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), as amended. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. The accounting for the gain or loss due to changes in
fair value of the derivative instrument depends on whether the derivative
qualifies as a hedge. If the derivative instrument does not qualify as a hedge,
the gains or losses arereported in earnings when they occur. If the derivative
instrument qualifies as a hedge, the accounting varies based upon the type of
risk being hedged.
As of January 1, 2001, the Company held an interest rate cap and swap
agreement designed to convert the variable rate interest payments on certain
debt to fixed rate interest rate payments. This agreement had previously been
designated as a cash flow hedging relationship, but did not qualify as a hedge
under SFAS No. 133. Adopting the provisions of SFAS No. 133 on January 1, 2001
resulted in a cumulative after-tax charge to Accumulated Other Comprehensive
Income as of January 1, 2001 of $2,334, representing the fair value of the
interest rate agreement, net of tax. This amount is being amortized as interest
rate agreement expense over the term of the debt. For the twelve months ended
December 31, 2001, the Company recognized a pre-tax loss of $4,114 reported as
Interest rate swap agreement expense in the Consolidated Statements of
Operations related to the change in the fair value of the interest rate
agreement.
REVENUE RECOGNITION
-------------------
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 requires sales to
be recognized, among other things, when the risk of ownership transfers to the
customer. Hines records revenue, net of sales discounts and allowances, when the
risk of ownership is transferred to the customer. The adoption of SAB 101 did
not have a material effect on the financial position or results of operations of
the Company.
SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by management using the following criteria:
past sales returns experience, current economic conditions, and other relevant
factors, and is re-evaluated on a quarterly basis. The allowance is increased by
provisions for sales discounts and allowances charged against income. The
Company records revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time of
revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When
Right of Return Exists."
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The allowance for bad debts is maintained
at a level believed adequate by management to reflect the probable losses in the
trade receivable due to customer default, insolvency, or bankruptcy. The
provision is established by management using the following criteria: customer
credit history, customer current credit rating, and other relevant factors, and
is re-evaluated on a quarterly basis. The allowance is increased by provisions
to bad debt expense charged against income. All recoveries on trade receivables
previously charged off are credited to the accounts receivable recovery account
charged against income, while direct charge-offs of trade receivables are
deducted from the allowance.
F-7
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
CONCENTRATION OF CREDIT RISK
----------------------------
The Company is subject to credit risk primarily through its accounts
receivable balances. Credit risk on accounts receivable balances are minimized
as a result of the large and diverse nature of the Company's customer base
throughout North America. The Company does not require collateral for its
accounts receivable. Certain customers are granted deferred payment terms
("dating"). At December 31, 2001 and 2000, significant accounts receivable
balances were subject to dating terms. The Company's largest customer accounted
for approximately 33%, 29% and 20% of the Company's consolidated net sales in
2001, 2000 and 1999, respectively. The Company's largest customer accounted for
approximately 44%, 41% and 30% of the Company's consolidated net sales excluding
discontinued operations, held for sale in 2001, 2000 and 1999, respectively.
AMORTIZATION OF DEFERRED FINANCING EXPENSES
-------------------------------------------
Deferred financing expenses are being amortized using a method, which
approximates the effective interest method over the term of the associated
financing agreements.
DEPRECIATION AND DEPLETION
--------------------------
Fixed assets are stated at cost less accumulated depreciation. Interest is
capitalized for qualifying assets during the assets' acquisition period. The
amount of interest capitalized for the years ended December 31, 2001, 2000 and
1999 was $786, $984 and $467, respectively. Capitalized interest is recorded as
part of the asset to which it relates and is amortized over the respective
asset's estimated useful life. Depreciation has been provided for on the
straight-line method over the following estimated economic useful lives:
Buildings 20 to 60 years
Machinery and equipment 2 to 25 years
Vehicles and trailers 2 to 15 years
Software 5 to 10 years
Furniture and fixtures 3 to 5 years
Bog depletion is based on the volume of peat produced during the year at
rates which will amortize the bog acquisition costs, as well as the initial bog
clearing and development costs, over the period of production of peat from the
bog.
GOODWILL
--------
Goodwill recorded in connection with the Company's acquisitions, as
discussed in Note 2, is being amortized on a straight-line basis over an
estimated life of 35 years. At each balance sheet date, the Company reviews the
recoverability of goodwill by comparing projected operating income on an
undiscounted basis to the net book value of the related assets.
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
The Company annually evaluates its long-lived assets, including
identifiable intangible assets, for potential impairment. When circumstances
indicate that the carrying amount of the asset may not be recoverable, as
demonstrated by the projected undiscounted cash flows, an impairment loss would
be recognized based on fair value. The Company has adopted SFAS 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets." The adoption of SFAS 144
did not have a material impact on the Company's accounting policy related to the
impairment of long-lived assets.
INTERNAL USE SOFTWARE
---------------------
The Company capitalizes costs of materials, consultants, interest and
payroll and payroll-related costs for employees incurred in developing
internal-use computer software in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Computer software costs are being amortized using the
straight-line method over an estimated useful life of 5 to 10 years.
F-8
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
INVENTORIES
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Hines' ornamental nursery stock has an average growing period of
approximately eighteen months. All nursery stock is classified as a current
asset based on Hines Nurseries' normal operating cycle.
FOREIGN CURRENCY TRANSLATION
----------------------------
The Company follows the principles of SFAS No. 52 (Foreign Currency
Translation). Accordingly, when the local currency of its foreign entities is
the functional currency, all assets and liabilities are translated into United
States dollars at the rate of exchange in effect at the balance sheet date.
Income and expense items are translated at the weighted average exchange rate
prevailing during the period. The effects for foreign currency translation
adjustments for these entities are deferred and included as a component of
stockholders' equity.
INCOME TAXES
------------
Hines' operations are agricultural in nature and the Company derives
significant benefits by qualifying to use the cash method of accounting for
federal tax purposes. The Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred tax liabilities,
and assets for the expected future tax consequences of temporary differences
between the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
ADVERTISING
-----------
The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $977, $989 and $1,127 for the years ended
December 31, 2001, 2000 and 1999, respectively, excluding the discontinued
operations, held for sale. Advertising expense for discontinued operations, held
for sale was $97, $126 and $127 for the years ended December 31, 2001, 2000 and
1999, respectively.
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.
F-9
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
EARNINGS PER SHARE ("EPS")
--------------------------
Earnings per share are calculated in accordance with SFAS No. 128 (Earnings
per Share), which requires the Company to report both basic earnings per share,
based on the weighted-average number of common shares outstanding, and diluted
earnings per share, based on the weighted-average number of common shares
outstanding adjusted to include the potentially dilutive effect of outstanding
stock options and warrants. For the twelve months ended December 31, 2001 and
2000, the incremental shares related to the 440,000 warrants outstanding did not
result in a difference between basic and diluted earnings per share.
Additionally, for the twelve months ended December 31, 2001 and 2000, shares
related to employee stock options in the amount of 2.7 million and 2.9 million,
respectively, were excluded from the computation of diluted earnings per share
because they would have been anti-dilutive.
SHIPPING AND HANDLING FEES AND COSTS
------------------------------------
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10 (Accounting for Shipping and Handling Fees and
Costs) ("EITF No. 00-10"). EITF No. 00-10 became effective in the fourth quarter
of 2000 and addresses the income statement classification of amounts charged to
customers for shipping and handling, as well as costs related to shipping and
handling. The EITF concluded that amounts billed to a customer in a sale
transaction related to shipping and handling should be classified as revenue.
The Company adopted EITF No. 00-10 in the fourth quarter of 2000. Prior to
adopting EITF No. 00-10, the Company classified certain shipping and handling
fees as an offset to selling and distribution expenses. Shipping and handling
fees included as revenue totaled $25,473, $23,275 and $22,275 for the years
ended December 31, 2001, 2000 and 1999, respectively.
The Company classifies shipping and handling costs as part of selling and
distribution expenses. Shipping and handling costs were $64,694, $58,866 and
$37,004 in 2001, 2000 and 1999, respectively, excluding those attributable to
the discontinued operations, held for sale. Shipping and handling costs for
discontinued operations, held for sale was $24,252, $24,622 and $21,837 for the
years ended December 31, 2001, 2000 and 1999, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In July 2001, the Financial Accounting Standards Board issued Statements on
Financial Accounting Standards ("SFAS") No. 141 (Business Combinations) and SFAS
No. 142 (Goodwill and Other Intangible Assets). SFAS No. 141, among other
things, eliminates the use of the pooling of interests method of accounting for
business combinations. Under the provisions of SFAS No. 142, goodwill will no
longer be amortized, but will be subject to a periodic test for impairment based
upon fair values. During the years ended December 31, 2001 and 2000, the Company
reported goodwill amortization of $3.7 million and $3.1 million respectively,
excluding discontinued operations, held for sale. SFAS No. 141 is effective for
all business combinations initiated after June 30, 2001. SFAS No. 142 will be
effective for the Company beginning January 1, 2002. As of December 31, 2001,
the Company had $121.4 million of Goodwill, net of amortization. Given the
recent issuance of these standards, the Company has not yet quantified the
impact to the financial statements for fiscal 2002. However, the completion of a
formal evaluation of the Company's goodwill under this standard may have a
material impact on the financial statements.
In August 2001, Financial Accounting Standards Board ("FASB") issued SFAS
No. 143 (Accounting for Asset Retirement Obligations). SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It would be effective for the Company beginning with its 2003 financial
statements.
F-10
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform to current
year presentations.
2. ACQUISITIONS
------------
The following acquisitions have been accounted for under the purchase
method for accounting purposes. The consolidated financial statements include
the operating results of each acquired company from the respective acquisition
date.
On January 14, 2000, the Company completed its acquisition of certain
assets (primarily land and buildings) and all of the outstanding capital stock
of Willow Creek Greenhouses, Inc. ("Willow Creek"), a producer of quality annual
bedding plants and holiday plants. The total acquisition price was approximately
$18,800, which resulted in goodwill of approximately $9,700. In accordance with
the terms of the purchase agreement, and as a result of Willow Creek achieving
certain operating results relating to the year ended December 31, 2000, the
Company made an additional purchase price payment of $811 in fiscal 2001. At
December 31, 2000, the Company recorded this amount as goodwill. In addition,
contingent upon Willow Creek achieving certain operating results for the year
ended December 31, 2001, the Company is required to make additional purchase
price payments of up to $900 in fiscal 2002. Accordingly, at December 31, 2001,
the Company recorded this amount as goodwill.
On March 3, 2000, the Company completed its acquisition of (i)
substantially all of the assets and certain liabilities of Lovell Farms, Inc.
and Botanical Farms, Inc.; (ii) the capital stock of Enviro-Safe Laboratories,
Inc. and (iii) the partnership interest of Lovell Properties (collectively
referred to as "Lovell"). Lovell is a producer of quality annual bedding and
holiday plants. The total acquisition price was approximately $92,000, which
resulted in goodwill of approximately $72,200. In accordance with the terms of
the purchase agreement, and as a result of Lovell achieving certain operating
results relating to the year ended December 31, 2000, the Company made an
additional purchase price payment of $7,500 in fiscal 2001, and recorded this
amount as goodwill.
PRO FORMA OPERATING DATA
The following selected unaudited pro forma results of operations for the
years ended December 31, 2001 and 2000 gives effect to the acquisitions of
Willow Creek and Lovell as if they had occurred on January 1, 2000 for the
Company's greed goods business (in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
2001 2000
--------- ---------
Sales, net $326,973 $311,365
Net Income 6,024 10,610
Basic and diluted earnings per share:
Income per common share $ 0.27 $ 0.48
F-11
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
3. INVENTORIES
-----------
Inventories consisted of the following:
December 31,
--------------------------------
2001 2000
-------------- --------------
Continuing operations:
Nursery stock $ 155,096 $ 146,924
Materials and supplies 9,579 6,201
-------------- --------------
$ 164,675 $ 153,125
============== ==============
Discontinued operations, held for sale:
Finished goods $ 5,495 $ 8,213
Materials and supplies 8,559 7,237
-------------- --------------
$ 14,054 $ 15,450
============== ==============
4. FIXED ASSETS
Fixed assets consisted of the following:
December 31,
--------------------------------
2001 2000
-------------- --------------
Continuing operations:
Land $ 29,245 $ 25,347
Buildings and improvements 91,687 84,707
Machinery and equipment 30,796 27,904
Software 17,296 7,272
Construction in progress 3,469 9,085
-------------- --------------
172,493 154,315
Less accumulated depreciation and depletion 30,106 21,656
-------------- --------------
$ 142,387 $ 132,659
============== ==============
Discontinued operations, held for sale
Land $ 2,542 $ 2,608
Peat reserves and bog costs 58,252 60,317
Buildings and improvements 14,519 9,489
Machinery and equipment 29,451 30,043
Software 1,220 1,220
-------------- --------------
105,984 103,677
Less accumulated depreciation and depletion 30,082 27,617
-------------- --------------
$ 75,902 $ 76,060
============== ==============
F-12
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. REVOLVING LINES OF CREDIT
-------------------------
Effective June 26,1998, the Company entered into a Senior Credit Facility
to provide for a $50,000 term loan, a $100,000 acquisition revolving credit
facility and a $100,000 working capital revolving credit facility. On March 3,
2000, in connection with the Lovell acquisition, the Company entered into an
amendment to its existing Senior Credit Facility (the "Amended Senior Credit
Facility") to provide for a new $100,000 term loan and a $15,000 increase in the
Company's existing working capital revolving credit facility.
The interest rate spread over the U.S. prime rate and Eurodollar rate
varies depending upon the Company's quarterly leverage and interest coverage
ratios as defined in the Amended Senior Credit Facility agreement. The revolving
credit facility and all other obligations under the Amended Senior Credit
Facility are collateralized by substantially all of the assets and common stock
of Hines Nurseries and Sun Gro-U.S., as well as a pledge of 65% of the common
stock of Sun Gro-Canada. The Amended Senior Credit Facility contains covenants
that, among other matters, establish minimum interest coverage and net worth and
maximum leverage ratios and capital expenditure amounts. The average daily
amount of the unused portion of the revolving credit facility is subject to a
commitment fee that varies depending upon the Company's quarterly leverage ratio
as defined in the Amended Senior Credit Facility agreement. The revolving credit
facility, which expires on June 30, 2003, was extended to December 31, 2004.
Amounts borrowed under the acquisition facility converted into a term loan on
June 30, 2000 and began to amortize thereafter. The weighted average interest
rate on borrowings outstanding under the Company's revolving lines of credit for
the years ended December 31, 2001 and 2000 was approximately 7.9% and 9.6%,
respectively.
Effective November 28, 2000 the Company's Amended Senior Credit Facility
was amended to (i) provide the Company with additional revolving loan
commitments in the amount of $30,000 guaranteed by its majority shareholder,
MDCP, which can only be borrowed and can only be outstanding between March 15
and June 15 of 2001 and 2002, (ii) increase the interest rate on all loans by
1/4% to 1/2%, (iii) reset the financial covenants that establish minimum
interest coverage ratios and net worth levels and maximum leverage ratios and
capital expenditure amounts, (iv) add a minimum EBITDA covenant, (v) amend the
clean down requirement for working capital revolving loans and (vi) provide for
additional restrictions on the Company's ability to make acquisitions and
reinvest proceeds from asset sales. In consideration for its guarantee on the
additional revolving loan commitments, MDCP received a fee of $600 and warrants
to purchase 440,000 shares of the Company's common stock valued at $843. All
other significant terms and conditions of the Amended Senior Credit Facility
remain unchanged.
Effective November 28, 2000, Hines Nurseries also received the approval of
its noteholders to amend the Indenture governing Senior Subordinated Notes due
for the purpose of amending the definition of "Permitted Indebtedness" within
the Indenture to include (i) all indebtedness that may be incurred under the
Amended Senior Credit Facility in an aggregate principal amount to not exceed
$365,000 (less the amount of all mandatory principal repayments and required
permanent reductions made thereunder) plus (ii) up to an additional $35,000 in
indebtedness under the additional revolving loan commitments, provided that such
borrowings may only be borrowed and may only be outstanding between March 15 and
June 15 of 2001 and 2002. In consideration for the amendment, Hines Nurseries
agreed to (i) pay a fee of $35 per $1,000 of the principal amount of Notes, (ii)
increase the interest rate thereon from 11 3/4% to 12 3/4% per annum, (iii)
increase the optional redemption price to 106.00% of the principal amount
thereof, (iv) increase the purchase price upon a change of control from 101.00%
to 105.00% of the principal amount thereof and add to the events that constitute
a change of control and (v) pay a premium at maturity equal to 5.00% of the
principal amount to be repaid. All other terms of the Notes remain unchanged.
F-13
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Effective February 1, 2002 the Company's Amended Senior Credit Facility was
amended to:
(i) Permit the sale of the Sun Gro business upon receipt of a minimum of
net cash proceeds of $105 million,
(ii) To the extent net cash proceeds from the sale of the Sun Gro business
exceed $105 million, allow the Company to retain up to $8.25 million
for capital expenditure reinvestment over the 2002 fiscal year,
(iii) Permit the property sale of Minter Bridge and apply all the net cash
proceeds to the permanent prepayment of debt,
(iv) Amend the mandatory prepayment provisions of the existing Amended
Senior Credit Facility to allow the application of the net proceeds
from the sale of the Sun Gro business and the sale of the Minter Bridge
property to prepay amortization payments under the Term Loans in direct
(or forward) rather than inverse order of maturities,
(v) Combine the post pay-down Acquisition Term Loan and the Domestic Term
Loan into one term loan facility, the New Term Loan, and reset the
amortization schedule,
(vi) Extend to December 31, 2004 maturities under the existing Working
Capital Revolving Loans and the New Term Loan,
(vii) Reset the financial covenants that establish minimum EBITDA levels,
minimum interest coverage ratios and net worth levels and maximum
leverage ratios and capital expenditure amounts,
(viii) Extend through June 15, 2004 the Company's ability to utilize the
additional revolving loan commitments in the amount of $30.0 million
guaranteed by its majority shareholder, MDCP, and alter the
availability period that it can only be borrowed and can only be
outstanding to the period between February 1 and June 15,
(ix) Increase the sub-limit for letters of credit that may be issued under
the Working Capital Revolver from $3.0 million to $7.5 million,
(x) Amend and shorten the maturity of the Tranche B Term Loan to December
31, 2004,
(xi) Increase the interest rate on the New Term Loan and Working Capital
Revolver by 1/2%, and
(xii) Pay amendment fees of 3/4% to extending lenders under the New Term
Loan, the Working Capital Revolver and the Seasonal Revolver and 1/4%
to the lenders under the Tranche B Term Loan
All other significant terms and conditions of the Amended Senior Credit
Facility remain unchanged. As a result of the requirement to record a deferred
income tax expense of $8.1 million related to the difference between the book
and tax basis of the investment in Sun Gro-Canada by Sun Gro-U.S. for the
anticipated repatriation of foreign earnings in connection with the sale of Sun
Gro-Canada which was completed on March 27, 2002, the Company was unable to
comply with the net worth covenant under its Amended Senior Credit Facility. The
Company requested and received a waiver from its senior lenders effective March
26, 2002.
Management believes that cash generated by operations, cash generated from
the sale of the Sun Gro business and from borrowings available under the Amended
Senior Credit Facility will be sufficient to meet the Company's anticipated
working capital, capital expenditures and debt service requirements through
2002.
F-14
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
6. LONG-TERM DEBT
--------------
December 31, December 31,
2001 2000
--------- ---------
Tranche B term debt, interest at the bank's reference rate (4.75%
and 9.50% at December 31, 2001 and 2000, respectively) plus 2.75%
or the Eurodollar rate plus 3.75%. Principal payments of $47,900
due March 27, 2002 with the remaining balance due on December 31,
2004. $ 99,000 $100,000
New term debt interest at the bank's reference rate (4.75% and
9.50% at December 31, 2001 and 2000, respectively) plus 3.0% or the
Eurodollar rate plus 4.0%. Principal payments due from June 30,
2003 through December 31, 2004 ranging from $3,500 to $10,000 with
the remaining balance due on December 31, 2004, as specified in the
loan agreement. 111,386 134,968
Senior Subordinated Notes, Series B, interest at 12.75% payable
semi-annually on each June 30 and December 31, maturing on
October 15, 2005. 79,040 78,066
Other obligations due at various dates through 2004. 444 2,386
--------- ---------
289,870 315,420
Less current portion of continuing operations 43,159 18,196
Less amounts owing of discontinued operations, held
for sale 37,072 45,401
--------- ---------
$209,639 $251,823
========= =========
The following are the Company's estimated principal maturities of long-term
debt outstanding for each of the next four years ending December 31, as amended
on February 1, 2002, pursuant to the amendment of the Company's Amended Senior
Credit Facility:
2002 $ 108,283
2003 17,585
2004 84,962
2005 79,040
--------------
$ 289,870
==============
The Senior Subordinated Notes were issued by Hines Nurseries and are
redeemable, in whole or in part, at the option of the Company, on or after
October 15, 2000 at a redemption price of 106.00% of the principal amount
thereof plus accrued interest, if any, to the date of redemption. Upon a change
F-15
HNES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
of control, each holder will have the right to require Hines Nurseries to
repurchase such holder's notes at a price equal to 105.00% of the principal
amount thereof plus accrued interest, if any, to the date of repurchase. The
Senior Subordinated Notes are unsecured and subordinated to all existing and
future senior debt and unconditionally guaranteed on a senior subordinated basis
by Hines and Sun Gro-U.S.
In addition, under its Senior Subordinated Notes, the Company is obligated
to pay a premium at maturity equal to 5.00% of the principal amount of the
Senior Subordinated Notes to be repaid. The Company is accreting this premium
over the term of the maturity of the Notes. At December 31, 2001 the amount of
the premium was $1.0 million and, based on the $78.0 million of Notes
outstanding is expected, to be $3.9 million upon maturity.
The indenture governing the Senior Subordinated Notes imposes certain
limitations on the ability of Hines and Sun Gro-U.S. to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments and consummate certain asset sales.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASES
The Company leases certain land, office and warehouse facilities under
various renewable long-term operating leases, which expire through 2010. Certain
of these leases include escalation clauses based upon changes in the consumer
price index and/or the fair rental value of leased land. One of the operating
land leases requires the Company to pay rent equal to the greater of 2.25
percent, increasing to 3 percent by the year 2010, of the sales derived from the
related land, or a minimum per acre amount, as defined in the agreement. Total
rent expense for continuing operations for these operating lease agreements for
the years ended December 31, 2001, 2000 and 1999 was $1,786, $1,835 and $1,342,
respectively. Total rent expense for discontinued operations, held for sale for
these operating lease agreements for the years ended December 31, 2001, 2000 and
1999 was $612, $590 and $424, respectively.
The following are the Company's future minimum annual payments under its
non-cancelable operating leases for each of the next five years ending December
31 and thereafter:
Discontinued
Continuing Operations,
Operations held for sale
------------ -------------
2002 $ 5,659 $ 1,825
2003 4,969 1,066
2004 4,063 674
2005 3,023 323
2006 2,198 42
Thereafter 7,615 60
------------ ------------
$ 27,527 $ 3,990
============ ============
F-16
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
LEGAL MATTERS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company.
Management believes, however, that the ultimate resolution of such matters will
not have a material adverse impact on the Company's consolidated financial
position, results of operations or cash flows.
8. SHAREHOLDERS' EQUITY
--------------------
STOCK OPTION PLAN: On June 22, 1998, the Board adopted the 1998 Long-Term
Equity Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for
grants of stock options, stock appreciation rights, restricted stock,
performance awards and any combination of the foregoing to certain directors,
officers and employees of the Company and its subsidiaries. The purpose of the
1998 Stock Plan is to provide such individuals with incentives to maximize
shareholder value and otherwise contribute to the success of the Company and to
enable the Company to attract, retain and reward the best available persons for
positions of substantial responsibility. The options are granted at the fair
market value of the shares underlying the options at the date of grant, and
generally become exercisable over a four-year period and expire in ten years.
On June 1, 2000, the Board adopted and approved to increase the number of
shares of common stock available for issuance under the 1998 Stock Plan by 1
million shares. At December 31, 2001, the Company had reserved 3.6 million
shares of its common stock for issuance upon exercise of options granted or to
be granted under this plan.
In November 2000, and in conjunction with the Amendment to the Senior
Credit Facility, as further discussed in Note 5, the Company issued warrants to
purchase 440,000 shares of the Company's common stock to its majority
shareholder, MDCP. The warrants were issued with an exercise price of $3.50 per
share, were fully vested at December 31, 2000 and are exercisable through
December 31, 2005. The fair value of the warrants was estimated to be $843 and
is being amortized to interest expense over the period MDCP is providing the
guarantee or through June 15, 2002.
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") in 1998. As permitted by SFAS No.
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, but provides pro forma disclosures of net income and
earnings per share as if the fair value method (as defined in SFAS No. 123) had
been applied. Had compensation cost been determined using the fair value method
prescribed by SFAS No. 123, the Company's net income and earnings per share,
including discontinued operations, held for sale, for the years ended December
31, 2001 and 2000 would have been as follows (in thousands, except per share
amounts):
F-17
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2001 2000
---- ----
Pro forma net income: $1,400 $10,422
Pro forma basic and diluted earnings per share $ 0.06 $ 0.47
The Company estimates the weighted average fair value of each stock option
on the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions:
2001 2000
---- ----
Dividend yield 0% 0%
Expected volatility 85.77% 92.58%
Risk-free interest rate 5.56% 5.56%
Expected life Six years Six years
A summary of the status of the Company's stock option plan as of December
31 is presented below:
2001 2000 1999
----------------------------- ---------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------ ------------ ------------- ------------- ------------- ------------
Outstanding -beginning of year 2,897,480 $ 9.93 2,274,470 $ 10.99 2,043,951 $ 10.99
Granted - - 287,600 7.86 376,363 11.00
Granted - - 200,000 6.88 - -
Granted - - 297,200 6.38 - -
Exercised - - - - - -
Cancelled (153,666) 8.91 (161,790) 10.73 (145,844) 11.00
------------ ------------- -------------
Outstanding -end of year 2,743,814 $ 9.97 2,897,480 $ 9.93 2,274,470 $ 10.99
============ ============= =============
Weighted average fair value
of options granted during period $ - $ 3.69 $ 4.40
============ ============= ============
F-18
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The weighted average remaining contractual life was seven years at December
31, 2001. As of December 31, 2001, expiration dates ranged from June 22, 2008 to
July 3, 2010. The range of exercise prices was $6.00 to $11.00 for options
outstanding as of December 31, 2001.
9. INCOME TAXES
-------------
The components of income (loss) before provision for income taxes and the
provision for income taxes consisted of the following:
For the Years Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- --------------
Income (loss) before income taxes:
U.S. $ 10,723 $ 16,504 $ 20,812
Foreign 8,645 (257) 3,252
--------------- --------------- --------------
$ 19,368 $ 16,247 $ 24,064
=============== =============== ==============
Income from continuing operations $ 10,320 $ 18,671 $ 15,561
Income (loss) from discontinued operations 9,048 (2,424) 8,503
--------------- --------------- --------------
$ 19,368 $ 16,247 $ 24,064
=============== =============== ==============
Current income tax provision (benefit):
Federal $ -- $ -- $ 61
State -- -- 130
Foreign 1,090 605 523
--------------- --------------- --------------
$ 1,090 $ 605 $ 714
--------------- --------------- --------------
Deferred provision (benefit):
Federal $ 12,121 $ 3,643 $ 7,614
State 863 764 876
Foreign 1,869 (1,203) (560)
--------------- --------------- --------------
14,853 3,204 7,930
--------------- --------------- --------------
$ 15,943 $ 3,809 $ 8,644
=============== ============== ==============
F-19
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 35 percent (34 percent in
1999) to income before provision for income taxes as follows:
For the Years Ended December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Provision computed at statutory rate $ 6,779 $ 5,686 $ 8,182
Increase (decrease) resulting from:
State tax, net of federal benefit 546 764 1,007
Foreign taxes 389 (12) 179
Goodwill 413 470 395
Meals and entertainment 194 173 198
Reduction in tax reserves (482) -- (918)
Investment in Foreign Subsidiary (a) 8,125 -- --
FAS 52 -Translation remeasurement -- (2,995) --
Capital loss valuation allowance -- (571) --
Other (21) 294 (399)
-------------- -------------- --------------
$ 15,943 $ 3,809 $ 8,644
============== ============== ==============
Provision for continuing operations $ 4,627 $ 8,034 $ 6,516
Provision (benefit) for discontinued operations 11,316 (4,225) 2,128
-------------- -------------- --------------
$ 15,943 $ 3,809 $ 8,644
============== ============== ==============
Deferred tax assets (liabilities) are comprised of the following:
December 31,
--------------------------------
2001 2000
-------------- --------------
Deferred tax assets:
Deferred expenses $ 586 $ 879
Capital loss carryforwards 477 559
Deferred currency loss 413 658
Net operating loss carryforwards 19,506 19,432
Foreign currency cumulative translation adjustment 3,690 2,700
Book/tax difference in debt 7,978 5,751
Other 174 878
-------------- --------------
Gross deferred tax assets 32,824 30,857
-------------- --------------
Deferred tax liabilities:
Accrual to cash adjustment (64,874) (63,432)
Fixed asset basis differences (35,099) (30,560)
Investment in foreign subsidiary (a) (8,125) --
Other (1,284) (1,788)
-------------- --------------
Gross deferred tax liabilities (109,382) (95,780)
-------------- --------------
Net deferred tax liability $ (76,558) $ (64,923)
============== ==============
Deferred income tax liability, current $ (72,000) $ (61,895)
Deferred income tax liability, non-current (4,558) (3,338)
-------------- --------------
$ (76,558) $ (64,923)
============== ==============
F-20
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Deferred income tax liability - current - Continuing operations (64,874) (63,432)
Deferred income tax liability - current - Discontinued operations (7,126) 1,847
------------ ------------
$ (72,000) $ (61,585)
============ ============
Deferred income tax liability - non-current - Continuing operations 7,727 9,565
Deferred income tax liability - non-current - Discontinued operations (12,285) (12,903)
------------ ------------
$ (4,558) $ (3,338)
============ ============
(a) Represents the difference between the book basis and the tax basis of Hines'
investment in Sun Gro Canada, Ltd. for the anticipated repatriation of foreign
earnings in connection with the sale of Sun Gro Canada. Management had not
previously provided for deferred taxes due to their belief that the investment
in Sun Gro Canada was previously expected to be permanent in nature.
The Company derives significant benefits by qualifying to use the cash
method of accounting for federal income tax purposes. Under the cash method,
sales are included in taxable income when payments are received and expenses are
deducted as they are paid. The primary benefit the Company receives is the
ability to deduct the cost of inventory as it is incurred. The net benefit
realized by the Company thus far is represented by the "Accrual to Cash
Adjustment" item above. Because the items to which this "Accrual to Cash
Adjustment" relate to are comprised of current assets and current liabilities in
the balance sheet (such as inventory, accounts receivable, accounts payable,
etc.), this deferred tax item is also characterized as current.
At December 31, 2001, the Company had approximately $51,608 in net
operating loss carryforwards for federal income tax reporting purposes. The
Company's federal net operating losses begin to expire in 2005.
At December 31, 2001, Sun Gro-Canada had capital loss carryforwards of
approximately Cdn. $2,996 (U.S. $1,884). These capital loss carryforwards may be
carried forward indefinitely, but may only be used to the extent of capital
gains realized by Sun Gro-Canada. It is the opinion of management that the
capital loss carryforwards are more likely than not going to be realized in the
future.
At December 31, 2001, the Company had capital loss carryforwards of
approximately $350. These capital loss carryforwards expire in 2005 and may only
be used to the extent of capital gains realized by Sun Gro. It is the opinion of
management that the capital loss carryforwards are more likely than not going to
be realized in the future.
10. EMPLOYEE BENEFIT PLANS
----------------------
As of January 1, 2001, Hines Nurseries established a 401(k) Retirement
Savings Plan for salaried and permanent hourly employees. Participants may make
voluntary contributions to the plan up a maximum of ten-thousand-five-hundred
dollars not to exceed 15 percent of their annual compensation (as defined).
Hines' matching contribution to the Plan is equal to 25 percent of the
participant's voluntary contribution not to exceed 4 percent of the
participant's salary per calendar year. As of January 1, 2002, Hines Nurseries
amended its 401(k) Retirement Savings Plan for salaried and permanent hourly
employees. Participants may make voluntary contributions to the plan up a
maximum of eleven- thousand dollars not to exceed 20 percent of their annual
compensation (as defined). Hines' matching contribution to the Plan is equal to
100 percent of the first 3 percent of a participant's voluntary deferral of
salary, and 50 percent of the next 2 percent of a participant's voluntary
deferral of salary per calendar year.
Sun Gro sponsors a 401(k) Retirement Savings Plan for salaried and
permanent hourly United States employees (the "U.S. Plan") and a Registered
Pension Plan for Canadian salaried and certain hourly employees (the "Canadian
Plan"). Participants of the U.S. Plan may make voluntary contributions to the
plan up a maximum of ten-thousand-five-hundred dollars not to exceed 15 percent
of their defined annual compensation. Sun Gro's matching contribution formula is
based on return on sales for the previous year. Sun Gro's matching contribution
to the U.S. Plan may not exceed three-thousand-five-hundred dollars per
participant per calendar year.
F-21
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Certain participants of the Canadian Plan may make contributions to the
plan up to 5 percent and 3 percent of their compensation (as defined) and may
make voluntary contributions to the plan up to 18 percent of their compensation
(as defined). Sun Gro contributes up to 5 percent and 3 percent of each
participant's compensation (as defined) to the Canadian Plan with no maximum for
the salaried and hourly plans, respectively. The participants required
contributions and employer contributions vary for those employees under a
collective bargaining agreement.
The total expense related to the Hines plan was $342, nil and nil for the
years ended December 31, 2001, 2000 and 1999, respectively. The total expense
related to the Sun Gro plan was $450, $500 and $444 for the years ended December
31, 2001, 2000 and 1999, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Supplemental disclosure of non-cash investing and financing activities were
as follows:
December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Fair value of assets acquired $ 9,211 $ 118,282 $ 40,314
Liabilities assumed and incurred
in connection with acquisitions - (6,007) (9,684)
Discontinued operations, held for sale - (1,485) 30,955
-------------- -------------- --------------
Cash paid $ 9,211 $ 110,790 $ 61,585
============== ============== ==============
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
CASH
The carrying amount reported in the balance sheet for cash approximates its
fair value.
SHORT-TERM AND LONG-TERM DEBT
The fair value of the Senior Subordinated Notes is based on the closing
price of the debt securities at December 31, 2001 and 2000. The carrying amount
of the Company's other long-term debt approximates its fair value based upon
borrowing rates currently available to the Company. The carrying amount of the
short-term debt approximates the fair value based on the short-term maturity of
the instrument.
F-22
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
INTEREST RATE SWAP
In May 2000, the Company entered into an interest rate swap agreement to
hedge $75,000 of its long-term debt. The Company does not hold or issue interest
rate swap agreements for trading purposes. This interest rate swap agreement
effectively converts a portion of the Company's variable rate debt to a fixed
rate of 7.13% based on the 3-month London Interbank Offering Rate ("LIBOR") rate
in effect at the beginning of each quarterly period, with a maximum rate of 8%.
The interest rate swap agreement matures in February 2005.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2001 and 2000 are as follows:
December 31,
-----------------------------------------------------------------
2001 2000
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
Cash $ -- $ -- $ -- $ --
Revolving line of credit 100,000 100,000 79,500 79,500
Long-term debt (including
current portion) 252,798 251,240 270,019 255,199
Interest rate swap
agreement liability 7,117 7,117 -- 3,896
Discontinued Operations
Long-term debt (including
current portion) 37,072 37,072 45,401 45,401
13. VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:
For the Years Ended December 31,
------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Continuing Operations:
Beginning balance $ 1,528 $ 858 $ 671
Acquisition increases -- 297 532
Charges to expense 699 554 68
Amounts written off (924) (181) (413)
-------------- -------------- --------------
Ending balance $ 1,303 $ 1,528 $ 858
============== ============== ==============
F-23
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
--------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Discontinued operations, held for sale
Beginning balance $ 676 $ 586 $ 553
Acquisition increases -- -- 110
Charges to expense 71 586 26
Amounts written off (326) (496) (103)
-------------- -------------- --------------
Ending balance $ 421 $ 676 $ 586
============== ============== ==============
14. GEOGRAPHIC INFORMATION
Geographic information is summarized as follows:
For the Years Ended December 31,
-------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
NET SALES:
UNITED STATES:
Sales to unaffiliated customers
-Continuing Operations $ 326,973 $ 304,202 $ 199,117
Sales to unaffiliated customers
-Discontinued Operations 99,744 108,704 89,178
CANADA:
Sales to unaffiliated customers
-Discontinued Operations 13,021 13,195 13,334
Transfers to other geographic areas
-Discontinued Operations 18,362 21,505 19,425
Eliminations (21,860) (24,291) (21,129)
-------------- -------------- --------------
$ 436,240 $ 423,315 $ 299,925
============== ============== ==============
OPERATING INCOME:
United States -Continuing Operations $ 48,508 $ 47,742 $ 29,414
United States -Discontinued Operations 5,367 3,870 8,788
Canada -Discontinued Operations 10,974 2,924 4,020
-------------- -------------- --------------
$ 64,849 $ 54,536 $ 42,222
============== ============== ==============
TOTAL ASSETS:
United States-Continuing Operations $ 507,787 $ 488,614 $ 309,396
United States-Discontinued Operations 72,070 70,045 74,117
Canada -Discontinued Operations 70,687 69,346 71,001
Eliminations (40,400) (28,620) (35,733)
-------------- -------------- --------------
$ 610,144 $ 599,385 $ 418,781
============== ============== ==============
Export sales for the Company from the United States totaled $9,172, $7,588
and $7,434 for the years ended December 31, 2001, 2000 and 1999, respectively.
F-24
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
15. GUARANTOR/NON-GUARANTOR DISCLOSURES
-----------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (the issuer) have
been guaranteed by Hines (the parent guarantor) and by Sun Gro-U.S. (the
subsidiary guarantor). The issuer and the subsidiary guarantor are wholly owned
subsidiaries of the parent guarantor and the parent and subsidiary guarantees
are full, unconditional and joint and several. Separate financial statements of
Hines Nurseries and Sun Gro-U.S. are not presented and Hines Nurseries and Sun
Gro-U.S. are not filing separate reports under the Securities Exchange Act
because management believes that they would not be material to investors. The
Senior Subordinated Notes are not guaranteed by Sun Gro-Canada or its present or
future subsidiaries.
The following condensed consolidating information shows (a) Hines on a
parent company basis only as the parent guarantor (carrying its investment in
its subsidiary under the equity method), (b) Hines Nurseries as the issuer
(carrying its investment in its subsidiary under the equity method), (c) Sun
Gro-U.S. as subsidiary guarantor (carrying its investment in Sun Gro-Canada
under the equity method), (d) Sun Gro-Canada and its direct and indirect
subsidiaries, as subsidiary non-guarantors, (e) eliminations necessary to arrive
at the information for the parent guarantor and its direct and indirect
subsidiaries on a consolidated basis and (f) the parent guarantor on a
consolidated basis, as follows:
o Consolidating balance sheets as of December 31, 2001 and December 31,
2000;
o Consolidating statements of operations for the year ended December 31,
2001, 2000 and 1999; and
o Consolidating statements of cash flows for the year ended December 31,
2001, 2000 and 1999.
16. SUBSEQUENT EVENTS
-----------------
On March 4, 2002, the Company completed the sale its Minter Bridge, Oregon
property, one of its real estate holdings related to its Forest Grove nursery
facility. In connection with the sale, the Company received net proceeds of
approximately $3,000. The book gain will be recorded in the first quarter ending
March 31, 2002. The net proceeds of the sale were allocated to repay debt in
accordance with the amendment to the Amended Senior Credit Facility dated
February 1, 2002.
F-25
CONSOLIDATING BALANCE SHEET
As of December 31, 2001
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 28,182 19,557 3,321 - 51,060
Inventories - 164,675 6,340 7,714 - 178,729
Prepaid expenses and other current assets - 2,322 1,925 1,277 - 5,524
Deferred income taxes - - - 384 (384) -
---------- ---------- ---------- ---------- ---------- ----------
Total current assets - 195,179 27,822 12,696 (384) 235,313
---------- ---------- ---------- ---------- ---------- ----------
Fixed assets, net - 150,638 10,272 57,379 - 218,289
Deferred financing expenses, net 250 8,067 - - - 8,317
Goodwill, net - 121,371 18,515 612 - 140,498
Deferred income taxes 253 28,417 3,153 - (24,096) 7,727
Investments in subsidiaries 96,038 4,115 12,308 - (112,461) -
---------- ---------- ---------- ---------- ---------- ----------
$ 96,541 $ 507,787 $ 72,070 $ 70,687 $(136,941) $ 610,144
========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 12,824 $ 1,687 $ 4,153 $ - $ 18,664
Accrued liabilities - 8,450 406 473 - 9,329
Accrued payroll and benefits - 7,091 1,110 1,029 - 9,230
Accrued interest - 2,904 - - - 2,904
Long-term debt, current portion - 43,159 13,568 7,545 - 64,272
Borrowings on revolving credit facility - 100,000 - - - 100,000
Deferred income taxes - 64,874 7,510 - (384) 72,000
Intercompany accounts 7,796 (58,993) 29,881 21,316 - -
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 7,796 180,309 54,162 34,516 (384) 276,399
---------- ---------- ---------- ---------- ---------- ----------
Long-term debt - 209,639 11,306 4,653 - 225,598
Interest rate swap agreement - 7,117 - - - 7,117
Deferred income taxes - 20,943 - 15,438 (24,096) 12,285
Shareholders' equity
Common stock 221 17,971 11,414 4,500 (33,885) 221
Additional paid-in capital 128,781 21,362 5,889 1,777 (29,028) 128,781
Retained earnings (deficit) (33,282) 52,221 (5,149) 9,451 (56,523) (33,282)
Cumulative foreign currency translation adjustments (5,200) - (5,552) 352 5,200 (5,200)
Accumulated other comprehensive loss (1,775) (1,775) - - 1,775 (1,775)
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' equity 88,745 89,779 6,602 16,080 (112,461) 88,745
---------- ---------- ---------- ---------- ---------- ----------
$ 96,541 $ 507,787 $ 72,070 $ 70,687 $(136,941) $ 610,144
========== ========== ========== ========== ========== ==========
F-26
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Balance Sheet
As of December 31, 2000
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 26,754 19,681 2,667 - 49,102
Inventories - 153,125 7,881 7,569 - 168,575
Prepaid expenses and other current assets - 1,880 2,060 1,602 - 5,542
Deferred income taxes - 122 1,239 608 (122) 1,847
---------- ---------- ---------- ---------- ---------- ----------
Total current assets - 181,881 30,861 12,446 (122) 225,066
---------- ---------- ---------- ---------- ---------- ----------
Fixed assets, net - 141,210 12,819 54,690 - 208,719
Deferred financing expenses, net 797 11,288 - - - 12,085
Goodwill, net - 124,196 19,082 672 - 143,950
Deferred income taxes 37 20,828 - 1,538 (12,838) 9,565
Investments in subsidiaries 94,057 9,211 7,283 - (110,551) -
---------- ---------- ---------- ---------- ---------- ----------
$ 94,891 $ 488,614 $ 70,045 $ 69,346 $(123,511) $ 599,385
========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 8,919 $ 1,836 $ 2,910 $ - $ 13,665
Accrued liabilities - 13,151 2,294 531 - 15,976
Accrued payroll and benefits - 7,339 916 1,095 - 9,350
Accrued interest - 1,732 - - - 1,732
Long-term debt, current portion - 18,196 3,769 4,548 - 26,513
Borrowings on revolving credit facility - 79,500 - - - 79,500
Deferred income taxes - 63,554 - - (122) 63,432
Intercompany accounts 7,484 (54,698) 27,738 19,476 - -
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 7,484 137,693 36,553 28,560 (122) 210,168
---------- ---------- ---------- ---------- ---------- ----------
Long-term debt - 251,823 24,875 12,209 - 288,907
Deferred income taxes - 11,300 (2,353) 16,794 (12,838) 12,903
Shareholders' equity
Common stock 221 17,971 11,414 4,500 (33,885) 221
Additional paid-in capital 128,781 21,362 5,889 1,778 (29,029) 128,781
Notes receivable from stock sales (30) - - - - (30
Retained earnings (deficit) (36,707) 48,465 (1,475) 5,505 (52,495) (36,707)
Cumulative foreign currency translation adjustments (4,858) - (4,858) - 4,858 (4,858)
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' equity 87,407 87,798 10,970 11,783 (110,551) 87,407
---------- ---------- ---------- ---------- ---------- ----------
$ 94,891 $ 488,614 $ 70,045 $ 69,346 $(123,511) $ 599,385
========== ========== ========== ========== ========== ==========
F-27
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Operations
For the year ended December 31, 2001
(Unaudited, Dollars in thousands)
Growing Media Segment
------------------------------------
Nursery
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Sales, net $ - $ 326,973 $ 99,744 $ 31,383 $ (21,860) $ 436,240
Cost of goods sold - 156,490 56,646 23,433 (21,860) 214,709
---------- ---------- ---------- ---------- ---------- ----------
Gross profit - 170,483 43,098 7,950 - 221,531
Operating expenses - 121,975 37,731 (3,024) - 156,682
---------- ---------- ---------- ---------- ---------- ----------
Operating income - 48,508 5,367 10,974 - 64,849
---------- ---------- ---------- ---------- ---------- ----------
Other expenses:
Interest - 32,882 2,546 1,197 - 36,625
Interest rate swap
agreement expense - 4,114 - - - 4,114
Interest - intercompany - (3,550) 2,419 1,131 - -
Amortization of deferred
financing expenses, other (3,209) 6,463 (5,688) - 7,176 4,742
---------- ---------- ---------- ---------- ---------- ----------
(3,209) 39,909 (723) 2,328 7,176 45,481
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
for income taxes 3,209 8,599 6,090 8,646 (7,176) 19,368
Income tax (benefit) provision (216) 4,843 8,358 2,958 - 15,943
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 3,425 $ 3,756 $ (2,268) $ 5,688 $ (7,176) $ 3,425
========== ========== ========== ========== ========== ==========
F-28
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Operations
For the year ended December 31, 2000
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Sales, net $ - $ 304,202 $ 108,704 $ 34,700 $ (24,291) $ 423,315
Cost of goods sold - 143,262 63,314 21,669 (24,291) 203,954
---------- ---------- ---------- ---------- ---------- ----------
Gross profit - 160,940 45,390 13,031 - 219,361
Operating expenses - 113,198 41,520 10,107 - 164,825
---------- ---------- ---------- ---------- ---------- ----------
Operating income - 47,742 3,870 2,924 - 54,536
---------- ---------- ---------- ---------- ---------- ----------
Other expenses:
Interest (10) 31,546 3,461 1,662 - 36,659
Interest - intercompany - (4,095) 2,579 1,516 - -
Amortization of deferred financing expenses, other (12,415) (217) (344) - 14,606 1,630
---------- ---------- ---------- ---------- ---------- ----------
(12,425) 27,234 5,696 3,178 14,606 38,289
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income taxes 12,425 20,508 (1,826) (254) (14,606) 16,247
Income tax (benefit) provision (13) 8,047 (3,627) (598) - 3,809
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 12,438 $ 12,461 $ 1,801 $ 344 $ (14,606) $ 12,438
========== ========== ========== ========== ========== ==========
F-29
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Operations
For the year ended December 31, 1999
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Sales, net $ - $ 199,117 $ 89,178 $ 32,759 $ (21,129) $ 299,925
Cost of goods sold - 93,403 47,674 19,973 (21,129) 139,921
---------- ---------- ---------- ---------- ---------- ----------
Gross profit - 105,714 41,504 12,786 - 160,004
Operating expenses - 76,300 32,716 8,766 - 117,782
---------- ---------- ---------- ---------- ---------- ----------
Operating income - 29,414 8,788 4,020 - 42,222
---------- ---------- ---------- ---------- ---------- ----------
Other expenses:
Interest (20) 14,780 1,366 1,282 - 17,408
Interest - intercompany - (1,657) 1,229 428 - -
Amortization of deferred financing expenses, other (15,408) (5,625) (2,346) - 24,129 750
---------- ---------- ---------- ---------- ---------- ----------
(15,428) 7,498 249 1,710 24,129 18,158
---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 15,428 21,916 8,539 2,310 (24,129) 24,064
Income tax (benefit) provision 8 6,508 2,165 (37) - 8,644
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 15,420 $ 15,408 $ 6,374 $ 2,347 $ (24,129) $ 15,420
========== ========== ========== ========== ========== ==========
F-30
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Cash Flows
For the year ended December 31, 2001
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Cash provided by operating activities $ - $ 26,551 $ 2,067 $ 4,675 $ - $ 33,293
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets, net - (18,178) 405 (3,130) - (20,903)
Acquisitions, net of cash - (9,211) - - - (9,211)
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in (provided by) investing activities - (27,389) 405 (3,130) - (30,114)
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from revolving line of credit - 20,500 - - - 20,500
Intercompany advances (repayments) (30) (3,953) 3,783 200 - -
Proceeds from the issuance of long-term debt - - - - - -
Repayments of long-term debt - (18,195) (3,769) (4,561) - (26,525)
Deferred financing costs - - - - - -
Penalty on early payment of subordinated notes - - - - - -
Deferred financing costs - - - - - -
Dividends received (paid) - 2,486 (2,486) - - -
Repayments of notes receivables from stock sales 30 - - - - 30
Issuance of preferred and common stock - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities - 838 (2,472) (4,361) - (5,995)
---------- ---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash - - - 2,816 - 2,816
---------- ---------- ---------- ---------- ---------- ----------
Net decrease in cash - - - - - -
Cash, beginning of year - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Cash, end of year $ - $ - $ - $ - $ - $ -
========== ========== ========== ========== ========== ==========
F-31
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Cash Flows
For the year ended December 31, 2000
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Cash provided by (used in) operating activities $ 10 $ 2,828 $ (5,416) $ 7,869 $ - $ 5,291
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets, net - (29,686) (1,845) (5,845) - (37,376)
Acquisitions, net of cash - (112,275) 1,485 - - (110,790)
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in investing activities - (141,961) (360) (5,845) - (148,166)
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from revolving line of credit - 44,750 - - - 44,750
Intercompany advances (repayments) (153) (12,344) 12,497 - - -
Proceeds from the issuance of long-term debt - 121,216 - - - 121,216
Repayments of long-term debt - (9,707) (2,024) (2,547) - (14,278)
Deferred financing costs - - - - - -
Penalty on early payment of subordinated notes - - - - - -
Deferred financing costs - (9,479) - - - (9,479)
Dividends received (paid) - 4,697 (4,697) - - -
Repayments of notes receivables from stock sales 143 - - - - 143
Issuance of preferred and common stock - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by financing activities (10) 139,133 5,776 (2,547) - 142,352
---------- ---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash - - - 523 - 523
---------- ---------- ---------- ---------- ---------- ----------
Net decrease in cash - - - - - -
Cash, beginning of year - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Cash, end of year $ - $ - $ - $ - $ - $ -
========== ========== ========== ========== ========== ==========
F-32
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Statement of Cash Flows
For the year ended December 31, 1999
(Unaudited, Dollars in thousands)
Growing Media Segment
----------------------
Segment Sun Gro
Hines ---------- Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
---------- ---------- ---------- ---------- ---------- ----------
Cash provided by operating activities $ 20 $ 14,673 $ 191 $ 5,651 $ - $ 20,535
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets, net - (15,895) (2,380) (3,119) - (21,394)
Acquisitions, net of cash - (30,630) (30,470) (485) - (61,585)
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in investing activities - (46,525) (32,850) (3,604) - (82,979)
---------- ---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from revolving line of credit - 3,900 - - - 3,900
Intercompany advances (repayments) (173) (3,866) 4,039 - - -
Proceeds from the issuance of long-term debt - 30,500 30,178 313 - 60,991
Repayments of long-term debt - (755) - (1,012) - (1,767)
Deferred financing costs - - - - - -
Penalty on early payment of subordinated notes - - - - - -
Dividends received (paid) - 1,558 (1,558) - - -
Repayments of notes receivables from stock sales 153 - - - - 153
Issuance of preferred and common stock - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by financing actities (20) 31,337 32,659 (699) - 63,277
---------- ---------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash - - - (1,348) - (1,348)
---------- ---------- ---------- ---------- ---------- ----------
Net decrease in cash - (515) - - - (515)
Cash, beginning of year - 515 - - - 515
---------- ---------- ---------- ---------- ---------- ----------
Cash, end of year $ - $ - $ - $ - $ - $ -
========== ========== ========== ========== ========== ==========
F-33