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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
HTTP://WWW.HINESHORTICULTURE.COM
____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer.
[ ]
As of June 30, 2003, the aggregate market value of the registrant's
voting common stock held by non-affiliates of the registrant was approximately
$17.4 million.
As of March 23, 2004, there were 22,072,549 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held in 2004 are incorporated in Part
III hereof by reference.
HINES HORTICULTURE, INC.
TABLE OF CONTENTS
PAGE
NO.
----
PART I
------
ITEM 1. BUSINESS.....................................................................1
ITEM 2. PROPERTIES...................................................................6
ITEM 3. LEGAL PROCEEDINGS............................................................7
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................7
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................................7
ITEM 6. SELECTED FINANCIAL DATA......................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................................30
ITEM 9A. CONTROLS AND PROCEDURES.....................................................30
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................30
ITEM 11. EXECUTIVE COMPENSATION......................................................31
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................31
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................................31
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............31
i
HINES HORTICULTURE, INC.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. Hines Horticulture, Inc.
desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor with
respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with such
forward-looking statements individually, could affect the future results of
Hines Horticulture, Inc. and could cause those results to differ materially from
those expressed in the forward-looking statements contained herein.
Hines Horticulture, Inc.'s estimated or anticipated future results,
products and service performance or other non-historical facts are
forward-looking and reflect Management's current perspective of existing trends
and information. These statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among others, the continued ability of Hines
Horticulture, Inc. to access water, the impact of growing conditions, risks
associated with customer concentration, adverse weather conditions, seasonality,
government regulations, loss of key employees, general economic conditions,
general agricultural risks including risks associated with plant disease and
pests and sudden oak death, increases in operating costs, the impact of
competition, the ability to obtain future financing or to satisfy payment
obligations under existing financing, limitations of Hines Horticulture, Inc.'s
substantial leverage and debt restrictions and other risks and uncertainties
described from time to time in Hines Horticulture, Inc.'s Securities and
Exchange Commission filings.
Therefore, Hines Horticulture, Inc. wishes to caution each reader of this
report to consider carefully these factors as well as the specific factors
discussed with each forward-looking statement in this report and disclosed in
its filings with the Securities and Exchange Commission as such factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of Hines Horticulture, Inc. to implement its business
strategy and may cause actual results to differ materially from those
contemplated by the statements expressed herein.
We maintain an Internet website at http://www.hineshorticulture.com (this
uniform resource locator, or URL, is an inactive textual reference only and is
not intended to incorporate our website into this Form 10-K). We file our
reports with the Securities and Exchange Commission (the "SEC") and make
available, free of charge, on or through this website, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
and information statements and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
Any of the materials we file with the SEC may also be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
ITEM 1. BUSINESS
INTRODUCTION
Hines Horticulture, Inc. ("Hines," the "Company," "we," "our" or "us"), a
Delaware corporation, currently produces and distributes horticultural products
through its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries")
and Enviro-Safe Laboratories, Inc. Unless otherwise specified, references to
"Hines" or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.
Hines is a leading national supplier of ornamental shrubs, color plants and
container-grown plants with 13 commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. Hines markets its products to retail and commercial customers throughout
1
the United States and Canada. Hines produces approximately 4,300 varieties of
ornamental shrubs and color plants. Hines sells to more than 2,000 retail and
commercial customers, representing more than 8,000 outlets throughout the United
States and Canada.
On March 27, 2002, the Company completed the sale of its growing media
business, Sun Gro Horticulture, Inc. and its wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. (collectively known as "Sun Gro") to Sun Gro
Horticulture Income Fund, a newly-established Canadian income fund. The assets
sold included 13 facilities located across Canada and the United States and
control of approximately 50,000 acres of peat bogs in Canada. We will no longer
harvest, produce or sell peat moss or other growing media soil mixes. We
received net proceeds of approximately $125 million from the sale, the majority
of which were used to pay down outstanding bank debt.
The Company's Consolidated Financial Statements included in this Annual
Report on Form 10-K reflect the financial position, results of operations and
cash flows of the Sun Gro business as "discontinued operations." In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS No.
144"), "Accounting for the Impairment or Disposal of Long-lived Assets," the
Company's Consolidated Financial Statements have been restated to reflect the
financial position, results of operations and cash flows of the Sun Gro business
as "discontinued operations."
HISTORY
OWNERSHIP
James W. Hines Sr. in San Gabriel, California founded Hines in 1920. Hines
was a family owned business until its acquisition by the Weyerhauser Company in
1976. Hines was sold in 1990 to a private investment group and certain members
of Management. In August 1995, Hines was acquired by Madison Dearborn Capital
Partners, L.P. ("MDCP"), a private equity investment firm and certain members of
Management. On June 22, 1998, Hines completed an initial public offering of 5.1
million shares of its Common Stock.
ACQUISITIONS
Hines has completed a number of acquisitions since 1994 to expand and
diversify its operations, which complement the Company's existing operations and
enhance its current product offerings.
The following table sets forth information with respect to these
acquisitions exclusive of the acquisitions related to Sun Gro:
ACQUIRED
DATE COMPANY PURCHASE PRICE LOCATION PRINCIPAL PRODUCTS
- ----------------------------------------------------------------------------------------------------------------------
March 2000 Lovell Farms $100.0 million Florida and Georgia Color bedding plants
January 2000 Willow Creek $20.5 million Arizona Color bedding plants
September 1999 Atlantic $30.1 million New York and Pennsylvania Flowering potted plants and
color bedding plants
December 1997 Bryfogle's $19.0 million Pennsylvania Color bedding plants
October 1997 Pacific Color $1.7 million California Color bedding plants
November 1996 Flynn $11.7 million California Ornamental plants and
flowering color plants
August 1996 Iverson $10.3 million South Carolina Perennial flowers and plants
January 1995 OGP $17.6 million Oregon Ornamental, cold-tolerant
plants and flowering color plants
- ----------------------------------------------------------------------------------------------------------------------
We have not completed any acquisitions since March 2000.
On January 14, 2000, the Company completed its acquisition of certain
assets (primarily land and buildings) and all of the outstanding capital stock
of Willow Creek Greenhouses, Inc. ("Willow Creek"), a producer of quality annual
bedding and holiday plants. In accordance with the terms of the purchase
2
agreement, and as a result of Willow Creek achieving certain operating results
relating to the years ended December 31, 2001 and 2000, the Company made
additional purchase price payments of $0.9 and $0.8 million, respectively, in
fiscal 2002 and 2001.
On March 3, 2000, the Company completed its acquisition of (i)
substantially all of the assets and certain liabilities of Lovell Farms, Inc.
and Botanical Farms, Inc.; (ii) the capital stock of Enviro-Safe Laboratories,
Inc. and (iii) the partnership interest of Lovell Properties (collectively
referred to as "Lovell"). Lovell is a producer of quality annual bedding and
holiday plants. In accordance with the terms of the purchase agreement, and as a
result of Lovell achieving certain operating results relating to the year ended
December 31, 2000, the Company made an additional purchase price payment of $7.5
million in fiscal 2001. Additionally in fiscal 2002 the Company incurred $0.5
million in acquisition related expenses.
BUSINESS OVERVIEW
Hines is one of the largest commercial nursery operations in North America,
producing one of the broadest assortments of container-grown plants in the
industry. Hines sells its green goods primarily to the retail segment which
includes the premium independent garden centers, as well as the leading home
centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart and Target.
Hines produces and markets approximately 4,300 varieties of ornamental,
container-grown plants grown primarily for outdoor use, most of which are sold
under its Hines Nurseries(TM) and Iverson(TM) trade names. The Company grows
most of its product categories at several of its nurseries. However, the Company
emphasizes certain product categories at particular nurseries depending on the
growing climate conducive to a particular product and on regional customer
needs. Most of Hines' revenues fall into the following variety categories for
the years ended December 31:
PRODUCT CATEGORY REPRESENTATIVE PRODUCTS 2003 2002 2001
- -------------------------- --------------------------------------------- ----------- ----------- ----------
Evergreens
Broadleafs Azalea, boxwood, camellia, euonymous, holly 21% 21% 20%
Conifers Pines, spruce, junipers 7% 7% 6%
Deciduous Plants Barberry, dogwood, forsythia, spirea 7% 7% 7%
Flowering Color Plants Perennials, Annual bedding plants,
Tropical flowering plants, bulbs 60% 59% 66%
Other Ferns, trees 5% 6% 1%
----------- ----------- ----------
100% 100% 100%
=========== =========== ==========
Since 1993, Hines has added numerous plant varieties to its product line.
During the past years, Hines has aggressively expanded its offering of flowering
color plants. Hines has also successfully developed patio-ready type products,
which it markets under the names of Patio Tropics(TM) and Festival Pots(TM).
These products generally command premium prices and improved profit margins
compared with other plants offered by the Company.
Plants (other than annual bedding plants) are produced by propagating young
plants called "liners" using cuttings from mature plants. Using propagation
techniques for each specific crop with respect to growing media, hormonal
stimulation and growing conditions, these cuttings are cultivated into viable
liners and are then transplanted into one gallon containers. These plants are
placed in the nursery for six to 24 months until they reach certain specified
sizes and levels of maturity, according to market demand, and are sold at
different price points depending on their size and levels of maturity. During
the field growing stages, plants are typically pruned by mechanized pruning
machines that are designed for specific plant categories and watered and
fertilized by integrated irrigation and fertilization systems, which are closely
monitored and regulated to ensure consistency and quality.
The Company's water and fertilizer recycling systems are designed to
minimize the costs of these elements and maximize water conservation. Each of
the Company's facilities has infrastructure and procedures in place to protect
3
its growing stock from most frost, snow and freezing conditions typically
prevailing at these facilities.
To produce annual bedding plants, a nursery either buys and germinates
seeds to produce small plants, called "plugs," or purchases plugs from
specialized plug producers. The plugs are then transplanted to bedding packs,
gallon hanging baskets and containers of various sizes. The growth cycle of
color plants is typically less than one year, with many color plants having a
growing seasons as short as eight to 16 weeks, allowing certain of the Company's
nurseries to produce approximately three to four inventory turns per year. As
with ornamental plants, the Company applies controlled watering and fertilizing
in order to ensure high quality.
CUSTOMERS. Our retail customers include home centers, mass merchandisers,
independent garden centers and garden center chains. The following table sets
forth the estimated percentage of Hines' net sales by customer type for the
period indicated:
YEARS ENDED DECEMBER 31,
--------------------------
CUSTOMER TYPE 2003 2002 2001
------------- ---- ---- ----
Home centers................................ 63% 64% 58%
Mass merchandisers.......................... 17 17 21
Independent garden centers.................. 10 10 11
Garden center chains........................ 5 5 5
Re-wholesalers.............................. 4 3 4
Landscapers and others...................... 1 1 1
------- ------ ------
Total............................ 100% 100% 100%
===== ===== =====
Management believes the Company enjoys competitive advantages in selling
into this channel due to its ability to provide a broad assortment of
consistently high quality products in large volumes, its nationwide distribution
and its value-added services such as custom labeling, bar-coding, full
electronic data interchange and technical support. Management expects to
participate in the overall growth of this channel to a greater extent than its
competitors that do not offer such services. Hines' top ten customers accounted
for approximately 78%, 78% and 74% of its net sales in 2003, 2002 and 2001,
respectively. Hines' largest customer, The Home Depot, accounted for
approximately 47%, 47% and 44% of its net sales in 2003, 2002 and 2001,
respectively. Hines' next largest customer is Lowe's Companies, Inc., accounted
for approximately 12%, 12% and 9% of its net sales in 2003, 2002 and 2001,
respectively. No other customer accounts for more than 10% of net sales.
DISTRIBUTION. Hines distributes its products directly from its nursery
sites to its retail customers primarily through common carriers and through the
Company's fleet of approximately 214 trucks, 78 of which are owned and the
balance of which are leased. The Company believes that common carriers are
available to accommodate seasonal delivery peaks. The Company uses a variety of
product shipping techniques, such as specialized shelving, protective racks and
special loading techniques. Nursery products are distributed nationwide, except
color plants, which are typically distributed within a 300-mile radius of each
nursery.
RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. Hines' product sourcing
and development yield unique plant varieties, which are marketed under a trade
name and patented whenever possible. The Company applies for patents on plant
varieties that are significantly different from existing varieties. Differences
among plant varieties may include coloration, size at maturity or hardiness in
drought or cold conditions. These varieties command higher prices, provide
higher unit margins and enhance the Company's reputation as a product innovator.
The Company's expenses associated with research and development are not material
and are recorded in selling and distribution expenses.
The Company has registered numerous trademarks, service marks and logos
used in its businesses in the United States and Canada. In addition, the Company
has developed and continues to develop specialty plants for which it holds
patents registered with the U.S. Patent and Trademark Office. The Company
currently holds 47 patents, with 15 patent applications pending. The Company's
Management does not believe that the loss of any particular patent would have a
material adverse effect on the Company.
PRODUCTION. Raw materials consist of starter materials, containers and soil
mixtures. The Company's Management believes that there are alternate sources of
supply readily available.
4
SALES AND MARKETING. Most of Hines' facilities have separate sales forces,
which include a sales manager, in-house customer service representatives, direct
sales consultants and various support personnel. As of December 31, 2003, Hines
employed approximately 274 direct sales consultants, key account managers,
market area managers and merchandisers. National accounts are serviced through
"National Account Task Teams" comprised of a senior management member and direct
sales personnel from each nursery supplying the account. Hines also markets its
products through trade shows, print advertising in trade journals, direct mail
promotion and catalogues.
COMPETITION. Competition in the nursery products segment of the lawn and
garden industry is based principally on the breadth of product offering,
consistent product quality and availability, customer service and price. The
nursery products segment is highly fragmented. According to the 1997 Census of
Agriculture released by the U.S. Department of Agriculture's National
Agricultural Statistics Service, the nursery business is comprised of
approximately 30,000 primarily small and regionally based growers, with the top
100 growers accounting for approximately 22% of the industry volume. Management
believes Hines is one of only two growers able to serve every major regional
market in North America, the Company's only national competitor being Monrovia
Nursery Company. In each of its markets, Hines competes with regional growers
such as Color Spot in the West, Clinton Nurseries in the Northeast, Zelenka
Nurseries in the Midwest, Wight Nurseries in the South and many other smaller
regional and local growers. Hines' key competitive advantages are its ability to
provide consistent, high quality products in large volumes, its nationwide
distribution and its value-added services.
SEASONALITY
Our business is highly seasonal in nature, with most of sales typically
occurring in the first half of the year. In particular, our sales are strongest
in the second quarter, which corresponds to the Spring gardening season. In
2003, approximately 75% of net sales and approximately 105% of operating profits
occurred in the first half of the year. Additionally, approximately 56% of net
sales and approximately 95% of operating profits occurring in the second quarter
of 2003. The table below sets forth the Company's quarterly net sales, as a
percentage of total year net sales, for the periods indicated:
PERCENTAGE OF TOTAL NET SALES
-----------------------------
2003 2002 2001
---- ---- ----
First Quarter 17% 21% 21%
Second Quarter 56 54 53
Third Quarter 15 13 13
Fourth Quarter 12 12 13
---- ---- ----
100% 100% 100%
==== ==== ====
GOVERNMENT REGULATION
The Company is subject to certain United States federal, state and local
provincial health, safety and environmental laws and regulations regarding the
production, storage and transportation of certain products and the disposal of
its wastes. The Environmental Protection Agency ("EPA") and similar state and
local agencies regulate the Company's operations and activities, including, but
not limited to, water runoff and the use of certain pesticides in its nursery
operations. In the ordinary course of business, the Company uses substances that
are regulated or may be hazardous under environmental laws. The Company does not
anticipate that future expenditures for compliance with such environmental laws
and regulations will have a material adverse effect on the Company's financial
position or results of operations. The Company cannot give any assurance,
however, that compliance with such laws and regulations, or compliance with
other environmental laws and regulations that may be enacted in the future, will
not have an adverse effect on the Company's financial position or results of
operations.
Hines obtains certain irrigation water supplied to local water districts
from facilities owned and operated by the United States acting through the
Department of Interior Bureau of Reclamation ("reclamation water"). Federal
reclamation laws and regulations govern the use and price of reclamation water,
including availability of subsidized water rates. Hines utilizes reclamation
water as one of the water supplies for its Northern California and Oregon
facilities. The Company's Management believes that the nursery operations are in
compliance with applicable regulations and it maintains a continuous compliance
program; however, changes in law may reduce availability of, or increase the
price of, reclamation water to the Company.
5
EMPLOYEES
As of December 31, 2003, the Company employed approximately 3,540 persons.
At its peak, an additional 1,450 seasonal employees are employed. All of the
Company's employees are non-union, and the Company's Management believes that
its labor relations are good.
ITEM 2. PROPERTIES
At December 31, 2003, the Company owned approximately 4,360 acres related
to its nursery facilities. In addition, the Company leases approximately 1,150
acres related to its nursery facilities (including leases from Blooming Farm,
Inc., an affiliated entity). Approximately 4,000 acres were usable for
production, with approximately 2,500 acres currently in production. We believe
that its owned and leased facilities are sufficient to meet its operating
requirements for the foreseeable future.
The Company's current facilities are identified in the table below:
LOCATION DESCRIPTION STATUS
- -------- ----------- ------
Blairsville, Georgia................ 43 acre nursery Owned (a)
Chino Valley, Arizona............... 59 acre nursery Owned
Danville, Pennsylvania.............. 154 acre nursery Leased (b)
Fallbrook, California............... 261 acre nursery Owned/leased (c)
Forest Grove, Oregon................ 1,066 acre nursery Owned/leased (d)
Fulshear, Texas..................... 450 acre nursery Owned
Irvine, California.................. 542 acre nursery and headquarters Leased (e)
Miami, Florida...................... 334 acre nursery Owned
Newark, New York.................... 37 acre nursery Owned
Northern California................. 1,389 acre nursery Owned (f)
Pipersville, Pennsylvania........... 60 acre nursery Owned/leased (g)
San Joaquin Valley, California ..... 57 acre nursery Owned/leased (h)
Trenton, South Carolina............. 1,001 acre nursery Owned/leased (i)
Utica, New York..................... 65 acre nursery Owned
(a) Blairsville, Georgia is managed by the Miami, Florida location and they are
both considered to be a single nursery operation.
(b) 60 acres are year-to-year, 13 acres expire in 2009, 42 acres expire in 2021
and 39 acres expire in 2022.
(c) We own 248 acres and lease 13 acres at this nursery.
(d) We own 721 acres and lease 345 acres at this nursery.
(e) 114 acres expire June 2006 and 140 acres expire December 2006. The lease
for the remaining acreage does not expire until December 2010.
(f) The Northern California nursery consists of sites in Allendale, Vacaville
and Winters, California.
(g) We own 31 acres and lease 29 acres at this nursery.
(h) The San Joaquin nursery consists of sites in Chowchilla and Madera,
California. We own 48 acres and lease 9 acres at this nursery.
(i) We own 941 acres and lease 60 acres at this nursery.
In May 2003, we amended the lease for our 479-acre Irvine, California
nursery headquarters. Under the amendment, we agreed to vacate 254 acres covered
by the lease in 2006 in exchange for an extension of the term of the lease on
170 acres that was set to expire in September 2003 to December 2010 and the
lease of an additional 63 acres contiguous to our existing facility from July
2003 to December 2010. Our landlord also agreed to assist with the costs of
developing the new acreage and transition costs of up to $4 million, which
include payments of $2 million and percentage rent credits of up to $2 million.
The landlord also agreed to assist us with our objective of trying to secure
beyond 2010 an acceptable nursery property relatively near our current location
in Irvine, California, although we cannot be sure that we will accomplish this
objective.
In April 2003, we entered into an option agreement to sell our 168-acre
nursery property in Vacaville, California. We entered into the option agreement
because the nursery property is located in an area which the city of Vacaville
is planning to develop as a residential project. Under the agreement, we granted
the buyer an option to purchase the nursery property in April 2005. The buyer
can maintain the option by making payments totaling $751,000 during the option
term. The option exercise price is $15.1 million. If the buyer exercises the
option, we will be allowed to transition off of the property in three phases
from 2005 to 2007. We plan on developing replacement acreage and infrastructure
at our 842-acre Winters South facility in Northern California.
6
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company's
financial position. Management believes, however, that the ultimate resolution
of such matters will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
In connection with the Company's acquisition of Lovell, the Company agreed,
subject to various provisions in the purchase agreement, to make earn-out
payments to the sellers of up to approximately $5.0 million for fiscal 2001 if
the purchased operations achieved certain performance thresholds. Although the
Company determined that the thresholds were not met and no earn-out payment was
required, the sellers of Lovell are disputing the Company's determination and
have initiated arbitration proceedings against the Company. The sellers also
contend that the amount of the earn-out at issue is $7.5 million. As of the date
hereof, the two sides have mutually selected an arbitrator, discovery is
proceeding and the arbitration hearing has been scheduled to occur during May
2004. The Company intends to vigorously contest this matter and believes it has
meritorious defense to the sellers' claims. However, in the event of an adverse
determination, the Company could be required to pay all or a portion of the
disputed earn-out payment plus other fees and expenses. The amount of such
earn-out payment would become part of the purchase price for the assets
associated with the acquisition and would be accounted for as goodwill, subject
to the impairment testing discussed in "New Accounting Pronouncements" under
Note 1 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Hines currently trades on The Nasdaq National Market
under the symbol "HORT." As of March 10, 2004, there were 80 registered holders
of record of the Company's Common Stock. The following table sets forth the
quarterly high and low share price for the years ended December 31:
2003 High Low
- ---- ------- -------
1st quarter $2.97 $2.00
2nd quarter $2.87 $1.51
3rd quarter $4.34 $1.42
4th quarter $4.75 $3.55
2002 High Low
- ---- ------- -------
1st quarter $4.10 $3.18
2nd quarter $5.25 $3.29
3rd quarter $3.88 $2.70
4th quarter $3.20 $2.42
Hines has not paid dividends on its Common Stock in the past and does not
presently plan to pay dividends on the Common Stock. The payment of dividends is
restricted under the terms of the Company's senior credit agreement and senior
subordinated note indenture. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
The Company currently maintains its 1998 Long-Term Equity Incentive Plan
(the "1998 Stock Plan") under which Common Stock is authorized for issuance to
employees and directors upon the exercise of options. The Company's stockholders
have approved this plan. As of December 31, 2003, the Company did not have
outstanding any options, warrants or rights under any other equity compensation
plan. The following table provides aggregate information regarding the shares of
Common Stock that may be issued upon the exercise of options, warrants and
rights under all of the Company's equity compensation plans as of December 31,
2003.
7
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding under equity compensation
outstanding options, options, warrants plans (excluding securities
warrants and rights and rights reflected in column (a))
Plan Category (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS:
1998 Long-Term Equity
Incentive Plan 989,723 $ 6.22 2,599,487
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS: -- $ -- --
-------------- --------------
Total 989,723 2,599,487
============== ==============
Excluded from the above table are the warrants issued on November 28, 2000
to Madison Dearborn Capital Partners, L.P.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of the end of and for each
of the years in the five-year period ended December 31, 2003 have been derived
from the consolidated financial statements of Hines Horticulture and its
subsidiaries. The consolidated financial statements as of December 31, 2003 and
2002, and for each of the years in the three-year period ended December 31,
2003, and the audit report thereon (which contains explanatory paragraphs
related to the issues discussed in Note 1 to the consolidated financial
statements regarding our sale of the assets of our wholly owned subsidiary Sun
Gro Horticulture, Inc. on March 27, 2002 and our adoption of the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," and the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Disposal of Long Lived
Assets"), are included elsewhere in this filing. The following financial
information is not necessarily indicative of the operating results to be
expected in the future and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto contained elsewhere in
this filing. The following table has been restated to reflect all of the
activity of our peat moss and soil mix business as "discontinued operations" and
to reclassify losses on early debt extinguishment under SFAS No. 145 previously
reported as an extraordinary item to continuing operations.
8
YEAR ENDED DECEMBER 31, (a)
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales, net $ 338,272 $ 336,546 $ 326,973 $ 304,202 $ 199,117
Cost of goods sold 167,833 166,994 156,490 143,262 93,403
------------- ------------- ------------- ------------- -------------
Gross profit 170,439 169,552 170,483 160,940 105,714
Operating expenses 125,784 122,338 121,975 113,198 76,300
------------- ------------- ------------- ------------- -------------
Operating income 44,655 47,214 48,508 47,742 29,414
Other expense, primarily interest expense 35,223 33,900 38,188 29,071 13,853
Provision for income taxes 3,867 5,456 4,627 8,034 6,516
------------- ------------- ------------- ------------- -------------
Income from continuing operations (a) 5,565 7,858 5,693 10,637 9,045
Income (loss) from discontinued operations (b),
net of tax (benefit) expense of ($2,785),
$10,442, $11,316, ($4,225) and $2,128 4,148 (5,413) (2,268) 1,801 6,375
Cumulative effect of change in accounting
principle (c), net of tax of $23,609 -- (55,148) -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 9,713 $ (52,703) $ 3,425 $ 12,438 $ 15,420
============= ============= ============= ============= =============
EARNINGS PER SHARE:
Income from continuing operations
Basic $ 0.25 $ 0.36 $ 0.26 $ 0.48 $ 0.41
Diluted $ 0.25 $ 0.36 $ 0.26 $ 0.48 $ 0.41
Net income (loss)
Basic $ 0.44 $ (2.39) $ 0.16 $ 0.56 $ 0.70
Diluted $ 0.44 $ (2.39) $ 0.16 $ 0.56 $ 0.70
Weighted average shares outstanding
- Basic 22,072,549 22,072,549 22,072,549 22,072,549 22,072,549
Weighted average shares outstanding
- Diluted 22,072,549 22,078,012 22,091,208 22,072,549 22,072,549
SUMMARY CASH FLOW DATA:
Net cash provided by operating activities $ 22,693 $ 29,712 $ 26,551 $ 2,838 $ 14,693
Net cash provided by (used in) investing
activities 2,464 109,738 (28,886) (149,761) (46,525)
Net cash (used in) provided by financing
activities (25,157) (139,450) 2,335 146,923 31,317
SUPPLEMENTAL DATA:
Depreciation and amortization $ 9,394 $ 8,565 $ 12,436 $ 10,582 $ 6,709
Capital expenditures 5,589 7,209 18,178 29,686 15,953
Ratio of earnings to fixed charges (d) 1.3x 1.4x 1.3x 1.6x 2.0x
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ -- $ -- $ -- $ -- $ --
Working capital 61,976 12,051 (41,086) 14,898 54,042
Short-term debt 36,107 90,335 143,159 97,696 43,419
Total assets 402,208 405,812 610,144 599,385 418,781
Long-term debt 209,287 164,829 209,639 251,823 149,775
Shareholders' equity 52,730 41,802 88,745 87,407 74,750
9
NOTES TO SELECTED CONSOLIDATED YEARLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) From January 1, 1998 through March 31, 2000, the Company acquired the
following three companies: Atlantic (September 9, 1999), Willow Creek
(January 14, 2000) and Lovell (March 3, 2000). The financial results
include the operations of each acquisition since its respective acquisition
date.
(b) On March 27, 2002, we sold Sun Gro, our peat moss and soil mix business,
for net proceeds of approximately $125,000, the majority of which we
used to repay indebtedness. Our consolidated financial statements in this
filing reflect the financial position, results of operations and cash flows
of the Sun Gro business as "discontinued operations." In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," we have restated our
consolidated financial statements to reflect the financial position,
results of operations and cash flows of the Sun Gro business as
"discontinued operations." For the year ended December 31, 2003, we
recognized a $4,148 gain, net of tax, from the sale. For the year ended
December 31, 2002, we recognized a $5,562 loss, net of tax, from the sale
and a $149 gain, net of tax, from the operations through the date of the
sale. For the years ended December 31, 2001, 2000 and 1999, the income
(loss) from discontinued operations of $(2,268), $1,801 and $6,375,
respectively, represents the income (loss) from the operations of those
periods.
(c) The cumulative effect of change in accounting principle for the year ended
December 31, 2002 of $55,148, net of tax, represents the goodwill
impairment charge resulting from the Company's adoption of SFAS No. 142.
(d) The ratio of earnings to fixed charges is unaudited for all periods
presented. For the purpose of calculating the ratios of earnings to fixed
charges, earnings consist of net income (loss) plus income taxes and fixed
charges, and exclude the cumulative effect of a change in accounting
principle. Fixed charges consist of interest expense, amortization of debt
issuance costs and the estimated portion of rental expenses deemed a
reasonable approximation of the interest factor. For the years ended
December 31, 2003, 2002, 2001, 2000 and 1999, earnings exceeded fixed
charges by $9,432, $13,314, $10,320, $18,671 and $15,561, respectively.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in Item 8 of this
Annual Report on Form 10-K. This discussion contains trend analyses and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties are discussed at "Cautionary Statement for Purposes of the Safe
Harbor Provision of the Private Securities Litigation Reform Act of 1995" and
under the heading "Forward-Looking Statements and Factors That May Affect Our
Future Results" in this Annual Report on Form 10-K.
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 4,300 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 and Canada.
Hines Horticulture, Inc. produces and distributes horticultural products through
its wholly-owned subsidiaries, Hines Nurseries and Enviro-Safe Laboratories,
Inc.
REFINANCING
On September 30, 2003, we refinanced substantially all of our outstanding
debt (the "Refinancing"), which included the issuance of $175 million of 10.25%
Senior Notes ("Notes") due in 2011 and an amended and restated Senior Credit
Facility ("Senior Credit Facility") that expires in 2008. Our Senior Credit
Facility consists of a revolving facility with availability of up to $145
million (subject to certain borrowing base limits) and a term loan facility of
up to $40 million. Our Refinancing enables us to extend the maturity of our
previous debt, which we believe will provide us with greater financial and
operating flexibility in the future. For additional information concerning our
Notes and Senior Credit Facility, see "Liquidity and Capital Resources."
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 million from the sale, which includes the tax
refunds from the Canadian Customs & Revenue Authority ("CCRA") 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-K for 2003 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, 2003, we had $26.9 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 December 31, 2003, we had a
current deferred liability for deferred income taxes of $65.2 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.
11
CANADIAN TAX MATTERS
In connection with the sale of Sun Gro, the 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 proceeds withheld
were not included in the initial measurement of the loss on the sale of Sun Gro.
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.
RECENT DEVELOPMENTS
On March 9, 2004, two California nurseries, which we do not own or operate,
tested positive for Sudden Oak Death ("SOD"), also referred to as Phytophthora.
ramorum ("P. ramorum"). As a result of these findings, certain states declared a
quarantine on all plant material coming from California and several others
imposed a quarantine on SOD host and associated host plants only. On March 19,
2004, we took the precautionary measure of voluntarily suspending the shipment
of all SOD host and associated host plants grown in our California facilities
pending the results of the joint California Department of Food & Agriculture
("CDFA") and U.S. Department of Agriculture ("USDA") testing of our facilities.
On March 26, 2004, we were notified by the CDFA that all of our California
growing facilities had tested negative for P. ramorum and, as a result, the CDFA
and the USDA subsequently issued compliance agreements to our Fallbrook and
Irvine facilities, allowing us to ship host and associated host plants. For
additional information concerning SOD, see "Risks Related to Our Business."
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2002
NET SALES. Net sales of $338.3 million for the fiscal year ended December
31, 2003 increased $1.7 million, or 0.5%, from net sales of $336.5 million 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 partially 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 $170.4 million for the fiscal year ended
December 31, 2003 increased $0.9 million, or 0.5%, from gross profit of $169.6
million in 2002 due mainly to higher sales as discussed above. As a percent of
net sales, gross profit in 2003 remained unchanged at 50.4% from 2002. Better
inventory management through our store service programs and certain changes in
product mix improved our gross margins throughout the year. However, during the
second half of the year, increased scrap rates for bedding plants and the need
for selective price discounting countered any increase in year over year gross
margins.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$101.6 million for the fiscal year ended December 31, 2003 increased $2.4
million, or 2.4%, from $99.2 million in 2002. The increase was due mainly to
higher sales and higher distribution costs. Distribution costs increased by $1.8
12
million, or 2.6%, from 2002 as a result of higher fuel prices and escalating
common carrier costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$22.6 million for the fiscal year ended December 31, 2003 decreased $3.4
million, or 13.1%, from $26.0 million in 2002. The decrease was primarily due to
our efforts to control costs, improve efficiencies, and a reduction in salary
expense that resulted from the management changes that took place in late 2002
and early 2003, as discussed below.
OTHER OPERATING LOSS (INCOME) AND SEVERANCE COSTS. Other operating expenses
of $1.6 million for the fiscal year ended December 31, 2003 primarily represents
severances costs associated with the resignation of our former Chief Executive
Officer in February of 2003 of $1.2 million and the elimination of certain other
positions during the year of $0.4 million. Other operating income of $2.8
million for the fiscal year ended December 31, 2002 primarily represents the net
gain from the sale of our property in Hillsboro, Oregon during the first quarter
of 2002.
OPERATING INCOME. Operating income of $44.7 million for the fiscal year
ended December 31, 2003 decreased $2.6 million, or 5.4% from $47.2 million in
2002. This decline was primarily due to the change in other operating loss,
severance costs and the increase in selling and distribution costs offset by the
decline in general and administrative expenses. As a percentage of net sales,
operating income decreased to 13.2% from 14.0%.
OTHER EXPENSES. Other expenses of $35.2 million for the fiscal year ended
December 31, 2003 increased $1.3 million, or 3.9%, from $33.9 million in 2002.
The increase was mainly due to the $9.2 million loss on debt extinguishment
during the third quarter. This loss was partially offset by the impact of the
mark to market adjustment on our interest rate swap and lower interest expense
during 2003. Financing costs for 2003 included income of $2.7 million relating
to the fair value adjustment of the interest rate swap agreement compared with a
loss of $2.6 million in 2002. Interest expense for the fiscal year ended
December 31, 2003 decreased by $0.3 million from 2002.
INCOME TAX PROVISION. Our effective income tax rate for the fiscal year
ended December 31, 2003 was 41.0%, unchanged from 2002.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$5.6 million for the fiscal year ended December 31, 2003 decreased $2.3 million,
or 29.1%, from $7.9 million in 2002. The decrease was due primarily to the
changes affecting operating income and other expenses, as discussed above.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.1 million for the fiscal year ended December 31, 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 entitled "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 loss from
discontinued operations of $5.4 million in 2002 is from the sale of Sun Gro, as
discussed above in the section entitled "Discontinued Operations."
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative effect
of change in accounting principle of $55.1 million for the fiscal year ended
December 31, 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 charge. Our 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 in 2003.
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2001.
NET SALES. Net sales of $336.5 million for the fiscal year ended December
31, 2002 increased $9.5 million, or 2.9%, from net sales of $327.0 million in
2001. The increase was due primarily to increased sales volume resulting from
strong sales generated by our West Coast operations, successful in-store service
programs in the Northeast markets and strong sales of perennials. Sales
generated by our West Coast operations were strong because of product line
changes, while increased sales in the Northeast were driven by the expansion of
successful in-store service programs. These programs enable us to offer a
13
broader selection of green goods and streamline ordering and in-store
merchandising activities with our customers. This was somewhat offset by
sluggish sales in Arizona, Texas and the Southeast, which resulted primarily
from overcapacity of green goods in the market. In addition, given Kmart's
uncertain financial situation, we reduced our sales to the large retailer for
the fiscal year ended December 31, 2002 by approximately $8.6 million from the
previous year.
GROSS PROFIT. Gross profit of $169.6 million for the fiscal year ended
December 31, 2002 decreased $0.9 million, or 0.5%, from $170.5 million in 2001.
As a percentage of net sales, gross margins decreased to 50.4% from 52.1% mainly
due to the lower sales in our Southeast markets, which typically carry higher
margins, and increased scrap rates primarily related to the lower Kmart sales
and higher unit production costs in the nursery operations.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$99.2 million for the fiscal year ended December 31, 2002 increased $5.1
million, or 5.4%, from $94.1 million in 2001. The increase was primarily
attributable to the higher sales, additional sales and merchandising personnel
and higher distribution costs. Distribution costs increased by $4.4 million, or
6.7%, from 2001 due mainly to our transition to a unitized delivery mode for
many of our nursery products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of
$26.0 million for the fiscal year ended December 31, 2002 increased $0.6
million, or 2.4%, from $25.4 million in 2001. The change was due mainly to an
increase in bad debt expense relating to the Kmart pre-Chapter 11 receivable,
higher costs associated with our continued implementation of our Oracle system
and severance costs associated with the elimination of certain administrative
positions somewhat offset by the reduction in salary costs related to the
elimination of these positions.
OTHER OPERATING INCOME. Other operating income of $2.8 million for the
fiscal year ended December 31, 2002 increased $1.6 million, or 133.3%, from $1.2
million in 2001. The increase was primarily due to the net gain from the sale of
our property in Hillsboro, Oregon and the gain on sale of fixed assets,
partially offset by the write-off of software we no longer use.
AMORTIZATION OF GOODWILL. Goodwill amortization for the fiscal year ended
December 31, 2002 of $0 decreased $3.7 million, or 100%, from $3.7 million in
2001. The decrease was entirely due to the adoption of SFAS No. 142, which
discontinued the amortization of goodwill.
OPERATING INCOME. Operating income of $47.2 million for the fiscal year
ended December 31, 2002 decreased $1.3 million, or 2.7%, from $48.5 million in
2001. As a percentage of net sales, operating income decreased to 14.0% from
14.8%. The decrease was due mainly to the lower gross margins and higher selling
and distribution costs discussed above and was offset by ceasing the
amortization of goodwill in 2002 under the provisions of SFAS No. 142.
OTHER EXPENSES. Other expenses of $33.9 million for the fiscal year ended
December 31, 2002 decreased $4.3 million, or 11.2%, from $38.2 million in 2001.
The decrease was primarily attributable to lower interest expenses and a fair
value charge of $2.6 million relating to our $75.0 million interest rate swap
agreement as compared to a charge of $4.1 million for 2001. This adjustment
results from the quarterly change in the swap's valuation, which is based on
long-term interest rate expectations. Other expenses include interest expense of
$25.2 million and $29.3 million for the years ended December 31, 2002 and 2001,
respectively. The decrease in interest expense in 2002 resulted from using the
net proceeds from the sale of the Sun Gro business and the sale of the Oregon
land to reduce debt.
INCOME TAX PROVISION. Our effective income tax rate was 41.0% and 44.8% for
the years ended December 31, 2002 and 2001, respectively. The decline in the
effective income tax rate from 2001 to 2002 was due to the adoption of SFAS No.
142, which discontinued the amortization of goodwill.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of
$7.9 million for the fiscal year ended December 31, 2002 increased $2.2 million,
or 38.6%, from $5.7 million in 2001. The increase was mainly due to lower other
expenses, the net gain from the sale of the Oregon land recorded as other
operating income and our ceasing the amortization of goodwill under the
provisions of SFAS No. 142, as discussed above.
(LOSS) FROM DISCONTINUED OPERATIONS. The loss from discontinued operations
of $5.4 million for the fiscal year ended December 31, 2002 includes a loss of
14
$5.5 million, net of tax, from the sale of the Sun Gro business and a gain of
$0.1 million from the operations of Sun Gro through the date of sale. The loss
from discontinued operations of $2.3 million for the fiscal year ended December
31, 2001 is comprised entirely of a loss from the operations of Sun Gro.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative effect
of change in accounting principle of $55.1 million for the fiscal year ended
December 31, 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 charge. Our 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.
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
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 $22.7 million for the fiscal
year ended December 31, 2003 compared to $29.7 million for 2002 mainly due to
larger increases in working capital in 2003 compared to 2002. The increase in
working capital was primarily related to a lower level of accounts payable and
accrued liabilities and interest at December 31, 2003 compared to the prior year
period. The decrease in accounts payable during 2003 was impacted by the cost
management initiatives undertaken during the year and the reorganization that
took place in late 2002 and early 2003. The lower level of accrued interest at
December 31, 2003 resulted mainly from the Refinancing, which required payment
of all accrued interest relating to our old credit facility and 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
2003 compared to the prior year.
Net cash provided by investing activities was $2.5 million for the fiscal
year ended December 31, 2003 compared to net cash provided by investing
activities of $109.7 million for 2002. The decrease was mainly due 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 $5.6 million for the fiscal year ended
December 31, 2003 compared to capital expenditures of $7.2 million in 2002. The
capital expenditures for the fiscal year ended December 31, 2003 primarily
included the purchase of nursery related machinery and equipment.
Net cash used in financing activities was $25.1 million for the fiscal year
ended December 31, 2003 compared to $139.5 million for 2002. The improvement was
primarily related to the impact of the Refinancing during the third quarter of
2003 and the impact of certain items 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 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 the sale of the Oregon property to pay
down existing bank debt and to pay deferred financing costs.
We typically draw down 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 the year,
generally allowing us to reduce borrowing under our revolving credit facilities
in the second and third quarters. On December 31, 2003, we had $30.3 million of
borrowings under our new working capital revolver, resulting in unused borrowing
capacity of $38.1 million after applying the borrowing base limitations to our
available borrowings.
At December 31, 2003, we had total indebtedness outstanding of $245.4
million.
15
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 December 31, 2003.
Payments Due by Period
-------------------------------------------------------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- -------------------------------------- ---------------- ---------------- --------------- ------------- --------------
(in millions)
New term loan $ 40.0 $ 5.7 $ 17.1 $ 17.2 $ -
Revolving facility 30.3 30.3 - - -
Senior notes 175.0 - - - 175.0
Other obligations 0.1 0.1 - - -
Operating leases 20.5 4.7 8.1 1.2 6.5
---------------- ---------------- --------------- ------------- --------------
Total $ 265.9 $ 40.8 $ 25.2 $ 18.4 $ 181.5
================ ================ =============== ============= ==============
We believe that cash generated by operations and from borrowings expected
to be available under our 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 Senior Credit Facility on September 30, 2003. Hines
Nurseries and its domestic operating subsidiaries are borrowers under the Senior
Credit Facility. The 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 new credit facility. Borrowings under the Senior Credit Facility are
collateralized 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 our ability to incur additional debt, pay dividends or make
distributions, sell assets or make investments. The Senior Credit Facility
specifically restricts Hines Nurseries and its subsidiaries from making
distributions to Hines Horticulture. Distributions to Hines Horticulture are
limited to (i) payments covering customary general and administrative expenses,
not to exceed $0.5 million in any fiscal year, (ii) payments to discharge any
consolidated tax liabilities, (iii) and payments, not to exceed as much as $8.3
million in any fiscal year or $9.3 million over the term of the Senior Credit
Facility, to enable Hines Horticulture to repurchase its own outstanding common
stock from holders other than our majority shareholder. Dividends to Hines
Horticulture are disallowed under the Senior Credit Facility.
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 December 31, 2003, we
were in compliance with all covenants.
INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit
Facility may be, at our option, prime rate loans or London Inter Bank Offering
Rate ("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.
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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 borrowing 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 were due for the term loan in 2003. Amortization payments of $1.9
million on the term loan will be required at the end 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 scheduled installments of the term loan facility. The Senior Credit
Facility may also be voluntarily prepaid at any time without premium or penalty.
OUR SENIOR NOTES
On September 30, 2003, Hines Nurseries issued $175.0 million of Senior
Notes that mature on October 1, 2011. The 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 Notes.
REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate principal
amount of the 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 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 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 material term of the indenture
or other material indebtedness that results in acceleration of the indebtedness
under the Notes also constitutes an event of default under our Senior Credit
Facility.
REPURCHASE ON A CHANGE IN CONTROL. The Notes contain a put option whereby
the holders have the right to put the Notes back to us at 101.000% 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.
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Actual results could differ from those estimates. We believe that the following
areas represent our most critical accounting policies related to actual results
that may vary from those estimates.
REVENUE RECOGNITION. We record revenue, net of sales discounts and
allowances, when all of the following have occurred: an agreement of sale
exists, product delivery and acceptance has occurred and collection is
reasonably assured.
SALES RETURNS AND ALLOWANCES. Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by management using the following criteria:
past sales returns experience, current economic conditions and other relevant
factors. The rate is re-evaluated on a quarterly basis. Provisions for sales
discounts and allowances charged against income increase the allowance. We
record revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time
revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When
Right of Return Exists."
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts 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. Accrued liabilities include amounts accrued for
expected claims costs relating to our insurance programs for workers
compensation and auto liability. We have large deductibles for these lines of
insurance, which means we must pay the portion of each claim that falls below
the deductible amount. Our expected claims costs are based on an actuarial
analysis that considers our current payroll and automobile profile, recent
claims history, insurance industry loss development factors and the deductible
amounts. We accrue our expected claims costs for each year on a ratable monthly
basis with a corresponding charge against income. Management reviews the
adequacy of the accruals at the end of each quarter. The accruals for the
expected costs relating to our insurance programs for workers compensation and
auto liability are maintained at levels believed by our management to adequately
reflect our probable claims obligations.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In August 2001, 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.
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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."
We have included the disclosure requirements of SFAS No. 148 in the notes to the
consolidated financial statements.
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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). The primary objectives of FIN 46 are to provide guidance on
the identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and to determine when
and which business enterprise ("primary beneficiary") should consolidate the
variable interest entity. FIN 46 requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. In addition, FIN 46
requires that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the FASB
revised FIN 46 ("FIN 46R") to address certain FIN 46 implementation issues. The
revised provisions are applicable no later than the first reporting period
ending after March 15, 2004. We do not believe that the adoption of FIN 46 and
FIN 46R will have a material effect on our consolidated financial statements.
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EFFECTS OF INFLATION
Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
We have made and will make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 in our Annual Report, Forms 10-K and 10-Q and in other
contexts relating to our future prospects, our operations and our strategies.
Forward-looking statements include, but are not limited to, information
regarding our future economic performance and financial condition, the plans and
objectives of our Management and our assumptions regarding our performance and
these plans and objectives.
The forward-looking statements that we make in our Annual Report, Forms
10-K and 10-Q and in other contexts represent challenging goals for our Company,
and the achievement of these goals and our operations are subject to a variety
of risks and assumptions and numerous factors beyond our control. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make are described below. The following factors
that may affect our future results should not be considered a definitive list of
all risks associated with our operations and should be read in conjunction with
the risks and uncertainties contained in our other filings with the Securities
and Exchange Commission.
RISKS RELATED TO OUR CAPITAL STRUCTURE
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING, WHICH COULD HURT OUR FUTURE
PROSPECTS AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS.
We have a significant amount of debt outstanding. As of December 31, 2003,
we had total consolidated debt outstanding of $245.4 million. This debt may have
several important consequences for the holders of the Notes. As it could:
o make it more difficult for us to satisfy our obligations,
including making scheduled interest payments under the Notes and
other debt obligations;
o limit our ability to obtain additional financing;
o increase our vulnerability to adverse general economic conditions
and commercial nursery industry conditions, including changes in
interest rates;
o require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing the
availability of our cash flow for other purposes;
o limit our flexibility in planning for, or reacting to, changes in
our business and the commercial nursery industry; and
o place us at a competitive disadvantage compared to our
competitors that have less debt.
IF WE INCUR ADDITIONAL DEBT, THE RISKS RELATED TO OUR SUBSTANTIAL AMOUNT OF DEBT
COULD INCREASE.
In the future, we may be able to incur substantially more debt, subject to
certain covenants contained in our Senior Credit Facility and the indenture
governing our Notes. Our Senior Credit Facility permits additional borrowings
and all of those borrowings are collateralized by substantially all of our
assets and are effectively senior to the Notes and the guarantees to the extent
of the value of the collateral. If we incur new debt, the related risks that we
now face could intensify.
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THE TERMS OF OUR DEBT MAY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN
OUR BUSINESS.
Our Senior Credit Facility and the indenture governing the Notes issued by
Hines Nurseries contain covenants that restrict our ability to, among other
things:
o incur additional debt or issue certain preferred stock;
o pay dividends or distributions on, or redeem or repurchase,
capital stock;
o create liens or negative pledges with respect to our assets;
o make investments, loans or advances;
o make capital expenditures;
o issue, sell or allow distributions on capital stock of specified
subsidiaries;
o enter into sale and leaseback transactions;
o prepay or defease specified debt;
o enter into transactions with affiliates;
o enter into specified hedging arrangements;
o merge, consolidate or sell our assets; or
o engage in any business other than the commercial nursery
business.
These covenants may affect our ability to operate our business, may limit
our ability to take advantage of business opportunities as they arise and may
adversely affect the conduct of our current business. A breach of a covenant in
our debt instruments could cause acceleration of a significant portion of our
outstanding indebtedness.
REPAYMENT OF THE PRINCIPAL OF THE NOTES AND OUR OTHER DEBT MAY REQUIRE
ADDITIONAL FINANCING. WE ARE NOT CERTAIN OF THE SOURCE OR AVAILABILITY OF ANY
SUCH FINANCING AT THIS TIME.
Our anticipated operating cash flows will not be sufficient to repay the
principal of the Notes and our other debt. Accordingly, in order to pay the
principal of the Notes and our other debt, we will be required to refinance our
debt, sell our equity securities, sell our assets or take other actions. The
foregoing actions may not enable us to pay the principal of the Notes or such
other debt or may not be permitted by the terms of our debt instruments then in
effect.
RISKS RELATED TO OUR BUSINESS
OUR PRODUCTION OF PLANTS MAY BE ADVERSELY AFFECTED BY A NUMBER OF AGRICULTURAL
FACTORS BEYOND OUR CONTROL.
Our production of plants may be adversely affected by a number of
agricultural risks, including disease, pests, freezing conditions, snow, drought
or other inclement weather, and improper use of pesticides or herbicides. These
factors could cause production difficulties which could damage or reduce our
inventory, resulting in sales, profit and operating cash flow declines, which
could be material.
INCREASES IN WATER PRICES OR INSUFFICIENT AVAILABILITY OF WATER COULD ADVERSELY
AFFECT OUR PLANT PRODUCTION, RESULTING IN REDUCED SALES AND PROFITABILITY.
Plant production depends upon the availability of water. Our nurseries
receive their water from a variety of sources, including on-site wells, creeks,
reservoirs and holding ponds, municipal water districts and irrigation water
supplied to local districts by facilities owned and operated by the United
21
States acting through the Department of Interior Bureau of Reclamation. The loss
or reduction of access to water at any of our nurseries could have a material
adverse effect on our business, results from operations and operating cash
flows. In addition, increases in our costs for water could adversely impact our
profitability and operating cash flows.
Our nursery in Arizona receives its water from on-site wells. Under
Arizona's Groundwater Management Act, these wells have been issued
"grandfathered non-irrigation water" permits, which limit the amount of
groundwater we can use. The availability of water depends on the groundwater
aquifer, which at this time, we believe is adequate to supply our needs for this
nursery as it is currently operated.
Our Northern California and Oregon nurseries rely primarily on surface
water supplies and, therefore, may experience fluctuations in available water
supplies and serious reductions in their supplies of surface water in the event
of prolonged droughts. If such reductions occur, those nurseries would have to
rely on backup water supplies which are more costly than surface water supplies.
The use and price of water supplied by facilities owned and operated by the
Bureau of Reclamation, including availability of subsidized water rates, is
governed by federal reclamation laws and regulations. Such water is used at our
Northern California nursery and is the source of a substantial majority of the
water for our Oregon nursery. While we believe we are in material compliance
with applicable regulations and maintain a compliance program, there can be no
assurance that changes in law will not reduce availability or increase the price
of reclamation water to us. Any such change could have a material adverse effect
on our business, financial position, results of operations and operating cash
flows.
The reclamation regulations govern who may hold an interest in irrigation
lands. Under the reclamation regulations, persons having a direct or indirect
beneficial economic interest in us will be treated as "indirect holders" of
irrigation land owned by us in proportion to their beneficial interest in us. If
any holder of our common stock (whether directly or indirectly through a
broker-dealer or otherwise) is ineligible under applicable reclamation
regulations to hold an indirect interest in our irrigation land, we may not be
eligible to receive reclamation water on this land. Generally, the eligibility
requirement of the reclamation regulations would be satisfied by a person:
o who is a citizen of the United States or an entity established
under federal or state law or a person who is a citizen of or an
entity established under the laws of certain foreign countries
(including Canada and Mexico and members of the Organization for
Economic Cooperation and Development); and
o whose ownership, direct and indirect, of other land which is
qualified to receive water from a reclamation project, when added
to such person's attributed indirect ownership of irrigation land
owned by us, does not exceed certain maximum acreage limitations
(generally, 960 acres for individuals and 640 acres for
entities).
While our restated certificate of incorporation contains provisions
intended to prohibit ineligible holders of irrigation land from owning our
common stock, such provisions may not be effective in protecting our right to
continue to use reclamation water.
WE FACE RISKS ASSOCIATED WITH SUDDEN OAK DEATH. QUARANTINES OF OUR PRODUCTS BY
FEDERAL AND STATE REGULATORY AUTHORITIES IN RESPONSE TO SUDDEN OAK DEATH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
SOD is caused by a fungus-like pathogen recently identified by scientists
in California and named P. ramorum. Since its appearance in 1995, P. ramorum has
killed thousands of coast live oak, black oak, tanoak and Shreve oak in Northern
California. P. ramorum can also infect the leaves and branches of other plants
referred to as SOD host plants. Currently, fifty-nine plant varieties grown by
commercial nurseries have been identified as SOD hosts.
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In February 2004, as part of the SOD National Nursery Survey, the USDA
encouraged all states to conduct a survey of nurseries that ship SOD host plants
interstate. Accordingly, the CDFA and the USDA conducted joint tests at
nurseries located throughout California, which tests included our Irvine,
Vacaville, Winters, and Fallbrook facilities. On March 9, 2004, two nurseries,
which we do not own or operate, tested positive for P. ramorum. As a result of
these findings certain states declared a quarantine on all plant material coming
from California and several others imposed a quarantine on SOD host and
associated host plants only. We grow 5 out of the fifty-nine species known to be
SOD host and associated host plants as specified by the California Department of
Agriculture.
On March 19, 2004, we took the precautionary measure of voluntarily
suspending the shipment of all SOD host plants grown in our California
facilities pending the results of the joint CDFA and USDA testing of our
facilities. On March 26, 2004, we were notified by the CDFA that all of our
California growing facilities had tested negative for P. ramorum. As a result of
these findings, the CDFA and the USDA issued compliance agreements with our
Fallbrook and Irvine facilities, allowing us to ship host and associated host
plants, if we meet, and continue to meet, certain inspection requirements. Our
Northern California facilities, Vacaville and Winters, have been located in a P.
ramorum regulated county and have continued to operate under the terms of a
previous compliance agreement with the CDFA and USDA. Their compliance agreement
requires that potential SOD host plants be inspected and tested monthly during
the growing season for the presence of P. ramorum. To date, our two northern
facilities have tested as SOD free places of production
On March 26, 2004, the USDA's Animal and Plant Health Inspection Service
announced that it will now regulate the interstate movement of SOD host and
associated host plants from all California nurseries. This new measure prohibits
an estimated 1,500 California nurseries from shipping plants susceptible to P.
ramorum until those nurseries can be inspected and are found to be free of the
pathogen. The USDA will also launch a national survey to determine if P. ramorum
is causing disease symptoms on hosts and associated hosts in other parts of the
country. We believe that all states will honor the USDA's decision to regulate
this situation and will now allow us to resume interstate shipping of all plant
material from California, with the exception of SOD host plants, which will be
subject to the terms of our compliance agreements.
All of our California nurseries have tested negative for P. ramorum.
However, if in the future we do test positive for P. ramorum, our products could
be subject to quarantine by federal and state regulatory authorities. If this
were to occur, we could experience a significant loss of sales and may be
required to write-off inventory, which would have a material adverse effect on
our business, results from operations, and operating cash flows. Regulatory
authorities could also enact restrictive regulations on soil media containing
redwood sawdust, a known carrier of P. ramorum, requiring us to modify our
current growing procedures as well as develop alternatives to using it. If these
restrictions are enacted, we may be unable to successfully develop a cost
effective alternative to using redwood sawdust, which could also adversely
affect our business, results of operations and operating cash flows.
BECAUSE OUR BUSINESS IS HIGHLY SEASONAL, OUR REVENUES, CASH FLOWS FROM
OPERATIONS AND OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY
BASIS.
Our business is highly seasonal. The seasonal nature of our operations
results in a significant increase in our working capital 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. We have experienced, and expect to continue to
experience, significant variability in net sales, operating cash flows and net
income on a quarterly basis. One significant factor contributing to this
variability is weather, particularly on weekends during the peak gardening
season in the second quarter. Unfavorable weather conditions during the peak
gardening season could have a material adverse effect on our net sales, cash
flows from operations and operating income.
Other factors that may contribute to this variability include:
o shifts in demand for live plant products;
o changes in product mix, service levels and pricing by us and our
competitors;
o period-to-period changes in holidays;
o the economic stability of our retail customers; and
o our relationship with each of our retail customers.
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BECAUSE WE DEPEND ON A CORE GROUP OF SIGNIFICANT CUSTOMERS, OUR SALES, CASH
FLOWS FROM OPERATIONS AND RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED IF
OUR KEY CUSTOMERS REDUCE THE AMOUNT OF PRODUCTS THEY PURCHASE FROM US.
Our top ten customers together accounted for approximately 78% of our net
sales in 2003. Our largest customer, The Home Depot, accounted for approximately
47% of our 2003 net sales. We expect that a small number of customers will
continue to account for a substantial portion of our net sales for the
foreseeable future. We do not have long-term contracts with any of our retail
customers, and they may not continue to purchase our products.
The loss of, or a significant adverse change in, our relationship with The
Home Depot or any other major customer could have a material adverse effect on
us. The loss of, or a reduction in orders from, any significant retail
customers, losses arising from retail customers' disputes regarding shipments,
fees, merchandise condition or related matters, or our inability to collect
accounts receivable from any major retail customer could have a material adverse
effect on us. In addition, revenue from customers that have accounted for
significant revenue in past periods, individually or as a group, may not
continue, or if continued, may not reach or exceed historical levels in any
period.
WE FACE INTENSE COMPETITION, AND OUR INABILITY TO COMPETE EFFECTIVELY FOR ANY
REASON COULD ADVERSELY AFFECT OUR BUSINESS.
Our competition varies by region, each of which is highly competitive.
Although many of our largest customers are national retailers, buying decisions
are generally made locally by our customers. We compete primarily on the basis
of breadth of product mix, consistency of product quality, product availability,
customer service and price. We generally face competition from several local
companies and usually from one or two regional companies in each of our current
markets. Competition in our existing markets may also increase considerably in
the future. Some of our competitors may have greater market share in a
particular region or market, less debt, greater pricing flexibility or superior
marketing or financial resources. Increased competition could result in lower
profit margins, substantial pricing pressure, reduced market share and lower
operating cash flows. Price competition, together with other forms of
competition, could have a material adverse effect on our business, financial
position, results of operations and operating cash flows.
OUR NURSERY FACILITY IN IRVINE, CALIFORNIA IS ENTIRELY ON LEASED LAND AND WE DO
NOT EXPECT THE LEASES TO BE EXTENDED BEYOND THEIR CURRENT TERMS.
Our 542-acre nursery facility and headquarters in Irvine, California are
entirely on leased land. We recently entered into an amended lease agreement for
this facility in which 63 new acres were added and the lease expiration schedule
was changed. Under the amended lease agreement, the lease on 114 acres expires
on June 30, 2006, the lease on 140 acres expires on December 31, 2006, and the
lease on the remaining 288 acres expires on December 31, 2010. We do not expect
these leases to be extended beyond their current terms. For the 254 acres that
will expire in 2006, we are developing plans to transition a majority of the
production to our Allendale, California facility and the remaining production to
the parcel recently added to our facility in Irvine. For the 288 acres that will
expire at the end of 2010, we will be required to establish new production
facilities or transition production to existing facilities. We may incur
substantial costs in connection with the establishment of these new production
facilities or the transition of production to existing facilities.
We may not be successful in executing our transition plan or establishing
suitable replacement production facilities. If we are unsuccessful in these
efforts, our net sales, cash flows and operating income could be materially
adversely affected. In addition, when we vacate 254 acres in 2006, we currently
estimate that we will incur approximately $223,000 of removal and remediation
costs. We may incur significant expenses beyond what we have forecasted if
additional remedial action is required. Significant costs in excess of our
estimates could have a material adverse effect on us.
WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND REGULATIONS THAT GOVERN, AND
IMPOSE LIABILITY, FOR OUR ACTIVITIES AND OPERATIONS. IF WE DO NOT COMPLY WITH
THESE LAWS AND REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY
AFFECTED.
We are subject to federal, state and local laws and regulations that
govern, and impose liability for, our activities and operations which may have
24
adverse environmental effects, such as discharges to air and water, as well as
handling and disposal practices for hazardous substances and other wastes. Some
of our nursery operations are conducted near residential developments, which
could increase our exposure to liability for the environmental effects of our
operations. Our operations have resulted, or may result, in noncompliance with
or liability for cleanup under these laws. In addition, the presence of
hazardous substances on our properties, or the failure to properly remediate any
resulting contamination may adversely affect our ability to sell, lease or
operate our properties or to borrow using them as collateral. In some cases, our
liability may not be limited to the value of the property or its improvements.
We cannot assure you that these matters, or any similar matters that may arise
in the future, will not have a material adverse effect on us.
Certain of our operations and activities, such as water runoff from our
production facilities and the use of certain pesticides, are subject to
regulation by the United States Environmental Protection Agency and similar
state and local agencies. These agencies may regulate or prohibit the use of
such products, procedures or operations, thereby affecting our operations and
profitability. In addition, we must comply with a broad range of environmental
laws and regulations. Additional or more stringent environmental laws and
regulations may be enacted in the future and such changes could have a material
adverse effect on us.
WE ARE SUBJECT TO FEDERAL AND STATE "FAIR TRADE" LAWS AND WEIGHTS AND MEASURES
REGULATIONS THAT GOVERN AND IMPOSE LIABILITY FOR IMPROPERLY MARKETING, LABELING
OR ADVERTISING PLANT CONTAINER SIZE. IF WE DO NOT COMPLY WITH THESE LAWS AND
REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
We are subject to federal and state weights and measures regulations that
govern and impose liability for improperly labeling or advertising our plant
container sizes. It is common in our industry, at the wholesale and retail
levels, to market, label, and advertise container grown nursery stock with
varying types of measurements, such as imperial volume or diameter of container.
These measurements, although consistent with industry practice, may not
represent the exact size of the actual product. If the Federal Trade Commission
or any state regulator determines that our current marketing, labeling, or
advertising is in violation of "fair trade" laws or weights and measures
regulations in their jurisdiction, we may incur significant costs to become
compliant, be forced to terminate further shipments of inventory into certain
jurisdictions, be fined, or otherwise suffer a material adverse affect on our
business.
CHANGES IN LOCAL ZONING LAWS MAY ADVERSELY AFFECT OUR BUSINESS.
We are subject to local zoning laws regulating the use of our owned and
leased property. Some of our facilities are located in areas experiencing rapid
development and growth, which typically are characterized by changes in existing
zoning. Changes in local zoning laws could require us to establish new
production facilities or transition production to other facilities, which could
have a material adverse effect on our cash flows, financial position and results
of operations.
COMPLIANCE WITH, AND CHANGES TO LABOR LAWS, PARTICULARLY THOSE CONCERNING
SEASONAL WORKERS, COULD SIGNIFICANTLY INCREASE OUR COSTS.
The production of our plants is labor intensive. We are subject to the Fair
Labor Standards Act as well as various federal, state and local regulations that
govern matters such as minimum wage requirements, overtime and working
conditions, including, but not limited, to federal and state health and worker
safety rules and regulations. A large number of our seasonal employees are paid
at or slightly above the applicable minimum wage level and, accordingly, changes
in minimum wage laws could materially increase our costs. Non-U.S. nationals
comprise a large portion of our seasonal employee workforce and changes to U.S.
immigration policies that restrict the ability of immigrant workers to obtain
employment in the United States and which may contribute to shortages of
available seasonal labor could increase our costs. Non-compliance with
applicable regulations or modifications to existing regulations may increase
costs of compliance, require a termination of certain activities, result in
fines or loss of a portion of our labor force or otherwise have a material
adverse impact on our business and results of operations.
25
OUR TRANSPORTATION COSTS ARE SIGNIFICANT AND WE DEPEND ON INDEPENDENT
CONTRACTORS FOR TRUCKING SERVICES TO SHIP LARGE QUANTITIES OF OUR PRODUCTS AND
INCREASES IN TRANSPORTATION COSTS, CHANGES IN AVAILABLE TRUCKING CAPACITY AND
OTHER CHANGES AFFECTING SUCH CARRIERS, AS WELL AS INTERRUPTIONS IN SERVICE OR
WORK STOPPAGES, COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
We rely extensively on the services of agents and independent contractors
to provide trucking services to us. Transportation costs accounted for
approximately 21% of our net sales in 2003. Our ability to ship our products,
particularly during our peak shipping seasons, could be adversely impacted by
shortages in available trucking capacity, changes by carriers and transportation
companies in policies and practices, such as scheduling, pricing, payment terms
and frequency of service, or increases in the cost of fuel, taxes and labor, and
other factors not within our control. We compete with other companies who ship
perishable goods for available trucking capacity and, accordingly, reductions in
capacity or shortages of the agents and independent contractors who provide
trucking services to us could potentially adversely impact our sales.
Significant increases in transportation costs could have a material adverse
effect on our business, particularly if we are not able to pass on such price
increases to our customers in the form of higher prices for our products.
Material interruptions in service or stoppages in transportation, whether caused
by strike or otherwise, could adversely impact our business, results of
operations, financial position and operating cash flows.
WE ARE CURRENTLY IMPLEMENTING A NEW ENTERPRISE RESOURCE PLANNING SOFTWARE
PROGRAM, AND UNEXPECTED DELAYS, EXPENSES OR DISRUPTIONS IN THE IMPLEMENTATION OF
SUCH SOFTWARE PROGRAM COULD DISRUPT OUR BUSINESS OR IMPAIR OUR ABILITY TO
MONITOR OUR OPERATIONS, RESULTING IN A NEGATIVE IMPACT ON OUR OPERATIONS,
FINANCIAL POSITION AND OPERATING CASH FLOWS.
In four of our nurseries we have implemented a new enterprise resource
planning software program which we utilize for production planning and inventory
purposes. Over time, we intend to continue the implementation of this software
program to our other nursery facilities. Our distribution and sales order
system, however, remains on our prior computer information systems. We may
experience delays, disruptions and unanticipated expenses in implementing,
integrating and operating our management information and reporting systems,
which could disrupt our operations or otherwise impair our ability to monitor
our operations and have a negative impact on our business, results of
operations, financial position and operating cash flows.
OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.
Our success is based, in part, upon our ability to discover and develop new
products that customers will want. As a result, we continue to invest in
research and development in order to enable us to identify and develop new
products to meet consumer demands. Despite investments in this area, our
research and development may not result in the discovery or successful
development of new products which will be accepted by our customers.
OUR CURRENT PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE OVER OUR BUSINESS
AND COULD DELAY, DETER OR PREVENT A CHANGE OF CONTROL OR OTHER BUSINESS
COMBINATION.
Investment partnerships controlled by Madison Dearborn Partners, Inc.
beneficially own approximately 54% of the outstanding common stock of Hines
Horticulture and have sufficient voting power to control, or at the least
significantly influence, the election of directors and the approval of other
actions requiring the approval of our shareholders. In addition, Madison
Dearborn Partners has two of its designees on Hines Horticulture's six member
board of directors.
OUR BUSINESS WILL SUFFER IF CERTAIN SENIOR EXECUTIVES DISCONTINUE EMPLOYMENT
WITH US OR IF WE ARE UNABLE TO RECRUIT AND RETAIN HIGHLY SKILLED STAFF.
Our success is largely dependent on the skills, experience and efforts of
our senior management, including Robert A. Ferguson (President and Chief
Executive Officer) and Claudia M. Pieropan (Chief Financial Officer, Secretary
and Treasurer). The loss of services of one or more members of our senior
management could have a material adverse effect on us. We do not maintain
key-man life insurance policies on any members of management. No members of
senior management are bound by non-compete agreements, and if any such members
were to depart and subsequently compete with us, such competition could have a
material adverse effect on us. Our business also depends on our ability to
continue to recruit, train and retain skilled employees, particularly skilled
26
growers and sales personnel. The loss of the services of any key personnel, or
our inability to hire new personnel with the requisite skills, could impair our
ability to develop new products or enhance existing products, sell products to
our customers or manage our business effectively.
PRICE INCREASES OF CERTAIN RAW MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
We and our competitors are vulnerable to price increases for raw materials.
For 2003, raw material costs accounted for approximately 19% of net sales. We do
not have long-term contracts with the majority of our raw material suppliers.
Increases in the cost of raw materials essential to our operations, including
seed, plastic, chemicals and fertilizer, would increase our costs of production.
Significant increases in the price of petrochemicals or a scarcity of raw
materials essential to plant propagation could have a material adverse effect on
our business. We may not be able to pass such price increases on to our
customers in the form of higher prices for our products, which could materially
adversely affect our results of operations and operating cash flows.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS MAY BE HARMED.
Our success depends in part on proprietary techniques and plant designs.
Although we attempt to protect our proprietary property and processes through a
combination of patents, trade secrets and non-disclosure agreements, these may
be insufficient. Litigation may be necessary to protect our intellectual
property and determine the validity and scope of the proprietary rights of
competitors. Intellectual property litigation could result in substantial costs
and diversion of our management and other resources. If we are unable to
successfully protect our intellectual property rights, our competitors could be
able to market products that compete with our proprietary products without
obtaining a license from us.
27
ITEM 7A. 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 December 31, 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 $5.3 million at December 31, 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 debt. For fixed-rate debt, interest rate changes affect the fair
market value of such debt but do not impact earnings or cash flows. Conversely,
for variable-rate debt, interest rate changes generally do not affect the fair
market value of such debt but do impact future earnings and cash flows, assuming
other factors are held constant. At December 31, 2003 the carrying amount and
estimated fair value of our debt was $245.4 million and $261.1 million,
respectively. Given the current balance of our fixed rate and variable rate
debt, we estimate a change in interest costs of less than $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
$0.7 million for every one-percentage point change in applicable interest rates.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements commence at page F-1 of this report
and an index thereto is included in Part IV, Item 15 of this report.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected unaudited quarterly financial data should be read in
conjunction with the consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. The following
table has been restated to reflect all the activity of the growing media
business as "Discontinued operations."
FOURTH THIRD SECOND FIRST
2003 QUARTER QUARTER QUARTER QUARTER
- -------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Sales, net $ 40,579 $ 51,302 $ 187,868 $ 58,523
Gross profit 17,204 23,853 98,729 30,653
(Loss) income from continuing operations (4,216) (9,493) 20,596 (1,322)
Income from discontinued operations (a) (b) 135 4,013 -- --
Net (loss) income (4,081) (5,480) 20,596 (1,322)
(Loss) income from continuing operations per common share:
Basic & Diluted $ (0.19) $ (0.43) $ 0.93 $ (0.06)
Income from discontinued operations per common share:
Basic & Diluted $ 0.01 $ 0.18 $ -- $ --
------------- ------------- ------------- -------------
Net (loss) income per common share: $ (0.18) $ (0.25) $ 0.93 $ (0.06)
============= ============= ============= =============
FOURTH THIRD SECOND FIRST
2002 QUARTER QUARTER QUARTER QUARTER
- -------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Sales, net $ 40,628 $ 45,049 $ 182,146 $ 68,723
Gross profit 17,871 21,349 95,925 34,407
(Loss) income from continuing operations (4,691) (7,067) 18,623 993
Income (loss) from discontinued operations (a) (b) 1,565 -- -- (6,978)
Cumulative effect of change in accounting principle (c) -- -- -- (55,148)
Net (loss) income (3,126) (7,067) 18,623 (61,133)
(Loss) income from continuing operations per common share:
Basic & Diluted $ (0.21) $ (0.32) $ 0.84 $ 0.04
Income (loss) from discontinued operations per common share:
Basic & Diluted $ 0.07 $ -- $ -- $ (0.32)
Cumulative effect of change in accounting principle:
Basic & Diluted $ -- $ -- $ -- $ (2.49)
------------- ------------- ------------- -------------
Net (loss) income per common share: $ (0.14) $ (0.32) $ 0.84 $ (2.77)
============= ============= ============= =============
29
NOTES TO SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(a) On March 27, 2002, the Company completed the sale of its growing media
business to Sun Gro Horticulture Income Fund, a newly-established Canadian
income fund. The Company's Consolidated Financial Statements included in
this Annual Report on Form 10-K reflect the financial position, results of
operations and cash flows of the Sun Gro business as "discontinued
operations." In accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets,"
the Company's Consolidated Financial Statements have been restated to
reflect the financial position, results of operations and cash flows of the
Sun Gro business as "discontinued operations." Subsequent to March 27,
2002, charges for discontinued operations relate primarily to adjustments
to the proceeds from the sale of Sun Gro relating to working capital
adjustments, net of insurance proceeds received, in the second quarter and
amounts received relating to the partial refund of amounts held in tax
escrow in the fourth quarter of 2002.
(b) The Company recognized a gain of $1,565, net of tax, in the fourth quarter
of 2002, a $4,013 gain, net of tax, in the third quarter of 2003 and a $135
gain, net of tax, for the fourth quarter of 2003. The gain 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 third and fourth
quarter of 2003 related to the tax refund of the remaining $8,219 Canadian
plus accrued interest that the Company received from the CCRA.
(c) The cumulative effect of change in accounting principle for the first
quarter of $55,148, net of tax, represents the goodwill impairment charge
resulting from the Company's adoption of SFAS No. 142.
The other information in response to this item is submitted as a separate
section of this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90 days prior to this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Management, including the Company's principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as defined by Exchange Act Rule
15d-15(e). Based upon that evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in enabling the Company to record, process,
summarize and report information required to be included in the Company's
periodic SEC filings within the required time period.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's 2004 Proxy Statement to be filed
with the Securities and Exchange Commission.
The Company has adopted a code of conduct and ethics that applies to all
directors, officers and employees. The code of conduct and ethics is posted on
the Company's website, the address of which is www.hineshorticulture.com. The
Company intends to include on its website any amendments to, or waivers from, a
provision of its code of conduct and ethics that applies to the Company's
directors, officers and employees that relates to any element of the code of
conduct and ethics definition enumerated in Item 406(b) of Regulation S-K.
30
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's 2004 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's 2004 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's 2004 Proxy Statement to be filed
with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the Company's 2004 Proxy Statement to be filed
with the Securities and Exchange Commission.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements:
---------------------
PAGE
----
Report of Independent Auditors.......................................................................F-1
Consolidated Balance Sheets at December 31, 2003 and 2002............................................F-2
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001...........F-3
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended
December 31, 2003, 2002 and 2001.................................................................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001...........F-5
Notes to Consolidated Financial Statements...........................................................F-6
(2) Financial Statement Schedules:
------------------------------
All schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the Consolidated Financial Statements and Notes
thereto.
(b) We filed or furnished the following reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 2003:
(1) On October 1, 2003, we filed information pursuant to Item 5 of
Form 8-K relating the closing of the Refinancing on September 30,
2003.
(2) On November 6, 2003, we furnished information pursuant to Item 12
of Form 8-K relating to our results of operation and financial
condition for the third quarter ended September 30, 2003.
(c) List of Exhibits
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Acquisition Agreement, dated as of March 18, 2002, by and among
Hines Horticulture, Inc., Hines Nurseries, Inc., Sun Gro
Horticulture, Inc., Sun Gro Horticulture Canada Ltd. And Sun Gro
Horticulture Income Fund. (11)
2.2 Asset Purchase Agreement, dated as of March 26, 2002, by and
between Sun Gro Horticulture, Inc. and Sun Gro Horticulture
Canada Ltd. (11)
2.3 Underwriting Agreement, dated as of March 18, 2002, by and among
Hines Horticulture, Inc., Sun Gro Horticulture, Inc. and Sun Gro
Horticulture Income Fund. (11)
3.1 Restated Certificate of Incorporation of Hines Horticulture, Inc.
(2)
3.2 Amended and Restated By-laws of Hines Horticulture, Inc. (3)
4.1 Indenture, dated as of September 30, 2003, between Hines
Nurseries, Inc., Hines Horticulture, Inc., the Subsidiary
Guarantors named therein and the Bank of New York, as Trustee,
relating to Hines Nurseries, Inc.'s $175,000,000 10.25% Senior
Notes due 2011. (4)
4.2 Holdings Guaranty dated September 30, 2003, by Hines
Horticulture, Inc., in favor of and for the benefit of, Deutsche
Bank Trust Company Americas, as Guaranteed Party. (4)
4.3 Form of 144A Senior Note due 2011. (4)
4.4 Form of Senior Note due 2011. (4)
4.5 Form of Regulation S Senior Note due 2011. (4)
4.6 Registration Rights Agreement, dated as of September 30, 2003,
between Hines Nurseries, Inc., Hines Horticulture, Inc., Hines
SGUS Inc., Enviro-Safe Laboratories, Inc. and the Initial
Purchasers named therein. (4)
10.1 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Stephen P. Thigpen.
10.2 Employment Agreement dated as of August 4, 1995 between Hines
Horticulture and Claudia M. Pieropan.
10.3 1998 Long-Term Equity Incentive Plan. (4)*
10.4 Form of Incentive Stock Option Agreement. (2)*
10.5 Stock Purchase Agreement dated September 9, 1999 between Hines
Nurseries, Inc. and those individuals whose names are set forth
on the Signature Page to Stock Purchase Agreement. (6)
10.6 Purchase Agreement by and among Hines Nurseries, Inc., Lovell
Farms, Inc., Botanical Farms, Inc., Warren W. Lovell III, Jeffrey
S. Lovell, Jenifer E. Moreno, as Trustee of the Trace Lovell
Family Investment Trust and Enrique A. Yanes, Dated as of March
3, 2000. (8)
10.7 Warrant and Guarantee Agreement, dated November 28, 2000 by and
between Hines Horticulture, Inc., Hines Nurseries, Inc. and
Madison Dearborn Capital Partners, L.P. (9)
10.8 Warrant, dated November 28, 2000, issued by Hines Horticulture,
Inc. to Madison Dearborn Capital Partners, L.P. (9)
10.9 Amended and Restated Promissory Note by Blooming Farm, Inc. in
favor of Hines Nurseries, Inc. dated September 22, 2003. (4)
10.10 Amended and Restated Secured Promissory Note by Blooming Farm,
Inc. in favor of Hines Nurseries, Inc. dated September 22, 2003.
(4)
10.11 Amended and Restated Ground Lease dated September 1, 1996 by and
between The Irvine Company and Hines Horticulture, Inc. (4) **
10.12 Addendum No. 1 to Amended and Restated Ground Lease dated October
29, 1996 by and between The Irvine Company and Hines
Horticulture, Inc. (4)
10.13 Addendum No. 2 to Amended and Restated Ground Lease dated
December 18, 1997 by and between The Irvine Company and Hines
Horticulture, Inc. (4)
10.14 Addendum No. 3 to Amended and Restated Ground Lease dated May 19,
2003 by and between The Irvine Company and Hines Nurseries, Inc.
(4) **
10.15 Letter Agreement dated September 18, 2003 by and between The
Irvine Company and Hines Nurseries, Inc. (4)**
10.16 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 Agent, Fleet Capital Corporation and Lasalle
Business Credit, LLC, as Co-Syndication Agents, and Harris Trust
and Savings Bank and Wells Fargo Bank, N.A., as Co-Documentation
Agents. (4)
32
10.17 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 for and representative of the
beneficiaries named therein. (4)
10.18 Registration Agreement dated as of June 11, 1998 by and between
Hines Holdings, Inc. and MDCP. (2)
21.1 Subsidiaries of the Company. (+)
23.1 Consent of Independent Accountants (+)
31.1 Certification of CEO pursuant to Rules 13a-15(e) and 15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.(+)
31.2 Certification of CFO pursuant to Rules 13a-15(e) and 15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.(+)
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. (+)(++)
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. (+)(++)
- ----------------
+ Filed herewith.
* Management contract or compensatory arrangement.
++ This certification shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, or otherwise subject to the
liability of that section, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
(1) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on April 10, 2002.
(2) Incorporated by reference to Hines Horticulture, Inc.'s Registration
Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and
amended on May 26 1998 and June 16, 1998.
(3) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on
form 10-K for the year ended December 31, 1998. (4) Incorporated by
reference to Hines Horticulture, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September
30, 2003
(5) Incorporated by reference to Hines Holdings, Inc.'s Registration
Statement on Form S-4, File No. 33-99452, filed on November 15, 1995
and amended on December 22, 1995 and January 8, 1996.
(6) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
(8) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on March 17, 2000.
(9) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed
on November 29, 2000.
(10) Incorporated by reference to Hines Horticulture, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2002.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 2004.
HINES HORTICULTURE, INC.
By: /s/ Claudia M. Pieropan
---------------------------
Claudia M. Pieropan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 30, 2004.
SIGNATURE CAPACITY
- --------- --------
/s/ Robert A. Ferguson President, Chief Executive Officer and
- ---------------------------------- Director (Principal Executive Officer)
Robert A. Ferguson
/s/ Claudia M. Pieropan Chief Financial Officer, Secretary and
- ---------------------------------- Treasurer (Principal Financial and
Claudia M. Pieropan Accounting Officer)
/s/ Thomas R. Reusche Director and Chairman of the Board
- ----------------------
Thomas R. Reusche
/s/ Douglas D. Allen Director
- ----------------------------------
Douglas D. Allen
/s/ Stan R. Fallis Director
---------------------------------
Stan R. Fallis
/s/ James R. Tennant Director
- ----------------------------------
James R. Tennant
/s/ G. Ronald Morris Director
- ----------------------------------
G. Ronald Morris
/s/ Paul R. Wood Director
- ----------------------------------
Paul R. Wood
34
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and
Shareholders of Hines Horticulture, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 15(a)(1) on page 31 present fairly, in all material
respects, the financial position of Hines Horticulture, Inc. and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's Management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by Management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statements of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, the
provision of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," and the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long
Lived Assets."
As discussed in Note 1 to the consolidated financial statements, on March 27,
2002, the Company sold the assets of its wholly owned subsidiary Sun Gro
Horticulture, Inc.
PRICEWATERHOUSECOOPERS LLP
Orange County, California
March 15, 2004
F-1
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
ASSETS DECEMBER 31,
------ -------------------------------
2003 2002
------------- -------------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $601 and $1,997 23,724 25,838
Inventories 173,090 169,981
Prepaid expenses and other current assets 3,157 6,672
------------- -------------
Total current assets 199,971 202,491
------------- -------------
FIXED ASSETS, net 136,435 140,239
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $443 and $10,958 10,589 7,137
DEFERRED INCOME TAXES 12,234 12,966
GOODWILL 42,979 42,979
------------- -------------
$ 402,208 $ 405,812
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 10,104 $ 12,321
Accrued liabilities 9,234 10,911
Accrued payroll and benefits 6,971 6,845
Accrued interest 5,073 6,034
Interest rate swap agreement, current portion 5,320 --
Long-term debt, current portion 5,789 17,585
Borrowings on revolving credit facility 30,318 72,750
Deferred income taxes 65,186 63,994
------------- -------------
Total current liabilities 137,995 190,440
------------- -------------
LONG-TERM DEBT 209,287 164,829
INTEREST RATE SWAP AGREEMENT -- 8,741
OTHER LIABILITIES 2,196 --
SHAREHOLDERS' EQUITY
Common stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549
shares at December 31, 2003 and 2002 221 221
Additional paid-in capital 128,781 128,781
Accumulated deficit (76,272) (85,985)
Accumulated other comprehensive loss -- (1,215)
------------- -------------
Total shareholders' equity 52,730 41,802
------------- -------------
$ 402,208 $ 405,812
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Sales, net $ 338,272 $ 336,546 $ 326,973
Cost of goods sold 167,833 166,994 156,490
-------------- -------------- --------------
Gross profit 170,439 169,552 170,483
-------------- -------------- --------------
Selling and distribution expenses 101,557 99,154 94,082
General and administrative expenses 22,592 25,976 25,422
Other operating loss (income) 73 (2,792) (1,215)
Severance costs 1,562 -- --
Amortization of goodwill -- -- 3,686
-------------- -------------- --------------
Total operating expenses 125,784 122,338 121,975
-------------- -------------- --------------
Operating income 44,655 47,214 48,508
Other expenses
Interest expense 24,927 25,205 29,332
Interest rate swap agreement (income) expense (2,710) 2,573 4,114
Amortization of deferred financing expense 3,771 4,383 4,742
Loss on debt extinguishment 9,235 1,739 --
-------------- -------------- --------------
35,223 33,900 38,188
-------------- -------------- --------------
Income before provision for income taxes, discontinued operations
and cumulative effect of change in accounting principle 9,432 13,314 10,320
Income tax provision 3,867 5,456 4,627
-------------- -------------- --------------
Income from continuing operations before discontinued operations
and cumulative effect of change in accounting principle 5,565 7,858 5,693
Income (loss) from discontinued operations, net of tax (benefit)
expense of $(2,784), $10,442 and $11,316 4,148 (5,413) (2,268)
Cumulative effect of change in accounting principle, net of tax
benefit of $23,609 -- (55,148) --
-------------- -------------- --------------
Net income (loss) $ 9,713 $ (52,703) $ 3,425
============== ============== ==============
Basic and diluted earnings per share:
Income per common share from continuing operations $ 0.25 $ 0.36 $ 0.26
Income (loss) per common share from discontinued operations $ 0.19 $ (0.25) $ (0.10)
Cumulative effect of change in accounting principle $ -- $ (2.50) $ --
-------------- -------------- --------------
Net income (loss) per common share $ 0.44 $ (2.39) $ 0.16
============== ============== ==============
Weighted average shares outstanding-Basic 22,072,549 22,072,549 22,072,549
============== ============== ==============
Weighted average shares outstanding-Diluted 22,072,549 22,078,012 22,091,208
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share data)
ACCUMULATED
COMMON STOCK OTHER
----------------------- ADDITIONAL NOTES REC. COMPRE- SHARE- COMPRE-
NUMBER OF PAID-IN STOCK ACCUMULATED HENSIVE HOLDERS' HENSIVE
SHARES AMOUNT CAPITAL SALES DEFICIT LOSS EQUITY INCOME
------------ ---------- ------------ ---------- ----------- ------------ ----------- ------------
BALANCE, December 31, 2000 22,072,549 $ 221 $ 128,781 $ (30) $ (36,707) $ (4,858) $ 87,407 $ 11,671
------------ ---------- ------------ ---------- ----------- ------------ ------------ ============
Net income -- -- -- -- 3,425 -- 3,425 3,425
Cumulative foreign currency
translation adjustments,
net of tax benefit of $238 -- -- -- -- -- (342) (342) (342)
Accumulated other comprehen-
sive loss, net of tax
benefit of $1,233 -- -- -- -- -- (1,775) (1,775) (1,775)
Payments received on notes
receivable from stock sales -- -- -- 30 -- -- 30 --
------------ ---------- ------------ ---------- ----------- ------------ ------------ ------------
BALANCE, December 31, 2001 22,072,549 221 128,781 -- (33,282) (6,975) 88,745 $ 1,308
------------ ---------- ------------ ---------- ----------- ------------ ------------ ============
Net loss -- -- -- -- (52,703) -- (52,703) (52,703)
Cumulative foreign currency
translation adjustments,
net of tax expense of
$3,614 -- -- -- -- -- 5,200 5,200 5,200
Accumulated other comprehen-
sive loss, net of tax
expense of $388 -- -- -- -- -- 560 560 560
------------ ---------- ------------ ---------- ----------- ------------ ------------ ------------
BALANCE, December 31, 2002 22,072,549 221 128,781 -- (85,985) (1,215) 41,802 $ (46,943)
------------ ---------- ------------ ---------- ----------- ------------ ------------ ============
Net income -- -- -- -- 9,713 -- 9,713 9,713
Accumulated other comprehen-
sive loss, net of tax
expense of $843 -- -- -- -- -- 1,215 1,215 1,215
------------ ---------- ------------ ---------- ----------- ------------ ------------ ------------
BALANCE, December 31, 2003 22,072,549 $ 221 $ 128,781 $ -- $ (76,272) $ -- $ 52,730 $ 10,928
============ ========== ============ ========== =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 9,713 $ (52,703) $ 3,425
(Income) loss from discontinued operations (4,148) 5,413 2,268
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change -- 55,148 --
Depreciation, depletion and amortization 9,394 8,565 12,436
Amortization of deferred financing costs 3,771 4,383 4,742
Interest rate swap agreement (income) expense (2,710) 2,573 4,114
Loss on extinguishment of debt 9,235 1,739 --
Deferred income taxes 3,867 5,456 4,508
Loss (gain) on disposition of fixed assets 73 (2,793) --
------------ ------------ ------------
29,195 27,781 31,493
Change in working capital accounts:
Accounts receivable 1,790 2,344 (1,428)
Inventories (3,188) (5,306) (11,550)
Prepaid expenses and other current assets (1,305) 42 (442)
Accounts payable and accrued liabilities (3,799) 4,851 8,478
------------ ------------ ------------
Net cash provided by operating activities 22,693 29,712 26,551
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (5,589) (7,209) (18,178)
Proceeds from sale of fixed assets -- 3,584 --
Proceeds from sale of discontinued operations 5,778 118,948 --
Leasehold incentive proceeds 2,275 -- --
Contingent consideration for acquisitions -- (1,265) (9,211)
Net cash used by discontinued operations -- (4,320) (1,497)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,464 109,738 (28,886)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings on revolving line of credit (42,432) (27,250) 20,500
Proceeds from the issuance of long-term debt 215,000 -- --
Repayments of long-term debt (180,555) (108,000) (18,195)
Deferred financing costs (11,637) (4,200) --
Redemption premium on early payment of subordinated notes (5,533) -- --
Repayments of notes receivables from stock sales -- -- 30
------------ ------------ ------------
Net cash (used in) provided by financing activities (25,157) (139,450) 2,335
------------ ------------ ------------
NET CHANGE IN CASH -- -- --
CASH, beginning of period -- -- --
------------ ------------ ------------
CASH, end of period $ -- $ -- $ --
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest - Continuing Operations $ 25,833 $ 22,797 $ 31,710
Cash paid for interest - Discontinued Operations $ -- $ 528 $ 3,743
Cash paid for income taxes - Continuing Operations $ 457 $ 81 $ --
Cash paid for income taxes - Discontinued Operations $ -- $ 1,162 $ 727
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware
corporation, produces and distributes horticultural products through its wholly
owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and Enviro-Safe
Laboratories, Inc. Unless otherwise specified, references to "Hines" or the
"Company" refer to Hines Horticulture, Inc. and its subsidiaries.
Hines is a leading national supplier of ornamental shrubs, color plants and
container-grown plants with commercial nursery facilities located in Arizona,
California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and
Texas. Hines markets its products to retail and commercial customers throughout
the United States.
As of December 31, 2001, the Company also had a growing media business. The
growing media business was conducted through Sun Gro Horticulture, Inc. ("Sun
Gro-U.S."), a wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly
owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun
Gro-Canada's direct and indirect Canadian subsidiaries.
On March 27, 2002, the Company sold the assets of Sun Gro-U.S. and the
stock of Sun Gro-Canada, its growing media business, to the Sun Gro Horticulture
Income Fund, a newly established Canadian income fund. The assets sold included
14 facilities located across Canada and the United States and control of
approximately 50,000 acres of peat bogs in Canada. Hines no longer harvests,
produces or sells peat moss or other growing media soil mixes. Hines received
net proceeds of approximately $125,000 from the sale, which were used to pay
down outstanding bank debt. Included in the loss on disposal of Sun Gro-U.S. for
the year end December 31, 2002 was $19,127 of goodwill.
For the years ended December 31,
--------------------------------
2003 2002 2001
--------- --------- ---------
Income (loss) from operations of discontinued
Sun Gro-U.S., net of tax $ -- $ 153 $ (2,268)
Gain (loss) on disposal of Sun Gro-U.S., net
of tax 4,148 (5,566) --
--------- --------- ---------
Income (loss) on discontinued operations,
net of tax $ 4,148 $ (5,413) $ (2,268)
========= ========= =========
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 sale be withheld in an escrow account pending the
determination of whether certain aspects of the sale were taxable for Canadian
purposes. The proceeds withheld were not included in the initial measurement of
the loss on the sale of Sun Gro. In 2002, the Company 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.
The Consolidated Financial Statements include the accounts of Hines and its
wholly owned subsidiaries after elimination of intercompany accounts and
transactions. The Company early adopted the provisions of Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
F-6
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Long-Lived Assets" ("SFAS No. 144"), and accordingly, the Company's Consolidated
Financial Statements have been restated to reflect the financial position,
results of operations and cash flows of the Sun Gro business as "discontinued
operations." Revenues of Sun Gro-U.S. were $31,150 and $131,127 for the partial
period ended March 27, 2002 and for the year ended December 31, 2001,
respectively. Income before provision for income taxes were $26,925 and $14,736
for the partial period ended March 27, 2002 and for the year ended December 31,
2001, respectively.
SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------
REVENUE RECOGNITION
-------------------
Hines records revenue, net of sales discounts and allowances, when all of
the following have occurred; an agreement of sale exists, product delivery and
acceptance has occurred and collection is reasonably assured.
SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and
allowance are maintained at a level believed adequate by Management to absorb
probable losses in the trade receivable due to sales discounts and allowances.
The provision rate is established by Management using the following criteria:
past sales returns experience, current economic conditions, and other relevant
factors, and are re-evaluated on a quarterly basis. The allowance is increased
by provisions for sales discounts and allowances charged against income. The
Company records revenue, net of sales discounts and allowances, when the risk of
ownership is transferred to the customer. Allowances are provided at the time of
revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When
Right of Return Exists."
ALLOWANCE FOR DOUBTFUL ACCOUNTS: The allowance for doubtful accounts is
maintained at a level believed adequate by Management to reflect the probable
losses in the trade receivable due to customer default, insolvency or
bankruptcy. The provision is established by Management using the following
criteria: customer credit history, customer current credit rating and other
relevant factors, and is re-evaluated on a quarterly basis. The allowance is
increased by provisions to bad debt expense charged against income. All
recoveries on trade receivables previously charged off are credited to the
accounts receivable recovery account charged against income, while direct
charge-offs of trade receivables are deducted from the allowance.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company is subject to credit risk primarily through its accounts
receivable balances. The Company does not require collateral for its accounts
receivable. The Company's largest customer accounted for approximately 47%, 47%
and 44% of the Company's consolidated net sales, excluding discontinued
operations, in 2003, 2002 and 2001, respectively. The Company's next largest
customer is Lowe's Companies, inc., accounted for approximately 12%, 12% and 9%
of its net sales in 2003, 2002 and 2001, respectively. No other customer
accounts for more than 10% of net sales.
AMORTIZATION OF DEFERRED FINANCING EXPENSES
-------------------------------------------
Deferred financing expenses are being amortized using a method, which
approximates the effective interest method over the term of the associated
financing agreements. As a result of the Company's refinancing of both the
amended and restated Senior Credit Facility and Senior Notes, $11,032 was
capitalized as deferred financing fees.
F-7
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DEPRECIATION
------------
Fixed assets are stated at cost less accumulated depreciation. Interest is
capitalized for qualifying assets during the assets' acquisition period. No
interest was capitalized for the years ended December 31, 2003 and 2002, and
$786 was capitalized for the year ended December 31, 2001. Capitalized interest
is recorded as part of the asset to which it relates and is depreciated over the
respective asset's estimated useful life. Depreciation has been provided for on
the straight-line method over the following estimated economic useful lives:
Buildings 10 to 40 years
Machinery and equipment 2 to 10 years
Vehicles and trailers 2 to 10 years
Software 5 to 10 years
Furniture and fixtures 3 to 5 years
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In accordance with SFAS No. 144, long-lived assets and intangible assets
with determinate lives are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates potential impairment by comparing the
carrying amount of the asset with the estimated undiscounted future cash flows
associated with the use of the asset and its eventual disposition. Should the
review indicate that the asset is not recoverable; the Company's carrying value
of the asset would be reduced to its estimated fair value, which is generally
measured by future discounted cash flows.
GOODWILL
--------
On January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS," whereby goodwill is no longer amortized, but instead is
subject to a periodic impairment review. As the Company's operations are
comprised of one reporting unit, the Company reviews the recoverability of its
goodwill by comparing the Company's fair value to the net book value of its
assets. If the book value of the Company's assets exceeds the Company's fair
value, the goodwill is written down to its implied fair value. The Company
evaluates the carrying value of goodwill in the fourth quarter of each year and
when events and circumstances indicate that the assets may be impaired. At
December 31, 2003, the Company did not believe any impairment of goodwill had
occurred.
Upon adoption of SFAS No. 142, the Company completed its initial impairment
analysis in the fourth quarter of 2002. The Company recorded a one-time,
non-cash charge of $55,148 to reduce the carrying value of its goodwill. The
measurement of the fair value of the goodwill was based on the market
capitalization of the Company's common stock over a reasonable period of time,
including a control premium. Accordingly, the primary factor contributing to the
impairment charge was the overall deterioration in the Company's stock price and
the Company's substantial leverage. The Company has recognized this impairment
charge as a cumulative effect of change in accounting principle for the year
ended December 31, 2002.
Pursuant to SFAS No. 142, the results for periods prior to adoption are not
restated. If SFAS No. 142 had been effective January 1, 2001, net income and
basic and diluted earnings per share would have been as follows for the year
ended December 31, 2001:
Net Income:
Reported net income $3,425
Goodwill amortization, net of tax 2,064
-------
Adjusted net income $5,489
=======
Earnings per basic and diluted share
Reported net income $0.16
Adjusted net income $0.25
F-8
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ENVIRONMENTAL COSTS
-------------------
The Company recognizes environmental liabilities when conditions requiring
remediation are identified. The Company determines its liability on a site by
site basis and records a liability at the time when it is probable and can be
reasonably estimated. Expenditures that extend the life of the related property
or mitigate or prevent future environmental contamination are capitalized.
Environmental liabilities are not discounted or reduced for possible recoveries
from insurance carriers.
INTERNAL USE SOFTWARE
---------------------
The Company capitalizes costs of materials, consultants, interest and
payroll and payroll-related costs for employees incurred in developing
internal-use computer software in accordance with Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Computer software costs are being amortized using the
straight-line method over an estimated useful life of 5 to 10 years.
INVENTORIES
-----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. Hines' ornamental nursery stock has an average growing period of
approximately eighteen months. All nursery stock is classified as a current
asset based on Hines' normal operating cycle.
INCOME TAXES
------------
Hines' operations are agricultural in nature and the Company derives
significant benefits by qualifying to use the cash method of accounting for
federal tax purposes. The Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences
between the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
ADVERTISING
-----------
The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $884, $1,025 and $977 for the years ended
December 31, 2003, 2002 and 2001, respectively, excluding the discontinued
operations.
ACCRUED LIABILITIES
-------------------
Accrued liabilities include amounts accrued for expected claims costs
relating to our insurance programs for workers compensation and auto liability.
The Company has large deductibles for these lines of insurance, which means the
Company must pay the portion of each claim that falls below the deductible
amount. 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. Expected claims
costs for each year are accrued on a ratable monthly basis with a corresponding
charge against income. The adequacy of the accruals is reviewed at the end of
each quarter. The accruals for the expected costs relating to the insurance
programs for workers compensation and auto liability are maintained at levels
believed by the Company's management to adequately reflect their claims
obligations.
COMPREHENSIVE INCOME
--------------------
Comprehensive income encompasses all changes in equity other than those
arising from transactions with stockholders, and consisted of net income,
currency translation adjustments and unrealized net gains and losses on cash
flow hedges. As a result of the sale of Sun Gro and the debt refinancing there
are no items in accumulated other comprehensive income at December 31, 2003
F-9
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
Management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
EARNINGS PER SHARE ("EPS")
--------------------------
Earnings per share are calculated in accordance with SFAS No. 128 "Earnings
per Share" ("SFAS No. 128"), which requires the Company to report both basic
earnings per share, based on the weighted-average number of common shares
outstanding, and diluted earnings per share, based on the weighted-average
number of common shares outstanding adjusted to include the potentially dilutive
effect of outstanding stock options and warrants. For the years ended December
31, 2003, 2002 and 2001, the incremental shares related to 440,000 warrants
outstanding increased fully diluted shares by 0, 5,463 and 18,659, respectively.
Additionally, for the years ended December 31, 2003, 2002 and 2001, shares
related to employee stock options in the amount of 1.0 million, 0.3 million and
2.8 million, respectively, were excluded from the computation of diluted
earnings per share because they would have been anti-dilutive.
SHIPPING AND HANDLING FEES AND COSTS
------------------------------------
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 00-10 "Accounting for Shipping and Handling Fees and
Costs" ("EITF No. 00-10"). The EITF concluded that amounts billed to a customer
in a sale transaction related to shipping and handling should be classified as
revenue. Shipping and handling fees included as revenue totaled $30,276, $27,229
and $25,473 for the years ended December 31, 2003, 2002 and 2001, respectively,
excluding those attributable to discontinued operations.
The Company classifies shipping and handling costs as part of selling and
distribution expenses. Shipping and handling costs were $70,866, $69,044 and
$64,694 for the years ended December 31, 2003, 2002 and 2001, respectively,
excluding those attributable to discontinued operations.
DERIVATIVES
-----------
Derivative instruments are accounted in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The Company's only derivative instrument is an interest rate swap agreement that
does not qualify for hedge accounting treatment under SFAS No. 133 and therefore
is marked to market.
ACCOUNTING PRONOUNCEMENTS ADOPTED
---------------------------------
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.
F-10
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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. In accordance with SFAS No. 146, the Company recorded $1,562 of severance
expense primarily related to the resignation of Stephen P. Thigpen, Chairman and
Chief Executive Officer, for the year ended December 31, 2003.
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."
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Net income (loss), as reported $ 9,713 $(52,703) $ 3,425
Stock option expense, net of tax
benefit of $338, $755 and $1,407 (486) (1,086) (2,025)
--------- --------- ---------
Pro forma net (loss) income $ 9,227 $(53,789) $ 1,400
========= ========= =========
Earnings per share:
Basic and diluted - as reported $ 0.44 $ (2.39) $ 0.16
========= ========= =========
Basic and diluted - pro forma $ 0.42 $ (2.44) $ 0.06
========= ========= =========
The Company estimates the weighted average fair value of each stock option
on the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
2003 2002 2001
---- ---- ----
Dividend Yield 0% 0% 0%
Expected volatility 74.95% 74.16% 85.77%
Risk-free interest rate 3.77% 3.36% 5.56%
Expected life Six years Six years Six years
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 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
F-11
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). The primary objectives of FIN 46 are to provide guidance on
the identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities") and to determine when
and which business enterprise ("primary beneficiary") should consolidate the
variable interest entity. FIN 46 requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved. Variable
interest entities that effectively disperse risks will not be consolidated
unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. In addition, FIN 46
requires that the primary beneficiary, as well as all other enterprises with a
significant variable interest in a variable interest entity, make additional
disclosures. Certain disclosure requirements of FIN 46 were effective for
financial statements issued after January 31, 2003. In December 2003, the FASB
revised FIN 46 ("FIN 46R") to address certain FIN 46 implementation issues. The
revised provisions are applicable no later than the first reporting period
ending after March 15, 2004. The adoption of FIN 46 and FIN 46R is not expected
to have a material effect on the Company's financial position, results of
operations and cash flows.
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform to current
year presentations.
2. INVENTORIES
-----------
Inventories consisted of the following:
December 31,
--------------------------------
2003 2002
-------------- --------------
Nursery stock $ 162,861 $ 161,007
Materials and supplies 10,229 8,974
-------------- --------------
$ 173,090 $ 169,981
============== ==============
3. FIXED ASSETS
------------
Fixed assets consisted of the following:
December 31,
--------------------------------
2003 2002
-------------- --------------
Land $ 31,570 $ 31,541
Buildings and improvements 93,972 93,064
Machinery and equipment 34,408 32,327
Software 18,247 17,891
Construction in progress 5,804 3,518
-------------- --------------
184,001 178,341
Less accumulated depreciation (47,566) (38,102)
-------------- --------------
Fixed assets, net $ 136,435 $ 140,239
============== ==============
F-12
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
4. INTEREST RATE SWAP AGREEMENT
----------------------------
In May 2000, the Company entered into an interest rate swap agreement to
economically hedge $75,000 of debt. This interest rate swap agreement does not
qualify for hedge accounting treatment under SFAS No. 133 and therefore is
marked to market. 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 refinancing of long-term debt (see Note 6),
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 $5,320 at December 31, 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 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, net of tax, of
$(1,215). For the year ended December 31, 2003, $420 was amortized and the
balance of $795 was written off as a loss on debt extinguishment due to the
refinancing. For the year ended December 31, 2003, the Company recognized
pre-tax income $2,710 reported as interest rate swap agreement income in the
condensed consolidated statements of operations. This was comprised of a $3,421
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.
In addition, as a result of the refinancing of long-term debt, the Company
recognized the remaining pre-tax unamortized value of the interest rate swap
agreement of $1,347 as loss on debt retirement in the 2003 statement of
operations. For the year ended December 31, 2002, the Company recognized $2,573
as interest rate swap agreement expense in the condensed consolidated statements
of operations.
5. REVOLVING LINES OF CREDIT
On September 30, 2003, the Company amended and restated its Senior Credit
Facility. 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 $145,000 (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.
SENIOR CREDIT FACILITY. The Company entered into the amended and restated
Senior Credit Facility on September 30, 2003. 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 specifically restricts Hines Nurseries and its subsidiaries from making
distributions to Hines Horticulture. Distributions to Hines Horticulture are
limited to (i) payments covering customary general and administrative expenses,
not to exceed $500 in any fiscal year, (ii) payments to discharge any
consolidated tax liabilities, (iii) and payments, not to exceed as much as
$8,300 in any fiscal year or $9,300 over the term of the Senior Credit Facility,
to enable Hines Horticulture to repurchase its own outstanding common stock from
holders other than its majority shareholder. Dividends to Hines Horticulture are
disallowed under the Senior Credit Facility.
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 December 31, 2003, the Company was in compliance with all
covenants.
F-13
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 that 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 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. At December 31, 2003, the Company had $38,080 of
available credit.
REPAYMENT. Under the terms of the Senior Credit Facility, 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.
F-14
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
6. LONG-TERM DEBT
--------------
December 31, December 31,
2003 2002
------------ ------------
Term loan at the bank's reference rate plus 2.25% or the LIBOR
(1.19% at December 31, 2003) 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 76 162
------------ ------------
215,076 182,414
Less current portion 5,789 17,585
------------ ------------
Total long-term debt $ 209,287 $ 164,829
============ ============
The following are the Company's estimated principal maturities of long-term
debt outstanding for each of the next five years ending December 31 and
thereafter:
2004 $ 5,789
2005 5,714
2006 5,714
2007 5,714
2008 17,145
Thereafter 175,000
--------------
Total $ 215,076
==============
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
year ended December 31, 2003.
SENIOR CREDIT FACILITY - TERM LOAN. The term loan facility was drawn down
in full in connection with the refinancing. Please see Footnote 5 above for the
terms.
F-15
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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.
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.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
OPERATING LEASES
The Company leases certain land, office, trucks and warehouse facilities
under various renewable long-term operating leases, which expire through 2010.
Certain of these leases include escalation clauses based upon changes in the
consumer price index and/or the fair rental value of leased land. One of the
operating land leases requires the Company to pay rent equal to the greater of
2.25 percent, increasing to 3 percent by the year 2010, of the sales derived
from the related land, or a minimum per acre amount, as defined in the
agreement. Total rent expense for continuing operations for these operating
lease agreements for the years ended December 31, 2003, 2002 and 2001 was
$7,972, $9,174 and $8,144, respectively.
The following are the Company's future minimum annual payments under its
non-cancelable operating leases for each of the next five years ending December
31 and thereafter:
Continuing
Operations
------------
2004 $ 4,693
2005 3,898
2006 3,017
2007 1,164
2008 618
Thereafter 7,106
------------
$ 20,496
============
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
F-16
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 million, which include payments of $2 million and percentage rent credits
of up to $2 million. The payment of $2 million is being amortized over the life
of the lease. Additionally, 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.
LEGAL MATTERS
In connection with the Company's acquisition of Lovell, the Company agreed,
subject to various provisions in the purchase agreement, to make earn-out
payments to the sellers of up to approximately $5.0 million for fiscal 2001 if
the purchased operations achieved certain performance thresholds. Although the
Company determined that the thresholds were not met and no earn-out payment was
required, the sellers of Lovell are disputing the Company's determination and
have initiated arbitration proceedings against the Company. The sellers also
contend that the amount of the earn-out at issue is $7.5 million. As of the date
hereof, the two sides have mutually selected an arbitrator, discovery is
proceeding and the arbitration hearing has been scheduled to occur during May
2004. The Company intends to vigorously contest this matter and believes it has
meritorious defense to the sellers' claims. However, in the event of an adverse
determination, the Company could be required to pay all or a portion of the
disputed earn-out payment plus other fees and expenses. The amount of such
earn-out payment would become part of the purchase price for the assets
associated with the acquisition and would be accounted for as goodwill, subject
to the impairment testing discussed in "New Accounting Pronouncements" under
Note 1 to the Consolidated Financial Statements.
Additionally, from time to time, the Company is involved in various
disputes and litigation matters, which arise in the ordinary course of business.
The litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company.
Management believes, however, that the ultimate resolution of such matters will
not have a material adverse impact on the Company's consolidated financial
position, results of operations or cash flows.
8. SHAREHOLDERS' EQUITY
--------------------
On June 22, 1998, the Board adopted the 1998 Long-Term Equity Incentive
Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for grants of stock
options, stock appreciation rights, restricted stock, performance awards and any
combination of the foregoing to certain directors, officers and employees of the
Company and its subsidiaries. The purpose of the 1998 Stock Plan is to provide
such individuals with incentives to maximize shareholder value and otherwise
contribute to the success of the Company and to enable the Company to attract,
retain and reward the best available persons for positions of substantial
responsibility. The options are granted at the fair market value of the shares
underlying the options at the date of grant, and generally become exercisable
over a four-year period and expire in ten years.
On June 1, 2000, the Board adopted and approved to increase the number of
shares of common stock available for issuance under the 1998 Stock Plan by 1.0
million shares. At December 31, 2003, the Company had reserved 3.6 million
shares of its common stock for issuance upon exercise of options granted or to
be granted under this plan.
On July 9, 2002, the Company offered to exchange all outstanding stock
options held by certain employees under the 1998 Stock Plan for new stock
options to be granted under the 1998 Stock Plan upon the terms and subject to
the conditions described in the offer to exchange. If an employee elected to
participate in the exchange, they were required to tender for exchange all of
the stock options they held in exchange for a certain number of new stock
options. The offer to exchange expired on August 14, 2002 and all stock options
properly tendered before the expiration of the offer to exchange were accepted
and cancelled on August 15, 2002. A total of 1.8 million stock options were
tendered by employees and cancelled pursuant to the terms of the offer to
exchange.
On February 18, 2003, the Company granted new stock options to those
employees who participated in the exchange program. The exercise price of the
new stock options is $5.50 per share. A total of 0.8 million new options were
granted pursuant to this exchange program. There was no additional compensation
expense associated with the exchange program.
F-17
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") in 1998. As permitted by SFAS No.
123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations, but provides pro forma disclosures of net income and
earnings per share as if the fair value method (as defined in SFAS No. 123) had
been applied. Had compensation cost been determined using the fair value method
prescribed by SFAS No. 123, the Company's net income and earnings per share,
including discontinued operations, for the years ended December 31, 2003 and
2002 as noted in Note 1.
A summary of the status of the Company's stock option plan as of December
31 is presented below:
2003 2002 2001
------------------------------- -------------------------------- -------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ---------------- ------------- ---------------- ------------- ----------------
Outstanding -beginning of year 271,078 $ 8.33 2,824,814 $ 9.81 2,897,480 $ 9.93
Granted 1,303,633 5.50 -- -- 81,000 4.53
Exercised -- -- -- -- -- --
Cancelled (584,988) 5.60 (2,553,736) 9.97 (153,666) 8.91
------------- ------------- -------------
Outstanding -end of year 989,723 $ 6.22 271,078 $ 8.33 2,824,814 $ 9.81
============= ============= =============
Exercisable 933,834 208,303 1,961,827
============= ============= =============
Weighted average fair value
of options granted during period $ 3.62 $ -- $ 3.52
============= ============= =============
The weighted average remaining contractual life was eight years at December
31, 2003. As of December 31, 2003, expiration dates ranged from June 22, 2008 to
October 8, 2013. The range of exercise prices was $3.32 to $11.00 for options
outstanding as of December 31, 2003.
WARRANTS
--------
In November of 2000, in connection with the Third Amendment to the
Company's then existing senior credit facility, the Company issued a warrant to
its majority stockholder in exchange for guarantee for the extension of the
$30,000 seasonal revolving loan commitment. The warrant is convertible into
440,000 shares of common stock at an exercise price of $3.50 per share valued at
$843. The warrant is exercisable at any time prior to December 31, 2005.
F-18
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES
------------
The components of (loss) income before provision for income taxes and the
provision for income taxes consisted of the following:
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
(Loss) income before income taxes:
U.S. $ 10,796 $ (64,377) $ 10,723
Foreign -- 3,963 8,645
---------- ---------- ----------
$ 10,796 $ (60,414) $ 19,368
========== ========== ==========
Income from continuing operations $ 9,432 $ 13,314 $ 10,320
Income from discontinued operations 1,364 5,029 9,048
Loss from SFAS No. 142 adjustment -- (78,757) --
---------- ---------- ----------
$ 10,796 $ (60,414) $ 19,368
========== ========== ==========
Current income tax provision:
Federal $ -- $ -- $ --
State -- 1,400 --
Foreign -- 819 1,090
---------- ---------- ----------
$ -- $ 2,219 $ 1,090
---------- ---------- ----------
Deferred provision (benefit):
Federal $ 959 $ (8,360) $ 12,121
State 124 (2,410) 863
Foreign -- 840 1,869
---------- ---------- ----------
1,083 (9,930) 14,853
---------- ---------- ----------
$ 1,083 $ (7,711) $ 15,943
========== ========== ==========
F-19
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 35 percent to income before
provision for income taxes as follows:
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
Provision computed at statutory rate $ 3,779 $ (21,145) $ 6,779
Increase (decrease) resulting from:
State tax, net of federal benefit 506 (1,010) 546
Foreign taxes -- 272 389
Goodwill -- 8,881 413
Canada withholding tax (3,344) 3,344 --
Meals and entertainment 80 118 194
Reduction in tax reserves -- -- (482)
Investment in Foreign Subsidiary -- 1,840 8,125
Other 62 (11) (21)
---------- ---------- ----------
$ 1,083 $ (7,711) $ 15,943
========== ========== ==========
Provision for continuing operations $ 3,867 $ 5,456 $ 4,627
Provision (benefit) for discontinued
operations (2,784) 10,442 11,316
Benefit for SFAS No. 142 adjustment -- (23,609) --
---------- ---------- ----------
$ 1,083 $ (7,711) $ 15,943
========== ========== ==========
F-20
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DEFERRED TAX ASSETS (LIABILITIES) ARE COMPRISED OF THE FOLLOWING:
December 31,
Deferred tax assets: 2003 2002
---------- ----------
Net operating loss carryforwards 10,780 5,102
Book/tax difference in debt 2,101 7,640
Intangible asset basis differences 15,723 17,869
Other 160 (284)
---------- ----------
Gross deferred tax assets 28,764 30,327
---------- ----------
Deferred tax liabilities:
Accrual to cash adjustment (65,186) (63,994)
Fixed asset basis differences (15,075) (12,562)
Canada withholding tax -- (3,344)
Other (1,455) (1,455)
---------- ----------
Gross deferred tax liabilities (81,716) (81,355)
---------- ----------
Net deferred tax liability $ (52,952) $ (51,028)
========== ==========
Deferred income tax liability, current $ (65,186) $ (63,994)
Deferred income tax asset (liability), non-current 12,234 12,966
---------- ----------
$ (52,952) $ (51,028)
========== ==========
The Company derives significant benefits by qualifying to use the cash
method of accounting for federal income tax purposes. Under the cash method,
sales are included in taxable income when payments are received and expenses are
deducted as they are paid. The primary benefit the Company receives is the
ability to deduct the cost of inventory as it is incurred. The net benefit
realized by the Company thus far is represented by the "Accrual to Cash
Adjustment" item above. Because the items to which this "Accrual to Cash
Adjustment" relate to are comprised of current assets and current liabilities in
the balance sheet (such as inventory, accounts receivable, accounts payable,
etc.), this deferred tax item is also characterized as current.
At December 31, 2003, the Company had approximately $26,893 in net
operating loss carryforwards for federal income tax reporting purposes. The
Company's federal net operating losses begin to expire in 2020.
10. EMPLOYEE BENEFIT PLANS
----------------------
As of January 1, 2001, Hines Nurseries established a 401(k) Retirement
Savings Plan for salaried and permanent hourly employees. As of January 2002,
participants voluntary contribution limits were increased in accordance with IRS
rules. As of January 1, 2003, pursuant to IRS rules, participants may now make
voluntary contributions to the plan up to a maximum of twelve thousand dollars
not to exceed 20 percent of their annual compensation (as defined). In addition
to this, employees over age 50 may now contribute an additional two thousand
dollars. Hines' matching contribution to the Plan is equal to 100 percent of the
first 3 percent of a participant's voluntary deferral of salary, and 50 percent
of the next 2 percent of a participant's voluntary deferral of salary per
calendar year. As of May 16, 2003, Hines discontinued its matching
contributions. As of January 1, 2004, pursuant to IRS rules, participants may
make voluntary contributions to the plan up to a maximum of thirteen thousand
dollars not to exceed 50 percent of their annual compensation (as defined). In
addition to this, employees over age 50 may now contribute an additional three
thousand dollars.
The total expense related to the Hines plan was $632, $1,593 and $342 for
the years ended December 31, 2003, 2002 and 2001, respectively.
F-21
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
CASH
The carrying amount reported in the balance sheet for cash approximates its
fair value.
SHORT-TERM AND LONG-TERM DEBT
The fair value of the Senior Notes is based on the closing price of the
debt securities at December 31, 2003 and 2002. The carrying amount of the
Company's other long-term debt approximates its fair value based upon borrowing
rates currently available to the Company. The carrying amount of the short-term
debt approximates the fair value based on the short-term maturity of the
instrument.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2003 and 2002 are as follows:
December 31,
------------------------------------------------------------------
2003 2002
------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
Cash $ -- $ -- $ -- $ --
Revolving line of credit 30,318 30,318 72,750 72,750
Long-term debt (including
current portion) 215,076 230,826 182,414 184,533
12. VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:
For the Years Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Beginning balance $ 1,997 $ 1,303 $ 1,528
Charges to expense 163 1,049 699
Amounts written off (1,559) (355) (924)
--------------- -------------- --------------
Ending balance $ 601 $ 1,997 $ 1,303
=============== ============== ==============
F-22
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
13. GUARANTOR/NON-GUARANTOR DISCLOSURES
-----------------------------------
The 10.25% Senior Subordinated 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 100% owned
subsidiaries of the parent guarantor and the parent and subsidiary guaranties
are full, unconditional and joint and several. Separate financial statements of
Hines Nurseries, Hines SGUS and Enviro-Safe are not presented in accordance with
the exceptions provided by Rule 3-10 of Regulation S-X.
The following condensed consolidating information shows (a) Hines
Horticulture on a parent company basis only as the parent guarantor (carrying
its investment in its subsidiaries under the equity method), (b) Hines Nurseries
as the issuer, (c) Hines SGUS and Enviro-Safe as subsidiary guarantors, (d)
eliminations necessary to arrive at the information for the parent guarantor and
its direct and indirect subsidiaries on a consolidated basis and (e) the parent
guarantor on a consolidated basis as follows:
o Condensed consolidating balance sheets as of December 31, 2003 and
2002;
o Condensed consolidating statements of operations for the years ended
December 31, 2003, 2002 and 2001; and
o Condensed consolidating statements of cash flows for the years ended
December 31, 2003, 2002 and 2001.
F-23
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 23,361 363 -- 23,724
Inventories -- 172,626 464 -- 173,090
Prepaid expenses and other current assets -- 2,640 517 -- 3,157
------------- ------------- ------------- ------------- -------------
Total current assets -- 198,627 1,344 -- 199,971
------------- ------------- ------------- ------------- -------------
Fixed assets, net -- 136,399 36 -- 136,435
Deferred financing expenses, net -- 10,589 -- -- 10,589
Deferred income taxes 2,922 28,461 -- (19,149) 12,234
Goodwill, net -- 42,979 -- -- 42,979
Investments in subsidiaries 57,641 -- -- (57,641) --
------------- ------------- ------------- ------------- -------------
$ 60,563 $ 417,055 $ 1,380 $ (76,790) $ 402,208
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 10,099 $ 5 $ -- $ 10,104
Accrued liabilities -- 9,061 173 -- 9,234
Accrued payroll and benefits -- 6,971 -- -- 6,971
Accrued interest -- 5,073 -- -- 5,073
Long-term debt, current portion -- 5,789 -- -- 5,789
Borrowings on revolving credit facility -- 30,318 -- -- 30,318
Deferred income taxes -- 68,972 -- (3,786) 65,186
Intercompany accounts 7,832 (7,832) -- -- --
------------- ------------- ------------- ------------- -------------
Total current liabilities 7,832 128,451 178 (3,786) 132,675
------------- ------------- ------------- ------------- -------------
Long-term debt -- 209,287 -- -- 209,287
Interest rate swap agreement -- 5,320 -- -- 5,320
Deferred income taxes -- 15,363 -- (15,363) --
Accrued long-term liability, net -- 2,196 -- -- 2,196
Shareholders' equity
Common stock 221 16,981 990 (17,971) 221
Additional paid in capital 128,781 21,362 -- (21,362) 128,781
Retained earnings (deficit) (76,271) 18,095 212 (18,308) (76,272)
Total shareholders' equity 52,731 56,438 1,202 (57,641) 52,730
------------- ------------- ------------- ------------- -------------
$ 60,563 $ 417,055 $ 1,380 $ (76,790) $ 402,208
============= ============= ============= ============= =============
F-24
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 25,309 529 -- 25,838
Inventories -- 169,258 723 -- 169,981
Prepaid expenses and other current assets -- 6,672 5,144 (5,144) 6,672
------------- ------------- ------------- ------------- -------------
Total current assets -- 201,239 6,396 (5,144) 202,491
------------- ------------- ------------- ------------- -------------
Fixed assets, net -- 140,195 44 -- 140,239
Deferred financing expenses, net -- 7,137 -- -- 7,137
Deferred income taxes 2,921 10,045 -- -- 12,966
Goodwill, net -- 42,979 -- -- 42,979
Investments in subsidiaries 46,713 -- -- (46,713) --
------------- ------------- ------------- ------------- -------------
$ 49,634 $ 401,595 $ 6,440 $ (51,857) $ 405,812
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 12,231 $ 90 $ -- $ 12,321
Accrued liabilities -- 10,855 56 -- 10,911
Accrued payroll and benefits -- 6,844 1 -- 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 -- 63,855 139 -- 63,994
Intercompany accounts 7,832 (7,650) (182) -- --
------------- ------------- ------------- ------------- -------------
Total current liabilities 7,832 182,504 5,248 (5,144) 190,440
------------- ------------- ------------- ------------- -------------
Long-term debt -- 164,829 -- -- 164,829
Derivative Liability -- 8,741 -- -- 8,741
Shareholders' equity
Common stock 221 16,981 990 (17,971) 221
Additional paid in capital 128,781 21,362 -- (21,362) 128,781
Retained earnings (deficit) (85,985) 8,393 202 (8,595) (85,985)
Accumulated other comprehensive loss (1,215) (1,215) -- 1,215 (1,215)
------------- ------------- ------------- ------------- -------------
Total shareholders' equity 41,802 45,521 1,192 (46,713) 41,802
------------- ------------- ------------- ------------- -------------
$ 49,634 $ 401,595 $ 6,440 $ (51,857) $ 405,812
============= ============= ============= ============= =============
F-25
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------ ----------- ----------- ------------ ------------
Sales, net $ -- $ 336,647 $ 1,625 $ -- $ 338,272
Cost of goods sold -- 166,771 1,062 -- 167,833
----------- ----------- ----------- ----------- -----------
Gross Profit -- 169,876 563 -- 170,439
Operating expenses -- 125,252 532 -- 125,784
----------- ----------- ----------- ----------- -----------
Operating income -- 44,624 31 -- 44,655
----------- ----------- ----------- ----------- -----------
Other expenses:
Interest -- 24,927 -- -- 24,927
Interest - intercompany -- -- -- -- --
Interest rate swap agreement expense -- (2,710) -- -- (2,710)
Amortization of deferred financing expenses, other (9,713) 3,771 -- 9,713 3,771
Loss on debt extinguishment -- 9,235 -- -- 9,235
----------- ----------- ----------- ----------- -----------
(9,713) 35,223 -- 9,713 35,223
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 9,713 9,401 31 (9,713) 9,432
Income tax (benefit) provision -- 3,846 21 -- 3,867
----------- ----------- ----------- ----------- -----------
Net income before discontinued operations 9,713 5,555 10 (9,713) 5,565
(Loss) income from discontinued operations, net of tax -- 4,148 -- -- 4,148
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 9,713 $ 9,703 $ 10 $ (9,713) $ 9,713
=========== =========== =========== =========== ===========
F-26
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Sales, net $ -- $ 334,669 $ 33,027 $ (31,150) $ 336,546
Cost of goods sold -- 165,680 18,243 (16,929) 166,994
------------- ------------- ------------- ------------- -------------
Gross Profit -- 168,989 14,784 (14,221) 169,552
Operating expenses -- 121,848 (8,228) 8,718 122,338
------------- ------------- ------------- ------------- -------------
Operating income -- 47,141 23,012 (22,939) 47,214
------------- ------------- ------------- ------------- -------------
Other expenses:
Interest -- 25,927 528 (1,250) 25,205
Interest - intercompany -- (722) 722 -- --
Interest rate swap agreement expense -- 2,573 -- -- 2,573
Amortization of deferred financing
expenses, other 104,260 1,915 -- (101,792) 4,383
Loss on debt extinguishment -- 1,739 -- -- 1,739
------------- ------------- ------------- ------------- -------------
104,260 31,432 1,250 (103,042) 33,900
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for income
taxes (104,260) 15,709 21,762 80,103 13,314
Income tax (benefit) provision (2,668) 8,095 19,502 (19,473) 5,456
------------- ------------- ------------- ------------- -------------
Net income before discontinued operations (101,592) 7,614 2,260 99,576 7,858
(Loss) income from discontinued operations,
net of tax (6,259) (1,371) -- 2,217 (5,413)
Cumulative effect of change in accounting
principle, net of tax 55,148 (55,148) -- (55,148) (55,148)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (52,703) $ (48,905) $ 2,260 $ 46,645 $ (52,703)
============= ============= ============= ============= =============
F-27
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
------------- ------------- ------------- ------------- -------------
Sales, net $ -- $ 325,178 $ 132,922 $ (131,127) $ 326,973
Cost of goods sold -- 155,363 81,206 (80,079) 156,490
------------- ------------- ------------- ------------- -------------
Gross Profit -- 169,815 51,716 (51,048) 170,483
Operating expenses -- 121,571 35,111 (34,707) 121,975
------------- ------------- ------------- ------------- -------------
Operating income -- 48,244 16,605 (16,341) 48,508
------------- ------------- ------------- ------------- -------------
Other expenses:
Interest -- 32,882 3,743 (7,293) 29,332
Interest rate swap agreement expense -- 4,114 -- -- 4,114
Interest - intercompany -- (3,550) 3,550 -- --
Amortization of deferred financing
expenses, other (3,209) 6,463 (5,688) 7,176 4,742
------------- ------------- ------------- ------------- -------------
(3,209) 39,909 1,605 (117) 38,188
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes 3,209 8,335 15,000 (16,224) 10,320
Income tax (benefit) provision (216) 4,735 11,424 (11,316) 4,627
------------- ------------- ------------- ------------- -------------
Net income 3,425 3,600 3,576 (4,908) 5,693
(Loss) income from discontinued operations,
net of tax -- -- -- (2,268) (2,268)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 3,425 $ 3,600 $ 3,576 $ (7,176) $ 3,425
============= ============= ============= ============= =============
F-28
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
------------- ------------- ------------- ------------- -------------
Cash provided by (used in) operating activities $ -- $ 22,693 $ -- $ -- $ 22,693
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets -- (5,589) -- -- (5,589)
Proceeds from sale of discontinued
operations -- 5,778 -- -- 5,778
Leasehold incentive proceeds -- 2,275 -- -- 2,275
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
investing activities -- 2,464 -- -- 2,464
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Net (repayments) borrowings on revolving
line of credit -- (42,432) -- -- (42,432)
Proceeds from the issuance of long-term debt -- 215,000 -- -- 215,000
Repayments of long-term debt -- (180,555) -- -- (180,555)
Deferred financing costs incurred -- (11,637) -- -- (11,637)
Penalty on early payment of subordinated
notes -- (5,533) -- -- (5,533)
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities -- (25,157) -- -- (25,157)
------------- ------------- ------------- ------------- -------------
Net increase in cash -- -- -- -- --
Cash, beginning of period -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Cash, end of period $ -- $ -- $ -- $ -- $ --
============= ============= ============= ============= =============
F-29
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Cash provided by (used in) operating activities $ -- $ 29,712 $ (2,233) $ 2,233 $ 29,712
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets, net -- (7,209) (2,503) 2,503 (7,209)
Proceeds from sale of fixed assets -- 3,971 -- (387) 3,584
Proceeds from sale of discontinued
operations -- (8,390) 127,338 -- 118,948
Acquisitions, net of cash -- (1,265) -- -- (1,265)
Net cash used by discontinued operations -- -- -- (4,320) (4,320)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
investing activities -- (12,893) 124,835 (2,204) 109,738
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from revolving line of credit -- (27,250) -- -- (27,250)
Intercompany advances (repayments) -- 92,840 (92,840) -- --
Repayments of long-term debt -- (96,000) (12,000) -- (108,000)
Deferred financing costs -- (4,200) -- -- (4,200)
Dividends received (paid) -- 17,791 (17,791) -- --
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities -- (16,819) (122,631) -- (139,450)
------------- ------------- ------------- ------------- -------------
Effect of exchange rate changes on cash
and cash equivalents -- -- 29 (29) --
------------- ------------- ------------- ------------- -------------
Net increase in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Cash, end of year $ -- $ -- $ -- $ -- $ --
============= ============= ============= ============= =============
F-30
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
------------- ------------- ------------- ------------- -------------
Cash provided by (used in) operating activities $ -- $ 26,551 $ 6,742 $ (6,742) $ 26,551
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets, net -- (18,178) (2,725) 2,725 (18,178)
Acquisitions, net of cash -- (9,211) -- -- (9,211)
Net cash used by discontinued operations -- -- -- (1,497) (1,497)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
investing activities -- (27,389) (2,725) 1,228 (28,886)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from revolving line of credit -- 20,500 -- -- 20,500
Intercompany advances (repayments) (30) (3,953) 3,983 -- --
Repayments of long-term debt -- (18,195) (8,330) 8,330 (18,195)
Dividends received (paid) -- 2,486 (2,486) -- --
Repayments of notes receivables from
stock sales 30 -- -- -- 30
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities -- 838 (6,833) 8,330 2,335
------------- ------------- ------------- ------------- -------------
Effect of exchange rate changes on cash
and cash equivalents -- -- 2,816 (2,816) --
------------- ------------- ------------- ------------- -------------
Net increase in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Cash, end of year $ -- $ -- $ -- $ -- $ --
============= ============= ============= ============= =============
F-31