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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 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
000-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes( ) No(X)
As of October 18, 2004 there were 22,072,549 shares of Common Stock,
par value $0.01 per share, outstanding.
================================================================================
Page 1
HINES HORTICULTURE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets as of
September 30, 2004 (unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2004 and
2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits 33
Signature 35
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
September 30, 2004 and December 31, 2003
(Dollars in thousands, except share data)
ASSETS
- ------ September 30, December 31,
2004 2003
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $521 and $601 36,904 23,724
Inventories 170,570 173,090
Prepaid expenses and other current assets 2,723 3,157
---------- ----------
Total current assets 210,197 199,971
---------- ----------
FIXED ASSETS, net of accumulated depreciation
of $55,489 and $47,566 132,132 136,435
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $1,782 and $443 9,328 10,589
DEFERRED INCOME TAXES 12,234 12,234
GOODWILL 43,926 42,979
---------- ----------
$ 407,817 $ 402,208
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 14,765 $ 10,104
Accrued liabilities 11,286 9,234
Accrued payroll and benefits 9,689 6,971
Accrued interest 9,377 5,073
Interest rate swap agreement, current portion 1,916 5,320
Long-term debt, current portion 5,722 5,789
Borrowings on revolving credit facility 6,031 30,318
Deferred income taxes 74,831 65,186
---------- ----------
Total current liabilities 133,617 137,995
---------- ----------
LONG-TERM DEBT 205,476 209,287
OTHER LIABILITIES 2,115 2,196
SHAREHOLDERS' EQUITY
Common stock
Authorized - 60,000,000 shares, $.01 par value;
Issued and outstanding - 22,072,549 shares
at September 30, 2004 and December 31, 2003 221 221
Additional paid-in capital 128,781 128,781
Accumulated deficit (62,393) (76,272)
---------- ----------
Total shareholders' equity 66,609 52,730
---------- ----------
$ 407,817 $ 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 and Nine Months Ended September 30, 2004 and 2003
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales, net $ 51,748 $ 51,792 $ 293,219 $ 300,396
Cost of goods sold 28,220 27,939 146,736 147,161
------------- ------------- ------------- -------------
Gross profit 23,528 23,853 146,483 153,235
------------- ------------- ------------- -------------
Selling and distribution expenses 18,519 18,782 86,913 87,938
General and administrative expenses 5,361 5,753 17,381 17,550
Other operating (income) expenses (4) 203 543 1,635
------------- ------------- ------------- -------------
Total operating expenses 23,876 24,738 104,837 107,123
------------- ------------- ------------- -------------
Operating (loss) income (348) (885) 41,646 46,112
Other expenses (income)
Interest expense 6,602 5,730 20,186 18,466
Loss on debt extinguishment -- 9,235 -- 9,235
Interest rate swap agreement income (1,080) (852) (3,403) (1,496)
Amortization of deferred financing expenses 445 1,140 1,339 3,328
------------- ------------- ------------- -------------
5,967 15,253 18,122 29,533
------------- ------------- ------------- -------------
(Loss) income before income taxes (6,315) (16,138) 23,524 16,579
Income tax (benefit) provision (2,589) (6,645) 9,645 6,798
------------- ------------- ------------- -------------
(Loss) income from continuing operations (3,726) (9,493) 13,879 9,781
Income from discontinued operations, net -- 4,013 -- 4,013
------------- ------------- ------------- -------------
Net (loss) income $ (3,726) $ (5,480) $ 13,879 $ 13,794
============= ============= ============= =============
Basic and diluted earnings per share:
(Loss) income per common share from
continuing operations $ (0.17) $ (0.43) $ 0.63 $ 0.44
Income per common share from
discontinued operations $ -- $ 0.18 $ -- $ 0.18
------------- ------------- ------------- -------------
Net (loss) income per common share: $ (0.17) $ (0.25) $ 0.63 $ 0.62
============= ============= ============= =============
Weighted average shares outstanding--Basic 22,072,549 22,072,549 22,072,549 22,072,549
============= ============= ============= =============
Weighted average shares outstanding--Diluted 22,072,549 22,072,549 22,136,050 22,108,668
============= ============= ============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 4
HINES HORTICULTURE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(Dollars in thousands)
(Unaudited)
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,879 $ 13,794
Income from discontinued operations -- (4,013)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and accretion of asset retirement obligation 7,997 7,005
Amortization of deferred financing expenses 1,339 3,328
Interest rate swap agreement income (3,403) (1,496)
Loss on sale of assets 71 73
Loss on debt extinguisment -- 9,235
Deferred income taxes 9,645 6,798
---------- ----------
29,528 34,724
Change in working capital accounts:
Accounts receivable (13,181) (9,270)
Inventories 2,314 7,379
Prepaid expenses and other current assets 434 (839)
Accounts payable and accrued liabilities 13,733 (1,952)
---------- ----------
Change in working capital accounts 3,300 (4,682)
---------- ----------
Net cash provided by operating activities 32,828 30,042
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (3,762) (4,173)
Payments on sale of discontinued operations -- (500)
Acquisitions, adjusted (947) --
Leasehold incentive proceeds 125 1,150
---------- ----------
Net cash used in investing activities (4,584) (3,523)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on revolving line of credit (24,287) (45,352)
Proceeds from the issuance of long-term debt -- 215,000
Repayments of long-term debt (3,878) (180,533)
Deferred financing expenses incurred (79) (10,101)
Penalty on early payment of Senior Subordinated Notes -- (5,533)
---------- ----------
Net cash used in financing activities (28,244) (26,519)
---------- ----------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
---------- ----------
CASH, end of period $ -- $ --
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 15,502 $ 24,073
Cash paid for income taxes $ 33 $ 380
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 AND PER SHARE DATA)
(UNAUDITED)
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.
On March 27, 2002, the Company sold the assets of Sun Gro-U.S.
and the stock of Sun Gro-Canada (collectively referred to as "Sun
Gro"), 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.
In connection with the sale of Sun Gro, the Canadian Customs &
Revenue Authority ("CCRA") required that approximately $13,136 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 $8,219
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 $4,917 Canadian 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. Hines received the
refund check of $8,663 Canadian 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.
Page 6
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.
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 nine months ended
September 30, 2004, the incremental shares related to 440,000 warrants
outstanding increased fully diluted shares by 63,501. For the three
months ended September 30, 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 and nine months ended September 30, 2004,
shares related to the underlying employee stock options in the amount
of 1,067,823 were excluded from the computation of diluted earnings per
share because they would have been anti-dilutive.
5. Stock-Based Compensation:
-------------------------
In December 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 148, "Accounting for
Stock-Based-Compensation-Transition and Disclosure-an Amendment of FASB
Page 7
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."
Nine months ended
September 30,
2004 2003
----------- -----------
Net income, as reported $ 13,879 $ 13,794
Stock option expense (228) (23)
----------- ----------
Pro forma net income $ 13,651 $ 13,771
=========== ==========
Net income per share:
Basic - as reported $ 0.63 $ 0.62
=========== ==========
Basic - pro forma $ 0.62 $ 0.62
=========== ==========
Diluted - as reported $ 0.63 $ 0.62
=========== ==========
Diluted - pro forma $ 0.62 $ 0.62
=========== ==========
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:
September 30,
2004 2003
------------ ------------
Dividend Yield 0% 0%
Expected volatility 61.08% 81.48%
Risk-free interest rate 3.90% 3.41%
Expected life Six years Six years
Page 8
6. Inventories:
------------
Inventories consisted of the following:
September 30, December 31,
2004 2003
--------- ---------
Nursery stock $156,870 $162,861
Material and supplies 13,700 10,229
--------- ---------
$170,570 $173,090
========= =========
7. Goodwill:
---------
In connection with the Company's acquisition of Lovell Farms,
the Company agreed, subject to various provisions in the purchase
agreement, to make earn-out payments to the sellers of up to
approximately $5,000 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, as previously disclosed the sellers of Lovell Farms disputed
the Company's determination and initiated arbitration proceedings
against the Company. Going into the hearings, the sellers demanded that
the arbitrator award $5,000 and payment of their attorney's fees and
costs. An arbitration hearing regarding this matter was held in May
2004 and final determination was made by the arbitrator on July 26,
2004 awarding the sellers $947 and denying their request for
reimbursement of attorney's fees and costs. The amount of this award
has been accounted for by the Company as part of the purchase price
associated with the acquisition and has resulted in an increase the
Company's goodwill in the third quarter of 2004. Legal fees and other
costs in connection with the arbitration have been expensed as
incurred.
8. 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
Company 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
Page 9
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 Senior Credit Facility contains
customary representations and warranties and customary events of
default and other covenants. As of September 30, 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 September 30, 2004, the Company had
$71,030 of available credit.
Page 10
REPAYMENT. Under the terms of the Senior Credit Facility,
amortization payments of $1,905 on the term loan are required at the
end of each of its second, third and fourth fiscal quarters that began
on 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.
9. Long-Term Debt:
September 30, December 31,
2004 2003
--------- ---------
Term loan at the bank's reference rate plus 2.25% or
the LIBOR rate plus 3.25%. Interest rates were 5.14%
and 4.44% at September 30, 2004 and December 31,
2003, respectively $ 36,190 $ 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 8 76
--------- ---------
211,198 215,076
Less current portion 5,722 5,789
--------- ---------
Total long-term debt $205,476 $209,287
========= =========
SENIOR CREDIT FACILITY - TERM LOAN. 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.
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.
Page 11
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 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.
10. 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
$1,916 at September 30, 2004.
11. Comprehensive Income:
---------------------
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to
the Company's shareholders. The Company's comprehensive income includes
the amortization of the fair value of the interest rate agreement
recognized upon adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The components of comprehensive
income during the three and nine months ended September 30, 2004 and
2003, were as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net (loss) income $(3,726) $(5,480) $13,879 $13,794
Amortization of interest rate swap agreement,
net of tax of $0, $97, $0 and $291, respectively -- 140 -- 420
Loss on debt extinguishment, net of tax
of $0, $552, $0 and $552, respectively -- 795 -- 795
-------- -------- -------- --------
Comprehensive (loss) income $(3,726) $(4,545) $13,879 $15,009
======== ======== ======== ========
Page 12
12. 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 September 30,
2004 and December 31, 2003;
o Condensed consolidating statements of operations for the nine
and three months ended September 30, 2004 and 2003; and
o Condensed consolidating statements of cash flows for the nine
months ended September 30, 2004 and 2003.
Page 13
GUARANTOR / NON-GUARANTOR DISCLOSURES
Condensed Consolidating Balance Sheet
As of September 30, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
---------- ---------- ---------- ---------- ----------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 36,664 240 -- 36,904
Inventories -- 170,134 436 -- 170,570
Prepaid expenses and other current assets -- 2,186 537 -- 2,723
---------- ---------- ---------- ---------- ----------
Total current assets -- 208,984 1,213 -- 210,197
---------- ---------- ---------- ---------- ----------
Fixed assets, net -- 132,102 30 -- 132,132
Deferred financing expenses, net -- 9,328 -- -- 9,328
Deferred income taxes 2,922 28,461 -- (19,149) 12,234
Goodwill -- 43,926 -- -- 43,926
Investments in subsidiaries 71,519 -- -- (71,519) --
---------- ---------- ---------- ---------- ----------
$ 74,441 $ 422,801 $ 1,243 $ (90,668) $ 407,817
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ -- $ 14,709 $ 56 $ -- $ 14,765
Accrued liabilities -- 11,286 -- -- 11,286
Accrued payroll and benefits -- 9,689 -- -- 9,689
Accrued interest -- 9,377 -- -- 9,377
Interest rate swap agreement, current portion -- 1,916 -- -- 1,916
Long-term debt, current portion -- 5,722 -- -- 5,722
Borrowings on revolving credit facility -- 6,031 -- -- 6,031
Deferred income taxes -- 78,617 -- (3,786) 74,831
Intercompany accounts 7,832 (7,832) -- -- --
---------- ---------- ---------- ---------- ----------
Total current liabilities 7,832 129,515 56 (3,786) 133,617
---------- ---------- ---------- ---------- ----------
Long-term debt -- 205,476 -- -- 205,476
Deferred income taxes -- 15,363 -- (15,363) --
Other liabilties -- 2,115 -- -- 2,115
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) (62,393) 31,989 197 (32,186) (62,393)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity 66,609 70,332 1,187 (71,519) 66,609
---------- ---------- ---------- ---------- ----------
$ 74,441 $ 422,801 $ 1,243 $ (90,668) $ 407,817
========== ========== ========== ========== ==========
Page 14
GUARANTOR / NON-GUARANTOR DISCLOSURES - (CONTINUED)
Condensed 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 -- 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
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
---------- ---------- ---------- ---------- ----------
Sales, net $ -- $ 291,972 $ 1,247 $ -- $ 293,219
Cost of goods sold -- 145,833 903 -- 146,736
---------- ---------- ---------- ---------- ----------
Gross Profit -- 146,139 344 -- 146,483
Operating expenses -- 104,472 365 -- 104,837
---------- ---------- ---------- ---------- ----------
Operating income (loss) -- 41,667 (21) -- 41,646
---------- ---------- ---------- ---------- ----------
Other expenses (income):
Interest expense -- 20,186 -- -- 20,186
Interest rate swap agreement income -- (3,403) -- -- (3,403)
Amortization of deferred financing expenses, other (13,879) 1,339 -- 13,879 1,339
---------- ---------- ---------- ---------- ----------
(13,879) 18,122 -- 13,879 18,122
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 13,879 23,545 (21) (13,879) 23,524
Income tax provision -- 9,651 (6) -- 9,645
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 13,879 $ 13,894 $ (15) $ (13,879) $ 13,879
========== ========== ========== ========== ==========
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2003
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
---------- ---------- ---------- ---------- ----------
Sales, net $ -- $ 299,216 $ 1,180 $ -- $ 300,396
Cost of goods sold -- 146,391 770 -- 147,161
---------- ---------- ---------- ---------- ----------
Gross Profit -- 152,825 410 -- 153,235
Operating expenses -- 106,751 372 -- 107,123
---------- ---------- ---------- ---------- ----------
Operating income -- 46,074 38 -- 46,112
---------- ---------- ---------- ---------- ----------
Other expenses (income):
Interest expense -- 18,466 -- -- 18,466
Loss on debt extinguishment -- 9,235 -- -- 9,235
Interest rate swap agreement income -- (1,496) -- -- (1,496)
Amortization of deferred financing expenses, other (13,794) 3,328 -- 13,794 3,328
---------- ---------- ---------- ---------- ----------
(13,794) 29,533 -- 13,794 29,533
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 13,794 16,541 38 (13,794) 16,579
Income tax provision -- 6,788 10 -- 6,798
---------- ---------- ---------- ---------- ----------
Income from continuing operations 13,794 9,753 28 (13,794) 9,781
Income from discontinued operations -- 4,013 -- -- 4,013
---------- ---------- ---------- ---------- ----------
Net income (loss) 13,794 13,766 28 (13,794) 13,794
========== ========== ========== ========== ==========
Page 16
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
--------- --------- --------- --------- ---------
Sales, net $ -- $ 51,518 $ 230 $ -- $ 51,748
Cost of goods sold -- 27,978 242 -- 28,220
--------- --------- --------- --------- ---------
Gross Profit -- 23,540 (12) -- 23,528
Operating expenses -- 23,769 107 -- 23,876
--------- --------- --------- --------- ---------
Operating loss -- (229) (119) -- (348)
--------- --------- --------- --------- ---------
Other expenses (income):
Interest expense -- 6,602 -- -- 6,602
Interest rate swap agreement income -- (1,080) -- -- (1,080)
Amortization of deferred financing expenses, other 3,726 445 -- (3,726) 445
--------- --------- --------- --------- ---------
3,726 5,967 -- (3,726) 5,967
--------- --------- --------- --------- ---------
(Loss) income before income taxes (3,726) (6,196) (119) 3,726 (6,315)
Income tax benefit -- (2,543) (46) -- (2,589)
--------- --------- --------- --------- ---------
Net (loss) income $ (3,726) $ (3,653) $ (73) $ 3,726 $ (3,726)
========= ========= ========= ========= =========
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2003
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
--------- --------- --------- --------- ---------
Sales, net $ -- $ 51,567 $ 225 $ -- $ 51,792
Cost of goods sold -- 27,784 155 -- 27,939
--------- --------- --------- --------- ---------
Gross Profit -- 23,783 70 -- 23,853
Operating expenses -- 24,610 128 -- 24,738
--------- --------- --------- --------- ---------
Operating loss -- (827) (58) -- (885)
--------- --------- --------- --------- ---------
Other expenses (income):
Interest expense -- 5,730 -- -- 5,730
Loss on debt extinguishment -- 9,235 -- -- 9,235
Interest rate swap agreement income -- (852) -- -- (852)
Amortization of deferred financing expenses, other 5,480 1,140 -- (5,480) 1,140
--------- --------- --------- --------- ---------
5,480 15,253 -- (5,480) 15,253
--------- --------- --------- --------- ---------
(Loss) income before income taxes (5,480) (16,080) (58) 5,480 (16,138)
Income tax benefit -- (6,618) (27) -- (6,645)
--------- --------- --------- --------- ---------
Loss from continuing operations $ (5,480) $ (9,462) $ (31) $ 5,480 $ (9,493)
Income from discontinued operations -- 4,013 -- -- 4,013
--------- --------- --------- --------- ---------
Net (loss) income $ (5,480) $ (5,449) $ (31) $ 5,480 $ (5,480)
========= ========= ========= ========= =========
Page 17
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2004
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
--------- --------- --------- --------- ---------
Cash provided by operating activities $ -- $ 32,828 $ -- $ -- $ 32,828
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets -- (3,762) -- -- (3,762)
Acquisitions, adjusted -- (947) -- -- (947)
Leasehold incentive proceeds -- 125 -- -- 125
--------- --------- --------- --------- ---------
Net cash used in investing activities: -- (4,584) -- -- (4,584)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments on revovling line of credit -- (24,287) -- -- (24,287)
Repayments of long-term debt -- (3,878) -- -- (3,878)
Deferred financing costs -- (79) -- -- (79)
--------- --------- --------- --------- ---------
Net cash used in financing activities -- (28,244) -- -- (28,244)
--------- --------- --------- --------- ---------
Net change in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
--------- --------- --------- --------- ---------
Cash, end of year $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Page 18
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2003
(Dollars in thousands)
(Unaudited)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantor Eliminations Total
--------- ---------- --------- --------- ----------
Cash provided by operating activities $ -- $ 30,042 $ -- $ -- $ 30,042
--------- ---------- --------- --------- ----------
Cash flows from investing activities:
Purchase of fixed assets -- (4,173) -- -- (4,173)
Payments on sale of discontinued operations -- (500) -- -- (500)
Leasehold incentive proceeds -- 1,150 -- -- 1,150
--------- ---------- --------- --------- ----------
Net cash used in investing activities: -- (3,523) -- -- (3,523)
--------- ---------- --------- --------- ----------
Cash flows from financing activities:
Repayments on revovling line of credit -- (45,352) -- -- (45,352)
Proceeds from the issuance of long-term debt -- 215,000 -- -- 215,000
Repayments of long-term debt -- (180,533) -- -- (180,533)
Deferred financing costs -- (10,101) -- -- (10,101)
Penalty on early payment of Senior Subordinated Notes -- (5,533) -- -- (5,533)
--------- ---------- --------- --------- ----------
Net cash used in financing activities -- (26,519) -- -- (26,519)
--------- ---------- --------- --------- ----------
Net change in cash -- -- -- -- --
Cash, beginning of year -- -- -- -- --
--------- ---------- --------- --------- ----------
Cash, end of year $ -- $ -- $ -- $ -- $ --
========= ========== ========= ========= ==========
Page 19
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 and in Exhibit 99.1 to 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 and in Exhibit 99.1 to
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 20
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 collateralized 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' then 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 the 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.
LOVELL FARMS ARBITRATION SETTLEMENT
In connection with the acquisition of Lovell Farms, we agreed, subject
to various provisions in the purchase agreement, to make earn-out payments to
the sellers ("Claimants") of up to approximately $5.0 million for fiscal 2001 if
certain performance thresholds were met. We determined that the thresholds were
not met and that no earn-out payment be made. In response to this decision, the
Claimants initiated arbitration proceedings, which concluded in May 2004. Going
into the hearings, the Claimants demanded that the arbitrator award $5.0 million
and payment of their attorney's fees and costs. A final determination was made
on July 26, 2004 awarding the Claimants $0.9 million and denying their request
for attorney's fees and costs. Payment of the $0.9 million increased our
goodwill during the third quarter of 2004. Legal defense fees and other costs
incurred in connection with the arbitration of $0.5 million have been expensed
during the nine month period ended September 30, 2004.
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 $26.0 million in net operating loss
carryforwards for federal income tax purposes.
Page 21
Based on our current projections, we anticipate that we will incur tax
liability and begin paying cash income taxes for federal purposes in 2006. We
are currently paying cash income taxes for state income tax purposes in certain
states due to the differing rules regarding the utilization of net operating
losses.
Although the use of the cash method of accounting for federal income
taxes defers the payment of federal income taxes, the deferral of such taxes
produces a current liability for accounting purposes. At September 30, 2004, we
had a current liability for deferred income taxes of $74.8 million. The
liability is deemed current for accounting purposes because the majority of the
items to which this liability relates are comprised of current assets and
current liabilities in our balance sheet (such as inventory, accounts receivable
and accounts payable). The classification of this liability as a current item,
however, does not mean that it is required to be paid within the next twelve
months.
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 EVENTS
On September 20, 2004 we announced that our Forest Grove, Oregon
facility had suspended the shipment of all plant material known capable of
carrying PHYTOPHTHORA RAMORUM, also know as Sudden Oak Death ("SOD"), as a
result of receiving notification from the U.S. Department of Agriculture
("USDA") that a routine inspection had resulted in a positive detection of the
pathogen. Total net sales from our Oregon facility of SOD capable host and
associated host plants, represented less than 1.0% of our net sales for the past
twelve months.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
NET SALES. Net sales of $51.7 million for the three months ended
September 30, 2004 decreased $0.1 million, or 0.1%, from net sales of $51.8
million for the comparable period in 2003. Net sales in the Sunbelt markets
increased $2.9 million as strong spring-like demand continued into July as a
result of favorable weather and the Company's continued focus on the
merchandising of its products. Third quarter shrub sales in these regions also
benefited from a successful joint marketing effort with a major customer.
Page 22
Net sales in the Southeast for the three months ended September 30,
2004 declined $2.0 million compared to the same period a year ago mainly as a
result of hurricanes Charley, Frances, Ivan, and Jeanne. All four major
hurricanes made landfall at a distance of approximately 100 miles or more from
our Miami facility, which resulted in little or no damage to our inventory and
facilities. However, the hurricanes did force our facility to temporarily
shutdown for several days during the quarter and considerably reduced consumer
demand for our products throughout the entire region.
Net sales throughout the rest of the country declined $1.0 million
compared to a year ago as a result of overcapacity in the market from recent
nursery liquidations and gardening retailer bankruptcies.
GROSS PROFIT. Gross profit of $23.5 million for the three months ended
September 30, 2004 decreased $0.3 million, or 1.4%, from gross profit of $23.9
million for the comparable period in 2003. As a percentage of net sales, gross
profit for the quarter declined to 45.5% from 46.1% for the three months ended
September 30, 2003. The decline in gross profit and gross profit margin was
mainly due to increased scrap levels at our Miami facility as a result of the
lower demand caused by the four major hurricanes that impacted the Southeast
region.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses
of $18.5 million for the three months ended September 30, 2004 decreased $0.3
million, or 1.4%, from $18.8 million for the comparable period in 2003. Selling
expenses for the quarter increased $0.8 million mainly as a result of increased
merchandising efforts. Distribution expense declined $1.1 million mainly due to
fewer sales. However, as a percentage of net sales, distribution expenses for
the three months ended September 30, 2004 improved to 22.4% from 24.4% for the
same period in 2003 as a result of improved logistics and better payload
management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $5.4 million for the three months ended September 30, 2004 decreased
$0.4 million, or 6.8%, from $5.8 million for the comparable period in 2003 as
management continued to focus on controlling costs.
OTHER OPERATING EXPENSES. There were no significant other operating
expenses to report in the third quarter of 2004.
OPERATING LOSS. Operating loss of $0.3 million for the three months
ended September 30, 2004 decreased by $0.5 million, or 60.7%, from $0.9 million
for the comparable period in 2003. The improvement in operating loss was mainly
due to lower distribution expenses and general and administrative expenses, as
discussed above.
OTHER EXPENSES. Other expenses of $6.0 million for the three months
ended September 30, 2004 decreased $9.3 million, or 60.9%, from $15.3 million
for the comparable period in 2003. The decrease in other expenses was mainly due
to the $9.2 million loss on debt extinguishment recognized during the third
quarter of 2003 as a result of our Refinancing.
INCOME TAX PROVISION. Our effective income tax rate was approximately
41% for the three months ended September 30, 2004 and 2003.
Page 23
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.0 million for the three months ended September 30, 2003,
represents the after-tax portion of the $6.3 million received as a result of
collecting the receivable for withheld Canadian income taxes from the Canadian
government. 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.
NET LOSS. Net loss of $3.7 million for the three months ended
September 30, 2004 decreased by $1.8 million, or 32.0%, from a net loss of $5.5
million for the comparable period in 2003 as a result of the decline in other
expenses partially offset by the decline in income from discontinued operations,
as discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET SALES. Net sales of $293.2 million for the nine months ended
September 30, 2004 decreased by $7.2 million, or 2.4%, from $300.4 million for
the comparable period in 2003. We began the year with strong sales of color
plants and shrubs in the Sunbelt markets primarily as a result of favorable
weather and our new market strategy. However, net sales slowed at the end of the
first quarter as the gardening retailers continued their recent trend of better
managing inventory levels by reducing pre-spring stocking orders.
Net sales during the second quarter started strong as spring arrived
throughout the country and as the gardening retailers began to rebuild their
inventory levels. However, as the quarter progressed net sales began to
significantly decline as a result of reduced demand for perennials and bedding
plants in the Midwest, Mid-Atlantic and Southeast. The decline in demand
resulted mainly from unfavorable weather in the Midwest and Mid-Atlantic and
competitive pressure from other growers during the middle-to-late parts of
spring.
Net sales for the third quarter started strong as spring-like demand
continued into July. However, the impact in the Southeast region of the four
major hurricanes over a six-week period ended up offsetting our strong
performance in the Sunbelt markets and significantly hindered our sales recovery
strategy in the third quarter.
GROSS PROFIT. Gross profit of $146.5 million for the nine months ended
September 30, 2004 decreased by $6.8 million, or 4.4%, from $153.2 million for
the comparable period in 2003. As a percentage of net sales, gross profit for
the period decreased to 50.0% compared to 51.0% in 2003. The decline in gross
profit and gross profit margin was mainly due to the decline in net sales, which
mainly resulted from lower demand and unfavorable weather in the second quarter
and the impact of the four major hurricanes during the third quarter. We also
experienced increased scrap rates at our Miami facility during the third
quarter.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses
of $86.9 million for the nine months ended September 30, 2004 decreased by $1.0
million, or 1.2%, from $87.9 million for the comparable period in 2003. Selling
expense for the nine-month period increased $1.7 million to $27.6 million mainly
as a result of increased merchandising efforts at our customers' store
locations. Distribution expenses improved to $59.4 million, or 20.2% of net
sales, compared to $62.1 million, or 20.7% of net sales, for the comparable
period in 2003. Improved logistics, increased payloads and better carrier
relations have successfully offset rising fuel costs and increased common
carrier charges resulting from new trucking regulations.
Page 24
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $17.4 million for the nine months ended September 30, 2004 decreased
by $0.2 million, or 1.0%, from $17.6 million for the comparable period in 2003
as management continued to focus on controlling costs.
OTHER OPERATING EXPENSES. Other operating expenses of $0.5 million for
the nine months ended September 30, 2004 decreased $1.1 million from $1.6
million for the comparable period in 2003. The decline was due to severance
costs associated with the resignation of our former Chief Executive Officer in
February of 2003, offset by legal fees of $0.5 million incurred as a result of
the Lovell Farms Arbitration Settlement.
OPERATING INCOME. Operating income of $41.6 million for the nine months
ended September 30, 2004 decreased by $4.5 million, or 9.7%, from $46.1 million
for the comparable period in 2003. The decline in operating income was mainly
due to the decrease in net sales and gross profit, as discussed above.
OTHER EXPENSES. Other expenses of $18.1 million for the nine months
ended September 30, 2004 decreased $11.4 million, or 38.6%, from $29.5 million
for the comparable period in 2003. The decline in other expenses was mainly due
to the $9.2 million loss on debt extinguishment recognized during the third
quarter of 2003 as a result of our Refinancing. The improvement was also due to
the impact of the mark to market adjustment on our interest rate swap and a
decline in the amortization of deferred financing expenses of $2.0 million,
partially offset by higher interest expense. For the nine months ended September
30, 2004, the mark to market adjustment amounted to income of $3.4 million
compared with income of $1.5 million for the same period a year ago. Interest
expense increased to $20.2 million from $18.5 million a year ago due to our
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 PROVISION. Our effective income tax rate was approximately
41% for the nine months ended September 30, 2004 and 2003.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued
operations of $4.0 million for the nine months ended September 30, 2003,
represents the after-tax portion of the $6.3 million received as a result of
collecting the receivable for withheld Canadian income taxes from the Canadian
government. 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.
NET INCOME. Net income of $13.9 million for the nine months ended
September 30, 2004 increased by $0.1 million, or 0.6%, from $13.8 million for
the comparable period in 2003 as a result of the improvements in other expenses,
partially offset by the decline in operating income, as discussed above.
Page 25
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. At September 30, 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 provided by operating activities was $32.8 million for the
nine months ended September 30, 2004 compared to $30.0 million for the
comparable period in 2003 mainly due to the change in timing of our semi-annual
interest payment of $9.0 million, which will be paid during the fourth quarter.
Interest payments on our previously outstanding 12.75% senior subordinated notes
amounted to $7.4 million during the third quarter of 2003.
Net cash used in investing activities was $4.6 million for the nine
months ended September 30, 2004 compared to $3.5 million for the comparable
period in 2003 mainly due to the $1.0 million of leasehold incentives received
in accordance with our Irvine lease agreement during the third quarter of 2003.
Our capital expenditures were $3.8 million for the nine months ended
September 30, 2004 compared to capital expenditures of $4.2 million for the nine
months ended September 30, 2003. The capital expenditures for the nine months
ended September 30, 2004 primarily included the purchase of nursery related
machinery and equipment. We currently expect that our total capital expenditures
for 2004 will be approximately $6.5 million.
Net cash used in financing activities was $28.2 million for the nine
months ended September 30, 2004 compared to $26.5 million for the comparable
period in 2003. The increase in cash used in financing activities was primarily
related to the impact of our Refinancing. As part of the Refinancing, 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
previously outstanding 12.75% senior subordinated notes.
We typically draw down our revolving credit facilities in the first and
fourth quarters to fund our seasonal inventory buildup and seasonal operating
expenses. Based upon 2003, 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 September 30, 2004, we
had $6.0 million of borrowings under our working capital revolver, resulting in
unused borrowing capacity of approximately $71.0 million after applying the
borrowing base limitations and letters of credits to our available borrowings.
Page 26
At September 30, 2004, we had total outstanding indebtedness of $217.2
million.
We do not have any off balance sheet financing or any financial
arrangements with related parties, other than operating leases. The following
table discloses aggregate information about our contractual obligations and
commercial commitments as of September 30, 2004.
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------
Less than (DOLLARS IN MILLIONS) After
Contractual Cash Obligations Total 1 year 1-3 years 4-5 years 5 years
--------------- -------------- --------------- -------------- --------------
Term Loan ......................... 36.2 5.7 17.2 13.3 -
10.25% Senior Notes................ 175.0 - - - 175.0
Revolving Facility................. 6.0 6.0 - - -
Operating Leases................... 19.3 4.5 7.2 7.6
--------------- -------------- --------------- -------------- --------------
Total $ 236.5 $ 16.2 $ 24.4 $ 20.9 $ 175.0
=============== ============== =============== ============== ==============
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 $145.0 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 Hines Horticulture 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.
Page 27
The Senior Credit Facility requires Hines Nurseries and its
subsidiaries to meet specific covenants and financial ratios, including a
minimum fixed charge coverage test, a maximum leverage test and a maximum
capital expenditure test. The new Senior Credit Facility contains customary
representations and warranties and customary events of default and other
covenants. As of September 30, 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 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 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. Amortization payments of $1.9 million on the term loan are
required at the end of our second, third and fourth fiscal quarters that began
on 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 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.
Page 28
OUR SENIOR NOTES
On September 30, 2003, Hines Nurseries issued $175.0 million of Senior
Notes that mature on October 1, 2011. The Senior Notes bear interest at the rate
of 10.25% per annum and are payable semi-annually in arrears on each April 1 and
October 1, which commenced 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 a 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 in control occurs.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. We believe that the following
areas represent our most critical accounting policies related to actual results
that may vary from those estimates.
REVENUE RECOGNITION.
We record revenue, net of sales discounts and allowances, when all of
the following have occurred: an agreement of sale exists, product delivery and
acceptance has occurred and collection is reasonably assured.
Page 29
SALES RETURNS AND ALLOWANCES.
Amounts accrued for sales returns and allowance are maintained at a
level believed adequate by management to absorb probable losses in the trade
receivable due to sales discounts and allowances. The provision rate is
established by management using the following criteria: past sales returns
experience, current economic conditions and other relevant factors. The rate is
re-evaluated on a quarterly basis. Provisions for sales discounts and allowances
charged against income increase the allowance. We record revenue, net of sales
discounts and allowances, when the risk of ownership is transferred to the
customer. Allowances are provided at the time revenue is recognized in
accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists."
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The allowance for bad debts is maintained at a level believed by
management to adequately reflect the probable losses in the trade receivable due
to customer defaults, insolvencies or bankruptcies. The provision is established
by management using the following criteria: customer credit history, customer
current credit rating and other relevant factors. The provision is re-evaluated
on a quarterly basis. Provisions to bad debt expense charged against income
increase the allowance. All recoveries on trade receivables previously charged
off are credited to the accounts receivable recovery account charged against
income, while direct charge-offs of trade receivables are deducted from the
allowance.
ACCOUNTING FOR GOODWILL IMPAIRMENT.
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with this standard, goodwill has been
classified as indefinite-lived assets no longer subject to amortization.
Indefinite-lived assets are subject to impairment testing upon adoption of SFAS
No. 142 and at least annually thereafter. In accordance with SFAS No. 142, this
involves a two step process. First, we must determine if the carrying amount of
equity exceeds the fair value based upon the quoted market price of our common
stock. If we determine that goodwill may be impaired, we compare the "implied
fair value" of the goodwill, as defined by SFAS No. 142, to its carrying amount
to determine the impairment loss, if any.
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.
EFFECTS OF INFLATION
Management believes our results of operations have not been materially
impacted by inflation over the past three years.
Page 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and Hines Horticulture's common stock price. We do not enter
into transactions designed to mitigate market risks for trading or speculative
purposes.
We have various debt instruments outstanding at September 30, 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 $1.9 million at September 30, 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 September 30, 2004 the
carrying amount and estimated fair value of our long-term debt was $217.2
million and $227.7 million, respectively. Given the current balance of our fixed
rate and variable rate debt, we estimate a change in interest costs of
approximately $0.3 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 $0.4 million for every one-percentage point
change in applicable interest rates.
Page 31
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.
Page 32
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 Farms, 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, as previously disclosed the sellers of Lovell Farms
disputed the Company's determination and initiated arbitration proceedings
against the Company. Going into the hearings, the sellers demanded that the
arbitrator award $5.0 million and payment of their attorney's fees and costs. An
arbitration hearing regarding this matter was held in May 2004 and final
determination was made by the arbitrator on July 26, 2004 awarding the sellers
$0.9 million and denying their request for reimbursement of attorney's fees and
costs. The amount of this award has been accounted for by the Company as part of
the purchase price associated with the acquisition and has resulted in an
increase the Company's goodwill in the third quarter of 2004. Legal fees and
other costs in connection with the arbitration have been expensed as incurred.
ITEM 6. EXHIBITS
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
Page 33
* 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.
Page 34
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HINES HORTICULTURE, INC.
(REGISTRANT)
By: /s/ Claudia M. Pieropan
--------------------------
Claudia M. Pieropan
Chief Financial Officer,
Secretary and Treasurer
(Principal financial officer
and duly authorized officer)
Date: November 12, 2004
Page 35