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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes( ) No(X)
As of July 24, 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
June 30, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Operations for the Three Months
And Six Months Ended June 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
Note: Items 1, 2 and 3 of Part II are omitted because they are not applicable.
Page 2
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
(Dollars in thousands, except share data)
June 30, December 31,
2003 2002
---------- ----------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash $ 463 $ --
Accounts receivable, net of allowance for
doubtful accounts of $426 and $1,997 79,310 25,838
Inventories 152,270 169,981
Prepaid expenses and other current assets 7,522 6,672
---------- ----------
Total current assets 239,565 202,491
---------- ----------
FIXED ASSETS, net of accumulated depreciation
of $42,772 and $38,102 138,247 140,239
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $12,767 and $10,958 5,970 7,137
DEFFERRED INCOME TAXES 12,773 12,966
GOODWILL 42,979 42,979
---------- ----------
$ 439,534 $ 405,812
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 15,122 $ 12,321
Accrued liabilities 13,467 10,911
Accrued payroll and benefits 10,063 6,845
Accrued interest 5,986 6,034
Long-term debt, current portion 19,088 17,585
Borrowings on revolving credit facility 65,000 72,750
Deferred income taxes 77,436 63,994
---------- ----------
Total current liabilities 206,162 190,440
---------- ----------
LONG-TERM DEBT 163,663 164,829
INTEREST RATE SWAP AGREEMENT 7,623 8,741
OTHER LIABILITIES 730 --
---------- ----------
Total liabilities 378,178 364,010
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549 shares
at June 30, 2003 and December 31, 2002 221 221
Additional paid-in capital 128,781 128,781
Deficit (66,712) (85,985)
Accumulated other comprehensive loss (934) (1,215)
---------- ----------
Total shareholders' equity 61,356 41,802
---------- ----------
$ 439,534 $ 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 and Six Months Ended June 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Restated) (Restated)
Sales, net $ 187,868 $ 182,146 246,391 250,869
Cost of goods sold 89,139 86,221 117,009 120,537
------------- ------------- ------------- -------------
Gross profit 98,729 95,925 129,382 130,332
------------- ------------- ------------- -------------
Selling and distribution expenses 50,109 46,765 69,156 67,501
General and administrative expenses 6,211 7,931 11,797 13,432
Other operating expenses (income) 190 -- 1,432 (2,103)
------------- ------------- ------------- -------------
Total operating expenses 56,510 54,696 82,385 78,830
------------- ------------- ------------- -------------
Operating income 42,219 41,229 46,997 51,502
Other expenses
Interest 6,445 6,751 12,736 13,462
Loss on debt extinguishment -- -- -- 1,739
Interest rate swap agreement (income) expense (320) 1,777 (644) 763
Amortization of deferred financing expenses 1,138 1,131 2,188 2,285
------------- ------------- ------------- -------------
7,263 9,659 14,280 18,249
------------- ------------- ------------- -------------
Income before income taxes and
discontinued operations 34,956 31,570 32,717 33,253
Income tax provision 14,360 12,947 13,443 13,637
------------- ------------- ------------- -------------
Income from continuing operations 20,596 18,623 19,274 19,616
Loss from discontinued operations, net of tax
expense of $13,081 -- -- -- (6,978)
Cumulative effect of change in accounting principle, net of tax
benefit of $23,609 -- -- -- (55,148)
------------- ------------- ------------- -------------
Net income (loss) $ 20,596 $ 18,623 $ 19,274 (42,510)
============= ============= ============= =============
Basic and diluted earnings per share:
Income per common share from
continuing operations $ 0.93 $ 0.84 $ 0.87 $ 0.88
Loss per common share from
discontinued operations $ -- $ -- $ -- $ (0.32)
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (2.49)
------------- ------------- ------------- -------------
Net income (loss) per common share $ 0.93 $ 0.84 $ 0.87 $ (1.93)
============= ============= ============= =============
Weighted average shares outstanding--Basic 22,072,549 22,072,549 22,072,549 22,072,549
============= ============= ============= =============
Weighted average shares outstanding--Diluted 22,072,549 22,162,549 22,072,549 22,136,021
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
Page 4
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
2003 2002
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19,274 $ (42,510)
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 4,670 4,305
Amortization of deferred financing expenses 2,188 2,285
Interest rate swap agreement (income) expense (644) 763
Loss (gain) on sale of assets 73 (2,103)
Loss on early retirement of debt -- 1,739
Deferred income taxes 13,443 13,637
---------- ----------
39,004 40,242
Change in working capital accounts
Accounts receivable (53,796) (44,008)
Inventories 18,391 22,677
Prepaid expenses and other current assets (526) 1,019
Accounts payable and accrued liabilities 9,127 10,541
---------- ----------
Change in working capital accounts (26,804) (9,771)
---------- ----------
Net cash provided by operating activities 12,200 30,471
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,853) (3,323)
Net cash used by discontinued operations -- (4,320)
(Payments to) proceeds from sale of discontinued operations (500) 123,429
Proceeds from sale of fixed asset 50 3,116
Acquisitions, adjusted -- (1,426)
---------- ----------
Net cash (used in) provided by investing activities (3,303) 117,476
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on revolving line of credit (7,750) (35,500)
Repayments of long-term debt (42) (107,959)
Deferred financing expenses incurred (642) (4,200)
---------- ----------
Net cash used in financing activities (8,434) (147,659)
---------- ----------
NET CHANGE IN CASH 463 288
CASH, beginning of period -- --
---------- ----------
CASH, end of period $ 463 $ 288
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,021 $ 11,674
Cash paid for income taxes $ 277 $ 477
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
$5,413 loss, net of tax, from its discontinued operations for the year
ended December 31, 2002 (a loss of $6,978 in the first quarter of 2002
and a gain of $1,565 in the fourth quarter of 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 Company's Form
10-K for the year ended December 31, 2002, 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 Statement
of Financial Accounting Standard ("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 six months ended June
30, 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
six months ended June 30, 2003, shares related to the underlying
employee stock options in the amount of 1,042,221 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 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. The adoption of SFAS No. 143 on January 1, 2003 did not have an
impact on our financial position, results of operations or cash flows.
Page 7
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 June
30, 2002 of $1,026, net of a $713 tax benefit, to continuing
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 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, results of operations or cash flows.
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."
Six months ended June 30,
2003 2002
------------ ------------
Net income (loss), as reported $ 19,274 $ (42,510)
Stock option expense (16) (601)
------------ ------------
Pro forma net income (loss) $ 19,258 $ (43,111)
============ ============
Net income (loss) per share:
Basic and diluted - as reported $ 0.87 $ (1.93)
============ ============
Basic and diluted - pro forma $ 0.87 $ (1.95)
============ ============
Page 8
5. Inventories:
------------
Inventories consisted of the following:
June 30, December 31,
2003 2002
---------------- ----------------
Nursery Stock $ 142,846 $ 161,007
Material and supplies 9,424 8,974
---------------- ----------------
$ 152,270 $ 169,981
================ ================
6. Interest Rate Swap Agreement:
-----------------------------
In May 2000, the Company entered into an interest rate swap
agreement to hedge $75,000 of our loan facility. The interest rate swap
agreement effectively changes our exposure on our 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.
The interest rate swap agreement matures in February 2005. The
estimated fair value of our obligation under the interest rate swap
agreement was $7,623 at June 30, 2003.
Effective January 1, 2001, the Company adopted the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. Adopting the provisions of SFAS No. 133 on
January 1, 2001 resulted in a cumulative after-tax charge to
accumulated other comprehensive income as of January 1, 2001 of $2,334,
representing the fair value of the interest rate agreement, net of tax.
This amount is being amortized as interest rate agreement expense over
the term of the debt. For the six months ended June 30, 2003, the
Company recognized a pre-tax loss of $644 reported as interest rate
swap agreement expense in the consolidated statements of operations
related to the change in the fair value of the interest rate agreement.
Page 9
7. 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 amortization of the fair value of the interest rate agreement
recognized upon adoption of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The components of comprehensive
income during the six months ended June 30, 2003 and 2002, were as
follows:
Six Months Ended
June 30,
2003 2002
---- ----
(Restated)
Net income (loss) $ 19,274 $(42,510)
Amortization of interest rate swap
agreement 281 280
--------- ---------
Comprehensive income (loss) $ 19,555 $(42,230)
========= =========
8. Goodwill:
---------
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.
As required, the Company also tested goodwill for impairment
as of December 31, 2002. In conducting the first step of the impairment
test, the Company determined that there was no potential impairment of
goodwill as of December 31, 2002.
Page 10
For the years ended December 31, 2002 and December 31, 2001,
the Company reported net goodwill of $42,979 and $121,371,
respectively. For the year ended December 31, 2001, the Company
reported goodwill amortization of $3,686, excluding discontinued
operations.
9. Irvine Land Lease:
------------------
In May 2003, the Company amended the lease for our 479-acre
Irvine, California nursery headquarters. Under the amendment, we agreed
to vacate 254 acres covered by the lease in 2006 in exchange for an
extension of the term of the lease on 170 acres that was set to expire
in September 2003 to December 2010 and the lease of an additional 63
acres contiguous to our existing facility from July 2003 to December
2010. Our landlord also agreed to assist with the costs of developing
the new acreage and transition costs of up to $4,000, which include
payments of $2,000 and percentage rent credits of up to $2,000. The
landlord also agreed to assist us with our objective of trying to
secure beyond 2010 an acceptable nursery property relatively near our
current location in Irvine, California.
10. New Accounting Pronouncements:
------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement No. 133 on Derivative Instruments and Hedging Activities"
("SFAS No. 149"). The statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. This statement amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities. This statement amends Statement 133 for
decisions made as part of the Derivatives Implementation Group process
that effectively required amendments to Statement 133, in connection
with other Board projects dealing with financial instruments and in
connection with implementation issues raised in relation to the
application of the definition of a derivative. Management does not
expect the adoption of SFAS No. 149 to have a material impact on its
financial condition, results of operations or cash flows.
In May 2003 the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("SFAS No. 150"). This statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. This statement
applies specifically to a number of financial instruments that
companies have historically presented within their financial statements
either as equity or between the liabilities section and the equity
section, rather than as liabilities. This statement is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Management does not expect the adoption
of SFAS No. 150 to have a material impact on its financial condition,
results of operations or cash flows.
Page 11
11. Segment Information and Guarantor/Non-guarantor Disclosures:
------------------------------------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (the
issuer) have been guaranteed by Hines Horticulture (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 Horticulture, 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 Horticulture and Hines Nurseries
is not presented. Separate financial statements of Hines Nurseries are
not presented and Hines Nurseries is not filing separate reports under
the Exchange Act because management believes that they would not be
material to investors.
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Unless the context otherwise requires, the term (1) "Hines
Horticulture" means Hines Horticulture, Inc., a Delaware corporation, (2) the
term "Hines Nurseries" means Hines Nurseries, Inc., a California corporation,
and a wholly owned subsidiary of Hines Horticulture and (3) the terms "we," "us"
and "our" mean, collectively, the combined entity of Hines Horticulture and its
wholly owned subsidiaries.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Except for historical information contained herein, this quarterly
report on Form 10-Q contains 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, as amended, which involve certain risks and uncertainties.
Forward-looking statements are included with respect to, among other things, the
company's current business plan and strategy and strategic operating plan. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. Our actual
results or outcomes may differ materially from those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Important factors that we believe might cause actual results to differ
from any results expressed or implied by these forward-looking statements are
discussed in the cautionary statements contained in Exhibit 99.1 to this Form
10-Q, which are incorporated herein by reference. In assessing forward-looking
statements contained herein, readers are urged to read carefully all cautionary
statements contained in this Form 10-Q. For these forward-looking statements, we
claim the protection of the safe harbor for forward-looking statements in
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.
OVERVIEW
We are a leading national supplier of ornamental shrubs, color plants
and container-grown plants with 13 commercial nursery facilities located in
Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South
Carolina and Texas. We produce approximately 5,500 varieties of ornamental
shrubs and color plants and we sell to more than 2,200 retail and commercial
customers, representing more than 8,400 outlets throughout the United States.
Hines Horticulture currently produces and distributes horticultural products
through its wholly-owned subsidiaries, Hines Nurseries and Enviro-Safe
Laboratories, Inc.
Page 13
DISCONTINUED OPERATIONS
On March 27, 2002, we sold Sun Gro, to a newly established Canadian
income fund. We received net proceeds of approximately $119.0 million from the
sale, the majority of which were used to pay down outstanding bank debt. As a
result of the sale of Sun Gro, we no longer harvest or produce peat moss or
other growing soil mixes. Our consolidated financial statements included in this
Form 10-Q for 2002 reflect the financial position, results of operations and
cash flows of Sun Gro as "discontinued operations."
UNITED STATES TAX MATTERS
As a result of our business activities, we qualify for a special
exception under the U.S. federal tax code that allows us 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. We derive significant tax benefits by being able to deduct the
cost of inventory as the cost is incurred. As a result of our ability to utilize
the cash method of accounting, we have historically generated net operating
losses for federal income tax purposes and have not been required to pay cash
income taxes. We estimate that at December 31, 2002, we had approximately $9.6
million in net operating loss carryforwards for federal income tax purposes,
pending the completion and filing of our 2002 income tax returns.
Based on our current projections, we anticipate that we will incur tax
liability and begin paying cash income taxes for federal purposes in 2006. We
are currently paying cash income taxes for state income tax purposes in certain
states due to the differing rules regarding the utilization of net operating
losses.
Although the use of the cash method of accounting for federal income
taxes defers the payment of federal income taxes, the deferral of such taxes
produces a current liability for accounting purposes. At June 30, 2003, we had a
current liability for deferred income taxes of $77.4 million. The liability is
deemed current for accounting purposes because the majority of the items to
which this liability relates are comprised of current assets and current
liabilities in our balance sheet (such as inventory, accounts receivable and
accounts payable). The classification of this liability as a current item,
however, does not mean that it is required to be paid within the next twelve
months.
CANADIAN TAX MATTERS
In connection with the sale of Sun Gro, the Canadian Customs & Revenue
Authority required that approximately $13.1 million Canadian 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. We believe the transaction
should be exempt from tax for Canadian purposes, but we were unable to
satisfactorily resolve the issue through discussions with the Canadian Customs &
Page 14
Revenue Authority within a reasonable time frame after the sale of Sun Gro.
Accordingly, on November 7, 2002, we filed a tax return, submitted a tax payment
of $8.2 million Canadian and submitted a claim for refund on the basis that the
transaction is exempt from tax for Canadian purposes. The balance of the escrow
funds of $4.9 million Canadian (US$3.1 million) was then remitted to us and was
recorded in the fourth quarter of 2002 as an adjustment to the loss on the sale
of Sun Gro. We are now waiting for the formal ruling from the Canadian Customs &
Revenue Authority on our claim for refund of $8.2 million Canadian (US $5.8
million as of July 22, 2003). We will continue to actively pursue this refund
through the appropriate administrative and/or judicial channels.
SEASONALITY
Our business is highly seasonal. The seasonal nature of our operations
results in a significant increase in our working capital between the growing and
selling cycles. As a result, operating activities in the first and fourth
quarters use significant amounts of cash, and in contrast, operating activities
in the second and third quarters generate substantial cash as we ship inventory
and collect accounts receivable. We have experienced, and expect to continue to
experience, significant variability in net sales, operating income and net
income on a quarterly basis.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2002
NET SALES. Net sales of $187.9 million for the three months ended June
30, 2003 increased $5.8 million, or 3.2%, from net sales of $182.1 million for
the comparable period in 2002. This increase was primarily due to two factors.
First, color bedding plant sales in the Northeast were strong because Easter
occurred in late April in 2003 versus late March last year, which resulted in
some sales shifting from the first quarter to the second quarter of 2003 and
because pent up consumer demand drove strong sales in June when the weather
finally improved. Second, improved sales of our patio-ready type products were
driven by increased market penetration in the Midwest and Northeast markets.
This increase was somewhat offset by sluggish sales of perennials stemming from
cold, wet weather that persisted late into spring in the Midwest and Northeast.
Sales were also down for color bedding plants in Colorado and the Southwest and
for shrubs in the Texas market, primarily due to overcapacity in the market. In
addition, given Kmart's uncertain financial situation, we reduced our sales to
the large retailer during the second quarter by approximately $1.0 million from
the second quarter of 2002.
GROSS PROFIT. Gross profit of $98.7 million for the three months ended
June 30, 2003 increased $2.8 million, or 2.9%, from gross profit of $95.9
million for the comparable period in 2002 due to higher sales as discussed
above. As a percentage of net sales, gross profit for the second quarter
remained relatively flat at 52.6% compared to 52.7% in 2002.
Page 15
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$50.1 million for the three months ended June 30, 2003 increased $3.3 million,
or 7.1%, from $46.8 million for the comparable period in 2002 mainly due to
higher sales and increased distribution costs. As a percentage of net sales,
selling and distribution expenses increased to 26.7% compared to 25.7% for the
comparable period in 2002. This increase was driven primarily by higher fuel
prices and escalating common carrier costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $6.2 million for the three months ended June 30, 2003 decreased $1.7
million, or 21.5%, from $7.9 million for the comparable period in 2002. This
decrease was mainly attributable to our efforts to control costs, consolidate
some of our operational activities and realign our fixed costs with anticipated
slower top-line annual revenue growth.
OTHER OPERATING LOSS (INCOME). Other operating loss of $0.2 million for
the three months ended June 30, 2003 represents severance costs associated with
the elimination of certain administrative positions and a loss on the write-off
of fixed assets.
OPERATING INCOME. Operating income of $42.2 million for the three
months ended June 30, 2003 increased by $1.0 million, or 2.4%, from the $41.2
million for the comparable period in 2002. This increase was due primarily to
the increase in net sales and the reduction in general and administrative
expenses discussed above.
OTHER EXPENSES. Other expenses of $7.3 million for the three months
ended June 30, 2003 decreased $2.4 million, or 24.7%, from $9.7 million for the
comparable period in 2002. The decrease was mainly attributable to the impact of
the fair value adjustment on our interest rate swap and lower interest expenses.
The financing costs for the second quarter included income of $0.3 million
relating to the fair value adjustment compared with a charge of $1.8 million in
2002. Interest expense for the quarter was $0.3 million lower than in 2002.
INCOME TAX PROVISION. Our effective income tax rate was 41% for each of
the three months ended June 30, 2003 and 2002.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$20.6 million for the three months ended June 30, 2003 increased by $2.0 million
from income of $18.6 million for the comparable period in 2002 due primarily to
the increase in operating income and the reduction in other expenses discussed
above.
SIX MONTH PERIOD ENDED JUNE 30, 2003 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 2002
NET SALES. Net sales of $246.4 million for the six months ended June
30, 2003 decreased by $4.5 million, or 1.8%, from net sales of $250.9 million
for the comparable period in 2002. This decrease was primarily due to the soft
retail environment and sluggish sales of shrubs, color bedding plants and
perennials in the Midwest and Northeast because of cold, wet weather that
persisted late into spring. Sales were also down for color bedding plants in
Colorado and the Southwest and for shrubs in the Texas market, primarily due to
Page 16
overcapacity in the market. In addition, given Kmart's uncertain financial
situation, we reduced our sales to the large retailer for the six-month period
by approximately $1.9 million compared to the same period in 2002. This decrease
was somewhat offset by improved sales of our patio-ready type products that were
driven by increased market penetration in the Midwest, and Northeast markets
during the second quarter of 2003 and by strong sales of color bedding plants in
the South during the first quarter of 2003 resulting from favorable weather and
newly established store service programs that generated increased volume in the
Atlanta and Memphis markets.
GROSS PROFIT. Gross profit of $129.4 million for the six months ended
June 30, 2003 decreased by $0.9 million, or 0.7%, from gross profit of $130.3
million for the comparable period in 2002. This decrease was due mainly to lower
sales but was somewhat offset by an improvement in the gross margin for the
period. As a percentage of sales, gross profit for the period increased to 52.5%
compared to 52.0% in 2002. This increase was primarily attributable to better
inventory management through our store service programs and certain changes in
product mix toward higher margin items.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$69.2 million for the six months ended June 30, 2003 increased by $1.7 million,
or 2.5%, from $67.5 million for the comparable period in 2002 due to higher
distribution costs. As a percentage of sales, selling and distribution expenses
increased to 28.1% compared to 26.9% in 2002. This increase was driven primarily
by higher fuel prices, escalating common carrier costs and the impact of lower
sales on the ratio of fixed distribution costs to sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $11.8 million for the six months ended June 30, 2003 decreased by
$1.6 million, or 11.9%, from $13.4 million for the comparable period in 2002.
This decrease was mainly attributable to our efforts to control costs,
consolidate many of our operational activities and realign our fixed costs with
anticipated slower top-line annual revenue growth.
OTHER OPERATING LOSS (INCOME). Other operating loss of $1.4 million for
the six months ended June 30, 2003 primarily represents severance costs
associated with both the resignation of our former Chief Executive Officer in
February of 2003 ($1.2 million) and the elimination of certain administrative
positions ($0.1 million). Other operating income of $2.1 million for the six
months ended June 30, 2002 mainly represents the net gain from the sale of our
property in Hillsboro, Oregon in the first quarter of 2002.
OPERATING INCOME. Operating income of $47.0 million for the six months
ended June 30, 2003 decreased by $4.5 million, or 8.7%, from $51.5 million for
the comparable period in 2002 due mainly to the decline in net sales, increased
selling and distribution expenses and the other operating loss discussed above.
Page 17
OTHER EXPENSES. Other expenses of $14.3 million for the six months
ended June 30, 2003 decreased by $3.9 million, or 21.4%, from $18.2 million for
the comparable period in 2002. This decrease was attributable to a $1.7 million
loss on the extinguishment of debt that was included in other expenses for the
six months ended June 30, 2002 and the impact of the fair value adjustment on
our interest rate swap and lower interest expense during the six months ended
June 30, 2003. The financing costs for the period included income of $0.6
million relating to the fair value adjustment compared with a charge of $0.8
million in 2002. Interest expense was $0.8 million lower in the six months ended
June 30, 2003 compared to the comparable prior year period.
INCOME TAX PROVISION. Our effective income tax rate was 41% for each of
the six months ended June 30, 2003 and 2002.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$19.3 million for the six months ended June 30, 2003 decreased by $0.3 million,
or 1.5%, from income of $19.6 million for the comparable period in 2002. This
modest decrease was due to the decrease in operating income and decrease in
other expenses discussed above.
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued
operations of $7.0 million for the six months ended June 30, 2002 included a
loss of $7.1 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.
There was no comparable loss during the six months ended June 30, 2003.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of change in accounting principle of $55.1 million for the six months
ended June 30, 2002 represents the goodwill impairment charge, net of tax,
resulting from our adoption of SFAS No. 142. We 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. The measurement of the fair value of the goodwill was based on
the market capitalization of our 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 our stock price and our
substantial leverage. There was no comparable charge during the six months ended
June 30, 2003.
NET INCOME. Net income increased to $19.3 million for the six months
ended June 30, 2003 compared to a net loss of $42.5 million for the comparable
period in 2002. This increase was primarily due to the occurrence during the six
months ended June 30, 2002 of the loss from discontinued operations and the
cumulative effect of change in accounting principle discussed above. There were
no comparable charges during the six months ended June 30, 2003 that impacted
net income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are funds generated by operations and
borrowings under our existing credit facility. The seasonal nature of our
operations results in a significant fluctuation 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 we ship inventory
and collect accounts receivable.
Page 18
Net cash provided by operating activities was $12.2 million for the six
months ended June 30, 2003 compared to $30.5 million for the comparable period
in 2002 mainly due to larger increases in working capital during the six months
ended June 30, 2003 compared to the prior year comparable period. The increase
in working capital was primarily related to higher levels of accounts receivable
and inventory during the six months ended June 30, 2003 compared to the prior
year comparable period. The increase in accounts receivable during the six
months ended June 30, 2003 stemmed primarily from increased sales during the
second quarter of 2003, while the increase in inventory during the six months
ended June 30, 2003 resulted from lower sales during the first six months of
2003. The increase in working capital was also affected by an increase in
prepaid expenses and a decrease in accounts payable and accrued liabilities
during the six months ended June 30, 2003 compared to the prior year comparable
period.
Net cash used in investing activities was $3.3 million for the six
months ended June 30, 2003 compared to net cash provided by investing activities
of $117.5 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, which
primarily included the proceeds received from the sale of Sun Gro and the sale
of the property in Oregon.
Our capital expenditures were $2.9 million for the six months ended
June 30, 2003 compared to capital expenditures of $3.3 million for the six
months ended June 30, 2002. The capital expenditures for the six months ended
June 30, 2003 primarily included the purchase of nursery related machinery and
equipment. We currently expect that our total capital expenditures for 2003 will
be approximately $7.0 million.
Net cash used in financing activities was $8.4 million for the six
months ended June 30, 2003 compared to $147.7 million for the comparable period
in 2002. The improvement was primarily related to the impact of certain events
during the first quarter of 2002, including the use of the proceeds from the
sale of Sun Gro and the sale of the Oregon property to pay down outstanding bank
debt and to pay financing costs of $4.2 million.
At June 30, 2003, our existing secured 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. Madison Dearborn Capital Partners, our
majority stockholder, has provided a guarantee for the $30.0 million seasonal
revolving loan commitment.
Page 19
We typically draw down under our revolving credit facilities in the
first and fourth quarters to fund our seasonal inventory buildup of products and
seasonal operating expenses. Approximately 75% of our sales occur in the first
half of the year, generally allowing us to reduce borrowings under our revolving
credit facilities in the second and third quarters. On July 30, 2003, we had
unused borrowing capacity of $60.1 million under our $115.0 million working
capital revolver facility. In addition, we had fully repaid our $30.0 million
seasonal revolving loan commitment.
Borrowings under our existing credit facility are collateralized by
substantially all our assets. The existing credit facility places various
restrictions on us, including, but not limited to, limitations on our ability to
incur additional debt, limitations on capital expenditures and limitations on
dividends we can pay to shareholders. Our existing credit facility requires us
to meet specific covenants and financial ratios.
The interest rate on the loans under the existing credit facility may
be, at our option, 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. 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 our 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 our 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 our
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 our 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 current terms of our existing credit facility, principal
repayments due for the term loans total $17.5 million in 2003 and $84.9 million
in 2004. The $30.0 million seasonal working capital facility expires on June 15,
2004 and the new term loan, the tranche B term loan and the $115.0 million
working capital revolver mature on December 31, 2004.
In addition, Hines Nurseries has outstanding $78.0 million of senior
subordinated notes due October of 2005. Hines Horticulture has fully and
unconditionally guaranteed the obligations of Hines Nurseries under the existing
senior subordinated notes and the notes are redeemable, in whole or in part, at
our option at a redemption price of 106.00% of the principal amount thereof plus
accrued interest, if any, to the date of redemption. The senior subordinated
notes contain an embedded derivative in the form of a put option whereby the
holder has the right to put the instrument back to us at 105.00% if a change in
control should occur. We do not anticipate that the derivative will have
significant value because no change of control is currently contemplated.
Page 20
The senior subordinated 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 Hines Nurseries and our other subsidiaries, including
their ability to incur additional indebtedness, to make certain restricted
payments (including dividends to Hines Horticulture), 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 senior
subordinated notes or other material indebtedness that results in the
acceleration of the indebtedness under the senior subordinated notes also
constitutes an event of default under our existing credit facility. In addition,
we are obligated to pay a premium at maturity equal to 5.00% of the principal
amount of the senior subordinated notes to be repaid. We are accreting this
premium over the term of the maturity of the senior subordinated notes as
additional interest expense. At June 30, 2003, the amount of the premium was
$2.2 million and, based on the $78.0 million of senior subordinated notes
outstanding, is expected to be $3.9 million upon maturity.
At June 30, 2003, we had total indebtedness outstanding of $247.8
million. Our net debt position (short-term and long-term debt less cash and cash
equivalents on hand) at June 30, 2003 was $247.3 million. A total of $17.5
million will become due under the existing credit facility during 2003.
We do not have any off balance sheet financing or any financial
arrangements with related parties, other than operating leases. The following
table discloses aggregate information about our contractual obligations and
commercial commitments as of June 30, 2003.
PAYMENTS DUE BY PERIOD
----------------------------------------------------
LESS THAN 1 (DOLLARS IN MILLIONS) AFTER
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------- ---------- ---------- ---------- ----------
Tranche B term loan................. $ 51.1 $ - $ 51.1 $ - $ -
New term loan....................... 51.3 19.0 32.3 - -
Senior subordinated notes........... 81.9 - 81.9 - -
Other obligations................... 0.1 0.1 - - -
Operating leases.................... 19.3 4.3 8.1 0.6 6.3
---------- ---------- ---------- ---------- ----------
Total............................... $ 203.7 $ 23.4 $ 173.4 $ 0.6 $ 6.3
========== ========== ========== ========== ==========
In our opinion, cash generated by operations and from borrowings
available under the existing credit facility will be sufficient to meet our
anticipated working capital, capital expenditures and debt service requirements
through 2003.
Our existing credit facility requires us to maintain compliance with
various financial covenants. Failure to comply with any of these covenants
during the remainder of 2003 would require us to seek waivers or an amendment to
the existing credit facility. In the past, we have been successful in obtaining
waivers and in negotiating amendments to our bank agreements, including an
amendment, effective March 2003. We were in compliance with these amended
financial covenants during the first two quarters of 2003 and, based on our 2003
operating plan, expect to remain in compliance with these amended financial
covenants as of the end of the third and fourth quarters of 2003. Our actual
results of operations will depend on numerous factors, many of which are beyond
our control, and as a result, we cannot ensure that the we will comply with the
Page 21
financial covenants during the remainder of 2003. If we fail to comply in the
future with the financial covenants in our existing credit facility, we believe
that, based on our prior experience with lenders, we may be able to obtain a
waiver of such non-compliance. In the event we should fail to comply with one of
the covenants and are unable to either obtain a waiver or successfully negotiate
an amendment to the existing credit facility, then we would be in default under
the existing credit facility.
A total of $84.9 million will become due under the existing credit
facility during 2004. At this time, we are in the process of exploring a variety
of alternatives for refinancing our indebtedness, including, but not limited to,
seeking to refinance our indebtedness, extending the maturity dates of our
existing credit facility, attempting to obtain additional capital and other
actions. As of the date of this filing, we have not entered into any agreements
regarding any of the foregoing and there can be no assurance that we will be
successful in refinancing our indebtedness or extending its maturity on
reasonable terms or otherwise.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires us 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. We believe that the following
areas represent our most critical accounting policies related to actual results
that may vary from those estimates.
REVENUE RECOGNITION.
We record 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. We record 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."
Page 22
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, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." 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, we must determine if the carrying amount of
equity exceeds the fair value based upon the quoted market price of our common
stock. If we determine that goodwill may be impaired, we compare 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. We recorded a non-cash charge of $55.1
million, net of tax, to reduce the carrying value of our goodwill. We have
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 our insurance programs for workers compensation and auto
liability. We have large deductibles for these lines of insurance, which means
we must pay the portion of each claim that falls below the deductible amount.
Our expected claims costs are based on an actuarial analysis that considers our
current payroll and automobile profile, recent claims history, insurance
industry loss development factors and the deductible amounts. We accrue our
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 our insurance programs for workers compensation and auto liability
are maintained at levels believed by our management to adequately reflect our
probable claims obligations.
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 us 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, results of operations or cash flows.
Page 23
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. We 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 a $713 tax benefit, to continuing 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, results of operations or cash flows.
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 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," 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 accounting 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 us as of
December 31, 2002 and the interim disclosure requirements will be effective
during the first quarter of fiscal year 2003. As permitted under both SFAS No.
123 and SFAS No. 148, we continue to follow the intrinsic value method of
accounting under Accounting Principles Board No. 25 "Accounting for Stock Issued
to Employees." We have included the disclosure requirements of SFAS No. 148 in
the notes to the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The
statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. This
statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This statement amends Statement 133 for
decisions made as part of the Derivatives Implementation Group process that
effectively required amendments to Statement 133, in connection with other Board
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative. Management does not expect the adoption of SFAS No. 149 to have a
material impact on its financial condition, results of operations or cash flows.
Page 24
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement applies specifically to a number of
financial instruments that companies have historically presented within their
financial statements either as equity or between the liabilities section and the
equity section, rather than as liabilities. This statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Management does not expect the adoption of SFAS No. 150 to have a
material impact on its financial condition, results of operations or cash flows.
EFFECTS OF INFLATION
Management believes our 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 our ongoing business, we are exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and Hines Horticulture's common stock price. We do not enter
into transactions designed to mitigate its market risks for trading or
speculative purposes.
We have various debt instruments outstanding at June 30, 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, we entered into an interest rate swap agreement to hedge
$75.0 million of our loan facility. The interest rate swap agreement effectively
changes our exposure on our 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. The interest rate swap agreement matures in
February 2005. The estimated fair value of our obligation under the interest
rate swap agreement was $7.6 million at June 30, 2003.
We also manage our interest rate risk by balancing the amount of our
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 June 30, 2003 the
carrying amount and estimated fair value of our long-term debt was $182.8
million and $186.7 million, respectively. Given our 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.
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ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended), our principal executive officer and our
principal financial officer have concluded that such controls and procedures
were effective as of the end of the period covered by this report. In connection
with such evaluation, no change in our internal control over financial reporting
occurred during the last fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on May 29, 2003 at which
meeting our stockholders elected six directors and ratified the appointment of
PricewaterhouseCoopers LLP as our independent public accountants for the 2003
fiscal year.
The following individuals were elected as directors and received the
number of votes indicated below:
Name of Nominee Votes For Against Abstentions
- --------------- ---------- ------- -----------
Douglas D. Allen 18,084,959 423,019 0
Stan R. Fallis 18,502,277 5,701 0
G. Ronald Morris 18,084,959 423,019 0
Thomas R. Reusche 18,084,959 423,019 0
James R. Tennant 18,084,959 423,019 0
Paul R. Wood 18,084,959 423,019 0
For the ratification of PricewaterhouseCoopers LLP as our independent
public accountants, 17,887,131 votes were cast in favor, 619,222 votes were cast
against and there were 1,625 abstentions.
ITEM 5. OTHER INFORMATION
In May 2003, we amended the lease for our 479-acre Irvine, California
nursery headquarters. Under the amendment, we agreed to vacate 254 acres covered
by the lease in 2006 in exchange for an extension of the term of the lease on
170 acres that was set to expire in September 2003 to December 2010 and the
lease of an additional 63 acres contiguous to our existing facility from July
2003 to December 2010. Our landlord also agreed to assist with the costs of
developing the new acreage and transition costs of up to $4.0 million, which
include payments of $2.0 million and percentage rent credits of up to $2.0
million. The landlord also agreed to assist us with our objective of trying to
secure beyond 2010 an acceptable nursery property relatively near our current
location in Irvine, California.
In April 2003, we entered into an option agreement to sell our 168-acre
nursery property in Vacaville, California. We entered into the option agreement
because the nursery property is located in an area which the city of Vacaville
is planning to develop as a residential project. Under the agreement, we granted
the buyer an option to purchase the nursery property in April 2005. The buyer
can maintain the option by making payments totaling $751,000 during the option
term. The option exercise price is $15.1 million. If the buyer exercises the
option, we will be allowed to transition off of the property in three phases
from 2005 to 2007. We plan on developing replacement acreage and infrastructure
at our 842-acre Winters South facility in Northern California.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Operating Officer Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant
To Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit32.1 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 32.2 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.*
Exhibit 99.1 Cautionary Statements
* Pursuant to Commission Release No. 33-8238, 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 Securities Exchange Act of
1934, as amended, or otherwise subject to the liability of Section 18 of the
Securities Exchange Act of 1934, as amended, 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 Securities Exchange Act of 1934, as amended, except
to the extent that the registrant specifically incorporates it by reference.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter
ended June 30, 2003.
1. Current report on Form 8-K dated April 1, 2003 (the
date of the earliest event reported), filed on April
3, 2003, for the purpose of reporting operating
results from continuing operations for the fourth
quarter and fiscal year ended December 31, 2002 and
other information.
2. Current report on Form 8-K dated May 5, 2003 (the
date of the earliest event reported), filed on May 8,
2003, for the purpose of reporting results of
operations and financial condition for the fiscal
quarter ended March 31, 2003.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HINES HORTICULTURE, INC.
(REGISTRANT)
By: /s/ Claudia M. Pieropan
--------------------------
Claudia M. Pieropan
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
Date: August 6, 2003
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