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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-24439
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HINES HORTICULTURE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0803204
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12621 JEFFREY ROAD, IRVINE, CALIFORNIA 92620
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 559-4444
HTTP://WWW.HINESHORTICULTURE.COM
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer.
[ ]
As of June 30, 2002, the aggregate market value of the registrant's
voting common stock held by non-affiliates of the registrant was approximately
$37.3 million.
As of March 21, 2003, there were 22,072,549 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held in 2003 are incorporated in Part
III hereof by reference.
HINES HORTICULTURE, INC.
TABLE OF CONTENTS
PAGE
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NO.
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PART I
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ITEM 1. BUSINESS.............................................................1
ITEM 2. PROPERTIES...........................................................6
ITEM 3. LEGAL PROCEEDINGS....................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................7
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................7
ITEM 6. SELECTED FINANCIAL DATA..............................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..............................................26
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................26
ITEM 11. EXECUTIVE COMPENSATION..............................................26
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................27
ITEM 14. CONTROLS AND PROCEDURES.............................................27
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....27
HINES HORTICULTURE, INC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. Hines Horticulture, Inc.
desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor with
respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of
Hines Horticulture, Inc. and could cause those results to differ materially from
those expressed in the forward-looking statements contained herein.
Hines Horticulture, Inc.'s estimated or anticipated future results,
products and service performance or other non-historical facts are
forward-looking and reflect Management's current perspective of existing trends
and information. These statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among others, the continued ability of Hines
Horticulture, Inc. to access water, the impact of growing conditions, risks
associated with customer concentration, adverse weather conditions, seasonality,
government regulations, loss of key employees, general economic conditions,
future acquisitions and the ability to integrate such acquisitions in a timely
and cost effective manner, the ability to manage growth, the impact of
competition, the ability to obtain future financing or to satisfy payment
obligations under existing financing, limitations of Hines Horticulture, Inc.'s
substantial leverage and debt restrictions and other risks and uncertainties
described from time to time in Hines Horticulture, Inc.'s Securities and
Exchange Commission filings.
Therefore, Hines Horticulture, Inc. wishes to caution each reader of this
report to consider carefully these factors as well as the specific factors
discussed with each forward-looking statement in this report and disclosed in
its filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of Hines Horticulture, Inc. to implement its business
strategy and may cause actual results to differ materially from those
contemplated by the statements expressed herein.
ITEM 1. BUSINESS
INTRODUCTION
Hines Horticulture, Inc. ("Hines," the "Company," "we" or "our"), a
Delaware corporation, currently produces and distributes horticultural products
through its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries")
and Enviro-Safe Laboratories, Inc. Unless otherwise specified, references to
"Hines" or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.
Hines is a leading national supplier of ornamental shrubs, color plants and
container-grown plants with 14 commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. Hines markets its products to retail and commercial customers throughout
the United States. Hines produces approximately 5,500 varieties of ornamental
shrubs and color plants. Hines sells to more than 2,200 retail and commercial
customers, representing more than 8,400 outlets throughout the United States and
Canada.
On March 27, 2002, the Company completed the sale of its growing media
business, Sun Gro Horticulture, Inc. and its wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. (collectively known as "Sun Gro") to Sun Gro
Horticulture Income Fund, a newly-established Canadian income fund. The assets
sold included 14 facilities located across Canada and the United States and
control of approximately 50,000 acres of peat bogs in Canada. Hines will no
longer harvest, produce or sell peat moss or have the rights to the Sunshine,
Parkland Fairway, Black Gold, Lakeland Grower, Alberta Rose, Nature's and
Gardener's Gold trade names. Hines received net proceeds of approximately $119
million from the sale, the majority of which were used to pay down outstanding
bank debt.
1
The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as "discontinued operations." In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144 ("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."
HISTORY
OWNERSHIP
James W. Hines Sr. in San Gabriel, California founded Hines in 1920. Hines
was a family owned business until its acquisition by the Weyerhauser Company in
1976. Hines was sold in 1990 to a private investment group and certain members
of Management. In August 1995, Hines was acquired by Madison Dearborn Capital
Partners, L.P. ("MDCP"), a private equity investment firm and certain members of
Management. On June 22, 1998, Hines completed an initial public offering of 5.1
million shares of its common stock.
ACQUISITIONS
Hines has completed a number of acquisitions since 1994 to expand and
diversify its operations, which complement the Company's existing operations and
enhance its current product offerings.
The following table sets forth information with respect to these
acquisitions exclusive of the acquisitions related to Sun Gro:
ACQUIRED
DATE COMPANY PURCHASE PRICE LOCATION PRINCIPAL PRODUCTS
- ------------------------------------------------------------------------------------------------------------
March 2000 Lovell Farms $100.0 million Florida and Georgia Color bedding plants
January 2000 Willow Creek $20.5 million Arizona Color bedding plants
September 1999 Atlantic $30.1 million New York and Pennsylvania Flowering potted plants and
color bedding plants
December 1997 Bryfogle's $19.0 million Pennsylvania Color bedding plants
October 1997 Pacific Color $1.7 million California Color bedding plants
November 1996 Flynn $11.7 million California Ornamental plants and
flowering color plants
August 1996 Iverson $10.3 million South Carolina Perennial flowers and plants
January 1995 OGP $17.6 million Oregon Ornamental, cold-tolerant
plants and flowering color plants
- ------------------------------------------------------------------------------------------------------------
There were no acquisitions during fiscal 2002 and 2001.
On January 14, 2000, the Company completed its acquisition of certain
assets (primarily land and buildings) and all of the outstanding capital stock
of Willow Creek Greenhouses, Inc. ("Willow Creek"), a producer of quality annual
bedding and holiday plants. The total acquisition price was approximately $20.5
million, which resulted in goodwill of approximately $11.4 million. In
accordance with the terms of the purchase agreement, and as a result of Willow
Creek achieving certain operating results relating to the years ended December
31, 2001 and 2000, the Company made additional purchase price payments of $0.9
and $0.8 million, respectively, in fiscal 2002 and 2001. At December 31, 2001
and 2000, the Company recorded these amounts as goodwill.
2
On March 3, 2000, the Company completed its acquisition of (i)
substantially all of the assets and certain liabilities of Lovell Farms, Inc.
and Botanical Farms, Inc.; (ii) the capital stock of Enviro-Safe Laboratories,
Inc. and (iii) the partnership interest of Lovell Properties (collectively
referred to as "Lovell"). Lovell is a producer of quality annual bedding and
holiday plants. The total acquisition price was approximately $92.0 million,
which resulted in goodwill of approximately $72.2 million. In accordance with
the terms of the purchase agreement, and as a result of Lovell achieving certain
operating results relating to the year ended December 31, 2000, the Company made
an additional purchase price payment of $7.5 million in fiscal 2001.
Additionally in fiscal 2002 the Company incurred $0.5 million in acquisition
related expenses. Accordingly, the Company recorded these amounts as goodwill.
The Company did not make an earn-out payment in connection with this transaction
for fiscal 2001, which is currently the subject of an arbitration proceeding.
See "Item 3. Legal Proceedings."
BUSINESS OVERVIEW
Hines is one of the largest commercial nursery operations in North America,
producing one of the broadest assortments of container-grown plants in the
industry. Hines sells its green goods primarily to the retail segment which
includes the premium independent garden centers, as well as the leading home
centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart and Target.
Hines produces and markets approximately 5,500 varieties of ornamental,
container-grown plants grown primarily for outdoor use, most of which are sold
under its Hines Nurseries(TM) and Iverson(TM) trade names. The Company grows
most of its product categories at several of its nurseries. However, the Company
emphasizes certain product categories at particular nurseries depending on the
growing climate conducive to a particular product and on regional customer
needs. Most of Hines' revenues fall into the following variety categories for
the years ended December 31:
PRODUCT CATEGORY REPRESENTATIVE PRODUCTS 2002 2001 2000
- -------------------------- --------------------------------------------- ------ ------ ------
Evergreens
Broadleafs Azalea, boxwood, camellia, euonymous, holly 21% 20% 19%
Conifers Pines, spruce, junipers 7% 6% 7%
Deciduous Plants Barberry, dogwood, forsythia, spirea 7% 7% 6%
Flowering Color Plants Perennials, Annual bedding plants,
Tropical flowering plants, bulbs 59% 66% 67%
Other Ferns, trees 6% 1% 1%
------ ------ ------
100% 100% 100%
====== ====== ======
Since 1993, Hines has added numerous plant varieties to its product line.
During the past years, Hines has aggressively expanded its offering of flowering
color plants. Hines has also successfully developed patio-ready type products,
which it markets under the names of Patio Tropics(TM) and Festival Pots(TM).
These products generally command premium prices and improved profit margins
compared with other plants offered by the Company.
Plants (other than annual bedding plants) are produced by propagating young
plants called "liners" using cuttings from mature plants. Using propagation
techniques for each specific crop with respect to growing media, hormonal
stimulation and growing conditions, these cuttings are cultivated into viable
liners and are then transplanted into one gallon containers. These plants are
placed in the nursery for six to 24 months until they reach certain specified
sizes and levels of maturity, according to market demand, and are sold at
different price points depending on their size and levels of maturity. During
the field growing stages, plants are typically pruned by mechanized pruning
machines that are designed for specific plant categories and watered and
fertilized by integrated irrigation and fertilization systems, which are closely
monitored and regulated to ensure consistency and quality.
3
The Company's water and fertilizer recycling systems are designed to minimize
the costs of these elements and maximize water conservation. Each of the
Company's facilities has infrastructure and procedures in place to protect its
growing stock from most frost, snow and freezing conditions typically prevailing
at these facilities.
To produce annual bedding plants, a nursery either buys and germinates
seeds to produce small plants, called "plugs", or purchases plugs from
specialized plug producers. The plugs are then transplanted to bedding packs,
gallon hanging baskets and containers of various sizes. The growth cycle of
color plants is typically less than one year, with many color plants having a
growing seasons as short as eight to 16 weeks, allowing certain of the Company's
nurseries to produce approximately three to four inventory turns per year. As
with ornamental plants, the Company applies controlled watering and fertilizing
in order to ensure high quality.
The following table sets forth the estimated percentage of Hines' net sales
by customer type for the period indicated:
YEARS ENDED DECEMBER 31,
------------------------
CUSTOMER TYPE 2002 2001 2000
------------- ------ ------ ------
Home centers.................................... 64% 60% 44%
Mass merchandisers.............................. 17 22 33
Independent garden centers...................... 10 11 12
Garden center chains............................ 5 1 6
Re-wholesalers.................................. 3 5 4
Landscapers and others.......................... 1 1 1
------ ------ ------
Total................................ 100% 100% 100%
====== ====== ======
The Company's Management believes sales to home centers and mass
merchandisers have increased significantly during the past several years as a
result of the rapid growth of this channel of distribution. Management believes
the Company enjoys competitive advantages in selling into this channel due to
its ability to provide a broad assortment of consistently high quality products
in large volumes, its nationwide distribution and its value-added services such
as custom labeling, bar-coding, full electronic data interchange and technical
support. Management expects to participate in the overall growth of this channel
to a greater extent than its competitors that do not offer such services. Hines'
top ten customers accounted for approximately 78%, 74% and 70% of its net sales
in 2002, 2001 and 2000, respectively. Hines' largest customer, Home Depot,
accounted for approximately 47%, 44% and 41% of its net sales in 2002, 2001 and
2000, respectively.
DISTRIBUTION. Hines distributes its products directly from its nursery
sites to its retail customers primarily through common carriers and through the
Company's fleet of approximately 220 trucks, 50 of which are owned and the
balance of which are leased. The Company believes that common carriers are
available to accommodate seasonal delivery peaks. The Company uses a variety of
product shipping techniques, such as specialized shelving, protective racks and
special loading techniques. Nursery products are distributed nationwide, except
color plants, which are typically distributed within a 300-mile radius of each
nursery.
RESEARCH AND DEVELOPMENT. Hines' product sourcing and development yield
unique plant varieties, which are marketed under a trade name and patented
whenever possible. The Company applies for patents on plant varieties that are
significantly different from existing varieties. Differences among plant
varieties may include coloration, size at maturity or hardiness in drought or
cold conditions. These varieties command higher prices, provide higher unit
margins and enhance the Company's reputation as a product innovator. The
Company's expenses associated with research and development are not material and
are recorded in selling and distribution expenses.
PRODUCTION. Raw materials consist of starter materials, containers and soil
mixtures. The Company's Management believes that there are alternate sources of
supply readily available.
4
SALES AND MARKETING. Most of Hines' facilities have separate sales forces,
which include a sales manager, in-house customer service representatives, direct
sales consultants and various support personnel. As of December 31, 2002, Hines
employed approximately 369 direct sales consultants, key account managers,
market area managers and merchandisers. National accounts are serviced through
"National Account Task Teams" comprised of a senior management member and direct
sales personnel from each nursery supplying the account. Hines also markets its
products through trade shows, print advertising in trade journals, direct mail
promotion and catalogues.
COMPETITION. Competition in the nursery products segment of the lawn and
garden industry is based principally on the breadth of product offering,
consistent product quality and availability, customer service and price. The
nursery products segment is highly fragmented. According to the 1997 Census of
Agriculture released by the USDA's National Agricultural Statistics Service, the
nursery business is comprised of approximately 30,000 primarily small and
regionally based growers, with the top 100 growers accounting for approximately
22% of the industry volume. Management believes Hines is one of only two growers
able to serve every major regional market in North America, the Company's only
national competitor being Monrovia Nursery Company. In each of its markets,
Hines competes with regional growers such as Color Spot in the West, Clinton
Nurseries in the Northeast, Zelenka Nurseries in the Midwest, Wight Nurseries in
the South and many other smaller regional and local growers. Hines' key
competitive advantages are its ability to provide consistent, high quality
products in large volumes, its nationwide distribution and its value-added
services.
SEASONALITY
The Company's green goods business is highly seasonal in nature, with most
of its sales typically occurring in the first half of the year. The table below
sets forth the Company's quarterly net sales, as a percentage of total year net
sales, during the year ended December 31, 2002:
Percentage of Total
Quarter 2002 Net Sales
--------------------- -------------------
First Quarter 21%
Second Quarter 54
Third Quarter 13
Fourth Quarter 12
------
100%
======
PATENTS AND TRADEMARKS
The Company has registered numerous trademarks, service marks and logos
used in its businesses in the United States and Canada. In addition, the Company
has developed and continues to develop specialty plants for which it holds
patents registered with the U.S. Patent and Trademark Office. The Company
currently holds 41 patents, with 19 patent applications pending. The Company's
Management does not believe that the loss of any particular patent would have a
material adverse effect on the Company.
GOVERNMENT REGULATION
The Company is subject to certain United States federal, state and local
provincial health, safety and environmental laws and regulations regarding the
production, storage and transportation of certain products and the disposal of
its wastes. The Environmental Protection Agency ("EPA")and similar state and
local agencies regulate the Company's operations and activities, including, but
not limited to, water runoff and the use of certain pesticides in its nursery
operations. In the ordinary course of business, the Company uses substances that
are regulated or may be hazardous under environmental laws. The Company does not
anticipate that future expenditures for compliance with such environmental laws
and regulations will have a material adverse effect on the Company's financial
position or results of operations. The Company cannot give any assurance,
however, that compliance with such laws and regulations, or compliance with
other environmental laws and regulations that may be enacted in the future, will
not have an adverse effect on the Company's financial position or results of
operations.
5
Hines obtains certain irrigation water supplied to local water districts
from facilities owned and operated by the United States acting through the
Department of Interior Bureau of Reclamation ("reclamation water"). Federal
reclamation laws and regulations govern the use and price of reclamation water,
including availability of subsidized water rates. Hines utilizes reclamation
water as one of the water supplies for its Northern California and Oregon
facilities. The Company's Management believes that the nursery operations are in
compliance with applicable regulations and it maintains a continuous compliance
program; however, changes in law may reduce availability of, or increase the
price of, reclamation water to the Company.
EMPLOYEES
As of December 31, 2002, the Company employed approximately 3,340 persons.
At its peak, an additional 1,800 seasonal employees are employed. All of the
Company's employees are non-union, and the Company's Management believes that
its labor relations are good.
ITEM 2. PROPERTIES
At December 31, 2002, the Company owned approximately 4,371 acres related
to its nursery facilities. In addition, the Company leases approximately 1,100
acres related to its nursery facilities (including leases from Blooming Farm,
Inc., an affiliated entity). The Company's Management believes that its owned
and leased facilities are sufficient to meet its operating requirements for the
foreseeable future.
The Company's current facilities are identified in the table below:
LOCATION DESCRIPTION STATUS
-------- ----------- ------
Blairsville, Georgia................40 acre nursery Owned
Chino Valley, Arizona...............70 acre nursery Owned
Danville, Pennsylvania..............150 acre nursery Leased
Fallbrook, California...............256 acre nursery Owned/leased (a)
Forest Grove, Oregon................1,082 acre nursery Owned/leased (b)
Fulshear, Texas.....................450 acre nursery Owned
Irvine, California..................479 acre nursery
and headquarters Leased (c)
Miami, Florida......................351 acre nursery Owned
Newark, New York....................37 acre nursery Owned
Northern California.................1,389 acre nursery Owned (d)
Pipersville, Pennsylvania...........60 acre nursery Owned/leased (e)
San Joaquin Valley, California .....59 acre nursery Owned/leased (f)
Trenton, South Carolina.............981 acre nursery Owned/leased (g)
Utica, New York.....................67 acre nursery Owned
(a) The Company owns 244 acres and leases 12 acres at this nursery.
(b) The Company owns 722 acres and leases 360 acres at this nursery.
(c) The lessor under this lease has provided written notice to the Company that
it must vacate a 115-acre parcel by September 1, 2003 and vacate an
additional 30-acre parcel by August 31, 2004. The lease for the remaining
acreage does not expire until December 31, 2010.
(d) The Northern California nursery consists of sites in Allendale, Vacaville
and Winters, California.
(e) The Company owns 31 acres and leases 29 acres at this nursery.
(f) The San Joaquin Valley nursery consists of sites in Chowchilla and Madera,
California. The Company owns 49 acres and leases 10 acres at this nursery.
(g) The Company owns 921 acres and leases 60 acres at this nursery.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company's
financial position. Management believes, however, that the ultimate resolution
of such matters will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
6
In connection with the Company's acquisition of Lovell, the Company agreed,
subject to various provisions in the purchase agreement, to make earn-out
payments to the sellers of up to approximately $5.0 million for fiscal 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 are disputing the Company's determination and
have initiated arbitration proceedings against the Company. The sellers also
contend that the amount of the earn-out at issue is $7.5 million. As of the time
of this filing, the two sides have mutually selected an arbitrator, but no
hearing date for resolution of the arbitration has been set. The Company intends
to vigorously contest this matter and believes it has meritorious defense to the
sellers' claims. 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
"New Accounting Pronouncements" under Note 1 to the Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of Hines currently trades on The Nasdaq National Market
under the symbol "HORT." As of March 21, 2003, there were 88 registered holders
of record of the Company's common stock. The following table sets forth the
quarterly high and low share price for the years ended December 31:
2002 High Low
- ---- ------ ------
1st quarter $4.10 $3.18
2nd quarter $5.25 $3.29
3rd quarter $3.88 $2.70
4th quarter $3.20 $2.42
2001 High Low
- ---- ------ ------
1st quarter $4.44 $2.56
2nd quarter $4.20 $2.56
3rd quarter $4.10 $3.10
4th quarter $3.85 $3.34
Hines has not paid dividends on its common stock in the past and does not
presently plan to pay dividends on the common stock. The payment of dividends is
restricted under the terms of the Company's senior credit agreement and senior
subordinated note indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
For disclosure regarding equity compensation plan information, see Item 12.
"Security Ownership of Certain Beneficial Owners and Management," below.
7
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be
read in conjunction with the Consolidated Financial Statements and the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
The following table has been restated to reflect all the activity of the growing
media business as "discontinued operations."
For the Years Ended December 31, (a)
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Statement of Operations Data:
Net sales $ 336,546 $ 326,973 $ 304,202 $ 199,117 $ 168,535
Cost of goods sold 166,994 156,490 143,262 93,403 78,198
Gross profit 169,552 170,483 160,940 105,714 90,337
Operating expenses 122,338 121,975 113,198 76,300 62,712
Operating income 47,214 48,508 47,742 29,414 27,625
Interest expense 32,161 38,188 29,071 13,853 17,010
Provision for income taxes 6,169 4,627 8,034 6,516 4,086
Income from continuing operations (a) 8,884 5,693 10,637 9,045 6,529
(Loss) income from discontinued operations (b) (5,413) (2,268) 1,801 6,375 3,945
Extraordinary item, net of tax (c) (1,026) -- -- -- --
Cumulative effect of change in accounting principle (d) (55,148) -- -- -- --
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (52,703) $ 3,425 $ 12,438 $ 15,420 $ 10,474
============= ============= ============= ============= =============
Income from continuing operations per common share: (e)
Basic & Diluted $ 0.40 $ 0.26 $ 0.48 $ 0.41 $ 0.06
Income (loss) from discontinued operations
per common share: (e)
Basic & Diluted $ (0.25) $ (0.10) $ 0.08 $ 0.29 $ 0.26
Extraordinary Item $ (0.05) $ -- $ -- $ -- $ --
Cumulative effect of change in accounting principle $ (2.49) $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
Total net (loss) income per common share $ (2.39) $ 0.16 $ 0.56 $ 0.70 $ 0.32
============= ============= ============= ============= =============
Weighted average shares outstanding (f):
Basic 22,072,549 22,072,549 22,072,549 22,072,549 15,106,960
Diluted 22,078,012 22,091,208 22,072,549 22,072,549 15,353,016
OTHER DATA:
Capital expenditures $ 7,209 $ 18,178 $ 29,686 $ 15,895 $ 19,189
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 12,051 $ (41,086) $ 14,898 $ 54,042 $ 51,757
Short-term debt 90,335 143,159 97,696 43,419 32,916
Total assets 405,812 610,144 599,385 418,781 324,935
Long-term debt 164,829 209,639 251,823 149,775 126,633
Shareholders' equity 41,802 88,745 87,407 74,750 63,322
8
NOTES TO SELECTED CONSOLIDATED YEARLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) From January 1, 1998 through March 31, 2000, the Company acquired the
following three companies: Atlantic (September 9, 1999), Willow Creek
(January 14, 2000) and Lovell (March 3, 2000). The financial results
include the operations of each acquisition since its respective acquisition
date.
On March 27, 2002, the Company completed the sale of its growing media
business to Sun Gro Horticulture Income Fund, a newly-established Canadian
income fund. The Company's Consolidated Financial Statements included in
this Annual Report on Form 10-K reflect the financial position, results of
operations and cash flows of the Sun Gro business as "discontinued
operations." In accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets,"
the Company's Consolidated Financial Statements have been restated to
reflect the financial position, results of operations and cash flows of the
Sun Gro business as "discontinued operations."
(b) On March 27, 2002, the Company completed the sale of its growing media
business and for the year ended December 31, 2002, recognized a $5,562
loss, net of tax, from the sale and a $149 gain, net of tax, from the
operations through the date of sale. For the years ended December 31, 2001,
2000, 1999 and 1998 the (loss) income from discontinued operations of
$(2,268), $1,801, $6,375, and $3,945, respectively represents the net
(loss) income from the operations for those periods.
(c) The extraordinary item for the year ended December 31, 2002 of $1,026, 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.
(d) The cumulative effect of change in accounting principle for the year ended
December 31, 2002 of $55,148, net of tax, represents the goodwill
impairment charge resulting from the Company's adoption of SFAS No. 142.
(e) After deduction of the accrued preferred stock dividends of $5,609 for the
year ended December 31, 1998.
(f) All shares and per share amounts reflect a 1.3611-for-one reverse stock
split effected on June 22, 1998.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included in Item 8 of this
Annual Report on Form 10-K. This discussion contains trend analyses and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties are discussed at "Cautionary Statement for Purposes of the Safe
Harbor Provision of the Private Securities Litigation Reform Act of 1995" and
under the heading "Forward Looking Statements and Risk Factors" in this Annual
Report on Form 10-K.
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 (the "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 received net proceeds of approximately $119 million from
the sale, which were used to pay down outstanding bank debt. The Company
recognized a $5.6 million loss, net of tax, from the sale of its growing media
business for the year ended December 31, 2002. The Company's current operations
consist solely of its green goods business.
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.
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$8.2 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 was not 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 $8.2 million Canadian (US$5.1 million) to the CCRA. The balance of
the escrow funds of $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) was
recorded in the fourth quarter as an adjustment to the loss on the sale of Sun
Gro. The Company will continue to actively pursue a refund of the $8.2 million
Canadian (US$5.1 million) through all the appropriate administrative and/or
judicial channels.
The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as "discontinued operations." In accordance
with SFAS No. 144, 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."
10
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.
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 three years ended December 31, 2002, 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 as discussed below in "Critical Accounting Policies."
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. 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.
As a result of the Company's ability to deduct its growing costs under the
farming exception, the Company has historically not been required to pay cash
income taxes and has generated net operating losses for federal income tax
purposes. At December 31, 2001, the Company had approximately $49.2 million in
net operating loss ("NOL") carryforwards for federal income tax purposes.
As a result of the sale of the Sun Gro business, the Company estimates that
it will utilize approximately $37.9 million of these net operating loss
carryforwards in 2002 for federal income tax purposes. Because of this NOL
utilization and the Company's projections of future earnings, the Company
anticipates it will begin paying cash income taxes for federal purposes in 2005.
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 December 31, 2002, the Company has a current liability for deferred
income taxes of $64.0 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.
RECENT DEVELOPMENTS
On February 3, 2003, the Board of Directors accepted the resignation of
Stephen P. Thigpen as Chairman and C.E.O. and appointed Douglas D. Allen as
Chairman and Robert A. Ferguson as Chief Operating Officer. Pursuant to his
employment agreement with the Company, dated as of August 3, 1995, the Company
made a lump sum cash payment to Mr. Thigpen of two times his annual base salary
totaling $1.0 million which will be recorded as compensation expense in the
three months ending March 31, 2003.
11
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.
REVENUE RECOGNITION: Hines records revenue, net of sales discounts and
allowances, when all of the following have occurred; an agreement of sale
exists, product delivery and acceptance has occurred and collection is
reasonably assured.
SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by Management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by Management using the following criteria:
past sales returns experience, current economic conditions and other relevant
factors. The rate is re-evaluated on a quarterly basis. Provisions for sales
discounts and allowances charged against income increase the allowance. 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
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 receivable 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. Provisions to bad debt expense
charged against income increase the allowance. 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: On January 1, 2002, the Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In
accordance with this standard, goodwill has been classified as indefinite-lived
assets no longer subject to amortization. Indefinite-lived assets are subject to
impairment testing upon adoption of SFAS No. 142 and at least annually
thereafter. In accordance with SFAS No. 142, this involves a two step process.
First, the Company must determine if the carrying amount of equity exceeds the
fair value based upon the quoted market price of the Company's common stock. If
the Company determines that goodwill may be impaired, the Company compares the
"implied fair value" of the goodwill, as defined by SFAS No. 142, to its
carrying amount to determine the impairment loss, if any. The initial impairment
analysis was completed in the fourth quarter of 2002. The Company recorded a
one-time, non-cash charge of $55.1 million, net of tax, to reduce the carrying
value of its goodwill. The Company has recognized this impairment charge as a
cumulative effect of change in accounting principle.
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.
12
RESULTS OF OPERATIONS
The following discussion reflects only the results of operations from
continuing operations of the green goods business.
Fiscal Year Ended December 31, 2002 compared to Fiscal Year Ended December 31,
2001.
NET SALES. Net sales of $336.5 million for the fiscal year ended December
31, 2002 increased $9.5 million, or 2.9%, from net sales of $327.0 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 Northeast markets and
strong sales of perennials. Sales generated by the Company's West Coast
operations were strong because of product line changes, while increased sales in
the Northeast were driven by the expansion of 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. This was somewhat offset by sluggish sales in Arizona, Texas and the
Southeast, which resulted primarily from overcapacity of green goods in the
market. In addition, given Kmart's uncertain financial situation, the Company
reduced its sales to the large retailer for the year ended December 31, 2002 by
approximately $9.0 million from the previous year. The Company's Management
believes that the trend of overcapacity in the market is likely to continue
until the retail lawn and garden channels can effectively absorb the sales
volume formerly serviced by Kmart.
GROSS PROFIT. Gross profit of $169.6 million for the year ended December
31, 2002 decreased $0.9 million, or 0.5%, from $170.5 million for the comparable
period in 2001. As a percent of net sales, gross margins decreased to 50.4% from
52.1% 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
$99.2 million for the year ended December 31, 2002 increased $5.1 million, or
5.4%, from $94.1 million for the comparable period in 2001. The increase was
primarily attributable to the higher sales, additional sales and merchandising
personnel and higher distribution costs. Distribution costs increased by $4.4
million, or 6.7%, from 2001 due mainly to the Company's transition to a unitized
delivery mode for many of its nursery products. The Company anticipates that the
distribution costs related to this unitized delivery mode will remain at a
consistent level in future years.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$26.0 million for the year ended December 31, 2002 increased $0.6 million, or
2.4%, from $25.4 million for the comparable period in 2001. The change was due
mainly to an increase in bad debt expense relating to the Kmart pre-Chapter 11
receivable, higher costs associated with the Company's continued implementation
of its Oracle system and severance costs associated with the elimination of
certain administrative positions somewhat offset by the reduction in salary
costs related to the elimination of these positions.
OTHER OPERATING INCOME. Other operating income of $2.8 million for the year
ended December 31, 2002 increased $1.6 million, or 133.3%, from $1.2 million for
the comparable period in 2001. The increase was primarily due to the net gain
from the sale of the Company's property in Hillsboro, Oregon and the gain on
sale of fixed assets, partially offset by the write-off of software the Company
no longer uses.
AMORTIZATION OF GOODWILL: Goodwill amortization for the year ended December
31, 2002 of $0 decreased $3.7 million, or 100%, from $3.7 million for the
comparable period in 2001. The decrease was entirely due to the adoption of SFAS
No. 142, which discontinued the amortization of goodwill.
OPERATING INCOME. Operating income of $47.2 million for the year ended
December 31, 2002 decreased $1.3 million, or 2.7%, from $48.5 million for the
comparable period in 2001. As a percentage of net sales, operating income
decreased to 14.0% from 14.8%. The decrease was due mainly to the lower gross
margins and higher selling and distribution costs discussed above and was offset
by the Company ceasing the amortization of goodwill in 2002 under the provisions
of SFAS No. 142.
13
OTHER EXPENSES. Other expenses of $32.2 million for the year ended December
31, 2002 decreased $6.0 million, or 15.7%, from $38.2 million for the comparable
period in 2001. The decrease was primarily attributable to lower interest
expenses and a mark-to-market charge of $2.6 million relating to the Company's
$75.0 million interest rate swap agreement as compared to a charge of $4.1
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 $4.1 million lower in 2002, which
resulted from using the net proceeds from the sale of the Sun Gro business and
the sale of the Oregon land to reduce debt.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
41.0% and 44.8% for the years ended December 31, 2002 and 2001, respectively.
The decline in the effective income tax rate from 2001 to 2002 was due to the
adoption of SFAS No. 142, which discontinued the amortization of goodwill.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$8.9 million for the year ended December 31, 2002 increased $3.2 million, or
56.1%, from $5.7 million for the comparable period in 2001. The increase was
mainly due to lower other expenses, the net gain from the sale of the Oregon
land recorded as other operating income and the Company ceasing the amortization
of goodwill under the provisions of SFAS No. 142 as discussed above.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. The loss from discontinued
operations of $5.4 million for the year ended December 31, 2002 includes a loss
of $5.5 million, net of tax, from the sale of the Sun Gro business and a gain of
$0.1 million from the operations of Sun Gro through the date of sale. The loss
from discontinued operations of $2.3 million for the year ended December 31,
2001 is comprised entirely of a loss from the operations of Sun Gro.
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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative effect
of change in accounting principle of $55.1 million for the year ended December
31, 2002 represents the goodwill impairment charge, net of tax, resulting from
the Company's adoption of SFAS No. 142. The Company valued both the tangible and
intangible assets and liabilities as of January 1, 2002. The difference between
the implied fair value of goodwill and the book value goodwill led to a pre-tax
charge of $78.8 million. A $23.6 million tax benefit was recorded in connection
with the loss. Our measurement of the fair value of the goodwill was based on
the market capitalization of the Company's common stock over a reasonable period
of time, including a control premium. Accordingly, the primary factor
contributing to the impairment charge was the overall deterioration in the
Company's stock price and the Company's substantial leverage.
NET (LOSS) INCOME. The net loss of $52.7 million for the year ended
December 31, 2002 decreased $56.1 million from net income of $3.4 million for
the comparable period in 2001. The decrease was primarily due to the loss from
discontinued operations, extraordinary item and the goodwill impairment charge
discussed above.
Fiscal Year Ended December 31, 2001 compared to Fiscal Year Ended December 31,
2000.
NET SALES. Net sales of $327.0 million for the fiscal year ended December
31, 2001 increased $22.8 million, or 7.5%, from net sales of $304.2 million for
the comparable period in 2000. Strong sales in early 2001 were partially offset
by unfavorable weather conditions in May and June of 2001 and softening economic
conditions and aggressive inventory management control programs by customers.
GROSS PROFIT. Gross profit of $170.5 million for the year ended December
31, 2001 increased $9.6 million, or 5.9%, from $160.9 million for the comparable
period in 2000. The increase was primarily attributable to higher sales at the
Company's green goods business as discussed above. As a percent of net sales,
gross margins decreased to 52.1% from 52.9% primarily due to lower margins at
our color sites.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$94.1 million for the year ended December 31, 2001 increased $9.1 million, or
10.7%, from $85.0 million for the comparable period in 2000. The increase was
due mainly to the higher sales, additional sales and merchandising personnel and
higher distribution costs.
14
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$25.4 million for the year ended December 31, 2001 increased $0.4 million, or
1.6%, from $25.0 million for the comparable period in 2000. The modest increase
was primarily due to the Company's efforts to control costs, improve
efficiencies and consolidate many of its operational activities.
OTHER OPERATING INCOME. Other operating income of $1.2 million for the year
ended December 31, 2001 represents the net gain from the sale of fixed assets.
No such sales occurred in 2000.
AMORTIZATION OF GOODWILL: Goodwill amortization for the year ended December
31, 2001 of $3.7 million increased $0.6 million, or 19.4%, from $3.1 million for
the comparable period in 2000. The increase was primarily due to the
acquisitions in 2000 having an entire year of amortization expense in 2001.
OPERATING INCOME. Operating income of $48.5 million for the year ended
December 31, 2001 increased $0.8 million, or 1.7%, from $47.7 million for the
comparable period in 2000 primarily as a result of the higher sales. As a
percentage of net sales, operating income decreased to 14.8% from 15.7% due
primarily to a decrease in gross margins and higher total operating expenses as
described above.
OTHER EXPENSES. Other expenses of $38.2 million for the year ended December
31, 2001 increased $9.1 million, or 31.3%, from $29.1 million for the comparable
period in 2000. The increase was due to higher interest expenses, increased
amortization of deferred financing expenses and a mark-to-market charge of $4.1
million relating to the Company's $75.0 million interest rate swap agreement.
This charge stems from the Company's adoption of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" in 2001 and results from the
quarterly change in the swap's valuation, which is based on long-term interest
rate expectations. Interest expense was $1.9 million higher in 2001, which
resulted from increased borrowing levels due to acquisitions made in late fiscal
1999 and early fiscal 2000 and increased interest rates in 2001.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was
44.8% and 43.0% for the years ended December 31, 2001 and 2000, respectively.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$5.7 million for the year ended December 31, 2001 decreased $4.9 million, or
46.2%, from $10.6 million for the comparable period in 2000. The decrease was
primarily attributable to the lower gross margins, the higher operating expenses
and the increased other expenses described above.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. The loss from discontinued
operations of $2.3 million for the year ended December 31, 2001 decreased $4.1
million from income of $1.8 million for the comparable period in 2000. The
decrease was due mainly to a deferred income tax expense of $8.1 million related
to the difference between the book and tax basis of the investment in Sun
Gro-Canada by Sun Gro-U.S. for the anticipated repatriation of foreign earnings
in connection with the sale of Sun Gro-Canada. Management had not previously
provided for deferred taxes due to their belief that the investment in Sun
Gro-Canada was previously expected to be permanent in nature.
NET (LOSS) INCOME. Net income of $3.4 million for the year ended December
31, 2001 decreased $9.0 million, or 72.6%, from $12.4 million for the comparable
period in 2001. The decrease was primarily due to lower gross margins, higher
operating expenses, increased interest expenses and the loss from discontinued
operations as described above.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 2002, the Company completed the sale of the Sun Gro business
and received net proceeds of approximately $119 million. In addition, the
Company completed the sale of 22.5 acres of land located in Hillsboro, Oregon in
March 2002, and received net proceeds of approximately $2.9 million.
15
The Company used $108.0 million of the aggregate proceeds from the sale of
the Sun Gro business and the sale of the Oregon land to reduce long-term debt
with the remaining amount of $14.0 million used to reduce the amount outstanding
under its working capital revolver. Consequently, the Company's net debt
position (short-term and long-term debt) at December 31, 2002 was $255.2 million
compared to net debt of $389.9 million at December 31, 2001, which included
long-term debt from its discontinued operations.
Net cash provided by operating activities was $29.7 million for the year
ended December 31, 2002 compared to $26.6 million for the comparable period in
2001 mainly due to increased cash generated from working capital changes and
lower interest costs. 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. The smaller increase was
expected because the Company obtained extended payment terms from a significant
number of vendors at the beginning of 2001, which caused a one-time improvement
in accounts payable and accrued liabilities in the 2001 period.
The seasonal nature of the Company's operations results in a significant
increase in certain components of working capital (primarily accounts receivable
and inventory) during the growing and selling cycles. As a result, operating
activities during the first and fourth quarters use significant amounts of cash,
and in contrast, operating activities for the second and third quarters generate
substantial cash as the Company ships inventory and collects accounts
receivable.
Net cash provided by investing activities was $109.7 million for the year
ended December 31, 2002 compared to a net use of cash of $28.9 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 $11.0 million less than those
for the comparable period in 2001.
Net cash used in financing activities was $139.5 million for the year ended
December 31, 2002 compared to net cash provided of $2.3 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 as described above and to
pay financing costs of $4.2 million.
The Company's capital expenditures were $7.2 million for the year ended
December 31, 2002 compared to capital expenditures of $18.1 million for the
comparable period in 2001. The capital expenditures for 2002 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 2003 are expected to be approximately $7.0
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 75% of the Company's
sales 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 March 21, 2003, the Company had unused borrowing capacity of $35.2
million under its $115.0 million working capital revolver facility and had no
unused borrowing capacity under its $30.0 million seasonal revolver facility
that can only be utilized between February 1 and June 15.
The Company's primary sources of liquidity are funds generated by
operations and borrowings under its Amended Senior Credit Facility as amended,
which matures on December 31, 2004. As of December 31, 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 1.00% in excess of the federal funds effective rate, or
Eurodollar rate loans.
16
Effective March 18, 2003, the Company obtained a fourth amendment to its
Amended Senior Credit Facility to (i) allow the Company to add back to EBITDA
for 2002 and 2003 specific charges related to certain one-time events for
purposes of its financial covenants that establish minimum EBITDA levels,
minimum interest coverage ratios, and maximum leverage ratios, and (ii) allow
the Company to add-back to EBITDA fees and expenses associated with the fourth
amendment. In consideration for approving the amendment, all consenting lenders
were paid a fee of 25 basis points on outstanding loan commitments, which
equated to approximately $0.6 million.
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.
Under the Company's Amended Senior Credit Facility, the New Term Loan, the
Tranche B Term Loan, and the $115.0 million working capital revolver mature on
December 31, 2004. Principal repayments due under the Company's Amended Senior
Credit Facility for the term loans total $17.5 million in 2003 and $85.0 million
in 2004. The expiration of the Company's $30.0 million seasonal working capital
facility has been extended to June 15, 2004.
MDCP, the Company's principal shareholder, provided a guarantee for the
extension of the $30.0 million seasonal revolving loan commitment effective
February 1, 2002. On November 28, 2000, in exchange for MDCP's original guaranty
of the Company's seasonal revolver, the Company issued a warrant to MDCP to
purchase 440,000 shares of common stock at an exercise price of $3.50 per share
valued at $0.8 million. The warrant is exercisable at any time prior to December
31, 2005. 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 of the notes 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. The Notes
contain an embedded derivative in the form of a put option whereby the holder
has the right to put the instrument back to the Company at 105% if a change in
control of the Company should occur. This put option will be marked-to-market
quarterly and any effect will be shown in the Statement of Operations. The
Company does not anticipate that the derivative will have significant value
because no change of control is currently contemplated.
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 December 31, 2002,
the amount of the premium was $1.8 million and, based on the $78.0 million of
Notes outstanding, is expected to be $3.9 million upon maturity.
17
At December 31, 2002, the Company had the following contractual obligations
(payments due by period, in millions):
Payments Due by Period
-----------------------------------------------------
Less than
Contractual Cash Obligations Total 1 year 1-3 years 4-5 years After 5 years
- ---------------------------- ----------- ----------- ----------- ----------- -----------
Tranche B Term Loan $ 51.1 $ -- $ 51.1 $ -- $ --
New Term Loan 51.3 17.5 33.8 --
Senior Subordinated Notes 81.9 -- 81.9 -- --
Other obligations 0.2 0.1 0.1 --
Operating Leases 21.4 4.5 9.7 0.9 6.3
----------- ----------- ----------- ----------- -----------
Total $ 205.9 $ 22.1 $ 176.6 $ 0.9 $ 6.3
=========== =========== =========== =========== ===========
Hines does not have any off balance sheet financing or any financial
arrangements with any related parties, except for operating leases, which are
disclosed under Note 7 to the Consolidated Financial Statements.
In our opinion, cash generated by operations and from borrowings available
under the amended Senior Credit Facility will be sufficient to meet the
Company's anticipated working capital, capital expenditures and debt service
requirements through 2003. A total of $17.5 million will become due under the
Senior Credit Facility during 2003.
The Senior Credit Facility requires the Company to maintain compliance with
various financial covenants. Failure to comply with any of the covenants of the
Senior Credit Facility during 2003 would require the Company to seek waivers or
an amendment to the Senior Credit Facility. The Company has been successful in
negotiating amendments to its bank agreements, including the amendment to the
Senior Credit Facility, effective March 18, 2003. If the Company is unable to
obtain such waivers, all debt under the Senior Credit Facility would become due
and payable ($175.2 at December 31, 2002). The Company was in compliance with
these covenants during 2002 and, based upon management's 2003 operating plan,
expects to remain in compliance with these covenants during 2003. Actual results
of operations will depend on numerous factors, many of which are beyond our
control. As a result, we cannot ensure that the Company will comply with its
financial covenants during 2003. If this occurs, management believes that it
will be able to successfully renegotiate its covenants to ensure compliance
throughout 2003.
A total of $84.9 million will become due under the Senior Credit Facility
during 2004. The Company expects to refinance this debt with existing financial
institutions or others, or extend its maturity prior to maturity.
There can be no assurance that management will be successful in refinancing
this debt or extending its maturity.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
We have made and will make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our Annual Report, Forms 10-K and 10-Q and in other
contexts relating to our future prospects, our operations and our strategies.
Forward-looking statements include, but are not limited to, information
regarding our future economic performance and financial condition, the plans and
objectives of our Management and our assumptions regarding our performance and
these plans and objectives.
The forward-looking statements that we make in our Annual Report, Forms
10-K and 10-Q and in other contexts represent challenging goals for our Company,
and the achievement of these goals and our operations are subject to a variety
of risks and assumptions and numerous factors beyond our control. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make are described below. The following risk
factors should not be considered a definitive list of all risks associated with
our operations and should be read in conjunction with the risks and
uncertainties contained in our other filings with the Securities and Exchange
Commission.
18
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.
IRVINE LAND LEASE
The Company's 479-acre nursery facility and headquarters in Irvine,
California is entirely on leased land. The lease on the majority of the acreage
does not expire until December 31, 2010. However, the lessor of the Irvine land
has the option to terminate the lease on two specific parcels at an earlier
date. The lessor has exercised this option and has provided written notice to
the Company that it must vacate a 115-acre parcel by September 1, 2003 and must
vacate an additional 30-acre parcel by August 31, 2004. The Company is actively
pursuing an extension of these exit timelines with the lessor in order to allow
the Company the time necessary to transition the product that is grown on this
acreage to other facilities. However, there can be no assurance that the Company
will be successful in obtaining these extensions. The failure of the Company to
obtain these extensions could cause declines in net sales and operating income
that 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
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 clearly understood 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 2002, approximately 75% of net sales and approximately 109% of operating
profits occurred in the first half of the year, with approximately 54% of net
sales and approximately 87% of operating profits occurring in the second quarter
of 2002. 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.
19
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 78% of our fiscal
year 2002 net sales. Our largest customer, Home Depot, accounted for
approximately 47% of our fiscal year 2002 net sales. These customers hold
significant positions in the retail lawn and garden market. Management expects
that a small number of customers will continue to account for a substantial
portion of the Company's net sales for the foreseeable future. The Company does
not have long-term contracts with any of its retail customers, and there can be
no assurance that they will continue to purchase its products.
The loss of, or a significant adverse change in, the Company's relationship
with Home Depot or any other major customer could have a material adverse effect
on the Company. The loss of, or a reduction in orders from, any significant
retail customers, losses arising from retail customers' disputes regarding
shipments, fees, merchandise condition or related matters, or the Company's
inability to collect accounts receivable from any major retail customer could
have a material adverse effect on the Company. In addition, there can be no
assurance that revenue from customers that have accounted for significant
revenue in past periods, individually or as a group, will continue, or if
continued, will reach or exceed historical levels in any period.
KMART BANKRUPTCY
Kmart, one of our top customers, filed for bankruptcy relief under Chapter
11 of the bankruptcy code on January 22, 2002. Following such filing, we
recommenced shipping products to Kmart. If Kmart does not successfully emerge
from its bankruptcy reorganization, the loss of, or reduction in, orders or the
Company's inability to collect accounts receivables from Kmart, could have a
material adverse effect on the Company, its business and operations. During the
year ended December 31, 2002, the Company's net sales to Kmart were
approximately $8.0 million, a decrease of $9.0 million from the comparable
period in 2001. The Company believes that it will likely further reduce sales to
Kmart in fiscal 2003.
SUBSTANTIAL LEVERAGE
We had debt outstanding in the principal amount of $255.2 million as of
December 31, 2002. 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.
20
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,
and 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 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 common 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.
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 Horticulture, Inc. 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' key
competitive advantages are its ability to provide consistent, high quality
products in large volumes, its nationwide distribution and its value-added
services.
21
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.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 2002, Hines adopted the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets." Under 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 at least
annually for impairment using a two-step process. The first step is to identify
a potential impairment. The second step is to measure the amount of the
impairment loss. In the year of adoption, the initial testing must be done as of
the beginning of the fiscal year. For this transition testing, the first step
must be completed within six months and the second step must be completed by the
end of the Company's fiscal year.
The Company completed the first step of the transition testing by June 30,
2002 and completed the second step by December 31, 2002. As a result, the
pre-tax impairment charge related to goodwill as of January 1, 2002 was
determined to be $78.8 million. The impairment charge was recorded net of its
associated $23.6 million tax benefit in the first quarter as a cumulative change
in accounting principle, effective as of January 1, 2002. Net income has been
reduced by the amount of the after-tax impairment charge. This impairment charge
will not impact the Company's covenants under its Amended Senior Credit
Facility.
As required, the Company also tested goodwill for impairment as of December
31, 2002. In conducting Step 1 of the impairment test, the Company determined
that there was no potential impairment of goodwill as of December 31, 2002.
For the years ended December 31, 2002 and December 31, 2001, the Company
reported net goodwill of $43.0 million and $121.4 million, respectively. For the
year ended December 31, 2001, the Company reported goodwill amortization of $3.7
million, excluding discontinued operations.
Effective January 1, 2001, Hines adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
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 $2.3 million, representing the fair value of the interest
rate agreement, net of tax. This amount is being amortized as interest rate
agreement expense over the term of the debt. For the twelve months ended
December 31, 2002, the Company recognized a pre-tax loss of $2.6 million
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based-Compensation-Transition and Disclosure-an Amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
account for stock-based employee compensation and the effect of then method used
on reported results. The annual disclosure requirements of SFAS No. 123 are
effective for the Company as of December 31, 2002 and the interim disclosure
requirements will be effective during its first quarter of fiscal year 2003. As
permitted under both SFAS No. 123 and SFAS No. 148, the Company continues to
follow the intrinsic value method of accounting under Accounting Principles
Board No. 25 "Accounting for Stock Issued to Employees." The Company has
included the disclosure requirements of SFAS No. 148 in the notes to the
accompanying Consolidated Financial Statements.
22
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, Financial Accounting Standards Board issued SFAS No. 143
"Accounting for Asset Retirement Obligations." ("SFAS No. 143"). 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 will 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"). SFAS No. 145 addresses financial
accounting and reporting for the extinguishments of debt, leases and intangible
assets of motor carriers. The Company will adopt SFAS No. 145 beginning 2003 and
will reclassify the 2002 extraordinary item of $1.0 million, net of tax, to
operations.
In June 2002, Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146"). 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 does not expect this to
have a material impact on its financial statements.
EFFECTS OF INFLATION
Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and its common stock price. The Company does not enter into
transactions designed to mitigate its market risks for trading or speculative
purposes.
We have various debt instruments outstanding at December 31, 2002 that are
impacted by changes in interest rates. As a means of managing our interest rate
risk on these debt instruments, we entered into the interest rate swap agreement
described below to effectively convert certain variable rate debt obligations to
fixed rate obligations.
In May 2000, the Company entered into an interest rate swap agreement to
hedge $75.0 million of its loan facility. The interest rate swap agreement
effectively changes the Company's exposure on its variable rate interest
payments to fixed rate interest payments (7.13%) based on the 3-month LIBOR rate
in effect at the beginning of each quarterly period, with a maximum rate of 8%.
The interest rate swap agreement matures in February 2005. The estimated fair
value of the Company's obligation under the interest rate swap agreement was
$8.7 million at December 31, 2002.
The Company also manages its interest rate risk by balancing the amount of
its fixed and variable long-term debt. For fixed-rate debt, interest rate
changes affect the fair market value of such debt but do not impact earnings or
cash flows. Conversely, for variable rate debt, interest rate changes generally
do not affect the fair market value of such debt but do impact future earnings
and cash flows, assuming other factors are held constant. At December 31, 2002
the carrying amount and estimated fair value of the Company's long-term debt was
$182.4 million and $184.5 million, respectively. Given the Company's balance of
fixed rate and variable rate debt, we estimate a change in interest costs of
approximately $1.0 million for every one-percentage point change in applicable
interest rates.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
The following selected unaudited quarterly financial data should be read in
conjunction with the Consolidated Financial Statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The following
table has been restated to reflect all the activity of the growing media
business as "Discontinued operations."
FOURTH THIRD SECOND FIRST
2002 QUARTER QUARTER QUARTER QUARTER
- -------------- ---------- ---------- ---------- ----------
RESTATED RESTATED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales, net $ 40,628 $ 45,049 $ 182,146 $ 68,723
Gross profit 17,871 21,349 95,925 34,407
(Loss) income from continuing operations (4,691) (7,067) 18,623 2,019
Income (loss) from discontinued operations (a) (b) 1,565 -- -- (6,978)
Extraordinary item, net of tax benefit (c) -- -- -- (1,026)
Cumulative effect of change in accounting principle (d) -- -- -- (55,148)
Net (loss) income (3,126) (7,067) 18,623 (61,133)
(Loss) income from continuing operations per common share:
Basic & Diluted $ (0.21) $ (0.32) $ 0.84 $ 0.09
Income (loss) from discontinued operations per common share:
Basic & Diluted $ 0.07 $ -- $ -- $ (0.32)
Extraordinary item: Basic & Diluted $ -- $ -- $ -- $ (0.05)
Cumulative effect of change in accounting principle:
Basic & Diluted $ -- $ -- $ -- $ (2.49)
---------- ---------- ---------- ----------
Total net (loss) income per common share: $ (0.14) $ (0.32) $ 0.84 $ (2.77)
========== ========== ========== ==========
FOURTH THIRD SECOND FIRST
2001 QUARTER QUARTER QUARTER QUARTER
- -------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales, net $ 42,012 $ 43,023 $ 174,181 $ 67,757
Gross profit 19,916 20,637 94,887 35,043
(Loss) income from continuing operations (4,787) (8,945) 20,315 (890)
(Loss) income from discontinued operations (a) (7,036) 919 1,757 2,092
Net (loss) income (11,823) (8,026) 22,072 1,202
(Loss) income from continuing operations per common share:
Basic & Diluted $ (0.21) $ (0.41) $ 0.92 $ (0.04)
(Loss) income from discontinued operations per common share:
Basic & Diluted $ (0.32) $ 0.05 $ 0.08 $ 0.09
---------- ---------- ---------- ----------
Total net (loss) income per common share: $ (0.53) $ (0.36) $ 1.00 $ 0.05
========== ========== ========== ==========
24
NOTES TO SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) 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 Company's Consolidated Financial Statements included in
this Annual Report on Form 10-K reflect the financial position, results of
operations and cash flows of the Sun Gro business as "discontinued
operations." In accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets,"
the Company's Consolidated Financial Statements have been restated to
reflect the financial position, results of operations and cash flows of the
Sun Gro business as "discontinued operations." Subsequent to March 27,
2002, charges for discontinued operations relate primarily to adjustments
to the proceeds from the sale of Sun Gro relating to working capital
adjustments, net of insurance proceeds received, in the second quarter and
amounts received relating to the partial refund of amounts held in tax
escrow in the fourth quarter.
(b) The first quarter net income from discontinued operations has been restated
to reflect an adjustment to the loss from discontinued operations net of
tax as a result of a reclassification of the cumulative foreign currency
translation adjustment in accumulated other comprehensive income to the
loss from discontinued operations. In addition to this, a working capital
adjustment, net of insurance proceeds received, previously recorded in the
second quarter has now been recognized in the first quarter. The net effect
for the first quarter of fiscal 2002 is a $8,434 decrease to the net income
from discontinued operations, from a net income of $1,456 as previously
reported to a restated net loss of $6,978.
(c) The extraordinary item for the first quarter of $1,026, 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.
(d) The cumulative effect of change in accounting principle for the first
quarter of $55,148, net of tax, represents the goodwill impairment charge
resulting from the Company's adoption of SFAS No. 142.
The other information in response to this item is submitted as a separate
section of this Report beginning on page F-1.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's 2003 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's 2003 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's 2003 Proxy Statement to be filed
with the Securities and Exchange Commission.
EQUITY COMPENSATION PLAN INFORMATION
The Company currently maintains its 1998 Long-Term Equity Incentive Plan
(the "1998 Stock Plan") under which common stock is authorized for issuance to
employees and directors upon the exercise of options. The Company's stockholders
have approved this plan. As of December 31, 2002, the Company did not have
outstanding any options, warrants or rights under any other equity compensation
plan. The following table provides aggregate information regarding the shares of
Common Stock that may be issued upon the exercise of options, warrants and
rights under all of the Company's equity compensation plans as of December 31,
2002.
Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance
outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
in column (a))
Plan Category (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS:
1998 Long-Term Equity
Incentive Plan 271,078 $ 8.33 3,318,132
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS: -- $ -- --
-------------------------- -------------------------------
Total 271,078 3,318,132
========================== ===============================
Excluded from the above table are the warrants issued on November 28, 2000
to Madison Dearborn Capital Partners, L.P. in connection to their guarantee of
the Company's working capital revolving credit facility.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's 2003 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 14. 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 principal executive officer and
principal 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 principal executive
officer and principal 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. Incorporated by reference to the Company's
2003 Proxy Statement to be filed with the Securities and Exchange Commission.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements listed in "Index to Financial Statements."
2. The exhibits listed in "Index to Exhibits."
27
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Acquisition Agreement, dated as of March 18, 2002, by and
among Hines Horticulture, Inc., Hines Nurseries, Inc., Sun
Gro Horticulture, Inc., Sun Gro Horticulture Canada Ltd. and
Sun Gro Horticulture Income Fund. (11)
2.2 Asset Purchase Agreement, dated as of March 26, 2002, by and
between Sun Gro Horticulture, Inc. and Sun Gro Horticulture
Canada Ltd. (11)
2.3 Underwriting Agreement, dated as of March 18, 2002, by and
among Hines Horticulture, Inc., Sun Gro Horticulture, Inc.
and Sun Gro Horticulture Income Fund. (11)
3.1 Restated Certificate of Incorporation of the Company. (2)
3.2 Amended and Restated By-laws of the Company. (5)
4.1 Form of certificate representing Common Stock. (2)
4.2 Amended and Restated Credit Agreement dated June 26, 1998
among Hines Nurseries, Inc., Sun Gro Horticulture Canada,
Ltd., and Lakeland Canada Ltd., as borrowers, the lenders
listed therein, Bank of America N.T. & S.A., as syndication
agent, Harris Trust & Savings Bank, as documentation agent,
BT Bank of Canada, as Canadian agent, and Bankers Trust
Company, as administrative agent. (3)
4.3 First Amendment to Credit Agreement and Consent, dated as of
March 3, 2000, among Hines Nurseries, Inc., Sun Gro
Horticulture Canada Ltd., as Borrowers, and The Lenders
Listed therein, as Lenders, Bank of America National Trust
and Savings Association, as Syndication Agent, Harris Trust
and Savings Bank, as Documentation Agent, Deutsche Bank
Canada, as Canadian Agent, and Bankers Trust Company, as
Administrative Agent. (8)
4.4 Second Amendment to the Credit Agreement and Limited Waiver,
dated November 28, 2000, among the Borrowers, the lenders
listed therein, Bank of America, N.A., as Syndication Agent,
Harris Trust and Savings Bank, as Documentation Agent,
Deutsche Bank Canada, as Canadian Agent, and Bankers Trust
Company, as Administrative Agent. (9)
4.5 Guarantee Agreement, dated November 28, 2000, between
Madison Dearborn Capital Partners, L.P. and the Borrowers,
the lenders listed therein, Bank of America, N.A., as
Syndication Agent, Harris Trust and Savings Bank, as
Documentation Agent, Deutsche Bank Canada, as Canadian
Agent, and Banker Trust Company, as Administrative Agent.
(9)
4.6 Indenture dated as of October 19, 1995 between Hines
Horticulture (the predecessor of Hines Nurseries, Inc.), the
Company and Sun Gro and IBJ Schroeder Bank & Trust Company,
as trustee (including the form of Exchange Note and Senior
Subordinated Guarantees). (1)
4.7 First Supplement to Indenture, dated June 26, 1998, by and
among Hines Nurseries, Inc., Hines Horticulture, Inc., Sun
Gro Horticulture Inc. and IBJ Schroder Bank & Trust Company,
as Trustee. (7)
4.8 Second Supplement to Indenture, dated November 28, 2000, by
and among Hines Nurseries, Inc., Hines Horticulture, Inc.,
Sun Gro Horticulture Inc., Enviro-Safe Laboratories, Inc.
and The Bank of New York, as Trustee. (9)
4.9 Third Supplement to Indenture, dated November 28, 2000, by
and among Hines Nurseries, Inc., Hines Horticulture, Inc.,
Sun Gro Horticulture, Inc., Enviro-Safe Laboratories, Inc.
and The Bank of New York, as Trustee. (9)
4.10 Registration Agreement dated as of June 11, 1998 by and
between Hines Holdings, Inc. and MDCP. (2)
28
10.1 Employment Agreement dated as of August 3, 1995 between
Hines Horticulture and Stephen P. Thigpen. (1)*
10.2 Employment Agreement dated as of August 4, 1995 between
Hines Horticulture and Claudia M. Pieropan. (1)*
10.3 1998 Long-Term Equity Incentive Plan. (4)*
10.4 Form of Incentive Stock Option Agreement. (2)*
10.5 Stock Purchase Agreement dated September 9, 1999 between
Hines Nurseries, Inc. and those individuals whose names are
set forth on the Signature Page to Stock Purchase Agreement.
(6)
10.6 Purchase Agreement by and among Hines Nurseries, Inc.,
Lovell Farms, Inc., Botanical Farms, Inc., Warren W. Lovell
III, Jeffrey S. Lovell, Jenifer E. Moreno, as Trustee of the
Trace Lovell Family Investment Trust and Enrique A. Yanes,
Dated as of March 3, 2000. (8)
10.7 Warrant and Guarantee Agreement, dated November 28, 2000 by
and between Hines Horticulture, Inc., Hines Nurseries, Inc.
and Madison Dearborn Capital Partners, L.P. (9)
10.8 Warrant, dated November 28, 2000, issued by Hines
Horticulture, Inc. to Madison Dearborn Capital Partners,
L.P. (9)
10.9 Third Amendment to Credit Agreement and Consent dated
February 1, 2002. (10)
10.10 Limited Waiver Regarding Financial Covenants dated March 22,
2002. (10)
10.11 Fourth Amendment to Credit Agreement and Consent dated March
18, 2003. (+)
21.1 Subsidiaries of the Company. (+)
23.1 Consent of Independent Accountants (+)
99.1 Certification of Chief Operating Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act of 2002. (+)(++)
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. (+)(++)
________________
+ Filed herewith.
* Management contract or compensatory arrangement.
++ Pursuant to Commission Release No. 33-8212, this certification will be
treated as "accompanying" this Annual Report on Form 10-K and not
"filed" as part of such report for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of Section 18 of
the Exchange Act and this certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference.
(1) Incorporated by reference to Hines Holdings, Inc.'s Registration
Statement on Form S-4, File No. 33-99452, filed on November 15, 1995
and amended on December 22, 1995 and January 8, 1996.
(2) Incorporated by reference to Hines Horticulture, Inc.'s Registration
Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and
amended on May 26 1998 and June 16, 1998.
(3) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(4) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
(5) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998.
29
(6) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(7) Incorporated by reference to Hines Horticulture, Inc.'s Annual Report
Form 10-K for the year ended December 31, 2000.
(8) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on March 17, 2000.
(9) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on November 29, 2000.
(10) Incorporated by reference to Hines Horticulture, Inc.'s Annual Report
Form 10-K for the year ended December 31, 2001.
(11) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on April 10, 2002.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 10, 2003.
HINES HORTICULTURE, INC.
By: /s/ Claudia M. Pieropan
-----------------------
Claudia M. Pieropan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on April 11, 2003.
SIGNATURE CAPACITY
- --------- --------
/s/ Robert A. Ferguson Chief Operating Officer
- ----------------------------- (Principal Executive Officer)
Robert A. Ferguson
/s/ Claudia M. Pieropan Chief Financial Officer, Secretary and Treasurer
- ----------------------------- (Principal Financial and Accounting Officer)
Claudia M. Pieropan
/s/ Douglas D. Allen Director and Chairman of the Board
- -----------------------------
Douglas D. Allen
/s/ Stan R. Fallis Director
- -----------------------------
Stan R. Fallis
/s/ James R. Tennant Director
- -----------------------------
James R. Tennant
/s/ G. Ronald Morris Director
- -----------------------------
G. Ronald Morris
/s/ Thomas R. Reusche Director
- -----------------------------
Thomas R. Reusche
/s/ Paul R. Wood Director
- -----------------------------
Paul R. Wood
31
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert A. Ferguson, certify that:
1. I have reviewed this annual report on Form 10-K of Hines Horticulture,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 11, 2003 By: /S/ ROBERT A. FERGUSON
-----------------------------
Robert A. Ferguson
Chief Operating Officer
(Principal Executive Officer)
32
I, Claudia M. Pieropan, certify that:
1. I have reviewed this annual report on Form 10-K of Hines Horticulture,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date");
and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: April 11, 2003 By: /S/ CLAUDIA M. PIEROPAN
-----------------------------
Claudia M. Pieropan
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer)
33
HINES HORTICULTURE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
- --------------------------------------------------------------------------------
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of Hines Horticulture, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Hines Horticulture, Inc. and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's Management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by Management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on March 27,
2002, the Company sold the assets of its wholly owned subsidiary Sun Gro
Horticulture, Inc.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," and the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long
Lived Assets."
PRICEWATERHOUSECOOPERS LLP
Orange County, California
March 26, 2003
F-1
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS DECEMBER 31,
------ -----------------------
2002 2001
---------- ----------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $1,997 and $1,303 25,838 28,182
Inventories 169,981 164,675
Prepaid expenses and other current assets 6,672 2,322
Assets of discontinued operations, held for sale -- 40,134
---------- ----------
Total current assets 202,491 235,313
---------- ----------
FIXED ASSETS, net of accumulated depreciation
and depletion of $38,102 and $30,106 140,239 142,387
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $10,958 and $8,291 7,137 8,317
ASSETS OF DISCONTINUED OPERATIONS, HELD FOR SALE -- 95,029
DEFERRED INCOME TAXES 12,966 7,727
GOODWILL, net of accumulated amortization
of $0 and $10,195 42,979 121,371
---------- ----------
$ 405,812 $ 610,144
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 12,321 $ 12,824
Accrued liabilities 10,911 8,450
Accrued payroll and benefits 6,845 7,091
Accrued interest 6,034 2,904
Long-term debt, current portion 17,585 43,159
Borrowings on revolving credit facility 72,750 100,000
Liabilities of discontinued operations, held for sale -- 37,097
Deferred income taxes 63,994 64,874
---------- ----------
Total current liabilities 190,440 276,399
---------- ----------
LONG-TERM DEBT 164,829 209,639
INTEREST RATE SWAP AGREEMENT 8,741 7,117
DEFERRED INCOME TAXES -- --
LIABILITIES OF DISCONTINUED OPERATIONS, HELD FOR SALE -- 28,244
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549
shares at December 31, 2002 and 2001 221 221
Additional paid-in capital 128,781 128,781
Deficit (85,985) (33,282)
Cumulative foreign currency translation adjustments -- (5,200)
Accumulated other comprehensive loss (1,215) (1,775)
---------- ----------
Total shareholders' equity 41,802 88,745
---------- ----------
$ 405,812 $ 610,144
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------- ------------- -------------
2002 2001 2000
------------- ------------- -------------
Sales, net $ 336,546 $ 326,973 $ 304,202
Cost of goods sold 166,994 156,490 143,262
------------- ------------- -------------
Gross profit 169,552 170,483 160,940
------------- ------------- -------------
Selling and distribution expenses 99,154 94,082 85,046
General and administrative expenses 25,976 25,422 25,028
Other operating income (2,792) (1,215) --
Amortization of goodwill -- 3,686 3,124
------------- ------------- -------------
Total operating expenses 122,338 121,975 113,198
------------- ------------- -------------
Operating income 47,214 48,508 47,742
Other expenses
Interest expense 25,205 29,332 27,441
Interest rate swap agreement expense 2,573 4,114 --
Amortization of deferred financing expense 4,383 4,742 1,630
------------- ------------- -------------
32,161 38,188 29,071
------------- ------------- -------------
Income before provision for income taxes, discontinued
operations extraordinary item and cumulative effect
of change in accounting principle 15,053 10,320 18,671
Income tax provision 6,169 4,627 8,034
------------- ------------- -------------
Income from continuing operations before discontinued
operations, extraordinary item and cumulative effect
of change in accounting principle 8,884 5,693 10,637
(Loss) income from discontinued operations, net of tax
expense (benefit) of $10,442, $11,316 and ($4,225) (5,413) (2,268) 1,801
Extraordinary item, net of tax benefit of $713 (1,026) -- --
Cumulative effect of change in accounting principle, net
of tax of $23,609 (55,148) -- --
------------- ------------- -------------
Net (loss) income $ (52,703) $ 3,425 $ 12,438
============= ============= =============
Basic and diluted earnings per share:
Income per common share from
continuing operations $ 0.40 $ 0.26 $ 0.48
(Loss) income per common share from discontinued operations $ (0.25) $ (0.10) $ 0.08
Extraordinary item $ (0.05) $ -- $ --
Cumulative effect of change in accounting principle $ (2.49) $ -- $ --
------------- ------------- -------------
Total net (loss) income per common share $ (2.39) $ 0.16 $ 0.56
============= ============= =============
Weighted average shares outstanding-Basic 22,072,549 22,072,549 22,072,549
============= ============= =============
Weighted average shares outstanding-Diluted 22,078,012 22,091,208 22,072,549
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except share data)
Common Stock
----------------------------- Additional Notes Rec.
Number of Paid -In Stock
Shares Amount Capital Sales
------------- ------------- ------------- -------------
BALANCE, December 31, 1999 22,072,549 $ 221 $ 127,938 $ (173)
------------- ------------- ------------- -------------
Net income -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Issuance of warrants -- -- 843 --
Payments received on notes receivable from stock sales -- -- -- 143
------------- ------------- ------------- -------------
BALANCE, December 31, 2000 22,072,549 221 128,781 (30)
------------- ------------- ------------- -------------
Net income -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Accumulated other comprehensive loss -- -- -- --
Payments received on notes receivable from stock sales -- -- -- 30
------------- ------------- ------------- -------------
BALANCE, December 31, 2001 22,072,549 221 128,781 --
------------- ------------- ------------- -------------
Net loss -- -- -- --
Cumulative foreign currency translation adjustments -- -- -- --
Accumulated other comprehensive income -- -- -- --
------------- ------------- ------------- -------------
BALANCE, December 31, 2002 22,072,549 $ 221 $ 128,781 $ --
============= ============= ============= =============
(CONTINUED)
Accumulated Other Shareholders'
Comprehensive Equity Comprehensive
Deficit Loss (Deficit) Income
------------- ------------- ------------- -------------
BALANCE, December 31, 1999 $ (49,145) $ (4,091) $ 74,750
------------- ------------- -------------
Net income 12,438 -- 12,438 12,438
Cumulative foreign currency translation adjustments -- (767) (767) (767)
Issuance of warrants -- -- 843 --
Payments received on notes receivable from stock sales -- -- 143 --
------------- ------------- ------------- -------------
BALANCE, December 31, 2000 (36,707) (4,858) 87,407 $ 11,671
------------- ------------- ------------- =============
Net income 3,425 -- 3,425 3,425
Cumulative foreign currency translation adjustments -- (342) (342) (342)
Accumulated other comprehensive loss -- (1,775) (1,775) (1,775)
Payments received on notes receivable from stock sales -- -- 30 --
------------- ------------- ------------- -------------
BALANCE, December 31, 2001 (33,282) (6,975) 88,745 $ 1,308
------------- ------------- ------------- =============
Net loss (52,703) -- (52,703) (52,703)
Cumulative foreign currency translation adjustments -- 5,200 5,200 5,200
Accumulated other comprehensive income -- 560 560 560
------------- ------------- ------------- -------------
BALANCE, December 31, 2002 $ (85,985) $ (1,215) $ 41,802 $ (46,943)
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (52,703) $ 3,425 $ 12,438
Loss (income) from discontinued operations 5,413 2,268 (1,801)
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change 55,148 -- --
Depreciation, depletion and amortization 8,565 12,436 10,582
Amortization of deferred financing costs 4,383 4,742 1,630
Interest rate swap agreement expenses 2,573 4,114 --
Loss on early retirement of debt 1,026 -- --
Deferred income taxes 6,169 4,508 8,034
Gain on sale of fixed assets (2,793) -- --
---------- ---------- ----------
27,781 31,493 30,883
Change in working capital accounts, net of acquisitions:
Accounts receivable 2,344 (1,428) (6,959)
Inventories (5,306) (11,550) (15,804)
Prepaid expenses and other current assets 42 (442) 768
Accounts payable and accrued liabilities 4,851 8,478 (6,050)
---------- ---------- ----------
Net cash provided by operating activities 29,712 26,551 2,838
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (7,209) (18,178) (29,686)
Proceeds from sale of fixed assets 3,584 -- --
Proceeds from sale of discontinued operations 118,948 -- --
Acquisitions, net of cash acquired (1,265) (9,211) (112,275)
Net cash used by discontinued operations (4,320) (1,497) (7,800)
---------- ---------- ----------
Net cash provided by (used in) investing activities 109,738 (28,886) (149,761)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings on revolving line of credit (27,250) 20,500 44,750
Proceeds from the issuance of long-term debt -- -- 121,216
Repayments of long-term debt (108,000) (18,195) (9,707)
Deferred financing costs (4,200) -- (9,479)
Repayments of notes receivables from stock sales -- 30 143
---------- ---------- ----------
Net cash (used in) provided by financing activities (139,450) 2,335 146,923
---------- ---------- ----------
NET DECREASE IN CASH -- -- --
CASH, beginning of period -- -- --
---------- ---------- ----------
CASH, end of period $ -- $ -- $ --
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest - Continuing Operations $ 22,797 $ 31,710 $ 34,542
Cash paid for interest - Discontinued Operations $ 528 $ 3,743 $ 5,221
Cash paid for income taxes - Continuing Operations $ 81 $ -- $ --
Cash paid for income taxes - Discontinued Operations $ 1,162 $ 727 $ 1,698
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware
corporation, currently produces and distributes horticultural products through
its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and
Enviro-Safe Laboratories, Inc. Unless otherwise specified, references to "Hines"
or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.
Hines 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 markets its products to retail and commercial customers throughout
the United States.
As of December 31, 2001, the Company also had a 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.
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 $119,000 from the sale,
which were used to pay down outstanding bank debt. The Company recognized a
$5,562 loss, net of tax, from the sale of its growing media business for the
year ended December 31, 2002. The Company's current operations consist solely of
its green goods business.
The Consolidated Financial Statements include the accounts of Hines and its
wholly owned subsidiaries after elimination of intercompany accounts and
transactions. The Company has early adopted the provisions of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), and accordingly, the Company's
Consolidated Financial Statements have been restated to reflect the financial
position, results of operations and cash flows of the Sun Gro business as
"discontinued operations."
ACCOUNTING PRONOUNCEMENTS ADOPTED
---------------------------------
Effective January 1, 2002, Hines adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under 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. The second step is to measure the amount of the
impairment loss. In the year of adoption, the initial testing must be done as of
the beginning of the fiscal year. For this transition testing, the first step
must be completed within six months and the second step must be completed by the
end of the Company's fiscal year.
The Company completed the first step of the transition testing by June 30,
2002 and completed the second step by December 31, 2002. As a result, the
pre-tax impairment charge related to goodwill as of January 1, 2002 was
determined to be $78,757. As required by SFAS No. 142, the impairment charge was
recorded net of its associated $23,609 tax benefit in the first quarter as a
cumulative change in accounting principle, effective as of January 1, 2002. Net
income has been reduced by the amount of the after-tax impairment charge. This
impairment charge will not impact the Company's covenants under its Amended
Senior Credit Facility.
F-6
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
As required, the Company also tested goodwill for impairment as of December
31, 2002. In conducting Step 1 of the impairment test, the Company determined
that there was no impairment of goodwill as of December 31, 2002.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141, among other
things, eliminates the use of the pooling of interests method of accounting for
business combinations.
Effective January 1, 2001, Hines adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
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 twelve months ended December 31,
2002, the Company recognized a pre-tax loss of $2,573 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based-Compensation-Transition and Disclosure-an Amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
account for stock-based employee compensation and the effect of then method used
on reported results. The annual disclosure requirements of SFAS No. 123 are
effective for the Company as of December 31, 2002 and the interim disclosure
requirements will be effective during its first quarter of fiscal year 2003. As
permitted under both SFAS No. 123 and SFAS No. 148, the Company continues to
follow the intrinsic value method of accounting under Accounting Principles
Board No. 25 "Accounting for Stock Issued to Employees."
Year Ended December 31
2002 2001 2000
--------- --------- ---------
Net (loss) income, as reported $(52,703) $ 3,425 $ 12,438
Stock option expense (1,086) (2,025) (2,016)
--------- --------- ---------
Pro forma net (loss) income $(53,789) $ 1,400 $ 10,422
========= ========= =========
Earnings per share:
Basic and diluted - as reported $ (2.39) $ 0.16 $ 0.56
========= ========= =========
Basic and diluted - pro forma $ (2.44) $ 0.06 $ 0.47
========= ========= =========
REVENUE RECOGNITION
-------------------
Hines records revenue, net of sales discounts and allowances, when all of
the following have occurred; an agreement of sale exists, product delivery and
acceptance has occurred and collection is reasonably assured.
SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by Management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by Management using the following criteria:
past sales returns experience, current economic conditions, and other relevant
factors, and are 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."
F-7
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The allowance for bad debts is maintained
at a level believed adequate by Management to reflect the probable losses in the
trade receivable due to customer default, insolvency or bankruptcy. The
provision is established by Management using the following criteria: customer
credit history, customer current credit rating and other relevant factors, and
is re-evaluated on a quarterly basis. The allowance is increased by provisions
to bad debt expense charged against income. All recoveries on trade receivables
previously charged off are credited to the accounts receivable recovery account
charged against income, while direct charge-offs of trade receivables are
deducted from the allowance.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company is subject to credit risk primarily through its accounts
receivable balances. Credit risk on accounts receivable balances are minimized
as a result of the large and diverse nature of the Company's customer base
throughout North America. The Company does not require collateral for its
accounts receivable. Certain customers are granted deferred payment terms
("dating"). At December 31, 2002, 2001 and 2000, significant accounts receivable
balances were subject to dating terms. The Company's largest customer accounted
for approximately 47%, 44% and 41% of the Company's consolidated net sales
excluding discontinued operations in 2002, 2001 and 2000, respectively.
AMORTIZATION OF DEFERRED FINANCING EXPENSES
-------------------------------------------
Deferred financing expenses are being amortized using a method, which
approximates the effective interest method over the term of the associated
financing agreements. As a result of the Company's third amendment to its Senior
Credit Facility, $4,200 was capitalized as deferred financing fees. Assuming no
additions, disposals or adjustments are made to the carrying values and/or
useful lives of the assets, annual amortization expense is estimated to be
approximately $3,465, 3,420 and $253 for the years ending December 31, 2003,
2004 and 2005, respectively.
DEPRECIATION AND DEPLETION
--------------------------
Fixed assets are stated at cost less accumulated depreciation. Interest is
capitalized for qualifying assets during the assets' acquisition period. The
amount of interest capitalized for the years ended December 31, 2002, 2001 and
2000 was $0, $786 and $984, respectively. Capitalized interest is recorded as
part of the asset to which it relates and is amortized over the respective
asset's estimated useful life. Depreciation has been provided for on the
straight-line method over the following estimated economic useful lives:
Buildings 20 to 60 years
Machinery and equipment 2 to 25 years
Vehicles and trailers 2 to 15 years
Software 5 to 10 years
Furniture and fixtures 3 to 5 years
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
The Company annually evaluates its long-lived assets, including
identifiable intangible assets, for potential impairment. When circumstances
indicate that the carrying amount of the asset may not be recoverable, as
demonstrated by the projected undiscounted cash flows, an impairment loss would
be recognized based on fair value. The Company has adopted SFAS No. 144. The
adoption of SFAS No. 144 did not have a material impact on the Company's
accounting policy related to the impairment of long-lived assets.
ENVIRONMENTAL COSTS
-------------------
The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures that extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.
F-8
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
INTERNAL USE SOFTWARE
---------------------
The Company capitalizes costs of materials, consultants, interest and
payroll and payroll-related costs for employees incurred in developing
internal-use computer software in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Computer software costs are being amortized using the
straight-line method over an estimated useful life of 5 to 10 years.
INVENTORIES
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Hines' ornamental nursery stock has an average growing period of
approximately eighteen months. All nursery stock is classified as a current
asset based on Hines' normal operating cycle.
INCOME TAXES
------------
Hines' operations are agricultural in nature and the Company derives
significant benefits by qualifying to use the cash method of accounting for
federal tax purposes. The Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
ADVERTISING
-----------
The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $1,025, $977 and $989 for the years ended
December 31, 2002, 2001 and 2000, respectively, excluding the discontinued
operations.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE ("EPS")
--------------------------
Earnings per share are calculated in accordance with SFAS No. 128 "Earnings
per Share" ("SFAS No. 128"), which requires the Company to report both basic
earnings per share, based on the weighted-average number of common shares
outstanding, and diluted earnings per share, based on the weighted-average
number of common shares outstanding adjusted to include the potentially dilutive
effect of outstanding stock options and warrants. For the twelve months ended
December 31, 2002 and 2001, the incremental shares related to the 440,000
warrants outstanding increased fully diluted shares by 5,463 and 18,659,
respectively. Additionally, for the twelve months ended December 31, 2002 and
2001, shares related to employee stock options in the amount of 0.3 million and
2.8 million, respectively, were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive.
F-9
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SHIPPING AND HANDLING FEES AND COSTS
------------------------------------
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10 "Accounting for Shipping and Handling Fees and
Costs" ("EITF No. 00-10"). EITF No. 00-10 became effective in the fourth quarter
of 2000 and addresses the income statement classification of amounts charged to
customers for shipping and handling, as well as costs related to shipping and
handling. The EITF concluded that amounts billed to a customer in a sale
transaction related to shipping and handling should be classified as revenue.
The Company adopted EITF No. 00-10 in the fourth quarter of fiscal 2000. Prior
to adopting EITF No. 00-10, the Company classified certain shipping and handling
fees as an offset to selling and distribution expenses. Shipping and handling
fees included as revenue totaled $27,229, $25,473 and $23,275 for the years
ended December 31, 2002, 2001 and 2000, respectively.
The Company classifies shipping and handling costs as part of selling and
distribution expenses. Shipping and handling costs were $69,044, $64,694 and
$58,866 for the years ended December 31, 2002, 2001 and 2000, respectively,
excluding those attributable to discontinued operations.
EXTRAORDINARY ITEM
------------------
The extraordinary item of $1,026, 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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In August 2001, Financial Accounting Standards Board issued SFAS No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"). 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"). SFAS No. 145 addresses financial
accounting and reporting for the extinguishments of debt, leases and intangible
assets of motor carriers. The Company will adopt SFAS No. 145 beginning 2003 and
will reclassify the 2002 extraordinary item of $1,026, net of tax, to
operations.
In June 2002, Financial Accounting Standards Board issued SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146"). SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies 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 does not expect this to have a material impact on its financial
statements.
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform to current
year presentations.
F-10
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2. INVENTORIES
-----------
Inventories consisted of the following:
December 31,
-------------------------
2002 2001
--------- ---------
Nursery stock $161,007 $155,096
Materials and supplies 8,974 9,579
--------- ---------
$169,981 $164,675
========= =========
3. FIXED ASSETS
------------
Fixed assets consisted of the following:
December 31,
-------------------------
2002 2001
---------- ----------
Land $ 31,541 $ 29,245
Buildings and improvements 93,064 91,687
Machinery and equipment 32,327 30,796
Software 17,891 17,296
Construction in progress 3,518 3,469
---------- ----------
178,341 172,493
Less accumulated depreciation and depletion 38,102 30,106
---------- ----------
Fixed assets, net $ 140,239 $ 142,387
========== ==========
F-11
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
4. GOODWILL
--------
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). In accordance with this standard, goodwill
has been classified as indefinite-lived assets no longer subject to
amortization. Indefinite-lived assets are subject to impairment testing upon
adoption of SFAS No. 142 and at least annually thereafter. In accordance with
SFAS No. 142, this involves a two step process. First, the Company must
determine if the carrying amount of equity exceeds the fair value based upon the
quoted market price of the Company's common stock. If the Company determines
that goodwill may be impaired, the Company compares the "implied fair value" of
the goodwill, as defined by SFAS No. 142, to its carrying amount to determine
the impairment loss, if any. The initial impairment analysis was completed in
the fourth quarter of 2002. The Company recorded a one-time, non-cash charge of
$55,148 to reduce the carrying value of its goodwill. The Company has recognized
this impairment charge as a cumulative effect of change in accounting principle.
Our measurement of the fair value of the goodwill was based on the market
capitalization of the Company's common stock over a reasonable period of time,
including a control premium. Accordingly, the primary factor contributing to the
impairment charge was the overall deterioration in the Company's stock price and
the Company's substantial leverage.
Years Ended December 31,
2002 2001 2000
----------- ---------- -----------
Net income
Reported net (loss) income $ (52,703) $ 3,425 $ 12,438
Goodwill amortization, net of tax -- 2,064 1,781
----------- ---------- -----------
Adjusted net (loss) income $ (52,703) $ 5,489 $ 14,219
=========== ========== ===========
Earnings per basic share
Reported net (loss) income $ (2.39) $ 0.16 $ 0.56
Adjusted net (loss) income $ (2.39) $ 0.25 $ 0.64
Earnings per diluted share
Reported net (loss) income $ (2.39) $ 0.16 $ 0.56
Adjusted net (loss) income $ (2.39) $ 0.25 $ 0.64
5. REVOLVING LINES OF CREDIT
-------------------------
The Company's Amended Senior Credit Facility provides for a $115,000
working capital revolving credit facility that expires on December 31, 2004. The
Amended Senior Credit Facility also provides for an additional $30,000 seasonal
working capital revolving credit facility that is guaranteed by the Company's
majority shareholder, Madison Dearborn Capital Partners, L.P. ("MDCP"), which
can only be borrowed and outstanding between February 1 and June 15 of each year
and expires on June 15, 2004.
The interest rate spread over the U.S. prime rate and Eurodollar rate
varies depending upon the Company's quarterly leverage and interest coverage
ratios as defined in the Amended Senior Credit Facility agreement. Substantially
all of the assets and common stock of the Company collateralize the revolving
credit facilities and all other obligations under the Amended Senior Credit
Facility. The Amended Senior Credit Facility contains covenants that, among
other matters, establish minimum interest coverage and net worth and maximum
leverage ratios and capital expenditure amounts. The average daily amount of the
unused portion of the revolving credit facilities is subject to a commitment fee
that varies depending upon the Company's quarterly leverage ratio as defined in
the Amended Senior Credit Facility agreement. The weighted average interest rate
on borrowings outstanding under the Company's revolving lines of credit for the
years ended December 31, 2002 and 2001 was approximately 6.2% and 7.9%,
respectively.
F-12
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Effective March 18, 2003, the Company obtained a fourth amendment to its
Amended Senior Credit Facility to (i) allow the Company to add back to EBITDA
for 2002 and 2003 specific charges related to certain one-time events for
purposes of its financial covenants that establish minimum EBITDA levels,
minimum interest coverage ratios and maximum leverage ratios, and (ii) allow the
Company to add-back to EBITDA fees and expenses associated with the fourth
amendment. In consideration for approving the amendment, all consenting lenders
were paid a fee of 25 basis points on outstanding loan commitments, which
equated to approximately $625.
In management's opinion, cash generated by operations and from borrowings
available under the amended Senior Credit Facility will be sufficient to meet
the Company's anticipated working capital, capital expenditures and debt service
requirements through 2003. A total of $17,500 will become due under the Senior
Credit Facility during 2003.
The Senior Credit Facility requires the Company to maintain compliance with
various financial covenants. Failure to comply with any of the covenants of the
Senior Credit Facility during 2003 would require the Company to seek waivers or
an amendment to the Senior Credit Facility. The Company has been successful in
negotiating amendments to its bank agreements, including the amendment to the
Senior Credit Facility, effective March 18, 2003. If the Company is unable to
obtain such waivers, all debt under the Senior Credit Facility would become due
and payable ($175,220 at December 31, 2002). The Company was in compliance with
these covenants during 2002 and, based upon management's 2003 operating plan,
expects to remain in compliance with these covenants during 2003. If this
occurs, management believes that it will be able to successfully renegotiate its
covenants to ensure compliance throughout 2003.
A total of $84,970 will become due under the Senior Credit Facility during
2004. The Company expects to refinance this debt with existing financial
institutions or others, or extend its maturity prior to maturity. There can be
no assurance that management will be successful in refinancing this debt or
extending its maturity.
F-13
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
6. LONG-TERM DEBT
--------------
December 31 December 31
2002 2001
----------- -----------
Tranche B term debt, interest at the bank's
reference rate (4.25% and 4.75% at
December 31, 2002 and 2001, respectively)
plus 3.00% or the Eurodollar rate plus
4.00%. Due on December 31, 2004. $ 51,100 $ 99,000
New term debt interest at the bank's
reference rate (4.25% and 4.75% at December
31, 2002 and 2001, respectively) plus 3.00%
or the Eurodollar rate plus 4.00%. Principal
payments due from June 30, 2003 through
December 31, 2004 ranging from $3,500 to
$10,000 with the remaining balance due on
December 31, 2004, as specified in the loan
agreement. 51,370 111,386
Senior Subordinated Notes, Series B, interest
at 12.75% payable semi-annually on each June
30 and December 31, maturing on October 15, 2005. 79,782 79,040
Other obligations due at various dates through 2004. 162 444
----------- -----------
182,414 289,870
Less current portion of continuing operations 17,585 43,159
Less amounts owing of discontinued operations 37,072
----------- -----------
Total long-term debt $ 164,829 $ 209,639
=========== ===========
The following are the Company's estimated principal maturities of long-term
debt outstanding pursuant to the amendment of the Company's Amended Senior
Credit Facility, as amended on February 1, 2002 for each of the next three years
ending December 31:
2003 $ 17,585
2004 85,047
2005 81,900
--------------
184,532
Less: amounts representing future interest (2,118)
--------------
Total $ 182,414
==============
The Company's Tranche B and new term debt make up a portion of the Amended
Senior Credit Facility. Refer to Note 5 for information on the Company's fourth
amendment to the Senior Credit Facility.
The Senior Subordinated Notes were issued by Hines Nurseries and are
redeemable, in whole or in part, at the option of the Company, on or after
October 15, 2000 at a redemption price of 106.00% of the principal amount
thereof plus accrued interest, if any, to the date of redemption. The Notes
contain an embedded derivative in the form of a put option whereby the holder
has the right to put the instrument back to the Company at 105% if a change in
control of the Company should occur. This put option will be marked-to-market
quarterly and any effect will be shown in the Statement of Operations. The
Company does not anticipate that the derivative will have significant value
because no change of control is currently contemplated. The Senior Subordinated
Notes are unsecured and subordinated to all existing and future senior debt and
unconditionally guaranteed on a senior subordinated basis by Hines.
F-14
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
In addition, under its Senior Subordinated Notes, the Company is obligated
to pay a premium at maturity equal to 5.00% of the principal amount of the
Senior Subordinated Notes to be repaid. The Company is accreting this premium
over the term of the maturity of the Notes. At December 31, 2002, the amount of
the premium was $1,800 and, based on the $78,000 of Notes outstanding, is
expected to be $3,900 upon maturity.
The indenture governing the Senior Subordinated Notes imposes certain
limitations on the ability of Hines, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments and
consummate certain asset sales.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASES
The Company leases certain land, office, trucks and warehouse facilities
under various renewable long-term operating leases, which expire through 2010.
Certain of these leases include escalation clauses based upon changes in the
consumer price index and/or the fair rental value of leased land. One of the
operating land leases requires the Company to pay rent equal to the greater of
2.25 percent, increasing to 3 percent by the year 2010, of the sales derived
from the related land, or a minimum per acre amount, as defined in the
agreement. Total rent expense for continuing operations for these operating
lease agreements for the years ended December 31, 2002, 2001 and 2000 was
$9,174, $8,144 and $8,627, respectively.
The following are the Company's future minimum annual payments under its
non-cancelable operating leases for each of the next five years ending December
31 and thereafter:
Continuing
Operations
------------
2003 $ 4,512
2004 4,076
2005 3,310
2006 2,347
2007 718
Thereafter 6,498
------------
$ 21,461
============
LEGAL MATTERS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company.
Management believes, however, that the ultimate resolution of such matters will
not have a material adverse impact on the Company's consolidated financial
position, results of operations or cash flows.
F-15
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
8. SHAREHOLDERS' EQUITY
--------------------
On June 22, 1998, the Board adopted the 1998 Long-Term Equity Incentive
Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for grants of stock
options, stock appreciation rights, restricted stock, performance awards and any
combination of the foregoing to certain directors, officers and employees of the
Company and its subsidiaries. The purpose of the 1998 Stock Plan is to provide
such individuals with incentives to maximize shareholder value and otherwise
contribute to the success of the Company and to enable the Company to attract,
retain and reward the best available persons for positions of substantial
responsibility. The options are granted at the fair market value of the shares
underlying the options at the date of grant, and generally become exercisable
over a four-year period and expire in ten years.
On June 1, 2000, the Board adopted and approved to increase the number of
shares of common stock available for issuance under the 1998 Stock Plan by 1.0
million shares. At December 31, 2002, the Company had reserved 3.6 million
shares of its common stock for issuance upon exercise of options granted or to
be granted under this plan.
On July 9, 2002, the Company offered to exchange all outstanding stock
options held by certain employees under the 1998 Stock Plan for new stock
options to be granted under the 1998 Stock Plan upon the terms and subject to
the conditions described in the offer to exchange. If an employee elected to
participate in the exchange, they were required to tender for exchange all of
the stock options they held in exchange for a certain number of new stock
options. The offer to exchange expired on August 14, 2002 and all stock options
properly tendered before the expiration of the offer to exchange were accepted
and cancelled on August 15, 2002. A total of 1.8 million stock options were
tendered by employees and cancelled pursuant to the terms of the offer to
exchange.
On February 18, 2003, the Company granted new stock options to those
employees who participated in the exchange program. The exercise price of the
new stock options is $5.50 per share. A total of 0.8 million new options were
granted pursuant to this exchange program. There was no additional compensation
expense associated with the exchange program.
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") in 1998. As permitted by SFAS No.
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations, but provides pro forma disclosures of net income and
earnings per share as if the fair value method (as defined in SFAS No. 123) had
been applied. Had compensation cost been determined using the fair value method
prescribed by SFAS No. 123, the Company's net income and earnings per share,
including discontinued operations, for the years ended December 31, 2002 and
2001 as noted in Note 1.
F-16
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The Company estimates the weighted average fair value of each stock option
on the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
2002 2001 2000
--------- --------- ---------
Dividend Yield 0% 0% 0%
Expected volatility 74.16% 85.77% 92.58%
Risk-free interest rate 3.36% 5.56% 5.56%
Expected life Six years Six years Six years
A summary of the status of the Company's stock option plan as of December
31 is presented below:
2002 2001 2000
---------------------------- --------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ------------- ------------ ------------- ------------- -------------
Outstanding -beginning of year 2,824,814 $ 9.81 2,897,480 $ 9.93 2,274,470 $ 10.99
Granted - - 81,000 4.53 287,600 7.86
Granted - - - - 200,000 6.88
Granted - - - - 297,200 6.38
Exercised - - - - - -
Cancelled (2,553,736) 9.97 (153,666) 8.91 (161,790) 10.73
------------- ------------ -------------
Outstanding -end of year 271,078 $ 8.33 2,824,814 $ 9.81 2,897,480 $ 9.93
============= ============ =============
Weighted average fair value
of options granted during period $ - $ 3.52 $ 3.69
============= ============= =============
The weighted average remaining contractual life was seven years at December
31, 2002. As of December 31, 2002, expiration dates ranged from June 22, 2008 to
October 8, 2011. The range of exercise prices was $3.32 to $11.00 for options
outstanding as of December 31, 2002.
WARRANTS
--------
In November of 2000, in connection with the Third Amendment to the Senior
Credit Facility, the Company issued a warrant to its majority stockholder in
exchange for guarantee for the extension of the $30,000 seasonal revolving loan
commitment. The warrant is convertible into 440,000 shares of common stock at an
exercise price of $3.50 per share valued at $843. The warrant is exercisable at
any time prior to December 31, 2005. If the majority shareholder 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 the majority shareholder
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.
F-17
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
9. INCOME TAXES
------------
The components of (loss) income before provision for income taxes and the
provision for income taxes consisted of the following:
For the Years Ended December 31,
--------------------------------
2002 2001 2000
--------- --------- ---------
(Loss) income before income taxes:
U.S. $(64,377) $ 10,723 $ 16,504
Foreign 3,963 8,645 (257)
--------- --------- ---------
$(60,414) $ 19,368 $ 16,247
========= ========= =========
Income from continuing operations $ 15,053 $ 10,320 $ 18,671
Income (loss) from discontinued operations 5,029 9,048 (2,424)
Loss from extraordinary item (1,739) -- --
Loss from SFAS No. 142 adjustment (78,757) -- --
--------- --------- ---------
$(60,414) $ 19,368 $ 16,247
========= ========= =========
Current income tax provision:
Federal $ -- $ -- $ --
State 1,400 -- --
Foreign 819 1,090 605
--------- --------- ---------
$ 2,219 $ 1,090 $ 605
--------- --------- ---------
Deferred provision (benefit):
Federal $ (8,360) $ 12,121 $ 3,643
State (2,410) 863 764
Foreign 840 1,869 (1,203)
--------- --------- ---------
(9,930) 14,853 3,204
--------- --------- ---------
$ (7,711) $ 15,943 $ 3,809
========= ========= =========
F-18
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 35 percent to income before
provision for income taxes as follows:
For the Years Ended December 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Provision computed at statutory rate $(21,145) $ 6,779 $ 5,686
Increase (decrease) resulting from:
State tax, net of federal benefit (1,010) 546 764
Foreign taxes 272 389 (12)
Goodwill 8,881 413 470
Canada withholding tax 3,344 -- --
Meals and entertainment 118 194 173
Reduction in tax reserves -- (482) --
Investment in Foreign Subsidiary 1,840 8,125 --
SFAS No. 52 -Translation remeasurement -- -- (2,995)
Capital loss valuation allowance -- -- (571)
Other (11) (21) 294
--------- --------- ---------
$ (7,711) $ 15,943 $ 3,809
========= ========= =========
Provision for continuing operations $ 6,169 $ 4,627 $ 8,034
Provision (benefit) for discontinued operations 10,442 11,316 (4,225)
Benefit for extraordinary item (713) -- --
Benefit for SFAS No. 142 adjustment (23,609) -- --
--------- --------- ---------
$ (7,711) $ 15,943 $ 3,809
========= ========= =========
F-19
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
DEFERRED TAX ASSETS (LIABILITIES) ARE COMPRISED OF THE FOLLOWING:
December 31,
Deferred tax assets: 2002 2001
---------- ----------
Deferred expenses $ -- $ 586
Capital loss carryforwards -- 477
Deferred currency loss -- 413
Net operating loss carryforwards 5,102 19,506
Foreign currency cumulative translation adjustment -- 3,690
Book/tax difference in debt 7,640 7,978
Intangible asset basis differences 17,869 --
Other (284) 174
---------- ----------
Gross deferred tax assets 30,327 32,824
---------- ----------
Deferred tax liabilities:
Accrual to cash adjustment (63,994) (64,874)
Fixed asset basis differences (12,562) (31,930)
Intangible asset basis differences -- (3,169)
Investment in foreign subsidiary -- (8,125)
Canada withholding tax (3,344) --
Other (1,455) (1,284)
---------- ----------
Gross deferred tax liabilities (81,355) (109,382)
---------- ----------
---------- ----------
Net deferred tax liability $ (51,028) $ (76,558)
========== ==========
Deferred income tax liability, current $ (63,994) $ (72,000)
Deferred income tax asset (liability), non-current 12,966 (4,558)
---------- ----------
$ (51,028) $ (76,558)
========== ==========
Deferred income tax liability - current - Continuing operations $ (63,994) $ (64,874)
Deferred income tax liability - current - Discontinued operations -- (7,126)
---------- ----------
$ (63,994) $ (72,000)
========== ==========
Deferred income tax asset - non-current - Continuing operations $ 12,966 $ 7,727
Deferred income tax liability - non-current - Discontinued operations -- (12,285)
---------- ----------
$ 12,966 $ (4,558)
========== ==========
The Company derives significant benefits by qualifying to use the cash
method of accounting for federal income tax purposes. Under the cash method,
sales are included in taxable income when payments are received and expenses are
deducted as they are paid. The primary benefit the Company receives is the
ability to deduct the cost of inventory as it is incurred. The net benefit
realized by the Company thus far is represented by the "Accrual to Cash
Adjustment" item above. Because the items to which this "Accrual to Cash
Adjustment" relate to are comprised of current assets and current liabilities in
the balance sheet (such as inventory, accounts receivable, accounts payable,
etc.), this deferred tax item is also characterized as current.
At December 31, 2002, the Company had approximately $11,298 in net
operating loss carryforwards for federal income tax reporting purposes. The
Company's federal net operating losses begin to expire in 2020.
F-20
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
10. EMPLOYEE BENEFIT PLANS
----------------------
As of January 1, 2001, Hines Nurseries established a 401(k) Retirement
Savings Plan for salaried and permanent hourly employees. Participants may make
voluntary contributions to the plan up to a maximum of ten thousand five hundred
dollars not to exceed 15 percent of their annual compensation (as defined).
Hines' matching contribution to the Plan is equal to 25 percent of the
participant's voluntary contribution not to exceed 4 percent of the
participant's salary per calendar year. As of January 1, 2002, pursuant to IRS
rules, participants may make voluntary contributions to the plan up to a maximum
of eleven thousand dollars not to exceed 20 percent of their annual compensation
(as defined). In addition to this, employees over age 50 may now contribute an
additional $1. Hines' matching contribution to the Plan is equal to 100 percent
of the first 3 percent of a participant's voluntary deferral of salary, and 50
percent of the next 2 percent of a participant's voluntary deferral of salary
per calendar year. As of January 1, 2003, pursuant to IRS rules, participants
may make voluntary contributions to the plan up to a maximum of twelve thousand
dollars not to exceed 20 percent of their annual compensation (as defined). In
addition to this, employees over age 50 may now contribute an additional $2.
Hines' matching contribution to the Plan is equal to 100 percent of the first 3
percent of a participant's voluntary deferral of salary, and 50 percent of the
next 2 percent of a participant's voluntary deferral of salary per calendar
year.
The total expense related to the Hines plan was $1,593, $342 and $0 for the
years ended December 31, 2002, 2001 and 2000, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Supplemental disclosure of non-cash investing and financing activities were
as follows:
December 31,
---------------------------------
2002 2001 2000
---------- --------- ----------
Fair value of assets acquired $ 1,265 $ 9,211 $ 118,282
Liabilities assumed and incurred
in connection with acquisitions -- -- (6,007)
Discontinued operations -- -- (1,485)
---------- --------- ----------
Cash paid $ 1,265 $ 9,211 $ 110,790
========== ========== ==========
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
CASH
The carrying amount reported in the balance sheet for cash approximates its
fair value.
SHORT-TERM AND LONG-TERM DEBT
The fair value of the Senior Subordinated Notes is based on the closing
price of the debt securities at December 31, 2002 and 2001. The carrying amount
of the Company's other long-term debt approximates its fair value based upon
borrowing rates currently available to the Company. The carrying amount of the
short-term debt approximates the fair value based on the short-term maturity of
the instrument.
F-21
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
INTEREST RATE SWAP
In May 2000, the Company entered into an interest rate swap agreement to
hedge $75,000 of its long-term debt. The Company does not hold or issue interest
rate swap agreements for trading purposes. This interest rate swap agreement
effectively converts a portion of the Company's variable rate debt to a fixed
rate of 7.13% based on the 3-month London Interbank Offering Rate ("LIBOR") rate
in effect at the beginning of each quarterly period, with a maximum rate of 8%.
The interest rate swap agreement matures in February 2005.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2002 and 2001 are as follows:
December 31,
--------------------------------------------------
2002 2001
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Cash $ -- $ -- $ -- $ --
Revolving line of credit 72,750 72,750 100,000 100,000
Long-term debt (including
current portion) 182,414 184,533 252,798 251,240
Interest rate swap
agreement liability 8,741 8,741 7,117 7,117
Discontinued Operations
Long-term debt (including
current portion) -- -- 37,072 37,072
13. VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:
For the Years Ended December 31,
----------------------------------
2002 2001
------------ ------------
Beginning balance $ 1,303 $ 1,528
Charges to expense 1,049 699
Amounts written off (355) (924)
------------ ------------
Ending balance $ 1,997 $ 1,303
============ ============
14. GUARANTOR/NON-GUARANTOR DISCLOSURES
-----------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (the issuer) have
been guaranteed by Hines (the parent guarantor) and by Hines SGUS, Inc. ("Hines
SGUS") (the subsidiary guarantor) (formerly known as "Sun Gro-U.S." or "Sun Gro
Horticulture, Inc."). The issuer and the subsidiary guarantor are wholly owned
subsidiaries of the parent guarantor and the parent and subsidiary guarantees
are full, unconditional and joint and several. The Senior Subordinated Notes
were not guaranteed by Sun Gro - Canada, which was sold in March 2002 and
reflected as a discontinued operation in these financial statements.
The indenture for the Senior Subordinated Notes imposes a number of
restrictions on Hines Nurseries, including its ability to incur additional
indebtedness, to make certain restricted payments (including dividends to Hines
(the parent guarantor)), to make certain asset dispositions, to incur additional
liens and to enter into other significant transactions. The Company's Amended
Senior Credit Facility also places various restrictions on both Hines and Hines
Nurseries, including, but not limited to, limitations concerning the incurrence
of additional debt and the payment of dividends.
Hines, the parent guarantor, has no independent assets or operations.
Although Hines SGUS is still in existence, all of its operating assets were sold
in March 2002 as part of the company's sale of its Sun Gro operations. As a
result, Hines SGUS currently conducts no operations and has no material assets
or liabilities. As previously indicated, the Company's consolidated financial
statements have been restated to reflect the financial position, results of
operations and cash flows of its Sun Gro business as "discontinued operations."
As a result of the foregoing, condensed consolidating financial information
regarding Hines and Hines Nurseries is not presented.
F-22
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
15. SUBSEQUENT EVENTS
-----------------
On February 3, 2003, the Board of Directors accepted the resignation of
Stephen P. Thigpen as Chairman and C.E.O. and appointed Douglas D. Allen as
Chairman and Robert A. Ferguson as Chief Operating Officer. Pursuant to his
employment agreement with the Company, dated as of August 3, 1995, the Company
made a lump sum cash payment to Mr. Thigpen of two times his annual base salary
totaling $1,050 which will be recorded as compensation expense in the three
months ending March 31, 2003.
F-23