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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission File Number
0-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes( ) No (X)
As of April 30, 2004 there were 22,072,549 shares of Common Stock, par
value $0.01 per share, outstanding.
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HINES HORTICULTURE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2004 and 2003 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 31
Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
(Dollars in thousands, except share data)
(Unaudited)
ASSETS
- ------ March 31, December 31,
2004 2003
------------- -------------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $444 and $601 51,692 23,724
Inventories 197,033 173,090
Prepaid expenses and other current assets 3,674 3,157
------------- -------------
Total current assets 252,399 199,971
------------- -------------
FIXED ASSETS, net of accumulated depreciation
of $50,311 and $47,566 134,583 136,435
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $888 and $443 10,225 10,589
DEFFERRED INCOME TAXES 12,234 12,234
GOODWILL 42,979 42,979
------------- -------------
$ 452,420 $ 402,208
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 23,521 $ 10,104
Accrued liabilities 10,935 9,234
Accrued payroll and benefits 5,980 6,971
Accrued interest 9,569 5,073
Interest rate swap agreement, current portion 4,450 5,320
Long-term debt, current portion 5,767 5,789
Borrowings on revolving credit facility 64,625 30,318
Deferred income taxes 64,440 65,186
------------- -------------
Total current liabilities 189,287 137,995
------------- -------------
LONG-TERM DEBT 209,287 209,287
OTHER LIABILITIES 2,189 2,196
------------- -------------
Total liabilities 400,763 349,478
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549 shares
at March 31, 2004 and December 31, 2003 221 221
Additional paid-in capital 128,781 128,781
Accumulated deficit (77,345) (76,272)
------------- -------------
Total shareholders' equity 51,657 52,730
------------- -------------
$ 452,420 $ 402,208
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended March 31,
2004 2003
------------- -------------
Sales, net $ 60,390 $ 59,253
Cost of goods sold 31,124 28,600
------------- -------------
Gross profit 29,266 30,653
------------- -------------
Selling and distribution expenses 19,198 19,047
General and administrative expenses 5,611 5,586
Other operating expenses -- 1,242
------------- -------------
Total operating expenses 24,809 25,875
------------- -------------
Operating income 4,457 4,778
Other expenses
Interest, net 6,700 6,291
Interest rate swap agreement income (869) (324)
Amortization of deferred financing expenses 445 1,050
------------- -------------
6,276 7,017
------------- -------------
Loss before income taxes (1,819) (2,239)
Income tax benefit (746) (917)
------------- -------------
Net loss $ (1,073) $ (1,322)
============= =============
Basic and diluted earnings per share:
Net loss per common share $ (0.05) $ (0.06)
============= =============
Weighted average shares outstanding--Basic and Diluted 22,072,549 22,072,549
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 4
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,073) $ (1,322)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,715 2,295
Amortization of deferred financing expenses 445 1,050
Interest rate swap agreement income (869) (324)
Deferred income tax benefits (746) (917)
------------ ------------
472 782
Change in working capital accounts:
Accounts receivable (27,968) (25,578)
Inventories (24,012) (25,025)
Prepaid expenses and other current assets (517) (1,236)
Accounts payable and accrued liabilities 18,622 9,384
------------ ------------
Change in working capital accounts (33,875) (42,455)
------------ ------------
Net cash used by operating activities (33,403) (41,673)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (863) (1,428)
Leasehold incentive proceeds 62 --
------------ ------------
Net cash used in investing activities (801) (1,428)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving line of credit 34,307 43,750
Repayments of long-term debt (22) (21)
Deferred financing expenses incurred (81) (628)
------------ ------------
Net provided by financing activities 34,204 43,101
------------ ------------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
------------ ------------
CASH, end of period $ -- $ --
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,126 $ 8,791
Cash paid for income taxes $ 7 $ 77
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 5
HINES HORTICULTURE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. Description of Business:
------------------------
Hines Horticulture, Inc. ("Hines" or the "Company"), a
Delaware corporation, produces and distributes horticultural products
through its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines
Nurseries") and Enviro-Safe Laboratories, Inc. Unless otherwise
specified, references to "Hines" or the "Company" refer to Hines
Horticulture, Inc. and its subsidiaries.
Hines is a leading national supplier of ornamental shrubs,
color plants and container-grown plants with commercial nursery
facilities located in Arizona, California, Florida, Georgia, New York,
Oregon, Pennsylvania, South Carolina and Texas. Hines markets its
products to retail and commercial customers throughout the United
States and Canada.
In March 2002, the Company completed the sale of Sun Gro
Horticulture, which it refers to as Sun Gro, which was the Company's
peat moss and growing soil mix business. The Company utilized the net
proceeds from the sale of Sun Gro primarily to reduce outstanding
indebtedness. As a result of the sale of Sun Gro, the Company no longer
harvests or produces peat moss or other soil mixes. The Company
recognized a $5,413 loss, net of tax, from its discontinued operations
for the year ended December 31, 2002 (a loss of $6,978 in the first
quarter of 2002 and a gain of $1,565 in the fourth quarter of 2002) and
a $4,013 gain, net of tax, for the nine months ended September 30,
2003. The gains in the fourth quarter of 2002 related to the Company's
receipt of $4,917 Canadian from an escrow account that the Canadian
Customs & Revenue Authority ("CCRA") required to be set up at the time
of the Sun Gro sale to withhold $13,136 Canadian pending the
determination of whether certain aspects of the sale were taxable for
Canadian purposes. The Company's current operations consist solely of
its nursery operations.
The Condensed Consolidated Financial Statements include the
accounts of Hines and its wholly owned subsidiaries after elimination
of intercompany accounts and transactions.
2. Unaudited Financial Information:
--------------------------------
The unaudited financial information furnished herein, in the
opinion of management, reflects all adjustments (consisting of only
normal recurring adjustments), which are necessary to state fairly the
consolidated financial position, results of operations and cash flows
of the Company as of and for the periods indicated. The Company
presumes that users of the interim financial information herein have
read or have access to the Company's audited consolidated financial
statements for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation, may be determined
in that context.
Page 6
Accordingly, footnote and other disclosures, which would
substantially duplicate the disclosures contained in the Company's Form
10-K for the year ended December 31, 2003, filed on March 30, 2004 by
Hines Horticulture, Inc. under the Securities Exchange Act of 1934, as
amended, have been omitted. The financial information herein is not
necessarily representative of a full year's operations.
3. Reclassifications:
------------------
Certain prior year amounts have been reclassified to conform
to current year presentations.
4. Earnings Per Share:
-------------------
Earnings per share are calculated in accordance with Statement
of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share," which requires the Company to report both basic earnings per
share, based on the weighted-average number of common shares
outstanding, and diluted earnings per share, based on the
weighted-average number of common shares outstanding adjusted to
include the potentially dilutive effect of outstanding stock options
and warrants using the treasury method. For the three months ended
March 31, 2004, the incremental shares related to 440,000 warrants
outstanding were excluded from the computation of diluted earnings per
share because they would have been anti-dilutive. Additionally, for the
three months ended March 31, 2004, shares related to the underlying
employee stock options in the amount of 1,088,723 were excluded from
the computation of diluted earnings per share because they would have
been anti-dilutive.
5. Adoption Of Accounting Pronouncements:
--------------------------------------
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. In accordance
with SFAS No. 146, the Company recorded $1,242 of severance expenses
primarily related to the resignation of Stephen P. Thigpen, Chairman
and Chief Executive Officer, for the quarter ended March 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.
Page 7
148, the Company continues to follow the intrinsic value method of
accounting under Accounting Principles Board No. 25 "Accounting for
Stock Issued to Employees."
Three months ended
March 31,
2004 2003
------------ ------------
Net loss, as reported $ (1,073) $ (1,322)
Stock option expense (124) (8)
------------ ------------
Pro forma net loss $ (1,197) $ (1,330)
============ ============
Net loss per share:
Basic and diluted - as reported $ (0.05) $ (0.06)
============ ============
Basic and diluted - pro forma $ (0.05) $ (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:
March 31,
2004 2003
---------- ----------
Dividend Yield 0% 0%
Expected volatility 74.22% 78.88%
Risk-free interest rate 3.33% 3.35%
Expected life Six years Six years
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 did not have an impact on the Company's
financial position, results of operations or cash flows.
Page 8
6. Inventories:
------------
Inventories consisted of the following:
March 31, December 31,
2004 2003
------------- -------------
Nursery stock $ 183,897 $ 162,861
Material and supplies 13,136 10,229
------------- -------------
$ 197,033 $ 173,090
============= =============
7. 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.
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 Senior Credit Facility contains
customary representations and warranties and customary events of
Page 9
default and other covenants. As of March 31, 2004, the Company was in
compliance with all covenants.
INTEREST RATE; FEES. The interest rate on the loans under the
Senior Credit Facility may be, at the Company's option, Prime rate
loans or 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 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 revolving loan facility and (ii) 2.25%
for the 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 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 revolving loan facility and (ii)
3.25% for the 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 March 31, 2004, the Company had
$47,072 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 and through the end of the term, with the
full remaining balance payable on the last installment date. Subject to
certain exceptions, 100% of the net cash proceeds the Company 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 are required to be applied to repay the term loan
facility and are to be applied on a pro rata basis to all remaining
scheduled installments of the term loan facility. The Senior Credit
Facility may also be voluntarily prepaid at any time without premium or
penalty.
Page 10
8. Long-Term Debt:
---------------
March 31, December 31,
2004 2003
------------ ------------
Term loan at the bank's reference rate plus
2.25% or the LIBOR rate plus 3.25%
Principal payments, beginning June 30, 2004,
due each quarter ending June 30, September
30 and December 31 in the amount of $1,905
with the outstanding balance of $15,238 due
on September 30, 2008 $ 40,000 $ 40,000
Senior Notes, interest at 10.25% payable
semi-annually on each April 1 and October 1,
maturing on October 1, 2011 175,000 175,000
Other obligations due at various dates
through 2004 54 76
------------ ------------
215,054 215,076
Less current portion 5,767 5,789
------------ ------------
Total long-term debt $ 209,287 $ 209,287
============ ============
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.
SENIOR CREDIT FACILITY - TERM LOAN. The term loan facility was drawn
down in full in connection with the refinancing. Please see Note 7
above for the terms.
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
Page 11
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 OR 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.
9. Interest Rate Swap Agreement:
-----------------------------
In May 2000, the Company entered into an interest rate swap
agreement to hedge $75,000 of debt. The interest rate swap agreement
effectively changes the Company's exposure on its variable-rate
interest payments to fixed-rate interest payments (7.13%) based on the
3-month LIBOR rate in effect at the beginning of each quarterly period.
Despite the debt refinancing, the interest rate swap agreement remains
outstanding and matures in February 2005. The estimated fair value of
the Company's obligation under the interest rate swap agreement was
$4,450 at March 31, 2004.
10. Comprehensive Loss:
-------------------
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to
the Company's shareholders. The Company's comprehensive income includes
the amortization of the fair value of the interest rate agreement
recognized upon adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The components of comprehensive
loss during the three months ended March 31, 2004 and 2003, were as
follows:
Three months ended
March 31,
2004 2003
------------ ------------
Net loss $ (1,073) $ (1,322)
Amortization of interest rate swap agreement,
net of tax of $97 -- 140
------------ ------------
Comprehensive loss $ (1,073) $ (1,182)
============ ============
11. 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
Page 12
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 March 31, 2004 and
December 31, 2003;
o Condensed consolidating statements of operations for the three months
ended March 31, 2004 and 2003; and
o Condensed consolidating statements of cash flows for the three months
ended March 31, 2004 and 2003.
Page 13
GUARANTOR / NON-GUARANTOR DISCLOSURES
Consolidating Balance Sheet
As of March 31, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 51,121 571 -- 51,692
Inventories -- 196,447 586 -- 197,033
Prepaid expenses and other current assets -- 3,216 458 -- 3,674
------------- ------------- ------------- ------------- -------------
Total current assets -- 250,784 1,615 -- 252,399
------------- ------------- ------------- ------------- -------------
Fixed assets, net -- 134,549 34 -- 134,583
Deferred financing expenses, net -- 10,225 -- -- 10,225
Deferred income taxes 2,921 28,462 -- (19,149) 12,234
Goodwill, net -- 42,979 -- -- 42,979
Investments in subsidiaries 56,568 -- -- (56,568) --
------------- ------------- ------------- ------------- -------------
$ 59,489 $ 466,999 $ 1,649 $ (75,717) $ 452,420
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 23,181 $ 340 $ -- $ 23,521
Accrued liabilities -- 10,933 2 -- 10,935
Accrued payroll and benefits -- 5,980 -- -- 5,980
Accrued interest -- 9,569 -- -- 9,569
Interest rate swap agreement, current portion -- 4,450 -- -- 4,450
Long-term debt, current portion -- 5,767 -- -- 5,767
Borrowings on revolving credit facility -- 64,625 -- -- 64,625
Deferred income taxes -- 68,226 -- (3,786) 64,440
Intercompany accounts 7,832 (7,832) -- -- --
------------- ------------- ------------- ------------- -------------
Total current liabilities 7,832 184,899 342 (3,786) 189,287
------------- ------------- ------------- ------------- -------------
Long-term debt -- 209,287 -- -- 209,287
Deferred income taxes -- 15,363 -- (15,363) --
Other liabilties -- 2,189 -- -- 2,189
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) (77,345) 16,918 317 (17,235) (77,345)
------------- ------------- ------------- ------------- -------------
Total shareholders' equity 51,657 55,261 1,307 (56,568) 51,657
------------- ------------- ------------- ------------- -------------
$ 59,489 $ 466,999 $ 1,649 $ (75,717) $ 452,420
============= ============= ============= ============= =============
Page 14
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Consolidating Balance Sheet
As of December 31, 2003
(Dollars in thousands)
(Unaudited)
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
Interest rate swap agreement -- 5,320 -- -- 5,320
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 7,832 133,771 178 (3,786) 137,995
------------- ------------- ------------- ------------- -------------
Long-term debt -- 209,287 -- -- 209,287
Deferred income taxes -- 15,363 -- (15,363) --
Other liabilities -- 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
============= ============= ============= ============= =============
Page 15
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three months ended March 31, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Sales, net $ -- $ 59,826 $ 564 $ -- $ 60,390
Cost of goods sold -- 30,757 367 -- 31,124
------------- ------------- ------------- ------------- -------------
Gross Profit -- 29,069 197 -- 29,266
Operating expenses -- 24,715 94 -- 24,809
------------- ------------- ------------- ------------- -------------
Operating income -- 4,354 103 -- 4,457
------------- ------------- ------------- ------------- -------------
Other expenses:
Interest, net -- 6,700 -- -- 6,700
Interest rate swap agreement expense -- (869) -- -- (869)
Amortization of deferred financing expenses, other 1,073 445 -- (1,073) 445
------------- ------------- ------------- ------------- -------------
1,073 6,276 -- (1,073) 6,276
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for income taxes (1,073) (1,922) 103 1,073 (1,819)
Income tax (benefit) provision -- (788) 42 -- (746)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (1,073) $ (1,134) $ 61 $ 1,073 $ (1,073)
============= ============= ============= ============= =============
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Consolidating Statement of Operations
For the three months ended March 31, 2003
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Sales, net $ -- $ 58,681 $ 572 $ -- $ 59,253
Cost of goods sold -- 28,228 372 -- 28,600
------------- ------------- ------------- ------------- -------------
Gross Profit -- 30,453 200 -- 30,653
Operating expenses -- 25,741 134 -- 25,875
------------- ------------- ------------- ------------- -------------
Operating income -- 4,712 66 -- 4,778
------------- ------------- ------------- ------------- -------------
Other expenses:
Interest, net -- 6,291 -- -- 6,291
Interest rate swap agreement expense -- (324) -- -- (324)
Amortization of deferred financing expenses, other 1,322 1,050 -- (1,322) 1,050
------------- ------------- ------------- ------------- -------------
1,322 7,017 -- (1,322) 7,017
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for income taxes (1,322) (2,305) 66 1,322 (2,239)
Income tax (benefit) provision -- (944) 27 -- (917)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ (1,322) $ (1,361) $ 39 $ 1,322 $ (1,322)
============= ============= ============= ============= =============
Page 16
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Cash used in operating activities $ -- $ (33,403) $ -- $ -- $ (33,403)
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets -- (863) -- -- (863)
Leasehold incentive proceeds -- 62 -- -- 62
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities -- (801) -- -- (801)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from revolving line of credit -- 34,307 -- -- 34,307
Repayments of long-term debt -- (22) -- -- (22)
Deferred financing costs -- (81) -- -- (81)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities -- 34,204 -- -- 34,204
------------- ------------- ------------- ------------- -------------
Net change in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Cash, end of year $ -- $ -- $ -- $ -- $ --
============= ============= ============= ============= =============
Page 17
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------- ------------- ------------- ------------- -------------
Cash used in operating activities $ -- $ (41,673) $ -- $ -- $ (41,673)
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets -- (1,428) -- -- (1,428)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities -- (1,428) -- -- (1,428)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from revolving line of credit -- 43,750 -- -- 43,750
Repayments of long-term debt (21) -- -- (21)
Deferred financing costs -- (628) -- -- (628)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities -- 43,101 -- -- 43,101
------------- ------------- ------------- ------------- -------------
Net change in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Cash, end of year
$ -- $ -- $ -- $ -- $ --
============= ============= ============= ============= =============
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Unless the context otherwise requires, the term (1) "Hines
Horticulture" means Hines Horticulture, Inc., a Delaware corporation, (2) the
term "Hines Nurseries" means Hines Nurseries, Inc., a California corporation,
and a wholly owned subsidiary of Hines Horticulture and (3) the terms "we," "us"
and "our" mean, collectively, the combined entity of Hines Horticulture and its
wholly owned subsidiaries.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Except for historical information contained herein, this quarterly
report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended, which involve certain risks and uncertainties.
Forward-looking statements are included with respect to, among other things, the
company's current business plan and strategy and strategic operating plan. These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. Our actual
results or outcomes may differ materially from those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Important factors that we believe might cause actual results to differ
from any results expressed or implied by these forward-looking statements are
discussed in the cautionary statements contained in Exhibit 99.1 to this Form
10-Q, which are incorporated herein by reference. In assessing forward-looking
statements contained herein, readers are urged to read carefully all cautionary
statements contained in this Form 10-Q. Our business and operations are subject
to a number of risks and uncertainties, and the cautionary statements contained
in this Form 10-Q should not be considered to be a definitive list of all
factors that might affect our business, financial condition and future results
of operations and should be read in conjunction with the factors, risks and
uncertainties contained in our other filings with the Securities and Exchange
Commission. For any forward-looking statements, we claim the protection of the
safe harbor for forward-looking statements in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
OVERVIEW
We are a leading national supplier of ornamental shrubs, color plants
and container-grown plants with 13 commercial nursery facilities located in
Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South
Carolina and Texas. We produce approximately 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.
Hines Horticulture currently produces and distributes horticultural products
through its wholly owned subsidiaries, Hines Nurseries and Enviro-Safe
Laboratories, Inc.
Page 19
On September 30, 2003, we closed a refinancing plan, which we refer to
as the refinancing, which included the issuance by our wholly owned subsidiary,
Hines Nurseries, of $175.0 million principal amount of 10.25% Senior Notes due
2011 and amending and restating our senior credit facility, which, as amended,
we refer to as our Senior Credit Facility. The Senior Credit Facility has a term
of five years and consists of a $145.0 million revolving facility, with
availability subject to a borrowing base, and a $40.0 million term loan
facility. Borrowings under the Senior Credit Facility are secured by
substantially all of our assets. The net proceeds from the refinancing were used
to refinance all borrowings under our prior Credit Facility and to redeem all of
Hines Nurseries' outstanding 12.75% Senior Subordinated Notes due 2005.
DISCONTINUED OPERATIONS
In March 2002, we completed the sale of Sun Gro Horticulture, which we
refer to as Sun Gro, to a newly established Canadian income fund. We received
net proceeds of approximately $125.0 million from the sale, which includes the
tax refunds from the Canadian Customs & Revenue Authority recorded in the fourth
quarter of 2002 and third quarter of 2003, the majority of which were used to
pay down outstanding indebtedness. As a result of the sale of Sun Gro, we no
longer harvest or produce peat moss or other growing soil mixes.
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 March 31, 2004, we had
a current liability for deferred income taxes of $64.4 million. The liability is
deemed current for accounting purposes because the majority of the items to
which this liability relates are comprised of current assets and current
liabilities in our balance sheet (such as inventory, accounts receivable and
accounts payable). The classification of this liability as a current item,
however, does not mean that it is required to be paid within the next twelve
months.
Page 20
SEASONALITY
Our business is highly seasonal. The seasonal nature of our operations
results in a significant increase in our working capital between the growing and
selling cycles. As a result, operating activities in the first and fourth
quarters use significant amounts of cash, and in contrast, operating activities
in the second and third quarters generate substantial cash as we ship inventory
and collect accounts receivable. We have experienced, and expect to continue to
experience, significant variability in net sales, operating income and net
income on a quarterly basis.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2003
NET SALES. Net sales of $60.4 million for the three months ended March
31, 2004 increased $1.1 million, or 1.9%, from net sales of $59.3 million for
the comparable period in 2003. The increase in sales was due to strong sales of
bedding plants and shrubs throughout the Sunbelt markets primarily as a result
of favorable weather in March. Sales in the Northeast declined as prolonged
winter weather reduced early spring orders for shrubs. Also affecting sales in
the Northeast, and other parts of the country, was the continued trend among
gardening retailers to better manage inventory levels by reducing pre-spring
stocking orders, which has resulted in lower first quarter sales. Sales in the
Southeast were weaker as we strategically consolidated our customer base and
transitioned certain sales to customers in other regions. However, we did see
higher same-store sales partially offset the impact of the customer
consolidation in the Southeast.
GROSS PROFIT. Gross profit of $29.3 million for the three months ended
March 31, 2004 decreased $1.4 million, or 4.5%, from gross profit of $30.7
million for the comparable period in 2003. As a percentage of net sales, gross
profit for the quarter declined to 48.5% from 51.7% in 2003. The decline in
gross profit was attributable to the softer sale of shrubs in the Northeast, and
a decrease in sales of bedding plants in the Southeast. These two regions tend
to generate better gross profit margins than those in other markets.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$19.2 million for the three months ended March 31, 2004 increased $0.2 million,
or 0.8%, from $19.0 million for the comparable period in 2003 due to increased
sales. As a percentage of net sales, selling and distribution expenses remained
unchanged at 32% as a result of new logistics strategies, improved common
carrier relations and better payload management. These initiatives have been
instrumental in mitigating rising fuel costs and the recently implemented
carrier charges associated with new federal trucking regulations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the three months ended March 31, 2004 were $5.6 million, unchanged
from the same period a year ago as a result of our continued focus on
controlling costs.
OTHER OPERATING EXPENSES. There were no other operating expenses for
the three months ended March 31, 2004. Other operating expense of $1.2 million
for the three months ended March 31, 2003 represents severance costs associated
Page 21
with the resignation of our former Chief Executive Officer in February of 2003
and the elimination of certain other management positions.
OPERATING INCOME. Operating income of $4.5 million for the three months
ended March 31, 2004 decreased by $0.3 million, or 6.7%, from $4.8 million for
the comparable period in 2003 due primarily to our lower gross profit margins.
The comparable period in 2003 included the severance expense of $1.2 million, as
discussed above.
OTHER EXPENSES. Other expenses of $6.3 million for the three months
ended March 31, 2004 decreased $0.7 million, or 10.6%, from $7.0 million for the
comparable period in 2003. The decrease was due to the impact of the mark to
market adjustment on our interest rate swap partially offset by higher interest
expense. Financing costs included income of $0.9 million relating to the fair
value adjustment of the interest rate swap agreement compared to income of $0.3
million in the comparable period a year ago. Interest expense increased to $6.7
million from $6.3 million a year earlier due to our debt refinancing, which
shifted more of our revolving debt to higher interest rate fixed-term
instruments in order to increase availability under our new revolving credit
facility.
INCOME TAX BENEFIT. Our effective income tax rate for the three months
ended March 31, 2004 was 41%, unchanged from the same period a year ago.
NET LOSS. Net loss of $1.1 million for the three months ended March 31,
2004 improved by $0.2 million, or 18.8%, from $1.3 million for the comparable
period in 2003. This improvement was due primarily to the improvement in our
other expenses and partially offset by the decline in our gross profit margins,
as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are funds generated by operations and
borrowings under our senior credit facility. Our senior credit facility expires
in 2008 and consists of a revolving facility with availability of up to $145.0
million (subject to certain borrowing base limits) and a term loan facility of
up to $40.0 million. Note 7 and Note 8 to the Condensed, Consolidated Financial
Statements (unaudited) included in Part I, Item 1 of this Quarterly Report on
Form 10-Q provides additional information pertaining to our senior credit
facility. At March 31, 2004, we were in compliance with all of our debt
covenants.
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 used in operating activities was $33.4 million for the three
months ended March 31, 2004 compared to $41.7 million for the comparable period
in 2003 mainly due to the change in timing of our semi-annual interest payment
of $9.0 million on our notes compared to $5.0 million paid in the first quarter
of 2003. However, continued improvements in working capital, through better
inventory management, have also contributed to us using less cash in the
Page 22
operations of our business. The improvement in working capital was also affected
to a lesser degree by an increase in prepaid expenses for the three months ended
March 31, 2004 compared to the same period a year ago.
Net cash used in investing activities was $0.8 million for the three
months ended March 31, 2004 compared to $1.4 million for the same period a year
ago due to a decrease in capital expenditures. Capital expenditures for the
three months ended March 31, 2004 primarily included the purchase of nursery
related machinery and equipment.
Net cash provided by financing activities was $34.2 million for the
three months ended March 31, 2004 compared to $43.1 million for the comparable
period in 2003. The decrease was the result of fewer net borrowings on our
revolving credit facility as a result of the change in timing of our semi-annual
interest payment on our notes and the improvements in working capital, as
discussed above.
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 73% 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 March 31, 2004, we had $64.6 million of
borrowings under our new working capital revolver, resulting in unused borrowing
capacity of approximately $47.1 million after applying the borrowing base
limitations and letters of credits to our available borrowings.
At March 31, 2004, we had total outstanding indebtedness of $279.7
million.
We do not have any off balance sheet financing or any financial
arrangements with related parties, other than operating leases. The following
table discloses aggregate information about our contractual obligations and
commercial commitments as of March 31, 2004.
PAYMENTS DUE BY PERIOD
--------------------------------------
(DOLLARS IN MILLIONS)
LESS --------------------- AFTER
THAN 1 1-3 4-5 5
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ---------------------------- -------- -------- -------- -------- --------
Term loan .................. 40.0 5.7 17.1 17.2 --
10.25% Senior Notes ........ 175.0 -- -- -- 175.0
Revolving Facility ......... 64.6 64.6 -- -- --
Other obligations .......... 0.1 0.1 -- -- --
Operating leases ........... 19.3 4.5 7.3 1.1 6.4
-------- -------- -------- -------- --------
Total ...................... $ 299.0 $ 74.9 $ 24.4 $ 18.3 $ 181.4
======== ======== ======== ======== ========
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.
Page 23
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 $145.0 million (subject to borrowing base limits) and (ii)
a term loan facility of up to $40.0 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 March 31, 2004, 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.
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
Page 24
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. 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 and through the end of the term, 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
Page 25
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.
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 bad debts is maintained at a level believed by
management to adequately reflect the probable losses in the trade receivable due
to customer defaults, insolvencies or bankruptcies. The provision is established
by management using the following criteria: customer credit history, customer
current credit rating and other relevant factors. The provision is re-evaluated
on a quarterly basis. Provisions to bad debt expense charged against income
increase the allowance. All recoveries on trade receivables previously charged
off are credited to the accounts receivable recovery account charged against
income, while direct charge-offs of trade receivables are deducted from the
allowance.
ACCOUNTING FOR GOODWILL IMPAIRMENT.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with this standard, goodwill has been
classified as indefinite-lived assets no longer subject to amortization.
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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.
ACCRUED LIABILITIES.
The accrued liabilities include amounts accrued for expected claims
costs relating to our insurance programs for workers compensation and auto
liability. We have large deductibles for these lines of insurance, which means
we must pay the portion of each claim that falls below the deductible amount.
Our expected claims costs are based on an actuarial analysis that considers our
current payroll and automobile profile, recent claims history, insurance
industry loss development factors and the deductible amounts. We accrue our
expected claims costs for each year on a ratable monthly basis with a
corresponding charge against income. Management reviews the adequacy of the
accruals at the end of each quarter. The accruals for the expected costs
relating to our insurance programs for workers compensation and auto liability
are maintained at levels believed by our management to adequately reflect our
probable claims obligations.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In 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 did not have a
material effect on our financial position, results of operations or cash flows.
EFFECTS OF INFLATION
Management believes our results of operations have not been materially
impacted by inflation over the past three years.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and Hines Horticulture's common stock price. We do not enter
into transactions designed to mitigate market risks for trading or speculative
purposes.
We have various debt instruments outstanding at March 31, 2004 that are
impacted by changes in interest rates. As a means of managing our interest rate
risk on variable-rate debt, we entered into the interest rate swap agreement
described below to effectively convert certain variable rate debt obligations to
fixed rate obligations.
In May 2000, we entered into an interest rate swap agreement to hedge
$75.0 million of debt. The interest rate swap agreement effectively changes our
exposure on the variable-rate interest payments to fixed-rate interest payments
(7.13%) based on the 3-month LIBOR rate in effect at the beginning of each
quarterly period. The estimated fair value of our obligation under the interest
rate swap agreement was $6.5 million at March 31, 2004. The interest rate swap
agreement remains outstanding and matures in February 2005.
We also manage our interest rate risk by balancing the amount of our
fixed and variable long-term debt. For fixed-rate debt, interest rate changes
affect the fair market value of such debt but do not impact earnings or cash
flows. Conversely, for variable-rate debt, interest rate changes generally do
not affect the fair market value of such debt but do impact future earnings and
cash flows, assuming other factors are held constant. At March 31, 2004 the
carrying amount and estimated fair value of our long-term debt was $279.7
million and $295.4 million, respectively. Given the current balance of our fixed
rate and variable rate debt, we estimate a change in interest costs of
approximately $0.3 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 $1.0 million for every one-percentage point
change in applicable interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended), our principal executive officer and our
principal financial officer have concluded that such controls and procedures
were effective as of the end of the period covered by this report. In connection
with such evaluation, no change in our internal control over financial reporting
occurred during the last fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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 has been completed and the arbitration hearing is in its
initial stages. 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 impairment testing under SFAS No. 142 "Goodwill and Other Intangible
Assets."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant To
Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 32.1 Certification of Chief Executive Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 906
Of The Sarbanes-Oxley Act of 2002.*
Exhibit 32.2 Certification of Chief Financial Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section 906
Of The Sarbanes-Oxley Act of 2002.*
Exhibit 99.1 Cautionary Statements
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* Pursuant to Commission Release No. 33-8238, this certification will be treated
as "accompanying" this Quarterly Report on Form 10-Q and not "filed" as part of
such report for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, or otherwise subject to the liability of Section 18 of the
Securities Exchange Act of 1934, as amended, and this certification will not be
deemed to be incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent that the registrant specifically incorporates it by reference.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the quarter
ended March 31, 2004.
1. Current report on Form 8-K dated March 11, 2004 (the
date of the earliest event reported), filed on March
17, 2004, for the purpose of reporting operating
results from continuing operations for the fiscal
year ended December 31, 2003 and to announce the
appointment of Robert A. Ferguson to President and
Chief Executive Officer and to announce the
appointment of Thomas R. Reusche to Chairman of the
Board.
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HINES HORTICULTURE, INC.
(REGISTRANT)
By: /s/ Claudia M. Pieropan
----------------------------
Claudia M. Pieropan
Chief Financial Officer,
Secretary and Treasurer
(Principal financial officer
and duly authorized officer)
Date: May 14, 2004
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