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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 quarterly period ended March 31, 2005
( ) 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 May 13, 2005 there were 22,072,549 shares of Common Stock, par
value $0.01 per share, outstanding.
================================================================================
HINES HORTICULTURE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits 24
Signature 25
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, 2005 and December 31, 2004
(Dollars in thousands, except share data)
(Unaudited)
ASSETS March 31, December 31,
- ------ 2005 2004
------------- -------------
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net 47,411 19,969
Inventories 207,300 181,133
Prepaid expenses and other current assets 4,163 3,072
------------- -------------
Total current assets 258,874 204,174
------------- -------------
FIXED ASSETS, net 131,333 131,536
DEFERRED FINANCING EXPENSES, net 8,438 8,883
DEFFERRED INCOME TAXES 9,210 9,210
GOODWILL 43,926 43,926
------------- -------------
$ 451,781 $ 397,729
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 31,923 $ 11,958
Accrued liabilities 13,695 9,820
Accrued payroll and benefits 5,585 5,900
Accrued interest 317 5,194
Interest rate swap agreement, current portion -- 895
Long-term debt, current portion 5,714 5,719
Borrowings on revolving credit facility 61,841 23,609
Deferred income taxes 65,231 66,445
------------- -------------
Total current liabilities 184,306 129,540
------------- -------------
LONG-TERM DEBT 203,571 203,571
OTHER LIABILITIES 4,684 3,652
------------- -------------
Total liabilities 392,561 336,763
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock
Authorized - 2,000,000, $0.01 par value;
none outstanding -- --
Common stock
Authorized - 60,000,000 shares, $.01 par value;
issued and outstanding - 22,072,549 shares
at March 31, 2005 and December 31, 2004 221 221
Additional paid-in capital 128,781 128,781
Accumulated deficit (69,782) (68,036)
------------- -------------
Total shareholders' equity 59,220 60,966
------------- -------------
$ 451,781 $ 397,729
============= =============
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, 2005 and 2004
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended March 31,
2005 2004
------------ ------------
Sales, net $ 63,990 $ 60,390
Cost of goods sold 32,766 31,124
------------ ------------
Gross profit 31,224 29,266
------------ ------------
Selling and distribution expenses 22,564 19,198
General and administrative expenses 5,945 5,611
Other operating income (115) --
------------ ------------
Total operating expenses 28,394 24,809
------------ ------------
Operating income 2,830 4,457
Other expenses
Interest, net 6,240 6,700
Interest rate swap agreement income (895) (869)
Amortization of deferred financing expenses 445 445
------------ ------------
5,790 6,276
------------ ------------
Loss before income taxes (2,960) (1,819)
Income tax benefit (1,214) (746)
------------ ------------
Net loss $ (1,746) $ (1,073)
============ ============
Basic and diluted earnings per share:
Net loss per common share $ (0.08) $ (0.05)
============ ============
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, 2005 and 2004
(Dollars in thousands, except share data)
(Unaudited)
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,746) $ (1,073)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,628 2,715
Amortization of deferred financing expenses 445 445
Interest rate swap agreement income (895) (869)
Gain on disposition of fixed assets (115) --
Accretion of asset retirement obligation 31 --
Deferred income tax benefits (1,214) (746)
-------- --------
(866) 472
Change in working capital accounts:
Accounts receivable (27,442) (27,968)
Inventories (26,236) (24,012)
Prepaid expenses and other current assets (1,091) (517)
Accounts payable and accrued liabilities 18,648 18,622
-------- --------
Change in working capital accounts (36,121) (33,875)
-------- --------
Net cash used in operating activities (36,987) (33,403)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,472) (863)
Proceeds from sale of fixed assets 132 --
Proceeds from land sale option 1,100 62
-------- --------
Net cash used in investing activities (1,240) (801)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on revolving line of credit 38,232 34,307
Repayments of long-term debt (5) (22)
Deferred financing expenses incurred -- (81)
-------- --------
Net cash provided by financing activities 38,227 34,204
-------- --------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
-------- --------
CASH, end of period $ -- $ --
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,689 $ 2,126
Cash paid for income taxes $ 22 $ 7
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.
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, 2004, filed on March 23, 2005 by
Hines 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. The reclassifications did not have a
material impact on the net loss or total shareholders' equity.
Page 6
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, 2005 and 2004, the incremental shares related to 440,000
warrants outstanding were 52,091 and 109,528, respectively.
Additionally, for the three months ended March 31, 2005 and 2004,
incremental shares related to the underlying employee stock options
were 2,532 and 6,155, respectively, from total outstanding options of
1,067,923. The incremental shares of warrants and employee stock
options have been excluded from the computation of earnings per share
for the three months ended March 31, 2005 and 2004 as the effect will
be 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
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. As permitted under both SFAS No. 123 and SFAS No. 148, the
Company continues to follow the intrinsic value method of accounting
under Accounting Principles Board No. 25 "Accounting for Stock Issued
to Employees."
Three months ended
March 31,
2005 2004
----------- -----------
Net loss, as reported $ (1,746) $ (1,073)
Stock-based compensation expense, net of tax (11) (124)
----------- -----------
Pro forma net loss $ (1,757) $ (1,197)
=========== ===========
Net loss per share:
Basic and diluted - as reported $ (0.08) $ (0.05)
=========== ===========
Basic and diluted - pro forma $ (0.08) $ (0.05)
=========== ===========
Page 7
In arriving at an option valuation, the Black-Scholes model
considers, among other factors, the expected life of an option and the
expected volatility of the Company's stock price. For pro forma
purposes, the estimated fair value of the Company's stock-based awards
to employees is amortized over their respective vesting periods.
6. Inventories:
------------
Inventories consisted of the following:
March 31, December 31,
2005 2004
---------------- ----------------
Nursery stock $ 193,775 $ 169,908
Material and supplies 13,525 11,225
---------------- ----------------
$ 207,300 $ 181,133
================ ================
7. New Accounting Pronouncements:
------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchange of
Non-Monetary Assets - An Amendment of ARB Opinion No. 29," which
requires non-monetary asset exchanges to be accounted for at fair
value. The Company is required to adopt the provisions of SFAS No. 153
for non-monetary exchanges occurring in fiscal periods beginning after
June 15 2005. The Company does not expect the adoption of this standard
to have a material impact on the Company's consolidated financial
statements.
In March 2005, the FASB issued FASB Interpretation No. ("FIN")
47, "Accounting for Conditional Asset Retirement Obligations." FIN 47
clarifies the term "conditional asset retirement obligation" used in
SFAS No. 143, "Accounting for Asset Retirement Obligations." FIN 47 is
effective no later than the end of the fiscal year ending after
December 15, 2005. The Company is in the process of evaluating whether
FIN 47 will result in the recognition of additional asset retirement
obligations for the Company.
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
ability to obtain letters of credit up to a sub-limit.
SENIOR CREDIT FACILITY. 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
Page 8
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
default and other covenants. As of March 31, 2005, 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, 2005, the Company had
$55,195 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 which
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
Page 9
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:
---------------
March 31, December 31,
2005 2004
----------------- -----------------
Senior Credit Facility - term loan at the
bank's reference rate plus 2.25% or the
LIBOR rate plus 3.25%. Interest rates
were 6.14% and 5.46% at March 31, 2005
and December 31, 2004, respectively. $ 34,285 $ 34,285
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 2005. - 5
----------------- -----------------
209,285 209,290
Less current portion 5,714 5,719
----------------- -----------------
Total long-term debt $ 203,571 $ 203,571
================= =================
SENIOR CREDIT FACILITY - TERM LOAN. Please see Note 8 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, which commenced
on April 1, 2004.
GUARANTEES. Hines Horticulture and each of its domestic
subsidiaries, subject to certain exceptions, have, jointly and
severally, fully and unconditionally guaranteed, on a senior unsecured
basis, the obligations of Hines Nurseries under the Senior Notes.
REDEMPTION. Prior to October 1, 2006, up to 35% of the
aggregate principal amount of the Senior Notes may be redeemed with the
net cash proceeds from one or more public equity offerings, at the
Company's option, at a redemption price of 110.250% of the principal
amount thereof plus accrued interest, if any, to the date of
redemption. On or after October 1, 2007, the Company is entitled, at
its option, to redeem all or a portion of the Senior Notes at
redemption prices ranging from 100.000% to 105.125%, depending on the
redemption date plus accrued and unpaid interest.
RESTRICTIONS. The indenture pursuant to which the Senior Notes
were issued imposes a number of restrictions on Hines Nurseries and its
other subsidiaries. Subject to certain exceptions, the Company may not
incur additional indebtedness, make certain restricted payments, make
certain asset dispositions, incur additional liens or enter into
significant transactions. A breach of a material term of the indenture
or other material indebtedness that results in acceleration of the
indebtedness under the Senior Notes also constitutes an event of
default under its Senior Credit Facility.
Page 10
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 changed 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.
The interest rate swap agreement matured in February 2005.
11. Guarantor/Non-guarantor Disclosures:
------------------------------------
The 10.25% Senior Subordinated Notes issued by Hines Nurseries
(the "issuer") have been guaranteed by the Company (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)
the Company 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, 2005 and
December 31, 2004;
o Condensed consolidating statements of operations for the three months
ended March 31, 2005 and 2004; and
o A condensed consolidating statement of cash flows for the three months
ended March 31, 2005 and 2004 has not been presented as there were no
cash flows from operating, financing and investing activities of Hines
Horticulture on a parent company basis, Hines SGUS and Enviro-Safe as
subsidiary guarantors or eliminations.
Page 11
GUARANTOR / NON-GUARANTOR DISCLOSURES
Condensed Consolidating Balance Sheet
As of March 31, 2005
(Dollars in thousands)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------ ----------- ----------- --------------- ---------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 47,023 388 -- 47,411
Inventories -- 206,960 340 -- 207,300
Prepaid expenses and other current assets -- 4,163 597 (597) 4,163
------------ ----------- ----------- --------------- ---------------
Total current assets -- 258,146 1,325 (597) 258,874
------------ ----------- ----------- --------------- ---------------
Fixed assets, net -- 131,306 27 -- 131,333
Deferred financing expenses, net -- 8,438 -- -- 8,438
Deferred income taxes 2,922 6,288 -- -- 9,210
Goodwill -- 43,926 -- -- 43,926
Investments in subsidiaries 64,130 -- -- (64,130) --
------------ ----------- ----------- --------------- ---------------
$ 67,052 $ 448,104 $ 1,352 $ (64,727) $ 451,781
============ =========== =========== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ -- $ 51,423 $ 97 $ -- $ 51,520
Long-term debt, current portion -- 5,714 -- -- 5,714
Borrowings on revolving credit facility -- 61,841 -- -- 61,841
Deferred income taxes -- 65,231 -- -- 65,231
Intercompany accounts 7,832 (7,235) -- (597) --
------------ ----------- ----------- --------------- ---------------
Total current liabilities 7,832 176,974 97 (597) 184,306
------------ ----------- ----------- --------------- ---------------
Long-term debt -- 203,571 -- -- 203,571
Accrued long-term liability, net -- 4,684 -- -- 4,684
Shareholders' equity 59,220 62,875 1,255 (64,130) 59,220
------------ ----------- ----------- --------------- ---------------
$ 67,052 $ 448,104 $ 1,352 $ (64,727) $ 451,781
============ =========== =========== =============== ===============
Page 12
GUARANTOR / NON-GUARANTOR DISCLOSURES
Condensed Consolidating Balance Sheet
As of December 31, 2004
(Dollars in thousands)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------ ----------- ----------- --------------- ---------------
ASSETS
------
Current assets:
Cash $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 19,682 287 -- 19,969
Inventories -- 180,806 327 -- 181,133
Prepaid expenses and other current assets -- 3,072 614 (614) 3,072
------------ ----------- ----------- --------------- ---------------
Total current assets -- 203,560 1,228 (614) 204,174
------------ ----------- ----------- --------------- ---------------
Fixed assets, net -- 131,508 28 -- 131,536
Deferred financing expenses, net -- 8,883 -- -- 8,883
Deferred income taxes 2,922 6,288 -- -- 9,210
Goodwill -- 43,926 -- -- 43,926
Investments in subsidiaries 65,876 -- -- (65,876) --
------------ ----------- ----------- --------------- ---------------
$ 68,798 $ 394,165 $ 1,256 $ (66,490) $ 397,729
============ =========== =========== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ -- $ 32,871 $ 1 $ -- $ 32,872
Interest rate swap agreement -- 895 -- -- 895
Long-term debt, current portion -- 5,719 -- -- 5,719
Borrowings on revolving credit facility -- 23,609 -- -- 23,609
Deferred income taxes -- 66,445 -- -- 66,445
Intercompany accounts 7,832 (7,218) -- (614) --
------------ ----------- ----------- --------------- ---------------
Total current liabilities 7,832 122,321 1 (614) 129,540
------------ ----------- ----------- --------------- ---------------
Long-term debt -- 203,571 -- -- 203,571
Accrued long-term liability, net -- 3,652 -- -- 3,652
Shareholders' equity 60,966 64,621 1,255 (65,876) 60,966
------------ ----------- ----------- --------------- ---------------
$ 68,798 $ 394,165 $ 1,256 $ (66,490) $ 397,729
============ =========== =========== =============== ===============
Page 13
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2005
(Dollars in thousands)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary Consolidated
Guarantor) (Issuer) Guarantors Eliminations Total
------------ ----------- ----------- --------------- ---------------
Sales, net $ -- $ 63,806 $ 184 $ -- $ 63,990
Cost of goods sold -- 32,644 122 -- 32,766
------------ ----------- ----------- --------------- ---------------
Gross Profit -- 31,162 62 -- 31,224
Operating expenses -- 28,318 76 -- 28,394
------------ ----------- ----------- --------------- ---------------
Operating income -- 2,844 (14) -- 2,830
------------ ----------- ----------- --------------- ---------------
Other expenses:
Interest -- 6,240 -- -- 6,240
Interest rate swap agreement expense -- (895) -- -- (895)
Amortization of deferred financing
expenses, other 1,746 445 -- (1,746) 445
------------ ----------- ----------- --------------- ---------------
1,746 5,790 -- (1,746) 5,790
------------ ----------- ----------- --------------- ---------------
Income (loss) before provision for income taxes (1,746) (2,946) (14) 1,746 (2,960)
Income tax (benefit) provision -- (1,214) -- -- (1,214)
------------ ----------- ----------- --------------- ---------------
Net income (loss) $ (1,746) $ (1,732) $ (14) $ 1,746 $ (1,746)
============ =========== =========== =============== ===============
GUARANTOR / NON-GUARANTOR DISCLOSURES - CONTINUED
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2004
(Dollars in thousands)
Hines
Horticulture Hines
(Parent Nurseries Subsidiary 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 -- 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)
============ =========== =========== =============== ===============
Page 14
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 4,900 varieties of ornamental
shrubs and color plants and we sell to more than 2,000 retail and commercial
customers, representing more than 8,700 outlets throughout the United States and
Canada. Hines Horticulture currently produces and distributes horticultural
products through its wholly owned subsidiaries, Hines Nurseries and Enviro-Safe
Laboratories, Inc.
Page 15
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, 2004, we had $29.7 million in net operating loss
carryforwards for federal income tax purposes. In addition, we had approximately
$27.8 million in net operating loss carryforwards for state income tax reporting
purposes. Our state net operating losses in certain states begin to expire in
2005.
Based on our current projections, we anticipate that we will incur tax
liability and begin paying cash income taxes for federal purposes in 2007. 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, 2005, we had
a current deferred liability for deferred income taxes of $65.2 million related
to the use of the cash method of accounting. 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.
PAY BY SCAN
In January 2005, we entered into an agreement with our largest customer
to sell a portion of our product under a new pay by scan ("PBS") program. Under
this program, our customer does not take ownership of the inventory at its
stores until the product is scanned at the check out register. Revenue is
recorded at the point the store sells our product to its customer. Sales under
this program began in February 2005 on a limited basis. It is currently planned
to roll out to all stores of this customer by the end of 2005. Annuals and
perennials are the only products impacted by this new program.
Page 16
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
NET SALES. Net sales of $64.0 million for the three months ended March
31, 2005 increased $3.6 million, or 6.0%, from net sales of $60.4 million for
the comparable period in 2004. The increase in net sales was mainly due to
increased pricing, improved product mix and early spring shipments into markets
in the East. Sales in the Southwest declined compared to the same period a year
ago as Southern California and Arizona experienced one of the wettest winters on
record. Net sales in the Northeast increased compared to the same period in 2004
as a result of strong first quarter Easter sales, while sales in the Southeast
declined mainly as a result of our new PBS program, which we estimate deferred
approximately $0.8 million of net sales into the second quarter.
GROSS PROFIT. Gross profit of $31.2 million for the three months ended
March 31, 2005 increased $2.0 million, or 6.7%, from gross profit of $29.3
million for the comparable period in 2004. As a percentage of net sales, gross
profit for the quarter increased to 48.8% from 48.5% for the comparable period
in 2004. The increase in gross profit was mainly due to our improved gross
profit margin and strong net sales results. The increase in gross profit margin
of 30 basis points compared to the same period a year ago was mainly due to
increased pricing and a change in product mix to higher margin products. Higher
labor and fuel costs continue to raise our average cost per unit sold.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of
$22.6 million for the three months ended March 31, 2005 increased $3.4 million,
or 17.5%, from $19.2 million for the comparable period in 2004. As a percentage
of net sales, selling and distribution expenses for the quarter increased to
35.3% from 31.8% in the first quarter of 2004. Selling expenses for the three
months ended March 31, 2005 increased $0.8 million, or 10.9%, compared to same
period a year ago as a result of higher sales commissions and increased customer
directed marketing and merchandising costs. Selling expenses also included a
$0.1 million charge that related to our 2004 sudden oak death remediation
efforts.
Distribution expenses of $14.7 million for the three months ended March
31, 2005 increased from $12.1 million for the comparable period in 2004. As a
percentage of net sales, distribution expenses for the quarter increased to
23.0% from 20.0% for the comparable period in 2004. The increase in distribution
expenses was mainly due to higher diesel fuel costs and third party carrier
charges combined with increased shipping distances as our west coast facilities
shipped more sales into the southern and eastern markets than in the same period
in 2004. Shipping distances increased mainly as a result of inclement weather in
the West and early spring demand in the East.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $5.9 million for the three months ended March 31, 2005 increased
$0.3 million, or 6.0%, from $5.6 million for the comparable period in 2004
mainly due to increased spending in connection with our documenting and testing
of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act.
Page 17
OPERATING INCOME. Operating income of $2.8 million for the three months
ended March 31, 2005 decreased by $1.6 million, or 36.5%, from $4.5 million for
the comparable period in 2004 mainly due to increased selling and distribution
expenses, partially offset by increased gross profit.
OTHER EXPENSES. Other expenses of $5.8 million for the three months
ended March 31, 2005 decreased $0.5 million, or 7.7%, from $6.3 million for the
comparable period in 2004 due to a decrease in interest expense. Interest
expense for the three months ended March 31, 2005 declined $0.5 million, or
6.9%, mainly as a result of the termination of our $75 million interest rate
swap agreement in February 2005.
INCOME TAX BENEFIT. Our effective income tax rate was 41.0%, unchanged
from the comparable period a year ago. Benefit from income taxes was $1.2
million for the three months ended March 31, 2005, compared to $0.7 million for
the comparable period in 2004.
NET LOSS. Net loss of $1.7 million for the three months ended March 31,
2005 increased by $0.7 million, or 62.7%, from $1.1 million for the comparable
period in 2004 mainly due to the decline in operating income, offset by the
improvement in other expense and the benefit from income taxes.
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 8 and Note 9 to the Condensed Consolidated Financial
Statements (unaudited) included in Part I, Item 1 of this Quarterly Report on
Form 10-Q provide additional information pertaining to our senior credit
facility. At March 31, 2005, 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 $37.0 million for the three
months ended March 31, 2005 compared to $33.4 million for the comparable period
in 2004. The increase in cash used in operating activities was mainly due to the
timing of our $9.0 million semi-annual interest payment on our senior notes,
offset by strong sales and customer collections. In 2005, we paid our April 1st
interest payment during the first quarter, while last year's payment was issued
during the second quarter.
Net cash used in investing activities was $1.2 million for the three
months ended March 31, 2005 compared to $0.8 million for the same period a year
ago. The increase in cash used in investing activities was mainly due to an
increase in capital expenditures of $1.6 million, offset by an increase in
proceeds received from land sale option of $1.1 million. The increase in
proceeds received from land sale option was due to a $0.9 million payment
Page 18
received in accordance with our amended option agreement to sell our 168 acre
nursery property in Vacaville, California and $0.2 million under the original
option agreement. The increase in capital expenditures was due to the
development of our new Winters South nursery facility in northern California.
Net cash provided by financing activities was $38.2 million for the
three months ended March 31, 2005 compared to $34.2 million for the same period
in 2004. The increase in cash provided by financing activities was due to the
timing of our $9.0 million semi-annual interest payment on our senior notes, 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 72% 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, 2005, we had $61.8 million of
borrowings under our working capital revolver, resulting in unused borrowing
capacity of approximately $55.2 million after applying the borrowing base
limitations and letters of credits to our available borrowings.
At March 31, 2005, we had total outstanding indebtedness of $271.1
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, 2005.
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 facility .................. 34.3 5.7 28.6 - -
Senior Notes ........................ 175.0 - - - 175.0
Revolving Facility .................. 61.8 61.8 - - -
Interest ............................ 129.2 21.6 61.2 35.9 10.5
Operating Leases .................... 16.2 4.0 5.0 1.1 6.1
---------- --------- --------- ---------- --------
Total $ 416.5 $ 93.1 $ 94.8 $ 37.0 $ 191.6
========== ========= ========= ========== ========
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 Senior Credit Facility
matures on September 30, 2008.
Page 19
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, 2005, 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
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.
Page 20
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 which
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 (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, which commenced on April 1, 2004.
GUARANTEES. Hines Horticulture and each of its domestic subsidiaries,
subject to certain exceptions, has, jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis, the obligations of
Hines Nurseries under the Notes.
REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate
principal amount of the Notes may be redeemed with the net cash proceeds from
one or more public equity offerings, at our option, at a redemption price of
110.250% of the principal amount thereof plus accrued interest, if any, to the
date of redemption. On or after October 1, 2007, we are entitled, at our option,
to redeem all or a portion of the Notes at redemption prices ranging from
100.000% to 105.125%, depending on the redemption date, plus accrued and unpaid
interest.
RESTRICTIONS. The indenture pursuant to which the Notes were issued
imposes a number of restrictions on Hines Nurseries and our other subsidiaries.
Subject to certain exceptions, we may not incur additional indebtedness, make
certain restricted payments, make certain asset dispositions, incur additional
liens or enter into significant transactions. A breach of material term of the
indenture or other material indebtedness that results in acceleration of the
indebtedness under the Notes also constitutes an event of default under our
Senior Credit Facility.
Page 21
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 accounting
principles generally accepted in the United States of America 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 with pay by scan arrangements are recognized when the products
are sold by the retailers.
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.
Page 22
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.
NEW ACCOUNTING PRONOUNCEMENTS.
In December 2004, the FASB issued SFAS No. 153, "Exchange of
Non-Monetary Assets - An Amendment of ARB Opinion No. 29," which requires
non-monetary asset exchanges to be accounted for at fair value. The Company is
required to adopt the provisions of SFAS No. 153 for non-monetary exchanges
occurring in fiscal periods beginning after June 15 2005. We do not expect the
adoption of this standard to have a material impact on our consolidated
financial statements.
In March 2005, the FASB issued FASB Interpretation No. ("FIN") 47,
"Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies the
term "conditional asset retirement obligation" used in SFAS No. 143, "Accounting
for Asset Retirement Obligations." FIN 47 is effective no later than the end of
the fiscal year ending after December 15, 2005. We are in the process of
evaluating whether FIN 47 will result in the recognition of additional asset
retirement obligations for the Company.
EFFECTS OF INFLATION
Management believes our results of operations have not been materially
impacted by inflation over the past three years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market
risks, including fluctuations in interest rates, foreign exchange rates,
commodity prices and Hines Horticulture's common stock price. We do not enter
into transactions designed to mitigate market risks for trading or speculative
purposes.
We have various debt instruments outstanding at March 31, 2005 that are
impacted by changes in interest rates.
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, 2005 the
carrying amount and estimated fair value of our long-term debt was $271.1
million and $283.4 million, respectively. Given the current balance of our fixed
rate and variable rate debt, we estimate a change in interest costs of
approximately $1.0 million for every one-percentage point change in applicable
interest rates.
Page 23
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 fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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.
ITEM 6. 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 24
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 16, 2005
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