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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 October 29, 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.
--------
Condensed Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months And Nine Months Ended September 30, 2003 and
2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 36
Signature 39
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are
not applicable.
Page 2
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
(Dollars in thousands, except share data)
(Unaudited)
ASSETS September December
- ------ 30, 2003 31, 2002
---------- ----------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $443 and $1,997 34,784 25,838
Inventories 162,580 169,981
Prepaid expenses and other current assets 8,969 6,672
---------- ----------
Total current assets 206,333 202,491
---------- ----------
FIXED ASSETS, net of accumulated depreciation
of $45,107 and $38,102 137,236 140,239
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $0 and $10,958 11,032 7,137
DEFFERRED INCOME TAXES 16,020 12,966
GOODWILL 42,979 42,979
---------- ----------
$ 413,600 $ 405,812
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,432 $ 12,321
Accrued liabilities 11,629 10,911
Accrued payroll and benefits 9,366 6,845
Accrued interest 395 6,034
Long-term debt, current portion 3,900 17,585
Borrowings on revolving credit facility 27,398 72,750
Deferred income taxes 71,808 63,994
---------- ----------
Total current liabilities 137,928 190,440
---------- ----------
LONG-TERM DEBT 211,198 164,829
INTEREST RATE SWAP AGREEMENT 6,534 8,741
OTHER LIABILITIES 1,128 --
---------- ----------
Total liabilities 356,788 364,010
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock
Authorized - 60,000,000 shares, $.01 par
value; issued and outstanding - 22,072,549
shares at September 30, 2003 and December
31, 2002 221 221
Additional paid-in capital 128,782 128,781
Deficit (72,191) (85,985)
Accumulated other comprehensive loss -- (1,215)
---------- ----------
Total shareholders' equity 56,812 41,802
---------- ----------
$ 413,600 $ 405,812
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Restated)
Sales, net $ 51,302 $ 45,049 $ 297,693 $ 295,918
Cost of goods sold 27,449 23,700 144,458 144,237
------------- ------------- ------------- -------------
Gross profit 23,853 21,349 153,235 151,681
------------- ------------- ------------- -------------
Selling and distribution expenses 18,782 18,492 87,938 85,993
General and administrative expenses 5,753 5,992 17,550 19,424
Other operating expenses (income) 203 (18) 1,635 (2,121)
------------- ------------- ------------- -------------
Total operating expenses 24,738 24,466 107,123 103,296
------------- ------------- ------------- -------------
Operating (loss) income (885) (3,117) 46,112 48,385
Other expenses
Interest 5,730 5,770 18,466 19,232
Loss on debt extinguishment 9,235 -- 9,235 1,739
Interest rate swap agreement (income) expense (852) 2,043 (1,496) 2,806
Amortization of deferred financing expenses 1,140 1,047 3,328 3,332
------------- ------------- ------------- -------------
15,253 8,860 29,533 27,109
------------- ------------- ------------- -------------
(Loss) income before income taxes and
discontinued operations (16,138) (11,977) 16,579 21,276
Income tax (benefit) expense (6,645) (4,910) 6,798 8,727
------------- ------------- ------------- -------------
(Loss) income from continuing operations (9,493) (7,067) 9,781 12,549
Income (loss) from discontinued operations, net
of tax (benefit) expense of $(2,879) and $13,081 4,013 -- 4,013 (6,978)
Cumulative effect of change in accounting
principle, net of tax benefit of $23,609 -- -- -- (55,148)
------------- ------------- ------------- -------------
Net (loss) income $ (5,480) $ (7,067) $ 13,794 $ (49,577)
============= ============= ============= =============
Basic and diluted earnings per share:
(Loss) income per common share from
continuing operations $ (0.43) $ (0.32) $ 0.44 $ 0.56
Income (loss) per common share from
discontinued operations $ 0.18 $ -- $ 0.18 $ (0.32)
Cumulative effect of change in accounting
principle $ -- $ -- $ -- $ (2.49)
------------- ------------- ------------- -------------
Net (loss) income per common share $ (0.25) $ (0.32) $ 0.62 $ (2.25)
============= ============= ============= =============
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 22,072,549 22,072,549 22,108,668
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002
(Dollars in thousands, except share data)
(Unaudited)
2003 2002
---------- ----------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 13,794 $ (49,577)
(Income) loss from discontinued operations (4,013) 6,978
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of change in accounting principle -- 55,148
Depreciation 7,005 6,515
Amortization of deferred financing expenses 3,328 3,332
Interest rate swap agreement (income) expense (1,496) 2,806
Loss (gain) on sale of assets 73 (2,121)
Loss on debt extinguishment 9,235 1,739
Deferred income taxes 6,798 8,329
---------- ----------
34,724 33,149
Change in working capital accounts:
Accounts receivable (9,270) (5,651)
Inventories 7,379 6,886
Prepaid expenses and other current assets (839) 1,029
Accounts payable and accrued liabilities (1,952) 5,393
---------- ----------
Change in working capital accounts (4,682) 7,657
---------- ----------
Net cash provided by operating activities 30,042 40,806
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (4,173) (4,533)
Net cash used by discontinued operations -- (4,320)
(Payments for) proceeds from sale of discontinued operations (500) 119,262
Proceeds from sale of fixed asset -- 3,143
Leasehold incentive proceeds 1,150 --
Acquisitions, adjusted -- (1,426)
---------- ----------
Net cash (used in) provided by investing activities (3,523) 112,126
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on revolving line of credit (45,352) (40,750)
Proceeds from the issuance of long-term debt 215,000 --
Repayments of long-term debt (180,533) (107,982)
Deferred financing expenses incurred (10,101) (4,200)
Penalty on early payment of Senior Subordinated Notes (5,533) --
---------- ----------
Net cash used in financing activities (26,519) (152,932)
---------- ----------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
---------- ----------
CASH, end of period $ -- $ --
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,073 $ 19,819
Cash paid for income taxes $ 380 $ 857
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
HINES HORTICULTURE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Description of Business:
------------------------
Hines Horticulture, Inc. ("Hines" or the "Company"), a
Delaware corporation, 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.
In March 2002, the Company completed the sale of Sun Gro
Horticulture, which it refers to as Sun Gro, which was the Company's
peat moss and growing soil mix business. The Company utilized the net
proceeds from the sale of Sun Gro primarily to reduce outstanding
indebtedness. As a result of the sale of Sun Gro, the Company no longer
harvests or produces peat moss or other soil mixes. 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) and
a $4,013 gain, net of tax, for the nine months ended September 30,
2003. The gains in the fourth quarter of 2002 related to the Company's
receipt of $4,917 Canadian from an escrow account that the Canadian
Customs & Revenue Authority ("CCRA") required to be set up at the time
of the Sun Gro sale to withhold $13,136 Canadian pending the
determination of whether certain aspects of the sale were taxable for
Canadian purposes. The gain in the nine months ended September 30, 2003
related to the tax refund of the remaining $8,219 Canadian plus accrued
interest that the Company received from the CCRA on October 2, 2003.
The Company's current operations consist solely of its nursery
operations.
The Condensed Consolidated Financial Statements include the
accounts of Hines and its wholly owned subsidiaries after elimination
of intercompany accounts and transactions.
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
Page 6
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, 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 three and nine months
ended September 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 three and nine months ended September 30, 2003,
shares related to the underlying employee stock options in the amount
of 996,881 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.
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
September 30, 2002 of $1,026, net of a $713 tax benefit, to continuing
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, 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 accounting
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 Nine months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- -----------
Net (loss) income, as reported $ (5,480) $ (7,067) $ 13,794 $ (49,577)
Stock option expense (7) (259) (23) (860)
--------- --------- --------- -----------
Pro forma net (loss) income $ (5,487) $ (7,326) $ 13,771 $ (50,437)
========= ========= ========= ===========
Net (loss) income per share:
Basic - as reported $ (0.25) $ (0.32) $ 0.62 $ (2.25)
========= ========= ========= ===========
Basic - pro forma $ (0.25) $ (0.33) $ 0.62 $ (2.29)
========= ========= ========= ===========
Diluted - as reported $ (0.25) $ (0.32) $ 0.62 $ (2.25)
========= ========= ========= ===========
Diluted - pro forma $ (0.25) $ (0.33) $ 0.62 $ (2.28)
========= ========= ========= ===========
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 SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), for decisions made as part of the Derivatives Implementation
Page 8
Group process that effectively required amendments to SFAS No. 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. The adoption of SFAS No.
149 on July 1, 2003 did not have an impact on our financial position,
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. The adoption of SFAS No. 150 on July 1,
2003 did not have an impact on our financial position, results of
operations or cash flows.
5. Inventories:
------------
Inventories consisted of the following:
September 30, December 31,
2003 2002
------------ ------------
Nursery Stock $ 152,277 $ 161,007
Material and supplies 10,303 8,974
------------ ------------
$ 162,580 $ 169,981
============ ============
6. Long-Term Debt:
---------------
On September 30, 2003, the Company called for redemption its
$78,000 in aggregate principal amount of the 12.75% Senior Subordinated
Notes at a redemption price of 106% of the aggregate principal amount
thereof ($82,680 at September 30, 2003), plus accrued and unpaid
interest thereon through the date of redemption. In addition, the
Company refinanced all debt outstanding under the previous Credit
Facility. Payment of the redemption premium on the 12.75% Senior
Subordinated Notes, the write-off of the unamortized deferred financing
expenses and the write-off of the remaining other comprehensive income
related to the FAS 133 adoption resulted in a loss on debt retirement
of $9,235, in the quarter ended September 30, 2003.
SENIOR CREDIT FACILITY. The Company entered into the amended and
restated Senior Credit Facility on September 30, 2003. Hines Nurseries
and its domestic operating subsidiaries are borrowers under the Senior
Page 9
Credit Facility. The Senior Credit Facility consists of (i) a revolving
facility with availability of up to $145,000 (subject to borrowing base
limits) and (ii) a term loan facility of up to $40,000. The revolving
facility also permits the ability to obtain letters of credit up to a
sub-limit. The term loan facility was drawn down in full in connection
with the refinancing. The Senior Credit Facility matures on September
30, 2008.
GUARANTEES; COLLATERAL. Obligations under the Senior Credit
Facility are guaranteed by Hines and any of its domestic subsidiaries
that are not borrowers under the Senior Credit Facility. Borrowings
under the Senior Credit Facility are collateralized by substantially
all of the Company's assets.
RESTRICTIONS; COVENANTS. The Senior Credit Facility places
various restrictions on Hines Nurseries and its subsidiaries,
including, but not limited to, limitations on the Company's ability to
incur additional debt, pay dividends or make distributions, sell assets
or make investments. The Senior Credit Facility requires Hines
Nurseries and its subsidiaries to meet specific covenants and financial
ratios, including a minimum fixed charge coverage test, a maximum
leverage test and a maximum capital expenditure test. The new Senior
Credit Facility contains customary representations and warranties and
customary events of default and other covenants. As of September 30,
2003, the Company was in compliance with all covenants.
INTEREST RATE; FEES. The interest rate on the loans under the
Senior Credit Facility may be, at the Company's option, Prime rate
loans or LIBOR rate loans. Prime rate loans under the revolving loan
facility bear interest at the Prime lending rate plus an additional
amount that ranges from 0.75% to 1.75%, depending on its consolidated
leverage ratio. Prime rate loans under the term loan bear interest at
the Prime lending rate plus an additional amount that ranges from 1.25%
to 2.25%, depending on its consolidated leverage ratio. Currently, the
applicable margin for Prime rate loans is (i) 1.75% for the new
revolving loan facility and (ii) 2.25% for the new term loan. LIBOR
rate loans under the revolving loan facility bear interest at the LIBOR
rate plus an additional amount that ranges from 1.75% to 2.75%,
depending on its consolidated leverage ratio. LIBOR rate loans under
the new term loan bear interest at the LIBOR rate plus an additional
amount that ranges from 2.25% to 3.25%, depending on its consolidated
leverage ratio. Currently, the applicable margin for LIBOR rate loans
is (i) 2.75% for the new revolving loan facility and (ii) 3.25% for the
new term loan. In addition to paying interest on outstanding principal,
the Company is required to pay a commitment fee on the daily average
unused portion of the revolving facility which will accrue from the
closing date based on the utilization of the revolving facility.
BORROWING BASE. Availability of borrowings under the revolving
facility are subject to a borrowing base consisting of the sum of (i)
85% of eligible accounts receivable plus (ii) the lesser of (x) up to
55% of eligible inventory or (y) 85% of the appraised net orderly
liquidation value of eligible inventory. The Company must deliver
borrowing base certificates and reports at least monthly. The borrowing
Page 10
base also may be subject to certain other adjustments and reserves to
be determined by the agent. Eligible accounts receivable of both The
Home Depot, the Company's largest customer, and Lowe's Companies, Inc.,
its second largest customer, may not exceed 30% of total eligible
accounts receivable at any time.
REPAYMENT. Under the terms of the Senior Credit Facility, no
principal payments are due for the term loan in 2003. Amortization
payments of $1,905 on the term loan will be required at the end of each
of its second, third and fourth fiscal quarters beginning with June 30,
2004, with the full remaining balance payable on the last installment
date. Subject to certain exceptions, 100% of the net cash proceeds it
receives from certain asset dispositions and issuances of debt, 50% of
the net cash proceeds the Company receives from issuances of equity and
25% of excess cash flow (beginning in 2004) are required to be applied
to repay the term loan facility and are to be applied on a pro rata
basis to all remaining scheduled installments of the term loan
facility. The Senior Credit Facility may also be voluntarily prepaid at
any time without premium or penalty.
SENIOR NOTES. On September 30, 2003, Hines Nurseries issued $175,000 of
Senior Notes that mature on October 1, 2011. The Senior Notes bear
interest at the rate of 10.25% per annum and will be payable
semi-annually in arrears on each April 1 and October 1, commencing
April 1, 2004.
GUARANTEES. Hines Horticulture and each of its domestic
subsidiaries, subject to certain exceptions, has, jointly and
severally, fully and unconditionally guaranteed, on a senior unsecured
basis, the obligations of Hines Nurseries under the Senior Notes.
REDEMPTION. Prior to October 1, 2006, up to 35% of the
aggregate principal amount of the Senior Notes may be redeemed with the
net cash proceeds from one or more public equity offerings, at the
Company's option, at a redemption price of 110.250% of the principal
amount thereof plus accrued interest, if any, to the date of
redemption. On or after October 1, 2007, the Company is entitled, at
its option, to redeem all or a portion of the Senior Notes at
redemption prices ranging from 100.000% to 105.125%, depending on the
redemption date plus accrued and unpaid interest.
RESTRICTIONS. The indenture pursuant to which the Senior Notes
were issued imposes a number of restrictions on Hines Nurseries and its
other subsidiaries. Subject to certain exceptions, the Company may not
incur additional indebtedness, make certain restricted payments, make
certain asset dispositions, incur additional liens or enter into
significant transactions. A breach of a material term of the indenture
or other material indebtedness that results in acceleration of the
indebtedness under the Senior Notes also constitutes an event of
default under its Senior Credit Facility.
Page 11
REPURCHASE ON A CHANGE OF CONTROL. The Senior Notes contain a
put option whereby the holders have the right to put the Senior Notes
back to Hines at 101.000% of the principal amount thereof on the date
of purchase plus accrued and unpaid interest if a change of control
occurs.
September 30, December 31,
2003 2002
--------- ---------
New term debt at the bank's reference
rate (4.00% at September 30, 2003)
plus 2.25% or the LIBOR rate plus 3.25%
Principal payments, beginning June 30,
2004, due each quarter ending June 30,
September 30 and December 31 in the
amount of $1,905 with the outstanding
balance of $15,238 due on September 30,
2008 $ 40,000 $ --
Senior Notes, interest at 10.25% payable
semi-annually on each April 1 and October
1, maturing on October 1, 2011 175,000 --
Tranche B term debt, interest at the bank's
reference rate (4.25% at December 31,
2002) plus 3.00% or the Eurodollar rate
plus 4.00% -- 51,100
Term debt interest at the bank's reference
rate (4.25% at December 31, 2002) plus
3.00% or the Eurodollar rate plus 4.00% -- 51,370
Senior Subordinated Notes, Series B,
interest at 12.75% -- 79,782
Other obligations due at various dates
through 2004 98 162
--------- ---------
215,098 182,414
Less current portion 3,900 17,585
--------- ---------
Total long-term debt $211,198 $164,829
========= =========
7. Interest Rate Swap Agreement:
-----------------------------
In May 2000, the Company entered into an interest rate swap
agreement to hedge $75,000 of debt. 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.
Despite the debt refinancing, the interest rate swap agreement remains
outstanding and matures in February 2005. The estimated fair value of
the Company's obligation under the interest rate swap agreement was
$6,534 at September 30, 2003.
Effective January 1, 2001, the Company adopted the provisions
of SFAS No. 133, as amended. Adopting the provisions of SFAS No. 133 on
January 1, 2001 resulted in a cumulative after-tax charge to
accumulated other comprehensive income as of January 1, 2001 of $2,334,
representing the fair value of the interest rate swap agreement, net of
Page 12
tax. This amount was being amortized as interest rate swap agreement
expense over the term of the debt. At December 31, 2002, accumulated
other comprehensive loss had a balance of $(1,215). For the nine months
ended September 30, 2003, $420 was amortized and the balance of $795
was written off as a loss on debt extinguishment due to the
refinancing. For the nine months ended September 30, 2003, the Company
recognized $1,496 of interest rate swap agreement income in the
condensed consolidated statements of operations. This was comprised of
$2,207 gain related to the change in the fair value of the interest
rate swap agreement, offset by $711 of pre-tax amortization of other
comprehensive income.
8. 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
(loss) income during the three and nine months ended September 30, 2003
and 2002, were as follows:
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(Restated)
Net (loss) income $ (5,480) $ (7,067) $ 13,794 $(49,577)
Amortization of interest rate swap agreement,
net of tax of $97, $97, $291 and $291 140 140 420 420
Loss on debt extinguishment, net of tax
of $552, $0, $552 and $0 795 -- 795 --
--------- --------- --------- ---------
Comprehensive (loss) income $ (4,545) $ (6,927) $ 15,009 $(49,157)
========= ========= ========= =========
9. 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
Page 13
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.
10. Irvine Land Lease:
------------------
In May 2003, the Company amended the lease for its 479-acre
Irvine, California nursery headquarters. Under the amendment, the
Company 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 beginning in September 2003 to December 2010 and the
lease of an additional 63 acres contiguous to its existing facility
from July 2003 to December 2010. The 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 with the Company's
objective of trying to secure beyond 2010 an acceptable nursery
property relatively near its current location in Irvine, California,
although the Company cannot be sure that it will be able to accomplish
this objective.
11. New Accounting Pronouncements:
------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51" ("FIN46"). FIN 46 requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved.
Variable interest entities that effectively disperse risk will not be
consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously
dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after December 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before
Page 14
February 1, 2003. The adoption of FIN 46 is not expected to have a
material effect on the Company's financial statements.
12. Guarantor/Non-guarantor Disclosures:
------------------------------------
The 10.25% Senior Notes issued by Hines Nurseries (the
"issuer") have been guaranteed by Hines Horticulture (the "parent
guarantor") and by both Hines SGUS, Inc. ("Hines SGUS) and Enviro-Safe
Laboratories, Inc. ("Enviro-Safe") (collectively Hines SGUS and
Enviro-Safe are the "subsidiary guarantors"). The issuer and the
subsidiary guarantors are wholly owned subsidiaries of the parent
guarantor and the parent and subsidiary guarantors are full,
unconditional and joint and several. Separate financial statements of
Hines Nurseries, Hines SGUS and Enviro-Safe are not presented, nor are
separate reports under the Exchange Act filed because management
believes that they would not be material to investors.
The following condensed consolidating information shows (a)
Hines Horticulture on a parent company basis only as the parent
guarantor (carrying its investment in its subsidiary under the equity
method), (b) Hines Nurseries as the issuer (carrying its investments in
its subsidiaries under the equity method) (Enviro-Safe has been
consolidated with Hines Nurseries because it was deemed immaterial to
investors. At September 30, 2003 and December 31, 2002, Enviro-Safe had
total assets of $800 and $458, respectively. For the nine months ended
September 30, 2003 and 2002, revenues were $1,181 and $1,483,
respectively). (d) Hines SGUS as a subsidiary guarantor, (e)
eliminations necessary to arrive at the information for the parent
guarantor and its direct and indirect subsidiaries on a consolidated
bases and (f) the parent guarantor on a consolidated basis as follows:
o Condensed consolidating balance sheets as of September 30, 2003 and
December 31, 2002;
o Condensed consolidating statements of operations for the three and nine
months ended September 30, 2003 and 2002; and
o Condensed consolidating statements of cash flows for the three and nine
months ended September 30, 2003 and 2002.
Page 15
GUARANTOR / NON-GUARANTOR DISCLOSURES
Consolidating Balance Sheet
As of September 30, 2003
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 34,784 -- -- 34,784
Inventories -- 162,580 -- -- 162,580
Prepaid expenses and other current assets -- 8,969 -- -- 8,969
--------------------------------------------------------------
Total current assets -- 206,333 -- -- 206,333
--------------------------------------------------------------
Fixed assets, net -- 137,236 -- -- 137,236
Deferred financing expenses, net -- 11,032 -- -- 11,032
Goodwill, net -- 42,979 -- -- 42,979
Deferred income taxes 2,922 13,098 -- -- 16,020
Investments in subsidiaries 61,722 -- -- (61,722) --
--------------------------------------------------------------
$ 64,644 $ 410,678 $ -- $ (61,722) $ 413,600
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 13,432 $ -- $ -- $ 13,432
Accrued liabilities -- 11,629 -- -- 11,629
Accrued payroll and benefits -- 9,366 -- -- 9,366
Accrued interest -- 395 -- -- 395
Long-term debt, current portion -- 3,900 -- -- 3,900
Borrowings on revolving credit facility -- 27,398 -- -- 27,398
Liabilities of discontinued operations -- -- -- -- --
Deferred income taxes -- 71,808 -- -- 71,808
Intercompany accounts 7,832 (7,832) -- -- --
--------------------------------------------------------------
Total current liabilities 7,832 130,096 -- -- 137,928
--------------------------------------------------------------
Long-term debt -- 211,198 -- -- 211,198
Derivative liability -- 6,534 -- -- 6,534
Accrued long-term liability, net -- 1,128 -- -- 1,128
Shareholders' equity
Common stock 221 17,971 -- (17,971) 221
Additional paid in capital 128,782 21,362 -- (21,362) 128,782
Retained earnings (deficit) (72,191) 22,389 -- (22,389) (72,191)
Accumulated other comprehensive loss -- -- -- -- --
--------------------------------------------------------------
Total shareholders' equity 56,812 61,722 -- (61,722) 56,812
--------------------------------------------------------------
$ 64,644 $ 410,678 $ -- $ (61,722) $ 413,600
==============================================================
Page 16
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Balance Sheet
As of December 31, 2002
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 25,838 -- -- 25,838
Inventories -- 169,981 -- -- 169,981
Prepaid expenses and other current assets -- 6,672 5,144 (5,144) 6,672
--------------------------------------------------------------
Total current assets -- 202,491 5,144 (5,144) 202,491
--------------------------------------------------------------
Fixed assets, net -- 140,239 -- -- 140,239
Deferred financing expenses, net -- 7,137 -- -- 7,137
Goodwill, net -- 42,979 -- -- 42,979
Deferred income taxes 2,921 10,045 -- -- 12,966
Investments in subsidiaries 46,713 -- -- (46,713) --
--------------------------------------------------------------
$ 49,634 $ 402,891 $ 5,144 $ (51,857) $ 405,812
==============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 12,321 $ -- $ -- $ 12,321
Accrued liabilities -- 10,911 -- -- 10,911
Accrued payroll and benefits -- 6,845 -- -- 6,845
Accrued interest -- 6,034 -- -- 6,034
Long-term debt, current portion -- 17,585 -- -- 17,585
Borrowings on revolving credit facility -- 72,750 -- -- 72,750
Liabilities of discontinued operations -- -- 5,144 (5,144) --
Deferred income taxes -- 63,994 -- -- 63,994
Intercompany accounts 7,832 (7,832) -- -- --
--------------------------------------------------------------
Total current liabilities 7,832 182,608 5,144 (5,144) 190,440
--------------------------------------------------------------
Long-term debt -- 164,829 -- -- 164,829
Derivative liability -- 8,741 -- -- 8,741
Accrued long-term liability, net -- -- -- -- --
Shareholders' equity
Common stock 221 17,971 -- (17,971) 221
Additional paid in capital 128,781 21,362 -- (21,362) 128,781
Retained earnings (deficit) (85,985) 8,595 -- (8,595) (85,985)
Accumulated other comprehensive loss (1,215) (1,215) -- 1,215 (1,215)
--------------------------------------------------------------
Total shareholders' equity 41,802 46,713 -- (46,713) 41,802
--------------------------------------------------------------
$ 49,634 $ 402,891 $ 5,144 $ (51,857) $ 405,812
==============================================================
Page 17
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the nine month period ended September 30, 2003
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
Sales, net $ -- $ 297,693 $ -- $ -- $ 297,693
Cost of goods sold -- 144,458 -- -- 144,458
--------------------------------------------------------------
Gross Profit -- 153,235 -- -153,235
Operating expenses -- 107,123 -- -- 107,123
--------------------------------------------------------------
Operating income -- 46,112 -- -- 46,112
--------------------------------------------------------------
Other expenses:
Interest -- 18,466 -- -- 18,466
Loss on debt extinguishment -- 9,235 -- -- 9,235
Amortization of deferred financing expenses, other (13,794) (2,181) -- 17,807 1,832
--------------------------------------------------------------
(13,794) 25,520 -- 17,807 29,533
--------------------------------------------------------------
Income (loss) before provision for income taxes 13,794 20,592 -- (17,807) 16,579
Income tax provision -- 6,798 -- -- 6,798
--------------------------------------------------------------
Net income from continuing operations 13,794 13,794 -- (17,807) 9,781
Income from discontinued operations -- -- 4,013 -- 4,013
--------------------------------------------------------------
Net income (loss) $ 13,794 $ 13,794 $ 4,013 $ (17,807) $ 13,794
==============================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three month period ended September 30, 2003
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
Sales, net $ -- $ 51,302 $ -- $ -- $ 51,302
Cost of goods sold -- 27,449 -- -- 27,449
--------------------------------------------------------------
Gross Profit -- 23,853 -- -- 23,853
Operating expenses -- 24,738 -- -- 24,738
--------------------------------------------------------------
Operating loss -- (885) -- -- (885)
--------------------------------------------------------------
Other expenses:
Interest -- 5,730 -- -- 5,730
Loss on debt extinguishment -- 9,235 -- -- 9,235
Amortization of deferred financing expenses, other 5,480 (3,725) -- (1,467) 288
--------------------------------------------------------------
5,480 11,240 -- (1,467) 15,253
--------------------------------------------------------------
(Loss) income before provision for income taxes (5,480) (12,125) -- 1,467 (16,138)
Income tax benefit -- (6,645) -- -- (6,645)
--------------------------------------------------------------
Net (loss) income from continuing operations (5,480) (5,480) -- 1,467 (9,493)
Income from discontinued operations -- -- 4,013 -- 4,013
--------------------------------------------------------------
Net (loss) income $ (5,480) $ (5,480) $ 4,013 $ 1,467 $ (5,480)
==============================================================
Page 18
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the nine month period ended September 30, 2002
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
(Restated) (Restated) (Restated) (Restated) (Restated)
Sales, net $ -- $ 295,918 $ 31,150 $ (1,583) $ 325,485
Cost of goods sold -- 144,237 16,929 (1,583) 159,583
--------------------------------------------------------------
Gross Profit -- 151,681 14,221 -- 165,902
Operating expenses (income) 6,259 112,623 (8,718) -- 110,164
--------------------------------------------------------------
Operating (loss) income (6,259) 39,058 22,939 -- 55,738
--------------------------------------------------------------
Other expenses:
Interest -- 19,954 528 -- 20,482
Interest - intercompany -- (722) 722 -- --
Loss on debt extinguishment -- 1,739 -- -- 1,739
Amortization of deferred financing expenses, other 45,987 3,671 -- (43,520) 6,138
--------------------------------------------------------------
45,987 24,642 1,250 (43,520) 28,359
--------------------------------------------------------------
Income (loss) before provision for income taxes (52,246) 14,416 21,689 43,520 27,379
Income tax (benefit) provision (2,669) 5,005 19,472 -- 21,808
--------------------------------------------------------------
Net (loss) income before change in accounting principle (49,577) 9,411 2,217 43,520 5,571
Cumulative effect of change in accounting
principle, net of tax -- (55,148) -- -- (55,148)
--------------------------------------------------------------
Net (loss) income $ (49,577) $ (45,737) $ 2,217 $ 43,520 $ (49,577)
==============================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three month period ended September 30, 2002
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
Sales, net $ -- $ 45,049 $ -- $ -- $ 45,049
Cost of goods sold -- 23,700 -- -- 23,700
--------------------------------------------------------------
Gross Profit -- 21,349 -- -- 21,349
Operating expenses -- 24,466 -- -- 24,466
--------------------------------------------------------------
Operating loss -- (3,117) -- -- (3,117)
--------------------------------------------------------------
Other expenses:
Interest -- 5,770 -- -- 5,770
Interest - intercompany -- -- -- -- --
Amortization of deferred financing expenses, other 7,067 3,090 -- (7,067) 3,090
--------------------------------------------------------------
7,067 8,860 -- (7,067) 8,860
--------------------------------------------------------------
(Loss) income before provision for income taxes (7,067) (11,977) -- 7,067 (11,977)
Income tax benefit -- (4,910) -- -- (4,910)
--------------------------------------------------------------
Net (loss) income $ (7,067) $ (7,067) $ -- $ 7,067 $ (7,067)
==============================================================
Page 19
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2003
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
Cash provided by (used in) operating activities $ -- $ 30,042 $ -- $ -- $ 30,042
--------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets -- (4,173) -- -- (4,173)
Payments for sale of discontinued operations -- (500) -- -- (500)
Leasehold incentive proceeds -- 1,150 -- -- 1,150
--------------------------------------------------------------
Net cash used in provided by investing activities -- (3,523) -- -- (3,523)
--------------------------------------------------------------
Cash flows from financing activities:
Net repayments on revolving line of credit -- (45,352) -- -- (45,352)
Proceeds from the issuance of long-term debt -- 215,000 -- -- 215,000
Repayments of long-term debt -- (180,533) -- -- (180,533)
Deferred financing expenses incurred -- (10,101) -- -- (10,101)
Penalty on early payment of Senior Subordinated Notes -- (5,533) -- -- (5,533)
--------------------------------------------------------------
Net cash used in financing activities -- (26,519) -- -- (26,519)
--------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents -- -- -- -- --
--------------------------------------------------------------
Net increase in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
--------------------------------------------------------------
Cash, end of period $ -- $ -- $ -- $ -- $ --
==============================================================
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2002
(Dollars in thousands)
Hines Hines
Horticulture Hines SGUS
(Parent Nurseries (Subsidiary Consolidated
Guarantor) (Issuer) Guarantor) Eliminations Total
--------------------------------------------------------------
Cash provided by operating activities $ -- $ 32,217 $ (2,233) $ -- $ 29,984
--------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net -- (4,533) (2,503) -- (7,036)
Proceds from sales of fixed assets -- 3,143 127,338 -- 130,481
Leasehold incentive proceeds -- -- -- -- --
Acquisitions, adjusted -- (526) -- -- (526)
--------------------------------------------------------------
Net cash used in investing activities -- (1,916) 124,835 -- 122,919
--------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit -- (40,750) -- -- (40,750)
Proceeds from the issuance of long-term debt -- -- -- -- --
Intercompany advances (repayments) -- 92,840 (92,840) -- --
Repayments of long-term debt -- (95,982) (12,000) -- (107,982)
Deferred financing costs -- (4,200) -- -- (4,200)
Penalty on early payment of subordinated notes -- -- -- -- --
Dividends received (paid) -- 17,791 (17,791) -- --
--------------------------------------------------------------
Net cash used in financing activities -- (30,301) (122,631) -- (152,932)
--------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents -- -- 29 -- 29
--------------------------------------------------------------
Net decrease in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
--------------------------------------------------------------
Cash, end of period $ -- $ -- $ -- $ -- $ --
==============================================================
Page 20
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 2,000 retail and commercial
customers, representing more than 8,000 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 21
On September 30, 2003, we closed a refinancing plan, which we refer to
as the refinancing, which included the issuance by our wholly owned subsidiary,
Hines Nurseries, of $175 million principal amount of 10.25% Senior Notes due
2011 and amending and restating our senior credit facility, which, as amended,
we refer to as our Senior Credit Facility. The Senior Credit Facility has a term
of five years and consists of a $145 million revolving facility, with
availability subject to a borrowing base, and a $40 million term loan facility.
Borrowings under the Senior Credit Facility are secured by substantially all of
our assets. The net proceeds from the refinancing were used to refinance all
borrowings under our prior Credit Facility and to redeem all of Hines Nurseries'
outstanding 12.75% Senior Subordinated Notes due 2005.
DISCONTINUED OPERATIONS
In March 2002, we completed the sale of Sun Gro Horticulture, which we
refer to as Sun Gro, to a newly established Canadian income fund. We received
net proceeds of approximately $125.0 million from the sale, which includes the
tax refunds from the Canadian Customs & Revenue Authority recorded in the fourth
quarter of 2002 and third quarter of 2003, the majority of which were used to
pay down outstanding indebtedness. 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. At December 31, 2002, we had $9.6 million in net operating loss
carryforwards for federal income tax purposes.
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 September 30, 2003, we
had a current liability for deferred income taxes of $71.8 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.
Page 22
CANADIAN TAX MATTERS
In connection with the sale of Sun Gro, the Canadian Customs & Revenue
Authority ("CCRA") 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 loss on
the sale of Sun Gro for financial statement purposes. On November 7, 2002, we
filed a tax return, submitted a tax payment of $8.2 million Canadian from the
escrow funds 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. On September 30, 2003, the CCRA completed its assessment of our tax return
in which it determined that the transaction was exempt from tax for Canadian
purposes and issued a refund to us of all tax paid plus accrued interest. We
received the refund check of $8.7 million Canadian (US $6.3 million) on October
2, 2003 and recorded it in the third quarter of 2003 as an adjustment to the
loss on the sale of Sun Gro.
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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2002
NET SALES. Net sales of $51.3 million for the three months ended
September 30, 2003 increased $6.3 million, or 14.0%, from net sales of $45.0
million for the comparable period in 2002. The increase was due primarily to
strong sales of color bedding plants in the South, expanded sales of shrubs and
perennials in the Rocky Mountain and Midwest markets, and increased sales of
shrubs and bedding plants in the Northeast. Strong sales of bedding plants in
the South were driven by favorable weather conditions, strong fall crop programs
and store service programs established earlier in the year that generated higher
sales volume. Increased sales of shrubs and perennials in the Rocky Mountain and
Midwest markets during the quarter were attributable to increased volumes
resulting from the efforts of our sales force combined with the impact of the
Page 23
delayed spring on consumer spending. In the Northeast, sales of both shrubs and
bedding plants were up significantly during the quarter because adverse weather
conditions that persisted late into spring 2003 pushed consumer purchases back
into the summer months.
GROSS PROFIT. Gross profit of $23.9 million for the three months ended
September 30, 2003 increased $2.6 million, or 12.2%, from gross profit of $21.3
million for the comparable period in 2002 due to higher sales as discussed
above. As a percentage of net sales, gross profit for the quarter declined to
46.5% from 47.4% in 2002. This percentage decrease was primarily driven by
increased scrap rates for bedding plants in the third quarter and the need for
selective price discounting during the quarter to facilitate the sale of
overstocked product, both of which resulted from the late emergence of spring in
the Midwest and Northeast.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$18.8 million for the three months ended September 30, 2003 increased $0.3
million, or 1.6%, from $18.5 million for the comparable period in 2002 due to
higher distribution costs resulting from increased sales. As a percentage of net
sales, selling and distribution expenses decreased to 36.6% from 41.1% during
the comparable period in 2002. This decrease was driven primarily by the impact
of higher sales on the ratio of fixed distribution costs to sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $5.8 million for the three months ended September 30, 2003 decreased
$0.2 million, or 3.3%, from $6.0 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 EXPENSES (INCOME). Other operating expense of $0.2
million for the three months ended September 30, 2003 represents severance costs
associated with the elimination of a management position during the quarter.
OPERATING LOSS. Operating loss of $0.9 million for the three months
ended September 30, 2003 improved by $2.2 million, or 71.0%, from $3.1 million
for the comparable period in 2002 due primarily to higher sales as discussed
above.
OTHER EXPENSES. Other expenses of $15.3 million for the three months
ended September 30, 2003 increased $6.4 million, or 71.9%, from $8.9 million for
the comparable period in 2002. The increase was mainly due to the $9.2 million
loss on debt extinguishment related to the Company's debt refinancing during the
quarter. This loss resulted primarily from the write-off of unamortized deferred
financing fees of $4.7 million, the redemption premium associated with the prior
12.75% Senior Subordinated Notes of $3.2 million and the write off of other
comprehensive income related to the adoption of SFAS No. 133 of $1.3 million.
This loss was somewhat offset by the impact of the fair value adjustment on our
interest rate swap as the financing costs for the third quarter included income
of $0.9 million relating to the fair value adjustment compared with a charge of
$2.0 million in 2002.
Page 24
INCOME TAX (BENEFIT) EXPENSE. Our effective income tax rate was 41% for
each of the three months ended September 30, 2003 and 2002.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations of
$9.5 million for the three months ended September 30, 2003 increased by $2.4
million from loss of $7.1 million for the comparable period in 2002 due
primarily to the increase in other expenses as discussed above.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.0 million for the three months ended September 30, 2003,
represents the after-tax portion of the $6.3 million received as a result of
collecting the receivable for withheld Canadian income taxes from the Canadian
government, as discussed above in the section on CANADIAN TAX MATTERS. The $6.3
million received included the collection of the $5.1 million receivable for
previously withheld Canadian income taxes and $1.2 million due to the favorable
exchange rate at the time the receivable was collected.
The income from discontinued operations of $4.0 million is comprised of
$3.3 million for the reversal of a previously recorded deferred tax liability
related to the withheld Canadian income taxes, $1.2 million of foreign exchange
income due to the favorable foreign exchange rate at the time the receivable was
collected and an income tax provision of $0.5 million on the foreign exchange
income.
NET LOSS. Net loss of $5.5 million for the three months ended September
30, 2003 improved by $1.6 million from $7.1 million for the comparable period in
2002. This improvement was due primarily to the higher sales and income from
discontinued operations as discussed above.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTH
PERIOD ENDED SEPTEMBER 30, 2002
NET SALES. Net sales of $297.7 million for the nine months ended
September 30, 2003 increased by $1.8 million, or 0.6%, from net sales of $295.9
million for the comparable period in 2002. The increase was driven primarily by
strong sales of patio-ready type products due to improved market penetration in
the Midwest and Northeast markets, increased sales of bedding plants in the
South and expanded sales of shrubs and perennials in the Rocky Mountain and
Midwest markets. These increases were somewhat offset by the soft retail
environment we experienced during the first quarter of 2003 and sluggish sales
during the first six months of the year in the Midwest and Northeast resulting
from cold, wet weather that persisted late into spring. Sales were also down for
bedding plants in Colorado and the Southwest during the period, primarily due to
overcapacity in the market.
GROSS PROFIT. Gross profit of $153.2 million for the nine months ended
September 30, 2003 increased by $1.5 million, or 1.0%, from gross profit of
$151.7 million for the comparable period in 2002 due mainly to higher sales as
discussed above. As a percentage of net sales, gross profit increased to 51.5%
from 51.3% last year because of better inventory management through our store
Page 25
service programs and certain changes in product mix toward higher margin items.
The year-to-date increase in gross margins was moderated by the margin decrease
during the third quarter discussed above.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$87.9 million for the nine months ended September 30, 2003 increased by $1.9
million, or 2.2%, from $86.0 million for the comparable period in 2002 due to
higher distribution costs. As a percentage of net sales, selling and
distribution expenses increased to 29.5% compared to 29.1% in 2002. This
increase was driven primarily by higher fuel prices and escalating common
carrier costs, particularly at the peak of our spring shipping season.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $17.6 million for the nine months ended September 30, 2003 decreased
by $1.8 million, or 9.3%, from $19.4 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 EXPENSES (INCOME). Other operating expenses of $1.6
million for the nine months ended September 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 other positions during the year ($0.4 million). Other operating income
of $2.1 million for the nine months ended September 30, 2002 mainly represents
primarily the net gain from the sale of our property in Hillsboro, Oregon during
the first quarter of 2002.
OPERATING INCOME. Operating income of $46.1 million for the nine months
ended September 30, 2003 decreased by $2.3 million, or 4.8%, from $48.4 million
for the comparable period in 2002. This decrease was due mainly to the change in
other operating expenses and the increase in selling and distribution expenses
as discussed above.
OTHER EXPENSES. Other expenses of $29.5 million for the nine months
ended September 30, 2003 increased by $2.4 million, or 8.9%, from $27.1 million
for the comparable period in 2002. The increase was mainly due to the $9.2
million loss on debt extinguishment during the third quarter as discussed above.
This loss was somewhat offset by the impact of the fair value adjustment on our
interest rate swap and lower interest expense during the nine-month period.
Financing costs for the nine months ended September 30, 2003 included income of
$1.5 million relating to the fair value adjustment compared with a charge of
$2.8 million in 2002. Interest expense for the nine-month period decreased by
$0.7 million from the comparable period in 2002.
INCOME TAX BENEFIT (EXPENSE). Our effective income tax rate was 41% for
each of the nine months ended September 30, 2003 and 2002.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$9.8 million for the nine months ended September 30, 2003 decreased by $2.7
Page 26
million from income of $12.5 million for the comparable period in 2002. This
decrease was due primarily to the change in other operating expenses, the
increase in other expenses and the increase in selling and distribution expenses
as discussed above
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.0 million for the nine months ended September 30, 2003,
represents the after-tax portion of the $6.3 million received as a result of
collecting the receivable for withheld Canadian income taxes from the Canadian
government, as discussed above in the section on Canadian Tax Matters. The $6.3
million received included the collection of the $5.1 million receivable for
previously withheld Canadian income taxes and $1.2 million due to the favorable
exchange rate at the time the receivable was collected.
The income from discontinued operations of $4.0 million is comprised of
$3.3 million for the reversal of a previously recorded deferred tax liability
related to the withheld Canadian income taxes, $1.2 million of foreign exchange
income due to the favorable foreign exchange rate at the time the receivable was
collected and an income tax provision of $0.5 million on the foreign exchange
income.
The loss from discontinued operations of $7.0 million for the nine
months ended September 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative
effect of change in accounting principle of $55.1 million for the nine months
ended September 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 nine months
ended September 30, 2003.
NET INCOME (LOSS). Net income increased to $13.8 million for the nine
months ended September 30, 2003 compared to a net loss of $49.6 million for the
comparable period in 2002. This increase was primarily due to the impact of the
cumulative effect of change in accounting principle during the period ended
September 30, 2002 and the difference in income from discontinued operations
between the two periods as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are funds generated by operations and
borrowings under our Senior Credit Facility. The seasonal nature of our
operations results in a significant fluctuation in certain components of working
Page 27
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.
Net cash provided by operating activities was $30.0 million for the
nine months ended September 30, 2003 compared to $40.8 million for the
comparable period in 2002 mainly due to larger increases in working capital
during the nine months ended September 30, 2003 compared to the prior year
comparable period. The increase in working capital was primarily related to a
higher level of accounts receivable and a lower level of accrued interest at
September 30, 2003 compared to the prior year comparable period. The increase in
accounts receivable during the nine months ended September 30, 2003 stemmed
primarily from increased sales during the third quarter of 2003. The lower level
of accrued interest at September 30, 2003 resulted mainly from the refinancing,
which required payment of all accrued interest relating to the old Credit
Facility and the previously outstanding 12.75% Senior Subordinated Notes. The
increase in working capital was also affected to a lesser degree by an increase
in prepaid expenses during the nine months ended September 30, 2003 compared to
the prior year comparable period.
Net cash used in investing activities was $3.5 million for the nine
months ended September 30, 2003 compared to net cash provided by investing
activities of $112.1 million for the comparable period in 2002. The decrease was
due mainly to the impact of certain events during the first quarter of 2002,
which primarily included the proceeds received from the sale of Sun Gro and the
sale of the Minter Bridge property in Oregon of $123.4 million and $3.1 million,
respectively.
Our capital expenditures were $4.2 million for the nine months ended
September 30, 2003 compared to capital expenditures of $4.5 million for the nine
months ended September 30, 2002. The capital expenditures for the nine months
ended September 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 $26.5 million for the nine
months ended September 30, 2003 compared to $152.9 million for the comparable
period in 2002. The improvement was primarily related to the impact of the
refinancing during the third quarter of 2003 and the impact of certain events
during the first quarter of 2002. As part of the refinancing during the third
quarter of 2003, proceeds from the issuance of new debt helped to offset the
repayments of existing debt, the payment of deferred financing fees and the
early redemption premium on the previous 12.75% Senior Subordinated Notes. The
first quarter of 2002 was impacted by the use of the proceeds from the sale of
Sun Gro and sale of the Oregon property to pay down existing bank debt and to
pay deferred financing costs.
We typically draw down under our revolving credit facilities in the
first and fourth quarters to fund our seasonal inventory buildup and seasonal
operating expenses. Approximately 75% of our sales occur in the first half of
Page 28
the year, generally allowing us to reduce borrowings under our revolving credit
facilities in the second and third quarters. On September 30, 2003, we had $27.4
million of borrowings under our new working capital revolver, resulting in
unused borrowing capacity of $50.7 million after applying the borrowing base
limitations to our available borrowings.
At September 30, 2003, we had total indebtedness outstanding of $242.5
million. Our net debt position (short-term and long-term debt less cash and cash
equivalents on hand) at September 30, 2003 was also $242.5 million.
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 September 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
- -------------------------------- ----------- --------- ---------- ---------- -----------
Term loan....................... 40.0 3.8 17.1 19.1 --
10.25% Senior Notes............. 175.0 -- -- -- 175.0
Other obligations............... 0.1 0.1 -- -- --
Operating leases................ 18.1 4.2 7.2 0.4 6.3
----------- --------- ---------- ---------- -----------
Total........................... $ 233.2 $ 8.1 $ 24.3 $ 19.5 $ 181.3
=========== ========= ========== ========== ===========
We believe that cash generated by operations and from borrowings
expected to be available under our new Senior Credit Facility will be sufficient
to meet our anticipated working capital, capital expenditures and debt service
requirements for at least the next twelve months.
The following is a summary of certain material terms of our Senior Credit
Facility and Hines Nurseries' 10.25% Senior Notes due 2011.
OUR SENIOR CREDIT FACILITY. We entered into our amended and restated Senior
Credit Facility on September 30, 2003. Hines Nurseries and its domestic
operating subsidiaries are borrowers under the Senior Credit Facility. The
Senior Credit Facility consists of (i) a revolving facility with availability of
up to $145 million (subject to borrowing base limits) and (ii) a term loan
facility of up to $40 million. The revolving facility also permits us to obtain
letters of credit up to a sub-limit. The term loan facility was drawn down in
full in connection with our refinancing. The Senior Credit Facility matures on
September 30, 2008.
GUARANTEES; COLLATERAL. Obligations under the Senior Credit Facility
are guaranteed by us and any of our domestic subsidiaries that are not borrowers
under the Senior Credit Facility. Borrowings under the Senior Credit Facility
are secured by substantially all of our assets.
RESTRICTIONS; COVENANTS. The Senior Credit Facility places various
restrictions on Hines Nurseries and its subsidiaries, including, but not limited
to, limitations on their ability to incur additional debt, pay dividends or make
Page 29
distributions, sell assets or make investments. The Senior Credit Facility
requires Hines Nurseries and its subsidiaries to meet specific covenants and
financial ratios, including a minimum fixed charge coverage test, a maximum
leverage test and a maximum capital expenditure test. The new Senior Credit
Facility contains customary representations and warranties and customary events
of default and other covenants.
INTEREST RATE; FEES. The interest rate on the loans under the new
Senior Credit Facility may be, at our option, Prime rate loans or LIBOR rate
loans. Prime rate loans under the revolving loan facility bear interest at the
Prime lending rate plus an additional amount that ranges from 0.75% to 1.75%,
depending on our consolidated leverage ratio. Prime rate loans under the term
loan bear interest at the Prime lending rate plus an additional amount that
ranges from 1.25% to 2.25%, depending on our consolidated leverage ratio.
Currently, the applicable margin for Prime rate loans is (i) 1.75% for the new
revolving loan facility and (ii) 2.25% for the new term loan. LIBOR rate loans
under the revolving loan facility bear interest at the LIBOR rate plus an
additional amount that ranges from 1.75% to 2.75%, depending on our consolidated
leverage ratio. LIBOR rate loans under the new term loan bear interest at the
LIBOR rate plus an additional amount that ranges from 2.25% to 3.25%, depending
on our consolidated leverage ratio. Currently, the applicable margin for LIBOR
rate loans is (i) 2.75% for the new revolving loan facility and (ii) 3.25% for
the new term loan. In addition to paying interest on outstanding principal, we
are required to pay a commitment fee on the daily average unused portion of the
revolving facility which will accrue from the closing date based on the
utilization of the revolving facility.
BORROWING BASE. Availability of borrowings under the revolving facility
are subject to a borrowing base consisting of the sum of (i) 85% of eligible
accounts receivable plus (ii) the lesser of (x) up to 55% of eligible inventory
or (y) 85% of the appraised net orderly liquidation value of eligible inventory.
We must deliver borrowing base certificates and reports at least monthly. The
borrowing base also may be subject to certain other adjustments and reserves to
be determined by the agent. Eligible accounts receivable of both The Home Depot,
our largest customer, and Lowe's Companies, Inc., our second largest customer,
may not exceed 30% of total eligible accounts receivable at any time.
REPAYMENT. Under the terms of the Senior Credit Facility, no principal
payments are due for the term loan in 2003. Amortization payments of $1.9
million on the term loan will be required at the end of each of our second,
third and fourth fiscal quarters beginning with June 30, 2004, with the full
remaining balance payable on the last installment date. Subject to certain
exceptions, 100% of the net cash proceeds we receive from certain asset
dispositions and issuances of debt, 50% of the net cash proceeds we receive from
issuances of equity and 25% of excess cash flow (beginning in 2004) are required
to be applied to repay the term loan facility and are to be applied on a pro
rata basis to all remaining scheduled installments of the term loan facility.
The Senior Credit Facility may also be voluntarily prepaid at any time without
premium or penalty.
Page 30
SENIOR NOTES. On September 30, 2003, Hines Nurseries issued $175.0 million of
Senior Notes that mature on October 1, 2011. The Senior Notes bear interest at
the rate of 10.25% per annum and will be payable semi-annually in arrears on
each April 1 and October 1, commencing April 1, 2004.
GUARANTEES. Hines Horticulture and each of its domestic subsidiaries,
subject to certain exceptions, has, jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis, the obligations of
Hines Nurseries under the Senior Notes.
REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate
principal amount of the Senior Notes may be redeemed with the net cash proceeds
from one or more public equity offerings, at our option, at a redemption price
of 110.250% of the principal amount thereof plus accrued interest, if any, to
the date of redemption. On or after October 1, 2007, we are entitled, at our
option, to redeem all or a portion of the Senior Notes at redemption prices
ranging from 100.000% to 105.125%, depending on the redemption date, plus
accrued and unpaid interest.
RESTRICTIONS. The indenture pursuant to which the Senior Notes were
issued imposes a number of restrictions on Hines Nurseries and our other
subsidiaries. Subject to certain exceptions, we may not incur additional
indebtedness, make certain restricted payments, make certain asset dispositions,
incur additional liens or enter into significant transactions. A breach of a
material term of the indenture or other material indebtedness that results in
acceleration of the indebtedness under the Senior Notes also constitutes an
event of default under our Senior Credit Facility.
REPURCHASE ON A CHANGE OF CONTROL. The Senior Notes contain a put
option whereby the holders have the right to put the Senior Notes back to us at
101.00% of the principal amount thereof on the date of purchase plus accrued and
unpaid interest if a change of control occurs.
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.
Page 31
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."
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
Page 32
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.
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.
Page 33
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 SFAS 133 for
decisions made as part of the Derivatives Implementation Group process that
effectively required amendments to SFAS 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. The adoption of SFAS No. 149 on July 1, 2003 did not have a
material impact on our financial position, 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. The adoption of SFAS No. 150 on July 1, 2003 did not have a material
impact on our financial position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
FIN 46 requires exiting unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after December 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 is not expected to
have a material effect on the Company's financial conditions, 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.
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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 market risks for trading or speculative
purposes.
We have various debt instruments outstanding at September 30, 2003 that
are impacted by changes in interest rates. As a means of managing our interest
rate risk on variable-rate debt, 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 debt. The interest rate swap agreement effectively changes our
exposure on the 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 estimated fair value of our obligation under the interest
rate swap agreement was $6.5 million at September 30, 2003. The interest rate
swap agreement remains outstanding and matures in February 2005.
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 September 30, 2003 the
carrying amount and estimated fair value of our long-term debt was $215.1
million and $224.7 million, respectively. Given the current balance of our fixed
rate and variable rate debt, we estimate a change in interest costs of
approximately $0.1 million for every one-percentage point change in applicable
interest rates. Without considering the fixed interest rate provided by our swap
agreement, which expires at the end of February of 2005, we estimate a change in
interest costs of approximately $0.8 million for every one-percentage point
change in applicable interest rates.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 Credit Agreement dated September 30, 2003 among Hines
Nurseries, Inc., Enviro-Safe Laboratories, Inc. and Hines SGUS
Inc., as borrowers, the lenders listed therein, Deutsche Bank
Trust Company Americas, as syndication agent, Fleet Capital
Corporation and LaSalle Business Credit, LLC, as co-syndication
agents, and Harris Trust & Savings Bank and Wells Fargo Bank,
N.A., as co-documentation agents.
Exhibit 4.2 Security Agreement dated September 30, 2003 among Hines
Nurseries, Inc., Enviro-Safe Laboratories, Inc., Hines SGUS Inc.,
and Hines Horticulture, Inc., as grantors, and Deutsche Bank Trust
Company Americas, as agent.
Exhibit 4.3 Holdings Guaranty dated September 30, 2003 by Hines
Horticulture, Inc., in favor of and for the benefit of Deutsche
Bank Trust Company Americas, as agent representative.
Exhibit 4.4 Indenture dated as of September 30, 2003 among Hines
Nurseries, Inc., Hines Horticulture, Inc., the subsidiary
guarantors named therein and The Bank of New York, as trustee.
Exhibit 4.5 Registration Rights Agreement dated as of September 30,
2003 by and between Hines Nurseries, Inc., Hines Horticulture,
Inc., Hines SGUS Inc. and Enviro-Safe Laboratories, Inc. and
Credit Suisse First Boston LLC and Deutsche Bank Securities Inc.
Exhibit 4.6 Form of 144A Senior Note due 2011.
Exhibit 4.7 Form of Regulation S Senior Note due 2011.
Exhibit 4.8 Form of Senior Note due 2011.
Exhibit 10.1 Amended and Restated Promissory Note dated September 30,
2003 from Blooming Farm, Inc., as maker, to Hines Nurseries, Inc.
Exhibit 10.2 Amended and Restated Secured Promissory Note dated
September 30, 2003 from Blooming Farm, Inc., as maker, to Hines
Nurseries, Inc.
Exhibit 10.3 Amended and Restated Ground Lease dated September 1, 1996
by and between The Irvine Company and Hines Horticulture, Inc. +
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Exhibit 10.4 Addendum No. 1 to Amended and Restated Ground Lease dated
October 29, 1996 by and between The Irvine Company and Hines
Horticulture, Inc.
Exhibit 10.5 Addendum No. 2 to Amended and Restated Ground Lease dated
December 18, 1997 by and between The Irvine Company and Hines
Horticulture, Inc.
Exhibit 10.6 Addendum No. 3 to Amended and Restated Ground Lease dated
May 19, 2003 by and between The Irvine Company and Hines
Nurseries, Inc. +
Exhibit 10.7 Letter Agreement dated September 18, 2003 by and between
The Irvine Company and Hines Nurseries, Inc. +
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.
Exhibit 32.1 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 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.
+ Confidential treatment requested as to certain portions of the exhibit which
have been filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter
ended September 30, 2003.
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1. Current report on Form 8-K dated July 29, 2003 (the date of the
earliest event reported), filed on July 29, 2003, for the purpose
of reporting operating results from continuing operations for the
fiscal quarter ended June 30, 2003.
2. Current report on Form 8-K dated September 10, 2003 (the date of
the earliest event reported), filed on September 11, 2003, for the
purpose of reporting the adoption of SFAS No. 145 "Rescission of
SFAS Nos. 4, 44, and 64, Amendment of SFAS 13 and Technical
Corrections" and subsequent impact on previous financials
statements for the years ended December 31, 2002, 2001 and 2000.
3. Current report on Form 8-K dated September 11, 2003 (the date of
the earliest event reported), filed on September 11, 2003, for the
purpose of announcing the Company's intention to raise funds
through the private placement of senior notes.
4. Current report on Form 8-K dated September 11, 2003 (the date of
the earliest event reported), filed on September 11, 2003, for the
purpose of announcing the Company's press release entitled "Hines
Horticulture, Inc. Announces Intended Debt Offering."
5. Current report on Form 8-K dated September 23, 2003 (the date of
the earliest event reported), filed on September 23, 2003, for the
purpose of announcing the Company's press release entitled "Hines
Horticulture, Inc. Announces Pricing of Debt Offering."
Page 38
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,
Secretary and Treasurer
(Principal financial officer
and duly authorized officer)
Date: November 13, 2003
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