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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
( ) 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
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
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
(Registrant's telephone number, including area code)
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
As of July 31, 2002 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
================================================================================
HINES HORTICULTURE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001 1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2002 and 2001 (unaudited) 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (unaudited) 3
Notes to the Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not
applicable.
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(Dollars in thousands, except share data)
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash $ 288 $ -
Accounts receivable, net of allowance for
doubtful accounts of $1,269 and $1,303 72,190 28,182
Inventories 141,998 164,675
Prepaid expenses and other current assets 9,517 2,322
Assets of discontinued operations - 40,134
------------- -------------
Total current assets 223,993 235,313
------------- -------------
FIXED ASSETS, net of accumulated depreciation
and depletion of $33,891 and $30,106 140,628 142,387
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $10,642 and $8,357 8,856 8,317
ASSETS OF DISCONTINUED OPERATIONS - 95,029
DEFFERED INCOME TAX - 7,727
GOODWILL 121,897 121,371
------------- -------------
$ 495,374 $ 610,144
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,285 $ 12,824
Accrued liabilities 17,436 8,450
Accrued payroll and benefits 11,585 7,091
Accrued interest 5,942 2,904
Long-term debt, current portion 3,584 43,159
Borrowings on revolving credit facility 64,500 100,000
Liabilities of discontinued operations - 37,097
Deferred income taxes 73,024 64,874
------------- -------------
Total current liabilities 189,356 276,399
------------- -------------
LONG-TERM DEBT 178,492 209,639
DERIVATIVE LIABILITY 7,406 7,117
DEFERRED INCOME TAXES 13,257 -
LIABILITIES OF DISCONTINUED OPERATIONS - 28,244
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares $.01 par value;
Issued and outstanding - 22,072,549 shares
at June 30, 2002 and December 31, 2001 221 221
Additional paid in capital 128,781 128,781
Deficit (15,408) (33,282)
Accumulated other comprehensive loss (6,731) (6,975)
------------- -------------
Total shareholders' equity 106,863 88,745
------------- -------------
$ 495,374 $ 610,144
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
Page 1
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended June 30, 2002 and 2001
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales, net $ 182,146 $ 174,181 $ 250,869 $ 241,938
Cost of goods sold 86,221 79,294 120,537 112,008
------------- ------------- ------------- -------------
Gross profit 95,925 94,887 130,332 129,930
------------- ------------- ------------- -------------
Selling and distribution expenses 46,765 42,641 67,501 61,894
General and administrative expenses 7,931 8,682 13,432 13,774
Other operating income - - (2,103) -
Amortization of goodwill - 933 - 1,818
------------- ------------- ------------- -------------
Total operating expenses 54,696 52,256 78,830 77,486
------------- ------------- ------------- -------------
Operating income 41,229 42,631 51,502 52,444
Other expenses
Interest 6,751 7,582 13,462 15,770
Interest rate swap agreement expense (income) 1,777 (472) 763 1,520
Amortization of deferred financing expenses 1,131 1,138 2,285 2,277
------------- ------------- ------------- -------------
9,659 8,248 16,510 19,567
------------- ------------- ------------- -------------
Income before provision for income taxes,
discontinued operation, and extraordinary items 31,570 34,383 34,992 32,877
Income tax provision 12,947 14,068 14,350 13,452
------------- ------------- ------------- -------------
Income from continuing operations 18,623 20,315 20,642 19,425
(Loss) income from discontinued operations, net of tax (3,198) 1,757 (1,742) 3,849
Extraordinary item, net of tax benefit - - (1,026) -
------------- ------------- ------------- -------------
Net income $ 15,425 $ 22,072 $ 17,874 $ 23,274
============= ============= ============= =============
Basic and diluted earnings per share:
Income per common share from
continuing operations $ 0.84 $ 0.92 $ 0.93 $ 0.88
(Loss) income per common share from
discontinued operations $ (0.14) $ 0.08 $ (0.07) $ 0.17
Extraordinary item $ - $ - $ (0.05) $ -
------------- ------------- ------------- -------------
Net income per common share $ 0.70 $ 1.00 $ 0.81 $ 1.05
============= ============= ============= =============
Weighted average shares outstanding--Basic 22,072,549 22,072,549 22,072,549 22,072,549
============= ============= ============= =============
Weighted average shares outstanding--Diluted 22,162,549 22,079,234 22,136,021 22,090,284
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
Page 2
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
(Dollars in thousands, except share data)
(Unaudited)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,874 $ 23,274
Loss (income) from discontinued operations 1,742 (3,849)
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 4,305 5,974
Amortization of deferred financing costs 2,285 2,277
Interest rate swap agreement expense 763 1,520
Gain on sale of assets (2,103) -
Extraordinary item (net of tax) 1,026 -
Deferred income taxes 14,350 13,440
---------- ----------
40,242 42,636
Change in working capital accounts
Accounts receivable (44,008) (43,920)
Inventories 22,677 16,527
Prepaid expenses and other current assets 1,019 (1,587)
Accounts payable and accrued liabilities 10,541 20,991
---------- ----------
Change in working capital accounts (9,771) (7,989)
---------- ----------
Net cash provided by operating activities 30,471 34,647
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (3,323) (12,948)
Net cash (used in) provided by discontinued operations (4,320) 4,631
Proceeds from sale of discontinued operations 123,429 -
Proceeds from sale of land 3,116 -
Acquisitions, adjusted (1,426) (8,311)
---------- ----------
Net cash provided by (used in) investing activities 117,476 (16,628)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 90,432 76,900
Repayments on revolving line of credit (125,932) (88,900)
Repayments of long-term debt (107,959) (6,049)
Deferred financing costs incurred (4,200) -
Repayments of notes receivables from stock sales - 30
---------- ----------
Net cash used in financing activities (147,659) (18,019)
---------- ----------
NET INCREASE IN CASH 288 -
CASH, beginning of period - -
---------- ----------
CASH, end of period $ 288 $ -
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,674 $ 17,774
Cash paid for income taxes $ 477 $ 404
The accompanying notes are an integral part of these consolidated financial statements.
Page 3
HINES HORTICULTURE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2002 AND 2001
(UNAUDITED)
1. Description of Business:
------------------------
As of June 30, 2002, Hines Horticulture, Inc. ("Hines" or the
"Company"), a Delaware corporation, 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. 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.
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.
During December 2001, the Company's Board of Directors approved and
authorized management to proceed with a planned sale of Sun Gro Canada and the
assets of Sun Gro-U.S. to a Canadian income fund. On March 27, 2002, the Company
sold the assets of Sun Gro-U.S. and the stock of Sun Gro Canada, its growing
media business, to the 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 $120,000 from the sale, which were used to pay down
outstanding bank debt. The Company recognized a $1,900 loss, net of tax, from
the sale of its growing media business for the six months ended June 30, 2002.
The Company's current operations consist solely of its Nursery and Color
divisions.
The consolidated financial statements include the accounts of Hines and
its wholly owned subsidiaries after elimination of inter-company accounts and
transactions. In 2001 the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 144 (Accounting for the Impairment
or Disposal of Long-lived Assets), 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." Refer to Note 8 "Guarantor/Non-guarantor Disclosures" for
information about the Company's guarantors for the six months ended June 30,
2002.
Page 4
2. Unaudited Financial Information:
--------------------------------
The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments (consisting of only normal recurring
adjustments), which are necessary to state fairly the consolidated financial
position, results of operations and cash flows of the Company as of and for the
periods indicated. The Company presumes that users of the interim financial
information herein have read or have access to the Company's audited
consolidated financial statements for the preceding fiscal year and that the
adequacy of additional disclosure needed for a fair presentation, except in
regard to material contingencies or recent significant events, may be determined
in that context.
Accordingly, footnote and other disclosures, which would substantially
duplicate the disclosures contained in the Form 10-K, filed on April 1, 2002 by
Hines Horticulture, Inc. under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), have been omitted. The financial information herein is not
necessarily representative of a full year's operations.
3. Earnings Per Share:
-------------------
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 six months ended June 30, 2002,
the incremental shares related to 440 warrants outstanding resulted in a
difference between basic and diluted earnings per share. Additionally, for the
six months ended June 30, 2002, shares related to the underlying employee stock
options in the amount of 2,213 were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive.
4. Adoption Of Accounting Pronouncements:
--------------------------------------
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 adopted SFAS
No. 144 in 2001.
Effective January 1, 2001, Hines adopted the provisions of SFAS No.
133, (Accounting for Derivative Instruments and Hedging Activities), as amended.
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 six months ended June 30, 2002, the
Company recognized a pre-tax loss of $763 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.
Page 5
For the twelve months ended December 31, 2002, the Company anticipates
that $560, net of tax, will be charged to the Other Comprehensive Income account
related to the interest rate swap agreement.
5. Inventories:
------------
Inventories consisted of the following:
June 30, December 31,
2002 2001
----------- -----------
Nursery stock $ 132,014 $ 155,096
Material and supplies 9,984 9,579
----------- -----------
Inventory from continuing operations 141,998 164,675
Discontinued operations - 14,054
----------- -----------
Total inventory $ 141,998 $ 178,729
=========== ===========
6. Comprehensive Income:
---------------------
Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. The Company's comprehensive income is composed of cumulative
foreign currency translation adjustments and the change in valuation of
derivative instruments. The components of comprehensive income during the six
months ended June 30, 2002 and 2001, were as follows:
Six Months Ended June 30,
2002 2001
----------- -----------
Net income $ 17,874 $ 23,274
Cumulative foreign currency
translation adjustments (36) (216)
Transaction impact upon
adoption of FAS 133 - (2,334)
Loss on derivatives
reclassified to earnings 280 279
----------- -----------
Comprehensive (loss) income $ 18,118 $ 21,003
=========== ===========
7. New Accounting Pronouncements:
------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
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. SFAS No. 141
is effective for all business combinations initiated after June 30, 2001. SFAS
No. 142 is effective for the Company beginning January 1, 2002. SFAS No. 142
requires that goodwill be tested annually for impairment using a two-step
process.
Page 6
The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step.
The second step of the goodwill impairment test measures the amount of
the impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company's goodwill impairment analysis has not yet been completed. The current
estimate of the impairment charge related to goodwill as of January 1, 2002 is
in the range of $40,000 to $70,000 before tax, pending completion of the
impairment analysis, and is expected to be recorded in the third quarter of the
2002 fiscal year, effective as of January 1, 2002. For the six months ended June
30, 2001 and the year ended December 31, 2001, the Company reported goodwill
amortization of $1,818 and $3,686, respectively, excluding discontinued
operations. As of June 30, 2002, the Company had $121,897 of goodwill.
In August 2001, Financial Accounting Standards Board 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. The Company is in the process of evaluating the impact of SFAS No.
143 on its financial statements and will adopt the provisions of this statement
in the first quarter of fiscal year 2003.
In April 2002, Financial Accounting Standards Board issued SFAS No. 145
(Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections). SFAS No. 145 addresses financial accounting and
reporting for the extinguishments of debt, leases and intangible assets of motor
carriers. It would be effective for the Company beginning with its 2003
financial statements. The Company is in the process of evaluating the impact of
SFAS No. 145 on its financial statements and will adopt the provisions of this
statement in the first quarter of fiscal year 2003.
8. Segment Information and Guarantor/Non-guarantor Disclosures:
------------------------------------------------------------
Prior to the sale of the growing media business on March 27, 2002, the
Senior Subordinated Notes issued by Hines Nurseries ("the issuer") were
guaranteed by Hines ("the parent guarantor") and by certain subsidiaries of
Hines including Sun Gro-U.S. After the March 27, 2002 sale of the growing media
business, Hines and Enviro-Safe Laboratories, Inc. are the remaining guarantors
and such guarantees are full, unconditional and joint and several. Separate
financial statements of Hines Nurseries are not presented and Hines Nurseries is
not filing separate reports under the Exchange Act because management believes
that they would not be material to investors.
The following 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) for periods prior
to March 27, 2002, Sun Gro-U.S. as subsidiary guarantor (carrying its investment
in Sun Gro-Canada under the equity method), (d) for periods prior to March 27,
2002, 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:
Page 7
o Consolidating balance sheets as of June 30, 2002 (unaudited) and
December 31, 2001;
o Consolidating statements of operations for the three months and
six months ended June 30, 2002 and 2001 (unaudited); and
o Consolidating statements of cash flows for the six months ended
June 30, 2002 and 2001 (unaudited).
Page 8
Guarantor / Non-guarantor Disclosures
Consolidating Balance Sheet
As of June 30, 2002
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
ASSETS
------
Current assets:
Cash $ - $ 288 $ - $ - $ 288
Accounts receivable, net - 72,190 - - 72,190
Inventories - 141,998 - - 141,998
Prepaid expenses and other current assets - 9,517 8,214 (8,214) 9,517
Deferred income taxes - - - - -
----------------------------------------------------------------------------
Total current assets $ - $ 223,993 $ 8,214 $ (8,214) $ 223,993
----------------------------------------------------------------------------
Fixed assets, net - 140,628 - - 140,628
Deferred financing expenses, net - 8,856 - - 8,856
Goodwill, net - 121,897 - - 121,897
Deferred income taxes 2,922 28,417 - (31,339) -
Investments in subsidiaries 111,773 - - (111,773) -
----------------------------------------------------------------------------
$ 114,695 $ 523,791 $ 8,214 $ (151,326) $ 495,374
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 13,285 $ - $ - $ 13,285
Accrued liabilities - 17,436 8,214 (8,214) 17,436
Accrued payroll and benefits - 11,585 - - 11,585
Accrued interest - 5,942 - - 5,942
Long-term debt, current portion - 3,584 - - 3,584
Borrowings on revolving credit facility - 64,500 - - 64,500
Deferred income taxes - 73,024 - - 73,024
Intercompany accounts 7,832 (7,832) - - -
----------------------------------------------------------------------------
Total current liabilities 7,832 181,524 8,214 (8,214) 189,356
----------------------------------------------------------------------------
Long-term debt - 178,492 - - 178,492
Derivative liability - 7,406 - - 7,406
Deferred income taxes - 44,596 - (31,339) 13,257
Shareholders' equity
Common stock 221 17,971 - (17,971) 221
Additional paid in capital 128,781 21,362 - (21,362) 128,781
Retained earnings (deficit) (15,408) 73,935 - (73,935) (15,408)
Accumulated other comprehensive loss (6,731) (1,495) - 1,495 (6,731)
----------------------------------------------------------------------------
Total shareholders' equity 106,863 111,773 - (111,773) 106,863
----------------------------------------------------------------------------
$ 114,695 $ 523,791 $ 8,214 $ (151,326) $ 495,374
============================================================================
Page 9
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of December 31, 2001
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ -
Accounts receivable, net - 28,182 22,878 - 51,060
Inventories - 164,675 14,054 - 178,729
Prepaid expenses and other current assets - 2,322 3,202 - 5,524
Deferred income taxes - - 384 (384) -
----------------------------------------------------------------------------
Total current assets $ - $ 195,179 $ 40,518 $ (384) $ 235,313
----------------------------------------------------------------------------
Fixed assets, net - 150,638 67,651 - 218,289
Deferred financing expenses, net 250 8,067 - - 8,317
Goodwill, net - 121,371 19,127 - 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 $ 142,757 $ (136,941) $ 610,144
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 12,824 $ 5,840 $ - $ 18,664
Accrued liabilities - 8,450 879 - 9,329
Accrued payroll and benefits - 7,091 2,139 - 9,230
Accrued interest - 2,904 - - 2,904
Long-term debt, current portion - 43,159 21,113 - 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) 51,197 - -
----------------------------------------------------------------------------
Total current liabilities 7,796 180,309 88,678 (384) 276,399
----------------------------------------------------------------------------
Long-term debt - 209,639 15,959 - 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 15,914 (33,885) 221
Additional paid in capital 128,781 21,362 7,666 (29,028) 128,781
Retained earnings (deficit) (33,282) 52,221 4,302 (56,523) (33,282)
Accumulated other comprehensive loss (6,975) (1,775) (5,200) 6,975 (6,975)
----------------------------------------------------------------------------
Total shareholders' equity 88,745 89,779 22,682 (112,461) 88,745
----------------------------------------------------------------------------
$ 96,541 $ 507,787 $ 142,757 $ (136,941) $ 610,144
============================================================================
Page 10
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the six month period ended June 30, 2002
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Sales, net $ - $ 250,869 $ 31,150 $ (1,583) $ 280,436
Cost of goods sold - 120,537 16,929 (1,583) 135,883
----------------------------------------------------------------------------
Gross Profit - 130,332 14,221 - 144,553
Operating expenses 6,259 88,157 (13,954) - 80,462
----------------------------------------------------------------------------
Operating income (6,259) 42,175 28,175 - 64,091
----------------------------------------------------------------------------
Other expenses:
Interest - 14,184 528 - 14,712
Interest - intercompany - (722) 722 - -
Amortization of deferred financing
expenses, other (21,464) (4,655) - 29,167 3,048
----------------------------------------------------------------------------
(21,464) 8,807 1,250 29,167 17,760
----------------------------------------------------------------------------
Income (loss) before provision for income taxes 15,205 33,368 26,925 (29,167) 46,331
Income tax (benefit) provision (2,669) 10,628 19,472 - 27,431
----------------------------------------------------------------------------
Net income before extraordinary item 17,874 22,740 7,453 (29,167) 18,900
Extraordinary item - 1,026 - - 1,026
----------------------------------------------------------------------------
Net income $ 17,874 $ 21,714 $ 7,453 $ (29,167) $ 17,874
============================================================================
Guarantor / Non-guarantor Disclosures - Continued
Consolidating Statement of Operations
For the three month period ended June 30, 2002
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Sales, net $ - $ 182,146 $ - $ - $ 182,146
Cost of goods sold - 86,221 - - 86,221
----------------------------------------------------------------------------
Gross Profit - 95,925 - - 95,925
Operating expenses - 54,696 5,200 - 59,896
----------------------------------------------------------------------------
Operating income - 41,229 (5,200) - 36,029
----------------------------------------------------------------------------
Other expenses:
Interest - 7,765 - - 7,765
Interest - intercompany - - - - -
Amortization of deferred financing
expenses, other (15,378) 4,979 - 12,293 1,894
----------------------------------------------------------------------------
(15,378) 12,744 0 12,293 9,659
----------------------------------------------------------------------------
Income before provision for income taxes 15,378 28,485 (5,200) (12,293) 26,370
Income tax provision (47) 12,994 (2,002) - 10,945
----------------------------------------------------------------------------
Net income $ 15,425 $ 15,491 $ (3,198) $ (12,293) $ 15,425
============================================================================
Page 11
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the six month period ended June 30, 2001
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Sales, net $ - $ 241,938 $ 78,748 $ (15,159) $ 305,527
Cost of goods sold - 112,008 49,885 (15,159) 146,734
----------------------------------------------------------------------------
Gross Profit - 129,930 28,863 - 158,793
Operating expenses - 77,486 17,923 - 95,409
----------------------------------------------------------------------------
Operating income - 52,444 10,940 - 63,384
----------------------------------------------------------------------------
Other expenses:
Interest - 17,834 2,246 - 20,080
Interest - intercompany - (2,064) 2,064 - -
Amortization of deferred financing
expenses, other (23,162) (325) - 27,284 3,797
----------------------------------------------------------------------------
(23,162) 15,445 4,310 27,284 23,877
----------------------------------------------------------------------------
Income (loss) before provision for income taxes 23,162 36,999 6,630 (27,284) 39,507
Income tax (benefit) provision (112) 13,564 2,781 - 16,233
----------------------------------------------------------------------------
Net income $ 23,274 $ 23,435 $ 3,849 $ (27,284) $ 23,274
============================================================================
Guarantor / Non-guarantor Disclosures - Continued
Consolidating Statement of Operations
For the three month period ended June 30, 2001
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Sales, net $ - $ 174,181 $ 35,921 $ (5,328) $ 204,774
Cost of goods sold - 79,294 21,783 (5,328) 95,749
----------------------------------------------------------------------------
Gross Profit - 94,887 14,138 - 109,025 -
Operating expenses - 52,256 9,049 - 61,305
----------------------------------------------------------------------------
Operating income - 42,631 5,089 - 47,720
----------------------------------------------------------------------------
Other expenses:
Interest - 8,515 1,065 - 9,580
Interest - intercompany - (933) 933 - -
Amortization of deferred financing
expenses, other (22,016) (1,227) 2,114 21,795 666
----------------------------------------------------------------------------
(22,016) 6,355 4,112 21,795 10,246
----------------------------------------------------------------------------
Income before provision for income taxes 22,016 36,276 977 (21,795) 37,474
Income tax provision (56) 14,124 1,334 - 15,402
----------------------------------------------------------------------------
Net income $ 22,072 $ 22,152 $ (357) $ (21,795) $ 22,072
============================================================================
Page 12
Guarantor / Non-guarantor Disclosures - Continued
Consolidating Statement of Cash Flows
For the six months ended June 30, 2002
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $ 26,049 $ (2,233) $ - $ 23,816
----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (3,323) (2,503) - (5,826)
Sales proceeds - 3,116 127,338 - 130,454
Acquisitions, adjusted - (526) - - (526)
----------------------------------------------------------------------------
Net cash (used in) provided by
investing activities - (733) 124,835 - 124,102
----------------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (35,500) - - (35,500)
Intercompany advances (repayments) - 92,840 (92,840) - -
Repayments of long-term debt - (95,959) (12,000) - (107,959)
Deferred financing costs - (4,200) - - (4,200)
Dividends received (paid) - 17,791 (17,791) - -
----------------------------------------------------------------------------
Net cash used in financing activities - (25,028) (122,631) - (147,659)
----------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents - - 29 - 29
----------------------------------------------------------------------------
Net increase in cash - 288 - - 288
Cash, beginning of year - - - - -
----------------------------------------------------------------------------
Cash, end of period $ - $ 288 $ - $ - $ 288
============================================================================
Page 13a
Guarantor / Non-guarantor Disclosures - Continued
Consolidating Statement of Cash Flows
For the six months ended June 30, 2001
(Dollars in thousands)
----------------------------------------------------------------------------
Nursery Growing Media
Segment Segment
(Discontinued
Operations)
----------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
----------------------------------------------------------------------------
Cash provided by operating activities $ - $ 34,647 $ 8,881 $ - $ 43,528
----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (12,948) (1,801) - (14,749)
Proceds from sales of fixed assets - - 70 - 70
Acquisitions, adjusted - (8,311) - - (8,311)
----------------------------------------------------------------------------
Net cash used in investing activities - (21,259) (1,731) - (22,990)
----------------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (12,000) - - (12,000)
Intercompany advances (repayments) (30) 3,418 (3,388) - -
Repayments of long-term debt - (6,049) (3,035) - (9,084)
Dividends received (paid) - 1,243 (1,243) - -
Repayments of notes receivables from
stock sales 30 - - - 30
----------------------------------------------------------------------------
Net cash used in financing activities - (13,388) (7,666) - (21,054)
----------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents - - 516 - 516
----------------------------------------------------------------------------
Net decrease in cash - - - - -
Cash, beginning of year - - - - -
----------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ -
============================================================================
Page 13b
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 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 the Company and could
cause those results to differ materially from those expressed in the
forward-looking statements contained herein.
The Company's estimated or anticipated future results,
products and service performance or other non-historical facts are
forward-looking and reflect Hines' 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 to access water, the
impact of growing conditions, risks associated with customer
concentration, 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' substantial leverage and debt restrictions,
government regulations and other risks and uncertainties described from
time to time in Hines' Securities and Exchange Commission filings.
Therefore, the Company 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 the Company's 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 the
Company to implement its business strategy and may cause actual results
to differ materially from those contemplated by the statements
expressed herein.
SALE OF SUN GRO BUSINESS
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.
Page 14
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 a subsidiary of
the Fund 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
Form 10-Q reflect the financial position, results of operations and
cash flows of the Sun Gro business as "discontinued operations." In
accordance with SFAS 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 "discontinued
operations."
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.
SEASONALITY. The Company's nursery business, like that of its
competitors, is highly seasonal. The Company has experienced, and
expects to continue to experience, significant variability in net
sales, operating income and net income on a quarterly basis.
ACQUISITIONS. In the three years ended December 31, 2001, the
Company completed, in connection with its nursery business, 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. Beginning January 1,
2002, goodwill will no longer be amortized, but will be subject to a
periodic test for impairment based upon fair values. Refer to Note 7
"New Accounting Pronouncements" for information on the goodwill
impairment testing.
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.
Page 15
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. If the Company's ability to use
the cash method of accounting for federal income tax purposes was
limited or eliminated, the Company's cash income tax payments could
increase significantly. At December 31, 2001, the Company had
approximately $51.6 million in net operating loss carryforwards for
federal income tax reporting purposes. As a result of the sale of the
Sun Gro business, the Company expects to utilize a significant amount
of these net operating loss carryforwards in 2002 for federal income
tax reporting purposes. As a result, the Company anticipates it will
pay cash income taxes for federal purposes in the future. The Company
is currently paying cash income taxes for state income tax purposes in
certain states due to the differing rules regarding the carryforward of
net operating losses.
At June 30, 2002, the Company has a current liability for
deferred income taxes of $73,024. Because the majority of the items to
which this liability relates 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. The classification of this liability as a
current item does not mean that it will be paid within the next year.
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 allowances 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. The rate 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 by management to adequately reflect the
probable losses in the trade receivables due to customer defaults,
insolvencies or bankruptcies.
The provision is established by management using the following
criteria: customer credit history, customer current credit rating and
other relevant factors. The provision is re-evaluated on a quarterly
basis. The allowance is increased by provisions to bad debt expense
charged against income.
Page 16
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: Beginning January 1, 2002,
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. SFAS No. 142 requires that goodwill be tested
annually for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be
measured as of the beginning of the fiscal year. However, a company has
six months from the date of adoption to complete the first step.
The second step of the goodwill impairment test measures the
amount of the impairment loss (measured as of the beginning of the year
of adoption), if any, and must be completed by the end of the Company's
fiscal year. The goodwill impairment analysis has not yet been
completed. The current estimate of the impairment charge related to
goodwill as of January 1, 2002 is in the range of $40.0 million to
$70.0 million before tax, pending completion of the impairment
analysis, and is expected to be recorded in the third quarter of the
2002 fiscal year, effective as of January 1, 2002. For the six months
ended June 30, 2001 and the year ended December 31, 2001, the Company
reported goodwill amortization of $1.8 million and $3.7 million
respectively, excluding discontinued operations. As of June 30, 2002,
the Company had $121.9 million of goodwill.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2001
NET SALES. Net sales of $182.1 million for the three months ended
June 30, 2002 increased $7.9 million, or 4.5%, from net sales of $174.2
million for the comparable period in 2001 due primarily to strong sales
across the board in the West with somewhat weaker early spring sales in
the East and Midwest. The Eastern part of the country experienced
weather extremes during the second quarter, going from drought
conditions in April to virtually constant rain in early to mid-May.
However, as the weather finally improved in June, consumers in the East
and Midwest purchased green goods reflecting pent up demand for lawn
and garden products. In addition, given Kmart's uncertain financial
situation, the Company reduced its second quarter sales to the large
retailer by approximately $4.8 million from the second quarter of 2001.
GROSS PROFIT. Gross profit of $95.9 million for the three months
ended June 30, 2002 increased $1.0 million, or 1.1%, from gross profit
of $94.9 million for the comparable period in 2001 primarily due to the
higher sales as discussed above. As a percent of net sales, gross
margins decreased to 52.7% from 54.5% of net sales mainly due to lower
sales in our southeast markets, which typically carry higher margins,
and increased scrap rates primarily related to lower Kmart sales.
Page 17
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
expenses of $46.8 million for the three months ended June 30, 2002
increased $4.2 million, or 9.9%, from $42.6 million for the comparable
period in 2001. The increase was primarily due to the higher sales,
additional sales and merchandising personnel in place to support the
peak spring selling season and higher distribution costs. Distribution
costs increased significantly as the Company completed its transition
to a unitized delivery mode for many of its nursery products, and
expedited product shipments across the country to meet improved retail
demand as the weather improved.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $7.9 million for the three months ended June 30, 2002
decreased $0.8 million, or 9.2%, from $8.7 million for the comparable
period in 2001. The decrease is primarily attributable to efforts by
the Company to reduce costs, improve efficiencies and consolidate many
of its operational activities.
OPERATING INCOME. Operating income of $41.2 million for the three
months ended June 30, 2002 decreased $1.4 million, or 3.3%, from $42.6
million for the comparable period in 2001 primarily due to the higher
selling and distribution expenses as discussed above. As a percentage
of net sales, operating income decreased to 22.6% from 24.5% due
primarily to the lower gross margins and the higher selling and
distribution expenses as discussed above.
OTHER EXPENSES. Other expenses of $9.7 million for the three
months ended June 30, 2002 increased $1.5 million, or 18.3%, from $8.2
million for the comparable period in 2001. The increase was primarily
attributable to a charge of $1.8 million, reflecting a mark-to-market
adjustment for the Company's $75.0 million interest rate swap
agreement. This adjustment arose from a change in the swap's valuation
since the previous quarter end, which is based on long-term interest
rate expectations. By contrast, the swap related adjustment for the
comparable period in 2001 resulted in income of $0.5 million. The
mark-to-market charge was offset somewhat by lower interest expense of
$0.8 million, which resulted from using the net proceeds from the sale
of the Sun Gro business and of the sale of an additional 22.5 acres of
land to reduce debt. As a result of the debt reduction, interest
expense is expected to be lower during the remainder of 2002 when
compared to 2001.
PROVISION FOR INCOME TAXES. The Company's effective income tax
rate was 41.0% and 40.9% for the three months ended June 30, 2002 and
2001, respectively.
INCOME FROM CONTINUING OPERATIONS. Net income from continuing
operations of $18.6 million for the three months ended June 30, 2002
decreased $1.7 million from net income of $20.3 million for the
comparable period in 2001. The decrease was primarily due to lower
operating income and higher other expenses as discussed above.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. The loss from
discontinued operations of $3.2 million reflects adjustments to the
sale of the Sun Gro business reported in the first quarter. The
adjustments result from changes in estimates related to working capital
adjustments, which occurred subsequent to the sale.
Page 18
NET INCOME. Net income decreased to $15.4 million for the three
months ended June 30, 2002 compared to $22.1 million in the comparable
period in 2001 due to the lower income from continuing operations and
the loss from discontinued operations as discussed above.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2001
NET SALES. Net sales of $250.9 million for the six months ended
June 30, 2002 increased $9.0 million, or 3.7%, from net sales of $241.9
million for the comparable period in 2001 due primarily to strong sales
in the Company's northeast and southwest markets. This was somewhat
offset by sluggish sales in the southeast markets due to the late
emergence of spring in those markets. Sales in the Company's northeast
color region were strong due to the impact of newly established store
service programs. These programs enable us to offer a broader selection
of green goods and streamline ordering and in-store merchandising
activities with our customers. In addition, given Kmart's uncertain
financial situation, the Company reduced its six months ended June 30,
2002 sales to the large retailer by approximately $6.4 million from the
six months ended June 30, 2001.
GROSS PROFIT. Gross profit of $130.3 million for the six months
ended June 30, 2002 increased $0.4 million, or 0.3%, from gross profit
of $129.9 million for the comparable period in 2001. As a percent of
net sales, gross margins decreased to 52.0% from 53.7% of net sales
mainly due to the lower sales in our southeast markets, which typically
carry higher margins, and increased scrap rates primarily related to
the lower Kmart sales.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
expenses of $67.5 million for the six months ended June 30, 2002
increased $5.6 million, or 9.0%, from $61.9 million for the comparable
period in 2001. The increase was primarily due to the higher sales,
additional sales and merchandising personnel in place to support the
peak spring selling season and higher distribution costs. Distribution
costs increased significantly as the Company transitioned to a unitized
delivery mode for many of its nursery products, and expedited product
shipments across the country to meet surges in retail demand as the
weather improved.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $13.4 million for the six months ended June 30, 2002
decreased $0.4 million, or 2.9%, from $13.8 million for the comparable
period in 2001. The decrease is primarily attributable to efforts by
the Company to reduce costs, improve efficiencies and consolidate many
of its operational activities.
OTHER OPERATING INCOME. Other operating income of $2.1 million
for the six months ended June 30, 2002 represents primarily the net
gain from the sale of our property in Hillsboro, Oregon.
OPERATING INCOME. Operating income of $51.5 million for the six
months ended June 30, 2002 decreased $0.9 million, or 1.7%, from $52.4
million for the comparable period in 2001. As a percentage of net
sales, operating income decreased to 20.5% from 21.7% due primarily to
the lower gross margins and the higher distribution costs as discussed
above.
Page 19
OTHER EXPENSES. Other expenses of $16.5 million for the six
months ended June 30, 2002 decreased $3.1 million, or 15.8%, from $19.6
million for the comparable period in 2001. The decrease was primarily
attributable to lower interest expenses and a mark-to-market charge of
$0.8 million relating to the Company's $75 million interest rate swap
agreement as compared to a charge of $1.5 million for the comparable
period in 2001. This adjustment results from the quarterly change in
the swap's valuation, which is based on long-term interest rate
expectations. As a result of the Company using the net proceeds from
the sale of the Sun Gro business and of the sale of an additional 22.5
acres of land to reduce debt, interest expense is expected to be lower
during the remainder of 2002 when compared to 2001.
PROVISION FOR INCOME TAXES. The Company's effective income tax
rate was 41.0% and 40.9% for the six months ended June 30, 2002 and
2001, respectively.
INCOME FROM CONTINUING OPERATIONS. Net income from continuing
operations of $20.6 million for the six months ended June 30, 2002
increased $1.2 million from net income of $19.4 million for the
comparable period in 2001. The increase was primarily due to Other
Expense, as discussed above.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. The net loss from
discontinued operations of $1.7 million includes a loss of $1.9
million, net of tax, from the sale of the Sun Gro business and net
income of $0.2 million from the operations of Sun Gro through the date
of sale.
EXTRAORDINARY ITEM. The extraordinary item of $1.0 million, net
of tax, represents the write-off of unamortized financing costs
resulting from the early extinguishment of debt which occurred as a
result of using the net proceeds received from the sale of the Sun Gro
business to pay down outstanding debt before its maturity.
NET INCOME. Net income decreased to $17.9 million for the six
months ended June 30, 2002 compared to $23.3 million in the comparable
period in 2001 primarily due to the loss from discontinued operations
and the extraordinary item as discussed above.
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 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, the
Company completed the sale of 22.5 acres of land located in Hillsboro,
Oregon in March 2002, and used the net proceeds of approximately $2.9
million to pay down outstanding bank debt.
Page 20
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.
The Company's net debt position (short and long term-debt) at
June 30, 2002 was $246.6 million compared to net debt of $389.9 million
at December 31, 2001, which included long-term debt from discontinued
operations. The decrease in debt compared to December 31, 2001 was due
to the Company using the net proceeds from the sale of the Sun Gro
business and the sale of 22.5 acres in Hillsboro, Oregon to reduce
debt.
Net cash provided by operating activities was $30.5 million
for the six months ended June 30, 2002 compared to $34.6 million for
the comparable period in 2001. Because the Company's working capital
improvement plan began in 2001, the 2001 comparable period was
favorably impacted by a one-time improvement relating to a change in
accounts payable and accrued liabilities. As part of the plan, the
Company sought and obtained extended payment terms from a significant
number of vendors. These factors thereby increased its accounts payable
and accrued liabilities amounts for the six months ended June 30, 2001.
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 use significant amounts of cash, and in contrast,
operating activities for the second and third quarters generate
substantial cash as the Company ships inventory and collects accounts
receivable.
Net cash provided by investing activities was $117.5 million
for the six months ended June 30, 2002 compared to a net use of cash of
$16.6 million for the comparable period in 2001. The increase was
primarily due to the proceeds received from the sale of the Sun Gro
business and the sale of the Oregon property.
Net cash used in financing activities was $147.7 million for
the six months ended June 30, 2002 compared to $18.0 million for the
comparable period in 2001. The increase in net cash used was primarily
related to the use of the proceeds from the sale of the Sun Gro
business and the sale of the Oregon property to pay down outstanding
bank debt in the amount of $107.9 million and to pay financing costs of
$4.2 million.
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 Company's sales of nursery products
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. On August 9, 2002, the Company had unused borrowing
capacity of $61.8 million under its $115.0 million working capital
revolver facility within the Amended Senior Credit Facility. In
addition, the Company had fully repaid its $30.0 million seasonal
revolver facility which can only be utilized between February 1 and
June 15.
Page 21
The Company's capital expenditures were approximately $3.3 million for
the six months ended June 30, 2002 and included the continued
implementation of our ERP information system, the completion of acreage
expansion plans at our South Carolina facility which we began in 2001
and the purchase of nursery related structures, machinery and
equipment. The Company's capital expenditures for 2002 are expected to
be approximately $8.0 to $9.0 million.
The Company's primary sources of liquidity are funds generated
by operations and borrowings under its Amended Senior Credit Facility,
which matures on December 31, 2004, as amended. As at June 30, 2002,
this facility is comprised of a $115.0 million working capital
revolver, a $30.0 million seasonal revolving loan commitment, which can
only be utilized for the period between February 1 and June 15, a New
Term Loan in the amount of $51.4 million and a Tranche B Term Loan in
the amount of $51.1 million. Borrowings under the Amended Senior Credit
Facility are secured by substantially all the Company's assets. The
Amended Senior Credit Facility places various restrictions on the
Company, including, but not limited to, limitations on the Company's
ability to incur additional debt, limitations on capital expenditures
and limitations on dividends the Company can pay to shareholders. The
Amended Senior Credit Facility requires the Company to meet specific
covenants and financial ratios. At the Company's option, the interest
rate on the loans under the Amended Senior Credit Facility may be base
rate loans, which is the higher of the prime rate or the rate which is
1/2 of 1% in excess of the federal funds effective rate, or Eurodollar
rate loans.
Base rate loans under the working capital revolving loan and
the New Term Loan bear interest at the base rate plus an additional
amount which ranges from 1.00% to 3.00%, depending on the Company's
consolidated leverage ratio. Base rate loans under the seasonal working
capital revolver bear interest at the base rate plus 2.25% and under
the Tranche B Term Loan at the base rate plus an additional amount
between 2.75% and 3.00%, depending on the Company's consolidated
leverage ratio. Currently, the applicable margin for base rate loans is
(i) 2.50% for working capital revolving loans, (ii) 2.50% for the New
Term Loan and (iii) 2.75% for the Tranche B Term Loan.
Eurodollar rate loans under the working capital revolving loan
and the New Term Loan bear interest at the Eurodollar rate plus an
additional amount that ranges from 2.00% to 4.00%, depending on the
Company's consolidated leverage ratio. Eurodollar rate loans under the
seasonal working capital revolver bear interest at the Eurodollar rate
plus 3.25% and under the Tranche B Term Loan at the Eurodollar rate
plus an additional amount between 3.75% and 4.00%, depending on the
Company's consolidated leverage ratio. Currently, the applicable margin
for Eurodollar rate loans is (i) 3.50% for working capital revolving
loans, (ii) 3.50% for the New Term Loan and (iii) 3.75% for the Tranche
B Term Loan.
Principal repayments due under the Company's Amended Senior
Credit Facility total $17.5 million in 2003 and $84.9 million in 2004.
The expiration of the Company's seasonal working capital facility has
been extended to June 15, 2004. Madison Dearborn Capital Partners, L.P.
("MDCP"), our principal shareholder, provided a guarantee for the
extension of the $30 million seasonal revolving loan commitment under
the Amended Senior Credit Facility.
Page 22
If MDCP is required to make any payment with respect to its
guarantee on the seasonal revolving loan commitment, 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.
Effective February 1, 2002 the Company's Amended Senior Credit
Facility was amended to, among other things:
(i) Permit the sale of the Sun Gro business upon receipt of
minimum net cash proceeds of $105.0 million (which was
completed in March 2002),
(ii) To the extent net cash proceeds from the sale of the Sun Gro
business exceeded $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 so long as all the
net cash proceeds were applied 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 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 seasonal revolving loan commitments in the amount of $30.0
million guaranteed by its majority shareholder, MDCP, and
alter the availability period for the seasonal revolving loans
to make them available the period between February 1 and June
15 for each year until maturity,
(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) 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.
In addition, Hines Nurseries (the issuer and our wholly owned
subsidiary) has outstanding $78.0 million of Senior Subordinated Notes
(the "Notes") due October of 2005.
Page 23
The Company has fully and unconditionally guaranteed the
issuer's obligations under the Notes and the Notes 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
of control, each holder will have the right to require the Company 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 Notes currently bear interest at 12.75% per annum, and the
indenture pursuant to which the Notes were issued imposes a number of
restrictions on our operating subsidiaries, including their ability to
incur additional indebtedness, to make certain restricted payments
(including dividends to the Company), to make certain asset
dispositions, to incur additional liens and to enter into significant
transactions. A breach of a material term of the indenture for the
Notes or other material indebtedness that results in the acceleration
of the indebtedness under the Notes also constitutes an event of
default under the Amended Senior Credit Facility. In addition, the
Company is obligated to pay a premium at maturity equal to 5.00% of the
principal amount of the Notes to be repaid. The Company is accreting
this premium over the term of the maturity of the Notes as additional
interest expense. At June 30, 2002, the amount of the premium was $1.4
million and, based on the $78.0 million of Notes outstanding, is
expected to be $3.9 million upon maturity.
At June 30, 2002, the Company had the following contractual
obligations (payments due by period, in millions):
2002 2003 2004 2005 Total
------- ------- ------- ------- -------
Tranche B Term Loan $ - $ - $ 51.1 $ - $ 51.1
New Term Loan - 17.5 33.8 - 51.3
Senior Subordinated Notes - - - 81.9 81.9
Other obligations 0.1 0.1 - - 0.2
------- ------- ------- ------- -------
Total $ 0.1 $ 17.6 $ 84.9 $ 81.9 $ 184.5
======= ======= ======= ======= =======
Hines does not have any off balance sheet financing or any
financial arrangements with any related parties, except for operating
leases, which are disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K.
In our opinion, cash generated by operations 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 and thereafter
for the foreseeable future. However, we cannot ensure that we will
generate sufficient cash flow from operations, that anticipated
operating improvements will be realized on schedule or at all, or that
future borrowings will be available under our credit facility in
amounts sufficient to pay indebtedness or fund our liquidity needs.
Actual results of operations will depend on numerous factors, many of
which are beyond our control. We cannot ensure that we will be able to
refinance any indebtedness, including our amended credit facility, on
commercially reasonable terms or at all.
Page 24
FORWARD LOOKING STATEMENTS AND RISK FACTORS
We have made and will make "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 in our Annual Report, Forms
10-K and 10-Q and in other contexts relating to our future prospects,
our operations and our strategies. Forward-looking statements include,
but are not limited to, information regarding our future economic
performance and financial condition, the plans and objectives of our
management and our assumptions regarding our performance and these
plans and objectives.
The forward-looking statements that we make in our Annual
Report, Forms 10-K and 10-Q and in other contexts represent challenging
goals for our company, and the achievement of these goals and our
operations are subject to a variety of risks and assumptions and
numerous factors beyond our control. Important factors that could cause
actual results to differ materially from the forward-looking statements
we make are described below. The following risk factors should not be
considered a definitive list of all risks associated with our
operations and should be read in conjunction with the risks and
uncertainties contained in our other filings with the Securities and
Exchange Commission.
WEATHER; GENERAL AGRICULTURAL RISKS
Adverse weather or production difficulties occurring at a time
of peak production or sales (in the first half of the calendar year),
particularly on weekends during the peak gardening season, could cause
declines in net sales and operating income that could have a material
adverse effect on the Company. The Company's operations may also be
adversely affected by disease, freezing conditions, snow, drought or
other inclement weather. There can be no assurance that future weather
conditions will not have a material adverse effect on the Company.
Agricultural production is highly dependent upon the availability of
water. The Company's facilities receive their water from a variety of
sources, including on-site wells, reservoirs and holding ponds,
municipal water districts and irrigation water supplied to local
districts by facilities owned and operated by the United States acting
through the Department of Interior Bureau of Reclamation. The loss or
reduction of access to water at any of the company's facilities could
have a material adverse effect on the Company.
SEASONALITY; VARIABILITY OF QUARTERLY RESULTS AND CERTAIN CHANGES
The Company's business, like that of its competitors, is
highly seasonal. In 2001, approximately 74% of net sales and
approximately 108% of operating profits occurred in the first half of
the year, with approximately 53% of net sales and approximately 88% of
operating profits occurring in the second quarter of 2001. The Company
has experienced, and expects to continue to experience, significant
variability in net sales, operating income and net income on a
quarterly basis. The principal factor contributing to this variability
is weather, particularly on weekends during the peak gardening season,
which could cause declines in net sales and operating income that could
have a material adverse effect on the Company.
Page 25
Other factors that may contribute to this variability include:
- weather conditions during peak growing and gardening
seasons;
- shifts in demand for live plant products;
- changes in product mix, service levels and pricing by
the Company and its competitors;
- the effect of acquisitions; - the economic stability
of the retail customers; and
- the Company's relationship with each of its retail
customers.
CUSTOMER CONCENTRATION; DEPENDENCE ON HOME DEPOT
Our top 10 customers together accounted for approximately 74%
of our fiscal year 2001 net sales. Our largest customer, Home Depot,
accounted for approximately 44% of our fiscal year 2001 net sales.
These customers hold significant positions in the retail lawn and
garden market. Management expects that a small number of customers will
continue to account for a substantial portion of the Company's net
sales for the foreseeable future. The Company does not have long-term
contracts with any of its retail customers, and there can be no
assurance that they will continue to purchase its products.
The loss of, or a significant adverse change in, the Company's
relationship with Home Depot or any other major customer could have a
material adverse effect on the Company. The loss of, or a reduction in
orders from, any significant retail customers, losses arising from
retail customers' disputes regarding shipments, fees, merchandise
condition or related matters, or the Company's inability to collect
accounts receivable from any major retail customer could have a
material adverse effect on the Company. In addition, there can be no
assurance that revenue from customers that have accounted for
significant revenue in past periods, individually or as a group, will
continue, or if continued, will reach or exceed historical levels in
any period.
KMART BANKRUPTCY
Kmart, one of our top customers, filed for bankruptcy relief
under Chapter 11 of the bankruptcy code on January 22, 2002. Following
such filing, we recommenced shipping products to Kmart. If Kmart does
not successfully emerge from its bankruptcy reorganization, the loss
of, or reduction in, orders or the Company's inability to collect
accounts receivables from Kmart, could have a material adverse effect
on the Company, its business and operations During the six months ended
June 30, 2002 the Company's net sales to Kmart were approximately $7.5
million, a decrease of $6.4 million from the comparable period in 2001.
The Company recently proposed a modification of the terms
under which it makes sales to Kmart, which they declined. Accordingly,
the Company believes that this is likely to further reduce future sales
to Kmart. As noted above, for the six months ended June 30, 2002 the
Company had approximately $7.5 million of sales to Kmart and for the
six-month period ended December 31, 2001 had net sales of approximately
$3.2 million to Kmart.
Page 26
SUBSTANTIAL LEVERAGE
We have a significant amount of debt. Our substantial
indebtedness could have important consequences for you. For example, it
could:
- make it more difficult for us to satisfy our
obligations;
- increase our vulnerability to general adverse
economic and industry conditions;
- require us to dedicate a substantial portion of cash
flows from operations to payments on our
indebtedness, which would reduce cash flows available
to fund working capital, capital expenditures, and
other general corporate requirements;
- limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which
we operate;
- place us at a competitive disadvantage compared to
our competitors that have less debt; - limit our
ability to borrow additional funds; and
- expose us to risks inherent in interest rate
fluctuations because some of our borrowings are at
variable rates of interest, which could result in
higher interest expense in the event of increases in
interest rates.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures will depend on
our ability to generate cash in the future. To some extent, this is
subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.
We may need to refinance all or a portion of our indebtedness
on or before maturity. We cannot assure that we will be able to
refinance any of our indebtedness on commercially reasonable terms or
at all.
COVENANT RESTRICTIONS
Our credit facility and the indenture governing our
outstanding Notes contain restrictive covenants that require us to
maintain specified financial ratios and satisfy other financial
condition tests. Our ability to meet those financial ratios and tests
can be affected by events beyond our control, and we cannot assure you
that we will meet those tests. A breach of any of these covenants could
result in a default under our credit facility and/or the Notes, the
lenders and/or noteholders could elect to declare all of our
outstanding indebtedness to be immediately due and payable and
terminate all commitments to extend further credit. We cannot be sure
that our lenders or the noteholders would waive a default or that we
could pay the indebtedness in full if it were accelerated.
GOVERNMENTAL REGULATIONS; MINIMUM WAGE
The Company is subject to certain federal, state and local
health, safety and environmental laws and regulations regarding the
production, storage and transportation of certain of its products and
the disposal of its waste.
Page 27
Certain of the Company's operations and activities, such as
water runoff from its production facilities and the use of certain
pesticides, are subject to regulation by the United States
Environmental Protection Agency (the "EPA") and similar state and local
agencies. These agencies may regulate or prohibit the use of such
products, procedures or operations, thereby affecting the Company's
operations and profitability. In addition, the Company must comply with
a broad range of environmental laws and regulations. Additional or more
stringent environmental laws and regulations may be enacted in the
future and such changes could have a material adverse effect on the
Company. The Company uses reclamation water as one of the sources of
water for a few of its production facilities. Federal reclamation laws
and regulations govern the use and pricing of reclamation water,
including availability of subsidized water rates. Changes in the law
could have a material adverse effect on the Company.
In addition, the Company is subject to the Fair Labor
Standards Act as well as various federal, state and local regulations
that govern matters such as minimum wage requirements, overtime and
working conditions. A large number of the Company's seasonal employees
are paid at or slightly above the applicable minimum wage level and,
accordingly, changes in such laws and regulations could have a material
adverse effect on the Company by increasing its costs.
MADISON DEARBORN CAPITAL PARTNERS, L.P. OWNS APPROXIMATELY 54% OF
THE OUTSTANDING COMMON SHARES OF HINES ON A FULLY DILUTED BASIS.
Madison Dearborn Capital Partners, L.P. ("MDCP") owns
approximately 54% of the outstanding commons shares of Hines on a fully
diluted basis and has sufficient voting power to significantly
influence the election of directors and the approval of other actions
requiring the approval of our shareholders.
COMPETITION
The wholesale nursery industry is highly competitive.
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 Nurseries, Inc. 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.
Page 28
DEPENDENCE ON MANAGEMENT
The Company's success is largely dependent on the skills,
experience and efforts of its senior management. The loss of services
of one or more members of the Company's senior management could have a
material adverse effect on the Company. The Company does not maintain
key-man life insurance policies on any members of management. No
members of senior management are bound by non-compete agreements, and
if any such members were to depart and subsequently compete with the
Company, such competition could have a material adverse effect on the
Company.
Page 29
ITEM 3. 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
and cap agreement ("interest rate agreement") to hedge $75.0 million of
its loan facility. The interest rate agreement effectively changes the
Company's exposure on its variable rate interest payments to fixed rate
interest payments of 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 agreement matures in February 2005. At June 30, 2002, the
estimated fair value of the interest rate agreement was $7.4 million.
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.
Page 30
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 30, 2002 at
which the stockholders of the Company elected seven directors and
ratified the appointment of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the 2002 fiscal year.
The following individuals were elected as directors and received the
number of votes indicated below:
Name of Nominee Votes For Against Abstentions
--------------- --------- ------- -----------
Douglas D. Allen 18,442,330 2,543,398 0
Stan R. Fallis 18,442,330 2,543,398 0
G. Ronald Morris 18,442,330 2,543,398 0
Thomas R. Reusche 18,442,330 2,543,398 0
James R. Tennant 18,442,330 2,543,398 0
Stephen P. Thigpen 18,442,330 2,543,398 0
Paul R. Wood 18,442,330 2,543,398 0
For the ratification of PricewaterhouseCoopers LLP as the
Company's independent public accountants, 18,456,426 votes were cast in
favor, 2,525,798 votes were cast against and there were 3,504
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 10, 2002, setting forth
the completion of the sale of all the issued and outstanding
shares of Sun Gro Horticulture Canada Ltd. and certain rights and
assets of Sun Gro Horticulture, Inc.
Items 1, 2, 3 and 5 of Part II are not applicable and have been
omitted.
Page 31
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HINES HORTICULTURE, INC.
(REGISTRANT)
By: /s/ Claudia M. Pieropan
---------------------------
Claudia M. Pieropan
CHIEF FINANCIAL OFFICER
(Principal financial officer
and duly authorized officer)
Date: August 14, 2002
Page 32