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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 September 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 October 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
September 30, 2002 (unaudited) and December 31, 2001 1
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2002
and 2001 (unaudited) 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 31
Item 4. Disclosure on Internal Control Procedures 31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(Dollars in thousands, except share data)
ASSETS September 30, December 31,
2002 2001
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,329 and $1,303 33,833 28,182
Inventories 157,789 164,675
Prepaid expenses and other current assets 9,507 2,322
Assets of discontinued operations -- 40,134
---------- ----------
Total current assets 201,129 235,313
---------- ----------
FIXED ASSETS, net of accumulated depreciation
and depletion of $36,048 and $30,106 139,619 142,387
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $11,689 and $8,357 7,999 8,317
ASSETS OF DISCONTINUED OPERATIONS -- 95,029
DEFFERRED INCOME TAX -- 7,727
GOODWILL 121,897 121,371
---------- ----------
$ 470,644 $ 610,144
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,014 $ 12,824
Accrued liabilities 11,674 8,450
Accrued payroll and benefits 10,678 7,091
Accrued interest 3,567 2,904
Long-term debt, current portion 10,584 43,159
Borrowings on revolving credit facility 59,250 100,000
Liabilities of discontinued operations -- 37,097
Deferred income taxes 67,716 64,874
---------- ----------
Total current liabilities 176,483 276,399
---------- ----------
LONG-TERM DEBT 171,660 209,639
DERIVATIVE LIABILITY 9,211 7,117
DEFERRED INCOME TAXES 13,354 --
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 September 30, 2002 and December 31, 2001 221 221
Additional paid-in capital 128,781 128,781
Deficit (22,475) (33,282)
Accumulated other comprehensive loss (6,591) (6,975)
---------- ----------
Total shareholders' equity 99,936 88,745
---------- ----------
$ 470,644 $ 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 Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands, except share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------------------------------------------------
Sales, net $ 45,049 $ 43,023 $ 295,918 $ 284,961
Cost of goods sold 23,700 22,386 144,237 134,394
------------- ------------- ------------- -------------
Gross profit 21,349 20,637 151,681 150,567
------------- ------------- ------------- -------------
Selling and distribution expenses 18,492 17,255 85,993 79,149
General and administrative expenses 5,992 6,012 19,424 19,786
Other operating income (18) -- (2,121) --
Amortization of goodwill -- 934 -- 2,752
------------- ------------- ------------- -------------
Total operating expenses 24,466 24,201 103,296 101,687
------------- ------------- ------------- -------------
Operating (loss) income (3,117) (3,564) 48,385 48,880
Other expenses
Interest 5,770 7,151 19,232 22,921
Interest rate swap agreement expense (income) 2,043 3,278 2,806 4,798
Amortization of deferred financing expenses 1,047 1,139 3,332 3,416
------------- ------------- ------------- -------------
8,860 11,568 25,370 31,135
------------- ------------- ------------- -------------
(Loss) income before provision for income taxes,
discontinued operations, and extraordinary items (11,977) (15,132) 23,015 17,745
Income tax provision (4,910) (6,187) 9,440 7,265
------------- ------------- ------------- -------------
(Loss) income from continuing operations (7,067) (8,945) 13,575 10,480
Income (loss) from discontinued operations, net of tax -- 919 (1,742) 4,768
Extraordinary item, net of tax benefit -- -- (1,026) --
------------- ------------- ------------- -------------
Net (loss) income $ (7,067) $ (8,026) $ 10,807 $ 15,248
============= ============= ============= =============
Basic and diluted earnings per share:
(Loss) income per common share from
continuing operations $ (0.32) $ (0.40) $ 0.62 $ 0.47
Income (loss) per common share from
discontinued operations $ -- $ 0.04 $ (0.08) $ 0.22
Extraordinary item $ -- $ -- $ (0.05) $ --
------------- ------------- ------------- -------------
Net (loss) income per common share $ (0.32) $ (0.36) $ 0.49 $ 0.69
============= ============= ============= =============
Weighted average shares outstanding--Basic 22,072,549 22,072,549 22,072,549 22,072,549
============= ============= ============= =============
Weighted average shares outstanding--Diluted 22,072,549 22,104,710 22,108,668 22,093,843
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
Page 2
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands, except share data)
(Unaudited)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,807 $ 15,248
Loss (income) from discontinued operations 1,742 (4,768)
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 6,515 9,268
Amortization of deferred financing costs 3,332 3,416
Interest rate swap agreement expense 2,806 4,798
Gain on sale of assets (2,121) --
Extraordinary item (net of tax) 1,026 --
Deferred income taxes 9,042 7,265
---------- ----------
33,149 35,227
Change in working capital accounts
Accounts receivable (5,651) (9,266)
Inventories 6,886 386
Prepaid expenses and other current assets 1,029 (1,901)
Accounts payable and accrued liabilities 5,393 12,403
---------- ----------
Change in working capital accounts 7,657 1,622
---------- ----------
Net cash provided by operating activities 40,806 36,849
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (4,533) (15,575)
Net cash (used in) provided by discontinued operations (4,320) 2,280
Proceeds from sale of discontinued operations 119,262 --
Proceeds from sale of land 3,143 --
Acquisitions, adjusted (1,426) (8,311)
---------- ----------
Net cash provided by (used in) investing activities 112,126 (21,606)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 109,182 107,700
Repayments on revolving line of credit (149,932) (109,950)
Repayments of long-term debt (107,982) (13,023)
Deferred financing costs incurred (4,200) --
Repayments of notes receivables from stock sales -- 30
---------- ----------
Net cash used in financing activities (152,932) (15,243)
---------- ----------
NET INCREASE IN CASH -- --
CASH, beginning of period -- --
---------- ----------
CASH, end of period $ -- $ --
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 19,819 $ 27,038
Cash paid for income taxes $ 857 $ 503
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)
1. Description of Business:
------------------------
As of September 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 and Color divisions
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 no longer harvests, produces or sells peat moss or has
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
$1,200 loss, net of tax, from the sale of its growing media business
for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2002, the
incremental shares related to 440 warrants outstanding resulted in a
difference between basic and diluted earnings per share. Additionally,
for the nine months ended September 30, 2002, shares related to the
underlying employee stock options in the amount of 429 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
years beginning after December 15, 2001, but early adoption is
encouraged. The Company adopted SFAS No. 144 in fiscal 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 nine months ended September 30, 2002, the
Company recognized a pre-tax loss of $2,806 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 ending December 31, 2002, the Company
anticipates that $560, net of tax, will be amortized as interest rate
agreement expense related to the $2,334 cumulative after-tax charge
made to Accumulated Other Comprehensive Income on January 1, 2001.
5. Inventories:
------------
Inventories consisted of the following:
September 30, December 31,
------------- ------------
2002 2001
---- ----
Nursery stock $148,127 $155,096
Material and supplies 9,662 9,579
--------- ---------
Inventory from continuing operations 157,789 164,675
Discontinued operations -- 14,054
--------- ---------
Total inventory $157,789 $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 shareholders. 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 nine months ended September 30, 2002
and 2001, were as follows:
Nine Months Ended
September 30,
2002 2001
---- ----
Net income $ 10,807 $ 15,248
Cumulative foreign currency (36) (1,455)
translation adjustments
Transaction impact upon
adoption of SFAS 133 -- (2,334)
Loss on derivatives
reclassified to earnings 420 419
--------- ---------
Comprehensive income $ 11,191 $ 11,878
========= =========
Page 6
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.
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. A company has six months from the date of adoption to
complete the first step. The Company completed the first step of SFAS
No. 142 by June 30, 2002.
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 $70,000 to $90,000
before tax (tax impact of the goodwill impairment charge will range
between $22,000 and $28,000), pending completion of the impairment
analysis, and is expected to be recorded in the fourth quarter of the
2002 fiscal year, effective as of January 1, 2002. The impairment
charge will be recorded net of tax in the fourth quarter as a
cumulative change in accounting principle. Net income will be reduced
by the amount of the after-tax impairment charge. For the nine months
ended September 30, 2001 and the year ended December 31, 2001, the
Company reported goodwill amortization of $2,752 and $3,686,
respectively, excluding discontinued operations. As of September 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.
In June 2002, Financial Accounting Standards Board issued SFAS
No. 146 (Accounting for Costs Associated with Exit or Disposal
Activities). SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, (Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity, including Certain Costs Incurred in a
Restructuring). The provisions of this statement are effective for exit
or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company is in the process of
evaluating the impact of SFAS No. 146 on its financial statements for
both the fourth quarter of fiscal 2002 and the 2003 fiscal year.
Page 7
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:
o Consolidating balance sheets as of September 30, 2002
(unaudited) and December 31, 2001;
o Consolidating statements of operations for the three months
and nine months ended September 30, 2002 and 2001 (unaudited);
and
o Consolidating statements of cash flows for the nine months
ended September 30, 2002 and 2001 (unaudited).
Page 8
GUARANTOR / NON-GUARANTOR DISCLOSURES
Consolidating Balance Sheet
As of September 30, 2002
(Dollars in thousands)
-------------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
-------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
-------------------------------------------------------------------------
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ -
Accounts receivable, net - 33,833 - - 33,833
Inventories - 157,789 - - 157,789
Prepaid expenses and other current assets - 9,507 8,214 (8,214) 9,507
Deferred income taxes - - - - -
------------------------------------------------------------------------
Total current assets - 201,129 8,214 (8,214) 201,129
------------------------------------------------------------------------
Fixed assets, net - 139,619 - - 139,619
Deferred financing expenses, net - 7,999 - - 7,999
Goodwill, net - 121,897 - - 121,897
Deferred income taxes 2,922 28,417 - (31,339) -
Investments in subsidiaries 104,846 - - (104,846) -
------------------------------------------------------------------------
$107,768 $499,061 $8,214 ($144,399) $470,644
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 13,014 $ - $ - $ 13,014
Accrued liabilities - 11,674 8,214 (8,214) 11,674
Accrued payroll and benefits - 10,678 - - 10,678
Accrued interest - 3,567 - - 3,567
Long-term debt, current portion - 10,584 - - 10,584
Borrowings on revolving credit facility - 59,250 - - 59,250
Deferred income taxes - 67,716 - - 67,716
Intercompany accounts 7,832 (7,832) - - -
------------------------------------------------------------------------
Total current liabilities 7,832 168,651 8,214 (8,214) 176,483
------------------------------------------------------------------------
Long-term debt - 171,660 - - 171,660
Derivative liability - 9,211 - - 9,211
Deferred income taxes - 44,693 - (31,339) 13,354
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) (22,475) 66,868 - (66,868) (22,475)
Accumulated other comprehensive loss (6,591) (1,355) - 1,355 (6,591)
------------------------------------------------------------------------
Total shareholders' equity 99,936 104,846 - (104,846) 99,936
------------------------------------------------------------------------
$107,768 $499,061 $8,214 ($144,399) $470,644
========================================================================
Page 9
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Balance Sheet
As of December 31, 2001
(Dollars in thousands)
----------------------------------------------------------------------------
Green Growing Media
Goods 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 nine month period ended September 30, 2002
(Dollars in thousands)
-------------------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
-------------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
-------------------------------------------------------------------------------
Sales, net $ - $295,918 $31,150 ($1,583) $325,485
Cost of goods sold - 144,237 16,929 (1,583) 159,583
----------------------------------------------------------------------------
Gross Profit - 151,681 14,221 - 165,902
Operating expenses 6,259 112,623 (13,954) - 104,928
----------------------------------------------------------------------------
Operating income (6,259) 39,058 28,175 - 60,974
----------------------------------------------------------------------------
Other expenses:
Interest - 19,954 528 - 20,482
Interest - intercompany - (722) 722 - -
Amortization of deferred financing expenses, other (14,397) (1,565) - 22,100 6,138
----------------------------------------------------------------------------
(14,397) 17,667 1,250 22,100 26,620
----------------------------------------------------------------------------
Income (loss) before provision for income taxes 8,138 21,391 26,925 (22,100) 34,354
Income tax (benefit) provision (2,669) 5,718 19,472 22,521
----------------------------------------------------------------------------
Net income before extraordinary item 10,807 15,673 7,453 (22,100) 11,833
Extraordinary item - 1,026 - - 1,026
----------------------------------------------------------------------------
Net income $10,807 $ 14,647 $ 7,453 ($22,100) $ 10,807
============================================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three month period ended September 30, 2002
(Dollars in thousands)
------------------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
------------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
------------------------------------------------------------------------------
Sales, net $ - $45,049 $ - $ - $45,049
Cost of goods sold - 23,700 - - 23,700
----------------------------------------------------------------------------
Gross Profit - 21,349 - - 21,349
Operating expenses - 24,466 - - 24,466
----------------------------------------------------------------------------
Operating income - (3,117) - - (3,117)
----------------------------------------------------------------------------
Other expenses:
Interest - 5,770 - - 5,770
Interest - intercompany - - - - -
Amortization of deferred financing expenses, other 7,067 3,090 - (7,067) 3,090
----------------------------------------------------------------------------
7,067 8,860 - (7,067) 8,860
----------------------------------------------------------------------------
Income before provision for income taxes (7,067) (11,977) - 7,067 (11,977)
Income tax provision - (4,910) - - (4,910)
----------------------------------------------------------------------------
Net (loss) ($7,067) ($7,067) $ - $7,067 ($7,067)
============================================================================
Page 11
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the nine month period ended September 30, 2001
(Dollars in thousands)
------------------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
------------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
-----------------------------------------------------------------------------
Sales, net $ - $284,961 $103,483 ($18,212) $370,232
Cost of goods sold - 134,394 63,295 (18,212) 179,477
-----------------------------------------------------------------------------
Gross Profit - 150,567 40,188 - 190,755
Operating expenses - 101,687 26,148 - 127,835
-----------------------------------------------------------------------------
Operating income - 48,880 14,040 - 62,920
-----------------------------------------------------------------------------
Other expenses:
Interest 410 25,742 3,104 - 29,256
Interest - intercompany - (2,821) 2,821 - -
Amortization of deferred financing expenses, other (15,490) 3,036 - 20,258 7,804
-----------------------------------------------------------------------------
(15,080) 25,957 5,925 20,258 37,060
-----------------------------------------------------------------------------
Income (loss) before provision for income taxes 15,080 22,923 8,115 (20,258) 25,860
Income tax (benefit) provision (168) 7,433 3,347 - 10,612
-----------------------------------------------------------------------------
Net income $15,248 $ 15,490 $ 4,768 ($20,258) $ 15,248
=============================================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three month period ended September 30, 2001
(Dollars in thousands)
------------------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
------------------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
-----------------------------------------------------------------------------
Sales, net $ - $43,023 $24,735 ($3,053) $64,705
Cost of goods sold - 22,386 13,410 (3,053) 32,743
-----------------------------------------------------------------------------
Gross Profit - 20,637 11,325 - 31,962
Operating expenses - 24,201 8,225 - 32,426
-----------------------------------------------------------------------------
Operating income - (3,564) 3,100 - (464)
-----------------------------------------------------------------------------
Other expenses:
Interest 410 7,908 858 - 9,176
Interest - intercompany - (757) 757 - -
Amortization of deferred financing expenses, other 7,672 3,361 - (7,026) 4,007
-----------------------------------------------------------------------------
8,082 10,512 1,615 (7,026) 13,183
-----------------------------------------------------------------------------
Income before provision for income taxes (8,082) (14,076) 1,485 7,026 (13,647)
Income tax provision (56) (6,131) 566 - (5,621)
-----------------------------------------------------------------------------
Net (loss) ($8,026) ($7,945) $ 919 $ 7,026 ($8,026)
=============================================================================
Page 12
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2002
(Dollars in thousands)
-----------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
----------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
---------------------------------------------------------------------
Cash provided by (used in) operating activities $ - $32,217 ($2,233) $ - $ 29,984
---------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (4,533) (2,503) - (7,036)
Sales proceeds - 3,143 127,338 - 130,481
Acquisitions, adjusted - (526) - - (526)
---------------------------------------------------------------------
Net cash (used in) provided by investing activities - (1,916) 124,835 - 122,919
---------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (40,750) - - (40,750)
Intercompany advances (repayments) - 92,840 (92,840) - -
Repayments of long-term debt - (95,982) (12,000) - (107,982)
Deferred financing costs - (4,200) - - (4,200)
Dividends received (paid) - 17,791 (17,791) - -
---------------------------------------------------------------------
Net cash used in financing activities - (30,301) (122,631) - (152,932)
---------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents - - 29 - 29
---------------------------------------------------------------------
Net increase (decrease) in cash - - - - -
Cash, beginning of year - - - - -
---------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ -
=====================================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2001
(Dollars in thousands)
-----------------------------------------------------------------------
Green Growing Media
Goods Segment
Segment (DISCONTINUED
OPERATIONS)
----------------------------------------------------------------------
Hines
Horticulture Hines
(Parent Nurseries Sun Gro Consolidated
Guarantor) (Issuer) Horticulture Eliminations Total
---------------------------------------------------------------------
Cash provided by operating activities $ - $36,849 $8,586 $ - $45,435
---------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (15,575) (2,082) - (17,657)
Proceds from sales of fixed assets - - 95 - 95
Acquisitions, adjusted - (8,311) - - (8,311)
---------------------------------------------------------------------
Net cash used in investing activities - (23,886) (1,987) - (25,873)
---------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (2,250) - - (2,250)
Intercompany advances (repayments) (30) 1,067 (1,037) - -
Repayments of long-term debt - (13,023) (5,685) - (18,708)
Dividends received (paid) - 1,243 (1,243) - -
Repayments of notes receivables from stock sales 30 - - - 30
---------------------------------------------------------------------
Net cash used in financing activities - (12,963) (7,965) - (20,928)
---------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents - - 1,366 - 1,366
---------------------------------------------------------------------
Net increase (decrease) in cash - - - - -
Cash, beginning of year - - - - -
---------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ -
=====================================================================
Page 13
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 no longer harvests, produces or sells peat moss or has 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.
The growing media business was sold pursuant to an Acquisition
Agreement, dated as of March 18, 2002, by and among Hines, the Fund and
other related parties which contained customary representations,
warranties and indemnification obligations of Hines, including
indemnification for tax related matters associated with transfer
pricing issues and the reorganization of the growing media business
prior to the sale to the Fund. In connection with the sale, Hines
entered into an Underwriting Agreement, dated as of March 18, 2002,
among Hines, the Fund and other related parties, pursuant to which the
Units of the Fund were offered. The Underwriting Agreement contains
customary representations, warranties and indemnification obligations
of Hines. Hines also 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.
In connection with the sale of the growing media business to the
Sun Gro Horticulture Income Fund, the Canadian Customs & Revenue
Authority (CCRA) required that approximately $13.1 million Canadian
(US$ 8.3 million) of the gross proceeds from the transaction be
withheld in an escrow account pending the determination of whether
certain aspects of the sale were taxable for Canadian purposes. The
amount withheld was not included in the measurement of the gain on the
sale of Sun Gro for financial statement purposes. The Company firmly
believes that the transaction is exempt from tax for Canadian purposes,
but after more than seven months of discussions with the CCRA, progress
on this matter has not been satisfactory to the Company. Accordingly,
the Company decided that the best course of action was to file a tax
return, submit the required tax payment, and make a claim for refund on
the basis that the transaction is exempt from tax for Canadian
purposes. On November 7, 2002, the Company submitted a tax payment of
approximately $8.3 million Canadian (US$ 5.2 million) to the CCRA. The
balance of the escrow funds of approximately $4.9 million Canadian (US$
3.1 million) was then remitted to the Company. The receipt of the $4.9
million Canadian (US$ 3.1 million) has not been recorded in the
financial statements for the period ended September 30, 2002, but will
be recorded as an adjustment to the gain on the sale of Sun Gro in the
fourth quarter. The Company will continue to actively pursue a refund
of the $8.3 million Canadian (US$ 5.2 million) through all the
appropriate administrative and/or judicial channels.
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 green goods
operations in North America, producing one of the broadest assortments
of container-grown plants in the industry. The Company sells its green
goods 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.
Page 15
SEASONALITY. The Company's green goods 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 two years ended December 31, 2001, the
Company completed, in connection with its green goods business, two
acquisitions in 2000, both 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.
In connection with the Company's acquisition of Lovell Farms, the
Company agreed to make earn-out payments to the sellers of up to
approximately $5.0 million for fiscal year 2001 if the purchased
operations achieved certain performance thresholds. Although the
Company determined that the thresholds were not met and no earn-out
payment was required, the sellers of Lovell Farms have indicated to the
Company that they are disputing the Company's determination. As of the
time of this filing, no formal proceedings have commenced. The Company
firmly believes that it will prevail in this matter. However, in the
event of an adverse determination, the Company could be required to pay
all or a portion of the disputed earn-out payment plus other fees and
expenses. The amount of such earn-out payment would become part of the
purchase price for the assets associated with the acquisition and would
be accounted for as goodwill subject to the impairment testing
discussed in Note 7.
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. 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
Page 16
approximately $49.2 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 September 30, 2002, the Company has a current liability for
deferred income taxes of $67.7 million. 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 17
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
Company completed the first step by June 30, 2002.
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 $70.0 million to
$90.0 million before tax (tax impact of the goodwill impairment charge
will range between $22.0 million and $28.0 million), pending completion
of the impairment analysis, and is expected to be recorded in the
fourth quarter of the 2002 fiscal year, effective as of January 1,
2002. The impairment charge will be recorded net of tax in the fourth
quarter as a cumulative change in accounting principle. Net income will
be reduced by the amount of the after-tax impairment charge. This
impairment charge is not expected impact the Company's covenants under
its Amended Senior Credit Facility. For the nine months ended September
30, 2001 and the year ended December 31, 2001, the Company reported
goodwill amortization of $2.8 million and $3.7 million respectively,
excluding discontinued operations. As of September 30, 2002, the
Company had $121.9 million of goodwill.
ACCRUED LIABILITIES: The accrued liabilities include amounts
accrued for expected claims costs relating to the Company's insurance
programs for workers compensation and auto liability. The Company has
large deductibles for these lines of insurance, which means it must pay
the portion of each claim that falls below the deductible amount. The
Company's expected claims costs are based on an actuarial analysis that
considers the Company's current payroll and automobile profile, recent
claims history, insurance industry loss development factors and the
deductible amounts. The Company accrues its expected claims costs for
each year on a ratable monthly basis with a corresponding charge
against income. Management reviews the adequacy of the accruals at the
end of each quarter. The accruals for the expected costs relating to
the Company's insurance programs for workers compensation and auto
liability are maintained at levels believed by management to adequately
reflect the Company's probable claims obligations.
Page 18
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2001
NET SALES. Net sales of $45.0 million for the three months ended
September 30, 2002 increased $2.0 million, or 4.7%, from net sales of
$43.0 million for the comparable period in 2001. The increase was due
primarily to increased sales volume resulting from strong sales
generated by the Company's West Coast operations, increased sales in
the Southwest markets and strong sales of perennials. This was somewhat
offset by sluggish sales in the Southeast markets. Sales generated by
the Company's West Coast operations were strong because of product line
changes, while increased sales in the Southwest market were driven by
successful in-store service programs. In addition, given Kmart's
uncertain financial situation, the Company reduced its third quarter
sales to the large retailer by approximately $1.0 million from the
third quarter of 2001.
GROSS PROFIT. Gross profit of $21.3 million for the three months
ended September 30, 2002 increased $0.7 million, or 3.4%, from gross
profit of $20.6 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 47.4% from 48.0% of net sales mainly due to
higher unit production costs in the Company's nursery operations
stemming primarily from cost increases that exceeded the Company's
limited price increases.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
expenses of $18.5 million for the three months ended September 30, 2002
increased $1.2 million, or 6.9%, from $17.3 million for the comparable
period in 2001. The increase was primarily due to the higher sales,
additional sales and merchandising personnel, 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $6.0 million for the three months ended September 30, 2002
did not change from $6.0 million for the comparable period in 2001.
These costs remained flat primarily due to efforts by the Company to
control costs, improve efficiencies and consolidate many of its
operational activities.
OPERATING (LOSS) INCOME. Operating loss of $3.1 million for the
three months ended September 30, 2002 improved by $0.5 million, or
13.9%, from the $3.6 million loss for the comparable period in 2001
primarily because goodwill is no longer being amortized under the
provisions of SFAS No. 142 as discussed above. As a percentage of net
sales, the operating loss improved to negative 6.9% from negative 8.3%.
OTHER EXPENSES. Other expenses of $8.9 million for the three
months ended September 30, 2002 decreased $2.7 million, or 23.3%, from
$11.6 million for the comparable period in 2001. The decrease was
primarily attributable to lower interest expenses and a mark-to-market
charge of $2.0 million relating to the Company's $75.0 million interest
rate swap agreement as compared to a charge of $3.3 million for the
comparable period in 2001. This adjustment arose from the quarterly
change in the swap's valuation, which is based on long-term interest
Page 19
rate expectations. Interest expense was $1.4 million lower, which
resulted from using the net proceeds from the sale of the Sun Gro
business and 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.
INCOME TAX PROVISION. The Company's effective income tax rate
was 41.0% and 40.9% for the three months ended September 30, 2002 and
2001, respectively.
(LOSS) INCOME FROM CONTINUING OPERATIONS. The net loss from
continuing operations of $7.1 million for the three months ended
September 30, 2002 improved by $1.8 million from the net loss of $8.9
million for the comparable period in 2001. The improvement was
primarily due to lower other expenses as discussed above.
NET (LOSS) INCOME. The net loss improved to $7.1 million for the
three months ended September 30, 2002 compared to $8.0 million in the
comparable period in 2001 primarily due to the higher income from
continuing operations as discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2001
NET SALES. Net sales of $295.9 million for the nine months ended
September 30, 2002 increased $10.9 million, or 3.8%, from net sales of
$285.0 million for the comparable period in 2001. The increase was due
primarily to increased sales volume resulting from strong sales
generated by the Company's West Coast operations, successful in-store
service programs in the Southwest and Northeast markets and strong
sales of perennials. This was somewhat offset by sluggish sales in the
South and Southeast. Sales generated by the Company's West Coast
operations were strong because of product line changes, while increased
sales in both the Southwest market and the Company's Northeast color
region were driven by successful in-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 sales to the large retailer for the nine months
ended September 30, 2002 by approximately $7.4 million from the nine
months ended September 30, 2001.
GROSS PROFIT. Gross profit of $151.7 million for the nine months
ended September 30, 2002 increased $1.1 million, or 0.7%, from gross
profit of $150.6 million for the comparable period in 2001. As a
percent of net sales, gross margins decreased to 51.3% from 52.8% 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 and higher unit production costs in
the nursery operations.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
expenses of $86.0 million for the nine months ended September 30, 2002
increased $6.9 million, or 8.7%, from $79.1 million for the comparable
period in 2001. The increase was primarily due to the higher sales,
additional sales and merchandising personnel and higher distribution
costs. Distribution costs increased significantly as the Company
transitioned to a unitized delivery mode for many of its nursery
products.
Page 20
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $19.4 million for the nine months ended September 30, 2002
decreased $0.4 million, or 2.0%, from $19.8 million for the comparable
period in 2001. The decrease is primarily attributable to efforts by
the Company to control costs, improve efficiencies and consolidate many
of its operational activities.
OTHER OPERATING INCOME. Other operating income of $2.1 million
for the nine months ended September 30, 2002 represents primarily the
net gain from the sale of our property in Hillsboro, Oregon.
OPERATING INCOME. Operating income of $48.4 million for the nine
months ended September 30, 2002 decreased $0.5 million, or 1.0%, from
$48.9 million for the comparable period in 2001. As a percentage of net
sales, operating income decreased to 16.4% from 17.2% due primarily to
the lower gross margins and the higher selling and distribution costs
as discussed above.
OTHER EXPENSES. Other expenses of $25.4 million for the nine
months ended September 30, 2002 decreased $5.7 million, or 18.3%, from
$31.1 million for the comparable period in 2001. The decrease was
primarily attributable to lower interest expenses and a mark-to-market
charge of $2.8 million relating to the Company's $75.0 million interest
rate swap agreement as compared to a charge of $4.8 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. Interest expense was $3.7 million lower, which
resulted from using the net proceeds from the sale of the Sun Gro
business and 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.
INCOME TAX PROVISION. The Company's effective income tax rate
was 41.0% and 40.9% for the nine months ended September 30, 2002 and
2001, respectively.
INCOME FROM CONTINUING OPERATIONS. Income from continuing
operations of $13.6 million for the nine months ended September 30,
2002 increased $3.1 million from income of $10.5 million for the
comparable period in 2001. The increase was primarily due to lower
other expenses, the net gain from the sale of the Oregon property and
the Company no longer amortizing goodwill under the provisions of SFAS
142 as discussed above.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. The loss from
discontinued operations of $1.7 million includes a loss of $1.5
million, net of tax, from the sale of the Sun Gro business and a loss
of $0.5 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.
Page 21
NET INCOME. Net income decreased to $10.8 million for the nine
months ended September 30, 2002 compared to $15.2 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 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.
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
September 30, 2002 was $241.5 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 $40.8 million
for the nine months ended September 30, 2002 compared to $36.8 million
for the comparable period in 2001 mainly due to increased cash
generated from working capital changes. The improvement in working
capital was mainly due to an improvement in Days Sales Outstanding and
lower inventory volume growth. This was somewhat offset by a smaller
increase in accounts payable and accrued liabilities compared to the
same 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 nine months ended September 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.
Page 22
Net cash provided by investing activities was $112.1 million
for the nine months ended September 30, 2002 compared to a net use of
cash of $21.6 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. In addition, capital
expenditures were $11.1 million less than those for the comparable
period in 2001.
Net cash used in financing activities was $152.9 million for
the nine months ended September 30, 2002 compared to $15.2 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 November 8, 2002, the Company had unused
borrowing capacity of $49.0 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.
The Company's capital expenditures were approximately $4.5
million for the nine months ended September 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 $7.5 to $8.0 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 of September 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.
Page 23
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) 3.00% for working capital revolving loans, (ii) 3.00% for the New
Term Loan and (iii) 3.00% 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) 4.00% for working capital revolving
loans, (ii) 4.00% for the New Term Loan and (iii) 4.00% 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 $30.0 million seasonal revolving loan commitment under
the Amended Senior Credit Facility.
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.
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. 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.
Page 24
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 September 30, 2002, the amount of the premium was
$1.6 million and, based on the $78.0 million of Notes outstanding, is
expected to be $3.9 million upon maturity.
At September 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 -- 0.2 -- -- 0.2
------- -------- -------- -------- ---------
Total $ 0.0 $ 17.7 $ 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 as the Company's business is
currently conducted through 2002 and thereafter for the next twelve
months. 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.
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.
Page 25
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.
SUDDEN OAK DEATH
Sudden Oak Death (SOD) is caused by a fungus-like pathogen
recently identified by University of California scientists and named
PHYTOPHTHORA RAMORUM. Since its appearance in 1995, SOD has killed tens
of thousands of coast live oak, black oak, tan oak and Shreve oak in
Northern California. It can also infect leaves and branches of
rhododendron, buckeye, madrone, manzanita, bigleaf maple, bay laurel,
and evergreen huckleberry. Most recently, both saplings of Redwood and
Douglas Fir trees have been found to be susceptible. To date, SOD has
been identified in 12 California counties and has been confirmed in a
small town in southwest Oregon.
Restrictive regulation of soil media containing Redwood and/or
Douglas Fir sawdust by the U.S. Department of Agriculture or California
Department of Forest & Agriculture could cause declines in net sales
and operating income that could have a material adverse effect on the
Company given that our California nursery operations utilize soil media
containing Redwood and/or Douglas Fir sawdust. At this point in time,
it is not clear how the USDA/CDFA will regulate soil media. Currently,
there is no scientific data that indicates that P. RAMORUM is present
Page 26
in sawdust, but Redwoods and Douglas Firs are on the host list as
discussed above. We are currently undergoing studies growing plants in
alternatives to Redwood and/or Douglas Fir sawdust. We are also working
closely with local, state and federal researchers on an effective
treatment for P. RAMORUM in a nursery operation. There is no known or
accepted treatment for wide-scale infection of this disease at this
time nor is it known how this disease is spread.
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.
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.
Page 27
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 nine months
ended September 30, 2002 the Company's net sales to Kmart were
approximately $7.6 million, a decrease of $7.4 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 nine months ended September 30, 2002
the Company had approximately $7.6 million of sales to Kmart and for
the three-month period ended December 31, 2001 had net sales of
approximately $1.9 million to Kmart.
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.
Page 28
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.
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 control, or at the
least, significantly influence the election of directors and the
approval of other actions requiring the approval of our shareholders.
Page 29
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.
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 30
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 September 30,
2002, the estimated fair value of the Company's obligation under the
interest rate agreement was $9.2 million. For the nine months ended
September 30, 2002, the Company recognized a pre-tax loss of $2,043
reported as interest rate swap agreement expense related to the change
in the fair value of the interest rate agreement. In addition, for the
twelve months ending December 31, 2002, the Company anticipates that
$0.6 million, net of tax, will be amortized as interest rate agreement
expense related to the $2.3 million cumulative after-tax charge made to
Accumulated Other Comprehensive Income on January 1, 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
President and Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rule
15d-14(c). Based upon that evaluation, the Company's President and
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in enabling
the Company to record, process, summarize and report information
required to be included in the Company's periodic SEC filings within
the required time period. There have been no significant changes in the
Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Page 31
PART II. OTHER INFORMATION
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.
Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
Page 32
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: November 14, 2002
CERTIFICATIONS
I, Stephen P. Thigpen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hines
Horticulture, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /S/ STEPHEN P. THIGPEN
---------------------------
Stephen P. Thigpen
President and Chief Executive Officer
(Principal Executive Officer)
Page 33
I, Claudia M. Pieropan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hines
Horticulture, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /S/ CLAUDIA M. PIEROPAN
-----------------------------------
Claudia M. Pieropan
Chief Financial Officer, Secretary and
Treasurer
(Principal Financial Officer)
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