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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission File Number
0-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
As of May 1, 2003 there were 22,072,549 shares of Common Stock, par value $0.01
per share, outstanding.
================================================================================
Page 1
HINES HORTICULTURE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Control and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 28
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
Page 2
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
(Dollars in thousands, except share data)
ASSETS March 31, December 31,
2003 2002
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $2,001 and $1,997 51,416 25,838
Inventories 195,006 169,981
Prepaid expenses and other current assets 7,908 6,672
---------- ----------
Total current assets 254,330 202,491
---------- ----------
FIXED ASSETS, net of accumulated depreciation
and depletion of $40,397 and $38,102 139,369 140,239
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $11,818 and $10,958 6,905 7,137
DEFFERRED INCOME TAX 12,870 12,966
GOODWILL 42,979 42,979
---------- ----------
$ 456,453 $ 405,812
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,624 $ 12,321
Accrued liabilities 11,592 10,911
Accrued payroll and benefits 4,741 6,845
Accrued interest 3,535 6,034
Long-term debt, current portion 17,587 17,585
Borrowings on revolving credit facility 116,500 72,750
Deferred income taxes 63,077 63,994
---------- ----------
Total current liabilities 242,656 190,440
---------- ----------
LONG-TERM DEBT 164,996 164,829
INTEREST RATE SWAP AGREEMENT 8,180 8,741
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares $.01 par value;
Issued and outstanding - 22,072,549 shares
at March 31, 2003 and December 31, 2002 221 221
Additional paid-in capital 128,781 128,781
Deficit (87,306) (85,985)
Accumulated other comprehensive loss (1,075) (1,215)
---------- ----------
Total shareholders' equity 40,621 41,802
---------- ----------
$ 456,453 $ 405,812
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended March 31,
2003 2002
------------- -------------
(Restated)
Sales, net $ 58,523 $ 68,723
Cost of goods sold 27,870 34,316
------------- -------------
Gross profit 30,653 34,407
------------- -------------
Selling and distribution expenses 19,047 20,736
General and administrative expenses 5,586 5,501
Other expense (income) 1,242 (2,103)
------------- -------------
Total operating expenses 25,875 24,134
------------- -------------
Operating income 4,778 10,273
Other expenses
Interest 6,291 6,711
Loss on debt extinguishment -- 1,739
Interest rate swap agreement income (324) (1,014)
Amortization of deferred financing expenses 1,050 1,154
------------- -------------
7,017 8,590
------------- -------------
(Loss) income before income taxes and
discontinued operations (2,239) 1,683
Income tax (benefit) provision (917) 690
------------- -------------
(Loss) income from continuing operations (1,322) 993
Loss from discontinued operations, net of tax
benefit of $13,081 -- (6,978)
Cumulative effect of change in accounting principle, net of tax
benefit of $23,609 -- (55,148)
------------- -------------
Net loss $ (1,322) $ (61,133)
============= =============
Basic and diluted earnings per share:
(Loss) income per common share from
continuing operations $ (0.06) $ 0.04
Loss per common share from
discontinued operations $ -- $ (0.32)
Cumulative effect of change in accounting principle $ -- $ (2.49)
------------- -------------
Net loss per common share $ (0.06) $ (2.77)
============= =============
Weighted average shares outstanding--Basic 22,072,549 22,072,549
============= =============
Weighted average shares outstanding--Diluted 22,072,549 22,104,455
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
2003 2002
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,322) $ (61,133)
Loss from discontinued operations -- 6,978
Adjustments to reconcile net income to
net cash used in operating activities -
Cumulative effect of change in accounting principle -- 55,148
Depreciation 2,295 2,208
Amortization of deferred financing costs 1,050 1,154
Interest rate swap agreement income (324) (1,014)
Gain on sale of assets -- (2,103)
Loss on early retirement of debt -- 1,739
Deferred income taxes (917) 689
---------- ----------
782 3,666
Change in working capital accounts
Accounts receivable (25,578) (31,952)
Inventories (25,025) (18,285)
Prepaid expenses and other current assets (1,236) (558)
Accounts payable and accrued liabilities 9,384 11,783
---------- ----------
Change in working capital accounts (42,455) (39,012)
---------- ----------
Net cash used in operating activities (41,673) (35,346)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,428) (1,730)
Net cash used by discontinued operations -- (6,520)
Proceeds from sale of discontinued operations -- 131,538
Proceeds from sale of fixed asset -- 3,116
Acquisitions, adjusted -- (170)
---------- ----------
Net cash (used in) provided by investing activities (1,428) 126,234
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving line of credit 43,750 21,250
Repayments of long-term debt (21) (107,938)
Deferred financing costs incurred (628) (4,200)
---------- ----------
Net cash provided by (used in) financing activities 43,101 (90,888)
---------- ----------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
---------- ----------
CASH, end of period $ -- $ --
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 8,791 $ 7,625
Cash paid for income taxes $ 77 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5
HINES HORTICULTURE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Description of Business:
------------------------
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 (collectively referred to as "Sun Gro").
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.
Page 6
2. Unaudited Financial Information:
--------------------------------
The unaudited financial information furnished herein, in the
opinion of management, reflects all adjustments (consisting of only
normal recurring adjustments), which are necessary to state fairly the
consolidated financial position, results of operations and cash flows
of the Company as of and for the periods indicated. The Company
presumes that users of the interim financial information herein have
read or have access to the Company's audited consolidated financial
statements for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation, except in regard
to material contingencies or recent significant events, may be
determined in that context.
Accordingly, footnote and other disclosures, which would
substantially duplicate the disclosures contained in the Form 10-K,
filed on April 11, 2003 by Hines Horticulture, Inc. under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), have
been omitted. The financial information herein is not necessarily
representative of a full year's operations.
3. Earnings Per Share:
-------------------
Earnings per share are calculated in accordance with SFAS No.
128, "Earnings per Share," which requires the Company to report both
basic earnings per share, based on the weighted-average number of
common shares outstanding, and diluted earnings per share, based on the
weighted-average number of common shares outstanding adjusted to
include the potentially dilutive effect of outstanding stock options
and warrants using the treasury method. For the three months ended
March 31, 2003, the incremental shares related to 440,000 warrants
outstanding were excluded from the computation of diluted earnings per
share because they would have been anti-dilutive. Additionally, for the
three months ended March 31, 2003, shares related to the underlying
employee stock options in the amount of 1,059,902 were excluded from
the computation of diluted earnings per share because they would have
been anti-dilutive.
4. Adoption Of Accounting Pronouncements:
--------------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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 adoption of
SFAS No. 143 on January 1, 2003 did not have an impact on our financial
position and results of operations.
In April 2002, the FASB 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 adopted
SFAS No. 145 on January 1, 2003 and reclassified the loss on debt
extinguishment previously reported as an extraordinary item as of March
31, 2002 of $1,026, net of tax, to operations.
Page 7
In June 2002, the FASB 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. The adoption of SFAS No. 146 on
January 1, 2003 did not have an impact on our financial position and
results of operations.
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 the method used on reported
results. 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."
Three months ended March 31,
2003 2002
--------- ---------
Net loss, as reported $ (1,322) $(61,133)
Stock option expense (8) (279)
--------- ---------
Pro forma net loss $ (1,330) $(61,412)
========= =========
Loss per share:
Basic and diluted - as reported $ (0.06) $ (2.77)
========= =========
Basic and diluted - pro forma $ (0.06) $ (2.78)
========= =========
5. Inventories:
------------
Inventories consisted of the following:
March 31, December 31,
2003 2002
--------- ---------
Nursery stock $184,835 $161,007
Material and supplies 10,171 8,974
--------- ---------
$195,006 $169,981
========= =========
Page 8
6. Comprehensive Income:
---------------------
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to
the Company's shareholders. The Company's comprehensive income includes
the change in valuation of derivative instruments. The components of
comprehensive income during the three months ended March 31, 2003 and
2002, were as follows:
Three Months Ended
March 31,
2003 2002
---- ----
(Restated)
Net loss $ (1,322) $(61,133)
Income on derivatives
reclassified to earnings 140 140
--------- ---------
Comprehensive loss $ (1,182) $(60,993)
========= =========
7. New Accounting Pronouncements:
------------------------------
In March 2003, the FASB issued SFAS No. 149, "Accounting for
Certain Financial Instruments with Characteristics of Liabilities and
Equity" ("SFAS No. 149"). This statement establishes standards for
classification of certain financial instruments that have
characteristics of both liabilities and equity in the statement of
financial position. This statement will be effective upon issuance for
all contracts created or modified after the date the statement is
issued and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. Management does not expect the
adoption of SFAS No. 149 to have a material impact on its financial
condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. Hines
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.
Page 9
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.
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.
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,
Page 10
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 of 2002 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 Quarterly Report on Form 10-Q reflect the financial position,
results of operations and cash flows of the Sun Gro business as
"discontinued operations." In accordance with SFAS No. 144, the
Company's Consolidated Financial Statements have been restated to
reflect the financial position, results of operations and cash flows of
the Sun Gro business as "discontinued operations."
OVERVIEW
GENERAL. Hines is one of the largest commercial green goods
operations in North America, producing one of the broadest assortments
of container-grown plants in the industry. The Company sells its green
goods products primarily to the retail segment, which includes premium
independent garden centers, as well as leading home centers and mass
merchandisers, such as Home Depot, Lowe's, Wal-Mart and Target.
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.
Page 11
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 for 2002 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 March 31, 2003, the Company has a current liability for
deferred income taxes of $63.1 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
was recorded as compensation expense in the three months ended March
31, 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
Page 12
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. 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. 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 were 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 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
Page 13
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2002
NET SALES. Net sales of $58.5 million for the three months ended
March 31, 2003 decreased $10.2 million, or 14.8%, from net sales of
$68.7 million for the comparable period in 2002. This decrease was due
to the soft retail environment and a shift in the seasonal stocking
patterns of the retail garden centers into April. These seasonal
stocking patterns were significantly affected by Easter occurring in
late April in 2003 versus late March last year and by cold, wet weather
that persisted through the end of March in the Northeast and Midwest.
This was somewhat offset by strong sales in the South resulting from
favorable weather and newly established store service programs that
generated increased volume in the Atlanta and Memphis markets. In
addition, the Company's first quarter sales to Kmart were down by
approximately $1.0 million from the first quarter of 2002.
GROSS PROFIT. Gross profit of $30.7 million for the three months
ended March 31, 2003 decreased $3.7 million, or 10.8%, from gross
profit of $34.4 million for the comparable period in 2002 due to lower
sales as discussed above. As a percentage of net sales, gross profits
for the first quarter increased to 52.4% compared to 50.1% in 2002.
This increase was primarily attributable to an increase in unit selling
price and better inventory management through the Company's store
service programs. The increase in unit selling price was mainly product
mix related but also reflected a modest price increase with key
customers.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution
expenses of $19.0 million for the three months ended March 31, 2003
decreased $1.7 million, or 8.2%, from $20.7 million for the comparable
period in 2002 due to lower sales as discussed above. As a percentage
of sales, selling and distribution expenses increased to 32.5% compared
to 30.1 % in 2002. This increase is mainly due to higher fuel costs and
the impact of lower sales on the ratio of fixed costs to sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $5.6 million for the three months ended March 31, 2003
increased $0.1 million, or 1.8%, from $5.5 million for the comparable
period in 2002. The modest increase was due primarily to efforts by the
Company to control costs, improve efficiencies and consolidate many of
its operational activities.
Page 14
OTHER (EXPENSE) INCOME. Other operating expense of $1.2 million
for the three months ended March 31, 2003 represents severance costs
associated with both the resignation of the Company's former Chief
Executive Officer in February of 2003 and the elimination of certain
administrative positions. Other operating income of $2.1 million for
the three months ended March 31, 2002 primarily represents the net gain
from the sale in the first quarter of 2002 of land in Hillsboro,
Oregon.
OPERATING INCOME. Operating income of $4.8 million for the three
months ended March 31, 2003 decreased by $5.5 million, or 53.4%, from
the $10.3 million for the comparable period in 2002. This decrease was
mainly due to the decrease in other operating income and lower sales as
discussed above.
OTHER EXPENSES. Other expenses of $7.0 million for the three
months ended March 31, 2003 decreased $1.6 million, or 18.6%, from $8.6
million for the comparable period in 2002. The decrease was mainly
attributable to a $1.7 million loss on the extinguishment of debt that
was included in other expenses in 2002. Lower interest expense during
the first quarter was offset by the impact of the mark-to-market
adjustment on the Company's interest rate swap. Last year's financing
costs included $1.0 million of income relating to the mark-to-market
adjustment compared with only $0.3 million in 2003.
INCOME TAX PROVISION. The Company's effective income tax rate
was 41% for both the three months ended March 31, 2003 and 2002.
(LOSS) INCOME FROM CONTINUING OPERATIONS. The loss from
continuing operations of $1.3 million for the three months ended March
31, 2003 declined by $2.3 million from income of $1.0 million for the
comparable period in 2002 due primarily to lower operating income as
discussed above.
NET (LOSS). The net loss of $1.3 million for the three months
ended March 31, 2003 improved from $61.1 million in the comparable
period in 2002. This improvement was mainly due certain charges that
impacted the first quarter of 2002, including a $55.1 million charge
stemming from the adoption of SFAS NO. 142, a $7.0 million loss from
discontinued operations, and a $1.7 million charge relating to the
early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are funds generated
by operations and borrowings under its Amended Senior Credit Facility,
which matures on December 31, 2004. 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. The Company
historically borrows under its revolving credit facilities to fund peak
working capital needs.
Page 15
Net cash used in operating activities was $41.7 million for the
three months ended March 31, 2003 compared to $35.3 million for the
comparable period in 2002 mainly due to lower sales and an increase in
working capital. The increase in working capital was mainly due to
higher inventory resulting from the lower sales and a smaller increase
in accounts payable and accrued liabilities compared to the same period
in 2002. This was partially offset by an improvement in Days Sales
Outstanding and a reduction in customer credits compared to the same
period in 2002.
Net cash used in investing activities was $1.4 million for the
three months ended March 31, 2003 compared to a net cash provided by
investing activities of $126.3 million for the comparable period in
2002. The decrease was due mainly to the impact of non-recurring events
during the first quarter of 2002, including the proceeds received from
the sale of the Sun Gro business and the sale of the Oregon property.
The Company's capital expenditures were $1.4 million for the
three months ended March 31, 2003 compared to capital expenditures of
$1.7 million for the comparable period in 2002. The capital
expenditures for 2003 primarily included the purchase of nursery
related machinery and equipment. The Company's capital expenditures for
2003 are expected to be approximately $7.0 million.
Net cash provided by financing activities was $43.1 million
for the three months ended March 31, 2003 compared to a net use of cash
of $90.9 million for the comparable period in 2002. The improvement was
primarily related to the impact of certain events on the first quarter
of 2002, including 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 below and to pay financing costs of $4.2
million.
The Company typically draws under its revolving credit
facilities in the first and fourth quarters to fund its seasonal
inventory buildup of green goods products and seasonal operating
expenses. Approximately 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 May 6, 2003, the Company had unused borrowing capacity of $24.5
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.
On March 27, 2002, the Company completed the sale of its Sun Gro
business and received net proceeds of approximately $119.0 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. 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.
Page 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.
At March 31, 2003, the Company's Amended Senior Credit Facility
was 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 $51.3 million and a Tranche B Term Loan in the amount of
$51.1 million. Borrowings under the Amended Senior Credit Facility are
collateralized 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.
The Company's net debt position (short-term and long-term
debt) at March 31, 2003 was $299.1 million compared to net debt of
$303.2 million at March 31, 2002.
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.
Page 17
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 $84.9 million in 2004. The expiration of the
Company's $30.0 million seasonal working capital facility has been
extended to June 15, 2004.
Madison Dearborn Capital Partners, L.P. ("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 $0.84 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. 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 March 31, 2003, the amount of the premium was $2.0
million and, based on the $78.0 million of Notes outstanding, is
expected to be $3.9 million upon maturity.
At March 31, 2003, the Company had the following contractual
obligations (payments due by period, in millions):
Page 18
Payments Due by Period
------------------------------------------
Contractual Cash Obligations Total Less than After
1 year 1-3 years 4-5 years 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 20.3 4.4 8.9 0.7 6.3
--------- -------- --------- ------- -------
Total $ 204.8 $ 22.0 $ 175.8 $ 0.7 $ 6.3
========= ======== ========= ======= =======
Hines does not have any off balance sheet financing or any
financial arrangements with any related parties, other than operating
leases.
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. In the past, the Company has been successful in
obtaining waivers and in negotiating amendments to its bank agreements,
including the amendment to the Senior Credit Facility, effective March
18, 2003. The Company was in compliance with these amended covenants
during the first quarter of 2003 and, based upon Management's 2003
operating plan, expects to remain in compliance with these amended
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 the remainder of 2003. If the Company fails to comply in the
future with the amended covenants in its Senior Credit Facility, the
Company currently believes that, based on its prior experience with
lenders, it may be able to seek a waiver of such non-compliance or
otherwise amend the covenants in a manner so as to cure the
non-compliance. In the event the Company should fail to comply with one
of the covenants and is unable to either obtain a waiver or
successfully negotiate an amendment to the Senior Credit Facility, then
the Company would be in default under the Senior Credit Facility.
A total of $84.9 million will become due under the Senior Credit
Facility during 2004. At this time, the Company is in the process of
considering alternatives for refinancing this debt, including
refinancing with existing financial institutions or others, or
extending the debt's 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,
Page 19
our operations and our strategies. Forward-looking statements include,
but are not limited to, information regarding our future economic
performance and financial condition, the plans and objectives of our
Management and our assumptions regarding our performance and these
plans and objectives.
The forward-looking statements that we make in our Annual Report,
Forms 10-K and 10-Q and in other contexts represent challenging goals
for our Company, and the achievement of these goals and our operations
are subject to a variety of risks and assumptions and numerous factors
beyond our control. Important factors that could cause actual results
to differ materially from the forward-looking statements we make are
described below. The following risk factors should not be considered a
definitive list of all risks associated with our operations and should
be read in conjunction with the risks and uncertainties contained in
our other filings with the Securities and Exchange Commission.
WEATHER; GENERAL AGRICULTURAL RISKS
Adverse weather or production difficulties occurring at a time of
peak production or sales (in the first half of the calendar year),
particularly on weekends during the peak gardening season, could cause
declines in net sales and operating income that could have a material
adverse effect on the Company. The Company's operations may also be
adversely affected by disease, freezing conditions, snow, drought or
other inclement weather. There can be no assurance that future weather
conditions will not have a material adverse effect on the Company.
Agricultural production is highly dependent upon the availability of
water. The Company's facilities receive their water from a variety of
sources, including on-site wells, reservoirs and holding ponds,
municipal water districts and irrigation water supplied to local
districts by facilities owned and operated by the United States acting
through the Department of Interior Bureau of Reclamation. The loss or
reduction of access to water at any of the Company's facilities could
have a material adverse effect on the Company.
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 adequate time 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.
Page 20
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 ("USDA") or
California Department of Forest and Agriculture ("CDFA") 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.
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.
Page 21
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. On May 6,
2003 Kmart emerged from bankruptcy. During this time we have continued
to ship products to Kmart. However, if Kmart substantially alters its
sales of lawn and garden products, 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. During the three months
ended March 31, 2003 the Company's net sales to Kmart were
approximately $1.3 million, a decrease of $1.0 million from the
comparable period in 2002. The Company believes that it will likely
further reduce sales to Kmart for the remainder of fiscal 2003.
SUBSTANTIAL LEVERAGE
We had debt outstanding in the principal amount of $299.1 million
as of March 31, 2003. 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.
Page 22
Our ability to make payments on and to refinance our indebtedness
and to fund planned capital expenditures will depend on our ability to
generate cash in the future. To some extent, this is subject to general
economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
We 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 laws
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.
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
Page 23
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.
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
In August 2001, FASB 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 adoption of SFAS No. 143 on January
1, 2003 did not have an impact on our financial position and results of
operations.
In April 2002, the FASB 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 adopted
SFAS No. 145 on January 1, 2003 and reclassified the loss on debt
extinguishment previously reported as an extraordinary item as of March
31, 2002 of $1,026, net of tax, to operations.
In June 2002, the FASB 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. The
adoption of FAS 146 on January 1, 2003 did not have an impact on our
financial position and results of operations.
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 the 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.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2003, the FASB issued SFAS No. 149, "Accounting for
Certain Financial Instruments with Characteristics of Liabilities and
Equity" ("SFAS No. 149"). This statement establishes standards for
classification of certain financial instruments that have
characteristics of both liabilities and equity in the statement of
financial position. This statement will be effective upon issuance for
all contracts created or modified after the date the statement is
issued and otherwise effective at the beginning of the first interim
Page 24
period beginning after June 15, 2003. Management does not expect the
adoption of SFAS No. 149 to have a material impact on its financial
condition or results of operations.
EFFECTS OF INFLATION
Management believes the Company's results of operations have
not been materially impacted by inflation over the past three years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to
certain market risks, including fluctuations in interest rates, foreign
exchange rates, commodity prices and its common stock price. The
Company does not enter into transactions designed to mitigate its
market risks for trading or speculative purposes.
We have various debt instruments outstanding at March 31, 2003
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 $8.2
million at March 31, 2003.
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 March 31, 2003 the carrying amount and
estimated fair value of the Company's long-term debt was $182.6 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.
Page 25
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's Management, including the Company's
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 and no corrective action with regard to significant
deficiencies or material weaknesses were undertaken.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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.*
Exhibit 99.2 Certification of Chief Financial Officer Pursuant
To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of 2002.*
* Pursuant to Commission Release No. 33-8212, this certification will be treated
as "accompanying" this Quarterly Report on Form 10-Q/A 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.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the
quarter ended March 31, 2003.
1. Current report on Form 8-K dated February 7, 2003
(the date of the earliest event reported), filed on
February 12, 2003, for the purpose of reporting under
Item 5, the resignation of Stephen P. Thigpen as
Chairman of the Board and Chief Executive Officer.
Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.
Page 26
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HINES HORTICULTURE, INC.
(REGISTRANT)
By: /s/ Claudia M. Pieropan
--------------------------
Claudia M. Pieropan
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
Date: May 14, 2003
Page 27
CERTIFICATIONS
I, Robert A. Ferguson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hines
Horticulture, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 By: /S/ ROBERT A. FERGUSON
--------------------------
Robert A. Ferguson
Chief Operating Officer
(Principal Executive Officer)
Page 28
I, Claudia M. Pieropan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hines
Horticulture, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 By: /S/ CLAUDIA M. PIEROPAN
----------------------------------
Claudia M. Pieropan
Chief Financial Officer, Secretary
and Treasurer (Principal Financial
Officer)
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