<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1998
REGISTRATION NO. 333-51943
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
HINES HORTICULTURE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 33-0803204 6719
(STATE OR OTHER (I.R.S. EMPLOYER (PRIMARY STANDARD INDUSTRIAL
JURISDICTION OF IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER)
INCORPORATION OR
ORGANIZATION)
12621 JEFFREY ROAD
IRVINE, CALIFORNIA 92620
TELEPHONE: (949) 559-4444
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
STEPHEN P. THIGPEN
12621 JEFFREY ROAD
IRVINE, CALIFORNIA 92620
TELEPHONE: (949) 559-4444
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL H. KERR, P.C. MARK A. STEGEMOELLER
KIRKLAND & ELLIS LATHAM & WATKINS
200 EAST RANDOLPH DRIVE SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60606
TELEPHONE: (312) 861-2000 TELEPHONE: (312) 876-7700
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 16, 1998
PROSPECTUS
5,397,051 SHARES
[LOGO OF HINES HORTICULTURE, INC.]
COMMON STOCK
-------------
Of the 5,397,051 shares of Common Stock ("Common Stock") offered hereby (the
"Offering"), 5,000,000 shares are being issued and sold by Hines Horticulture,
Inc. ("Hines" or the "Company") and 397,051 shares are being sold by certain
stockholders (the "Selling Stockholders"). See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price for the Common
Stock will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial offering price.
The Company's Common Stock has been approved for inclusion on the Nasdaq
National Market under the symbol "HORT."
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)....................... $ $ $ $
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</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 809,557 additional shares of Common Stock on the same terms
and conditions as the securities offered hereby solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., New York, New York on or
about , 1998.
-------------
LEHMAN BROTHERS
BT ALEXl BROWN
BANCAMERICA ROBERTSON STEPHENS
, 1998
<PAGE>
HINES HORTICULTURE, INC.
HINES NURSERIES SUN GRO HORTICULTURE
[Photo of selected nursery of the [Photo of selected Sun Gro products]
Company]
Hines Believes It Has Significant Competitive Advantages:
. National Scale with a Regional Focus . Value-Added Services
. Strategically Located Facilities . Proprietary Operating Processes
. High Quality Products on a Consistent . Experienced Management Team
Basis
[BAR GRAPH APPEARS HERE]
HINES NET SALES
$ Millions
<TABLE>
<CAPTION>
4 MONTHS
------------
1993 1994 1995 1996 1997 1997 1998
----- ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$85.0 $134.8 $156.9 $164.3 $201.3 $96.3 $108.1
</TABLE>
Sales growth is a result of both internal growth and acquisitions.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
[16 Photos of selected products and map showing locations of the Company's
facilities]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise noted or where the context otherwise requires, all information herein
(i) assumes the Underwriters' over-allotment option is not exercised, (ii) has
been adjusted to give effect to the Equity Recapitalization (as defined)
assuming the Equity Recapitalization occurs on June 22, 1998 and (iii) reflects
the reincorporation of the Company from Nevada to Delaware effected on June 12,
1998 and certain changes to the Company's charter and bylaws made in connection
therewith (the "Reincorporation"). References to "Hines" or the "Company" refer
to Hines Horticulture, Inc. and its direct and indirect subsidiaries unless
otherwise stated or the context otherwise requires. References to "Hines
Nurseries" refer to the Company's nursery division, which conducts its
operations through Hines Nurseries, Inc., a wholly-owned subsidiary of the
Company ("Hines Nurseries"). References to "Sun Gro" refer to the Company's
peat-based products division, which conducts its operations through Sun Gro
Horticulture Inc., a wholly-owned subsidiary of Hines Nurseries ("Sun Gro-
U.S."), and its Canadian subsidiaries. All references to "dollars" or "$" are
to U.S. dollars unless otherwise indicated. References to fiscal years refer to
the Company's fiscal year ended December 31 of the year indicated.
THE COMPANY
Hines is one of the largest commercial nursery operations in North America,
producing one of the broadest assortments of container-grown plants in the
industry. The Company is also the largest North American producer and marketer
of sphagnum peat moss and professional peat-based growing mixes. The Company
sells its nursery products primarily to leading home centers and mass
merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target, and to
premium independent garden centers, and sells its peat-based products primarily
to professional customers, including greenhouse growers, nursery growers and
golf course developers. As a result of both internal expansion and
acquisitions, the Company has grown from sales of approximately $50 million in
1992 to approximately $201 million in 1997, representing a compound annual
growth rate of 32%. Net sales for 1997, after giving effect to recent
acquisitions on a pro forma basis, would have been approximately $234 million.
Hines Nurseries, the Company's nursery division, produces approximately 4,100
varieties of ornamental shrubs and color plants through its eight nursery
facilities located in California, Oregon, Pennsylvania, South Carolina and
Texas. Hines Nurseries sells to more than 1,900 retail and commercial
customers, representing more than 7,300 outlets throughout the United States
and Canada. Sun Gro, the Company's peat-based products division, produces high
quality, sphagnum peat moss and peat-based potting and growing mixes. Sphagnum
peat moss is a natural, organic material that is generally considered the
highest quality growing medium available due to its excellent water and
nutrient retention and aeration characteristics. Sun Gro controls approximately
49,600 acres of peat bogs throughout Canada and produces its peat moss and
peat-based mixes in ten facilities strategically located across Canada and in
the United States.
The Company believes that a combination of demographic and societal trends,
including the aging of the population, expanding levels of home ownership and
the increasing popularity of gardening, have contributed to the growth of the
nursery industry. The Company also believes that the expansion of home centers
and mass merchandisers, as well as their increasing emphasis on lawn and garden
products, has accelerated the industry's growth by increasing consumers'
exposure to lawn and garden products. According to the 1996-1997 National
Gardening Survey, 64% of the approximately 101 million households in the U.S.
participated in some form of gardening in 1996. The nursery segment of the lawn
and garden industry generated approximately $19 billion of retail sales in 1997
and has grown at a compound annual rate of approximately 7% over the past four
years. In addition, management believes that the wholesale market for peat and
peat-based growing mixes was in excess of $225 million in 1997 and has grown at
a compound annual rate of approximately 4% over the past five years.
3
<PAGE>
The Company believes that it is well-positioned to capitalize on growth and
consolidation opportunities in the nursery industry. First, in recent years,
retail sales of nursery products have shifted from local independent nurseries
to large home centers and mass merchandisers. This shift in the retail
distribution channel has benefited suppliers such as the Company that have been
able to meet demanding delivery schedules, fulfill large volume requirements
and provide a variety of value-added services on a nationwide basis. Second,
the Company believes the fragmented nature of the wholesale nursery industry
will present opportunities for the Company to continue to make strategic
acquisitions. In 1996, the ten and 100 largest wholesale nurseries in the U.S.
accounted for only approximately 8% and 22%, respectively, of total sales at
the wholesale level, and management estimates, based on 1992 census data, that
there are currently more than 30,000 independent nurseries in operation.
Through strategic acquisitions, the Company will seek to continue to expand its
geographic presence and broaden its product offerings, thereby enhancing its
status as a preferred supplier in the industry.
The Company believes that it presently enjoys the following significant
competitive advantages:
. National Scale with a Regional Focus. With eight nurseries located across
the country, the Company believes that it is one of the few suppliers
with the product breadth, scale and distribution capabilities necessary
to service high volume "big box" retailers as well as smaller premium
independent garden centers and garden center chains. The Company
addresses regional variations in buying patterns, climatic conditions and
product mix by servicing and providing expertise to the Company's
customers on a local, regional and national basis. The Company's national
sales and distribution capabilities also reduce the effects of regional
adverse market conditions by enabling the Company to shift sales to other
regions.
. Strategically Located Facilities. The Company's geographically and
climatically diverse nursery facilities allow the Company to provide its
customers with a broad product mix, while reducing the effects of adverse
weather conditions on production. The location of certain of the
Company's nurseries, coupled with its national distribution system,
allows it to deliver products to cold weather regions early in the spring
season before similar nursery products are available from local
nurseries. Similarly, the Company is one of only two peat moss producers
with peat bogs located across Canada, which provides a distribution cost
advantage over certain of its competitors.
. High Quality Products on a Consistent Basis. Hines is able to provide its
customers with a broad mix of high quality products throughout the
selling season. Hines Nurseries' proprietary propagation techniques have
allowed the Company to achieve high quality standards and production
volumes on a consistent and cost effective basis. These techniques also
facilitate commercial introduction of new higher margin plant varieties
and enhance the reputation of Hines Nurseries as a product innovator. Sun
Gro's peat-based mixes are recognized by professional growers as being
among the highest quality in the industry. The Company distinguishes
itself from many of its competitors by offering a broad variety of value-
added growing mixes customized to suit specific customers' needs.
. Value-Added Services. The Company offers a variety of value-added
services, such as customized labeling, bar coding, electronic data
interchange and in-store sales and merchandising support. Management
believes that these capabilities are becoming increasingly important to
lawn and garden retailers, and that most of the Company's competitors
lack the size, scale, and sales and managerial resources to offer
comparable value-added services.
. Proprietary Operating Processes. Hines has made significant investments
in developing and refining proprietary operating and financial management
processes. These investments have improved profitability through
enhancements in production, order processing and fulfillment, and "real-
time" cost management. These processes provide management with
significant flexibility in allocating production and distribution
resources to better manage costs and meet customer delivery requirements.
The Company has applied these processes to all of its acquired businesses
to facilitate integration and improve operating performance.
4
<PAGE>
. Experienced Management Team. The Company's senior management team has
extensive knowledge and experience in the horticultural industry and has
successfully identified and integrated several recent strategic
acquisitions. The Company's twelve key management personnel have been
with the Company for an average of 13 years, and many have extensive
technical backgrounds and advanced degrees in the horticultural sciences
or in business, including several executives with Ph.D.s in the
horticultural sciences.
GROWTH STRATEGY
Hines is pursuing three key strategies for sales and income growth:
. Expand Production. The Company currently has unfulfilled demand from a
number of key customers and incremental acreage available for expansion
at most of its eight existing nurseries. The Company plans to continue to
expand its nursery acreage and greenhouse facilities in 1998 and 1999 in
order to increase production of key product lines (including the fast-
growing color plant category) and to commercially introduce new plant
varieties. By expanding production at existing facilities, the Company
seeks to increase sales volume and to leverage its established operating
processes and management, thereby reducing unit costs.
. Increase Customer Penetration and Expand Customer Base. With its
strategically-located nurseries and its emphasis on customer service, the
Company has established a national customer base and distribution system
for a wide variety of ornamental plants. The Company is pursuing
opportunities to increase its volume with existing customers by (i)
increasing sales to successful "big box" retailers and premium
independent garden centers as they open additional outlets, and (ii)
increasing same-store sales by capitalizing on its existing customers'
continued expansion of lawn and garden floor space and by offering such
customers a broader variety of merchandise, particularly in the color
plant category. The Company also intends to pursue new relationships with
other high volume retailers and premium garden centers. Management
believes that the demand for value-added peat-based mixes by professional
growers is increasing and that there is a trend among professional
growers to outsource the mixing of these products. Sun Gro intends to
further penetrate the professional market by expanding its offerings of
customized value-added mixes and technical expertise in order to
capitalize on this trend.
. Pursue Strategic Acquisitions. The Company believes that strategic
acquisitions will continue to play an important role in expanding its
geographic presence and product offerings. In particular, optimal
production and distribution of color plants such as holiday crops, annual
bedding plants and perennials require regional growing capacity, and the
Company will continue to seek acquisitions of additional regional color
plant growers as it continues to expand its nursery network. The Company
also intends to apply its proprietary operating processes to acquired
businesses to facilitate integration and improve operating performance.
In the peat category, the Company will continue to seek acquisitions of
businesses that offer operating synergies and complementary products.
RECENT DEVELOPMENTS
LAKELAND ACQUISITION
On April 6, 1998, the Company purchased Lakeland Peat Moss, Ltd. and certain
affiliated entities ("Lakeland"), a leading producer of sphagnum peat moss in
western Canada, for approximately Cdn. $31.8 million, or approximately U.S.
$22.4 million (the "Lakeland Acquisition"). The Lakeland Acquisition enhances
the Company's leading position in the North American peat moss market and is
expected to result in production and distribution efficiencies. In addition,
Lakeland's predominantly retail customer base complements Sun Gro's
predominantly professional customer base. For the twelve months ended December
31, 1997, Lakeland had net sales of $18.3 million.
5
<PAGE>
NEW SENIOR CREDIT FACILITY
The Company is completing arrangements with Bankers Trust Company, Bank of
America, N.T. & S.A., and Harris Trust & Savings Bank to amend and restate its
existing senior credit facilities (the "Existing Senior Credit Facilities") to
provide for a new $100.0 million revolving credit facility for working capital
purposes, a new $50.0 million term loan and a new $100.0 million revolving
credit/term facility to fund acquisitions (collectively, the "New Senior Credit
Facility"). The New Senior Credit Facility will replace the Existing Senior
Credit Facilities and increase the Company's borrowing capacity by up to $100.0
million to accommodate the Company's growth plans. The New Senior Credit
Facility is expected to close concurrently with the closing of the Offering and
is expected to have a five year maturity.
----------------
Hines Horticulture, Inc. was incorporated in Delaware on May 1, 1998. On June
12, 1998, as part of the Reincorporation, Hines became the successor to the
business of Hines Holdings, Inc., a Nevada corporation ("Holdings"). The
principal executive offices of the Company are located at 12621 Jeffrey Road,
Irvine, California 92620 and its telephone number is (949) 559-4444.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 5,000,000 shares
Common Stock offered by the Selling
Stockholders................................ 397,051 shares
Common Stock to be outstanding after the
Offering(1)................................. 19,737,500 shares
Use of Proceeds.............................. To prepay a portion of Hines
Nurseries' 11 3/4% Senior
Subordinated Notes due 2005,
Series B (the "Senior
Subordinated Notes"), to prepay
indebtedness of Hines Nurseries
under certain notes payable and
to fund a portion of the
Company's 1998 expansion plans.
See "Use of Proceeds."
Nasdaq National Market Symbol................ "HORT"
</TABLE>
- --------
(1) Excludes approximately 2.3 million shares which, prior to the consummation
of the Offering, will be reserved for issuance under the Company's 1998
Long-Term Equity Incentive Plan (the "1998 Stock Plan"). See "Management--
1998 Stock Plan." All of the Company's outstanding shares of preferred
stock, together with accrued dividends thereon, and a portion of the
Company's outstanding convertible subordinated promissory notes will
convert into shares of Common Stock immediately prior to the closing of
the Offering at the initial public offering price less underwriting
discounts and commissions. Because the initial public offering price has
not yet been determined and because the amount of accrued dividends will
depend on the date on which these securities are converted into Common
Stock, the number of shares to be outstanding after the Offering is
subject to change. See "Equity Recapitalization."
RISK FACTORS
An investment in the Common Stock offered hereby involves a large degree of
risk. In particular, prospective investors should be aware of the risks
presented by the factors listed under "Risk Factors."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated historical financial data
and unaudited summary consolidated pro forma financial data for the Company.
The consolidated historical financial data, insofar as it relates to each of
the years 1993 through 1997, have been derived from audited financial
statements, including the consolidated statements of operations and of cash
flows for the three years ended December 31, 1997 and notes thereto appearing
elsewhere herein. The data for the four months ended April 30, 1997 and 1998
have been derived from unaudited financial statements also appearing herein and
which, in the opinion of management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods. The following summary consolidated financial
data should be read in conjunction with the consolidated financial statements
and accompanying notes thereto, "Unaudited Pro Forma Statements of Operations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Capitalization" and "Use of Proceeds" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE FOUR MONTHS
FOR THE YEARS ENDED DECEMBER 31, (A) ENDED APRIL 30,
------------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 85,006 $ 134,781 $ 156,909 $ 164,323 $ 201,256 $ 96,318 $ 108,088
Cost of goods sold...... 40,457 60,827 72,245 80,812 99,407 49,957 53,531
Gross profit............ 44,549 73,954 84,664 83,511 101,849 46,361 54,557
Operating expenses...... 31,452 50,274 58,392 60,757 70,408 27,071 29,369
Unusual operating
expenses (b)........... -- -- -- 830 343 -- --
Operating income........ 13,097 23,680 26,272 21,924 31,098 19,290 25,188
Interest expense........ 6,868 9,422 17,831 21,080 21,805 7,479 8,430
Provision (benefit) for
income taxes........... 2,248 3,635 2,850 636 3,516 4,398 6,777
Income (loss) from
continuing operations.. 3,981 10,623 5,591 208 5,777 7,413 9,981
Income (loss) from
continuing operations
per common share (c):
Basic................. 10,795(d) 29,860(d) 0.06 (0.48) (0.12) 0.70 0.81
Diluted............... 10,795 29,860 0.06 (0.48) (0.12) 0.64 0.73
Weighted average shares
outstanding:
Basic................. 264 264 3,061,984 7,439,190 7,550,174 7,513,176 7,708,481
Diluted............... 264 264 3,061,984 7,439,190 7,550,174 8,122,977 8,560,808
UNAUDITED PRO FORMA OPERATING DATA
(E):
Net sales........................................................... $ 234,046 $ 108,810 $ 114,280
Income from continuing operations................................... 10,882 9,416 12,149
Basic and Diluted Earnings Per Share: Income (loss) from
continuing operations per common share............................. 0.59 0.55 0.62
Weighted average shares outstanding--Basic and Diluted.............. 18,434,156 17,191,859 19,514,770
OTHER DATA:
Capital expenditures.... $ 4,899 $ 7,389 $ 7,684 $ 8,752 $ 10,130 $ 3,087 $ 3,777
Cash paid for income
taxes (f).............. 65 131 3 4 161 -- --
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1998
-----------------------------------------
PRO FORMA PRO FORMA,
ACTUAL COMBINED (E) AS ADJUSTED (E)
-------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 44,659 $ 42,741 $ 61,454
Short-term debt.................... 78,964 80,882 63,814
Total assets....................... 367,155 367,155 370,271
Long-term debt..................... 177,317 174,199 128,000
Redeemable preferred stock......... 80,975 -- --
Shareholders' equity (deficit)..... (65,135)(d) 17,040 78,818
</TABLE>
7
<PAGE>
- --------
(a) From January 1, 1993 through December 31, 1997, the Company acquired the
following six companies: Sun Gro-U.S. (June 30, 1993), Oregon Garden
Products ("OGP") (January 27, 1995), Iverson Perennial Gardens, Inc.
("Iverson") (August 30, 1996), Flynn Nurseries, Inc. ("Flynn") (November
27, 1996), Pacific Color Nurseries, Inc. ("Pacific Color") (October 20,
1997) and Bryfogle's Wholesale, Inc. and certain affiliated entities
("Bryfogle's") (December 16, 1997). The financial results include the
operations of each acquisition since its respective acquisition date.
(b) Unusual operating expenses consist of certain severance and other
restructuring costs of $1,537 and $830 in 1997 and 1996, respectively, net
of a $1,194 gain from receipt of insurance proceeds on an involuntary
disposal of fixed assets in 1997.
(c) After deduction of the minority interest in earnings of subsidiaries of
$1,131, $2,740 and $3,958 for the years ended December 31, 1993, 1994 and
1995 and accrued preferred stock dividends of $1,460, $3,775 and $6,666
for the years ended December 31, 1995, 1996 and 1997 and $2,190 and $3,721
for the four month periods ended April 30, 1997 and April 30, 1998,
respectively.
(d) As further discussed in Note 21 to the consolidated financial statements,
included elsewhere in this Prospectus, the financial statements for the
year ended December 31, 1995 reflect purchase accounting for the exchange
by certain members of management (the "Management Shareholders") and other
investors of their minority interests for stock of the Company in
connection with the recapitalization of the Company on August 4, 1995. The
repurchase by the Company of its own stock from shareholders (other than
the Management Shareholders) was recorded as a repurchase and retirement
of treasury stock, which resulted in negative shareholders' equity. As a
result of this transaction, the earnings per share amounts for the years
ended December 31, 1993 and 1994 are not considered to be comparable to
the years ended December 31, 1995, 1996 and 1997.
(e) The unaudited pro forma operating data is presented as if the (i) Pacific
Color, Bryfogle's and Lakeland acquisitions, (ii) the Equity
Recapitalization, (iii) the closing of the New Senior Credit Facility, and
(iv) the Offering (collectively, the "Transactions") had occurred as of
January 1, 1997, and therefore incorporates certain assumptions that are
included in the Notes to Unaudited Pro Forma Statements of Operations
included elsewhere in this Prospectus. The "Pro Forma Combined" column
gives effect, as of April 30, 1998, to the Equity Recapitalization. The
"Pro Forma, As Adjusted" column also gives effect, as of April 30, 1998,
to the closing of the New Senior Credit Facility and the sale of 5.0
million shares of Common Stock offered hereby and application of the
estimated net proceeds thereof as described in "Use of Proceeds." The
unaudited pro forma financial data does not purport to represent what the
Company's financial position or results of operations actually would have
been had the Transactions occurred on such date or at the beginning of the
period indicated, or to project the Company's financial position or
results of operations at any future date or future period.
(f) The Company derives significant benefits under the U.S. federal tax code
by qualifying to use the cash method of accounting and by qualifying under
the "farming exception" to the uniform cost capitalization rules, as a
result of which the Company has generally not been required to pay cash
income taxes and has generated net operating losses for federal income tax
purposes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview--Tax Matters" and "Risk Factors--Risk
of Modification or Elimination of Favorable Agricultural Tax Accounting
Rules."
8
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
risk factors set forth below, as well as the other information contained in
this Prospectus. All statements, other than statements of historical fact,
included in this Prospectus that address activities, events or developments
that the Company expects, believes or anticipates will or may occur in the
future are based on certain assumptions and analyses made by the Company in
light of its experiences and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate under the circumstances when such assumptions and analyses were
made. Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors discussed below, general economic
and business conditions, the business opportunities (or lack thereof) that may
be presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company.
Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in or suggested by such forward-looking
statements.
EFFECT OF SEASONALITY, WEATHER AND OTHER FACTORS ON QUARTERLY RESULTS
The Company's nursery business, like that of its competitors, is highly
seasonal. In 1997, approximately 80% of Hines Nurseries' net sales
(approximately 71% of the Company's consolidated net sales) and approximately
102% of Hines Nurseries' operating profits occurred in the first half of the
year, with approximately 58% of Hines Nurseries' net sales (approximately 47%
of the Company's consolidated net sales) and approximately 84% Hines
Nurseries' operating profits occurring in the second quarter of 1997. Many of
the Company's nurseries experience operating losses during quarters that do
not include the peak selling season. The Company has experienced and expects
to continue to experience significant variability in net sales, operating
income and net income on a quarterly basis. The principal factor contributing
to this variability is weather, particularly weekend weather conditions during
the peak gardening season. During the first quarter of 1998, for example, the
phenomenon known as "El Nino" has resulted in unusually cool and wet weather
conditions in some of the Company's markets, particularly California, which
negatively impacted the Company's sales for the quarter and contributed to the
variability of quarterly results. Other factors that may contribute to this
variability include the timing of holidays such as Easter and the effect and
timing of acquisitions. Sun Gro's sales typically do not experience large
seasonal variances, and are only slightly weighted towards the first half of
the year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality and Variability of Quarterly Results."
GROWING CONDITIONS
The Company's production of nursery plants may be adversely affected by
disease, freezing conditions, snow, drought or other inclement weather. While
weather conditions have not had a material adverse effect on the Company's
production of nursery products for many years, there can be no assurance that
future weather conditions will not have a material adverse effect on the
Company.
The Company's production of peat moss and peat-based growing mixes may also
be negatively affected by unusual weather conditions. For example, the harvest
of peat, which requires dry weather, may be hampered by unseasonal rain. In
addition, unusually long peat moss harvesting seasons, such as the 1995
harvest in eastern Canada, which resulted in an excess supply of peat moss,
may adversely affect the sales price of peat moss and the profitability of the
Company's peat moss business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ACCESS TO WATER
Plant production is dependent upon the availability of water. The Company's
nurseries receive their water from a variety of sources, including on-site
wells, reservoirs and holding ponds, municipal water districts and irrigation
water supplied to local districts by facilities owned and operated by the
United States acting through
9
<PAGE>
the Department of Interior Bureau of Reclamation ("reclamation water"). The
loss or reduction of access to water at any of the Company's nurseries could
have a material adverse effect on the Company.
The use of reclamation water is governed by federal reclamation laws and
regulations. Reclamation water is used at the Company's Northern California
nursery and is the source of a substantial majority of the water for the
Company's Oregon nursery. While the Company believes that it is in material
compliance with all applicable regulations and maintains a continuous
compliance program, there can be no assurance that changes in law will not
reduce availability or increase the price of reclamation water to the Company.
Any such change could have a material adverse effect on the Company.
Under certain attribution provisions of the reclamation regulations, persons
having a direct or indirect beneficial economic interest in the Company will
be treated as "indirect holders" of irrigation land owned by the Company in
proportion to their beneficial interest in the Company. If any holder of the
Common Stock (whether directly or indirectly through a broker-dealer or
otherwise) is ineligible under applicable reclamation regulations to hold an
indirect interest in the Company's irrigation land, the Company itself may not
be eligible to receive reclamation water on such land. Generally, the
eligibility requirement of the reclamation regulations would be satisfied by a
person (i) who is a citizen of the United States or an entity established
under federal or state law or a person who is a citizen of or an entity
established under the laws of certain foreign countries (including Canada and
Mexico and members of the Organization for Economic Cooperation and
Development) and (ii) whose ownership, direct and indirect, of other land
which is qualified to receive water from a reclamation project, when added to
such person's attributed indirect ownership of irrigation land owned by the
Company, does not exceed certain maximum acreage limitations (generally, 960
acres for individuals and 640 acres for entities). While the Company's
Restated Certificate of Incorporation will have provisions intended to
prohibit transfers to holders who would render any portion of the Company's
irrigation land ineligible to receive reclamation water, there can be no
assurance that such provisions will be effective in protecting the Company's
right to continue to receive reclamation water. For example, such provisions
will not apply if the status of a stockholder of the Company subsequently
changes in a manner that reduces the Company's eligibility to receive
reclamation water on its entire landholding (such as through a stockholder
subsequently becoming a citizen of certain foreign countries or exceeding the
maximum acreage limitations through acquisitions of other interests in
irrigation land). See "--Ownership Restrictions" and "Description of Capital
Stock."
CUSTOMER CONCENTRATION
The Company's top ten customers accounted for 39% of the Company's net sales
in 1997. The Company's largest customer, Home Depot, accounted for
approximately 10% and 12% of the Company's consolidated net sales in 1996 and
1997, respectively. The Company expects a similar or greater concentration of
customers for the foreseeable future. These major customers may exert
significant bargaining leverage when negotiating with the Company and other
suppliers. The Company does not have long-term contracts with any of its
customers, and there can be no assurance that these customers will continue to
purchase the Company's products in historical quantities or at all. The loss
of, or a significant adverse change in, the relationship between the Company
and Home Depot or any other major customer could have a material adverse
effect on the Company. See "Business--Customers."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company has completed seven acquisitions since 1992 and expects to
pursue additional acquisitions in the future as a key component of the
Company's business strategy. See "Business--Growth Strategy." There are
currently no definitive agreements pending to make any acquisitions and there
can be no assurance that the Company will be able to obtain financing for or
otherwise consummate any future acquisitions, or that any acquisitions which
are consummated (including recently consummated acquisitions) will be
successfully integrated or operated profitably. As a result, the Company's
acquisition strategy could have a material adverse effect on the Company. In
addition, future acquisitions would likely require additional financing, which
would likely result in an increase in the Company's indebtedness and interest
expense, or the issuance of additional capital stock which could be dilutive
to holders of shares issued in the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
10
<PAGE>
Acquisitions of businesses, depending on the circumstances and applicable
law, are frequently subject to antitrust review by government agencies. In the
case of the recently completed Lakeland Acquisition, the Canadian government
may, at any time within three years of the closing of such acquisition, review
the competitive effect of the transaction. If it were to find that the
Lakeland Acquisition prevented or lessened competition substantially in a
relevant market in Canada within this three-year period, it could order the
dissolution of the acquisition, divestiture of assets or other appropriate
relief. The Company does not believe that the Lakeland Acquisition will have
any such anti-competitive effects in Canada, in part because the Company's
sales are predominantly to U.S. customers and because there is little customer
overlap in Canada, but there can be no assurance that an agency of the
Canadian government would not reach a contrary conclusion, which could have a
material adverse effect on the Company.
ABILITY TO MANAGE GROWTH
Implementation of the Company's growth strategy may divert management's
attention from other aspects of the Company's business and place a strain on
the Company's management, operational and financial resources, and accounting
controls. Continued growth will require an increase in Company personnel who
possess the training and experience necessary to operate the Company's
facilities and systems. There can be no assurance that the Company will be
able to continue to attract, develop and retain the personnel necessary to
pursue its growth strategy. Any failure by the Company to manage its growth
effectively could have a material adverse effect on the Company.
COMPETITION
The Company's competition varies by region, each of which is highly
competitive. Hines Nurseries competes primarily on the basis of breadth of
product mix, consistency of product quality, product availability, customer
service and price. Sun Gro competes primarily on the basis of product quality,
product availability, price and customer service. Sun Gro competes with
several large Canadian peat producers. Peat moss is largely a commodity, the
pricing and profitability of which depends to a large extent on supply and
demand, which in turn can be affected by harvest conditions. See "--Growing
Conditions." Certain of the Company's competitors are less leveraged and have
greater financial resources than the Company. The Company believes that it has
historically been able to compete effectively due to its ability to provide
consistent, high quality products in large volumes, its nationwide
distribution and its value-added services. However, there can be no assurance
that the consolidation in the retail markets will not provide similar benefits
to the Company's competitors or that the Company will be able to continue to
compete successfully. See "Business--Competition."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
While the Company anticipates that its available cash combined with the net
proceeds of the Offering, borrowings under the New Senior Credit Facility and
funds from operations will be sufficient to meet its anticipated working
capital, capital expenditure and acquisition financing requirements for the
foreseeable future, there can be no assurance that such resources will be
sufficient for such requirements. The Company may need to raise additional
funds through the issuance of debt or equity securities in order to finance
acquisitions or respond to changing business conditions. Issuance of
additional equity securities could dilute the ownership of stockholders of the
Company and such securities may rank senior to the Common Stock. Future debt
incurred by the Company could impose additional restrictions on the operations
of the Company. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all. If adequate funds are
not available, or not available on acceptable terms, the Company may not be
able to take advantage of future opportunities or otherwise respond to
unanticipated competitive pressures or business conditions, which could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
LEVERAGE AND DEBT RESTRICTIONS
On a pro forma basis as of April 30, 1998, after giving effect to the
Lakeland Acquisition, the Equity Recapitalization, the closing of the New
Senior Credit Facility and the sale of 5,000,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds thereof as
described in "Use of
11
<PAGE>
Proceeds," the Company would have approximately $191.8 million of indebtedness
outstanding, compared to $78.8 million of shareholders' equity. Under the
terms of the Senior Subordinated Notes and the New Senior Credit Facility, the
Company may increase its indebtedness to finance future acquisitions or for
other purposes. The Company's debt service obligations will require
significant cash interest payments that will reduce net income and reduce cash
available for expansion and other corporate purposes. In addition, the New
Senior Credit Facility will be secured by substantially all of the assets of
the Company. Finally, the Company's debt agreements impose certain financial
and other covenants which limit the Company's ability to pay dividends and
which could limit the Company's operating flexibility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
OWNERSHIP RESTRICTIONS
In order to protect the Company's ability to receive reclamation water, the
Restated Certificate of Incorporation of the Company will impose certain
restrictions on transfer of beneficial interests in the Company. Under such
restrictions, a purported transfer of a beneficial interest in the Company to
any person (a "purported transferee") who, as a result of the application of
the attribution rules under the reclamation regulations, would be ineligible
to be an indirect holder of irrigation land owned by the Company, will be
ineffective. For a description of these reclamation regulations, see "--Access
to Water." A purported transferee will not have any rights as a stockholder,
and an agent will be designated by the Company to sell any shares which were
purported to be transferred to such purported transferee, with the purported
transferee only being entitled to receive out of the sale proceeds an amount
up to the purported purchase price paid for such shares. Such purported
transferee would therefore lose the benefit of any appreciation in the Common
Stock between the time of the purported transfer and the sale by the Company's
agent. Notwithstanding that a stockholder of the Company may itself be
eligible to hold stock of the Company, if a person having a beneficial
interest in the Company through such stockholder is ineligible to hold stock
in the Company, such stockholder, under the terms of the Company's Restated
Certificate of Incorporation, will be deemed as of the time such ineligible
person acquired such beneficial interest to have disposed of sufficient shares
of Common Stock to cure such ineligibility (with an agent appointed by the
Company to effect such disposition and to pay such stockholder an amount up to
the fair market value of the shares at the deemed time of disposition).
Further, under the provisions of the Restated Certificate of Incorporation,
any person, before acquiring a beneficial interest in the Company that would
cause such person to be subject to the certification and reporting
requirements under applicable reclamation regulations, will be required to
enter into a written undertaking with the Company to comply with such
certification and reporting requirements and not to take any action which
would adversely affect the ability of the Company to receive reclamation
water. Generally, based on the Company's current ownership and leasehold
interests in irrigation land, an eligible person who does not otherwise have
any direct or indirect ownership or leasehold interest in irrigation land
should be able to acquire up to approximately a 4% beneficial interest in the
Company without becoming subject to such reporting and certification
requirements. The certificates representing the Common Stock will bear a
legend reflecting these restrictions on transfer.
GOVERNMENTAL REGULATION
The Company is subject to obligations and potential liability under United
States federal, state and local and Canadian federal, provincial and local
occupational health and safety and environmental laws and regulations
regarding the production, storage and transportation of certain of its
products, the disposal of its wastes and the remediation of releases
associated with its operations. The EPA and similar state and local agencies
regulate the Company's operations and activities, including but not limited to
water runoff and the use of certain pesticides in its nursery operations.
These agencies or regulations may adversely affect the Company by limiting or
prohibiting the use of certain pesticides or by mandating changes in operating
procedures for the protection of the environment. With respect to its peat
moss operations, the Company has various operating, monitoring, reclamation
and site maintenance obligations, which are prescribed by various Canadian and
U.S. agencies. Peat harvesting in general has received attention from various
environmental groups. The Company does not anticipate that future expenditures
for compliance with such environmental laws, regulations and obligations will
have a material adverse effect on the Company. No assurances can be given,
however, that such compliance, or compliance with future environmental laws
and regulations, will not have such an adverse effect. See "Business--
Government Regulation."
12
<PAGE>
The Company leases approximately 44,900 acres of peat bogs in Canada from
provincial governments, which represent 93% of the Company's harvestable peat
bogs. Although the Company has historically been able to renew its leases upon
expiration on terms not materially different than under existing leases, there
can be no assurance that the Company will be able to do so in the future. The
inability to renew these leases or to do so on such terms could have a
material adverse effect on the Company. See "Business--Properties."
In addition, the Company is subject to the Fair Labor Standards Act, as well
as various federal, state and local regulations that govern matters such as
minimum wage requirements, overtime and working conditions. A large number of
the Company's seasonal employees are paid at or slightly above the applicable
minimum wage level and, accordingly, changes in such laws and regulations
could have a material adverse effect on the Company.
Finally, the Company's use of reclamation water at certain of its nurseries
is highly regulated. See "--Access to Water."
RISK OF MODIFICATION OR ELIMINATION OF FAVORABLE AGRICULTURAL TAX ACCOUNTING
RULES
The Company derives significant benefits under the Internal Revenue Code of
1986, as amended (the "Code"), by qualifying to use the cash method of
accounting for federal income tax purposes. Under the cash method, sales are
included in taxable income only when payments are received and expenses are
deducted as they are paid. The primary benefit the Company receives is the
ability to deduct the cost of inventory as it is incurred by qualifying under
the "farming exception" to the uniform cost capitalization rules, which allows
nursery growers to deduct for federal income tax purposes certain costs of
growing plants as they are incurred rather than when the products are sold.
The Internal Revenue Service ("IRS") and the Department of Treasury issued
proposed regulations in August 1997 that raised a concern that the benefits of
the farming exception might be limited or reduced for nurseries. In response
to comments from numerous nurseries, the IRS issued an announcement, published
in December 1997, stating that the proposed regulations were not intended to
alter eligibility for the farming exception and confirming that nursery
growers would continue under the proposed regulations to qualify for the
farming exception to the extent that they are engaged in the growing of
plants. However, final regulations governing the farming exception and
implementing the announcement have not yet been published. If the Company's
ability to use the farming exception or to use the cash method of accounting
for federal income tax purposes were limited or eliminated, whether by future
regulations or future tax legislation, the Company's cash income tax payments
could increase significantly, which could have a material adverse effect on
the Company's cash flow. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
EXCHANGE RATE FLUCTUATIONS
Approximately 60% of Sun Gro's costs (25% of the Company's consolidated
costs) are incurred in Canadian dollars, while approximately 86% of Sun Gro's
sales (95% of the Company's consolidated sales) are in U.S. dollars. As a
result, the Company's operations are subject to the risks normally
attributable to fluctuations in foreign currency values. In general,
fluctuations in the value of the Canadian dollar may impact the Company by (i)
increasing profit margins when the value of the Canadian dollar weakens
against the U.S. dollar or (ii) decreasing profit margins when the value of
the Canadian dollar strengthens against the U.S. dollar. The Company from time
to time enters into forward exchange contracts and foreign exchange options
for the purchase of Canadian dollars in order to reduce the risks of exchange
rate fluctuations, but there can be no assurance that currency fluctuations
will not materially adversely affect the Company.
DEPENDENCE ON MANAGEMENT
The Company's success is largely dependent on the skills, experience and
efforts of its senior management. The loss of services of one or more members
of the Company's senior management could have a material adverse effect on the
Company. The Company does not maintain key-man life insurance policies on any
13
<PAGE>
members of management. No members of senior management are bound by non-
compete agreements, and if any such members were to depart and subsequently
compete with the Company, such competition could have a material adverse
effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, Madison Dearborn Capital Partners, L.P.
("MDCP") will beneficially own approximately 46.1% of the outstanding Common
Stock. By virtue of such stock ownership, MDCP will be able to exercise
considerable influence over the election of the members of the Company's Board
of Directors and over the affairs of the Company. Such concentration of
ownership could also have the effect of delaying, deterring or preventing a
change in control of the Company that might otherwise be beneficial to
stockholders. In addition, four representatives of MDCP currently serve on the
Company's Board of Directors. MDCP currently does not receive any management
or advisory fees from the Company and MDCP's representatives on the Company's
Board of Directors have not been and currently are not compensated for serving
as directors, other than receiving reimbursement of their travel expenses.
Although covenants in the Company's debt agreements generally limit
transactions between the Company and MDCP to arms length transactions, there
can be no assurance that conflicts of interest will not arise with respect to
such directors or that such conflicts will be resolved in a manner favorable
to the Company. See "Principal and Selling Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Commencing 180 days after the date of this Prospectus, upon the expiration
of certain lock-up agreements with Lehman Brothers Inc., approximately 13.4
million shares of Common Stock issued and outstanding as of the date of this
Prospectus will be eligible for immediate sale in the public market subject,
in certain cases, subject to compliance with certain volume and other
limitations under Rule 144 of the Securities Act ("Rule 144"). Holders of
approximately 12.2 million shares of Common Stock will have the right upon
consummation of the Offering to cause the Company to register their securities
under the Securities Act for sale to the public. These stockholders, as well
as certain stockholders holding an aggregate of approximately 1.6 million
shares of Common Stock, will also have the right to include their shares in
any registration initiated by the Company under the Securities Act. See
"Shares Eligible for Future Sale--Registration Rights." No prediction can be
made as to the effect, if any, that sales of shares of Common Stock or the
availability of shares of Common Stock for sale will have on the market price
of the Common Stock from time to time. The sale of a substantial number of
shares held by existing stockholders, whether pursuant to subsequent public
offerings or otherwise, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and could materially
impair the Company's future ability to raise capital through an offering of
equity securities. See "Shares Eligible For Future Sale" and "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may fluctuate significantly. These
fluctuations could result from, among other things, variations in the
Company's results of operations, which could be adversely affected by a number
of factors (some of which are beyond the Company's control), including those
discussed in this section and elsewhere in this Prospectus. In addition, the
stock market in general has experienced wide price and volume fluctuations in
recent periods and these fluctuations are often unrelated to the operating
performance of the specific issuers whose stock is affected.
ABSENCE OF PUBLIC MARKET; SUBSTANTIAL DILUTION
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company has applied to list the Common Stock on the Nasdaq
National Market, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
among the Company and the Underwriters and should not be considered as an
indication of the market price for the Common Stock after the Offering. See
"--Possible Volatility of Stock Price" and "Underwriting." Purchasers of the
Common Stock in the Offering will be subject to immediate and substantial
dilution. See "Dilution."
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<PAGE>
EQUITY RECAPITALIZATION
Immediately prior to the Offering, (i) all of the outstanding shares of the
Company's 12% Cumulative Redeemable Senior Preferred Stock, par value $.01 per
share (the "Senior Preferred"), and all of the outstanding shares of the
Company's 12% Cumulative Redeemable Junior Preferred Stock, par value $.01 per
share (the "Junior Preferred"), together, in each case, with all accrued and
unpaid dividends thereon through the date of the closing of the Offering, will
be converted into shares of Common Stock at the initial public offering price
less underwriting discounts and commissions (the "Preferred Stock
Conversion"), (ii) all of the Company's outstanding 6% Convertible
Subordinated Promissory Notes, which were issued in connection with the
Bryfogle's and Lakeland acquisitions in initial aggregate principal amounts of
$1.0 million and Cdn $3.0 million (U.S. $2.1 million), respectively, will
either be converted into shares of Common Stock at the initial public offering
price less underwriting discounts and commissions (the "Note Conversion") or
will be prepaid and (iii) all of the outstanding warrants to purchase Common
Stock will be exercised in accordance with their terms (the "Warrant
Exercise"). See "Description of Capital Stock." Prior to the Preferred Stock
Conversion, the Note Conversion and the Warrant Exercise, a 1.3611-for-one
reverse stock split will be effected with respect to the Common Stock and a
corresponding adjustment will be made to the number of shares issuable upon
exercise of all outstanding options under the 1998 Stock Plan. These actions
are collectively referred to herein as the "Equity Recapitalization." All
references in this Prospectus to the Equity Recapitalization assume that the
Equity Recapitalization will occur on June 22, 1998 and do not give effect to
the cash redemption of fractional shares. Because the initial public offering
price has not yet been determined and because the amount of accrued dividends
on the Senior Preferred and Junior Preferred will depend on the date on which
these securities are converted into Common Stock, the number of shares to be
outstanding after the Offering is subject to change.
On June 12, 1998, as a result of the Reincorporation, the Company became the
successor to the business of Holdings, a company subject to the periodic
reporting and disclosure requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). In the Reincorporation, Holdings merged with
and into the Company in order to change the Company's name and jurisdiction of
incorporation.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 5.0 million shares of
Common Stock offered by the Company hereby are estimated to be $68.8 million
($80.0 million if the Underwriters' over-allotment option is exercised in
full), in each case assuming an initial public offering price of $15.00 per
share, which is the midpoint of the range of the estimated offering price per
share set forth on the cover of this Prospectus, after deducting underwriting
discounts and commissions and estimated offering expenses. The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. The estimated net proceeds received by the Company are expected
to be used as follows (dollars in thousands):
<TABLE>
<S> <C>
Redemption of Senior Subordinated Notes (1)...................... $47,483
Prepayment of mortgages payable (2).............................. 15,584
Capital expenditures (3)......................................... 5,683
-------
$68,750
=======
</TABLE>
- --------
(1) Represents the redemption of $42.0 million in aggregate principal amount
of Senior Subordinated Notes, plus accrued and unpaid interest thereon
through the date of redemption ($1.6 million at April 30, 1998), at a
redemption price of 109.139% of the aggregate principal amount thereof
($45.8 million at April 30, 1998). The Senior Subordinated Notes bear
interest at 11.75% and mature on October 15, 2005.
(2) Represents the prepayment of borrowings secured by real property bearing
interest at 10.0% and 11.75% per annum and maturing on June 28, 2005 and
June 27, 2005, respectively.
(3) Represents an amount which will be used to fund a portion of the Company's
1998 expansion plans.
DIVIDEND POLICY
Since the acquisition of the Company by MDCP and certain members of
management in August 1995 (the "MDCP Acquisition"), the Company has not paid
any dividends on its capital stock. The Company presently intends to retain
all available funds for use in the business and therefore does not anticipate
paying cash dividends in the foreseeable future. Payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
expansion. As a holding company, the ability of the Company to pay dividends
is dependent upon the receipt of dividends or other payments from its
operating subsidiaries. The Company's operating subsidiaries are restricted in
their ability to pay dividends to the Company under the Existing Senior Credit
Facilities and the indenture governing the Senior Subordinated Notes and will
be limited in their ability to pay dividends to the Company under the New
Senior Credit Facility. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
and the pro forma capitalization of the Company as of April 30, 1998. The "Pro
Forma Combined" column gives effect, as of April 30, 1998, to the Equity
Recapitalization. The "Pro Forma, As Adjusted" column also gives effect, as of
April 30, 1998, to the closing of the New Senior Credit Facility and the sale
of 5.0 million shares of Common Stock offered hereby and the application of
the estimated net proceeds thereof as described in "Use of Proceeds." The
table set forth below should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto and "Unaudited
Pro Forma Statements of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 30, 1998
--------------------------------
PRO FORMA PRO FORMA,
ACTUAL COMBINED AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Working capital facility..................... $ 73,463 $ 75,381 $ 63,659
Existing Senior Credit Facilities............ 43,961 43,961 --
New Senior Credit Facility (a):
Acquisition facility....................... -- -- --
Term loans................................. -- -- 50,000
Mortgages payable............................ 15,584 15,584 --
Senior Subordinated Notes.................... 120,000 120,000 78,000
Convertible promissory notes................. 3,118 -- --
Capital lease obligations and other debt..... 155 155 155
-------- -------- --------
Total debt............................... 256,281 255,081 191,814
-------- -------- --------
Preferred equity:
Redeemable senior preferred stock............ 52,691 -- --
Redeemable junior preferred stock............ 28,284 -- --
-------- -------- --------
Total preferred equity................... 80,975 -- --
-------- -------- --------
Shareholders' equity (deficit):
Preferred Stock, par value $.01 per share
2,000,000 shares authorized, no shares
issued and outstanding...................... -- -- --
Common Stock, par value $.01 per share,
22,040,996, 60,000,000, 60,000,000, actual,
pro forma combined and pro forma, as
adjusted, shares authorized; 7,708,481,
14,514,770 and 19,514,770 actual, pro forma
combined and pro forma, as adjusted, shares
issued and outstanding...................... 77 136 186
Additional paid-in-capital................... (4,336) 77,780 146,480
Notes receivable from stock sales............ (224) (224) (224)
Retained earnings (deficit) (b).............. (60,652) (60,652) (67,624)
-------- -------- --------
Total shareholders' equity (deficit)..... (65,135) 17,040 78,818
-------- -------- --------
Total capitalization................... $272,121 $272,121 $270,632
======== ======== ========
</TABLE>
- --------
(a) The New Senior Credit Facility is expected to provide for a $100.0
million working capital facility, a $100.0 million acquisition facility
and a $50.0 million term loan. The New Senior Credit Facility is expected
to close concurrently with, and is conditioned upon, the closing of the
Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(b) The increase in the deficit from the "Pro Forma Combined" column to the
"Pro Forma, As Adjusted" column represents the premium paid on the
partial redemption of the Senior Subordinated Notes and the write off of
the deferred financing costs with respect to the debt which is being
repaid. See "Use of Proceeds."
17
<PAGE>
DILUTION
The Company's pro forma net tangible deficit of the Company as of April 30,
1998 was approximately $21.4 million, or $1.48 per share of Common Stock. Pro
forma net tangible book value per share represents the amount of the Company's
total tangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding (after giving effect to the Equity
Recapitalization). After giving effect to (i) the receipt of $68.8 million of
estimated net proceeds from the sale by the Company of 5.0 million shares of
Common Stock in the Offering (assuming an initial public offering price of
$15.00 per share, which is the midpoint of the range of the estimated offering
price per share set forth on the cover of the Prospectus), and (ii) the use of
such net proceeds and the proceeds from the closing of the New Senior Credit
Facility to repay indebtedness as described under "Use of Proceeds," the pro
forma net tangible book value of the Company at April 30, 1998 would have been
approximately $40.4 million, or $4.04 per share of Common Stock. This
represents an immediate dilution in net tangible book value of $10.96 per
share to new investors purchasing shares in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $15.00
Pro forma net tangible deficit per share at April 30, 1998. (1.48)
Increase per share attributable to new investors......... 5.52
-----
Pro forma net tangible book value per share after the
Offering.................................................. 4.04
------
Dilution per share to new investors...................... $10.96
======
</TABLE>
The following table summarizes, on a pro forma basis as of April 30, 1998
after giving effect to the Equity Recapitalization and the Offering, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and new investors purchasing shares in the Offering at an assumed
initial public offering price of $15.00 per share, which is the midpoint of
the range of the estimated offering price per share set forth on the cover of
the Prospectus (before deducting underwriting discounts and commissions and
estimated Offering expenses):
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK CONSIDERATION
------------------ ---------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 14,514,770 74% $ 77,916 51% $ 5.37
New investors.......... 5,000,000 26% 75,000 49% 15.00
---------- --- -------- ---
Total.............. 19,514,770 100% $152,916 100%
========== === ======== ===
</TABLE>
The foregoing computations exclude approximately 2.3 million shares of Common
Stock that, prior to the consummation of the Offering, will be reserved for
issuance upon the exercise of options issued under the 1998 Stock Plan. See
"Management--1998 Stock Plan."
18
<PAGE>
HINES HORTICULTURE, INC.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
The unaudited pro forma statement of operations for the four months ended
April 30, 1998 is based on the unaudited financial statements of the Company,
included elsewhere in this Prospectus, and the unaudited statement of
operations of Lakeland for the four months ended April 30, 1998 and gives
effect to the following transactions as if they had occurred as of January 1,
1998: (i) the Lakeland Acquisition; (ii) the Equity Recapitalization;
(iii) the closing of the New Senior Credit Facility; and (iv) the Offering.
The unaudited pro forma statement of operations for the four months ended
April 30, 1997 is based on the unaudited financial statements of the Company,
included elsewhere in this Prospectus, and the unaudited statements of
operations of Pacific Color, Bryfogle's and Lakeland for the four months ended
April 30, 1997 and gives effect to the following transactions as if they had
occurred as of January 1, 1997: (i) the Pacific Color, Bryfogle's and Lakeland
acquisitions; (ii) the Equity Recapitalization; (iii) the closing of the New
Senior Credit Facility; and (iv) the Offering.
The unaudited pro forma statement of operations for the year ended December
31, 1997 is based on the consolidated financial statements for the Company,
included elsewhere in this Prospectus, and the unaudited statements of
operations for the companies for the periods indicated in Note (a) to the
unaudited pro forma statement of operations for the twelve months ended
December 31, 1997 and gives effect to the following transactions as if they
had occurred as of January 1, 1997: (i) the Pacific Color, Bryfogle's and
Lakeland acquisitions; (ii) the Equity Recapitalization; (iii) the closing of
the New Senior Credit Facility; and (iv) the Offering.
The Unaudited Pro Forma Statements of Operations should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes thereto, and "Capitalization" and "Use of Proceeds"
included elsewhere in this Prospectus. The pro forma adjustments, which are
based on available information and certain assumptions that management
believes are reasonable, are described in the accompanying notes. The
unaudited pro forma financial information does not purport to represent what
the Company's financial position or results of operations actually would have
been had the applicable transactions, as described above, occurred on such
date or at the beginning of the period indicated, or to project the Company's
financial position or results of operations at any future date or future
period.
19
<PAGE>
HINES HORTICULTURE, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOUR MONTHS ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------------
HINES ACQUISITION/ OFFERING/DEBT
HORTICULTURE, ACQUISITIONS RECAPITALIZATION REFINANCING AS
INC. (A) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- ------------ ---------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 108,088 $6,192 $ -- $114,280 $ -- $ 114,280
Cost of goods sold...... 53,531 2,960 123 (b) 56,798 -- 56,798
184 (c)
--------- ------ ------ -------- ------- ----------
Gross profit........ 54,557 3,232 (307) 57,482 -- 57,482
Operating expenses...... 29,369 2,104 (244)(c) 31,229 -- 31,229
--------- ------ ------ -------- ------- ----------
Operating income.... 25,188 1,128 (63) 26,253 -- 26,253
--------- ------ ------ -------- ------- ----------
Other expenses:
Interest expense...... 7,999 209 131 (d) 8,339 (2,792)(g) 5,547
Amortization of
deferred financing
expenses............. 431 -- 32 (d) 463 (207)(g) 256
--------- ------ ------ -------- ------- ----------
8,430 209 163 8,802 (2,999) 5,803
--------- ------ ------ -------- ------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 16,758 919 (226) 17,451 2,999 20,450
Provision (benefit) for
income taxes........... 6,777 414 (90)(e) 7,101 1,200 (e) 8,301
--------- ------ ------ -------- ------- ----------
Net income (loss)....... 9,981 505 (136) 10,350 1,799 12,149
Less: Preferred stock
dividends.............. (3,721) -- 3,721 (f) -- -- --
--------- ------ ------ -------- ------- ----------
Net income (loss)
applicable to common
stock.................. $ 6,260 $ 505 $3,585 $ 10,350 $ 1,799 $ 12,149
========= ====== ====== ======== ======= ==========
Basic earnings (loss)
per share.............. $ 0.81 $ 0.62
========= ==========
Diluted earnings (loss)
per share.............. $ 0.73 $ 0.62
========= ==========
Weighted average shares
outstanding, no
dilution............... 7,708,481 19,514,770
========= ==========
Weighted average shares
outstanding, diluted
basis.................. 8,560,808 19,514,770
========= ==========
</TABLE>
20
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOUR MONTHS ENDED APRIL 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(a) Represents the historical operating results of Lakeland for the period
from January 1, 1998 through the date of the Lakeland Acquisition (April
6, 1998).
(b) Reflects the increase in depletion expense as a result of the preliminary
purchase price allocation pursuant to the purchase method of accounting,
which increased the basis of the Lakeland peat bogs. The total basis of
the bogs was increased by approximately $12.9 million, which will be
depleted over approximately 35 years.
(c) Reflects an adjustment to conform Lakeland's accounting policies to the
Company's current accounting policies.
(d) Reflects interest expense on a pro forma basis as if the Lakeland
Acquisition had occurred on January 1, 1998:
<TABLE>
<S> <C>
Existing Senior Credit Facilities (Lakeland)(1).................... $ 340
Amortization of deferred financing costs(2)........................ 32
-----
Pro forma interest expense....................................... 372
Less: Historical interest expense................................ (209)
-----
Net increase in interest expense............................... $ 163
=====
</TABLE>
--------
(1) Assumes an interest rate of 8.50% on a balance of $15.0 million.
(2) Deferred financing costs are amortized over the life of the
related debt or five years.
(e) Reflects a net income tax adjustment related to pro forma adjustments at
an assumed combined state and federal statutory income tax rate of 40%.
(f) Elimination of the preferred stock dividends related to the Senior
Preferred and the Junior Preferred, which are assumed to be converted as
of January 1, 1998.
(g) Pro forma interest expense as if the Offering and the closing of the New
Senior Credit Facility occurred on January 1, 1998 is as follows:
<TABLE>
<S> <C>
New Senior Credit Facility(1)................................... $ 2,303
Senior Subordinated Notes....................................... 3,055
Commitment fees(2).............................................. 189
Amortization of deferred financing costs(3)..................... 256
-------
Pro forma interest expense.................................... 5,803
Less: Historical interest expense............................. (8,802)
-------
Net decrease in interest expense............................ $(2,999)
=======
</TABLE>
--------
(1) Assumes an interest rate of 7.00% on average term loans
outstanding ($50.0 million) and drawn down balance on the working
capital facility. The pro forma average drawn down balance on the
working capital facility was $48.7 million.
(2) Represents a commitment fee of 0.375% applied to (i) the pro forma
average unused portion of the working capital facility of $51.3
million and (ii) the acquisition facility of $100.0 million.
(3) Represents amortization of deferred financing costs related to the
New Senior Credit Facility and the Senior Subordinated Notes. The
deferred financing costs are amortized over the remaining life of
the related debt (five and nine years for the New Senior Credit
Facility and Senior Subordinated Notes, respectively).
21
<PAGE>
HINES HORTICULTURE, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOUR MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------
HINES ACQUISITION/EQUITY OFFERING/DEBT
HORTICULTURE, ACQUISITIONS RECAPITALIZATION REFINANCING AS
INC. (A) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- ------------ ------------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 96,318 $12,492 $ -- $108,810 $ -- $ 108,810
Cost of goods sold...... 49,957 6,559 123 (b) 56,816 -- 56,816
317 (d)
(140)(c)
--------- ------- ------ -------- ------- ----------
Gross profit........ 46,361 5,933 (300) 51,994 -- 51,994
Operating expenses...... 27,071 3,881 304 (d) 31,256 -- 31,256
--------- ------- ------ -------- ------- ----------
Operating income.... 19,290 2,052 (604) 20,738 -- 20,738
--------- ------- ------ -------- ------- ----------
Other expenses:
Interest expense...... 7,137 439 326 (e) 7,902 (2,640)(h) 5,262
Amortization of
deferred financing
expenses............. 342 -- 76 (e) 418 (162)(h) 256
--------- ------- ------ -------- ------- ----------
7,479 439 402 8,320 (2,802) 5,518
--------- ------- ------ -------- ------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 11,811 1,613 (1,006) 12,418 2,802 15,220
Provision (benefit) for
income taxes........... 4,398 382 (97)(f) 4,683 1,121 (f) 5,804
--------- ------- ------ -------- ------- ----------
Net income (loss)....... 7,413 1,231 (909) 7,735 1,681 9,416
Less: Preferred stock
dividends.............. (2,190) -- 2,190 (g) -- -- --
--------- ------- ------ -------- ------- ----------
Net income (loss)
applicable to common
stock.................. $ 5,223 $ 1,231 $1,281 $ 7,735 $ 1,681 $ 9,416
========= ======= ====== ======== ======= ==========
Basic earnings (loss)
per share.............. $ 0.70 $ 0.55
========= ==========
Diluted earnings (loss)
per share.............. $ 0.64 $ 0.55
========= ==========
Weighted average shares
outstanding, no
dilution............... 7,513,176 17,191,859
========= ==========
Weighted average shares
outstanding, diluted
basis.................. 8,122,977 17,191,859
========= ==========
</TABLE>
22
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOUR MONTHS ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(a) Represents the historical operating results of Pacific Color, Bryfogle's
and Lakeland for the four months ended April 30, 1997.
(b) Reflects the increase in depletion expense as a result of the preliminary
purchase price allocation pursuant to the purchase method of accounting,
which increased the basis of the Lakeland peat bogs. The total basis of
the bogs was increased by approximately $12.9 million, which will be
depleted over approximately 35 years.
(c) Reflects the decrease in depreciation expense as a result of the purchase
price allocation pursuant to the purchase method of accounting, which
decreased the basis of the property, plant and equipment, and a change in
the method of depreciation to conform with the Company's accounting
policies. The total basis of property, plant and equipment was decreased
by approximately $1.6 million, which will be depreciated over a period of
20 to 40 years for buildings and 4 to 12 years for machinery and
equipment.
(d) Reflects an adjustment to conform Lakeland's accounting policies to the
Company's current accounting policies.
(e) Reflects interest expense on a pro forma basis as if the Bryfogle's and
Lakeland acquisitions had occurred on January 1, 1997:
<TABLE>
<S> <C>
Existing Senior Credit Facilities (Bryfogle's)(1).................. $ 340
Existing Senior Credit Facilities (Lakeland)(2).................... 425
Amortization of deferred financing costs(3)........................ 76
-----
Pro forma interest expense....................................... 841
Less: Historical interest expense................................ (439)
-----
Net increase in interest expense............................... $ 402
=====
</TABLE>
--------
(1) Assumes an interest rate of 8.50% on a balance of $12.0 million.
(2) Assumes an interest rate of 8.50% on a balance of $15.0 million.
(3) Deferred financing costs are amortized over the life of the
related debt or five years.
(f) Reflects a net income tax adjustment related to the pro forma adjustments
and for Pacific Color and Bryfogle's at an assumed combined state and
federal statutory income tax rate of 40%.
(g) Elimination of the preferred stock dividends related to the Senior
Preferred and the Junior Preferred, which are assumed to be converted as
of January 1, 1997.
(h) Pro forma interest expense as if the Offering and the closing of the New
Senior Credit Facility occurred on January 1, 1997 is as follows:
<TABLE>
<S> <C>
New Senior Credit Facility(1)................................... $ 2,002
Senior Subordinated Notes....................................... 3,055
Commitment fees(2).............................................. 205
Amortization of deferred financing costs(3)..................... 256
-------
Pro forma interest expense.................................... 5,518
Less: Historical interest expense............................. (8,320)
-------
Net decrease in interest expense............................ $(2,802)
=======
</TABLE>
--------
(1) Assumes an interest rate of 7.00% on average term loans
outstanding ($50.0 million) and drawn down balance on working
capital facility. The pro forma average drawn down balance on the
working capital facility was $35.8 million.
(2) Represents a commitment fee of 0.375% applied to (i) the pro forma
average unused portion of the working capital facility of $64.2
million and (ii) the acquisition facility of $100.0 million.
(3) Represents amortization of deferred financing costs related to the
New Senior Credit Facility and the Senior Subordinated Notes. The
deferred financing costs are amortized over the remaining life of
the related debt (five and nine years for the New Senior Credit
Facility and Senior Subordinated Notes, respectively).
23
<PAGE>
HINES HORTICULTURE, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------
HINES ACQUISITION/EQUITY OFFERING/DEBT
HORTICULTURE, RECAPITALIZATION REFINANCING AS
INC. ACQUISITIONS(A) ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- --------------- ------------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 201,256 $32,790 $ -- $234,046 $ -- $ 234,046
Cost of goods sold...... 99,407 18,082 (418)(b) 117,274 -- 117,274
369 (c)
(166)(d)
--------- ------- ------- -------- ------- ----------
Gross profit......... 101,849 14,708 215 116,772 -- 116,772
Operating expenses...... 70,751 11,211 383 (e) 82,508 -- 82,508
163 (d)
--------- ------- ------- -------- ------- ----------
Operating income..... 31,098 3,497 (331) 34,264 -- 34,264
--------- ------- ------- -------- ------- ----------
Other expenses:
Interest expense....... 20,708 1,106 1,147 (f) 22,961 (7,267) 15,694
Amortization of
deferred financing
expenses.............. 1,097 -- 227 (f) 1,324 (555) 769
--------- ------- ------- -------- ------- ----------
21,805 1,106 1,374 24,285 (7,822)(i) 16,463
--------- ------- ------- -------- ------- ----------
Income (loss) before
provision for income
taxes.................. 9,293 2,391 (1,705) 9,979 7,822 17,801
Provision (benefit) for
income taxes........... 3,516 -- 274 (g) 3,790 3,129 (g) 6,919
--------- ------- ------- -------- ------- ----------
Net income (loss)....... 5,777 2,391 (1,979) 6,189 4,693 10,882
Less: Preferred stock
dividends.............. (6,666) -- 6,666 (h) -- -- --
--------- ------- ------- -------- ------- ----------
Net income (loss)
applicable to common
stock.................. $ (889) $ 2,391 $ 4,687 $ 6,189 $ 4,693 $ 10,882
========= ======= ======= ======== ======= ==========
Basic earnings (loss)
per share.............. $ (0.12) $ 0.59
========= ==========
Diluted earnings (loss)
per share.............. $ (0.12) $ 0.59
========= ==========
Weighted average shares
outstanding, no
dilution............... 7,550,174 18,434,156
========= ==========
Weighted average shares
outstanding, diluted
basis.................. 7,550,174 18,434,156
========= ==========
</TABLE>
24
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(a) Represents the historical results for Lakeland, which was acquired on
April 6, 1998, for the year ended December 31, 1997 as if the Lakeland
Acquisition had been consummated as of January 1, 1997, as well as the
following acquired companies from January 1, 1997 through the respective
acquisition date, as summarized below:
<TABLE>
<CAPTION>
COMPANY ACQUIRED ACQUISITION DATE
---------------- ----------------
<S> <C>
Pacific Color October 20, 1997
Bryfogle's December 16, 1997
</TABLE>
(b) Reflects the decrease in depreciation expense as a result of the purchase
price allocation pursuant to the purchase method of accounting, which
decreased the basis of the property, plant and equipment, and a change in
the method of depreciation to conform with the Company's accounting
policies. The total basis of property, plant and equipment was decreased
by approximately $1.6 million, which will be depreciated over a period of
20 to 40 years for buildings and 4 to 12 years for machinery and
equipment.
(c) Reflects the increase in depletion expense as a result of the preliminary
purchase price allocation pursuant to the purchase method of accounting,
which increased the basis of the Lakeland peat bogs. The total basis of
the bogs was increased by approximately $12.9 million, which will be
depleted over approximately 35 years.
(d) Reflects an adjustment to conform Lakeland's accounting policies to the
Company's current accounting policies.
(e) Represents the addition of amortization of goodwill resulting from the
excess of the purchase price over the net assets acquired, primarily
related to the acquisition of Bryfogle's. The total incremental goodwill
of $14.0 million will be amortized over 35 years.
(f) Reflects interest expense on a pro forma basis as if the Bryfogle's and
Lakeland acquisitions had occurred on January 1, 1997:
<TABLE>
<S> <C>
Existing Senior Credit Facilities (Bryfogle's) (1)............... $ 978
Existing Senior Credit Facilities (Lakeland) (2)................. 1,275
Amortization of deferred financing costs (3)..................... 227
-------
Pro forma interest expense..................................... 2,480
Less: Historical interest expense.............................. (1,106)
-------
Increase in interest expense................................. $ 1,374
=======
</TABLE>
--------
(1) Assumes an interest rate of 8.50% on a balance of $12.0 million
(2) Assumes an interest rate of 8.50% on a balance of $15.0 million
(3) Deferred financing costs are amortized over the life of the
related debt or five years.
(g) Reflects a net income tax adjustment for Pacific Color, Bryfogle's and
Lakeland and for the pro forma adjustments at an assumed combined state
and federal statutory income tax rate of 40%.
(h) Elimination of the preferred stock dividends related to the Senior
Preferred and the Junior Preferred, which are assumed to be converted as
of January 1, 1997.
25
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(i) Interest expense based on the pro forma capitalization of the Company as
if the Offering and the closing of the New Senior Credit Facility had
closed on January 1, 1997 is summarized as follows:
<TABLE>
<S> <C>
New Senior Credit Facility(1).................................. $ 5,908
Senior Subordinated Notes...................................... 9,165
Commitment fees(2)............................................. 621
Amortization of deferred financing costs(3).................... 769
--------
Pro forma interest expense................................... 16,463
Less: Historical interest expense on debt repaid............. (24,285)
--------
Net decrease in interest expense........................... $ (7,822)
========
</TABLE>
--------
(1) Assumes an interest rate of 7.00% on average term loans
outstanding ($50.0 million) and drawn down balance on working
capital facility. The pro forma average drawn down balance on the
working capital facility was $34.4 million.
(2) Represents a commitment fee of 0.375% applied to (i) the pro forma
average unused portion of the working capital facility of $65.6
million and (ii) the acquisition facility of $100.0 million.
(3) Represents amortization of deferred financing costs related to the
New Senior Credit Facility and the Senior Subordinated Notes. The
deferred financing costs are amortized over the remaining life of
the related debt (five and nine years for the New Senior Credit
Facility and Senior Subordinated Notes, respectively).
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data and unaudited selected consolidated pro forma financial data for the
Company. The consolidated historical financial data, insofar as it relates to
each of the years 1993 through 1997, have been derived from audited financial
statements, including the consolidated balance sheets at December 31, 1996 and
1997 and the related consolidated statements of operations and of cash flows
for the three years ended December 31, 1997 and notes thereto appearing
elsewhere herein. The data for the four months ended April 30, 1997 and 1998
have been derived from unaudited financial statements also appearing herein
and which, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the unaudited interim periods. The following selected consolidated
financial data should be read in conjunction with the consolidated financial
statements and accompanying notes thereto, "Unaudited Pro Forma Statements of
Operations," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Capitalization" and "Use of Proceeds" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE FOUR MONTHS
FOR THE YEARS ENDED DECEMBER 31, (A) ENDED APRIL 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 85,006 $134,781 $ 156,909 $ 164,323 $ 201,256 $ 96,318 $ 108,088
Cost of goods sold...... 40,457 60,827 72,245 80,812 99,407 49,957 53,531
Gross profit............ 44,549 73,954 84,664 83,511 101,849 46,361 54,557
Operating expenses...... 31,452 50,274 58,392 60,757 70,408 27,071 29,369
Unusual operating
expenses (b)........... -- -- -- 830 343 -- --
Operating income........ 13,097 23,680 26,272 21,924 31,098 19,290 25,188
Interest expense........ 6,868 9,422 17,831 21,080 21,805 7,479 8,430
Provision (benefit) for
income taxes........... 2,248 3,635 2,850 636 3,516 4,398 6,777
Income (loss) from
continuing operations.. 3,981 10,623 5,591 208 5,777 7,413 9,981
Income (loss) from
continuing operations
per common share (c):
Basic................. 10,795(d) 29,860(d) 0.06 (0.48) (0.12) 0.70 0.81
Diluted............... 10,795 29,860 0.06 (0.48) (0.12) 0.64 0.73
Weighted average shares
outstanding:
Basic................. 264 264 3,061,984 7,439,190 7,550,174 7,513,176 7,708,481
Diluted............... 264 264 3,061,984 7,439,190 7,550,174 8,122,977 8,560,808
UNAUDITED PRO FORMA OPERATING DATA (E):
Net sales....................................................... $ 234,046 $ 108,810 $ 114,280
Income from continuing operations............................... 10,882 9,416 12,149
Basic and Diluted Earnings Per Share: Income (loss) from
continuing operations per common share......................... 0.59 0.55 0.62
Weighted average shares outstanding--Basic and Diluted.......... 18,434,156 17,191,859 19,514,770
OTHER DATA:
Capital expenditures.... $ 4,899 $ 7,389 $ 7,684 $ 8,752 $ 10,130 $ 3,087 $ 3,777
Cash paid for income
taxes (f).............. 65 131 3 4 161 -- --
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital......... $ 35,845 $ 26,132 $ 42,825 $ 29,597 $ 27,548 $ 36,553 $ 44,659
Short-term debt......... 15,185 18,025 16,751 34,254 48,502 61,026 78,964
Total assets............ 143,713 140,906 188,544 227,515 268,819 282,809 367,155
Long-term debt.......... 67,310 63,107 157,742 152,769 160,356 152,630 177,317
Redeemable preferred
stock.................. -- -- 31,460 54,525 70,682 56,767 80,975
Shareholders' equity
(deficit).............. 12,508 9,930 (67,798) (70,900) (71,751) (65,152) (65,135)
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1998
-----------------------------------------
PRO FORMA PRO FORMA,
ACTUAL COMBINED (E) AS ADJUSTED (E)
-------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 44,659 $ 42,741 $ 61,454
Short-term debt....................... 78,964 80,882 63,814
Total assets.......................... 367,155 367,155 370,271
Long-term debt........................ 177,317 174,199 128,000
Redeemable preferred stock............ 80,975 -- --
Shareholders' equity (deficit)........ (65,135)(d) 17,040 78,818
</TABLE>
27
<PAGE>
- --------
(a) From January 1, 1993 through December 31, 1997, the Company acquired the
following six companies: Sun Gro-U.S. (June 30, 1993), OGP (January 27,
1995), Iverson (August 30, 1996), Flynn (November 27, 1996), Pacific
Color (October 20, 1997) and Bryfogle's (December 16, 1997). The
financial results include the operations of each acquisition since its
respective acquisition date.
(b) Unusual operating expenses consist of certain severance and other
restructuring costs of $1,537 and $830 in 1997 and 1996, respectively,
net of a $1,194 gain from receipt of insurance proceeds on involuntary
disposal of fixed assets in 1997.
(c) After deduction of the minority interest in earnings of subsidiaries of
$1,131, $2,740 and $3,958 for the years ended December 31, 1993, 1994 and
1995 and accrued preferred stock dividends of $1,460, $3,775 and $6,666
for the years ended December 31, 1995, 1996 and 1997 and $2,190 and
$3,721 for the four months ended April 30, 1997 and April 30, 1998,
respectively.
(d) As further discussed in Note 21 to the consolidated financial statements
included elsewhere in this Prospectus the financial statements for the
year ended December 31, 1995 reflect purchase accounting for the exchange
by certain members of management (the "Management Shareholders") and
other investors of their minority interests for stock of the Company in
connection with the recapitalization of the Company on August 4, 1995.
The repurchase by the Company of its own stock from shareholders (other
than the Management Shareholders) was recorded as a repurchase and
retirement of treasury stock, which resulted in negative shareholders'
equity. As a result of this transaction, the earnings per share amounts
for the years ended December 31, 1993 and 1994 are not considered to be
comparable to the years ended December 31, 1995, 1996 and 1997.
(e) The unaudited pro forma operating data is presented as if the (i) Pacific
Color, Bryfogle's and Lakeland acquisitions, (ii) the Equity
Recapitalization, (iii) the closing of the New Senior Credit Facility,
and (iv) the Offering (collectively, the "Transactions") had occurred as
of January 1, 1997, and therefore incorporates certain assumptions that
are included in the Notes to Unaudited Pro Forma Statements of Operations
included elsewhere in this Prospectus. The "Pro Forma Combined" column
gives effect, as of April 30, 1998, to the Equity Recapitalization. The
"Pro Forma, As Adjusted" column also gives effect, as of April 30, 1998,
to the closing of the New Senior Credit Facility and the sale of
5.0 million shares of Common Stock offered hereby and application of the
estimated net proceeds thereof as described in "Use of Proceeds." The
unaudited pro forma financial data does not purport to represent what the
Company's financial position or results of operations actually would have
been had the Transactions occurred on such date or at the beginning of
the period indicated, or to project the Company's financial position or
results of operations at any future date or future period.
(f) The Company derives significant benefits under the U.S. federal tax code
by qualifying to use the cash method of accounting and by qualifying
under the "farming exception" to the uniform cost capitalization rules,
as a result of which the Company has generally not been required to pay
cash income taxes and has generated net operating losses for federal
income tax purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview--Tax Matters" and
"Risk Factors--Risk of Modification or Elimination of Favorable
Agricultural Tax Accounting Rules."
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the Company's consolidated
financial statements and the related notes thereto included elsewhere in this
Prospectus.
OVERVIEW
General. Hines is one of the largest commercial nursery operations in North
America, producing one of the broadest assortments of container-grown plants
in the industry. The Company is also the largest North American producer and
marketer of sphagnum peat moss and professional peat-based growing mixes. The
Company sells its nursery products primarily to leading home centers and mass
merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target, and to
premium independent garden centers. The Company sells its peat-based products
primarily to professional customers, including greenhouse growers, nursery
growers and golf course developers.
The Company believes that sales of its nursery products have been positively
affected by societal and demographic trends, such as greater levels of home
ownership, the aging of the American population and the increasing popularity
of gardening, as well as by trends in the retail distribution channel, as
large "big box" retailers have expanded and have increased their emphasis on
the lawn and garden category, thereby increasing consumer exposure to lawn and
garden products. Management believes these trends provide the Company with
excellent opportunities to improve its operating performance.
Seasonality. The Company's nursery business, like that of its competitors,
is highly seasonal. The Company has experienced and expects to continue to
experience significant variability in net sales, operating income and net
income on a quarterly basis. See "--Seasonality and Variability in Quarterly
Results" and "Risk Factors--Effect of Seasonality, Weather and Other Factors
on Quarterly Results."
Acquisitions. The Company has completed a number of recent acquisitions to
expand and diversify its operations. See "Business--History--Recent
Acquisitions." In the three years ended December 31, 1997, the Company
completed five acquisitions, and in April 1998 completed the Lakeland
Acquisition. These acquisitions have affected and will continue to affect the
period-to-period comparability of the operating results discussed below. The
Company intends to pursue strategic acquisitions from time to time in the
future that increase its production capacity, broaden or complement its
existing product lines, expand its geographic presence or offer operating
synergies. The Company believes that the highly fragmented nature of the
nursery industry presents the Company with a number of opportunities to make
such acquisitions, though the Company does not have any current agreements
with any parties to consummate any such acquisitions.
Tax Matters. The Company derives significant benefits under the Code by
qualifying to use the cash method of accounting for federal income tax
purposes. Under the cash method, sales are included in taxable income when
payments are received and expenses are deducted as they are paid. The primary
benefit the Company receives is the ability to deduct the cost of inventory as
it is incurred by qualifying under the "farming exception" to the uniform cost
capitalization rules, which allows nursery growers to deduct for federal
income tax purposes certain costs of growing plants as they are incurred
rather than when the plants are sold. As a result of the Company's ability to
deduct its growing costs under the farming exception, together with its
deduction of interest expense on indebtedness for borrowed money, the Company
has generally not been required to pay cash income taxes in recent years and
has generated net operating losses for federal income tax purposes. During the
same period, the Company has continued to show a tax provision relating to the
recording of deferred taxes. The Company anticipates that it will continue to
benefit from the farming exception in the future. See, however, "Risk
Factors--Risk of Modification or Elimination of Favorable Agricultural Tax
Accounting Rules." As of December 31, 1997, the Company had net operating loss
carryforwards of approximately $35.7 million for federal income tax purposes.
29
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth a summary of the Company's consolidated
results of operations for the periods indicated as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR FOUR MONTHS
ENDED ENDED APRIL
DECEMBER 31, 30,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 46.0 49.2 49.4 51.9 49.5
----- ----- ----- ----- -----
Gross profit............................. 54.0 50.8 50.6 48.1 50.5
Operating expenses....................... 37.2 37.5 35.2 28.1 27.2
----- ----- ----- ----- -----
Operating income......................... 16.8 13.3 15.4 20.0 23.3
Interest expense......................... 11.4 12.8 10.8 7.7 7.8
----- ----- ----- ----- -----
Income before provision (benefit) for
income taxes............................ 5.4 0.5 4.6 12.3 15.5
Provision (benefit) for income taxes..... 1.8 0.4 1.7 4.6 6.3
----- ----- ----- ----- -----
Net income (loss) from continuing
operations.............................. 3.6 0.1 2.9 7.7 9.2
Other non-operating expenses............. 2.0 -- -- -- --
----- ----- ----- ----- -----
Net income............................... 1.6% 0.1% 2.9% 7.7% 9.2%
===== ===== ===== ===== =====
</TABLE>
Four Months Ended April 30, 1998 compared to Four Months Ended April 30, 1997
Net sales. Net sales of $108.1 million for the four months ended April 30,
1998 increased $11.8 million, or 12.3%, from net sales of $96.3 million for
the comparable period in 1997. The Company's sales of nursery products
increased 14.1%, which included $5.1 million of sales from the Company's
acquisition of the nursery operations of Bryfogle's on December 16, 1997 and
of Pacific Color on October 20, 1997. Excluding the acquisitions, sales from
the Company's nursery operations increased 6.7% from the comparable period in
1997. The increase in net sales was primarily due to increased sales into the
eastern and southern regions of the country resulting primarily from increased
sales volumes attributable to the continued expansion of existing operations
and to the Bryfogle's acquisition. This increase was partially offset by lower
sales in the western and southwestern regions of the country, particularly in
California, where the strong seasonal demand historically experienced during
this period was reduced due to excessive and prolonged rainfall during the
period attributable to El Nino.
Net sales of the Company's peat moss and peat-based products increased by
$2.1 million, or 7.5%, from the comparable period in 1997, which included $1.7
million from the Company's acquisition on April 6, 1998 of Lakeland. Excluding
the Lakeland Acquisition, sales increased 1.3% from the comparable period in
1997. Sales of peat-based products in the western United States were
negatively impacted during the first four months by unseasonably wet weather
attributable to El Nino which were offset by increased sales in the eastern
and central United States. Sales to the Company's professional customers
increased $2.1 million, or 12.6%, during the period, while sales to retail
customers decreased $1.8 million, or 17.5%. This shift was attributable to the
Company's strategy to increase sales to professional customers. The shift to
professional from retail is expected to be mitigated in the future by the
Company's acquisition of Lakeland, a leading peat moss producer in western
Canada serving a predominantly retail customer base.
During the second quarter of 1998, the Company has experienced some recovery
of sales of both nursery and professional peat products into the western
states and continued growth of nursery products in other regions of the
country.
30
<PAGE>
Gross profit. Gross profit of $54.6 million (50.5% of net sales) for the
four months ended April 30, 1998 increased $8.2 million, or 17.7%, from gross
profit of $46.4 million (48.1% of net sales) for the comparable period in
1997. The increase was primarily attributable to (i) the improved gross profit
at the Company's peat operations resulting from a shift in sales to more
profitable customer accounts, and some pricing improvements in professional
products, and (ii) higher margins from the nursery operations resulting from a
more favorable product mix and higher unit volumes from those nursery
operations selling into the eastern and southern regions of the country.
Operating expenses. Operating expenses of $29.4 million (27.2% of net sales)
for the four months ended April 30, 1998 increased $2.3 million, or 8.5%, from
$27.1 million (28.1% of net sales) for the comparable period in 1997,
primarily due to the acquisitions.
Operating income. Operating income of $25.2 million for the four months
ended April 30, 1998 increased $5.9 million, or 30.6%, from $19.3 million for
the comparable period in 1997. Excluding $1.3 million of the increase
resulting from the acquisitions, operating income increased 23.8% from the
comparable period in 1997, primarily due to the higher sales at the nursery
operations and the higher gross profit margins from both the nursery and peat
operations.
Interest expense. Interest expense of $8.0 million for the four months ended
April 30, 1998 increased $0.9 million, or 12.7%, from $7.1 million for the
comparable period in 1997. The increase was attributable to higher borrowing
levels under the Company's revolving credit facilities to support the
Company's expansion.
Provision for income taxes. The effective income tax rate was 40% and 37%
for the four months ended April 30, 1998 and 1997, respectively.
Net income (loss). Net income of $10.0 million for the four months ended
April 30, 1998 increased $2.6 million, or 35.1%, from $7.4 million for the
comparable period in 1997. The increase was primarily attributable to the
higher sales and higher operating income described above.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December
31, 1996
Net sales. The Company had consolidated net sales of $201.3 million in 1997,
representing an increase of $37.0 million, or 22.5%, from net sales of $164.3
million in 1996. The Company's sales of its nursery products increased 38.2%
to $127.5 million from net sales of $92.2 million in 1996. This increase
reflects $26.3 million of sales in 1997 from two acquisitions completed in
August and November 1996 and two acquisitions completed in October and
December 1997, as well as increased sales volume and prices from its existing
nursery operations. Excluding these acquisitions, sales from the nursery
operations increased 9.6% in 1997. This increased sales volume resulted
primarily from increasing sales to home centers and mass merchandisers as well
as increased sales volume of flowering color plants. Net sales of peat moss
and peat-based products increased 2.3% to $73.8 million from $72.1 million in
1996 due to volume growth in the professional market. Sales of peat to the
retail market also increased in 1997 as a result of increased unit sales
volume, partially offset by lower retail peat prices. Peat prices in the first
half of 1997 continued to be adversely affected by the unusually long peat
moss harvesting season in eastern Canada in 1995, which created an excess
supply of peat moss in the Company's eastern markets.
Gross profit. Gross profit of $101.8 million (50.6% of net sales) for the
fiscal year ended December 31, 1997 represents an increase of $18.3 million,
or 21.9%, from gross profit of $83.5 million (50.8% of net sales) in 1996.
This increase was primarily attributable to the Company's 1996 and 1997
nursery acquisitions and the higher sales from the Company's existing nursery
operations. The slight decrease in gross margin percentage was primarily due
to lower margins from these acquisitions, which are in varying stages of being
integrated into the Company's existing nursery operations.
31
<PAGE>
Operating expenses. Operating expenses of $70.8 million (35.2% of net sales)
for the fiscal year ended December 31, 1997 represent an increase of $9.2
million, or 14.9%, from $61.6 million of operating expenses (37.5% of net
sales) in 1996. Operating expenses in 1997 also included $0.3 million of
unusual expense which consisted of $1.5 million of severance and other
restructuring costs (compared to $0.8 million in 1996), partially offset by
$1.2 million of gain on the involuntary disposal of fixed assets in connection
with a property casualty covered by insurance. The increase was primarily
attributable to the Company's nursery acquisitions, with the reduction as a
percentage of net sales primarily attributable to the leveraging of fixed
costs over a larger sales base.
Operating income. Operating income of $31.1 million (15.4% of net sales) for
the fiscal year ended December 31, 1997 represents an increase of $9.2
million, or 42.0%, from $21.9 million (13.3% of net sales) in 1996. The
increase was primarily due to the Company's nursery acquisitions and the
higher sales from the Company's existing nursery operations.
Interest expense. Interest expense of $20.7 million for the fiscal year
ended December 31, 1997 increased $0.6 million from $20.1 million in 1996. The
increase was attributable to higher borrowing levels under the Company's
revolving credit facilities as a result of increased capital expenditures and
working capital requirements relating to the acquisitions. This increase was
partially offset by lower interest rates.
Provision for income taxes. The effective income tax rate was 38% and 75%
for the years ended December 31, 1997 and 1996, respectively. The decrease in
the Company's effective income tax rate was due primarily to the $0.3 million
increase in the valuation allowance in 1996 against certain net operating loss
carryforwards and investment tax credits related to Sun Gro Horticulture
Canada Ltd., a wholly-owned Canadian subsidiary of Sun Gro-U.S. ("Sun-Gro
Canada").
Net income. Income from continuing operations of $5.8 million for 1997
represents an increase of $5.6 million from income of $0.2 million for the
comparable period in 1996. The increase was primarily due to the Company's
higher sales and operating margins as discussed above.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December
31, 1995
Net sales. The Company had consolidated net sales of $164.3 million for the
fiscal year ended December 31, 1996. This represents an increase of $7.4
million, or 4.7%, from net sales of $156.9 million in 1995. Net sales of the
Company's nursery products increased 5.7%, reflecting both increased sales
volume and prices. Sales in 1995 included approximately $1.6 million of sales
of finished inventory purchased from third parties by the Oregon nursery,
which sales were not repeated in 1996 because they were not profitable.
Excluding these sales, sales of the Company's nursery products increased 7.7%
in 1996 from sales in 1995. The increased sales volume resulted primarily from
increased sales to home centers and mass merchandisers, as well as increased
sales of flowering color plants. The two acquisitions completed in the second
half of 1996 did not contribute materially to 1996 net sales because they
occurred after the peak selling season. Net sales of the Company's peat moss
and peat-based products increased 3.4%, reflecting increased sales volume
primarily to the professional market. These increases were partially offset by
lower peat prices, which were more significant in the retail market. Declines
in the sales price of peat moss were primarily due to the continued effect of
the unusually long peat moss harvesting season in eastern Canada in 1995,
which created an excess supply of peat moss in the Company's eastern markets.
Gross profit. Gross profit of $83.5 million (50.8% of net sales) in 1996
represents a decrease of $1.2 million, or 1.4%, from gross profit of $84.7
million (54.0% of net sales) in 1995. The decrease was attributable to the
Company's peat and peat-based products due to (i) lower sales prices resulting
from the excess supply of peat moss, and (ii) higher unit production costs due
to lower production and harvest volume in 1996, compared to the unusually
favorable harvest in 1995, and inefficiencies due to numerous product mix
changes. Gross margins on the Company's nursery products in 1996 remained
substantially unchanged as compared to gross margins in 1995.
32
<PAGE>
Operating expenses. Operating expenses of $61.6 million (37.5% of net sales)
in 1996 represent an increase of $3.2 million, or 5.5%, from operating
expenses of $58.4 million (37.2% of net sales) in 1995. This increase was
attributable to higher selling and distribution expenses, which were incurred
as a result of higher overall sales volume and general cost increases.
Included in operating expenses for the fiscal year ended December 31, 1996 is
$0.8 million of non-recurring expenses representing severance and other
reorganization costs incurred by the Company's Sun Gro business.
Operating income. Operating income of $21.9 million in 1996 represents a
decrease of $4.4 million, or 16.7%, from operating income of $26.3 million in
1995. The decrease was primarily attributable to the Company's peat and peat-
based products, as described above. In addition, included in the 1996
operating income is $0.3 million of operating losses relating to the Iverson
and Flynn operations since the date of their respective acquisitions, which
occurred after completion of the peak selling season.
Interest expense. Interest expense of $20.1 million in 1996 represents an
increase of $6.8 million from interest expense of $13.3 million in 1995. The
increase was attributable to the higher rates and higher amounts outstanding
in connection with the issuance of $120.0 million of Senior Subordinated Notes
on October 19, 1995, which replaced the $110.0 million senior subordinated
credit facility obtained in connection with the MDCP Acquisition.
Provision for income taxes. The Company's effective income tax rate was 75%
and 34% for the years ended December 31, 1996 and 1995, respectively. The
increase in the Company's effective income tax rate was due primarily to the
$0.3 million increase in the valuation allowance in 1996 against certain net
operating loss carry forwards and investment tax credits related to Sun Gro-
Canada.
Net income. Net income of $0.2 million in 1996 represents a decrease of $2.2
million from net income of $2.4 million in 1995. Net income for 1995 includes
a $6.5 million non-operating charge and a $3.3 million non-recurring gain.
This decrease was attributable to the decrease in operating income and the
increase in interest expense, as described above.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's nursery business, like that of its competitors, is highly
seasonal. In 1997, approximately 80% of Hines Nurseries' net sales
(approximately 71% of the Company's consolidated net sales) and 102% of Hines
Nurseries' operating profits occurred in the first half of the year, with
approximately 58% of Hines Nurseries' net sales (approximately 47% of the
Company's consolidated net sales) and approximately 84% of Hines Nurseries'
operating profits, respectively, occurring in the second quarter of 1997. Many
of the Company's nurseries experience operating losses during quarters that do
not include peak selling seasons. The Company has experienced and expects to
continue to experience variability in net sales, operating income and net
income on a quarterly basis. This variability is primarily the result of
variability in weather conditions, particularly weekend weather during the
peak growing season, as well as other factors. See "Risk Factors--Effect of
Seasonality, Weather and Other Factors on Quarterly Results." Sun Gro's sales
typically do not experience large seasonal variances and are only slightly
weighted towards the first half of the year.
33
<PAGE>
The following table sets forth the Company's consolidated net sales, gross
profit, operating income (loss) and net income (loss) by quarter for each of
the quarters of fiscal 1996 and 1997.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------
JUNE
MARCH 31, 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- ------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............... $40,357 $69,970 $28,085 $25,911
Gross profit............ 20,050 36,266 14,142 13,053
Operating income (loss). 4,144 17,941 735 (896)
Net income (loss)....... (766) 7,664 (2,666) (4,024)
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------
JUNE
MARCH 31, 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- ------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............... $47,767 $94,112 $31,104 $28,273
Gross profit............ 22,836 47,560 16,803 14,650
Operating income........ 5,649 24,006 1,186 257
Net income (loss)....... 280 10,902 (2,311) (3,094)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its working capital requirements
through operating cash flow and, as a result of the highly seasonal nature of
the Company's nursery operations, through borrowings under its revolving
credit facilities. The Company's Existing Senior Credit Facilities consist of
(i) two revolving credit facilities providing for borrowings of up to $85.0
million, subject to a borrowing base tied to accounts receivable and
inventory, (ii) a $25.0 million term loan, of which $8.0 million has been
repaid, and (iii) an acquisition facility providing for borrowings of up to
$30.0 million to finance certain acquisitions.
The Company typically draws under its revolving credit facilities in the
first and fourth quarters to fund its inventory buildup of nursery products
and to fund continuing operating expenses. Approximately 80% of the sales of
Hines Nurseries occur in the first half of the year, generally allowing the
Company to reduce borrowings under its revolving credit facilities after the
first quarter. Working capital requirements for the Company's peat moss
operations are less seasonal in nature, with slight inventory buildups
generally occurring in the third and fourth quarters. On May 15, 1998, the
Company had $14.5 million of unused borrowing capacity under the revolving
credit facilities included within the Existing Senior Credit Facilities.
The Company is completing arrangements with Bankers Trust Company, Bank of
America, N.T. & S.A. and Harris Trust & Savings Bank, to amend and restate the
Existing Senior Credit Facilities to provide for a new $100.0 million
revolving credit facility, a new $50.0 million term loan and a new $100.0
million acquisition facility. The New Senior Credit Facility will replace the
Existing Senior Credit Facilities and increase the Company's borrowing
capacity by up to $100.0 million. The New Senior Credit Facility is expected
to close concurrently with, and is conditioned upon, the closing of the
Offering and is expected to have a five-year maturity. The principal repayment
schedule for the term loan is expected to be $2.5 million in 1999, $6.25
million in 2000, $11.25 million in 2001, $18.75 million in 2002 and $11.25
million in 2003. Amounts borrowed under the acquisition facility will convert
into a term loan in 2000 and will begin to amortize thereafter. The Company
has not entered into any agreements to make any acquisitions at the present
time, and will evaluate acquisition opportunities on a case-by-case basis. The
revolving credit facility and all other obligations under the amended and
restated credit agreement will be secured by substantially all of the assets
and common stock of Hines Nurseries and Sun Gro-U.S., as well as a pledge of
65% of the common stock of Sun Gro-Canada.
The Company has financed its recent acquisitions and working capital
requirements through a combination of borrowings under the Existing Senior
Credit Facilities and through the issuance of promissory notes, shares of
34
<PAGE>
Senior Preferred and warrants to purchase shares of Common Stock. On October
20, 1997, the Company financed its $1.7 million acquisition of Pacific Color
through the issuance of a demand note to MDCP, which was subsequently
exchanged for 2,500 shares of Senior Preferred and warrants to purchase 54,726
shares of Common Stock. On December 16, 1997, the Company financed its $19.0
million acquisition of Bryfogle's through the issuance of 7,000 shares of
Senior Preferred and warrants to purchase 153,232 shares of Common Stock to
MDCP and an unaffiliated equity investor, the issuance to the seller of a $1.0
million convertible subordinated promissory note of the Company and borrowings
of $12.0 million under the Existing Senior Credit Facilities. On February 5,
1998, the Company raised $2.0 million to fund the Company's short-term working
capital requirements through the issuance of 2,000 shares of Senior Preferred
to MDCP. On April 6, 1998, the Company financed the Lakeland Acquisition
through the issuance of 4,500 shares of Senior Preferred and warrants to
purchase 98,507 shares of Common Stock to an unaffiliated equity investor, the
issuance to the seller of a $2.1 million convertible subordinated promissory
note of the Company and borrowings of $15.0 million under the Existing Senior
Credit Facilities.
In October 1995, Hines Nurseries issued $120.0 million in aggregate
principal amount of 11 3/4% Senior Subordinated Notes due 2005 to refinance
certain indebtedness incurred in connection with the MDCP Acquisition, which
notes were subsequently exchanged in a registered offering for $120.0 million
of its 11 3/4% Senior Subordinated Notes due 2005, Series B. Approximately
$78.0 million in aggregate principal amount of the Senior Subordinated Notes
is expected to be outstanding after the Offering and the application of the
estimated net proceeds thereof. See "Use of Proceeds."
The indenture pursuant to which the Senior Subordinated Notes were issued
imposes a number of restrictions on Hines Nurseries and Sun Gro-U.S. The
indenture limits, among other things, their ability to incur additional
indebtedness, to make certain restricted payments (including dividends to the
Company), to make certain asset dispositions, to incur certain liens and to
enter into certain significant transactions. In addition, breach of a material
term of the indenture or any other material indebtedness that results in the
acceleration of such indebtedness would trigger an event of default under the
Existing Senior Credit Facilities or the New Senior Credit Facility, causing
all amounts owing thereunder to become immediately due and payable. The
Existing Senior Credit Facilities impose, and the New Senior Credit Facility
will impose, a number of similar and certain additional restrictions
(including financial covenants) on Hines Nurseries and Sun Gro-U.S.
As a result of the Company's ability to deduct its growing costs under the
farming exception, together with its deduction of interest expense on
indebtedness for borrowed money, the Company has generally not been required
to pay cash income taxes in recent years and has generated net operating
losses for federal income tax purposes. See "--Overview--Tax Matters."
However, even with the benefits of the farming exception, the Company may
nonetheless be required to pay cash income taxes in future years after use,
loss or expiration of its tax net operating loss carryforwards. Such cash
income taxes could also result from increased taxable income due to, among
other reasons, (i) reduction in the Company's deduction for interest expense
triggered by the Company's repayment of indebtedness with the proceeds of the
Offering, (ii) any slowdown in, or elimination of, future growth in the
Company's inventory of growing plants, or (iii) limits on the Company's
ability to use net operating loss carryforwards to offset all of its tax
liability under the alternative minimum tax system.
The Company's capital expenditures were approximately $10.1 million for the
year ended December 31, 1997, consisting of $7.3 million of capital
expenditures for Hines Nurseries and $2.8 million of capital expenditures for
Sun Gro. The capital expenditures for Hines Nurseries related primarily to the
development of additional nursery acreage and the purchase of nursery-related
structures, and the purchase of certain vehicles and machinery and equipment.
The capital expenditures of Sun Gro related primarily to preparing peat bogs
for harvest. The Company's capital expenditures for 1998 are expected to be
approximately $19.0 million, and will be used to increase production capacity,
primarily through the development of available acreage at the Company's
nursery facilities in Northern California, Texas and South Carolina and for
other maintenance expenditures.
Management believes that cash generated by operations, borrowings expected
to be available under the New Senior Credit Facility, when established, and
the estimated net proceeds of the Offering will be sufficient to meet the
Company's anticipated working capital, capital expenditure and debt service
requirements for the foreseeable future.
35
<PAGE>
However, as a result of the Company's strategy to make strategic acquisitions,
the Company may require additional debt or equity financing in the future. If
the Offering is not consummated or the New Senior Credit Facility is not
established, the Company would be required to seek additional sources of
capital or to modify its existing growth plans.
YEAR 2000 COMPLIANCE
The Company has completed its review of the compliance issues related to the
year 2000 and has implemented programming modifications to its operational and
financial reporting systems that it believes are required to address the
problem. All modified programming is currently operational, with testing
scheduled to be completed in 1998. There can be no assurance, however, until
the year 2000 that all of the Company's systems and the systems of its
suppliers, shippers, customers and other external business partners will
function adequately. If the systems of the Company's suppliers, shippers,
customers and other external business partners are not compliant, it could
have a material adverse effect on the Company. The amount spent to remediate
the Company's year 2000 issues was approximately $0.2 million during the year
ended December 31, 1997.
EFFECTS OF INFLATION
Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.
36
<PAGE>
BUSINESS
INTRODUCTION
Hines is one of the largest commercial nursery operations in North America,
producing one of the broadest assortments of container-grown plants in the
industry. The Company is also the largest North American producer and marketer
of sphagnum peat moss and professional peat-based growing mixes. The Company
sells its nursery products primarily to leading home centers and mass
merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target, and to
premium independent garden centers, and sells its peat-based products
primarily to professional customers, including greenhouse growers, nursery
growers and golf course developers. As a result of both internal expansion and
acquisitions, the Company has grown from sales of approximately $50 million in
1992 to approximately $201 million in 1997, representing a compound annual
growth rate of 32%. Net sales for 1997, after giving effect to recent
acquisitions on a pro forma basis, would have been approximately $234 million.
Hines Nurseries, the Company's nursery division, produces approximately
4,100 varieties of ornamental shrubs and color plants through its eight
nursery facilities located in California, Oregon, Pennsylvania, South Carolina
and Texas. Hines Nurseries sells to more than 1,900 retail and commercial
customers, representing more than 7,300 outlets throughout the United States
and Canada. Sun Gro, the Company's peat-based products division, produces high
quality, sphagnum peat moss and peat-based potting and growing mixes. Sphagnum
peat moss is a natural, organic material that is generally considered the
highest quality growing medium available due to its excellent water and
nutrient retention and aeration characteristics. Sun Gro controls
approximately 49,600 acres of peat bogs throughout Canada and produces its
peat moss and peat-based mixes in ten facilities strategically located across
Canada and in the United States.
HISTORY
Ownership
The Company was founded in 1920 by James Hines. Hines was a family owned
business until its acquisition by the Weyerhaeuser Company in 1976. The
Company was sold in 1990 to a private investment group and certain members of
management. On August 4, 1995, Hines was acquired by MDCP and certain members
of management.
Recent Acquisitions
Hines has completed a number of recent acquisitions to expand and diversify
its operations, including a number that have complemented the Company's
existing operations and enhanced the Company's product offerings, such as two
recent acquisitions of producers of color bedding plants, which management
believes present significant growth opportunities for the Company. The
following table sets forth information with respect to these acquisitions.
<TABLE>
<CAPTION>
PURCHASE
DATE TARGET PRICE LOCATION PRINCIPAL PRODUCTS
- ------------- ------------- ------------- ----------------------- --------------------------------
<S> <C> <C> <C> <C>
June 1993 Sun Gro $48.9 million Canada, Michigan, Texas Sphagnum peat moss and
and Washington peat-based mixes
January 1995 OGP $17.6 million Oregon Ornamental, cold-tolerant plants
and flowering color plants
August 1996 Iverson $10.3 million South Carolina Perennial flowers and plants
November 1996 Flynn $11.7 million California Ornamental plants and
flowering color plants
October 1997 Pacific Color $1.7 million California Color bedding plants
December 1997 Bryfogle's $19.0 million Pennsylvania Color bedding plants
April 1998 Lakeland $22.4 million Canada, Oregon and Utah Sphagnum peat moss and
peat-based mixes
</TABLE>
In June 1993, Hines acquired Sun Gro-U.S. and its subsidiaries in order to
enter the peat-products market, thereby diversifying the Company's operations
and expanding its share of the market for horticultural products.
37
<PAGE>
On January 27, 1995, the Company acquired OGP, a producer of ornamental,
cold-tolerant, container-grown plants sold primarily to home centers, mass
merchandisers and other retail customers located in the eastern and midwestern
regions of the United States and flowering color plants sold primarily to
retail customers located in the northwestern United States. The OGP
acquisition broadened Hines Nurseries' product mix and, as a result of the
acquisition of undeveloped acreage, has provided Hines Nurseries with
significant opportunities for future expansion.
On August 30, 1996, the Company acquired Iverson, a producer of perennial
flowers and plants sold primarily to home centers, mass merchandisers and
other retail customers located in the southeastern, eastern and midwestern
regions of the United States. The Iverson acquisition has increased the
Company's market presence in the eastern and southeastern United States,
increased penetration into the perennial plant market and provided expansion
capacity at the South Carolina nursery location.
On November 27, 1996, the Company acquired Flynn, a producer of ornamental
plants, flowering color plants and perennials sold to various retail customers
throughout the United States. The Company acquired Flynn, in part, because of
Southern California's ideal growing conditions, its close proximity to the
Company's Irvine, California nursery and its significant customer and product
overlap with the Company. Management believes that this overlap has resulted
in significant operating synergies as the Company has integrated Flynn into
the business of Hines Nurseries.
On October 20, 1997, the Company acquired the assets of Pacific Color, a
producer of color bedding plants sold primarily to home centers and mass
merchandisers in California. The acquisition of Pacific Color increased the
Company's offerings of annual bedding and holiday plants.
On December 16, 1997, the Company acquired Bryfogle's, a producer of color
bedding plants sold primarily to home centers and mass merchandisers in
Pennsylvania and surrounding states. This acquisition significantly enhanced
the Company's offerings of annual bedding and holiday plants. Management
believes that the acquisition presents cross-selling opportunities for both
the Company and for Bryfogle's.
On April 6, 1998, the Company acquired Lakeland, a leading producer of
sphagnum peat moss and peat-based potting and growing mixes in western Canada
with facilities in Utah and Oregon. Lakeland's products are sold primarily to
retail customers and, to a lesser extent, to professional customers such as
greenhouse growers, vegetable farmers and golf course developers located
primarily in the western United States. The Company anticipates significant
synergies from the Lakeland Acquisition through production and transportation
efficiencies and through access to Lakeland's predominantly retail customer
base, which complements Sun Gro's predominantly professional customer base.
INDUSTRY
Gardening is one of the most popular leisure activities in the United
States. According to the 1996-1997 National Gardening Survey conducted by the
Gallup Organization, Inc. (the "National Gardening Survey"), 64% of the
approximately 101 million U.S. households participated in some form of
gardening in 1996. The Company believes that a combination of demographic and
societal trends, including the aging of the population, expanding levels of
home ownership and the increasing popularity of gardening, have contributed to
the growth of the nursery industry. According to the National Gardening
Survey, the demographic group that spends the most money per capita on
gardening is individuals age 50 and older. This group will be the fastest
growing demographic group through the year 2010, according to the U.S. Census
Bureau. In addition, the percentage of American families owning their homes
reached a 30-year high of approximately 65.9% in the first quarter of 1998.
The nursery segment of the lawn and garden industry generated approximately
$19.1 billion of retail sales in 1997 and has grown at a compound annual rate
of approximately 7% over the past four years. Since 1995, growth in the
bedding and flowering color plants segments has outpaced overall growth in the
live plants category. The following table provides a breakdown of 1997
industry-wide retail sales of live plants. The substantial majority of
38
<PAGE>
Hines Nurseries' sales are of products within the evergreens and shrubs and
bedding and garden plant categories identified below, which together represent
a majority of the retail sales in the industry. The Company also participates
to a lesser extent in each of the other industry categories identified below
with the exception of bulbs.
<TABLE>
<CAPTION>
PERCENTAGE
INDUSTRY RETAIL OF RETAIL
CATEGORY REPRESENTATIVE PRODUCTS SALES(1) SALES
-------- ----------------------- -------- ----------
(IN BILLIONS)
<S> <C> <C> <C>
Evergreens and
Shrubs Pines and junipers $ 7.5 39.3%
Shade/Flowering
Trees Outdoor fruit and nut trees and shade trees 4.9 25.7
Bedding/Garden
Plants Outdoor flowers and vegetables 3.1 16.2
Indoor Flower-
ing Plants Chrysanthemums, poinsettias and African violets 2.2 11.5
Foliage Indoor house plants 0.9 4.7
Bulbs Flower bulbs 0.5 2.6
----- -----
$19.1 100.0%
===== =====
</TABLE>
- --------
(1) Source: February/March 1998 Nursery Retailer Magazine
The retail distribution channel for live plants has shifted significantly in
recent years, as large home centers and mass merchandisers such as Home Depot,
Lowe's, Kmart, Wal-Mart and Target have captured increasing market share and
expanded sales in the overall lawn and garden category. Management believes
that live plants are attractive product offerings for these retailers, as
these retailers generate an estimated four dollars of gardening equipment and
other complementary product sales for each dollar of live plant sales,
according to the National Gardening Survey. Moreover, the relatively modest
price point of most live plants encourages impulse buying by consumers. Retail
consolidation has altered the nature of the wholesale demand for live plants.
Given the sophistication, size and geographic diversity of the national
chains, they generally prefer suppliers that can meet demanding delivery
schedules, fulfill large volume requirements and provide a variety of value-
added services.
The Company believes the fragmented nature of the wholesale nursery industry
will present opportunities for the Company to make strategic acquisitions. In
1996, the ten and 100 largest wholesale nurseries in the U.S. accounted for
only approximately 8% and 22%, respectively, of total sales at the wholesale
level, and management estimates, based on a 1992 U.S. Department of
Agriculture census that identified approximately 47,000 nurseries and on
management's familiarity with consolidation trends since that date, that there
are currently more than 30,000 independent nurseries in operation. Through
strategic acquisitions, the Company will seek to expand its geographic
presence and broaden its product offerings, thereby enhancing its status as a
preferred supplier in the industry.
Management believes that the wholesale market for peat and peat-based
growing mixes was in excess of $225 million in 1997 and has grown at a
compound annual growth rate of approximately 4% over the past five years. In
addition, the Company believes that the demand for value-added peat-based
mixes by professional growers is increasing, as professional growers have
recognized the superior qualities of these value-added mixes. Management
believes that there is a trend among professional growers to outsource the
mixing of these peat-based products, which has benefitted suppliers such as
the Company who offer customers custom-blended mixes and technical expertise.
Management believes that the growth of the color plant segment of the nursery
industry in particular will continue to fuel the demand for peat-based mixes,
which tend to have higher margins than other peat products, as producers of
color plants rely almost exclusively on these value-added mixes.
BUSINESS STRENGTHS
The Company believes that it presently enjoys the following significant
competitive advantages:
. National Scale with a Regional Focus. With eight nurseries located across
the country, the Company believes that it is one of the few suppliers
with the product breadth, scale and distribution capabilities necessary
to service high volume "big box" retailers as well as smaller premium
independent garden centers and garden center chains. The Company
addresses regional variations in buying patterns, climatic conditions and
product mix by servicing and providing expertise to the Company's
customers on a local,
39
<PAGE>
regional and national basis. The Company's national sales and distribution
capabilities also reduce the effects of regional adverse market conditions
by enabling the Company to shift sales to other regions.
. Strategically Located Facilities. The Company's geographically and
climatically diverse nursery facilities allow the Company to provide its
customers with a broad product mix, while reducing the effects of adverse
weather conditions on production. The location of certain of the
Company's nurseries, coupled with its national distribution system,
allows it to deliver products to cold weather regions early in the spring
season before similar nursery products are available from local
nurseries. Similarly, the Company is one of only two peat moss producers
with peat bogs located across Canada, which provides a distribution cost
advantage over certain of its competitors.
. High Quality Products on a Consistent Basis. Hines is able to provide its
customers with a broad mix of high quality products throughout the
selling season. Hines Nurseries' proprietary propagation techniques have
allowed the Company to achieve high quality standards and production
volumes on a consistent and cost effective basis. These techniques also
facilitate commercial introduction of new higher margin plant varieties
and enhance the reputation of Hines Nurseries as a product innovator. Sun
Gro's peat-based mixes are recognized by professional growers as being
among the highest quality in the industry. The Company distinguishes
itself from many of its competitors by offering a broad variety of value-
added growing mixes customized to suit specific customers' needs.
. Value-Added Services. The Company offers a variety of value-added
services, such as customized labeling, bar coding, electronic data
interchange and in-store sales and merchandising support. Management
believes that these capabilities are becoming increasingly important to
lawn and garden retailers, and that most of the Company's competitors
lack the size, scale, and sales and managerial resources to offer
comparable value-added services.
. Proprietary Operating Processes. Hines has made significant investments
in developing and refining proprietary operating and financial management
processes. These investments have improved profitability through
enhancements in production, order processing and fulfillment, and "real-
time" cost management. These processes provide management with
significant flexibility in allocating production and distribution
resources to better manage costs and meet customer delivery requirements.
The Company has applied these processes to all of its acquired businesses
to facilitate integration and improve operating performance.
. Experienced Management Team. The Company's senior management team has
extensive knowledge and experience in the horticultural industry and has
successfully identified and integrated several recent strategic
acquisitions. The Company's twelve key management personnel have been
with the Company for an average of 13 years, and many have extensive
technical backgrounds and advanced degrees in the horticultural sciences
or in business, including several executives with Ph.D.s in the
horticultural sciences.
GROWTH STRATEGY
Hines is pursuing three key strategies for sales and income growth:
. Expand Production. The Company currently has unfulfilled demand from a
number of key customers and incremental acreage available for expansion
at most of its eight existing nurseries. The Company plans to continue to
expand its nursery acreage and greenhouse facilities in 1998 and 1999 in
order to increase production of key product lines (including the fast-
growing color plant category) and to commercially introduce new plant
varieties. By expanding production at existing facilities, the Company
seeks to increase sales volume and to leverage its established operating
processes and management, thereby reducing unit costs.
. Increase Customer Penetration and Expand Customer Base. With its
strategically-located nurseries and its emphasis on customer service, the
Company has established a national customer base and distribution system
for a wide variety of ornamental plants. The Company is pursuing
opportunities to increase its volume with existing customers by (i)
increasing sales to successful "big box" retailers and premium
independent garden centers as they open additional outlets, and (ii)
increasing same-store sales by
40
<PAGE>
capitalizing on its existing customers' continued expansion of lawn and
garden floor space and by offering such customers a broader variety of
merchandise, particularly in the color plant category. The Company also
intends to pursue new relationships with other high volume retailers and
premium garden centers. Management believes that the demand for value-
added peat-based mixes by professional growers is increasing and that
there is a trend among professional growers to outsource the mixing of
these products. Sun Gro intends to further penetrate the professional
market by expanding its offerings of customized value-added mixes and
technical expertise in order to capitalize on this trend.
. Pursue Strategic Acquisitions. The Company believes that strategic
acquisitions will continue to play an important role in expanding its
geographic presence and product offerings. In particular, optimal
production and distribution of color plants such as holiday crops, annual
bedding plants and perennials require regional growing capacity, and the
Company will continue to seek acquisitions of additional regional color
plant growers as it continues to expand its nursery network. The Company
also intends to apply its proprietary operating processes to acquired
businesses to facilitate integration and improve operating performance.
In the peat category, the Company will continue to seek acquisitions of
businesses that offer operating synergies and complementary products.
PRODUCTS
Hines Nurseries produces and markets approximately 4,100 varieties of
ornamental, container-grown plants grown primarily for outdoor use, most of
which are sold under its Hines Nurseries(TM) and Iverson(TM) trade names. Most
of Hines Nurseries' varieties fall into the following categories:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE TYPICAL
OF HINES NURSERIES' GROWING
PRODUCT CATEGORY REPRESENTATIVE PRODUCTS 1997 REVENUES TIMES
---------------- ----------------------- ---------------------- -------
<S> <C> <C> <C>
Evergreens
. Broadleafs Azalea, boxwood, camellia, 26.7% 12-18 months
euonymous, holly
. Conifers Pines, spruce, junipers 13.4% 18-24 months
Deciduous plants Barberry, dogwood, forsythia, 13.3% 12-18 months
spirea
Flowering color
plants
. Perennials Daylillies, clematis, ornamental 17.6% 4-10 months
grasses
. Annual bedding Marigolds, petunias 11.5% 2-4 months
plants
. Tropical flow-
ering
plants Bougainvillea, hibiscus 6.4% 6-12 months
. Holiday plants Easter lily, poinsettia 0.8% 3-6 months
Specialty/topiary Trellises, bonsais 7.6% 24-36 months
plants
Other Ferns, trees 2.7% 6-18 months
------
100.0%
======
</TABLE>
Evergreen broadleaf plants and conifers retain their foliage throughout the
year and thrive in most climatic conditions. Deciduous plants generate and
lose their foliage each year, and are grown primarily in less temperate
regions of the country. Flowering color plants vary widely by species, with
most species growing optimally in moderate and warmer climates found in the
spring and summer growing season in much of the country. Specialty and topiary
plants are primarily evergreen plants that are trained and pruned into unique
or unusual shapes and forms.
The Company grows most of its product categories at several of its
nurseries. However, the Company emphasizes certain product categories at
particular nurseries depending on the growing climate conducive to a
particular product
41
<PAGE>
and on regional customer needs. The moderate climates of Oregon and Northern
California enable the Company to produce a wide variety of evergreen and
deciduous plants year-round for national and cold climate regional
distribution. The warm and sunny climate of Southern California allows the
Company to produce a broad assortment of plants from all of the Company's
product categories year-round. These nurseries specialize in annual and other
flowering color and tropical plants. Products from the Company's West Coast
nurseries are grown to be "retail-ready" for spring shipments into less-
temperate climates nationwide, generally well in advance of comparable product
availability from local nurseries in those markets. The Company's South
Carolina nursery specializes in perennial production and uses a similar "early
season, retail ready" strategy to grow its products for the midwestern and
northeastern markets. The Company's Texas nursery produces a broad range of
products for the Company's customers in Texas and the Southeast. The Company's
Pennsylvania and San Joaquin Valley, California nurseries are primarily
regional in focus and specialize in producing annual bedding and holiday
plants for local distribution.
Since 1993, Hines Nurseries has added several plant product lines. Through
internal expansion and the recent strategic acquisitions of Bryfogle's,
Iverson and Pacific Color, Hines Nurseries has significantly expanded its
offerings of flowering color plants, which management believes presents a
significant growth opportunity for the Company. Hines has also successfully
developed patio-ready type products, which it markets under the names of Patio
Tropics(TM) and Festival Pots(TM). These products generally command premium
prices and have higher profit margins than other plants offered by the
Company.
Sun Gro harvests and produces high quality, sphagnum peat moss and peat-
based potting and growing mixes. Sphagnum peat moss is partially decomposed
sphagnum moss, a plant whose unique cellular structure consists of large
cavities with sponge-like absorption characteristics for air and water.
Because the optimal balance of air and water is essential for root development
and plant growth, organic sphagnum peat moss is generally considered the
highest quality growing medium available. While there are less expensive
products on the market that are used for similar purposes, such as top soil,
manure, bark, mulch and composts made from yard or sewage wastes, these
products do not contain the superior soil aeration and water and nutrient
retention characteristics of peat moss.
Sun Gro markets peat moss under its Sunshine(TM), Parkland(TM), Fairway(TM),
Black Gold(TM), Lakeland Grower(TM), Alberta Rose(TM), Nature's(TM) and
Gardener's Gold(TM) trade names in both the professional and retail markets in
four different grades: fine, medium, coarse and super coarse. Fine grade is
typically sold in the retail market, while the other grades, particularly
coarse grade, are sold to professional growers. Capitalizing on its strong
market position in the professional peat moss market, Sun Gro has become one
of the leading North American suppliers of value-added, peat-based growing
mixes used for specific professional applications such as seed germination,
cutting propagation and greenhouse crop production. As a result of Sun Gro's
success with this product line, higher margin professional growing mixes now
constitute a greater percentage of Sun Gro's professional market sales than
pure peat moss. Sun Gro's retail potting mixes use a similar blend of
ingredients as its professional growing mixes, but are specifically targeted
to home gardeners. By highlighting formulations for specific plant varieties,
Sun Gro has expanded its product offerings to the retail customer. In
addition, as a result of the acquisition of Lakeland, which has a
predominantly retail customer base, Sun Gro has increased its penetration of
the retail market.
CUSTOMERS
The following table sets forth a selected list of customers for each major
category of the Company's retail customers.
<TABLE>
<CAPTION>
HOME
CENTERS MASS MERCHANDISERS INDEPENDENT GARDEN CENTERS GARDEN CENTER CHAINS
----------- ------------------ --------------------------- --------------------------
<S> <C> <C> <C>
Home Depot Kmart Tea's Nursery Company, Inc. Frank's Nursery and Crafts
Lowe's Wal-Mart Homestead Gardens, Inc. Earl May Nursery and Seed
Hechinger's Target Roger's Gardens Pike's Family Nursery
Newport Beach, Inc.
Eagle Gar- Meijer, Inc. English Gardens & Armstrong Nurseries
den Fairlane Florists, Inc.
and Hard-
ware
</TABLE>
42
<PAGE>
Hines Nurseries sells its nursery products to over 1,900 retail and
commercial customers representing over 7,300 outlets throughout the United
States and Canada. Hines Nurseries' retail customers include home centers,
mass merchandisers, independent garden centers and garden center chains. The
following table sets forth the estimated percentage of Hines Nurseries' net
sales by customer type for the periods indicated:
<TABLE>
<CAPTION>
CUSTOMER TYPE 1995 1996 1997
------------- ---- ---- ----
<S> <C> <C> <C>
Home centers.............................................. 28% 29% 32%
Mass merchandisers........................................ 20 23 27
Garden center chains...................................... 12 11 11
Independent garden centers................................ 22 21 18
Rewholesalers............................................. 14 13 9
Landscapers and others.................................... 4 3 3
--- --- ---
Total................................................. 100% 100% 100%
=== === ===
</TABLE>
Sun Gro's peat moss and peat-related products are sold directly and by
distributors throughout the United States and Canada. Sun Gro also markets its
product through distributors who sell to Mexico and Japan and, to a lesser
extent, to other countries in Asia and South America. Peat moss is sold to
both the professional and retail markets, while growing mixes are sold
exclusively to the professional market and potting mixes are sold exclusively
to the retail market. Sun Gro's professional customers consist of greenhouse
growers, nursery growers and golf course developers. Sun Gro's retail
customers are similar to those of Hines Nurseries.
The following table sets forth the estimated percentage of Sun Gro's net
sales by customer type for the periods indicated:
<TABLE>
<CAPTION>
CUSTOMER TYPE 1995 1996 1997
------------- ---- ---- ----
<S> <C> <C> <C>
Professional:
Greenhouse and nursery growers........................ 59% 61% 57%
International distributors............................ 8 10 11
Golf course developers and others..................... 6 5 6
--- --- ---
Total Professional.................................. 73% 76% 74%
--- --- ---
Retail:
Home centers and mass merchandisers................... 18% 16% 18%
Independent garden centers............................ 6 5 5
Garden center chains.................................. 3 3 3
--- --- ---
Total Retail........................................ 27% 24% 26%
--- --- ---
Total Professional and Retail...................... 100% 100% 100%
=== === ===
</TABLE>
The Company's top ten customers accounted for approximately 39% of
consolidated net sales in 1997. The Company's largest customer, Home Depot,
accounted for approximately 10% and 12% of the Company's consolidated net
sales in 1996 and 1997, respectively. See "Risk Factors--Customer
Concentration."
SALES AND SERVICES
As of April 30, 1998, Hines Nurseries employed 83 direct sales consultants
and key account managers. Hines Nurseries coordinates its larger accounts,
such as Home Depot and Lowe's, which are typically serviced by multiple
nurseries, through teams consisting of members of the Company's senior
management and representatives from each nursery location. These teams develop
coordinated sales and service strategies, which are implemented by regional
and local sales personnel who work with customers' regional, district and
store level buying agents to address local demand for specific products. Hines
Nurseries also markets its products through trade shows, print advertising in
trade journals, direct mail promotion and catalogues.
43
<PAGE>
Hines Nurseries offers a variety of value-added services, such as customized
labeling, bar coding, electronic data interchange and in-store sales and
merchandising support. These services enable the Company to partner with
certain customers, assist in inventory planning and management, and enhance
category profitability.
Sun Gro sells its products on a direct basis and through a network of
approximately 220 distributors located throughout North America. There are
approximately 35 employees on Sun Gro's direct sales force. Sun Gro's sales
force is highly trained in the technical applications of its products.
Approximately 55% of Sun Gro's sales are currently conducted through the
distributor network. Sun Gro's distributor network provides broad market
coverage, reduces credit exposure and distributes products to smaller growers
cost effectively.
Sun Gro provides technical services to certain of its professional
customers. These services include physical and chemical analysis of growing
media, nutrient analysis of plant tissue and chemical analysis of fertilizers
and water. These services are designed to improve customer growing methods and
the overall quality of its customers' crops. The Company believes these
services enhance Sun Gro's reputation for technical expertise and build strong
loyalty with these customers, which management believes provides Sun Gro with
a competitive advantage over peat producers that do not offer similar
services. Sun Gro also develops new products to complement its existing
product lines. Recent product developments include specialty bark mixes and
professional growing mixes formulated for specific applications.
OPERATIONS
The Company has made significant investments in developing and refining
proprietary operating processes for application across the Company's
decentralized operations. Decisions regarding scheduling of production, new
product development, marketing, cost management, expansion planning, hiring
and purchasing are made by the management of each individual nursery.
Management believes that decentralization provides the managers of its
individual nursery facilities with the flexibility needed to effectively
manage the Company's regionally diverse operations. The Company's senior
management team is responsible for strategic planning, including acquisitions
and financing, and provides financial and information systems support and
management training to the nurseries.
Production
The Company's plants (other than annual bedding plants) are produced by
propagating young plants called "liners" using cuttings from mature plants.
Using proprietary propagation techniques for each specific crop with respect
to growing media, hormonal stimulation and growing conditions, these cuttings
are cultivated into viable liners and are then transplanted into one gallon
containers. These plants are placed in the nursery for six to 24 months until
they reach certain specified sizes and levels of maturity, according to market
demand, and are sold at different price points depending on their size or
level of maturity. During the field growing stages, plants are typically
pruned by mechanized pruning machines that are designed for specific plant
categories and watered and fertilized by integrated irrigation and
fertilization systems, which are closely monitored and regulated to ensure
consistency and quality. The Company's water and fertilizer recycling systems
are designed to minimize the costs of these elements and maximize water
conservation. Each of the Company's facilities has infrastructure and
procedures in place to protect its growing stock from most frost, snow and
freezing conditions typically prevailing at these facilities.
To produce annual bedding plants, a nursery either buys and germinates seeds
to produce small plants, called "plugs", or purchases plugs from specialized
plug producers. The plugs are then transplanted to bedding packs, gallon
hanging baskets and containers of various sizes. The growth cycle of color
plants is typically less than one year, with many color plants having a
growing season as short as eight to 16 weeks, allowing certain of the
Company's nurseries such as Bryfogle's to produce approximately three to four
inventory turns per year. As with ornamental plants, the Company applies
controlled watering and fertilizing in order to ensure high quality.
Peat moss is harvested from the Company's peat bogs. When a bog is about to
be harvested, it is cleared of all roots and sticks and then harrowed to
expose the top layer of peat moss to the drying forces of the sun and
44
<PAGE>
wind. Once dried, the top one-quarter inch of peat moss is vacuumed with
sophisticated harvesting machinery. Raw peat is then screened for particle
size uniformity and bagged or mixed with perlite, vermiculite and other
nutritional supplements to produce high quality growing and potting mixes. Sun
Gro's peat harvest typically occurs within the period from May to October,
with the typical harvest lasting 40 to 50 days.
Distribution
Hines Nurseries distributes its products directly from its nursery sites to
its retail customers primarily through common carriers and through the
Company's fleet of approximately 100 trucks, six of which are owned and the
balance of which are leased. The Company believes that common carriers are
available to accommodate seasonal delivery peaks. Hines Nurseries has
developed a variety of product shipping innovations, such as specialized
shelving, protective racks and special loading techniques. As a result of
these specialized shipping techniques, the Company has been able to improve
timeliness and efficiency and reduce travel damage, thereby expanding the
geographic coverage of each nursery. Nursery products are distributed
nationwide, except color plants, which are typically distributed within a 300-
mile radius of each nursery.
Sun Gro distributes its products to its customers by common carriers.
Because of the extensive distances involved, shipping expense is one of the
largest expenses at Sun Gro, representing approximately 24% of Sun Gro's net
sales for 1997.
Suppliers
The cost of raw materials accounts for approximately 18% of Hines Nurseries'
net sales and is composed primarily of green goods, starter materials,
containers and soil mix. The cost of raw materials accounts for approximately
21% of Sun Gro's net sales and is composed primarily of packaging materials
and growing mix constituents. Hines Nurseries' principal suppliers include
Productivity California for containers and Florasource, Ltd. for starter
materials, and Sun Gro's principal supplier is Bonar Packaging for packaging
materials. Due to its large sales volume, the Company receives purchasing
discounts from many of its suppliers. The Company believes that alternative
sources of supply are readily available.
ACQUISITION STRATEGY AND INTEGRATION
Hines' strategy is to make acquisitions which broaden or complement its
existing product lines, increase production capacity, expand geographic
presence and/or offer operating synergies. The Company carefully considers
several factors when evaluating potential acquisitions, including the
availability of water, nursery location, product pricing, product mix,
distribution costs, customer overlap and growth opportunities. In addition,
the Company conducts extensive accounting, financial, operational and
environmental due diligence on potential acquisition candidates. The Company
has consummated seven acquisitions since 1992 and has also reviewed numerous
other acquisition candidates which were not pursued. The Company intends to
continue this disciplined approach to acquisitions for the foreseeable future.
The Company has established standardized programs and procedures to
integrate acquired businesses into its existing operations in order to
increase the sales and profitability of acquired companies. The Company
believes the implementation of these programs and procedures enable the
Company to enhance the productivity and revenue growth of an acquired
company's operations.
RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS
Hines Nurseries' research and development efforts focus on international and
domestic sourcing and internal propagation of unique specialty plant
varieties, which are marketed under trade names and patented whenever
possible. Differences among plant varieties may include coloration, size at
maturity or hardiness in drought or cold conditions. These varieties often
command higher prices, provide higher unit margins and enhance the Company's
reputation as a product innovator. Hines Nurseries' research and development
has resulted in the
45
<PAGE>
introduction of several new products since the beginning of 1993, which
resulted in approximately $9.5 million of net sales in 1997 at attractive
gross profit margins. The Company currently holds 21 patents and has seven
patent applications pending. The Company does not believe that the loss of any
particular patent would have a material adverse effect on the Company. The
Company has entered into confidentiality agreements with all of its salaried
employees to protect its intellectual property rights.
Sun Gro's research and development efforts focus on the creation and
development of new value-added peat-based growing mixes for retail and
professional customers. Such mixes often command higher prices and provide
higher profit margins than peat alone. Differences in growing mixes may
include differences in coarseness of peat and amounts of nutrient additives,
such as limestone, and other mix constituents, such as perlite, vermiculite
and bark. Sun Gro's research and development efforts have resulted in the
commercial introduction of approximately 35 new growing mixes and related
products since 1992.
COMPETITION
The industry segments in which the Company conducts its business are highly
competitive. Certain of the Company's competitors are less leveraged and have
greater financial resources than the Company. See "Risk Factors--Competition."
Competition in the nursery products segment of the lawn and garden industry
is highly fragmented and based principally on breadth of product offering,
consistency of product quality and availability, customer service and price.
Management believes that the nursery products segment is comprised of
approximately 30,000 primarily small and regionally based growers, with the
top 100 growers accounting for only approximately 22% of industry sales in
1997. Hines Nurseries competes on a national basis with Monrovia Nursery
Company with respect to ornamental plants. In each of its markets, Hines
competes with regional growers such as Color Spot Nurseries in California and
Texas, Clinton Nurseries in the Northeast, Zelenka Nurseries in the Midwest,
Wight Nurseries in the South and many other smaller regional and local
growers. Management believes Hines Nurseries' key competitive advantages are
its national sales and distribution capabilities, its strategically located
facilities, its ability to provide high quality products on a consistent basis
and its ability to provide value-added services.
Competition in the peat moss, professional growing mix and retail potting
mix segments of the lawn and garden industry is based principally upon product
quality, distribution, price and customer service. Sun Gro is the largest
producer and marketer of sphagnum peat moss and professional peat-based
growing mixes. Substantially all of the peat bogs in North America are located
in Canada north of the 38th parallel. Outside of North America, bogs are also
located in Ireland, Scotland and Russia. In North America, the Company
estimates that five or six companies produce a majority of peat moss and peat-
based growing mixes in the market, although the Company believes that there
are at least 20 to 30 smaller regional producers of peat moss and peat-related
products. Sun Gro's principal competitors are Premier Canadian Enterprises
Ltd., Fafard Peat Moss Ltd., and Lambert Peat Moss Ltd., though it also
competes with the smaller regional producers of peat moss and peat-related
products. In the market for retail potting mixes, the Company's primary
competitor is the O.M. Scott & Sons Company, which is significantly larger
than the Company. Management believes Sun Gro's key competitive advantages
include the size and strategic location of its bogs and its ability to produce
high quality growing mixes.
GOVERNMENT REGULATION
The Company is subject to obligations and potential liability under United
States federal, state and local and Canadian federal, provincial and local
occupational health and safety and environmental laws and regulations
regarding the production, storage and transportation of certain of its
products, the disposal of its wastes and the remediation of releases
associated with its operations. The EPA and similar state and local agencies
regulate the Company's operations and activities, including but not limited to
water runoff and the use of certain pesticides in its nursery operations.
These agencies or regulations may adversely affect the Company by limiting or
prohibiting the use of certain pesticides or by mandating changes in operating
procedures for the protection of the environment.
46
<PAGE>
With respect to its peat moss operations, the Company has various operating,
monitoring, reclamation and site maintenance obligations, which are prescribed
by various Canadian and U.S. agencies. Peat harvesting in general has received
attention from various environmental groups. The Company does not anticipate
that future expenditures for compliance with such environmental laws,
regulations and obligations will have a material adverse effect on the
Company. No assurances can be given, however, that such compliance, or
compliance with future environmental laws and regulations, will not have such
an adverse effect. The Company does not anticipate material capital
expenditures for environmental controls in the current year or the succeeding
fiscal year.
The use of reclamation water is governed by federal reclamation laws and
regulations. Reclamation water is used at the Company's Northern California
nursery and is the source of a substantial majority of the water for the
Company's Oregon nursery. While the Company believes that it is in material
compliance with applicable regulations and maintains a continuous compliance
program, there can be no assurance that changes in law will not reduce
availability or increase the price of reclamation water to the Company. Any
such change could have a material adverse effect on the Company.
Under certain attribution provisions of the reclamation regulations, persons
having a direct or indirect beneficial economic interest in the Company will
be treated as "indirect holders" of irrigation land owned by the Company in
proportion to their beneficial interest in the Company. If any holder of the
Common Stock (whether directly or indirectly through a broker-dealer or
otherwise) is ineligible under applicable reclamation regulations to hold an
indirect interest in the Company's irrigation land, the Company itself may not
be eligible to receive reclamation water on such land. Generally, the
eligibility requirement of the reclamation regulations would be satisfied by a
person (i) who is a citizen of the United States or an entity established
under Federal or State law or a person who is a citizen of or an entity
established under the laws of certain foreign countries (including Canada and
Mexico and members of the Organization for Economic Cooperation and
Development) and (ii) whose ownership, direct and indirect, of other land
which is qualified to receive water from a reclamation project), when added to
such person's attributed indirect ownership of irrigation land owned by the
Company, does not exceed certain maximum acreage limitations (generally, 960
acres for individuals and 640 acres for entities). While the Company's
Restated Certificate of Incorporation will have provisions intended to
prohibit transfers to holders who would render any portion of the Company's
irrigation land ineligible to receive reclamation water, there can be no
assurance that such provisions will be effective in protecting the Company's
right to continue to receive reclamation water. For example, such provisions
will not apply if the status of a stockholder of the Company subsequently
changes in a manner that reduces the Company's eligibility to receive
reclamation water on its entire landholding (such as through a stockholder
subsequently becoming a citizen of certain foreign countries or exceeding the
maximum acreage limitations through acquisitions of other interests in
irrigation land), The loss of the right to use reclamation water could have a
material adverse effect on the Company. See "Risk Factors--Ownership
Restrictions" and "Description of Capital Stock."
The Company leases approximately 46,200 acres of peat bogs in Canada from
provincial governments, which represent 93% of the Company's harvestable peat
bogs. Although the Company has historically been able to renew its leases upon
expiration on terms not materially different than under existing leases, there
can be no assurance that the Company will be able to do so in the future. The
inability to renew these leases or to do so on such terms could have a
material adverse effect on the Company. See "Business--Properties."
EMPLOYEES
As of April 30, 1998, the Company had approximately 3,810 full-time regular
and seasonal employees. Of this total, approximately 3,280 were employed by
Hines Nurseries, and approximately 530 were employed by Sun Gro. During its
peak selling season, which runs from February through June, Hines Nurseries
expands its workforce with seasonal employees, and employed approximately
1,475 seasonal employees as of April 30, 1998. Sun Gro also adds seasonal
employees during its peak harvesting and production season, which runs from
May through September. As of April 30, 1998, approximately 420 of Sun Gro's
employees were employed in Canada. As of April 30, 1998, Lakeland had
approximately 150 employees, and employs additional seasonal employees during
its peak harvesting season. All of Hines Nurseries' and Lakeland's employees
are non-union. The non-management employees at Sun Gro's Canadian peat
processing facilities are represented by various labor unions, with collective
bargaining agreements in effect for all such facilities. Sun Gro's agreement
with the United Food and Commercial Workers Union, which covers 113 employees
at its Manitoba facility, expires in
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<PAGE>
May 1999. Its agreements with the Brotherhood of Carpenters and Joiners of
America, which cover 55 employees at Sun Gro's Lameque, New Brunswick facility
and 48 employees at its Maisonnette, New Brunswick facility, expire in
December 2000 and August 1998, respectively. The Company expects to enter into
negotiations to renew its agreement with its employees at its Maisonnette
facility prior to the expiration of the existing agreement. The Company has
not experienced any significant work stoppage in recent years, and management
believes the Company's labor relations are good.
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<PAGE>
PROPERTIES
The Company owns approximately 2,246 acres related to its nursery facilities
and approximately 1,600 acres of harvestable peat bogs in Canada. In addition,
the Company leases approximately 1,364 acres related to its nursery facilities
(including leases from Blooming Farm, Inc., an affiliated entity, as described
under "Certain Relationships and Related Transactions") and approximately
48,000 acres of harvestable peat bogs in Canada from provincial governments
and various private parties. Sun Gro has historically been able to renew its
leases upon expiration. However, no assurance can be given that Sun Gro will
be able to do so in the future. The Company's management believes that its
owned and leased facilities are sufficient to meet its operating requirements
for the foreseeable future.
The Company's facilities are identified in the table below:
<TABLE>
<CAPTION>
LOCATION DESCRIPTION STATUS
-------------------------------------- ------------------------ ----------------
<C> <S> <C>
HINES
Danville, Pennsylvania............. 141 acre nursery Leased
Fallbrook, California.............. 253 acre nursery Leased (a)
Forest Grove, Oregon............... 1,106 acre nursery Owned/leased (b)
Fulshear, Texas.................... 450 acre nursery Owned
Irvine, California................. 454 acre nursery and Leased
headquarters
Lake Elsinore, California.......... 85 acres of undeveloped Leased (a)
land
Northern California (c)............ 501 acre nursery Owned
San Joaquin Valley, California (d). 48 acre nursery Owned/leased (e)
Trenton, South Carolina............ 572 acre nursery Owned/leased (f)
SUN GRO
Seba Beach, Alberta................ 53,000 square foot Owned/leased (g)
processing and mixing
facility and 11,666
acres of peat bogs
Elma, Manitoba..................... 73,700 square foot Owned/leased (g)
processing and mixing
facility and 20,352
acres of peat bogs
Julius, Manitoba................... 39,000 square foot Owned/leased (g)
processing facility and
3,818 acres of peat
bogs
Lameque, New Brunswick............. 50,400 square foot Owned/leased (g)
processing and mixing
facility and 4,454
acres of peat bogs
Maisonnette, New Brunswick......... 47,900 square foot Owned/leased (g)
processing facility and
1,029 acres of peat
bogs
Quincy, Michigan................... 83,700 square foot Owned
mixing facility
Terrell, Texas..................... 55,800 square foot Owned
mixing facility
Surrey, British Columbia........... 30,000 square foot Leased
depot/storage yard
Niagara Falls, Ontario............. 8,000 square foot Owned
depot/storage yard
Montreal, Quebec................... 33,000 square foot Owned
depot/storage yard
Bellevue, Washington............... 10,000 square foot Leased
office (headquarters)
LAKELAND
Vilna, Alberta..................... 61,540 square foot Owned/leased (g)
processing and mixing
facility located on 295
acres and 1,676 acres
of peat bogs
Wandering River, Alberta........... 2,883 acres of peat bogs Owned/leased (g)
Corrigall Lake, Mallaig, Lobstick, 1,602 acres of peat bogs Owned/leased (g)
Alberta........................... and 30 acres of vacant
land
Matheson, Bingle Lake, Ontario..... 2,189 acres of peat bogs Owned/leased (g)
Iroquois Falls, Ontario............ 29 acres of vacant land Owned
Hubbard, Oregon.................... 24,840 square foot Owned
mixing facility on 7
acres
Fillmore, Utah..................... 48,400 square foot Owned
mixing facility on 21
acres
</TABLE>
49
<PAGE>
- --------
(a) The lease contains a purchase option that the Company has exercised. The
Company is in negotiations regarding the purchase price, and expects to
consummate the purchase of this property in 1999.
(b) The Company owns 745 acres and leases 361 acres at this nursery.
(c) The Northern California nursery consists of sites in Vacaville and
Allendale, California.
(d) The San Joaquin Valley nursery consists of sites in Chowchilla and Madera,
California.
(e) The Company owns 38 acres and leases 10 acres at this nursery.
(f) The Company owns 512 acres and leases 60 acres at this nursery.
(g) The Company leases all but 1,600 acres in the aggregate of these peat bogs
from Canadian provincial governments and various private parties. The
Company's peat processing facilities are owned by the Company but, with the
exception of the Vilna peat-processing facility, are situated on land
leased to the Company by Canadian provincial governments and various
private parties.
LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and litigation
matters that 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 could have a material adverse effect on the Company.
Management believes, however, that the ultimate resolution of such matters,
individually or in the aggregate, will not have a material adverse effect on
the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Set forth below is the name, age and position of each person who will be an
executive officer, key employee or director of the Company upon consummation
of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------- --- ------------------------------------------------
<C> <C> <S>
Douglas D. Allen 56 Chairman of the Board
Stephen P. Thigpen 43 President, Chief Executive Officer and Director
Claudia M. Pieropan 42 Chief Financial Officer, Secretary and Treasurer
Mitch Weaver 40 President, Sun Gro-U.S.
Robert E. Ferguson 40 Vice President, Hines Nurseries Southeast Region
David W. Fujino 42 Vice President, Hines Nurseries Eastern Region
E. G. "Bud" Summers 42 Vice President, Hines Nurseries Western Region
Paul R. Wood 44 Director and Assistant Secretary
Thomas R. Reusche 43 Director and Assistant Secretary
Gary J. Little 47 Director
David F. Mosher 42 Director
</TABLE>
The Board of Directors of the Company presently consists of seven directors
with one vacancy. The Company anticipates that two directors not otherwise
affiliated with the Company or any of its stockholders will be elected by the
Board of Directors following the completion of the Offering. All directors
hold their positions until the next annual meeting of stockholders and until
their respective successors are elected. Executive officers are elected by and
serve at the discretion of the Board of Directors. Historically, the directors
of the Company have been elected in accordance with the terms of the
Stockholders Agreement. Upon consummation of the Offering, the voting
provisions of the Stockholders Agreement will terminate. See "Certain
Relationships and Related Transactions--Stockholders Agreement."
BACKGROUND OF EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Mr. Allen has served as Chairman of the Board of Hines Nurseries since
September 1995 and as Vice President and a director of the Company since
August 1995. Prior to that time, he served as President of Hines Nurseries
from 1984 to August 1995. Previously, Mr. Allen held positions within
Weyerhaeuser Company's Paper Division as a General Manager from 1975 to 1984
and as a Sales Manager from 1971 to 1975. He has been a director of Hines
Nurseries since 1990. He received his undergraduate degree in business from
Ball State University in 1964. Upon completion of the Offering, Mr. Allen will
serve as non-executive Chairman of the Board of the Company.
Mr. Thigpen has served as President and Chief Executive Officer of Hines
Nurseries since September 1995, Chief Executive Officer of Sun Gro-U.S. since
May 1997, and a director of the Company since August 1995. Prior to that time,
he served as General Manager of the Northern California Nursery for Hines
Nurseries from 1985 to August 1995 and as Technical Resource Manager for Hines
Nurseries from 1984 to 1985. Previously, Mr. Thigpen was Research and
Development Program Manager with Weyerhaeuser Company's Nursery Products
Division from 1982 to 1984. Mr. Thigpen received his BS in Plant & Soil
Sciences from the University of Massachusetts in 1977. Mr. Thigpen received a
Ph.D. in Plant Physiology from the University of California at Davis in 1981.
Upon consummation of the Offering, Mr. Thigpen will become President and Chief
Executive Officer of the Company.
51
<PAGE>
Ms. Pieropan has served as Chief Financial Officer of the Company since
January 1996 and served as Vice President of Finance and Administration of Sun
Gro-U.S. from October 1991 until January 1996. Prior to that time, Ms.
Pieropan spent 14 years with Price Waterhouse in Montreal, Toronto and
Vancouver.
Mr. Weaver has served as President of Sun Gro-U.S. since June 1997. Prior to
that time, he served for 16 years with Weyerhaeuser Company in various
managerial positions, most recently as General Manager of Weyerhaeuser
Company's box plant in Salinas, California from 1992 to 1997. Mr. Weaver
graduated from Indiana University in 1980 with a BA in English and Education.
Mr. Ferguson has served as Vice President of Hines Nurseries' Southeast
Region since November 1997. Prior to that, he served as General Manager of the
Company's Texas nursery from 1990 to 1997, as Sales Manager from 1987 to 1990
and as Production Scheduling Manager from 1984 to 1987. Prior to joining the
Company, Mr. Ferguson was General Manager of Pocono Nurseries from 1981 to
1982. Mr. Ferguson received his BS in Horticulture from Texas A&M University
in 1980.
Mr. Fujino has served as Vice President of Hines Nurseries' Eastern Region
since November 1997. Prior to that, he served as General Manger of the
Company's Northern California nursery from 1995 to 1997, as the Socio-
Technical Resources Manager for Hines Nurseries from 1990 to 1995 and as
Socio-Technical Resources Manager at the Northern California nursery from 1987
to 1990. Prior to joining the Company, Mr. Fujino was a Staff Research
Associate at the University of California at Davis from 1980 to 1983. Mr.
Fujino received a BS in Plant Science from the University of California,
Riverside in 1978. Mr. Fujino also holds an MS in Environmental Horticulture
and a Ph.D. in Plant Physiology, both from the University of California at
Davis.
Mr. Summers has served as Vice President of Hines Nurseries' Western Region
since December 1996. Prior to that, he served as General Manager of the
Company's Irvine, California nursery from 1989 to 1996, as Socio-Technical
Resources Manager of Hines Nurseries from 1986 to 1989 and Research Program
Manager of Weyerhaeuser Company's Horticulture Research Station from 1984 to
1986. He has also served as a statistical analyst to the USDA from 1981 to
1984, instructor in the Department of Horticulture at the University of
Maryland from 1979 to 1981 and research assistant at the USDA from 1974 to
1977. Mr. Summers received his BS from Salisbury State University in 1977, an
MS in Horticulture from the University of Maryland in 1980, and Ph.D. in
Horticulture from the University of Maryland in 1983.
Mr. Wood has served as Chairman of the Board and President of the Company
since September 1995. Upon completion of the Offering, Mr. Wood will resign as
Chairman of the Board and President but will continue to serve as an Assistant
Secretary and a director of the Company. Since its formation in January 1993,
Mr. Wood has served as a principal of MDCP and as Vice President of Madison
Dearborn Partners, Inc. ("MDP"), its indirect general partner. Prior to that
time, Mr. Wood served as Vice President of First Chicago Venture Capital,
which comprised the private equity investment activities of First Chicago
Corporation, the holding company parent of First National Bank of Chicago. Mr.
Wood serves on the board of directors of Commerce Security Bank Corp. and a
number of private companies.
Mr. Reusche has served as Secretary and Treasurer and a director of the
Company since August 1995. Mr. Reusche will resign as Secretary and Treasurer
upon completion of the Offering but will continue to serve as an Assistant
Secretary and a director of the Company. Since its formation in January 1993,
Mr. Reusche has served as a principal of MDCP and Vice President of MDP. Prior
to that time, Mr. Reusche was a senior investment manager at First Chicago
Venture Capital. Mr. Reusche serves on the board of directors of Ryder TRS,
Inc. and a number of private companies.
Mr. Little has served as a director of the Company since August 1995. Since
its formation in January 1993, Mr. Little has served as a principal of MDCP
and as Vice President of Finance of MDP. Prior to that time, Mr. Little served
as Vice President of Finance and Administration of First Chicago Venture
Capital.
Mr. Mosher has served as a director of the Company since August 1995. Since
its formation in January 1993, Mr. Mosher has served as a principal of MDCP
and as a Vice President of MDP. Prior to that time, he served as an investment
manager of First Chicago Venture Capital.
52
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two standing committees--a Compensation
Committee and an Audit Committee. Following the consummation of the Offering,
a majority of these committees will be comprised of non-management directors.
The Compensation Committee recommends action to the Board of Directors
regarding the salaries and incentive compensation of elected officers of the
Company and administers the Company's bonus plans and stock plan. It is
currently anticipated that only Compensation Committee members who constitute
"Nonemployee Directors" as defined under Rule 16b-3 of the Exchange Act will
participate in decisions to grant stock options and other stock-based awards
to executive officers of the Company. The Compensation Committee is currently
comprised of Messrs. Allen, Wood and Reusche.
The Audit Committee makes recommendations to the Board regarding the
selection, retention and termination of the Company's independent auditors and
reviews the annual financial statements of the Company and the Company's
internal controls. The Audit Committee is currently comprised of Messrs.
Allen, Wood and Reusche.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of (i) the chief executive
officers of the Company and Hines Nurseries as of December 31, 1997, (ii) the
Company's three most highly compensated executive officers as of December 31,
1997, and (iii) one additional individual for whom disclosure would have been
required but for the fact such individual was not an executive officer at year
end (the "Named Executive Officers") for the three years ended December 31,
1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION AS OF ----------------- ALL OTHER
DECEMBER 31, 1997 YEAR SALARY BONUS(1) COMPENSATION(2)
- --------------------------------- ---- -------- -------- ---------------
<S> <C> <C> <C> <C>
Paul R. Wood........................... 1997 -- -- --
Chief Executive Officer of the Company 1996 -- -- --
1995 -- -- --
Douglas D. Allen....................... 1997 $200,825 $146,905 $ 4,746
Vice President of the Company 1996 $202,161 -- $ 5,631
Chairman of the Board of Hines
Nurseries 1995 $295,842 $361,920 $ 3,507
Stephen P. Thigpen..................... 1997 $217,851 $197,453 $ 6,194
President and Chief Executive Officer
of 1996 $210,135 $ 13,904 $ 5,861
Hines Nurseries 1995 $181,221 $184,904 $ 2,108
Claudia M. Pieropan.................... 1997 $159,628 $ 24,484 $ 7,831
Chief Financial Officer of the Company 1996 $150,000 -- $ 13,563
1995 $116,024 $ 31,907 $ 13,366
Michael R. Crowe(3).................... 1997 $ 26,187 -- $420,916
Former President of Sun Gro-U.S. 1996 $209,496 -- $ 19,953
1995 $212,815 $ 81,938 $ 17,935
</TABLE>
- --------
(1) Represents annual incentive compensation paid during the calendar year.
(2) Includes (i) the dollar value of premiums paid by the Company with respect
to health and term life insurance for Messrs. Allen, Thigpen and Crowe and
Ms. Pieropan in the amounts of $0, $450, $147 and $0 in 1997, $864, $259,
$870 and $259 in 1996 and $1,592, $140, $850 and $200 in 1995,
respectively, (ii) the taxable benefit relating to the use of an
automobile provided by the Company to Messrs. Allen, Thigpen and Crowe
53
<PAGE>
and Ms. Pieropan in the amounts of $4,746, $5,744, $427, and $7,389 in
1997, $4,767, $5,602, $15,583 and $10,879 in 1996 and $1,915, $1,968,
$13,585 and $9,666 in 1995, (iii) a one-time gain of $8,465 in 1996 on the
sale of a Company automobile purchased by Mr. Crowe from the Company upon
lease expiration, (iv) contributions made by the Company under Sun Gro-
U.S.'s 401(k) Plan on behalf of Mr. Crowe and Ms. Pieropan in the amounts
of $1,350 and $0 in 1997, $3,500 and $2,425 in 1996 and $3,500 and $3,500
in 1995, respectively, and (v) a $418,992 payment to Mr. Crowe on March 20,
1997 in connection with his departure from the Company.
(3) Mr. Crowe departed from the Company effective February 17, 1997.
1998 STOCK PLAN
Prior to the consummation of the Offering, the Board will adopt the 1998
Long-Term Equity Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan
provides for grants of stock options, stock appreciation rights ("SARs"),
restricted stock, performance awards and any combination of the foregoing to
certain directors, officers and employees of the Company and its subsidiaries.
The purpose of the 1998 Stock Plan is to provide such individuals with
incentives to maximize shareholder value and otherwise contribute to the
success of the Company and to enable the Company to attract, retain and reward
the best available persons for positions of substantial responsibility.
Approximately 2.3 million shares of Common Stock (representing 10.5% of the
sum of the fully diluted shares outstanding immediately after the Offering and
the number of shares available under the 1998 Stock Plan) will be available
for issuance pursuant to the 1998 Plan, subject to adjustment in the event of
a reorganization, stock split, merger or similar change in the corporate
structure of the Company or the outstanding shares of Common Stock. Such
shares may be, in whole or in part, authorized and unissued or held as
treasury shares.
The 1998 Stock Plan will be administered by the Compensation Committee. As
grants to be awarded under the 1998 Stock Plan will be made entirely in the
discretion of the Compensation Committee, the recipients, amounts and values
of future benefits to be received pursuant to the 1998 Stock Plan are not
determinable. The Company anticipates that in connection with the Offering,
the Company will grant options to purchase an aggregate of approximately 1.8
million shares of Common Stock to approximately 700 employees, including
grants of options to purchase 350,000 shares to Mr. Thigpen and 60,000 shares
to Ms. Pieropan. All of such options will have an exercise price equal to the
initial public offering price of the Common Stock in the Offering, and all of
such options are subject to daily vesting over a four-year period.
Terms of the 1998 Stock Plan
Eligibility. Directors and officers (whether or not employees) and employees
of the Company and its subsidiaries, in each case as selected by the
Compensation Committee, will be eligible to receive grants pursuant to the
1998 Stock Plan, except that only employees may receive grants of incentive
stock options. As of April 30, 1998, there were approximately 700 employees
expected to be eligible to participate in the 1998 Stock Plan.
Stock Options. Pursuant to the 1998 Stock Plan, the Compensation Committee
may award grants of incentive stock options conforming to the provisions of
Section 422 of the Code ("incentive options"), and other stock options ("non-
qualified options"), subject to (i) a maximum award to any one grantee in any
calendar year of options to purchase Common Stock equal to 20% of the total
number of shares authorized under the Plan, and (ii) with respect to grants of
incentive options, a maximum value of $100,000 (determined at the time of
grant) of underlying Common Stock for which any grantee's incentive options
first become exercisable in any calendar year.
The exercise price of any option will be determined by the Compensation
Committee in its discretion, provided that the exercise price of any option
may not be less than 100% of the fair market value of a share of Common Stock
on the date of grant of the option, and the exercise price of an incentive
option awarded to a
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<PAGE>
person who owns stock constituting more than 10% of the Company's voting power
may not be less than 110% of such fair market value on such date.
Unless otherwise determined by the Compensation Committee, the exercise
price of any option may be paid in cash, by delivery of shares of Common Stock
with a fair market value equal to the exercise price, by simultaneous sale
through a broker of shares of Common Stock acquired upon exercise, and/or by
having the Company withhold shares of Common Stock otherwise issuable upon
exercise.
If a participant elects to tender or withhold shares of Common Stock in
payment of any part of an option's exercise price, the Compensation Committee
may in its discretion grant the participant a "reload option" to purchase a
number of shares of Common Stock equal to the number so tendered or withheld.
The reload option may also include, if the Compensation Committee so chooses,
the right to purchase a number of shares of Common Stock equal to the number
tendered or withheld in satisfaction of any of the Company's tax withholding
requirements in connection with the exercise of the original option. The terms
of each reload option will be the same as those of the original exercised
option, except that the grant date will be the date of exercise of the
original option, and the exercise price will be the fair market value of the
Common Stock on the date of exercise.
The term of each option will be established by the Compensation Committee,
subject to a maximum term of ten years from the date of grant in the case of
any option and of five years from the date of grant in the case of an
incentive option granted to a person who owns stock constituting more than 10%
of the voting power of the Company. In addition, the 1998 Stock Plan provides
that all options generally cease vesting on the date on which a grantee ceases
to be a director, officer or employee of the Company or its subsidiaries.
Options generally terminate 90 days after such date, so long as the grantee
does not compete with the Company during the 90-day period.
There are, however, certain exceptions depending upon the circumstances of
cessation. In the case of a grantee's death or disability, all of the
grantee's options become fully vested and exercisable and remain so for one
year after the date of death or disability. In the event of retirement, a
grantee's options may become fully vested and exercisable in the discretion of
the Compensation Committee. Upon termination for cause, all options terminate
immediately. If there is a change in control of the Company and a grantee is
terminated from being a director, officer or employee of the Company and its
subsidiaries within one year thereafter, all of the grantee's options become
fully vested and exercisable and remain so for one year after the date of
termination. In addition, the Compensation Committee shall have the authority
to grant options that become fully vested and exercisable automatically upon a
change of control, whether or not the grantee is subsequently terminated
thereafter.
SARs. The Compensation Committee may grant SARs alone or in tandem with
stock options subject to such terms and conditions as it determines pursuant
to the 1998 Stock Plan. SARs granted in tandem with options become exercisable
only when, to the extent and on the conditions that the related options are
exercisable, and they expire at the same time the related options expire. The
exercise of an option results in the immediate forfeiture of any related SAR
to the extent the option is exercised, and the exercise of an SAR results in
the immediate forfeiture of any related option to the extent the SAR is
exercised.
Upon exercise of an SAR, the grantee will receive an amount in cash and/or
shares of Common Stock or other Company securities equal to the difference
between the fair market value of a share of Common Stock on the date of
exercise and the exercise price of the SAR or, in the case of an SAR granted
in tandem with options, the option to which the SAR relates, multiplied by the
number of shares as to which the SAR is exercised.
Restricted Stock. Under the 1998 Stock Plan, the Compensation Committee may
award restricted stock subject to such conditions and restrictions, and for
such duration (which shall generally be at least six months), as it determines
in its discretion. A grantee will be required to pay the Company at least the
aggregate par value of any shares of restricted stock within ten days of the
date of grant, unless such shares are treasury shares.
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<PAGE>
Except as otherwise provided by the Compensation Committee, all restrictions
on a grantee's restricted stock will lapse at such time as the grantee ceases
to be a director, officer or employee of the Company and its subsidiaries, if
such cessation occurs due to a termination within one year after a change in
control of the Company or due to death, disability or (in the discretion of
the Compensation Committee) retirement. If cessation of employment or service
occurs for any other reason, all of a grantee's restricted stock as to which
the applicable restrictions have not lapsed will be forfeited immediately.
Performance Awards. Pursuant to the 1998 Stock Plan, the Compensation
Committee may grant performance awards contingent upon achievement by the
grantee, the Company and/or its subsidiaries or divisions of set goals and
objectives regarding specified performance criteria, such as return on equity,
over a specified performance cycle, in each case as designated by the
Compensation Committee. Performance awards may include specific dollar-value
target awards, performance units, the value of which is established by the
Compensation Committee at the time of grant, and/or performance shares, the
value of which is equal to the fair market value of a share of Common Stock on
the date of grant. The value of a performance award may be fixed or fluctuate
on the basis of specified performance criteria. A performance award may be
paid out in cash and/or shares of Common Stock or other Company securities.
Except as otherwise provided by the Compensation Committee, if a grantee
ceases to be a director, officer or employee of the Company and its
subsidiaries prior to completion of a performance cycle, and if such cessation
occurs due to termination within one year after a change in control of the
Company or due to death, disability or retirement, the grantee will receive
the portion of the performance award payable to him or her based on
achievement of the applicable performance criteria over the elapsed portion of
the performance cycle. If cessation of employment or service occurs for any
other reason prior to completion of a performance cycle, the grantee will
become ineligible to receive any portion of a performance award.
Vesting, Withholding Taxes and Transferability of All Awards. The terms and
conditions of each award made under the 1998 Stock Plan, including vesting
requirements, will be set forth consistent with the Plan in a written
agreement with the grantee.
Unless otherwise determined by the Compensation Committee, a participant may
elect to deliver shares of Common Stock, or to have the Company withhold
shares of Common Stock otherwise issuable upon exercise or an option or SAR or
grant or vesting of restricted stock, in order to satisfy the Company's
withholding obligations in connection with any such exercise, grant or
vesting.
Unless the Compensation Committee determines otherwise, no award made
pursuant to the 1998 Stock Plan will be transferable other than by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order, and each award may be exercised only by the grantee or his or her
guardian or legal representative.
Amendment and Termination of the 1998 Stock Plan. The Board or Compensation
Committee may amend or terminate the 1998 Stock Plan in its discretion, except
that no amendment will become effective without prior approval of the
Company's stockholders if such approval is necessary for continued compliance
with any stock exchange listing requirements. Furthermore, any termination may
not materially and adversely affect any outstanding rights or obligations
under the 1998 Stock Plan without the affected participant's consent. If not
previously terminated by the Board or Compensation Committee, the 1998 Stock
Plan will terminate on the tenth anniversary of its adoption.
Certain Federal Income Tax Consequences of the 1998 Stock Plan
If a grantee disposes of the shares of Common Stock acquired pursuant to the
exercise of an incentive option before the expiration of the required holding
periods (a "Disqualifying Disposition"), the difference between
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<PAGE>
the exercise price of such shares and the lesser of (i) the fair market value
of such shares upon the date of exercise (the fair market value on the
exercise date or six months after the option grant date, whichever is later,
is likely to govern in the case of a 16b-3(d)(3) person) or (ii) the selling
price, will constitute compensation taxable to the grantee as ordinary income.
The Company is allowed a corresponding tax deduction equal to the amount of
compensation taxable to the grantee. If the selling price of the stock exceeds
the fair market value on the exercise date (or six months after the option
grant date, if later, in the case of a 16b-3(d)(3) person), the excess will be
taxable to the grantee as capital gain (long-term or short-term, depending
upon whether the grantee held the stock for more than one year). The Company
is not allowed a deduction with respect to any such capital gain recognized by
the grantee.
Use of Shares to Pay Option Price. If a grantee delivers previously acquired
shares of Common Stock, however acquired, in payment of all or any part of the
exercise price of a non-qualified option, the grantee will not, as a result of
such delivery, be required to recognize as taxable income or loss any
appreciation or depreciation in the value of the previously acquired shares
after their acquisition date. The grantee's tax basis in, and holding period
for, the previously acquired shares surrendered carries over to an equal
number of the option shares received on a share-for-share basis. The fair
market value of the shares received in excess of the shares surrendered
constitutes compensation taxable to the grantee as ordinary income (reduced by
any portion of the option price paid other than by delivering previously
acquired shares). Such income is recognized and such fair market value is
determined on the date of exercise, except in the case of 16b-3(d)(3) persons
as discussed above. The tax basis for such shares is equal to their fair
market value as so determined, and such shares' holding period begins on the
date on which the fair market value of such shares is determined. The Company
is entitled to a tax deduction equal to the compensation recognized by the
grantee.
If a grantee delivers previously acquired Common Stock (other than stock
acquired upon exercise of an incentive option and not held for the Required
Holding Periods) in payment of all or part of the option price of an incentive
option, the grantee will not be required to recognize as taxable income or
loss any appreciation or depreciation in the value of the previously acquired
Common Stock after its acquisition date. The grantee's tax basis in, and
holding period (for capital gain, but not Disqualifying Disposition, purposes)
for the previously acquired stock surrendered carries over to an equal number
of the option shares received on a share-for-share basis. Shares received in
excess of the shares surrendered have a tax basis equal to the amount paid (if
any) in excess of the previously acquired shares used to pay the exercise
price, and such shares' holding period will begin on the date of exercise
(with the possible exception of 16b-3(d)(3) persons). Proposed regulations
provide that when an incentive option is exercised using previously acquired
stock, a later Disqualifying Disposition of the shares received will be deemed
to have been a disposition of the shares having the lowest basis first.
If a grantee pays the exercise price of an incentive option in whole or in
part with previously acquired Common Stock that was acquired upon the exercise
of an incentive option and that has not been held for the Required Holding
Periods, the grantee will recognize ordinary income (but not capital gain)
under the rules applicable to Disqualifying Dispositions. The Company will be
entitled to a corresponding deduction. The grantee's basis in the shares
received in exchange for the shares surrendered will be increased by the
amount of ordinary income the grantee recognizes.
One Million Dollar Compensation Limit. The Revenue Reconciliation Act of
1993 limits the annual deduction a publicly held company may take for
compensation paid to its chief executive officer or any of its four other
highest compensated officers in excess of $1,000,000 per year, excluding for
this purpose compensation that is "performance-based" within the meaning of
Code Section 162(m). The Company intends that compensation realized upon the
exercise of an option or SAR granted under the 1998 Stock Plan be regarded as
"performance-based" under Code Section 162(m) and that such compensation be
deductible without regard to the limits imposed by Code Section 162(m) on
compensation that is not "performance-based." In addition, based on a special
rule contained in final regulations issued under Code Section 162(m), the $1
million deduction limitation described herein should not apply to any Stock
Options, SARs or Restricted Stock granted, or to any Performance Awards paid,
prior to the annual meeting of shareholders in the year 2002.
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<PAGE>
PENSION PLAN
The Company's defined benefit plan, the Sun Gro Horticulture Inc. U.S.
Executive Supplemental Retirement Plan (the "Pension Plan"), covered certain
members of the senior management of Sun Gro. The Pension Plan was discontinued
as of October 31, 1997. The following table shows the estimated annual pension
benefits payable to a covered participant upon normal retirement at age 65,
based on the remuneration that is covered under the Pension Plan and years of
service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF QUALIFYING SERVICE
ANNUAL --------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$150,000 $ 40,871 $ 54,494 $ 68,118 $ 68,118 $ 68,118
200,000 55,871 74,494 93,118 93,118 93,118
250,000 70,871 94,494 118,118 118,118 118,118
300,000 85,871 114,494 143,118 143,118 143,118
400,000 115,871 154,494 193,118 193,118 193,118
</TABLE>
Of the Named Executive Officers, Mr. Crowe, who resigned as an officer and
director of the Company and its subsidiaries effective February 17, 1997, is
the only participant in the Pension Plan. Mr. Crowe had 11.6 years of credited
service on February 17, 1997. Benefits under the Pension Plan are calculated
based on 2% of the participants' final average salary multiplied by the years
of qualifying service, up to a maximum of 50% of final average salary, reduced
by certain specified offsets.
BONUS PLANS
The Company has two bonus plans, the Hines Horticulture Nursery Division
Management Vision 2000 Variable Compensation Plan (the "Hines Bonus Plan") and
the Sun Gro Division Management Variable Compensation Plan (the "Sun Gro Bonus
Plan"). Bonuses under these plans are designed to be a significant portion of
the management team's compensation. The plans are directly tied to operating
cash flows (defined as earnings before interest, taxes, depreciation and
amortization and after maintenance capital expenditures and certain changes in
working capital). The Hines Bonus Plan provides for a compensation pool
equivalent to 7.75% of operating cash flows of Hines for each fiscal year. The
Sun Gro Bonus Plan provides for a compensation pool equivalent to 6.82% of
operating cash flows of Sun Gro for each fiscal year.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company and each of Messrs. Allen, Thigpen and Crowe and Ms. Pieropan
are parties to employment/ severance agreements (the "Employment Agreements").
The Employment Agreements provide that the executives shall devote full time
(half-time in the case of Mr. Allen) attention, skill and ability to discharge
the duties assigned and to use their best efforts to promote and protect the
interests of the Company. Except for the Employment Agreement with Mr. Allen
which is terminable "at will" by Mr. Allen but not by the Company, the
Employment Agreements are terminable by each of the respective parties thereto
at any time, for any reason and with or without cause, upon 30 days' advance
written notice. The Employment Agreements provide, among other things, for an
annual base salary, an annual cash bonus in an amount determined by the Board
of Directors and certain other benefits. If any such executive's employment is
terminated for any reason, other than for cause, death or the executive's
voluntary "at-will" termination, the executive will receive the following: (i)
in the case of Mr. Allen, he will receive an amount equal to his annual base
salary multiplied by 230%, plus a pro rata share of his bonus for the fiscal
year in which such termination occurs, and (ii) in the case of each of Messrs.
Thigpen and Crowe and Ms. Pieropan, the executive will receive an amount equal
to their annual base salary multiplied by 200%, plus a pro rata share of their
bonus for the fiscal year in which such termination occurs. On March 20, 1997,
Sun Gro-U.S. paid Mr. Crowe $418,992 in connection with his departure from the
Company.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company's inside directors and those directors affiliated with MDCP do
not receive any compensation for their services as directors. The Company will
determine the compensation to be paid to its independent outside directors at
the time of their initial appointments. All directors are reimbursed for all
travel-related expenses incurred in connection with their activities as
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Allen, Wood and Reusche, all of whom are officers of the Company.
Messrs. Wood and Reusche each serve as principals of MDCP and Vice Presidents
of MDP. MDCP will hold 9,099,420 shares, or approximately 46.1% on a fully
diluted basis, immediately after the Offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRIVATE ISSUANCE OF DEBT AND EQUITY SECURITIES
On November 27, 1996, the Company issued to MDCP and the California State
Teacher's Retirement System ("Calsters"), the holder of 6.0% of the Company's
fully diluted Common Stock immediately prior to the Offering, 19,000 shares of
Senior Preferred, at a price of $958.50 per share, and presently exercisable
warrants to purchase 579,311 shares of Common Stock, with an exercise price of
$.01 per share, at a price of $1.36 for each warrant to purchase one share of
Common Stock. The purchase price was paid in cash and was made on equivalent
terms and subject to the same terms and conditions as a contemporaneous sale
to an unaffiliated third party investor.
On September 29, 1997, the Company issued 73,470 shares of Common Stock to
Stephen P. Thigpen for $100,000 (representing the fair market value of such
shares on the issuance date). The purchase price was payable by a full-
recourse promissory note in favor of the Company bearing 6% interest and due
in three equal installments on April 30 of each of 1998, 1999 and 2000.
On October 20, 1997, the Company issued to MDCP a demand note, in an
aggregate principal amount of $2,500,000 (the "Demand Note"), for $2,500,000
in cash. The Demand Note bore interest at a rate equal to the dividend rate on
the Senior Preferred. The Demand Note was used to finance the acquisition of
Pacific Color and to provide working capital for the Company.
On December 16, 1997, the Company issued to MDCP, for an aggregate
consideration of $1,000,000 in cash and the surrender and cancellation of the
Demand Note (for which $2,500,000 of indebtedness was then outstanding), (i)
3,500 shares of Senior Preferred, at a price of $970.21 per share, and (ii)
presently exercisable warrants to purchase 76,616 shares of Common Stock, with
an exercise price of $.01 per share, at a price of $1.36 for each warrant to
purchase one share of Common Stock.
On December 16, 1997, the Company issued and sold to Abbott Capital 1330
Investors I, L.P. ("Abbott"), the holder of approximately 6.9% of the
Company's fully diluted Common Stock immediately prior to the Offering, (i)
6,000 shares of Senior Preferred, at a price of $970.21 per share, and (ii)
presently exercisable warrants to purchase 131,342 shares of Common Stock,
with an exercise price of $.01 per share, at a price of $1.36 for each warrant
to purchase one share of Common Stock. The purchase price was paid in cash.
On February 5, 1998, the Company issued to MDCP 2,000 shares of Senior
Preferred, having an aggregate liquidation value of $2,000,000, for $2,000,000
in cash.
On March 18, 1998, the Company issued and sold to Abbott (i) 4,250 shares of
Senior Preferred, at a price per share of $970.21 per share, and (ii)
presently exercisable warrants to purchase 93,034 shares of Common Stock, with
an exercise price of $.01 per share, at a price of $1.36 for each warrant to
purchase one share of Common Stock. The purchase price was paid in cash.
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<PAGE>
On April 2, 1998, the Company issued and sold to Abbott (i) 250 shares of
Senior Preferred, at a price per share of $970.21 per share, and (ii)
presently exercisable warrants to purchase 5,473 shares of Common Stock, with
an exercise price of $.01 per share, at a price of $1.36 for each warrant to
purchase one share of Common Stock. The purchase price was paid in cash.
MDCP REGISTRATION RIGHTS AGREEMENT
The Company and MDCP (which will hold 9,099,420 shares of Common Stock, or
approximately 46.1% on a fully diluted basis after the Offering) will be
parties to a Registration Rights Agreement to be entered into prior to the
Offering (the "Registration Agreement"), pursuant to which MDCP will have the
right upon consummation of the Offering, subject to certain restrictions, to
cause the Company to register its shares of Common Stock for sale under the
Securities Act on Form S-1 (a "Long-Form Registration Statement") or, if
available, Form S-2, Form S-3 or any similar short registration statement (a
"Short-Form Registration Statement"). See "Shares Eligible for Future Sale--
Registration Rights."
STOCKHOLDERS AGREEMENT
The Company, MDCP and certain executives and former executives of the
Company are parties to a Stockholders Agreement, dated as of August 4, 1995
(as amended, the "Stockholders Agreement"). The Stockholders Agreement
contains provisions (i) relating to the composition of the Board of Directors,
(ii) restricting the transferability of the shares subject to such agreement,
(iii) granting preemptive rights to certain parties thereto, and (iv) granting
registration rights to the parties thereto. The provisions of the Stockholders
Agreement will automatically terminate upon the consummation of the Offering,
with the exception of (i) a provision permitting the Company to repurchase the
shares owned by any of the executives party thereto in the event of
termination for fraud and (ii) the provisions granting "piggyback"
registration rights to the parties thereto, see "Shares Eligible for Future
Sale--Registration Rights."
BLOOMING FARM TRANSACTIONS
On August 4, 1995, OGP, a then wholly-owned subsidiary of Hines Nurseries
which was subsequently merged into Hines Nurseries, acquired the assets of
Gales Creek Nurseries, L.P., a Delaware limited partnership ("Gales Creek").
This acquisition resulted in Hines Nurseries (on a consolidated basis) owning
in excess of 640 acres of agricultural land potentially eligible to receive
reclamation water. Under applicable federal reclamation water law, however,
Hines Nurseries and its affiliates were eligible to receive federal
reclamation water for only 640 net irrigable acres of owned land. Accordingly,
MDCP and the senior management stockholders of the Company formed Blooming
Farm, Inc., a Delaware corporation ("Blooming Farm"), which is not an
affiliate of Hines Nurseries under applicable federal reclamation water law,
to hold title to approximately 290 acres of the Gales Creek property. The
stock of Blooming Farm held by MDCP and the senior management stockholders of
the Company is held in direct proportion to their stock ownership of the
Company at that time.
Simultaneously with the acquisition of assets of Gales Creek by OGP, OGP
sold to Blooming Farm approximately 290 acres of the agricultural land it
acquired from Gales Creek. As payment in full for such land, Blooming Farm
issued a five-year interest only promissory note to OGP in the amount of
$826,865 secured by a deed of trust on the land. Blooming Farm and OGP then
entered into a five-year agricultural lease ("First Blooming Farm Lease")
pursuant to which Blooming Farm currently leases the property to Hines
Nurseries (as successor-in-interest to OGP). Hines Nurseries subsequently
pledged the lease, the note and deed of trust to BT Commercial Corporation as
security under the Existing Senior Credit Facilities.
In June 1996, Hines Nurseries discovered that an additional approximately 53
acres of land purchased from Gales Creek could be made eligible for
reclamation water although it had not received any reclamation water in the
past. As this additional land caused Hines Nurseries to be over the 640 net
irrigable acre limit for owned
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<PAGE>
land, on June 21, 1996, Hines Nurseries sold the 53 acres of agricultural land
to Blooming Farm in exchange for a five-year interest only promissory note in
the amount of $151,050 secured by a deed of trust on the land. Blooming Farm
and Hines Nurseries then entered into a five-year agricultural lease ("Second
Blooming Farm Lease") pursuant to which Blooming Farm currently leases the
property to Hines Nurseries. Hines Nurseries subsequently pledged the lease,
the note and deed of trust as security under the Existing Senior Credit
Facilities.
In 1997, $58,000 was paid by Hines Nurseries to Blooming Farm under the
First Blooming Farm Lease, and $10,600 was paid by Hines Nurseries to Blooming
Farm under the Second Blooming Farm Lease. These amounts were used by Blooming
Farm to satisfy its obligations under the two respective promissory notes in
favor of Hines Nurseries described above. Since its inception, Blooming Farm
has made no distributions and paid no dividends to any of its stockholders.
In connection with Hines Nurseries' acquisition of certain real property in
Allendale, California, Hines Nurseries designated 128 acres of such property
to receive federal reclamation water. To avoid exceeding the 640 net irrigable
acre limit, Hines Nurseries and Blooming Farm entered into a Section 1031
like-kind exchange on February 28, 1997, pursuant to which Hines Nurseries
transferred to Blooming Farm 128 acres of property then owned by Hines
Nurseries which was receiving federal reclamation water, in exchange for 128
acres of land then owned by Blooming Farm and leased to Hines Nurseries, which
was not receiving federal reclamation water.
On or about the date of the Offering, both the First Blooming Farm Lease and
the Second Blooming Farm Lease will be terminated and new leases will be
entered into between Blooming Farm and Hines Nurseries covering the same land
at the same rent. These new leases will provide for, among other things, ten-
year lease terms which will run from the date of their execution until May 31,
2008, options to purchase the land covered by the leases in favor of Hines
Nurseries and rights of first refusal in favor of Hines Nurseries.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the equity
ownership of the Company by (i) each person known to the Company to own
beneficially 5% or more of the Common Stock, (ii) each director and Named
Executive Officer of the Company, (iii) all executive officers and directors
of the Company as a group, and (iv) all Selling Stockholders, in each case
after giving effect to the Equity Recapitalization. See "Equity
Recapitalization."
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING (1) OFFERING (1)
----------------- -----------------
SHARES
BEING
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
---------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Madison Dearborn Capital
Partners, L.P. (2).......... 9,099,420 61.7 -- 9,099,420 46.1
California State Teachers'
Retirement System (3)....... 1,983,782 13.5 -- 1,983,782 10.1
Abbott Capital 1330 Investors
I, LP (4)................... 1,019,547 6.9 -- 1,019,547 5.0
Douglas D. Allen............. 153,803 1.0 -- 153,803 *
Stephen P. Thigpen........... 312,720 2.1 25,000 287,720 1.5
Michael R. Crowe (5)......... 358,875 2.4 215,325 143,550 *
Claudia M. Pieropan.......... 61,521 * -- 61,521 *
Paul R. Wood (2)............. 9,099,420 61.7 -- 9,099,420 46.1
Thomas R. Reusche (2)........ 9,099,420 61.7 -- 9,099,420 46.1
David F. Mosher (2).......... 9,099,420 61.7 -- 9,099,420 46.1
Gary J. Little (2)........... 9,099,420 61.7 -- 9,099,420 46.1
All Executive Officers and
Directors as a Group (7
persons).................... 9,627,464 65.3 25,000 9,602,464 48.7
Alan A. Hollman (5).......... 68,357 * 34,179 34,178 *
Timothy P. Ryan (5).......... 136,714 * 110,047 26,667 --
Gerald Taylor................ 68,357 * 12,501 55,856 *
</TABLE>
- --------
* Denotes less than one percent.
(1) "Beneficial owner" generally means any person who, directly or
indirectly, has or shares voting power or investment power with respect
to a security. Unless otherwise indicated, the Company believes that each
stockholder has sole voting and investment power with regard to shares
listed as beneficially owned by such stockholder. Based on 14,737,500
shares outstanding prior to the Offering and 19,737,500 shares
outstanding after the Offering, and assuming no exercise of the
Underwriters' over-allotment option.
(2) All of such shares are held by Madison Dearborn Capital Partners, L.P.
The address of Madison Dearborn Capital Partners, L.P. and Messrs. Wood,
Reusche, Mosher and Little is Three First National Plaza, Suite 3800,
Chicago, Illinois 60602. Messrs. Wood, Reusche, Mosher and Little are
executive officers of Madison Dearborn Partners, Inc., the general
partner of Madison Dearborn Partners, L.P., the general partner of MDCP,
and therefore may be deemed to share voting and investment power over the
shares owned by MDCP and therefore to beneficially own such shares. Each
of Messrs. Wood, Reusche, Mosher and Little disclaims beneficial
ownership of the shares owned by Madison Dearborn Capital Partners, L.P.
(3) The address of the California State Teachers' Retirement System is 7667
Folsom Avenue, Sacramento, California 95826.
(4) The address of Abbott Capital 1330 Investors I, LP is c/o Abbott Capital
Management, 1330 Avenue of the Americas, Suite 2800, New York, New York
10019.
(5) Former employee of the Company.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, the total amount of authorized capital stock of
the Company will consist of 60,000,000 shares of Common Stock, par value $0.01
per share, and 2,000,000 shares of preferred stock, par value $0.01 per share
(the "Serial Preferred"). Upon completion of the Offering, 19,737,500 shares
of Common Stock will be issued and outstanding and no shares of Serial
Preferred will be issued and outstanding. As of April 30, 1998 and without
giving effect to the Equity Recapitalization (including the reverse stock
split to be effected as a part thereof), there were 10,492,014 shares of
Common Stock, 46,000 shares of Senior Preferred, 20,847,986 shares of Junior
Preferred and warrants to purchase 1,247,128 shares of Common Stock. In the
Equity Recapitalization, all of the outstanding shares of Senior Preferred and
Junior Preferred will be converted into shares of Common Stock and all of the
outstanding warrants to purchase Common Stock will be exercised for Common
Stock. The following discussion describes the Company's capital stock, the
Restated Certificate of Incorporation (the "Restated Certificate") and By-laws
as anticipated to be in effect upon consummation of the Offering. The
following summary of certain provisions of the Company's capital stock
describes all material provisions of, but does not purport to be complete and
is subject to, and qualified in its entirety by, the Restated Certificate and
the By-laws, which are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by the Company in connection with the Offering will
be, validly issued, fully paid and nonassessable. Subject to the prior fights
of the holders of any Serial Preferred, the holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally available
therefor at such time and in such amounts as the Board of Directors may from
time to time determine. See "Dividend Policy." The shares of Common Stock are
not convertible and the holders thereof have no preemptive or subscription
rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive pro rata the assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities
and subject to the prior rights of any holders of Serial Preferred then
outstanding. Each outstanding share of Common Stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative
voting.
In order to protect the Company's ability to receive reclamation water, the
Restated Certificate of Incorporation of the Company will impose certain
restrictions on transfer of beneficial interests in the Company. Under such
restrictions, a purported transfer of a beneficial interest in the Company to
any person (a "purported transferee") who, as a result of the application of
the attribution rules under the reclamation regulations, would be ineligible
to be an indirect holder of irrigation land owned by the Company, will be
ineffective. For a description of these reclamation regulations, see
"Business--Government Regulation." A purported transferee will not have any
rights as a stockholder, and an agent will be designated by the Company to
sell any shares which were purported to be transferred to such purported
transferee, with the purported transferee only being entitled to receive out
of the sale proceeds an amount up to the purported purchase price paid for
such shares. Such purported transferee would therefore lose the benefit of any
appreciation in the Common Stock between the time of the purported transfer
and the sale by the Company's agent. Notwithstanding that a stockholder of the
Company may itself be eligible to hold stock of the Company, if a person
having a beneficial interest in the Company through such stockholder is
ineligible to hold stock in the Company, such stockholder, under the terms of
the Company's Restated Certificate of Incorporation, will be deemed as of the
time such ineligible person acquired such beneficial interest to have disposed
of sufficient shares of Common Stock to cure such ineligibility (with an agent
appointed by the Company to effect such disposition and to pay such
stockholder an amount up to
63
<PAGE>
the fair market value of the shares at the deemed time of disposition).
Further, under the provisions of the Restated Certificate of Incorporation,
any person, before acquiring a beneficial interest in the Company that would
cause such person to be subject to the certification and reporting
requirements under applicable reclamation regulations, will be required to
enter into a written undertaking with the Company to comply with such
certification and reporting requirements and not to take any action which
would adversely affect the ability of the Company to receive reclamation-
water. Generally, based on the Company's current ownership and leasehold
interests in irrigation land, an eligible person who does not otherwise have
any direct or indirect ownership or leasehold interest in irrigation land
should be able to acquire up to approximately a 4% beneficial interest in the
Company without becoming subject to such reporting and certification
requirements. The certificates representing the Common Stock will bear a
legend reflecting these restrictions on transfer.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "HORT."
SERIAL PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Serial Preferred in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of Serial Preferred would reduce
the amount of funds available for the payment of dividends on shares of Common
Stock. Holders of Serial Preferred may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of shares of Common Stock.
Under certain circumstances, the issuance of Serial Preferred may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Upon the affirmative vote of a
majority of the total number of directors then in office, the Board of
Directors of the Company, without stockholder approval, may issue shares of
Serial Preferred with voting and conversion rights which could adversely
affect the holders of Common Stock. There are no shares of Serial Preferred
outstanding, and the Company has no present intention to issue any shares of
Serial Preferred.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provide
that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors or by the Chief Executive Officer of the Company.
Stockholders will not be permitted to call a special meeting or to require the
Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required for the stockholders to amend, alter, change
or repeal certain of their respective provisions. This requirement of a super-
majority vote to approve amendments
64
<PAGE>
to the Restated Certificate and By-laws could enable a minority of the
Company's stockholders to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer or (iii) on or subsequent to such date
the "business combination" is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder." A "business combination" is defined to include
mergers, asset sales and other transactions resulting in financial benefit to
a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate provides that the Company shall indemnify directors and
officers of the Company to the fullest extent permitted by such law. All of
the Company's directors and officers are also covered by insurance policies
maintained by MDCP against certain liabilities for actions taken in their
capacities as directors or officers, including liabilities under the
Securities Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have outstanding
19,737,500 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option). All of the shares of Common Stock sold in the Offering
will be freely tradeable under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined under the Securities Act.
Upon the expiration of lock-up agreements between the Company, certain
stockholders of the Company and the Underwriters 180 days after the date of
the Underwriting Agreement (the "Effective Date"), 13,397,903 shares of Common
Stock outstanding prior to the Offering (the "Restricted Shares") will be
eligible for sale, subject to compliance with Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of: (i) 1% of the number of shares
of Common Stock then outstanding (approximately 197,375 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which the notice of sale is filed with the Securities
and Exchange Commission. Sales
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<PAGE>
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company.
A person (or persons whose shares are aggregated) who is not deemed to have
been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned Restricted Shares for at
least two years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations and requirements described above.
Certain stockholders of the Company and the Company's executive officers and
directors have agreed with the Underwriters that until 180 days after the
Effective Date they shall not, directly or indirectly, offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or in any manner transfer all or a portion of the economic consequences
associated with the ownership of the Common Stock, or cause a registration
statement covering any shares of Common Stock to be filed, without the prior
written consent of Lehman Brothers Inc., subject to certain limited
exceptions. The Company has also agreed not to directly or indirectly, offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of
any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or, in any manner, transfer all or a portion of
the economic consequences associated with the ownership of the Common Stock or
cause a registration statement covering any shares of Common Stock to be
filed, for a period of 180 days after the Effective Date, without the prior
written consent of Lehman Brothers Inc., subject to certain limited
exceptions, including grants of options pursuant to, and issuance of shares of
Common Stock upon exercise of options under, the 1998 Stock Plan. The lock-up
agreements may be released at any time as to all or any portion of the shares
subject to such agreements at the sole discretion of Lehman Brothers. See
"Risk Factors--Shares Eligible for Future Sale."
The Company intends to file a registration statement on Form S-8 covering
the sale of approximately 2.3 million shares of Common Stock reserved for
issuance under the 1998 Stock Plan. See "Management--1998 Stock Plan." Such
registration statement is expected to be filed as soon as practicable after
the Effective Date and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the public market unless such shares are subject to
vesting restrictions and subject to limitations on resale by "affiliates"
pursuant to Rule 144 (unless the Company includes a resale prospectus in such
registration statement, in which case such Rule 144 restrictions will not
apply).
REGISTRATION RIGHTS
MDCP (which will hold 9,099,420 shares upon consummation of the Offering)
has the right, subject to certain terms and restrictions, to cause the Company
to register shares of its Common Stock for sale under the Securities Act. MDCP
will be entitled to up to three Long-Form Demand Registrations and up to two
Short-Form Demand Registrations in any year, in each case, the expenses of
which will be borne by the Company, other than underwriting discounts or
commissions. See "Certain Relationships and Related Transactions--MDCP
Registration Rights Agreement." Calsters, Abbott and Chilmark Fund II
("Chilmark"), which will hold 1,983,782, 1,019,547 and 116,693 shares,
respectively, immediately after the Offering, also will be entitled, upon
consummation of the Offering, to two Short-Form Demand Registrations. Exercise
by MDCP, Calsters, Abbott and Chilmark of their demand registration rights
could result in the distribution of substantial amounts of Common Stock,
including distributions in underwritten public offerings.
In addition, certain other holders of Common Stock (who in the aggregate
will hold approximately 1.6 million shares after the Offering), as well as
MDCP, Calsters, Abbott and Chilmark, will have unlimited "piggyback"
registration rights, which, subject to certain terms and conditions, entitle
them to include shares of Common Stock in any registration of securities by
the Company (other than registrations on Form S-4 or Form S-8). See "Certain
Relationships and Related Transactions--Stockholders Agreement." Exercise of
such "piggyback" registration rights could also result in the distribution of
substantial amounts of Common Stock. See "Risk Factors--Shares Eligible for
Future Sale."
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<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, each of the
underwriters named below, for whom Lehman Brothers Inc., BT Alex. Brown
Incorporated and BancAmerica Robertson Stephens are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company and
the Selling Stockholders, and the Company and the Selling Stockholders have
agreed to sell to each Underwriter, the aggregate number of shares of Common
Stock set forth opposite the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc.............................................
BT Alex. Brown Incorporated.....................................
BancAmerica Robertson Stephens..................................
---------
Total.......................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, including the conditions that no stop
order suspending the effectiveness of the Registration Statement is in effect
and no proceedings for such purpose are pending before or threatened by the
Commission, and that there has been no material adverse change in the
condition of the Company. The Underwriters will be obligated to purchase all
of the shares of Common Stock if any are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public initially at the public offering price set forth
on the cover page of this Prospectus and to certain selected dealers (who may
include the Underwriters) at such initial public offering price less a
concession not in excess of $ per share. The selected dealers may reallow
a concession not in excess of $ per share to certain other brokers and
dealers. After commencement of the initial public offering, the offering price
and other selling terms may be changed by the Representatives.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that may be required to be made
in respect thereof.
The Company has granted the Underwriters an option to purchase up to an
aggregate of 809,557 additional shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. Such option may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent that
the Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment as indicated in the preceding table. The Company will be obligated,
pursuant to such option, to sell such shares to the Underwriters to the extent
such option is exercised. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Stock offered
hereby.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 200,000 shares offered hereby for
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated between the
Company and the Representatives. Among the factors considered in
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<PAGE>
determining the initial public offering price of the shares of Common Stock,
in addition to prevailing market conditions, were the Company's historical
performance and capital structure, estimates of business potential and
earnings prospects of the Company, an overall assessment of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to the market valuation of companies in related
businesses.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
In addition, if the Representatives over-allot (i.e. if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus) and thereby create a short position in the Common Stock in
connection with the Offering, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives
may also elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Any offer of the shares of Common Stock in Canada will be made only pursuant
to an exemption from the prospectus filing requirement and an exemption from
the dealer registration requirement (where such an exemption is not available,
offers shall be made only by a registered dealer) in the relevant Canadian
jurisdiction where such offer is made.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "HORT."
The Company, all executive officers and directors of the Company and certain
existing stockholders of the Company have agreed that they will not, subject
to certain limited exceptions, for a period of 180 days from the date of this
Prospectus, directly or indirectly, offer, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for any such shares of Common Stock or enter into any derivative
transaction with similar effect as a sale of Common Stock, without the prior
written consent of Lehman Brothers Inc. The restrictions described in this
paragraph do not apply to (i) the sale of Common Stock to the Underwriters,
(ii) the issuance by the Company of shares of Common Stock upon the exercise
of options issued under the 1998 Stock Plan or (iii) transactions by any
person other than the Company relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
Offering.
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<PAGE>
BT Commercial Corporation, an affiliate of BT Alex. Brown Incorporated, is a
party to and agent under the Existing Senior Credit Facility ($95 million of
which was outstanding as of March 31, 1998) and BT Alex. Brown Incorporated
owns more than 10% of the Senior Subordinated Notes. As a result of owning
more than 10% of the Company's Senior Subordinated Notes, the National
Association of Securities Dealers, Inc. (the "NASD") may view the Offering as
a participation by BT Alex. Brown Incorporated in the distribution in a public
offering of securities issued by a company with which BT Alex. Brown
Incorporated has a conflict of interest. As a result, the Offering is being
made pursuant to the provisions of Rule 2710(c)(8) and 2720 of the NASD's
Conduct Rules. Such provisions require, among other things, that the initial
public offering price be no higher than that recommended by a "qualified
independent underwriter," who must participate in the preparation of the
registration statement and the prospectus and who must exercise the usual
standards of "due diligence" with respect thereto. Lehman Brothers Inc. is
acting as a qualified independent underwriter in this Offering, and the
initial public offering price of the shares will not be higher than the price
recommended by Lehman Brothers Inc.
Affiliates of each of the Representatives are expected to be party to the
New Senior Credit Facility and will receive customary fees in connection
therewith.
The Representatives have informed the Company that the Underwriters do not
intend to sell to, and therefore will not confirm the sales of shares of
Common Stock offered hereby to, any accounts over which they exercise
discretionary authority.
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis (a partnership which includes professional corporations),
Chicago, Illinois. Latham & Watkins, Chicago, Illinois, will act as counsel
for the Underwriters.
EXPERTS
The financial statements as of December 31, 1997 and 1996 and for the years
then ended included in this Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements for the year ended December 31, 1995 included in
this Prospectus have been audited by Arthur Andersen LLP. Such financial
statements have been so included in reliance on the report of Arthur Andersen
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of Sun Gro Horticulture, Inc. for the year ended
December 31, 1995, not separately presented in this Prospectus, have been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
appears herein. Such financial statements, to the extent they have been
included in the financial statements of Hines Horticulture, Inc. (formerly
Hines Holdings, Inc.) have been so included in reliance on their report given
on the authority of said firm as experts in auditing and accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 28, 1996, the Company dismissed Arthur Andersen LLP as its
independent accountants. The reports of Arthur Andersen LLP on the
consolidated financial statements for the years ended December 31, 1995 and
1994 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
The Board of Directors and Audit Committee of the Company
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<PAGE>
participated in and approved the decision to change independent accountants.
In connection with its audits for the fiscal years ended December 31, 1995 and
1994 and its work through October 28, 1996, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Arthur Andersen LLP would
have caused them to make reference thereto in their report on the consolidated
financial statements for such years. During the fiscal years ended December
31, 1995 and 1994 and its work through October 28, 1996, there were no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The
Company requested that Arthur Andersen LLP furnish it with a letter addressed
to the SEC stating whether or not it agreed with the above statements. A copy
of such letter, dated December 6, 1996, was filed as an exhibit to the
Company's Form 8-K/A dated December 9, 1996, and was filed as Exhibit 16.1 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The Company engaged Price Waterhouse LLP as its new independent accountants
as of October 28, 1996. During the fiscal years ended December 31, 1995 and
1994 and its work through October 28, 1996, the Company did not consult with
Price Waterhouse LLP on items which (1) were or should have been subject to
SAS 50 or (2) concerned the subject matter of a disagreement or reportable
event with the former auditor (as described in Regulation S-K Item 304(a)(2)).
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 with respect to
the Common Stock being offered hereby with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which
are omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus concerning the provisions of documents
filed with the Registration Statement as exhibits are necessarily summaries of
such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed as an exhibit to the
Registration Statement. The Registration Statement may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; at its
Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at its New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates or accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. For further information pertaining to the Company and the
Common Stock being offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof.
The Company is subject to the informational requirements of Section 15(d) of
the Exchange Act, and in accordance therewith, files certain reports and other
information with the Commission thereunder.
70
<PAGE>
HINES HORTICULTURE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and April
30, 1998................................................................. F-5
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the four months ended April 30, 1997 and 1998.... F-7
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and the four months ended April
30, 1998................................................................. F-8
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the four months ended April 30, 1997 and 1998.... F-9
Notes to Consolidated Financial Statements................................ F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hines Horticulture, Inc. (formerly Hines Holdings, Inc.)
The reverse stock split described in Note 22 to the financial statements has
not been consummated at June 12, 1998. When it has been consummated, we will
be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Hines Horticulture, Inc. (formerly Hines Holdings, Inc.) and its
subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above."
Price Waterhouse LLP
Costa Mesa, California
March 16, 1998, except as to Notes 2 and 22,
which are as of May 8, 1998
F-2
<PAGE>
To the Board of Directors of
Hines Horticulture, Inc. (formerly Hines Holdings, Inc.):
The accompanying consolidated financial statements for the year ended December
31, 1995, retroactively reflect a 1.3611-for-one reverse stock split which has
not yet been consummated. The opinion below is in the form which will be
signed by Arthur Andersen LLP upon consummation of the reverse stock split,
which is described in Note 22 of the Notes to the consolidated financial
statements.
Arthur Andersen LLP
Orange County, California
June 12, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hines Horticulture, Inc. (formerly Hines Holdings, Inc.):
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Hines Horticulture, Inc. (formerly
Hines Holdings, Inc.) for the year ended December 31, 1995. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of Sun Gro Horticulture
Inc., which statements represent revenues of 44 percent of Hines Horticulture,
Inc. (formerly Hines Holdings, Inc.) for the year ended December 31, 1995.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for that entity, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated results of operations and cash flows of Hines
Horticulture, Inc. (formerly Hines Holdings, Inc.) for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
Orange County, California
April 5, 1996
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Sun Gro Horticulture Inc.
In our opinion, the consolidated statements of operations, of shareholder's
equity and of cash flows of Sun Gro Horticulture Inc. for the year ended
December 31, 1995 present fairly, in all material respects, the results of
their operations and their cash flows, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Seattle, Washington
April 4, 1996
F-4
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997, AND APRIL 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, APRIL 30, 1998
------ ----------------- ------------------
PRO FORMA
1996 1997 (NOTE 1)
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets:
Cash.................................... $ 631 $ 2,543 $ 1,816 $ 1,816
Accounts receivable, net of allowance
for doubtful accounts of $1,019,
$1,193, and $1,345..................... 15,644 20,569 101,547 101,547
Inventories............................. 95,224 106,007 100,662 100,662
Prepaid expenses and other current
assets................................. 3,213 1,958 1,912 1,912
-------- -------- -------- --------
Total current assets................ 114,712 131,077 205,937 205,937
-------- -------- -------- --------
Fixed Assets, net of accumulated
depreciation and depletion of $14,169,
$20,459, and $22,887..................... 81,870 92,406 116,707 116,707
-------- -------- -------- --------
Deferred Financing Expenses, net of
accumulated amortization of $1,235,
$2,332 and $2,764........................ 6,352 6,477 6,045 6,045
-------- -------- -------- --------
Goodwill, net of accumulated amortization
of $1,490, $1,474, and $1,867............ 24,581 38,859 38,466 38,466
-------- -------- -------- --------
$227,515 $268,819 $367,155 $367,155
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997, AND APRIL 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT DECEMBER 31, APRIL 30, 1998
------------------------------------- ------------------ -------------------
PRO FORMA
1996 1997 (NOTE 1)
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable......................... $ 7,875 $ 8,046 $ 19,963 $ 19,963
Accrued liabilities...................... 5,627 5,309 12,489 12,489
Accrued payroll and benefits............. 5,957 6,521 8,459 8,459
Long-term debt, current portion.......... 4,897 5,400 5,501 5,501
Revolving line of credit................. 29,357 43,102 73,463 73,463
Deferred income taxes.................... 31,402 35,151 41,403 41,403
-------- -------- -------- --------
Total current liabilities............ 85,115 103,529 161,278 161,278
-------- -------- -------- --------
Long-Term Debt............................. 152,769 160,356 177,317 176,117
-------- -------- -------- --------
Deferred Income Taxes...................... 6,006 6,003 12,720 12,720
-------- -------- -------- --------
Commitments and Contingencies
Cumulative Redeemable Senior Preferred
Stock 12 Percent, par value $.01 per
share; liquidation preference of $1,000
per share; 50,000 shares authorized;
30,000, 39,500, and 46,000 shares issued.. 30,921 43,967 52,691 --
Cumulative Redeemable Junior Preferred
Stock 12 Percent, par value $.01 per
share; liquidation preference of $1 per
share; 22,000,000 shares authorized;
20,498,816, 20,847,986 and 20,847,986
shares issued............................. 23,604 26,715 28,284 --
Shareholders' Deficit
Common Stock
Authorized--22,040,996 shares $.01 par
value; Issued and outstanding--
7,513,176, 7,708,481, and 7,708,481
(actual) and 13,599,162 (pro forma)... 75 77 77 136
Accumulated accretion of cumulative
redeemable preferred stock (in excess)
less than additional paid-in capital.... 5,627 (829) (4,336) 77,780
Notes receivable from stock sales.......... (192) (366) (224) (224)
Deficit.................................... (76,410) (70,633) (60,652) (60,652)
-------- -------- -------- --------
Total shareholders' (deficit) equity....... (70,900) (71,751) (65,135) 17,040
-------- -------- -------- --------
$227,515 $268,819 $367,155 $367,155
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THE FOUR MONTHS ENDED APRIL 30, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales, net.............. $ 156,909 $ 164,323 $ 201,256 $ 96,318 $ 108,088
Cost of goods sold...... 72,245 80,812 99,407 49,957 53,531
---------- ---------- ---------- ---------- ----------
Gross profit......... 84,664 83,511 101,849 46,361 54,557
---------- ---------- ---------- ---------- ----------
Selling and distribution
expenses............... 39,904 43,308 50,233 20,013 20,429
General and
administrative
expenses............... 17,467 18,239 20,403 7,027 8,940
Other operating (income)
expenses............... 1,021 (790) (228) 31
Unusual expenses........ -- 830 343 -- --
---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 58,392 61,587 70,751 27,071 29,369
---------- ---------- ---------- ---------- ----------
Operating income..... 26,272 21,924 31,098 19,290 25,188
---------- ---------- ---------- ---------- ----------
Other expenses:
Interest............... 13,274 20,140 20,708 7,137 7,998
Amortization of
deferred financing
expenses.............. 4,557 940 1,097 342 432
---------- ---------- ---------- ---------- ----------
17,831 21,080 21,805 7,479 8,430
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes,
minority interest and
income from
discontinued
operations............. 8,441 844 9,293 11,811 16,758
Income tax provision
(benefit).............. 2,850 636 3,516 4,398 6,777
---------- ---------- ---------- ---------- ----------
Income (loss) before
minority interest and
income from
discontinued
operations............. 5,591 208 5,777 7,413 9,981
Minority interest in
earnings of
subsidiaries........... 3,958 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before
income from
discontinued
operations............. 1,633 208 5,777 7,413 9,981
Income (loss) from
discontinued
operations, net of tax. 3,307 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income before
extraordinary loss..... 4,940 208 5,777 7,413 9,981
Extraordinary loss, net
of tax................. (2,513) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)....... 2,427 208 5,777 7,413 9,981
Less: Preferred stock
dividends.............. (1,460) (3,775) (6,666) (2,190) (3,721)
---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to common
stock.................. $ 967 $ (3,567) $ (889) $ 5,223 $ 6,260
========== ========== ========== ========== ==========
Basic earnings per
share:
Income (loss) before
income from
discontinued
operations and
extraordinary loss.... $ .06 $ (.48) $ (.12) $ .70 $ .81
Extraordinary loss..... (0.82) -- -- -- --
Income from
discontinued
operations............ 1.08 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss) income per
common share.......... $ .32 $ (.48) $ (.12) $ .70 $ .81
========== ========== ========== ========== ==========
Diluted earnings per
share:
Income (loss) before
income from
discontinued
operations and
extraordinary loss.... $ .06 $ (.48) $ (.12) $ .64 $ .73
Extraordinary loss..... (0.82) -- -- -- --
Income from
discontinued
operations............ 1.08 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss) income per
common share.......... $ .32 $ (.48) $ (.12) $ .64 $ .73
========== ========== ========== ========== ==========
Weighted average
shares outstanding--
Basic................. 3,061,984 7,439,190 7,550,174 7,513,176 7,708,481
========== ========== ========== ========== ==========
Weighted average
shares outstanding--
Diluted............... 3,061,984 7,439,190 7,550,174 8,122,977 8,560,808
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND THE FOUR MONTHS ENDED
APRIL 30, 1998
(DOLLARS IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
NO PAR VALUE COMMON STOCK-A COMMON STOCK-B
----------------- ----------------- ------------------- NOTES REC. RETAINED SHAREHOLDERS'
NUMBER OF NUMBER OF NUMBER OF STOCK EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (I) SALES (DEFICIT) (DEFICIT)
--------- ------- --------- ------ ----------- ------ -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994......... 264 $ 3,600 -- $-- -- $ -- $ 433 $ -- $ 5,897 $ 9,930
Exchange of
common stock for
minority
interests....... -- -- 503,110 32 18,154,156 181 27,740 -- -- 27,953
Merger
transactions.... -- -- -- -- 735 -- 1 -- -- 1
Repurchase and
retirement of
stock........... (264) (3,600) (503,110) (32) -- -- (3,644) -- (84,662) (91,938)
Cumulative
undeclared
dividends....... -- -- -- -- -- -- (1,460) -- -- (1,460)
Exchange of
common stock for
preferred stock. -- -- -- -- (10,807,892) (108) (14,603) -- -- (14,711)
Net income...... -- -- -- -- -- -- -- -- 2,427 2,427
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Balance, December
31, 1995......... -- -- -- -- 7,346,999 73 8,467 -- (76,338) (67,798)
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Net proceeds
from issuance of
stock, net of
expenses........ -- -- -- -- 208,184 2 169 -- -- 171
Redemption of
stock........... -- -- -- -- (42,007) -- (58) -- -- (58)
Repurchase and
retirement of
stock........... -- -- -- -- -- -- -- -- (280) (280)
Cumulative
undeclared
dividends....... -- -- -- -- -- -- (3,775) -- -- (3,775)
Issuance of
warrants, net of
discount........ -- -- -- -- -- -- 824 -- -- 824
Notes receivable
from stock
sales........... -- -- -- -- -- -- -- (192) -- (192)
Net income...... -- -- -- -- -- -- -- -- 208 208
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Balance, December
31, 1996......... -- -- -- -- 7,513,176 75 5,627 (192) (76,410) (70,900)
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Net proceeds
from issuance of
stock, net of
expenses........ -- -- -- -- 213,048 2 24 -- -- 26
Redemption of
stock........... -- -- -- -- (17,743) -- (24) -- -- (24)
Cumulative
undeclared
dividends....... -- -- -- -- -- -- (6,666) -- -- (6,666)
Issuance of
warrants, net of
discount........ -- -- -- -- -- -- 210 -- -- 210
Notes receivable
from stock
sales........... -- -- -- -- -- -- -- (174) -- (174)
Net income...... -- -- -- -- -- -- -- -- 5,777 5,777
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Balance, December
31, 1997......... -- -- -- -- 7,708,481 77 (829) (366) (70,633) (71,751)
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Cumulative
undeclared
dividends....... -- -- -- -- -- -- (3,591) -- -- (3,591)
Issuance of
warrants, net of
discount........ -- -- -- -- -- -- 84 -- -- 84
Payments
received on
notes receivable
from stock
sales........... -- -- -- -- -- -- -- 142 -- 142
Net income...... -- -- -- -- -- -- -- -- 9,981 9,981
---- ------- -------- ---- ----------- ----- -------- ----- -------- --------
Balance, April
30, 1998
(Unaudited)...... -- $ -- -- $-- 7,708,481 $ 77 $ (4,336) $(224) $(60,652) $(65,135)
==== ======= ======== ==== =========== ===== ======== ===== ======== ========
</TABLE>
- -----
(i) Accumulated accretion of cumulative redeemable preferred stock (in excess)
less than additional paid-in-capital
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND THE
FOUR MONTHS ENDED APRIL 30, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
------------------------------- ------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income.............. $ 2,427 $ 208 $ 5,777 $ 7,413 $ 9,981
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Amortization of
deferred financing
costs................ 4,557 940 1,097 342 432
Depreciation,
depletion and
amortization......... 3,828 4,962 6,407 2,162 3,145
Write-off of deferred
financing costs...... 3,993 -- -- -- --
Minority interest in
earnings of
subsidiaries......... 3,958 -- -- -- --
Gain on sale of
discontinued
operations........... (4,871) -- -- -- --
Gain on involuntary
disposal of assets... -- -- (1,194) -- --
Deferred income taxes. 3,942 508 3,647 4,159 6,762
Gain on sale of fixed
assets............... -- -- -- -- 117
Other................. 483 525 (81) 174 (2)
--------- --------- --------- -------- --------
18,317 7,143 15,653 14,250 20,435
Change in working
capital accounts:
Accounts receivable... 836 824 (4,373) (62,445) (76,669)
Inventories........... (8,605) (4,270) (9,495) 7,058 7,591
Prepaid expenses and
other current assets. 1,169 (815) 1,008 1,118 170
Other assets.......... -- (577) (322) (286) --
Accounts payable and
accrued liabilities.. (951) (3,500) 297 16,511 18,855
Other liabilities..... (1,000) (361) (581) (4) --
--------- --------- --------- -------- --------
Net cash provided by
(used in) operating
activities......... 9,766 (1,556) 2,187 (23,798) (29,618)
--------- --------- --------- -------- --------
Cash Flows from Investing
Activities:
Purchase of fixed
assets................. (7,684) (8,752) (10,130) (3,087) (3,777)
Proceeds from sales of
fixed assets........... 1,417 175 154 -- 216
Proceeds from insurance
claims................. -- -- 1,194 -- --
Purchase of fixed
assets from insurance
claims................. -- -- (1,324) -- --
Acquisitions, net of
cash acquired.......... (3,498) (21,915) (19,632) -- (19,679)
--------- --------- --------- -------- --------
Net cash used in
investing
activities......... (9,765) (30,492) (29,738) (3,087) (23,240)
--------- --------- --------- -------- --------
Cash Flows from Financing
Activities:
Proceeds from revolving
line of credit......... 77,911 202,785 220,188 41,949 75,373
Repayments on revolving
line of credit......... (83,596) (186,121) (206,443) (15,160) (45,013)
Proceeds from the
issuance of long-term
debt................... 255,000 -- 12,000 -- 14,961
Repayments of long-term
debt................... (160,567) (4,209) (4,910) (156) (118)
Deferred financing
costs.................. (9,833) (253) (1,223) (379) --
Repurchase and
retirement of
preferred and common
stock.................. (91,938) (280) (75) -- --
Issuance of preferred
and common stock....... 11,673 20,612 9,926 -- 6,500
Proceeds from stock
sales notes
receivable............. -- -- -- -- 428
Other................... (1,120) (36) -- -- --
--------- --------- --------- -------- --------
Net cash provided by
(used in) financing
activities......... (2,470) 32,498 29,463 26,254 52,131
--------- --------- --------- -------- --------
Net Increase (Decrease)
in Cash................. (2,469) 450 1,912 (631) (727)
Cash, beginning of
period.................. 2,650 181 631 631 2,543
--------- --------- --------- -------- --------
Cash, end of period...... $ 181 $ 631 $ 2,543 $ -- $ 1,816
========= ========= ========= ======== ========
Cash Paid--Interest...... $ 8,689 $ 23,702 $ 20,729 $ 2,051 $ 2,226
========= ========= ========= ======== ========
Cash Paid--Income Taxes.. $ 3 $ 4 $ 161 $ -- $ --
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 AND APRIL 30, 1998
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Hines Horticulture, Inc. (formerly Hines Holdings, Inc.)("Hines") produces
and distributes horticultural products through its two operating divisions,
Hines Nurseries and Sun Gro Horticulture ("Sun Gro"). As of April 30, 1998,
the business of Hines is conducted through Hines Nurseries, Inc. (formerly
Hines Horticulture, Inc.) ("Hines Nurseries") and Hines II, Inc. ("Hines II"),
and the business of Sun Gro is conducted through Sun Gro Horticulture Inc.
("Sun Gro-U.S.") and its wholly owned subsidiary, Sun Gro Horticulture Canada
Ltd. ("Sun Gro-Canada"). Hines, together with Hines Nurseries, Hines II, Sun
Gro-U.S. and Sun Gro-Canada, are hereafter collectively referred to as the
"Company."
Hines Nurseries is a leading supplier of ornamental, container-grown plants
with nursery facilities located in California, Oregon, Texas, South Carolina
and Pennsylvania. Hines Nurseries markets its products to retail customers
throughout the United States.
Sun Gro produces, markets and distributes a range of peat-based horticulture
products for both retail and professional customers. Sun Gro markets its
products in North America and various international markets. Manufacturing is
conducted in facilities located in Canada and the United States.
Consolidation
The consolidated financial statements include the accounts of Hines and its
wholly owned direct and indirect subsidiaries Hines Nurseries, Hines II, Sun
Gro-U.S. and Sun Gro-Canada. All material intercompany accounts and
transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The interim financial data as of April 30, 1998 and for the four months
ended April 30, 1997 and 1998 is unaudited; however, in the opinion of
management the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods.
Unaudited Pro Forma Balance Sheet
The pro forma balance sheet as of April 30, 1998 is presented as if all of
the outstanding shares of the cumulative redeemable senior and junior
preferred stock and a portion of the convertible promissory notes as of April
30, 1998 were converted to common stock as of that date (refer to Note 22).
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenue, net of sales discounts and allowances, upon
product shipment to the customer. The Company is subject to credit risk
primarily through trade receivables. Credit risk on trade receivables is
minimized as a result of the large and diverse nature of the Company's
customer base throughout North America. The Company does not require
collateral for its accounts receivable. Certain customers are granted deferred
payment terms (dating). At December 31, 1996 and 1997, significant amounts of
accounts receivable are subject to dating. The Company's largest customer
accounted for approximately 10% and 12% of the Company's consolidated net
sales in 1996 and 1997, respectively. In 1995, no individual customer
accounted for more than 10% of consolidated net sales.
F-10
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and Depletion
Fixed assets are stated at cost less accumulated depreciation. Depreciation
has been provided for on a straight-line basis over the following estimated
economic useful lives:
<TABLE>
<S> <C>
Buildings.......................... 20 to 60 years
Machinery and equipment............ 2 to 25 years
Vehicles and trailers.............. 2 to 15 years
Furniture and fixtures............. 3 to 5 years
</TABLE>
Bog depletion is based on the volume of peat produced during the year at
rates which will amortize the bog acquisition costs, as well as the initial
bog clearing and development costs, over the period of production of peat from
the bog.
Amortization of Deferred Financing Expenses
Deferred financing expenses are being amortized using a method which
approximates the effective interest method over the term of the associated
financing agreements.
Goodwill and Negative Goodwill
In connection with its acquisition of Hines in 1990, the Company recorded
$6,100 of negative goodwill. Negative goodwill equals the excess of the fair
market value of the acquired net assets over the acquisition purchase price
after reducing the amount allocated to the fixed assets acquired to zero. The
Company has amortized negative goodwill on a straight-line basis as a
component of other operating expenses over the period from June 29, 1990 to
December 31, 1997.
In connection with the acquisition of the interests of minority shareholders
for stock in the Company, as further discussed in Note 21, approximately
$14,700 of goodwill was recorded and is being amortized over a 35-year period
as a component of other operating expenses.
Goodwill recorded in connection with the Company's recent acquisitions, as
discussed in Note 2, is being amortized over an estimated life of 35 years.
At each balance sheet date, the Company reviews the recoverability of
goodwill by comparing projected operating income on an undiscounted basis to
the net book value of the related assets. If the carrying value of goodwill
exceeds projected operating income, the carrying value of goodwill is written
down to undiscounted projected operating income.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including identifiable
intangible assets, for potential impairment. When circumstances indicate that
the carrying amount of the asset may not be recoverable, as demonstrated by
the projected undiscounted cash flows, an impairment loss would be recognized
based on fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
The Company's nursery stock has an average growing period of approximately 18
months. The nursery stock is classified as a current asset based on Hines
Nurseries' normal operating cycle.
F-11
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
The Company considers the U.S. dollar to be the functional currency of Sun
Gro's Canadian operations. Monetary assets and liabilities are translated at
the foreign exchange rate in effect as of the balance sheet date. Non-monetary
assets and liabilities are translated at historical rates and revenues and
expenses at average exchange rates for the period. Gains or losses from
changes in exchange rates are recognized in the consolidated results of
operations in the year of occurrence.
Income Taxes
The Company's operations are agricultural in nature. Hines Nurseries reports
its results for income tax purposes on the cash basis.
The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities at the applicable
enacted tax rates. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Derivatives
Gains and losses related to qualifying hedges of firm commitments or
anticipated transactions are deferred and are recognized in income when the
hedge transaction occurs. Gains or losses on forward foreign currency exchange
contracts that do not qualify as hedges are recognized currently and are
included as a component of other operating expenses in the consolidated
statements of income.
Advertising
The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $1,544, $1,658 and $1,898 for the years
ended December 31, 1995, 1996 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income, after deduction
of preferred dividends, by the weighted average number of common shares
outstanding in each year. Diluted earnings per share is computed by dividing
net income, after deduction of preferred dividends, by the weighted average
number of common shares outstanding plus any potential dilution that could
occur if outstanding warrants were converted into common stock in each year.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). In accordance with the implementation
provisions of SFAS 128, the Company has restated earnings per share in the
Consolidated Statements of Income for the years ended December 31, 1995 and
1996.
F-12
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There are no differences between the numerators and denominators for basic
and diluted earnings per share since common stock equivalents have been
excluded from the earnings per share calculation for 1996 and 1997 (in the
amounts of 51,791 and 617,777, respectively), because the effect would be
anti-dilutive. There were no outstanding common stock equivalents in fiscal
year 1995. A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the four months ended April 30, 1997 and 1998
is as follows (in thousands, except for EPS):
<TABLE>
<CAPTION>
FOR THE FOUR MONTHS ENDED
APRIL 30,
(UNAUDITED)
-------------------------
1997 1998
----------------------
<S> <C> <C>
Basic EPS Computation
Net income applicable to common stock $ 5,223 $ 6,260
============ ============
Weighted average shares outstanding 7,513 7,708
============ ============
BASIC EPS $ 0.70 $ 0.81
============ ============
Diluted EPS Computation
Net income applicable to common stock $ 5,223 $ 6,260
============ ============
Weighted average shares outstanding 7,513 7,708
Assumed exercise of warrants 610 853
------------ ------------
Weighted average shares outstanding, diluted
basis 8,123 8,561
============ ============
DILUTED EPS $ 0.64 $ 0.73
============ ============
</TABLE>
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), in June 1997. SFAS 131 establishes
standards for the reporting of information about operating segments of a
business. Generally, financial information is required to be reported on the
basis that it is used internally by management for evaluating segment
performance.
SFAS 131 addresses disclosure matters and will have no effect on the
Company's consolidated financial position, results of operations or cash
flows. The Company will adopt SFAS 131 in 1998.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentations.
F-13
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Lakeland
On April 6, 1998, Hines II acquired all of the issued and outstanding shares
of capital stock of Lakeland Peat Moss, Ltd. and certain affiliated entities
("Lakeland"), a producer of sphagnum peat moss in western Canada, for
approximately Cdn. $31,800 or approximately U.S. $22,400. The acquisition was
accounted for using the purchase method. The purchase price allocation is
summarized as follows:
<TABLE>
<S> <C>
Cash........................................................... $ 640
Accounts receivable............................................ 4,309
Inventories.................................................... 2,246
Prepaid expenses............................................... 124
Fixed assets................................................... 23,606
Accounts payable and accrued liabilities....................... (2,431)
Long-term debt................................................. (101)
Deferred income taxes.......................................... (5,956)
-------
Total purchase price......................................... $22,437
=======
</TABLE>
Bryfogle's
On December 16, 1997, Hines II acquired all of the issued and outstanding
shares of Bryfogle's Wholesale, Inc., Bryfogle's Power Plants, and Power
Plants II, Inc. (collectively "Bryfogle's") for approximately $19,000. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:
<TABLE>
<S> <C>
Cash........................................................... $ 54
Accounts receivable............................................ 452
Inventories.................................................... 1,088
Fixed assets................................................... 4,163
Other assets................................................... 639
Goodwill....................................................... 13,752
Accounts payable and accrued liabilities....................... (756)
Deferred tax liability--non-current............................ (411)
-------
Total purchase price......................................... $18,981
=======
</TABLE>
Pacific Color Nurseries
On October 20, 1997, Hines II acquired certain assets and assumed certain
liabilities of Pacific Color Nurseries, Inc. ("Pacific Color") for $1,700. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable............................................. $ 100
Inventories..................................................... 200
Prepaid expenses................................................ 5
Fixed assets.................................................... 1,385
Goodwill........................................................ 285
Accounts payable and accrued liabilities........................ (270)
------
Total purchase price.......................................... $1,705
======
</TABLE>
F-14
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Flynn Nurseries
On November 27, 1996, Hines Nurseries, Inc. acquired all of the issued and
outstanding shares of Flynn Nurseries, Inc. ("Flynn") for approximately
$11,700. The acquisition was accounted for using the purchase method. The
purchase price allocation is summarized as follows:
<TABLE>
<S> <C>
Cash........................................................... $ 39
Accounts receivable............................................ 642
Inventories.................................................... 11,644
Prepaid expenses............................................... 48
Fixed assets................................................... 3,162
Goodwill....................................................... 5,279
Accounts payable and accrued liabilities....................... (3,981)
Long-term debt................................................. (16)
Deferred tax liability--non-current............................ (5,164)
-------
Total purchase price....................................... $11,653
=======
</TABLE>
Iverson Perennial Gardens
On August 30, 1996, Hines Nurseries, Inc. acquired certain assets and
assumed certain liabilities of Iverson Perennial Gardens, Inc. ("Iverson") for
approximately $10,300. The acquisition was accounted for using the purchase
method. The purchase price allocation is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable............................................ $ 1,181
Inventories.................................................... 2,416
Prepaid expenses............................................... 40
Fixed assets................................................... 1,296
Goodwill....................................................... 6,114
Accounts payable and accrued liabilities....................... (691)
Long-term debt................................................. (55)
-------
Total purchase price....................................... $10,301
=======
</TABLE>
The consolidated financial statements reflect the operations of Lakeland,
Bryfogle's, Pacific Color, Flynn and Iverson since the date of their
respective acquisition. The following summary of condensed unaudited pro forma
results of operations for the years ended December 31, 1996 and 1997 reflects
the acquisitions of Bryfogle's, Pacific Color, Flynn and Iverson as if they
had occurred on January 1, 1996 and 1997. The following summary of condensed
unaudited pro forma results of operations for the four months ended April 30,
1997 and 1998 reflects the acquisitions of Bryfogle's, Pacific Color and
Lakeland as if they had occurred on January 1, 1997 and 1998 (in thousands,
except per share data):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE FOUR
ENDED DECEMBER MONTHS ENDED
31, APRIL 30,
------------------ -----------------
1996 1997 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $199,487 $215,721 $108,810 $114,280
Net income (loss) applicable to common
stock (a)............................ $ (5,594) $ (2,091) 4,905 6,127
Basic (loss) earnings per share....... $ (0.75) $ (0.28) 0.65 0.79
Diluted (loss) earnings per share..... $ (0.75) $ (0.28) 0.60 0.72
</TABLE>
- --------
(a) After deduction of preferred stock dividends of $4,915 and $7,758 for the
years ended December 31, 1996 and 1997 and $2,830 and $4,223 for the four
month periods ended April 30, 1997 and April 30, 1998, respectively.
F-15
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma results do not necessarily represent results which would have
occurred if the acquisitions had taken place as of the dates assumed, nor are
they indicative of the results of future combined operations.
3. UNUSUAL EXPENSES
During 1997, the Company received $1,194 of insurance proceeds from claims
to replace assets that had been damaged and recorded a gain of $1,194,
representing the difference between the proceeds received and the carrying
amount of the damaged assets. As of December 31, 1997, the Company had
acquired $1,324 of fixed assets utilizing the insurance proceeds.
In December 1996, the Company approved a restructuring plan for Sun Gro
which, for the year ended December 31, 1996, resulted in an unusual charge of
$830, representing severance-related payments. An additional liability of
$1,537 was recognized during the year ended December 31, 1997, representing
$1,100 of severance-related payments and $437 of other related restructuring
charges. As of December 31, 1997, $1,967 has been paid and charged against the
liability.
4. INVENTORIES
As of December 31, 1996 and 1997 and March 31, 1998, inventories consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31 APRIL 30,
---------------- -----------
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Nursery stock................................ $85,611 $ 95,195 $ 90,461
Finished goods............................... 2,975 4,003 2,819
Materials and supplies....................... 6,638 6,809 7,382
------- -------- --------
$95,224 $106,007 $100,662
======= ======== ========
</TABLE>
5. FIXED ASSETS
As of December 31, 1996 and 1997, fixed assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1996 1997
------- --------
<S> <C> <C>
Land.................................................... $ 6,845 $ 7,103
Peat reserves and bog costs............................. 48,887 49,146
Buildings and improvements.............................. 14,778 21,915
Machinery and equipment................................. 22,785 27,691
Construction in progress................................ 2,744 7,010
------- --------
96,039 112,865
Less--Accumulated depreciation and depletion............ 14,169 20,459
------- --------
$81,870 $ 92,406
======= ========
</TABLE>
F-16
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Sun Gro has entered into forward exchange contracts and options for hedging
future anticipated expenses denominated in Canadian dollars. As of December
31, 1997, Sun Gro has no forward exchange contracts as options outstanding. As
of December 31, 1996, Sun Gro held call options totaling Cdn. $29,700, each in
the amount of Cdn. $3,300 per month expiring at the end of each month, with
the last expiring on September 30, 1997. The premium paid was U.S. $264, which
was amortized over the life of the hedged transactions. As of December 31,
1995, Sun Gro held a call option for Cdn. $25,000. On June 20, 1996, Sun Gro
sold the unexercised balance of this option of Cdn. $12,000 for proceeds of
U.S. $364 and recorded a gain of U.S. $158 representing the excess of the
proceeds over the unamortized premium. Amortization expense of the premiums
paid in connection with the call options was $363 and $255 for the years ended
December 31, 1996 and 1997, respectively.
7. REVOLVING LINES OF CREDIT
On August 4, 1995, the Company entered into a new revolving credit agreement
that, as amended on December 16, 1997, provides for a line of credit equal to
the lesser of $75,000 or a specified percentage of accounts receivable and
inventory. Borrowings under this line bear interest at rates approximating the
U.S. prime rate plus 1.5 percent or the Eurodollar rate plus 2.5 percent. The
line of credit is secured by substantially all of the assets and common stock
of Hines Nurseries and Sun Gro-U.S. as well as a pledge of 66% of the common
stock of Sun Gro-Canada. The agreement contains covenants that, among other
matters, establish minimum interest coverage and maximum leverage ratios and
minimum earnings and maximum capital expenditure amounts. The average daily
amount of the unused portion of the line of credit is subject to a commitment
fee of 0.5 percent per annum. The line of credit expires on December 31, 2000.
On December 16, 1997, the Company entered into another revolving credit
agreement which provides for a line of credit equal to the lesser of $10,000
or a specified percentage of accounts receivable and inventory. Borrowings
under this line bear interest at rates approximating the U.S. prime rate plus
0.75 percent or the Eurodollar rate plus 2.25 percent. The line of credit is
secured by substantially all of the assets of Hines II. The agreement contains
covenants, which, among other matters, establish minimum interest coverage and
maximum leverage ratios and minimum earnings and maximum capital expenditure
amounts. The average daily amount of the unused portion of the line of credit
is subject to a commitment fee of 0.5 percent per annum. The line of credit
expires on December 31, 2002.
The weighted average interest rate on borrowings outstanding under the
Company's revolving lines of credit as of December 31, 1996 and 1997 was
approximately 9.0% and 8.4%, respectively.
F-17
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
Acquisition term loan, interest at the bank's reference rate
(8.5 percent per annum at December 31, 1997) plus 1.25
percent or the Eurodollar rate plus 2.75 percent per annum.
Principal payments due quarterly beginning March 31, 2000
through 2002 ranging from $300 to $600, with all remaining
principal due on December 31, 2002, secured by inventory
and fixed assets........................................... $ -- $ 12,000
Convertible subordinated promissory note, interest at 6
percent per annum. Principal due December 16, 2005......... -- 1,000
Senior term debt, interest at the bank's reference rate (8.5
percent per annum at December 31, 1997) plus 1.5 percent or
the Eurodollar rate plus 2.5 percent per annum. Principal
payments due on June 30, September 30 and December 31
through 2000 ranging from $500 to $3,250, secured by
inventories and fixed assets............................... 21,500 17,000
Senior subordinated notes, Series B, interest at 11.75
percent per annum payable semi-annually on each June 30 and
December 31, maturing on October 15, 2005.................. 120,000 120,000
Note payable; interest at 10 percent per annum, non
recourse, secured by specified real property, blended
payments of $81 per month from July 1, 1992 through June 1,
2005, with all remaining principal due on June 28, 2005.... 8,162 7,999
Note payable; interest at 10 percent per annum, until June
1, 1995, and 11.75 percent, thereafter, non recourse,
secured by specified real property, blended payments of $88
per month from July 1, 1995, through June 1, 2005, with all
remaining principal due on June 27, 2005................... 7,833 7,693
Capital lease obligations and equipment financing contracts
due at various dates through 1999, secured by leased
equipment.................................................. 171 64
-------- --------
157,666 165,756
Less--Current portion....................................... 4,897 5,400
-------- --------
$152,769 $160,356
======== ========
</TABLE>
The convertible subordinated promissory note may be optionally prepaid by
the Company without premium or penalty upon the occurrence of an initial
public offering of common stock or the sale of the Company. Upon and at any
time after the occurrence of an initial public offering of common stock, the
holder may convert all (but not less than all) of the principal amount
outstanding under the note into shares of common stock at the offering price
of the common stock in such offering (net of any sales or underwriting
commissions).
Estimated principal maturities of long-term debt outstanding at December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998........................................................... $ 5,400
1999........................................................... 5,874
2000........................................................... 6,919
2001........................................................... 465
2002........................................................... 387
Thereafter..................................................... 146,711
--------
$165,756
========
</TABLE>
F-18
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Subordinated Notes were issued by Hines Nurseries, Inc. and are
redeemable, in whole or in part, at the option of the Company, on or after
October 15, 2000 at prices specified by the indenture agreement (105.875% as a
percentage of the principal amount thereof in 2000 to 100.000% in 2004). In
addition, prior to October 15, 1998, the Company, at its option, may redeem
the notes in part with the net proceeds of one or more public equity offerings
at prices specified by the indenture agreement (109.139% in 1998), provided,
however, that after any such redemption the aggregate principal amount of
notes outstanding must equal at least 65 percent of the aggregate principal
amount of notes originally issued. Upon a change of control, each holder will
have the right to require the Company to repurchase such holder's notes at a
price equal to 101 percent of the principal amount thereof plus accrued
interest, if any, to the date of repurchase. The notes are unsecured and
subordinated to all existing and future senior debt and unconditionally
guaranteed on a senior subordinated basis by Hines and Sun Gro-U.S.
The indenture governing the Senior Subordinated Notes imposes certain
limitations on the ability of Hines Nurseries, Inc. and Sun Gro-U.S. to, among
other things, incur additional indebtedness, pay dividends or make certain
other restricted payments and consummate certain asset sales. In addition,
Hines Nurseries, Inc. must also meet certain specified financial covenants
related to its senior term debt.
9. COMMITMENTS
The Company leases certain land, office and warehouse facilities under
various renewable long-term operating leases which expire through 2010.
Certain of these leases include escalation clauses based upon changes in the
consumer price index and/or the fair rental value of leased land. One of the
operating land leases requires the Company to pay rent equal to the greater of
2.25 percent, increasing to 3 percent by the year 2010, of the sales derived
from the related land or a minimum per acre amount as defined in the
agreement. Two of the operating land leases provide the Company with the
option to purchase the property at the appraised fair value through 1997 or to
renew the leases, effective June, 1997, at the fair rental value for periods
of five to twenty-five years. Total rent expense under these operating lease
agreements for the years ended December 31, 1995, 1996 and 1997 was $1,068,
$1,302 and $1,684, respectively.
As of December 31, 1997, the Company's future minimum annual payments under
its non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 3,200
1999............................................................ 2,810
2000............................................................ 2,605
2001............................................................ 2,154
2002............................................................ 1,325
Thereafter...................................................... 6,354
-------
$18,448
=======
</TABLE>
10. CONTINGENCIES
From time to time, the Company is involved in various disputes and
litigation matters which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company.
Management believes, however, that the ultimate resolution of such matters
will not have a material adverse impact on the Company's consolidated
financial position or results of operations.
F-19
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. REDEEMABLE PREFERRED STOCK
On August 4, 1995, Hines issued $10,000 of 12 percent cumulative redeemable
senior preferred stock (the "Senior Preferred Stock") and $20,000 of 12
percent cumulative redeemable junior preferred stock (the "Junior Preferred
Stock"). The Senior Preferred Stock is redeemable on December 31, 2006, and is
non-voting. Hines has the option to redeem all or any portion of the Senior
Preferred Stock at any time prior to the scheduled redemption date. Upon
redemption, Hines is obligated to pay the holder a $1,000 liquidation value
for each share of Senior Preferred Stock plus any accrued but unpaid
dividends.
The Junior Preferred Stock is redeemable on January 1, 2007. Hines has the
option to redeem all or any of the Junior Preferred Stock at any time prior to
the scheduled redemption date. Upon redemption, Hines is obligated to pay the
holder a $1 liquidation value for each share of Junior Preferred Stock plus
any accrued but unpaid dividends. The holders of the Junior Preferred Stock
are allowed to vote (one vote for each share) in the election of Hines'
directors, but not in any other matters. Hines is prevented, without prior
consent from a majority of the holders of the Senior and Junior Preferred
Stock, from redeeming, repurchasing or otherwise acquiring any junior
securities or paying or declaring any dividends on any junior securities
without first paying the full amount of any preferred stock dividends accrued
but not paid.
In June 1996, Hines issued an additional 596,640 shares of Junior Preferred
Stock and 208,185 shares of common stock to certain employees for cash of $283
and promissory notes totaling $597. The promissory notes bear interest at a
rate of 6% per annum, compounded annually. The principal amount, together with
all accrued and unpaid interest thereon, will be due and payable in three
equal installments on March 31, 1996, 1997 and 1998, or earlier upon an event
of default under the promissory note or in certain other limited events. In
December 1996, 20,340 shares of the Junior Preferred Stock and 7,097 shares of
the common stock were redeemed and the promissory note relating to this stock,
in the amount of $20, was canceled and $10 in cash was paid. The outstanding
promissory note balance of $385 at December 31, 1996 relating to the issuance
of Junior Preferred Stock is recorded as a deduction from Cumulative
Redeemable Junior Preferred Stock in the consolidated balance sheets.
On November 27, 1996, Hines issued an additional 20,000 shares of Senior
Preferred Stock and warrants to purchase 609,801 shares of Hines common stock
at an exercise price of $.01 per share during a period which expires at the
earlier of (i) ten years from date of issuance, (ii) a qualified public
offering or (iii) the sale of the Company. An amount approximating the fair
value of the stock of $830 was allocated to the warrants at the date of
issuance and is being accreted using the interest method over the period from
issuance until redemption first becomes available to the holder of the stock.
During the year ended December 31, 1997, Hines issued an additional 400,020
shares of Junior Preferred Stock and 213,048 shares of common stock to certain
employees for cash of $63 and promissory notes totaling $627. The promissory
notes bear interest at a rate of 6% per annum, compounded annually. The
principal amount, together with all accrued and unpaid interest thereon, will
be due and payable in equal installments over a period of one to five years
from March 31, 1998 through March 31, 2001, or earlier upon an event of
default under the promissory note or in certain other limited events. In May
1997, 50,850 shares of the Junior Preferred Stock and 17,743 shares of the
common stock were redeemed and the promissory note relating to this stock, in
the amount of $25, was canceled and $50 was paid in cash. The outstanding
promissory note balance of $533 at December 31, 1997 relating to the issuance
of Junior Preferred Stock is recorded as a deduction from Cumulative
Redeemable Junior Preferred Stock in the consolidated balance sheets.
On December 16, 1997, Hines issued an additional 9,500 shares of Senior
Preferred Stock and warrants to purchase 207,958 shares of Hines common stock
at an exercise price of $.01 per share during a period which
F-20
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expires at the earlier of (i) ten years from the date of issuance, (ii) a
qualified public offering or (iii) the sale of the Company. An amount
approximating the fair value of the stock of $283 was allocated to the
warrants at the date of issuance and is being accreted using the interest
method over the period from issuance until redemption first becomes available
to the holder of the stock.
12. INCOME TAXES
The components of income (loss) from continuing operations before provision
for income taxes and the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996 1997
------ ------- ------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S............................................ $8,787 $ 1,902 $8,321
Foreign........................................ (346) (1,058) 972
------ ------- ------
$8,441 $ 844 $9,293
====== ======= ======
Current:
Federal........................................ $ 942 $ 264 $ --
State.......................................... 81 34 10
Foreign........................................ 92 -- --
------ ------- ------
1,115 298 10
------ ------- ------
Deferred:
Federal........................................ 1,276 456 3,345
State.......................................... 197 74 698
Foreign........................................ 262 (192) (537)
------ ------- ------
1,735 338 3,506
------ ------- ------
$2,850 $ 636 $3,516
====== ======= ======
</TABLE>
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 34 percent to income before
provision for income taxes for the years ended December 31, 1995, 1996 and
1997, as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1996 1997
------ ----- ------
<S> <C> <C> <C>
Provision computed at statutory rate............... $2,870 $ 287 $3,161
Increase (decrease) resulting from:
State tax, net of federal benefit................ 278 71 433
Foreign taxes.................................... (38) (95) (63)
Goodwill......................................... (217) (127) (93)
Meals and entertainment.......................... 92 100 113
Change in valuation allowance.................... -- 328 --
Other............................................ (135) 72 (35)
------ ----- ------
$2,850 $ 636 $3,516
====== ===== ======
</TABLE>
F-21
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred expenses.................................. $ 1,116 $ 1,210
Capital loss carryforwards......................... 618 660
Deferred currency loss............................. -- 304
Net operating loss carryforwards................... 14,732 14,417
Investment tax credit carryforwards................ 439 384
Other.............................................. 156 650
Valuation allowance................................ (2,916) (3,166)
-------- --------
Gross deferred tax assets............................ 14,145 14,459
-------- --------
Deferred tax liabilities:
Accrual to cash adjustment......................... (31,567) (36,280)
Deferred currency gain............................. (533) (235)
Fixed asset basis differences...................... (15,318) (15,255)
Investment in foreign subsidiary................... (1,178) (1,749)
Other.............................................. (2,957) (2,094)
-------- --------
Gross deferred tax liabilities....................... (51,553) (55,613)
-------- --------
Net deferred tax liability........................... (37,408) (41,154)
-------- --------
Deferred income tax liability, current............... (31,402) (35,151)
Deferred income tax liability, non-current........... (6,006) (6,003)
-------- --------
$(37,408) $(41,154)
======== ========
</TABLE>
At December 31, 1997, the Company had approximately $35,657 in net operating
loss carryforwards for federal income tax reporting purposes. The Company's
federal net operating losses begin to expire in 2005.
Included in the valuation allowance is $1,400 that relates to the deferred
tax assets recorded from acquisitions. Any tax benefits subsequently
recognized for these deferred tax assets will be allocated to goodwill.
At December 31, 1997, Sun Gro-Canada had capital loss carryforwards, net
operating loss carryforwards and investment tax credits of approximately Cdn.
$2,096 (U.S. $1,466), Cdn. $7,247 (U.S. $5,070) and Cdn. $549 (U.S. $384),
respectively. Their use is limited to future taxable earnings of Sun Gro-
Canada. A substantial valuation allowance has been recorded against the
deferred tax assets associated with the capital loss carryforwards and the
investment tax credits. The capital loss may be carried forward indefinitely
and the net operating loss carryforwards and the investment tax credits expire
as follows (Canadian dollars):
<TABLE>
<CAPTION>
NET INVESTMENT
YEAR OF EXPIRATION OPERATING LOSS TAX CREDITS
------------------ -------------- -----------
<S> <C> <C>
1998......................................... $6,013 $ 90
1999......................................... 713 165
2000......................................... -- 150
2001......................................... -- 123
2002......................................... 521 21
2003......................................... -- --
------ ----
$7,247 $549
====== ====
</TABLE>
F-22
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE BENEFIT PLANS
Sun Gro sponsors benefit contribution plans for certain salaried U.S.
employees, certain salaried Canadian employees and certain hourly Canadian
employees. Participants of the salaried U.S. investment plan may make
voluntary contributions to the plan up to 15 percent of their compensation (as
defined). Sun Gro contributes five percent of each participant's compensation
(as defined) up to a maximum of $3,500 per participant.
Participants of the salaried and hourly Canadian investment plan must
contribute 3 percent of their compensation (as defined) and may make voluntary
contributions to the plan up to 18 percent of their compensation (as defined).
Sun Gro contributes up to 5 percent and 3 percent of each participant's
compensation (as defined) with no maximum for the salaried and hourly plans,
respectively.
The total expense related to these plans was $368, $395 and $284 for the
years ended December 31, 1995, 1996 and 1997, respectively.
14. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, Hines Nurseries and Sun Gro paid
management fees of $789 to certain individuals who through affiliates were the
former owners of the Company. During 1995, Hines Nurseries and Sun Gro paid a
total of $140 to these individuals to cover administrative expenses incurred
by these individuals for office space. These expenses are included in general
and administrative expenses in the accompanying financial statements.
During the year ended December 31, 1995, the Company entered into an
agreement to receive financial advisory services from a company controlled by
a former minority shareholder. Under the terms of the consulting agreement,
the Company agreed to pay a financial advisory fee equal to a percent of the
amount by which the value of the common stock of Agri Holdings, Inc., a former
subsidiary of Hines Nurseries, exceeded $2,500 upon the occurrence of a change
of control (as defined in the agreement). As a result of the shareholder
transaction described in Note 21, the Company paid $3,300 to this related
party under the terms of this agreement.
15. DISCONTINUED OPERATIONS
Sun Gro incorporated its Green Cross division as a wholly-owned subsidiary,
Green Cross Garden Products, Ltd. ("GCGP"), effective May 31, 1994.
Immediately thereafter, Sun Gro adopted a plan to discontinue operations of
GCGP and entered into an asset purchase agreement with Monsanto Canada, Ltd.
("Monsanto"). In accordance with the agreement, Sun Gro agreed to sell to
Monsanto the operating assets of GCGP on January 4, 1995, for an amount equal
to $15,800 Cdn. ($11,262 U.S. at December 31, 1994), which resulted in the
recognition of a gain in the amount of $3,307, net of estimated taxes of
$1,564.
16. EXTRAORDINARY LOSSES
During 1995, as a result of retiring long-term debt prior to maturity, the
Company recorded an extraordinary loss of $4,272 less the related estimated
income tax benefit of $1,759. The loss was comprised primarily of unamortized
deferred financing costs and prepayment fees.
In 1993, Sun Gro entered into a combined interest rate and currency swap
related to its former subordinated debt, which was denominated in Canadian
dollars. As a result of the change in ownership described in Note 21, this
agreement was terminated and a fee of $1,030 was paid, which is included as a
component of extraordinary loss in 1995.
F-23
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of non-cash investing and financing activities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Fair value of assets acquired.................... $20,993 $31,822 $22,069
Liabilities assumed and incurred................. 17,495 9,907 2,437
------- ------- -------
Cash paid for businesses acquired................ $ 3,498 $21,915 $19,632
======= ======= =======
</TABLE>
During 1995, minority shareholders exchanged their shares of common stock in
Hines Nurseries and Sun Gro for $27,953 of common stock of the Company.
On October 20, 1997, the Company issued to Madison Dearborn Capital
Partners, L.P., the controlling stockholder of the Company ("MDCP"), a demand
note, in an aggregate principal amount of $2,500. On December 16, 1997, this
demand note was subsequently exchanged for Senior Preferred Stock and warrants
of the Company, as discussed in Note 11.
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
Cash
The carrying amount reported in the balance sheet for cash approximates its
fair value.
Short-term and Long-term Debt
The fair value of the Senior Subordinated Notes is based on the closing
price of the debt securities at December 31, 1996 and 1997. The carrying
amount of the Company's other long-term debt approximates its fair value based
upon borrowing rates currently available to the Company. The carrying amount
of the short-term debt approximates the fair value based on the short-term
maturity of the instrument.
Redeemable Preferred Stock
The fair value of the Senior Preferred Stock and Junior Preferred Stock
approximates its carrying value, as the stock was recently issued.
Off-Balance Sheet Instruments
The fair values associated with the foreign exchange contracts and foreign
currency options have been estimated based on broker quotes and published
foreign currency market rates.
F-24
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1996 1997
------------------ ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Cash............................... $ 631 $ 631 $ 2,543 $ 2,543
Short-term debt.................... 29,357 29,357 43,102 43,102
Long-term debt (including current
portion).......................... 157,666 167,266 165,756 177,756
Redeemable preferred stock......... 54,525 54,525 70,682 70,682
Off-Balance Sheet Financial
Instruments:
Forward currency call options.... $ 225 $ 29 $ -- $ --
</TABLE>
19. VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1995, 1996 and 1997, activity with respect
to the Company's allowance for doubtful accounts receivable is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Beginning balance................................. $ 622 $1,165 $1,019
Charges to expense.............................. 678 225 474
Amounts written off............................. (135) (371) (300)
------ ------ ------
Ending balance.................................... $1,165 $1,019 $1,193
====== ====== ======
</TABLE>
F-25
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. GEOGRAPHIC INFORMATION
Geographic information for the years ended December 31, 1995, 1996 and 1997,
is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States
Sales to unaffiliated customers......... $148,355 $155,136 $191,150
Canada
Sales to unaffiliated customers......... 8,554 9,187 10,106
Transfers to other geographic areas..... 16,530 14,531 13,852
Eliminations.............................. (16,530) (14,531) (13,852)
-------- -------- --------
$156,909 $164,323 $201,256
======== ======== ========
Operating income:
United States............................. $ 24,438 $ 21,379 $ 28,637
Canada.................................... 1,834 545 2,461
Eliminations.............................. -- -- --
-------- -------- --------
$ 26,272 $ 21,924 $ 31,098
======== ======== ========
Total assets:
United States............................. $154,486 $196,579 $241,679
Canada.................................... 58,489 54,689 54,174
Eliminations.............................. (24,431) (23,753) (27,034)
-------- -------- --------
$188,544 $227,515 $268,819
======== ======== ========
</TABLE>
Export sales from the United States totaled $6,244, $6,780 and $7,872 for
the years ended December 31, 1995, 1996 and 1997, respectively.
21. SHAREHOLDER TRANSACTION
On August 4, 1995, MDCP and certain members of management who were minority
shareholders of Hines and its subsidiaries (the "Management Shareholders")
became owners of Hines in a transaction in connection with which (i) Hines
Nurseries, Sun Gro-U.S. and Sun Gro-Canada first each became wholly-owned
(direct or indirect) subsidiaries of the Company through the exchange by the
Management Shareholders and other investors of their minority interests
therein for stock of the Company, (ii) MDCP and the Management Shareholders
became the sole shareholders of Hines through a merger in which the
shareholders of the Company (other than the Management Shareholders) exchanged
their shares for cash, (iii) certain assets were sold to or acquired from
entities owned by certain of the current and/or former shareholders of the
Company and (iv) Hines Nurseries, Sun Gro-U.S. and Sun Gro-Canada incurred
$35,800 of indebtedness under a senior bank credit agreement and Hines
Nurseries incurred $110,000 of indebtedness under a senior subordinated credit
facility, which indebtedness together with MDCP's equity investment was used
to pay off certain existing indebtedness of the Company, to pay the
consideration owing to the shareholders of the Company who exchanged their
shares for cash in the merger, and to pay related fees and expenses. On
October 19, 1995, Hines Nurseries refinanced the $110,000 indebtedness under
the senior subordinated credit facility referred to above and reduced the
balance outstanding on its revolving lines of credit by issuing $120,000 of
Senior Subordinated Notes due in 2005.
The transaction was accomplished by the Management Shareholders and certain
other investors exchanging their stock in Hines Nurseries and certain of its
subsidiaries for stock in Hines, followed by the merger of a
F-26
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
newly formed company (in which MDCP was the sole shareholder) into the
Company. In the merger, the shareholders of Hines other than the Management
Shareholders received cash for their stock, and MDCP and the Management
Shareholders became the sole shareholders of Hines. Immediately following the
merger, the Management Shareholders exchanged a portion of their stock in the
Company with MDCP for cash.
The financial statements for the year ended December 31, 1995 reflect
purchase accounting for the exchange by the Management Shareholders and other
investors of their minority interests for stock of Hines. The repurchase by
Hines of its own stock from shareholders (other than the Management
Shareholders) was recorded as a repurchase and retirement of treasury stock.
22. SUBSEQUENT EVENTS
Senior Preferred Stock Issuances
On February 5, 1998, Hines issued 2,000 shares of Senior Preferred Stock,
having an aggregate liquidation value of $2,000, for $2,000 in cash.
On March 18, 1998 and April 3, 1998, Hines issued an additional 4,250 and
250 shares, respectively, of Senior Preferred Stock and warrants to purchase
93,034 and 5,473 shares, respectively, of Hines common stock at an exercise
price of $.01 per share during a period which expires at the earlier of (i)
ten years from the date of issuance, (ii) a qualified public offering or (iii)
the sale of the Company. An amount approximating the fair value of the stock
of $127 and $7, respectively, was allocated to the warrants at the date of
issuance and is being accreted using the interest method over the period from
issuance until redemption first becomes available to the holder of the stock.
Proposed Equity Offering and Reverse Stock Split
Hines has proposed an initial public offering of common stock (the
"Offering"), which is currently expected to close in June 1998. Immediately
prior to the Offering, the Company proposes to effect a 1.3611-for-one reverse
stock split with respect to its common stock, which has been reflected in the
accompanying financial statements for all periods presented.
New Senior Credit Facility
The Company is completing arrangements with certain banks to amend and
restate its existing senior credit facilities (the "Existing Senior Credit
Facilities"), to provide for a new $100,000 revolving credit facility for
working capital purposes, a new $50,000 term loan and a new $100,000 revolving
credit/term facility to fund acquisitions (collectively, the "New Senior
Credit Facility"). The New Senior Credit Facility will replace the Existing
Senior Credit Facilities and increase the Company's borrowing capacity by up
to $100,000 to accommodate the Company's growth plans. The New Senior Credit
Facility is expected to close concurrently with, and is conditioned upon, the
closing of the Offering and is expected to have a five year maturity.
23. GUARANTOR/NON-GUARANTOR DISCLOSURES
The Senior Subordinated Notes issued by Hines Nurseries, Inc. (the issuer)
have been guaranteed by Hines (the parent guarantor) and by Sun Gro-U.S. (the
subsidiary guarantor). The issuer and the subsidiary guarantor are wholly-
owned subsidiaries of the parent guarantor and the parent and subsidiary
guarantees are full, unconditional, and joint and several. Separate financial
statements of Hines Nurseries and Sun Gro-U.S. are not presented and Hines
Nurseries and Sun Gro-U.S. are not filing separate reports under the
Securities Exchange
F-27
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Act of 1934 because management believes that they would not be material to
investors. The Senior Subordinated Notes are not guaranteed by Hines II, Sun
Gro-Canada or their respective present or future subsidiaries.
The following condensed consolidating information shows (a) Hines on a
parent company basis only as the parent guarantor (carrying its investment in
subsidiary under the equity method), (b) Hines Nurseries as the issuer
(carrying its investment in its subsidiary under the equity method), (c) Sun
Gro-U.S. as subsidiary guarantor (carrying its investment in Sun Gro-Canada
under the equity method), (d) Hines II and Sun Gro-Canada as subsidiary non-
guarantors, (e) eliminations necessary to arrive at the information for the
parent guarantor and its direct and indirect subsidiaries on a consolidated
basis and (f) the parent guarantor on a consolidated basis as follows:
. Condensed consolidating balance sheets as of December 31, 1996 and 1997
and April 30, 1998.
. Condensed consolidating statements of income and condensed consolidating
statements of cash flows for the years ended December 31, 1995, 1996 and
1997 and the four months ended April 30, 1997 and 1998.
F-28
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ -- $ 631 $ 91 $ (91) $ -- $ 631
Accounts receivable,
net.................. -- 5,316 8,679 1,649 -- 15,644
Inventories........... -- 88,361 1,455 5,408 -- 95,224
Prepaid expenses and
other current assets. -- 1,074 1,027 1,112 -- 3,213
Deferred income taxes. -- 50 603 -- (653) --
-------- -------- ------- ------- -------- --------
Total current
assets............. -- 95,432 11,855 8,078 (653) 114,712
-------- -------- ------- ------- -------- --------
Fixed assets, net....... -- 32,851 4,540 44,479 -- 81,870
Deferred financing
expenses, net.......... -- 5,020 43 1,289 -- 6,352
Goodwill, net........... -- 23,738 -- 843 -- 24,581
Deferred income taxes... -- 10,163 -- -- (10,163) --
Investments in
subsidiaries........... 40,296 15,606 7,729 -- (63,631) --
-------- -------- ------- ------- -------- --------
$ 40,296 $182,810 $24,167 $54,689 $(74,447) $227,515
======== ======== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ -- $ 4,048 $ 1,426 $ 2,401 $ -- $ 7,875
Accrued liabilities... -- 2,718 2,190 719 -- 5,627
Accrued payroll and
benefits............. -- 4,270 1,318 369 -- 5,957
Long-term debt,
current portion...... -- 2,147 -- 2,750 -- 4,897
Revolving line of
credit............... -- 24,201 5,156 -- -- 29,357
Deferred income taxes. -- 31,942 -- 113 (653) 31,402
Intercompany accounts. 56,671 (65,199) (9,023) 17,551 -- --
-------- -------- ------- ------- -------- --------
Total current
liabilities........ 56,671 4,127 1,067 23,903 (653) 85,115
-------- -------- ------- ------- -------- --------
Long-term debt.......... -- 142,269 -- 10,500 -- 152,769
Deferred income taxes... -- 2,377 1,235 12,557 (10,163) 6,006
Cumulative redeemable
senior preferred stock. 30,921 -- -- -- -- 30,921
Cumulative redeemable
junior preferred stock. 23,604 -- -- -- -- 23,604
Shareholders' equity
Common stock.......... 102 3,971 11,414 -- (15,385) 102
Additional paid-in
capital.............. 5,600 21,364 5,793 1,777 (28,934) 5,600
Notes receivable from
stock sales.......... (192) -- -- -- -- (192)
Retained earnings
(deficit)............ (76,410) 8,702 4,658 5,952 (19,312) (76,410)
-------- -------- ------- ------- -------- --------
Total shareholders'
equity (deficit)... (70,900) 34,037 21,865 7,729 (63,631) (70,900)
-------- -------- ------- ------- -------- --------
$ 40,296 $182,810 $24,167 $54,689 $(74,447) $227,515
======== ======== ======= ======= ======== ========
</TABLE>
F-29
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO CANADA
HINES SUN GRO & HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------------ --------- ----------- -------------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ -- $ 941 $ -- $ 1,602 $ -- $ 2,543
Accounts receivable,
net.................. -- 6,253 10,188 4,128 -- 20,569
Inventories........... -- 97,202 2,162 6,643 -- 106,007
Prepaid expenses and
other current assets. -- 842 536 580 -- 1,958
Deferred income taxes. -- 50 804 169 (1,023) --
-------- -------- ------- ------- -------- --------
Total current
assets............. -- 105,288 13,690 13,122 (1,023) 131,077
-------- -------- ------- ------- -------- --------
Fixed assets, net....... -- 38,851 4,242 49,313 -- 92,406
Deferred financing
expenses, net.......... -- 4,612 247 1,618 -- 6,477
Goodwill, net........... -- 24,021 -- 14,838 -- 38,859
Deferred income taxes... 16 10,163 -- -- (10,179) --
Investments in
subsidiaries........... 55,596 8,925 7,832 -- (72,353) --
-------- -------- ------- ------- -------- --------
$ 55,612 $191,860 $26,011 $78,891 $(83,555) $268,819
======== ======== ======= ======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ -- $ 4,041 $ 1,117 $ 2,888 $ -- $ 8,046
Accrued liabilities... 3 1,971 1,930 1,405 -- 5,309
Accrued payroll and
benefits............. -- 4,930 887 704 -- 6,521
Long-term debt,
current portion...... -- 2,400 -- 3,000 -- 5,400
Revolving line of
credit............... -- 36,231 6,871 -- -- 43,102
Deferred income taxes. -- 36,096 -- 78 (1,023) 35,151
Other liabilities..... -- -- (224) 224 -- --
Intercompany accounts. 55,678 (75,804) (1,308) 21,434 -- --
-------- -------- ------- ------- -------- --------
Total current
liabilities........ 55,681 9,865 9,273 29,733 (1,023) 103,529
-------- -------- ------- ------- -------- --------
Long-term debt.......... 1,000 139,856 -- 19,500 -- 160,356
Deferred income taxes... -- 2,418 1,555 12,209 (10,179) 6,003
Cumulative redeemable
senior preferred stock. 43,967 -- -- -- -- 43,967
Cumulative redeemable
junior preferred stock. 26,715 -- -- -- -- 26,715
Shareholders' equity
Common stock.......... 105 3,971 11,413 9,500 (24,884) 105
Accumulated accretion
of cumulative
redeemable preferred
stock (in excess)
less than additional
paid-in capital...... (857) 21,364 5,889 1,777 (29,030) (857)
Notes receivable from
stock sales.......... (366) -- -- -- -- (366)
Retained earnings
(deficit)............ (70,633) 14,386 (2,119) 6,172 (18,439) (70,633)
-------- -------- ------- ------- -------- --------
Total shareholders'
equity (deficit)... (71,751) 39,721 15,183 17,449 (72,353) (71,751)
-------- -------- ------- ------- -------- --------
$ 55,612 $191,860 $26,011 $78,891 $(83,555) $268,819
======== ======== ======= ======= ======== ========
</TABLE>
F-30
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF APRIL 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
CANADA &
HINES SUN GRO HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
ASSETS GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------ ------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash................... $ -- $ -- $ -- $ 1,816 $ -- $ 1,816
Accounts receivable,
net................... -- 66,547 21,307 13,693 -- 101,547
Inventories............ -- 90,356 1,273 9,033 -- 100,662
Prepaid expenses and
other current assets.. -- 836 721 355 -- 1,912
Deferred income taxes.. -- 50 805 640 (1,495) --
-------- -------- ------- -------- --------- --------
Total current assets. -- 157,789 24,106 25,537 (1,495) 205,937
-------- -------- ------- -------- --------- --------
Fixed assets, net....... -- 40,481 3,793 72,433 -- 116,707
Deferred financing
expenses, net.......... -- 4,353 220 1,472 -- 6,045
Goodwill, net........... -- 23,772 -- 14,694 -- 38,466
Deferred income taxes... 17 10,163 -- -- (10,180) --
Investments in
subsidiaries........... 72,196 9,859 9,455 -- (91,510) --
Escrow deposit-Lakeland
acquisition............ -- -- -- -- -- --
-------- -------- ------- -------- --------- --------
$ 72,213 $246,417 $37,574 $114,136 $(103,185) $367,155
======== ======== ======= ======== ========= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable....... $ -- $ 11,938 $ 1,932 $ 6,096 $ (3) $ 19,963
Accrued liabilities.... 34 7,277 1,918 3,260 -- 12,489
Accrued payroll and
benefits.............. -- 6,749 846 864 -- 8,459
Long-term debt,
current portion....... -- 2,400 -- 3,101 -- 5,501
Revolving line of
credit................ -- 61,138 7,940 4,385 -- 73,463
Deferred income taxes.. -- 41,838 -- 1,060 (1,495) 41,403
Intercompany accounts.. 53,221 (76,347) 7,156 15,970 -- --
-------- -------- ------- -------- --------- --------
Total current
liabilities......... 53,255 54,993 19,792 34,736 (1,498) 161,278
-------- -------- ------- -------- --------- --------
Long-term debt.......... 3,118 139,738 -- 37,579 (3,118) 177,317
Deferred income taxes... -- 2,418 1,664 18,818 (10,180) 12,720
Cumulative redeemable
senior preferred stock. 52,691 -- -- -- -- 52,691
Cumulative redeemable
junior preferred stock. 28,284 -- -- -- -- 28,284
Shareholders' equity
Common stock........... 105 3,971 11,413 12,997 (28,381) 105
Accumulated accretion
of cumulative
redeemable preferred
stock (in excess)
less than additional
paid-in capital....... (4,364) 21,364 5,889 1,777 (29,030) (4,364)
Notes receivable from
stock sales........... (224) -- -- -- -- (224)
Retained earnings
(deficit)............. (60,652) 23,933 (1,184) 8,229 (30,978) (60,652)
-------- -------- ------- -------- --------- --------
Total shareholders'
equity (deficit).... (65,135) 49,268 16,118 23,003 (88,389) (65,135)
-------- -------- ------- -------- --------- --------
$ 72,213 $246,417 $37,574 $114,136 $(103,185) $367,155
======== ======== ======= ======== ========= ========
</TABLE>
F-31
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ $87,222 $61,133 $25,084 $(16,530) $156,909
Cost of goods sold...... -- 42,874 30,886 15,015 (16,530) 72,245
------- ------- ------- ------- -------- --------
Gross profit........ -- 44,348 30,247 10,069 -- 84,664
Operating expenses...... -- 24,786 25,371 8,235 -- 58,392
------- ------- ------- ------- -------- --------
Operating income.... -- 19,562 4,876 1,834 -- 26,272
------- ------- ------- ------- -------- --------
Other expenses:
Interest.............. -- 11,031 486 1,757 -- 13,274
Interest--
intercompany......... -- (343) 284 59 -- --
Other, net............ (2,427) 1,021 (1,269) 364 6,868 4,557
------- ------- ------- ------- -------- --------
(2,427) 11,709 (499) 2,180 6,868 17,831
------- ------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes, minority
interest, income from
discontinued operations
and extraordinary loss. 2,427 7,853 5,375 (346) (6,868) 8,441
Provision for income
taxes.................. -- 1,655 841 354 -- 2,850
------- ------- ------- ------- -------- --------
Income (loss) before
minority interest,
income from
discontinued operations
and extraordinary loss. 2,427 6,198 4,534 (700) (6,868) 5,591
Minority interest in
earnings of
subsidiaries........... -- -- -- -- 3,958 3,958
------- ------- ------- ------- -------- --------
Income (loss) before
income from
discontinued operations
and extraordinary loss. 2,427 6,198 4,534 (700) (10,826) 1,633
Income from discontinued
operations, net of tax. -- -- -- 3,307 -- 3,307
------- ------- ------- ------- -------- --------
Income before
extraordinary loss..... 2,427 6,198 4,534 2,607 (10,826) 4,940
Extraordinary loss, net
of tax................. -- (1,101) (176) (1,236) -- (2,513)
------- ------- ------- ------- -------- --------
Net income.............. $ 2,427 $ 5,097 $ 4,358 $ 1,371 $(10,826) $ 2,427
======= ======= ======= ======= ======== ========
</TABLE>
F-32
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ $92,214 $62,922 $23,718 $(14,531) $164,323
Cost of goods sold ..... -- 45,650 33,544 16,149 (14,531) 80,812
----- ------- ------- ------- -------- --------
Gross profit........ -- 46,564 29,378 7,569 -- 83,511
Operating expenses...... -- 26,393 28,170 7,024 -- 61,587
----- ------- ------- ------- -------- --------
Operating income.... -- 20,171 1,208 545 -- 21,924
----- ------- ------- ------- -------- --------
Other expenses:
Interest.............. -- 18,420 536 1,184 -- 20,140
Interest--
intercompany......... -- (672) 552 120 -- --
Other, net............ (208) 1,485 867 299 (1,503) 940
----- ------- ------- ------- -------- --------
(208) 19,233 1,955 1,603 (1,503) 21,080
----- ------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes.................. 208 938 (747) (1,058) 1,503 844
Income tax provision
(benefit).............. -- 730 98 (192) -- 636
----- ------- ------- ------- -------- --------
Net income (loss)....... $ 208 $ 208 $ (845) $ (866) $ 1,503 $ 208
===== ======= ======= ======= ======== ========
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO CANADA
HINES SUN GRO & HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------------ --------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ $126,193 $63,685 $25,230 $(13,852) $201,256
Cost of goods sold...... -- 63,524 33,980 15,755 (13,852) 99,407
---- -------- ------- ------- -------- --------
Gross profit........ -- 62,669 29,705 9,475 -- 101,849
Operating expenses...... -- 33,647 30,380 6,724 -- 70,751
---- -------- ------- ------- -------- --------
Operating income.... -- 29,022 (675) 2,751 -- 31,098
---- -------- ------- ------- -------- --------
Other expenses:
Interest.............. 39 18,831 708 1,130 -- 20,708
Interest--
intercompany......... -- (1,036) 889 147 -- --
Other, net............ -- 739 48 310 -- 1,097
---- -------- ------- ------- -------- --------
39 18,534 1,645 1,587 -- 21,805
---- -------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes.................. (39) 10,488 (2,320) 1,164 -- 9,293
Income tax provision
(benefit).............. (16) 4,196 (239) (425) -- 3,516
---- -------- ------- ------- -------- --------
Net income (loss)....... $(23) $ 6,292 $(2,081) $ 1,589 $ -- $ 5,777
==== ======== ======= ======= ======== ========
</TABLE>
F-33
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $-- $69,002 $23,574 $9,419 $(5,677) $96,318
Cost of goods sold...... -- 35,813 13,342 6,479 (5,677) 49,957
---- ------- ------- ------ ------- -------
Gross profit........ -- 33,189 10,232 2,940 -- 46,361
Operating expenses...... -- 14,567 10,321 2,183 -- 27,071
---- ------- ------- ------ ------- -------
Operating income.... 18,622 (89) 757 19,290
---- ------- ------- ------ ------- -------
Other expenses:
Interest.............. -- 6,512 264 361 -- 7,137
Interest--
intercompany......... -- (250) 210 40 -- --
Other, net............ -- 97 (443) 102 586 342
---- ------- ------- ------ ------- -------
-- 6,359 31 503 586 7,479
---- ------- ------- ------ ------- -------
Income (loss) before
income tax provision
(benefit).............. -- 12,263 (120) 254 (586) 11,811
Income tax provision
(benefit).............. 4,850 (214) (238) 4,398
---- ------- ------- ------ ------- -------
Net income (loss)....... $-- $ 7,413 $ 94 $ 492 $ (586) $ 7,413
==== ======= ======= ====== ======= =======
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
CANADA &
HINES SUN GRO HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $-- $73,651 $23,648 $17,119 $(6,330) $108,088
Cost of goods sold...... -- 36,913 12,744 10,204 (6,330) 53,531
---- ------- ------- ------- ------- --------
Gross profit........ -- 36,738 10,904 6,915 -- 54,557
Operating expenses...... -- 15,725 9,130 4,514 -- 29,369
---- ------- ------- ------- ------- --------
Operating income.... -- 21,013 1,774 2,401 -- 25,188
---- ------- ------- ------- ------- --------
Other expenses:
Interest.............. 2 6,990 210 796 -- 7,998
Interest--
intercompany......... -- (591) 514 77 -- --
Other, net............ -- (675) (221) 146 1,182 432
---- ------- ------- ------- ------- --------
2 5,724 503 1,019 1,182 8,430
---- ------- ------- ------- ------- --------
Income (loss) before
provision for income
taxes.................. (2) 15,289 1,271 1,382 (1,182) 16,758
Income tax provision
(benefit).............. (1) 5,742 336 700 -- 6,777
---- ------- ------- ------- ------- --------
Net income (loss)....... $ (1) $ 9,547 $ 935 $ 682 $(1,182) $ 9,981
==== ======= ======= ======= ======= ========
</TABLE>
F-34
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............. $ 4,000 $ 10,608 $(6,649) $ 5,807 $(4,000) $ 9,766
-------- --------- ------- -------- ------- ---------
Cash flows from
investing activities:
Purchase of fixed
assets, net.......... -- (2,970) (1,007) (2,290) -- (6,267)
Acquisitions, net of
cash acquired........ -- (3,498) -- -- -- (3,498)
-------- --------- ------- -------- ------- ---------
Net cash used in
investing
activities......... -- (6,468) (1,007) (2,290) -- (9,765)
-------- --------- ------- -------- ------- ---------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- (3,987) (1,698) -- -- (5,685)
Proceeds from the
issuance of long-term
debt................. -- 240,000 -- 15,000 -- 255,000
Repayments of long-
term debt............ -- (146,799) -- (17,768) 4,000 (160,567)
Deferred financing
costs................ -- (8,257) -- (1,576) -- (9,833)
Repurchase and
retirement of stock.. (91,938) -- -- -- -- (91,938)
Issuance of preferred
and common stock..... 11,673 -- -- -- -- 11,673
Intercompany.......... 76,426 (85,019) 7,583 1,010 -- --
Other................. (161) 2 346 (1,307) -- (1,120)
-------- --------- ------- -------- ------- ---------
Net cash provided by
(used in) financing
activities......... (4,000) (4,060) 6,231 (4,641) 4,000 (2,470)
-------- --------- ------- -------- ------- ---------
Net increase (decrease)
in cash................ -- 80 (1,425) (1,124) -- (2,469)
Cash and cash
equivalents, beginning
of year................ -- 101 1,425 1,124 -- 2,650
-------- --------- ------- -------- ------- ---------
Cash and cash
equivalents, end of
year................... $ -- $ 181 $ -- $ -- $ -- $ 181
======== ========= ======= ======== ======= =========
</TABLE>
F-35
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON-- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............. $ (577) $ (8,963) $ 884 $ 3,084 $ 4,016 $ (1,556)
-------- -------- ------- ------- ------- --------
Cash flows from
investing
activities:
Purchase of fixed
assets, net.......... -- (5,761) (1,446) (1,370) -- (8,577)
Acquisitions, net of
cash acquired........ -- (21,915) -- -- -- (21,915)
-------- -------- ------- ------- ------- --------
Net cash used in
investing
activities......... -- (27,676) (1,446) (1,370) -- (30,492)
-------- -------- ------- ------- ------- --------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 12,388 4,276 -- -- 16,664
Repayments of long-
term debt............ -- (2,459) -- (1,750) -- (4,209)
Deferred financing
costs................ -- (87) (44) (122) -- (253)
Dividends received
(paid)............... -- 7,427 (7,427) -- -- --
Repurchase and
retirement of stock.. (280) -- -- -- -- (280)
Issuance of preferred
and common stock..... 20,612 -- 4,016 -- (4,016) 20,612
Intercompany.......... (19,755) 19,820 (132) 67 -- --
Other................. -- -- (36) -- -- (36)
-------- -------- ------- ------- ------- --------
Net cash provided by
(used in) financing
activities......... 577 37,089 653 (1,805) (4,016) 32,498
-------- -------- ------- ------- ------- --------
Net increase (decrease)
in cash................ -- 450 91 (91) -- 450
Cash and cash
equivalents, beginning
of year................ -- 181 -- -- -- 181
-------- -------- ------- ------- ------- --------
Cash, end of year....... $ -- $ 631 $ 91 $ (91) $ -- $ 631
======== ======== ======= ======= ======= ========
</TABLE>
F-36
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
CANADA &
HINES SUN GRO HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............. $(9,858) $ 2,483 $(6,998) $ 6,965 $ 9,595 $ 2,187
------- -------- ------- -------- ------- --------
Cash flows from
investing activities:
Purchase of fixed
assets, net.......... -- (7,146) (741) (2,089) -- (9,976)
Acquisitions, net of
cash................. -- -- -- (19,632) -- (19,632)
Proceeds from
insurance claims..... -- 1,194 -- -- -- 1,194
Purchase of fixed
assets from insurance
claims proceeds...... -- (1,324) -- -- -- (1,324)
------- -------- ------- -------- ------- --------
Net cash used in
investing
activities......... -- (7,276) (741) (21,721) -- (29,738)
------- -------- ------- -------- ------- --------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 12,030 1,715 -- -- 13,745
Intercompany advances
(repayments)......... 7 (10,605) 10,893 (295) -- --
Proceeds from the
issuance of long-term
debt................. -- -- -- 12,000 -- 12,000
Repayments of long-
term debt............ -- (2,160) -- (2,750) -- (4,910)
Deferred financing
costs................ -- (331) (257) (635) -- (1,223)
Dividends received
(paid)............... -- 6,169 (6,169) -- -- --
Repurchase and
retirement of stock.. (75) -- -- -- -- (75)
Issuance of preferred
and common stock..... 9,926 -- 95 9,500 (9,595) 9,926
------- -------- ------- -------- ------- --------
Net cash provided by
(used in) financing
activities......... 9,858 5,103 6,277 17,820 (9,595) 29,463
------- -------- ------- -------- ------- --------
Net increase (decrease)
in cash................ -- 310 (1,462) 3,064 -- 1,912
Cash, beginning of year. -- 631 -- -- -- 631
------- -------- ------- -------- ------- --------
Cash, end of year....... $ -- $ 941 $(1,462) $ 3,064 $ -- $ 2,543
======= ======== ======= ======== ======= ========
</TABLE>
F-37
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO
HINES SUN GRO CANADA
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTOR) ELIMINATIONS TOTAL
------------ --------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities:............ $ (286) $(16,033) $(8,265) $786 $-- $(23,798)
------ -------- ------- ---- ---- --------
Cash flows from
investing
activities:
Purchase of fixed
assets, net.......... -- (1,930) (392) (765) -- (3,087)
------ -------- ------- ---- ---- --------
Net cash used in
investing
activities......... -- (1,930) (392) (765) -- (3,087)
------ -------- ------- ---- ---- --------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 19,481 7,308 -- -- 26,789
Intercompany advances
(repayments)......... 286 (1,658) 1,393 (21) -- --
Repayments of long-
term debt............ -- (156) -- -- -- (156)
Deferred financing
costs................ -- (213) (166) -- -- (379)
Issuance of preferred
and common stock..... -- (122) 122 -- -- --
------ -------- ------- ---- ---- --------
Net cash provided by
(used in) financing
activities......... 286 17,332 8,657 (21) -- 26,254
------ -------- ------- ---- ---- --------
Net decrease in cash.... -- (631) -- -- -- (631)
Cash, beginning of
period................. -- 631 -- -- -- 631
------ -------- ------- ---- ---- --------
Cash, end of period..... $ -- $ -- $ -- $-- $-- $ --
====== ======== ======= ==== ==== ========
</TABLE>
F-38
<PAGE>
HINES HORTICULTURE, INC. AND SUBSIDIARIES
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUN GRO CANADA
HINES SUN GRO & HINES II
HORTICULTURE HINES U.S. (SUBSIDIARY
(PARENT NURSERIES (SUBSIDIARY NON- CONSOLIDATED
GUARANTOR) (ISSUER) GUARANTOR) GUARANTORS) ELIMINATIONS TOTAL
------------ --------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............. $(4,471) $(22,584) $(4,052) $ (5,129) $6,618 $(29,618)
------- -------- ------- -------- ------ --------
Cash flows from
investing activities:
Purchase of fixed
assets, net............ -- (2,602) (20) (1,155) -- (3,777)
Sales Proceeds.......... -- -- 3 213 216
Acquisitions, net of
cash................... -- -- -- (19,679) -- (19,679)
------- -------- ------- -------- ------ --------
Net cash used in
investing
activities......... -- (2,602) (17) (20,621) -- (23,240)
------- -------- ------- -------- ------ --------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 24,906 1,069 4,385 -- 30,360
Intercompany advances
(repayments)......... (2,457) (543) 3,000 -- --
Proceeds from the
issuance of long-term
debt................. 14,961 14,961
Repayments of long-
term debt............ -- (118) -- -- -- (118)
Proceeds from stock
sales notes
receivable........... 428 -- -- -- -- 428
Issuance of preferred
and common stock..... 6,500 -- -- 4,500 (4,500) 6,500
------- -------- ------- -------- ------ --------
Net cash provided by
(used in) financing
activities......... 4,471 24,245 4,069 23,846 (4,500) 52,131
------- -------- ------- -------- ------ --------
Net increase (decrease)
in cash................ -- (941) -- (1,904) 2,118 (727)
Cash, beginning of
period................. -- 941 -- 1,602 -- 2,543
------- -------- ------- -------- ------ --------
Cash, end of period..... $ -- $ -- $ -- $ (302) $2,118 $ 1,816
======= ======== ======= ======== ====== ========
</TABLE>
F-39
<PAGE>
[7 Photos of selected Hines' new product introductions]
The Company's 4,100 plant varieties include a number of innovative
proprietary products such as those pictured above.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELL-
ING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Equity Recapitalization................................................... 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Unaudited Pro Forma Statements of Operations.............................. 19
Selected Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 37
Management................................................................ 51
Certain Relationships and Related Transactions............................ 59
Principal and Selling Stockholders........................................ 62
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 65
Underwriting.............................................................. 67
Legal Matters............................................................. 69
Experts................................................................... 69
Available Information..................................................... 70
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,397,051 SHARES
[LOGO OF HINES HORTICULTURE, INC.]
COMMON STOCK
-----------------
PROSPECTUS
, 1998
-----------------
LEHMAN BROTHERS
BT ALEXl BROWN
BANCAMERICA ROBERTSON STEPHENS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 29,440
NASD filing fee............................................... 9,700
Nasdaq National Market fees................................... 95,000
Blue sky fees and expenses (including attorneys' fees and
expenses) ................................................... 10,000
Printing and engraving expenses............................... 175,000
Transfer agent's fees and expenses............................ 15,000
Accounting fees and expenses.................................. 175,000
Legal fees and expenses....................................... 475,000
Miscellaneous expenses........................................ 15,860
----------
Total......................................................... $1,000,000
==========
</TABLE>
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was or is an officer, director, employee or agent of
such corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Restated Certificate will provide for the indemnification of directors
and officers of the Company to the fullest extent permitted by Section 145.
In that regard, the Restated Certificate will provide that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
II-1
<PAGE>
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he is or was a director or officer of such corporation, or is or was
serving at the request of such corporation as a director, officer or member of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor will be limited to payment of settlement of
such an action or suit except that no such indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the indemnifying corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in
consideration of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
All of the Company's directors and officers are covered by insurance
policies maintained by MDCP against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The number of shares set forth below does not give effect to the proposed
stock split and other transactions referred to in the Prospectus under "Equity
Recapitalization."
On May 24, 1996, in a transaction exempt form registration under Section
4(2) of the Securities Act, the Company sold, for an aggregate consideration
of $880,000, (i) 283,360 shares of Common Stock and (ii) 596,640 shares of
Junior Preferred to certain members of management at a price of $1.00 per
share.
On November 27, 1996, in a transaction exempt from issuance under Section
4(2) of the Securities Act, the Company issued and sold to MDCP, Calsters and
Chilmark, for an aggregate consideration of $20,000,000, (i) 20,000 shares of
Senior Preferred at a price of $958.50 per share and (ii) presently
exercisable warrants to purchase 830,000 shares of Common Stock, with an
exercise price of $.01 per share, at a price of $1.00 for each warrant to
purchase one share of Common Stock.
On June 2, 1997, in a transaction exempt from registration under Rule 505 of
Regulation D of the Securities Act, the Company issued and sold 32,200 shares
of Common Stock and 67,800 shares of Junior Preferred, to a management
employee of Sun Gro-U.S. The management employee paid the purchase price for
such shares through the issuance of a full-recourse promissory note in favor
of the Company in the amount of $100,000 due in three equal installments on
March 31 of each of 1998, 1999 and 2000.
On September 29, 1997, in a transaction exempt from registration under the
Section 4(2) of the Securities Act, the Company issued 100,000 shares of
Common Stock to Stephen P. Thigpen for $100,000 in cash, payable through the
issuance of a full-recourse promissory note in favor of the Company due in
three equal installments on April 30 of each of 1998, 1999 and 2000.
On September 30, 1997, in a transaction exempt from registration under
Section 4(2) of the Securities Act, the Company sold 32,200 shares of Common
Stock, and 67,800 shares of Junior Preferred to a management employee of Sun
Gro-U.S. and his spouse for $100,000, payable by a full-recourse promissory
note in favor of the Company due in three equal installments on September 30,
1997 and on March 31 of each of 1998 and 1999.
On September 30, 1997, in a transaction exempt from registration under
Section 4(2) of the Act, the Company sold 48,300 shares of Common Stock and
101,700 shares of Junior Preferred to a management
II-2
<PAGE>
employee of Sun Gro-U.S. for $150,000, payable by a full-recourse promissory
note in favor of the Company due in five equal installments on September 30,
1997 and on March 31 of each of 1998, 1999, 2000 and 2001.
On October 20, 1997, in a transaction exempt from registration under Section
4(2) of the Securities Act, the Company issued to MDCP a 12% Demand Note in
the aggregate principal amount of $2,500,000 (the "Demand Note") for
$2,500,000 in cash.
On December 15, 1997, in a transaction exempt from registration under Rule
505 of Regulation D of the Securities Act, the Company issued and sold 77,280
shares of Common Stock and 162,720 shares of Junior Preferred, to three
management employees of Sun Gro-U.S. The management employees paid the
purchase price for such shares through the issuance of full-recourse
promissory notes in favor of the Company in an aggregate amount of $240,000,
due in three equal installments on March 31 of each of 1998, 1999 and 2000.
On December 16, 1997, in a transaction exempt from registration under
Section 4(2) of the Securities Act, the Company issued a Convertible
Subordinated Promissory Note with an initial aggregate principal amount of
$1,000,000 (the "Note") to Kenneth G. Bryfogle as partial consideration of the
Company's acquisition of Bryfogle's on such date. The Note bears interest at
6%, is due on the eighth anniversary of its issue date, and may be optionally
prepaid by the Company without premium or penalty upon the occurrence of an
initial public offering of Common Stock or sale of the Company. Upon the
consummation of the Offering, the holder may convert the principal amount
outstanding under the Note into shares of Common Stock at the net offering
price.
On December 16, 1997, in a transaction exempt from registration under
Section 4(2) of the Securities Act, the Company issued and sold to MDCP, for
an aggregate consideration of $1,000,000 in cash and cancellation of
$2,500,000 of outstanding indebtedness under the Demand Note, (i) 3,500 shares
of its Senior Preferred Stock at a price of $970.21 per share, and (ii)
presently exercisable warrants to purchase 104,282 shares of Common Stock,
with an exercise price of $.01 per share, at a price of $1.00 for each warrant
to purchase one share of Common Stock.
On December 16, 1997, in a transaction exempt from registration under
Section 4(2) of the Securities Act, the Company issued and sold to Abbott, for
an aggregate consideration of $6,000,000 in cash (i) 6,000 shares of Senior
Preferred, at a price of $970.21 per share, and (ii) presently exercisable
warrants to purchase 178,769 shares of Common Stock, with an exercise price of
$.01 per share, at a price of $1.00 for each warrant to purchase one share of
Common Stock.
On February 5, 1998, in a transaction exempt from registration under Section
4(2) of the Act, the Company issued to MDCP 2,000 shares of Senior Preferred,
having an aggregate liquidation value of $2,000,000, for $2,000,000 in cash.
On March 18, 1998, in a transaction exempt from registration under Section
4(2) of the Act, the Company issued and sold to Abbott, for an aggregate
consideration of $4,250,000 in cash (i) 4,250 shares of Senior Preferred, at a
price per share of $970.21 per share, and (ii) presently exercisable warrants
to purchase 126,627 shares of Common Stock, with an exercise price of $.01 per
share, at a price of $1.00 for each warrant to purchase one share of Common
Stock.
On April 2, 1998, in a transaction exempt from registration under Section
4(2) of the Act, the Company issued and sold to Abbott, for an aggregate
consideration of $250,000 in cash (i) 250 shares of Senior Preferred, at a
price per share of $970.21 per share, and (ii) presently exercisable warrants
to purchase 7,449 shares of Common Stock, with an exercise price of $.01 per
share, at a price of $1.00 for each warrant to purchase one share of Common
Stock.
On April 6, 1998, in a transaction exempt from registration under Section
4(2) of the Act, the Company issued Convertible Subordinated Promissory Notes
with an initial aggregate principal amount of $3.0 million Cdn. ($2.1 million
U.S.) to certain shareholders of Lakeland as partial consideration of the
Company's acquisition of Lakeland on such date. The Notes bear interest at 6%,
are due on the eighth anniversary of their issue date, and may be optionally
prepaid by the Company without premium or penalty upon the occurrence of an
initial public offering of Common Stock or sale of the Company. Upon the
consummation of the Offering, the holders may convert the principal amount
outstanding under the Notes into shares of Common Stock at the net offering
price.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Acquisition Agreement dated as of July 20, 1995 by and among the
Company, MDCP and Hines Horticulture as amended by Amendment No.
1 to Acquisition Agreement dated as of August 4, 1995. (1)
3.1 Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-laws of the Company.
4.1 Form of certificate representing Common Stock.
4.2 Indenture dated as of October 19, 1995 between Hines Horticul-
ture, the Company and Sun Gro and IBJ Schroder Bank & Trust Com-
pany, as trustee (including the forms of Exchange Note and Se-
nior Subordinated Guarantees). (1)
4.3 Form of Amended and Restated Credit Agreement among Hines Nurs-
eries, Inc. and Sun Gro Horticulture Canada Ltd., as borrowers,
the lenders listed therein, Bank of America N.T. & S.A., as syn-
dication agent, Harris Trust & Savings Bank, as documentation
agent, and Bankers Trust Company, as administrative agent.
4.4 Registration Rights Agreement dated as of June 11, 1998 by and
between the Company and MDCP.
5.1 Opinion of Kirkland & Ellis.
10.1 Stockholders Agreement dated as of August 4, 1995 by and among
the Company and the other parties signatory thereto. (1)
10.2 Amendment No. 1 to Stockholders Agreement dated as of November
27, 1996. (2)
10.3 Amendment No. 2 to Stockholders Agreement dated as of December
15, 1997. (5)
10.4 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Douglas D. Allen. (1)
10.5 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Stephen P. Thigpen. (1)
10.6 Employment Agreement dated as of August 4, 1995 between Sun Gro-
U.S. and Michael R. Crowe. (1)
10.7 Sun Gro Horticulture Inc. U.S. Executive Supplemental Retirement
Plan. (1)
10.8 Employment Agreement dated as of August 4, 1995 between Hines
Horticulture and Claudia M. Pieropan. (1)
10.9 Hines Horticulture Nursery Division Vision 2000 Management Vari-
able Compensation Plan. (6)
10.10 Sun Gro Division Management Variable Compensation Plan. (6)
10.11 Management Stock Agreement dated as of September 29, 1997 by and
between the Company and Stephen P. Thigpen. (5)
10.12 Management Stock Pledge Agreement dated as of September 29, 1997
by and between the Company and Stephen P. Thigpen. (5)
10.13 Promissory Note dated as of September 29, 1997 from Stephen P.
Thigpen, as maker, to the Company. (5)
10.14 Purchase and Sale Agreement dated as of August 4, 1995 by and
between Oregon Garden Products, Inc., as seller, and Blooming
Farm, Inc., as buyer. (1)
10.15 Promissory Note dated August 4, 1995, from Blooming Farm, Inc.,
as maker, to Oregon Garden Products, Inc., as seller, and Bloom-
ing Farm, Inc., as buyer. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16 Trust Deed, Security Agreement, Assignment of Leases and Rents
and Fixture Financing Statement dated August 4, 1995 from
Blooming Farm, Inc., as trustor, to Ticor Title Insurance
Company, as trustee, and Oregon Garden Products, Inc., as
beneficiary. (1)
10.17 Agricultural Lease dated as of August 4, 1995 between Blooming
Farm, Inc., as lessor, and Oregon Garden Products, Inc., as les-
see. (1)
10.18 Purchase Agreement by and among the Company, California State
Teachers' Retirement System, Chilmark Fund II L.P., and MDCP
dated as of November 27, 1996. (2)
10.19 Stock Purchase Warrants of the Company dated as of November 27,
1996 in favor of MDCP. (2)
10.20 Stock Purchase Warrants of the Company dated as of November 27,
1996 in favor of California State Teachers' Retirement System.
(2)
10.21 Demand Note dated October 17, 1997 in the principal amount of
$2,500,000 from the Company, as maker, to MDCP. (5)
10.22 Purchase Agreement dated as of December 16, 1997 by and among
the Company, Abbott Capital 1330 Investors I, LP and MDCP. (5)
10.23 Stock Purchase Warrants of the Company dated as of December 16,
1997 in favor of MDCP. (5)
10.24 Amendment No. 1 to Purchase Agreement dated as of June 11, 1998
by and among Hines Holdings, Inc., and the persons listed on the
signature pages thereto.
10.25 Securities Purchase Agreement dated as of February 5, 1998 by
and between the Company and MDCP. (5)
10.26 1998 Long-Term Equity Incentive Plan.
10.27 Form of Incentive Stock Option Agreement.
10.28 Form of Nonqualified Stock Option Agreement.
12.1 Statement re Computation of Ratios.*
16.1 Letter from Arthur Andersen LLP re change in certifying accoun-
tants. (2)
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Kirkland & Ellis (included in opinion to be filed as
Exhibit 5.1).
23.5 Consent of Schreck Morris (included in opinion to be filed as an
exhibit to Exhibit 5.1).
24.1 Power of Attorney.*
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
(1) Incorporated by reference to Hines Holdings, Inc.'s Registration Statement
on Form S-4, File No. 33-99452, filed on November 15, 1995 and amended on
December 22, 1995 and January 8, 1996.
(2) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996.
(3) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(4) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(5) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997.
(6) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
IRVINE, STATE OF CALIFORNIA ON JUNE 12, 1998.
Hines Horticulture, Inc.
/s/ Paul R. Wood
By: _________________________________
Paul R. Wood
President
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED ON JUNE 12,
1998, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED WITH RESPECT TO
HINES HORTICULTURE, INC.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Paul R. Wood President and Director (principal executive
___________________________________________ officer)
Paul R. Wood
* Chief Financial Officer (principal
___________________________________________ financial and accounting officer)
Claudia M. Pieropan
* Secretary, Treasurer and Director
___________________________________________
Thomas R. Reusche
* Vice President and Director
___________________________________________
Douglas D. Allen
* Director
___________________________________________
Stephen P. Thigpen
* Director
___________________________________________
David F. Mosher
* Director
___________________________________________
Gary J. Little
</TABLE>
* The undersigned, by signing his name hereto, does hereby sign and execute
this Amendment No. 2 to Registration Statement on behalf of the above named
officers and directors of the Company pursuant to the Power of Attorney
executed by such officers and directors and previously filed with the
Securities and Exchange Commission.
<TABLE>
<S> <C>
/s/ Paul R. Wood
___________________________________________
Paul R. Wood
Attorney-in-fact
</TABLE>
II-7
<PAGE>
5,397,051 SHARES
of
COMMON STOCK
of
HINES HORTICULTURE, INC.
UNDERWRITING AGREEMENT
----------------------
June __, 1998
Lehman Brothers Inc.
BT Alex Brown Incorporated
BancAmerica Robertson Stephens
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Hines Horticulture, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of 5,397,051 shares (the "Firm
Stock") of the Company's Common Stock, par value $0.01 per share (the "Common
Stock"). Of the 5,397,051 shares of the Firm Stock, 5,000,000 are being sold by
the Company and 397,051 by the Selling Stockholders. In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 809,557 shares of the
Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company and the Selling
Stockholders by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the
Stock has (i) been prepared by the Company in conformity with the
requirements of the Securities Act of 1933 (the "Securities Act") and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement have been delivered
by the Company to you as the representatives (the "Representatives") of the
Underwriters. As used in this Agreement, "Effective Time" means the date
and the time as of which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared effective by the
Commission; "Effective Date" means the date of the Effective Time;
<PAGE>
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became effective
under the Securities Act and any prospectus filed with the Commission by
the Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 6(a) hereof and deemed to be a part of the registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any post-effective amendments or supplements to the Registration Statement
or the Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do not
and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading (as to the Registration Statement and any amendment
thereto), in light of the circumstances under which they were made (as to
the Prospectus and any supplement thereto); provided that no representation
or warranty is made as to information contained in or omitted from the
Registration Statement or the Prospectus in reliance upon and in conformity
with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein.
(c) The Company and each of its subsidiaries (as defined in
Section 18) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are
in good standing as foreign corporations in each jurisdiction in which
their respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, except where the failure
to be so qualified or in good standing individually or in the aggregate
would not have a material adverse effect on the condition (financial or
otherwise), business, prospects, properties, stockholders' equity or
results of operations of the Company and its subsidiaries taken as a whole
(a "Material Adverse Effect") and have all power and authority necessary to
own or hold their respective properties and to conduct the businesses in
which they are engaged; and none of the subsidiaries of the Company (other
than Hines Nurseries, Inc. and Sun Gro Horticulture Inc. (collectively, the
"Significant Subsidiaries")) is a "significant subsidiary", as such term is
defined in Rule 405 of the Rules and Regulations.
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(d) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform in all material respects to the
description thereof contained in the Prospectus; and all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares and except as set forth in the
Prospectus) are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein, will
be duly and validly issued, fully paid and non-assessable and will conform
to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company. The Agreement and Plan of Merger dated as of June
___, 1998 (the "Merger Agreement") by and between the Company and Hines
Holdings, Inc., a Nevada corporation ("Hines Nevada") has been duly
authorized, executed and delivered by the Company and Hines Nevada, and the
merger of Hines Nevada with and into the Company (the "Merger") has been
consummated in accordance with the terms of the Merger Agreement.
(g) Neither the execution, delivery and performance of this
Agreement by the Company, the consummation of the transactions contemplated
hereby, the Merger, nor any transaction included in the Equity
Recapitalization (as defined in the Prospectus) of the Company as described
in the Prospectus under the captions "Equity Recapitalization" and
"Description of Capital Stock" conflict or will conflict with, or result in
a breach or violation of, any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any of the property or assets of the Company or any of
its subsidiaries is subject, except for any such conflict, breach or
violation which, individually or in the aggregate, would not have a
Material Adverse Effect or prevent the consummation of the transactions
contemplated by this Agreement, nor will such actions result in any
violation of the provisions of the charter or by-laws of the Company or any
of its subsidiaries or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties or assets; and except
for the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or qualifications as may
be required under the Securities Exchange Act of 1934 (the "Exchange Act")
and applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
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performance of this Agreement by the Company and the consummation of the
transactions constituting the Equity Recapitalization, other than such
actions as are contemplated in the Prospectus as being taken at a future
date or such actions as have already been taken.
(h) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right (other than rights which have been waived or
satisfied) to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities Act.
(i) Except as described in the Registration Statement, the
Company has not sold or issued any shares of Common Stock during the six-
month period preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the Securities Act.
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, there has not been any change in the
capital stock or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries taken as a whole, otherwise than as set forth
or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or in the
Prospectus present fairly in all material respects the financial condition
and results of operations of the entities purported to be shown thereby, at
the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(l) Price Waterhouse LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who
have delivered the initial letter referred to in Section 9(g) hereof, are
independent public accountants as required by the Securities Act and the
Rules and Regulations. Arthur Andersen LLP, whose report appears in the
Prospectus, were independent accountants as required by the Securities Act
and the Rules and Regulations during the periods covered by the financial
statements contained in the Prospectus on which they reported.
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(m) The Company and each of its subsidiaries have good and
marketable title in fee simple to all owned real property and good and
marketable title to all personal property owned by them, in each case free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries;
and all real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use
made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
(n) Except as described in the Prospectus or as would not
(individually or in the aggregate) have a Material Adverse Effect, the
Company and each of its subsidiaries own or possess adequate rights to use
all material patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of their respective businesses as now
conducted and have no reason to believe that the conduct of their
respective businesses will conflict with, and have not received any notice
of any claim of conflict with, any such rights of others.
(o) Except as described in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of the Company
or any of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, could reasonably be expected to
have a Material Adverse Effect; and to the best of the Company's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(p) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(q) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
subsidiaries on the other hand, which is required to be described in the
Prospectus which is not so described.
(r) Except as described in the Prospectus, no labor disturbance
by the employees of the Company or any of its subsidiaries exists or, to
the knowledge of the Company, is imminent which might be expected to have a
Material Adverse Effect.
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<PAGE>
(s) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
Code); and each pension plan for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the Internal Revenue Service
that it is so qualified and to the knowledge of the Company nothing has
occurred, whether by action or by failure to act, which would cause the
loss of such qualification. The Company's Canadian subsidiaries are in
compliance in all material respects with all Canadian and provincial laws
and regulations governing the pension and employee benefit plans of such
subsidiaries.
(t) The Company and its subsidiaries have filed all federal,
state, local and foreign income and franchise tax returns required to be
filed through the date hereof and have paid all taxes due thereon, and no
tax deficiency has been determined adversely to the Company or any of its
subsidiaries which has had (nor does the Company have any knowledge of any
tax deficiency which, if determined adversely to the Company or any of its
subsidiaries, could reasonably be expected to have) a Material Adverse
Effect.
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any material liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in
the ordinary course of business, (iii) entered into any material
transaction not in the ordinary course of business or (iv) declared or paid
any dividend on its capital stock.
(v) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(w) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time or
both, would constitute such a default, in the due performance or observance
of any term, covenant or condition contained in any material
6
<PAGE>
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to which any
of its properties or assets is subject or (iii) is in violation in any
material respect of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject
(including, without limitation, those regulating water rights and the use
of Reclamation Water, as defined in the Company's Restated Certificate of
Incorporation) or has failed to obtain any material license, permit,
certificate, franchise or other governmental authorization or permit
necessary to the ownership of its property or to the conduct of its
business (including, without limitation, those providing access to water
and those providing for the harvest of peat bogs, in each case to the
extent necessary for the Company to maintain its operations in
substantially the same manner as described in the Prospectus).
(x) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic
wastes, medical wastes, hazardous wastes or hazardous substances by the
Company or any of its subsidiaries (or, to the knowledge of the Company,
any of their predecessors in interest) at, upon or from any of the property
now or previously owned or leased by the Company or its subsidiaries in
violation of any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit or which would require remedial action under any
applicable law, ordinance, rule, regulation, order, judgment, decree or
permit, except for any violation or remedial action which would not have,
or could not be reasonably likely to have, singularly or in the aggregate
with all such violations and remedial actions, a Material Adverse Effect;
there has been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical wastes,
solid wastes, hazardous wastes or hazardous substances due to or caused by
the Company or any of its subsidiaries or with respect to which the Company
or any of its subsidiaries have knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which
would not have or would not be reasonably likely to have, singularly or in
the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a Material Adverse Effect; and
the terms "hazardous wastes", "toxic wastes", "hazardous substances" and
"medical wastes" shall have the meanings specified in any applicable local,
state, federal and foreign laws or regulations with respect to
environmental protection.
(y) Neither the Company nor any subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and agrees
that:
(a) The Selling Stockholder has, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) the Selling
Stockholder will have good and valid title
7
<PAGE>
to the shares of Stock to be sold by the Selling Stockholder hereunder on
such date, free and clear of all liens, encumbrances, equities or claims;
and upon delivery of such shares and payment therefor pursuant hereto, good
and valid title to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement" and, together with all other
similar agreements executed by the other Selling Stockholders, the "Custody
Agreements") with the Company, as custodian (the "Custodian"), for delivery
under this Agreement, certificates in negotiable form (with signature
guaranteed by a commercial bank or trust company having an office or
correspondent in the United States or a member firm of the New York or
American Stock Exchanges) representing the shares of Stock to be sold by
the Selling Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney") and, together
with all other similar agreements executed by the other Selling
Stockholders, the "Powers of Attorney") appointing Stephen P. Thigpen and
Claudia M. Pieropan, as attorneys-in-fact, with full power of substitution,
and with full authority (exercisable by any one or more of them) to execute
and deliver this Agreement and to take such other action as may be
necessary or desirable to carry out the provisions hereof on behalf of the
Selling Stockholder.
(d) The Selling Stockholder has the legal capacity and authority
to enter into this Agreement , the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of this Agreement, the
Power of Attorney and the Custody Agreement by the Selling Stockholder and
the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any agreement or instrument to which the Selling Stockholder
is a party or by which the Selling Stockholder is bound or to which any of
the property or assets of the Selling Stockholder is subject, nor will such
actions result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Selling Stockholder or the property or assets of the Selling
Stockholder; and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations, registrations
or qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution of
the Stock by the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or governmental agency
or body is required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by the Selling
Stockholder and the consummation by the Selling Stockholder of the
transactions contemplated hereby and thereby, other than such actions as
have already been taken.
8
<PAGE>
(e) The Registration Statement and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the applicable
effective date (as to the Registration Statement and any amendment thereto)
and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (as to the
Registration Statement and any amendment thereto), in light of the
circumstances under which they were made (as to the Prospectus and any
supplement thereto); provided that no representation or warranty is made as
to information contained in or omitted from the Registration Statement or
the Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein; provided, further, that
this paragraph (e) shall apply to each of the Selling Stockholders only to
the extent that the statements in or omissions from the Registration
Statement or the Prospectus were based on written information provided by
such Selling Stockholder specifically for inclusion therein.
(f) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 5,000,000 shares of
the Firm Stock and each Selling Stockholder hereby agrees to sell the number of
shares of the Firm Stock set opposite such Selling Stockholder's name in
Schedule 2 hereto, severally and not jointly, to the several Underwriters and
each of the Underwriters, severally and not jointly, agrees to purchase the
number of shares of the Firm Stock set opposite that Underwriter's name in
Schedule 1 hereto. Each Underwriter shall be obligated to purchase from the
Company, and from each Selling Stockholder, that number of shares of the Firm
Stock which represents the same proportion of the number of shares of the Firm
Stock to be sold by the Company, and by each Selling Stockholder, as the number
of shares of the Firm Stock set forth opposite the name of such Underwriter in
Schedule 1 represents of the total number of shares of the Firm Stock to be
purchased by all of the Underwriters pursuant to this Agreement. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 809,557 shares of Option Stock. Such option is granted solely for
the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 5 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be
9
<PAGE>
adjusted by the Representatives so that no Underwriter shall be obligated to
purchase Option Stock other than in 100 share amounts. The price to the
Underwriters of both the Firm Stock and any Option Stock shall be $_____ per
share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
4. Offering of Stock by the Underwriters. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
It is understood that 200,000 shares of the Firm Stock will initially
be reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to employees
and persons having business relationships with the Company and its subsidiaries
who have heretofore delivered to the Representatives to purchase shares of Firm
Stock in form satisfactory to the Representatives, and that any allocation of
such Firm Stock among such persons will be made in accordance with timely
directions received by the Representatives from the Company; provided, that
under no circumstances will the Representatives or any Underwriter be liable to
the Company or to any such person for any action taken or omitted in good faith
in connection with such offering to employees and persons having business
relationships with the Company and its subsidiaries. It is further understood
that any shares of such Firm Stock which are not purchased by such persons will
be offered by the Underwriters to the public upon the terms and conditions set
forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Latham & Watkins, 5800 Sears
Tower, Chicago, Illinois, at 10:00 A.M., New York City time, on the third full
business day following the date of this Agreement or at such other date or place
as shall be determined by agreement between the Representatives and the Company.
This date and time are sometimes referred to as the "First Delivery Date." On
the First Delivery Date, the Company and the Selling Stockholders shall deliver
or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company and the Selling Stockholders of the purchase price by
wire transfer of immediately available funds to such account as the Company
shall designate. Such payment shall be made upon delivery of the Firm Shares to
the Representatives for the respective accounts of the Underwriters (including,
without limitation, by "full fast" electronic transfer through Depository Trust
Company), provided, that the amount of such payment shall be reduced by one
day's interest on the amount of the gross proceeds at the Underwriters' cost of
borrowing such funds plus any other expenses associated with payment in
immediately available funds. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each Underwriter
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hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Representatives shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Selling Stockholders shall make the certificates
representing the Firm Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date").
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer of immediately
available funds to such account as the Company shall designate; provided, that
the amount of such payment shall be reduced by one day's interest on the amount
of the gross proceeds at the Underwriters' cost of borrowing such funds plus any
other expenses associated with payment in immediately available funds. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Option Stock shall be registered in such names and
in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives in
New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the Second Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than
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Commission's close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Securities Act; to
make no further amendment or any supplement to the Registration Statement
or to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of the time
when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has
been filed and to furnish the Representatives with copies thereof; to
advise the Representatives, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus, of
the suspension of the qualification of the Stock for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to use
promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits
other than the computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus; and,
if the delivery of a prospectus is required at any time after the Effective
Time in connection with the offering or sale of the Stock or any other
securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made when
such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary to amend or supplement the Prospectus in order to
comply with the Securities Act or the Exchange Act, to notify the
Representatives and, upon their request, to file such document and to
prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as the Representatives may from time to time
reasonably request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in
<PAGE>
the judgment of the Company or the Representatives, be required by the
Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters and obtain
the consent of the Representatives to the filing, which consent shall not
be unreasonably withheld or delayed;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least 410 days after the
end of the Company's current fiscal quarter), to make generally available
to the Company's security holders and to deliver to the Representatives an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Securities Act and the Rules
and Regulations (including, at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the
Company to its shareholders and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange (or, if applicable, the Nasdaq National Market) upon
which the Common Stock may be listed pursuant to requirements of or
agreements with such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, offer for sale, sell or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock and shares
issued pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans existing on the date hereof or pursuant
to currently outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of Common Stock
(other than the grant of options pursuant to option plans existing on the
date hereof), without the prior written consent of Lehman Brothers Inc.;
and to cause each officer, director and those stockholders of the Company
listed on Schedule 3 hereto to
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furnish to the Representatives, prior to the First Delivery Date, the Lock-
Up Letter Agreement in the form attached hereto as Exhibit A (the "Lock-Up
Agreement").
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the Nasdaq National Market and to use its best efforts to complete
that listing, subject only to official notice of issuance, prior to the
First Delivery Date;
(k) Prior to filing with the Commission any reports on the
Company's use of proceeds pursuant to Rule 463 of the Rules and
Regulations, to furnish a copy thereof to the counsel for the Underwriters
and receive and consider its comments thereon;
(l) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus, and
(m) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment company"
within the meaning of such term under the Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, offer for sale, sell or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock), without the
prior written consent of Lehman Brothers Inc. other than as permitted by
the Lock-Up Agreement.
(b) That the Stock to be sold by such Selling Stockholder
hereunder, which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the Underwriters, that
the arrangements made by the Selling Stockholder for such custody are to
that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated by any act of the Selling
Stockholder, by operation of law, by the death or incapacity of any
individual Selling Stockholder or, in the case of a trust, by the death or
incapacity of any executor or trustee or the termination of such trust, or
the occurrence of any other event.
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury Department
Form W-8 (if the Selling Stockholder is a non-United States person) or Form
W-9 (if the Selling Stockholder is a United States person.)
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8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of printing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the stock; (e) the costs of delivering and distributing the Custody
Agreements and the Powers of Attorney; (f) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Stock; (g) any applicable listing or other fees; (h)
the fees and expenses of qualifying the Stock under the securities laws of the
several jurisdictions as provided in Section 6 (h) and of preparing, printing
and distributing a Blue Sky Memorandum (including customary fees and expenses of
counsel to the Underwriters), not to exceed $10,000; and (i) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as provided in this Section 8 and in
Section 14, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters, and each Selling Stockholder shall pay the fees and expenses
of such Selling Stockholder's counsel, and such Selling Stockholder's pro rata
share of the fees and expenses of the Custodian (and any other attorney-in-
fact), and any transfer taxes payable in connection with the Selling
Stockholder's respective sales of Stock to the Underwriters and reimburse the
Company for such Selling Stockholder's pro rata share of the fees and expenses
paid by the Company in connection with the offering of the Stock, in each case
to the extent such obligations are not borne by the Company pursuant to a
registration rights agreement with such Selling Stockholder.
9. Conditions to Underwriters' Obligations. The respective obligations
of the Underwriters hereunder are subject to the accuracy, when made and on each
Delivery Date, of the representations and warranties of the Company and the
Selling Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder, and to each of
the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the
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opinion of Latham & Watkins, counsel for the Underwriters, is material or
omits to state a fact which, in the opinion of such counsel, is material
and is required to be stated therein or is necessary to make the statements
therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration Statement
and the Prospectus, the Merger, the Equity Recapitalization and all other
legal matters relating to this Agreement and the transactions contemplated
hereby shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company and the Selling Stockholders shall
have furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) The Company shall cause legal opinions to be delivered as
follows:
(A) Kirkland & Ellis shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporations and the Company and the Significant
Subsidiaries are in good standing under the laws of their
respective jurisdictions of incorporation, are duly qualified to
do business and, based solely on certificates of public
officials, are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification and have all power and authority necessary to
own or hold their respective properties and conduct the
businesses in which they are engaged;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
and all of the issued shares of capital stock of each Significant
Subsidiary have been duly and validly authorized and issued and
are fully paid, non-assessable and (except for directors'
qualifying shares and except as set forth in the Prospectus) are
owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims;
(iii) Except as described in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor
any restriction upon the
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<PAGE>
voting or transfer of, any shares of the Stock pursuant to the
Company's charter or by-laws or any agreement or other instrument
known to such counsel;
(iv) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or assets of
the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and,
to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose is pending or
threatened by the Commission;
(vi) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the historical and pro
forma financial statements and related schedules therein, as to
which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Securities Act
and the Rules and Regulations (other than the historical and pro
forma financial statements and related schedules therein, as to
which such counsel need express no opinion);
(vii) To such counsel's knowledge, there are no contracts
or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by
the Securities Act or by the Rules and Regulations which have not
been described or filed as exhibits to the Registration Statement
or incorporated therein by reference as permitted by the Rules
and Regulations;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
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<PAGE>
(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company with all of the provisions of this Agreement and
the consummation of the Merger and the transactions constituting
the Equity Recapitalization do not and will not (A) conflict with
or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets
of the Company or any of its subsidiaries is subject, (B) result
in any violation of the provisions of (1) the charter or by-laws
of the Company or any of its subsidiaries or (2) any statute or
any order, rule or regulation known to such counsel of any court
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or
assets; and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as have been made or obtained or
as may be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution
of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated
hereby, or for the Merger or any of the transactions constituting
the Equity Recapitalization; and
(x) To such counsel's knowledge, except as described in
the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right (other than rights which have been waived or
satisfied) to require the Company to file a registration
statement under the Securities Act with respect to any securities
of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
(xi) The Merger Agreement has been duly authorized,
executed and delivered by the Company and Hines Nevada, and the
merger of Hines Nevada with and into the Company (the "Merger")
has been consummated in accordance with the terms of the Merger
Agreement.
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In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United
States of America, the laws of Illinois, New York, California and the
General Corporation Law of the State of Delaware provided that such
counsel shall state that it believes that both the Underwriters and it
are justified in relying upon such opinions, abstracts, reports,
policies and certificates. Such counsel shall also have furnished to
the Representatives a written statement, addressed to the Underwriters
and dated such Delivery Date, in form and substance satisfactory to
the Representatives, to the effect that (x) such counsel acted as
special counsel to the Company in connection with the preparation of
the Registration Statement (although the Company is also represented
by McMillan Binch and Larson Lundell Lawson & McIntosh with respect to
matters of Canadian law), and (y) based on the foregoing, no facts
have come to the attention of such counsel which lead it to believe
that the Registration Statement, as of the Effective Date, contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the
Prospectus except for the statements made in the Prospectus under the
captions "Description of Capital Stock," "Shares Eligible for Future
Sale," "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview - Tax Matters," "Management -
1998 Stock Plan - Certain Federal Income Tax Consequences of the 1998
Stock Plan," "Certain Relationships and Related Transactions -
Blooming Farm Transactions," and Part II, Item 14 and Item 15 of the
Registration Statement, insofar as such statements relate to the Stock
or concern legal matters.
(B) Morris, Nichols, Arsht & Tunnell shall have furnished to
the Representatives its written opinion, as special Delaware counsel
to the Company, in form and substance satisfactory to the
Representatives and counsel to the Underwriters, with respect to the
enforceability of the provisions in the Company's Restated Certificate
of Incorporation under the caption "Certain Restrictions on the
Transfer of the Corporation's Stock."
(C) Baker, Manock & Jensen shall have furnished to the
Representatives its written opinion, as special water rights counsel
to the Company, in form and substance satisfactory to the
Representatives and counsel to the Underwriters, with respect to (1)
the matters specified in clause (x) of the opinion of Kirkland & Ellis
insofar as such matters relate to agreements with, or statutes,
orders, rules or regulations of, any U.S. federal, or California
governmental
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authority, or any consents, approvals, authorizations or orders of, or
filings or registrations with, any such governmental authority, that
relate to the Company's rights to use water resources as described in
the Prospectus, and (2) the description in the Prospectus in the
second and third paragraphs under the caption "Business -- Government
Regulation."
(e) The respective counsel for each of the Selling Stockholders
shall have furnished to the Representatives its written opinion, as counsel
to each of the Selling Stockholders for whom it is acting as counsel,
addressed to the Underwriters and dated the First Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the effect
that:
(i) The execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by
each Selling Stockholder and the consummation by each Selling
Stockholder of the transactions contemplated hereby and thereby
will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any
statute, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which
such Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets of
any Selling Stockholder is subject, nor will such actions result
in any violation of any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property
or assets of such Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement,
the Power of Attorney or the Custody Agreement by such Selling
Stockholder and the consummation by such Selling Stockholder of
the transactions contemplated hereby and thereby;
(ii) This Agreement has been duly executed and delivered
by or on behalf of such Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have
been duly authorized (if such Selling Stockholder is not a
natural person), executed and delivered by such Selling
Stockholder and constitute valid and
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<PAGE>
binding agreements of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with their
respective terms;
(iv) Immediately prior to the First Delivery Date, such
Selling Stockholder had good and valid title to the shares of
Stock to be sold by such Selling Stockholder under this
Agreement, free and clear of all liens, encumbrances, equities or
claims, and full right, power and authority to sell, assign,
transfer and deliver such shares to be sold by such Selling
Stockholder hereunder; and
(v) Good and valid title to the shares of Stock to be sold
by such Selling Stockholder under this Agreement, free and clear
of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United
States of America and the laws of New York and (ii) in rendering the
opinion in Section 9(e) above, rely upon a certificate of such Selling
Stockholder in respect of matters of fact, provided that such counsel
shall furnish copies thereof to the Representatives and state that it
believes that both the Underwriters and it are justified in relying
upon such certificate.
(f) The Representatives shall have received from Latham &
Watkins counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for the
purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from each of Price Waterhouse LLP a
letter, in form and substance satisfactory to the Representatives,
addressed to the Underwriters and dated the date hereof (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission, (ii) stating, as of the date hereof (or, with
respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof),
the conclusions and findings of such firm with respect to the financial
information and other matters ordinarily covered by accountants' "comfort
letters" to underwriters in connection with registered public offerings.
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<PAGE>
(h) With respect to the letters of Price Waterhouse LLP referred
to in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial letter"),
the Company shall have furnished to the Representatives a letter (the
"bring-down letter") of such accountants, addressed to the Underwriters and
dated such Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set forth
in the initial letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 10(a) and 10(k)
have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(j) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the First Delivery Date a certificate,
dated the First Delivery Date, signed by, or on behalf of, the Selling
Stockholder (or the Custodian or one or more attorneys-in-fact) stating
that the representations, warranties and agreements of the Selling
Stockholder contained herein are true and correct as of the First Delivery
Date and that the Selling Stockholder has complied with all agreements
contained herein to be performed by the Selling Stockholder at or prior to
the First Delivery Date.
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(k) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus or
(ii) since such date there shall not have been any change in the capital
stock or long-term debt of the Company or any of its subsidiaries or any
change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in clause (i) or (ii), is, in the judgment of
the Representatives, so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Stock being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(l) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market, or trading in any securities of
the Company on any exchange or in the over-the-counter market, shall have
been suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock
being delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(m) The Nasdaq National Market shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
(n) The New Senior Credit Facility (as defined in the
Prospectus) shall have been entered into on substantially the terms
described in the Prospectus.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
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11. Indemnification and Contribution.
(a) The Company and each of the Significant Subsidiaries, jointly
and severally, shall indemnify and hold harmless each Underwriter
(including any Underwriter in its role as QIU, as defined below), its
officers and employees and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to which
that Underwriter, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto or (B) in any blue sky
application or other document prepared or executed by the Company (or based
upon any written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Stock under the securities laws of
any state or other jurisdiction (any such application, document or
information being hereinafter called a "Blue Sky Application"), (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be
stated therein or necessary to make the statements therein not misleading
or (iii) any act or failure to act or any alleged act or failure to act by
any Underwriter in connection with, or relating in any manner to, the Stock
or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of
or based upon matters covered by clause (i) or (ii) above (provided that
the Company and the Significant Subsidiaries shall not be liable under this
clause (iii) to the extent that it is determined in a final judgment by a
court of competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken
or omitted to be taken by such Underwriter through its gross negligence or
willful misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer,
employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Company and the Significant Subsidiaries shall not be liable in any
such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any such
amendment or supplement, or in any Blue Sky Application, in reliance upon
and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein; provided, further, that the
indemnity agreement provided in this Section 11(a) with respect to any
prospectus shall not inure to the benefit of any Underwriter from whom the
person
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<PAGE>
asserting any loss, claim, damage, liability or action based upon any
untrue statement or alleged untrue statement of a material fact or omission
or alleged omission purchased Stock, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected was not sent or given to such person within the time
required by the Securities Act and the Rules and Regulations thereunder
unless the failure to deliver the corrected Prospectus is the result of
noncompliance by the Company with Section 6(c) hereof. In addition, the
Company and the Significant Subsidiaries hereby confirm that at their
request Lehman Brothers Inc. has acted as "qualified independent
underwriter" (in such capacity, the "QIU") within the meaning of Rule 2720
of the Conduct Rules of the National Association of Securities Dealers,
Inc. in connection with the offering of the Stock. Each of the Company and
the Significant Subsidiaries will jointly and severally indemnify and hold
harmless the QIU against any losses, claims, damages or liabilities, joint
or several, to which the QIU may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the QIU's acting
(or alleged failing to act) as such "qualified independent underwriter" and
will reimburse the QIU for any legal or other expenses reasonably incurred
by the QIU in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred. The
foregoing indemnity agreements are in addition to any liability which the
Company or the Significant Subsidiaries may otherwise have to any
Underwriter or the QIU or to any officer, employee or controlling person of
that Underwriter or the QIU.
(b) The Selling Stockholders, severally in proportion to the
number of shares of Stock to be sold by each of them hereunder, shall
indemnify and hold harmless each Underwriter, its officers and employees,
and each person, if any, who controls any Underwriter within the meaning of
the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Stock), to which that Underwriter, officer, employee
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
shall reimburse each Underwriter, its officers and employees and each such
controlling person for any legal or other expenses reasonably incurred by
that Underwriter, its officers and employees or controlling person in
connection with investigating or defending or preparing to defend against
any such loss, claim, damage, liability or action as such expenses are
incurred in each case to the extent, and only to the extent, that such
untrue statement or omission or alleged untrue statement or omission was
made in reliance upon and in conformity with written information furnished
to the Company by such Selling Stockholder specifically for
25
<PAGE>
use therein; provided, however, that the Selling Stockholders shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement
or alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in
any such amendment or supplement in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company
through the Representatives by or on behalf of any Underwriter specifically
for inclusion therein; provided, further, that the indemnity agreement
provided in this Section 11(a) with respect to any prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any
loss, claim, damage, liability or action based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission
purchased Stock, if a copy of the Prospectus in which such untrue statement
or alleged untrue statement or omission or alleged omission was corrected
was not sent or given to such person within the time required by the
Securities Act and the Rules and Regulations thereunder unless the failure
to deliver the corrected Prospectus is the result of noncompliance by the
Company with Section 6(c) hereof. The foregoing indemnity agreement is in
addition to any liability which the Selling Stockholders may otherwise have
to any Underwriter or any officer, employee or controlling person of that
Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each of its
directors (including any person who, with his or her consent, is named in
the Registration Statement as about to become a director of the Company),
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or
any such director, officer or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
in any amendment or supplement thereto, or (B) in any Blue Sky Application
or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person
in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses
are incurred. The foregoing indemnity agreement is in addition to any
26
<PAGE>
liability which any Underwriter may otherwise have to the Company or any
such director, officer, employee or controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 11 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 11, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under this
Section 11 except to the extent it has been materially prejudiced by such
failure and, provided further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 11. If any such claim
or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party
under this Section 11 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that the
Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriters against the Company or the Significant Subsidiaries any
Selling Stockholder under this Section 11 if, in the reasonable judgment of
the Representatives, it is advisable for the Representatives and those
Underwriters, officers, employees and controlling persons to be jointly
represented by separate counsel, and in that event the fees and expenses of
such separate counsel shall be paid by the Company or the Significant
Subsidiaries or Selling Stockholders. No indemnifying party shall (i)
without the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified
parties are actual or potential parties to such claim or action) unless
such settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim,
action, suit or proceeding, or (ii) be liable for any settlement of any
such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the
indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless
any indemnified party from and against any loss or liability by reason of
such settlement or judgment.
27
<PAGE>
(e) If the indemnification provided for in this Section 11 shall
for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 11(a), 11(b) or 11(c) in respect of any
loss, claim, damage or liability, or any action in respect thereof,
referred to therein, then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of such loss, claim, damage
or liability, or action in respect thereof, (i) in such proportion as shall
be appropriate to reflect the relative benefits received by the Company,
the Significant Subsidiaries and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company, the Significant Subsidiaries, and the Selling Stockholders on the
one hand and the Underwriters on the other with respect to the statements
or omissions which resulted in such loss, claim, damage or liability, or
action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the
Significant Subsidiaries, and the Selling Stockholders on the one hand and
the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the offering of
the Stock purchased under this Agreement (before deducting expenses)
received by the Company, the Significant Subsidiaries, and the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the
Stock purchased under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied
by the Company, the Significant Subsidiaries, the Selling Stockholders or
the Underwriters, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement
or omission. For purposes of the preceding two sentences, the net proceeds
deemed to be received by the Company shall be deemed to be also for the
benefit of the Significant Subsidiaries and information supplied by the
Company shall also be deemed to have been supplied by the Significant
Subsidiaries. The Company, the Significant Subsidiaries, the Selling
Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in
this Section shall be deemed to include, for purposes of this Section
11(e), any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 11(e), no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Stock underwritten by it and distributed to
the
28
<PAGE>
public was offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason of
any untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 11(e)
are several in proportion to their respective underwriting obligations and
not joint.
(f) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering of the
Stock by the Underwriters set forth on the cover page of, the legend
concerning over-allotments and stabilization on the inside front cover page
of, and the concession and reallowance figures and the ninth and tenth
paragraphs relating to overallotments and stabilization activities
appearing under the caption "Underwriting" in, the Prospectus are correct
and constitute the only information furnished in writing to the Company by
or on behalf of the Underwriters specifically for inclusion in the
Registration Statement and the Prospectus.
12. Defaulting Underwriters. If, on either Delivery Date, any
Underwriter defaults in the performance of its obligations under this Agreement,
the remaining non-defaulting Underwriters shall be obligated to purchase the
Stock which the defaulting Underwriter agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set opposite the name of each remaining non-defaulting Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 hereto; provided, however, that the remaining non-defaulting Underwriters
shall not be obligated to purchase any of the Stock on such Delivery Date if the
total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of shares of the Stock to be purchased on such Delivery Date, and
any remaining non-defaulting Underwriter shall not be obligated to purchase more
than 110% of the number of shares of the Stock which it agreed to purchase on
such Delivery Date pursuant to the terms of Section 3. If the foregoing maximums
are exceeded, the remaining non-defaulting Underwriters, or those other
underwriters satisfactory to the Representatives who so agree, shall have the
right, but shall not be obligated, to purchase, in such proportion as may be
agreed upon among them, all the Stock to be purchased on such Delivery Date. If
the remaining Underwriters or other underwriters satisfactory to the
Representatives do not elect to purchase the shares which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such Delivery Date,
this Agreement (or, with respect to the Second Delivery Date, the obligation of
the Underwriters to purchase, and of the Company to sell, the Option Stock)
shall terminate without liability on the part of any non-defaulting Underwriter
or the Company or the Selling Stockholders, except that the Company will
continue to be liable for the payment of expenses to the extent set forth in
Sections 8 and 14. As used in this Agreement, the term "Underwriter" includes,
for all purposes of this Agreement unless the context requires otherwise, any
party not listed in Schedule 1 hereto who, pursuant to this Section 12,
purchases Firm Stock which a defaulting Underwriter agreed but failed to
purchase.
29
<PAGE>
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
13. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
and the Selling Stockholders prior to delivery of and payment for the Firm Stock
if, prior to that time, any of the events described in Sections 9(k) or 9(l),
shall have occurred or if the Underwriters shall decline to purchase the Stock
for any reason permitted under this Agreement.
14. Reimbursement of Underwriters' Expenses. If the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 12 by
reason of the default of one or more Underwriters, neither the Company shall not
be obligated to reimburse any defaulting Underwriter on account of those
expenses.
15. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate Department
(Fax: 212-526-6588), with a copy, in the case of any notice pursuant to
Section 11(d), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New
York, NY 10285;
(b) if to the Company or to the Significant Subsidiaries, shall
be delivered or sent by mail or facsimile transmission to the address of
the Company set forth in the Registration Statement, Attention: Stephen P.
Thigpen (Fax: (714) 376-5512);
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at the
address set forth on Schedule 2 hereto;
30
<PAGE>
provided, however, that any notice to an Underwriter pursuant to Section 11(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and the
Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the and the Company and the Underwriters shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Selling Stockholders by the Custodian.
16. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters (including, to the
extent applicable, the QIU), the Company, the Selling Stockholders and their
respective personal representatives and successors. This Agreement and the terms
and provisions hereof are for the sole benefit of only those persons, except
that (A) the representations, warranties, indemnities and agreements of the
Company and the Selling Stockholders contained in this Agreement shall also be
deemed to be for the benefit of the person or persons, if any, who control any
Underwriter within the meaning of Section 15 of the Securities Act and (B) the
indemnity agreement of the Underwriters contained in Section 11(c) of this
Agreement shall be deemed to be for the benefit of directors of the Company,
officers of the Company who have signed the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed to
give any person, other than the persons referred to in this Section 16, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
17. Survival. The respective indemnities, representations, warranties
and agreements of the Company, the Significant Subsidiaries, the Selling
Stockholders and the Underwriters contained in this Agreement or made by or on
behalf on them, respectively, pursuant to this Agreement, shall survive the
delivery of and payment for the Stock and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any of them or any
person controlling any of them.
18. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
19. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
20. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be
31
<PAGE>
deemed to be an original but all such counterparts shall together constitute one
and the same instrument.
21. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
32
<PAGE>
If the foregoing correctly sets forth the agreement among the Company;
the Significant Subsidiaries, the Selling Stockholders and the Underwriters,
please indicate your acceptance in the space provided for that purpose below.
Very truly yours,
Hines Horticulture, Inc.
By ____________________________________
Name:
Title:
The Significant Subsidiaries
Hines Nurseries, Inc.
By ____________________________________
Name:
Title:
Sun Gro Horticulture Inc.
By ____________________________________
Name:
Title:
The Selling Stockholders named in Schedule 2 to
this Agreement
By ____________________________________
Attorney-in-Fact
33
<PAGE>
Accepted:
Lehman Brothers Inc.
BT Alex Brown Incorporated
BancAmerica Robertson Stephens
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By _____________________________
Authorized Representative
34
<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
------------ ---------
Lehman Brothers Inc. ...........................
BT Alex. Brown Incorporated.....................
BancAmerica Robertson Stephens..................
---------
Total
=========
<PAGE>
SCHEDULE 2
Number of Shares
Name of Selling Stockholder of Firm Stock
- --------------------------- ----------------
Stephen P. Thigpen................................... 25,000
Michael R. Crowe..................................... 215,325
Alan A. Hollman...................................... 34,179
Timothy P. Ryan...................................... 110,047
Gerald Taylor........................................ 12,501
-------
Total................................................ 397,052
=======
<PAGE>
SCHEDULE 3
The Lock-up will apply to the following individuals and entities:
MDCP
Abbott
Chilmark
Calsters
Doug Allen
Stephen Thigpen
Claudia Pieropan
Bud Summers
Rob Ferguson
David Fujino
Mitch Weaver
Ken Corman
Kirsten Judd
Brad Wiens
Raju Boligala
Bob Johnson
Sam Rizzi
Chris Colasono
Al Dorish
<PAGE>
EXHIBIT A
FORM OF
LOCK-UP LETTER AGREEMENT
Lehman Brothers Inc.
BT Alex Brown Incorporated
BancAmerica Robertson Stephens
As Representatives of the
several underwriters
c/o LEHMAN BROTHERS INC.
Three World Financial Center
New York, NY 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $0.01 per share (the "Common Stock"), of
Hines Horticulture, Inc. (the "Company") and that the Underwriters propose to
reoffer the Shares to the public (the "Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc., the undersigned will not, directly or indirectly, (1) offer for
sale, sell, pledge, or otherwise dispose of (or enter into any transaction or
device that is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock
(including, without limitation, shares of Common Stock that may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common Stock
that may be issued upon exercise of any option or warrant) or securities
convertible into or exchangeable for Common Stock (other than the Shares) owned
by the undersigned on the date of execution of this Lock-Up Letter Agreement or
on the date of the completion of the Offering, or (2) enter into any swap or
other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or other securities, in cash or
otherwise, for a period of 180 days after the date of the final Prospectus
relating to the Offering. The restrictions described in this paragraph, however,
do not apply to (i) the sale of Common Stock to the Underwriters, (ii) the
issuance by the Company of shares of Common Stock upon the exercise of
<PAGE>
options issued under the Company's 1998 Long-Term Equity Incentive Plan, as
described in the final Prospectus relating to the Offering, (iii) the transfer
of Common Stock by gift, will or laws of descent and distribution to any person
or entity, provided such person or entity agrees in writing to be bound by the
provisions of this Lock-Up Letter Agreement or (iv) transactions by any person
other than the Company relating to shares of Common Stock or other securities
acquired in open market transactions after completion of the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent are
hereby authorized to decline to make any transfer of securities if such transfer
would constitute a violation or breach of this Lock-Up Letter Agreement.
It is understood that, if the Company notifies you that it does not intend
to proceed with the Offering, if the Underwriting Agreement is not executed or
is terminated by its terms, or if the Underwriting Agreement (other than the
provisions thereof which survive termination) shall terminate or be terminated
prior to payment for and delivery of the Shares, we will be released from our
obligations under this Lock-Up Letter Agreement.
The undersigned understands that the Company, the Underwriters and the
stockholders selling shares in the Offering will proceed with the Offering in
reliance on this Lock-Up Letter Agreement.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Letter Agreement and that,
upon request, the undersigned will execute any additional documents necessary in
connection with the enforcement hereof. Any obligations of the undersigned shall
be binding upon the heirs, personal representatives, successors and assigns of
the undersigned.
Very truly yours,
By: _______________________
Name:
Title:
Dated: June __, 1998
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
HINES HORTICULTURE, INC.
ARTICLE I
---------
NAME
----
The name of the corporation is Hines Horticulture, Inc. (hereinafter
referred to as the "Corporation").
-----------
ARTICLE II
----------
REGISTERED OFFICE
-----------------
The registered office of the Corporation within the State of Delaware
is 9 East Loockerman Street, in the City of Dover, County of Kent, 19901. The
name of its registered agent at such address is National Registered Agents, Inc.
ARTICLE III
-----------
PURPOSE
-------
The nature of the business or purpose to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware ("Delaware General
Corporation Law").
ARTICLE IV
----------
CAPITAL STOCK
-------------
Part A. General. The Corporation shall be authorized to issue
------- -------
62,000,000 shares, consisting of: (i) 2,000,000 shares of Preferred Stock, par
value $0.01 per share (the "Preferred Stock"); and (ii) 60,000,000 shares of
---------------
Common Stock, par value $0.01 per share (the "Common Stock").
------------
1
<PAGE>
Part B. Preferred Stock. Authority is hereby expressly vested in
------- ---------------
the Board of Directors of the Corporation (each member thereof, a "Director,"
and collectively, the "Board of Directors" or the "Board"), without further
action by the Corporation's stockholders, subject to the provisions of this
Article IV and to the limitations prescribed by law, to authorize the issuance
from time to time of one or more series of Preferred Stock. The authority of
the Board of Directors with respect to each series shall include, but not be
limited to, the determination or fixing of the following by resolution or
resolutions adopted by the affirmative vote of a majority of the total number of
the Directors then in office:
(1) The designation of such series;
(2) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes or series of the
Corporation's capital stock and whether such dividends shall be cumulative or
non-cumulative;
(3) Whether the shares of such series shall be subject to redemption
for cash, property or rights, including securities of any other corporation, by
the Corporation or upon the happening of a specified event and, if made subject
to any such redemption, the times or events, prices, rates, adjustments and
other terms and conditions of such redemptions;
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(5) Whether or not the shares of such series shall be convertible
into, or exchangeable for, at the option of either the holder or the Corporation
or upon the happening of a specified event, shares of any other class or classes
or of any other series of the same class of the Corporation's capital stock and,
if provision be made for conversion or exchange, the times or events, prices,
rates, adjustments and other terms and conditions of such conversions or
exchanges;
(6) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(7) The rights of the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(8) The provisions as to voting, optional and/or other special rights
and preferences, if any, including, without limitation, the right to elect one
or more Directors.
Part C. Common Stock. Except as otherwise provided by the Delaware
------- ------------
General Corporation Law or this Restated Certificate of Incorporation (the
"Restated Certificate"), and subject to the rights of holders of any series of
--------------------
Preferred Stock, the holders of record of Common Stock shall share ratably in
all dividends payable in cash, stock or otherwise and other distributions,
whether in respect of liquidation or dissolution (voluntary or involuntary) or
otherwise and, are subject to all the powers, rights, privileges, preferences
and priorities of any series of Preferred Stock
-2-
<PAGE>
as provided herein or in any resolution or resolutions adopted by the Board of
Directors pursuant to authority expressly vested in it by the provisions of
Section B of this Article IV.
(1) The Common Stock shall not be convertible into, or exchangeable
for, shares of any other class or classes or of any other series of the same of
the Corporation's capital stock.
(2) No holder of Common Stock shall have any preemptive, subscription,
redemption, conversion or sinking fund rights with respect to the Common Stock,
or to any obligations convertible (directly or indirectly) into stock of the
Corporation whether now or hereafter authorized.
(3) Except as otherwise provided by the Delaware General Corporation
Law or the Restated Certificate and subject to the rights of holders of any
series of Preferred Stock, all of the voting power of the stockholders of the
Corporation shall be vested in the holders of the Common Stock, and each holder
of Common Stock shall have one vote for each share held by such holder on all
matters voted upon by the stockholders of the Corporation.
ARTICLE V
---------
CERTAIN RESTRICTIONS ON THE TRANSFER OF THE CORPORATION'S STOCK
---------------------------------------------------------------
Part A. Transfer Restrictions. In order to preserve the ability of
------ ---------------------
the Corporation and its Subsidiaries (as defined) to receive water subject to
Reclamation Law (as defined), the following restrictions shall apply until the
earlier of (x) the date on which neither the Corporation nor any of its
Subsidiaries receives or is seeking to qualify to receive such water, as
determined by the Board of Directors and (y) such other date (if any) as shall
be designated by the Board of Directors upon a written determination by the
Board of Directors that the continuation of the restrictions in this Article V
is no longer in the best interests of the Corporation. (The date on which the
restrictions of this Article V expire hereunder is sometimes referred to herein
as the "Expiration Date.")
---------------
A1. Definitions. For purposes of this Article V:
-----------
An "Affiliate" of a specified Person is a Person that directly, or
---------
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the Person specified.
"Beneficial Interest" shall have the same meaning as such term has in
-------------------
the definition of "Indirect" and in the attribution provisions under Reclamation
Law.
"Eligible" shall have the meaning as defined under Reclamation Law.
--------
"Indirect" shall have the meaning as defined under Reclamation Law.
--------
-3-
<PAGE>
"Ineligible Person" shall mean any Person who, as a result of
-----------------
acquiring a Beneficial Interest in the Corporation, renders any portion of the
Landholdings of the Corporation or any of its Subsidiaries ineligible to receive
Irrigation Water.
"Irrigation Water" shall have the meaning as defined under Reclamation
----------------
Law.
"Landholder" shall have the meaning as defined under Reclamation Law.
----------
"Landholdings" shall have the meaning as defined under Reclamation
------------
Law.
"Merger" shall mean the merger of Hines Holdings, Inc., a Nevada
------
corporation, with and into the Corporation.
"Person" shall mean any natural person or any "legal entity or entity"
------
as such terms are defined under Reclamation Law.
"Preexisting Reporting Person" shall mean the Company, Madison
----------------------------
Dearborn Capital Partners, L.P., Blooming Farm, Inc., California State Teachers
Retirement System, California Public Employees Retirement System, First Chicago
NBD Corp. and Virginia Retirement System.
"Reclamation" means the Bureau of Reclamation, U.S. Department of the
-----------
Interior, or any other government agency or authority which becomes responsible
as the successor to the Bureau of Reclamation for the administration of the
Reclamation Law.
"Reclamation Law" shall mean the Reclamation Act of 1902 and Acts
---------------
supplementary thereto and amendatory thereof (43 USC (S) 371 et seq.),
including, but not limited to, the Reclamation Reform Act of 1982 (43 USC (S)
390 aa, et seq.), and any rules and regulations promulgated thereunder, as from
time to time amended.
"Stock" refers to all classes of capital stock of the Corporation and
-----
all other Beneficial Interests in the Corporation.
"Subsidiary" means an Affiliate controlled by the Corporation
----------
directly, or indirectly through one or more intermediaries.
"Transfer" shall mean any conveyance, by any means, of legal or
--------
beneficial ownership (direct or indirect) of Stock, whether such means are
direct or indirect, voluntary or involuntary, including, without limitation, the
transfer of any ownership interest in any entity that owns (directly or
indirectly) Stock (and any reference in this Article V to a Transfer of Stock
shall include any Transfer of any interest in any such entity and references to
the Persons to whom Stock is Transferred shall include Persons to whom any
interest in any such entity shall have been Transferred).
"Transferee" means any Person to whom Stock is Transferred.
----------
-4-
<PAGE>
"Transferee Undertaking" shall mean a written undertaking in form and
----------------------
substance satisfactory to the Corporation which has been duly executed and
delivered by the Transferee (and, if requested by the Corporation, accompanied
by an opinion of counsel reasonably satisfactory to the Corporation regarding
due authorization, execution, delivery, no conflict and enforceability) pursuant
to which the Transferee agrees (i) to submit, and to cause its Affiliates to
submit, all certifications, reports and other information required under
Reclamation Law (which submissions shall be timely delivered, shall be
responsive to the applicable form or information requirement and shall be true
and correct), and to promptly deliver a copy of all such submissions to the
Secretary of the Corporation, and (ii) not to take any action or fail to take
any action, and to cause its Affiliates not to take any action or fail to take
any action, which would limit, or would reasonably be expected to limit, the
amount of land on which the Corporation or any of its Subsidiaries would
otherwise be eligible to receive Irrigation Water under Reclamation Law.
A2. Prohibited Transfers. From and after the effective time of the
--------------------
Merger, no Person shall Transfer any Stock to any other Person to the extent
that such Transfer, if effected: (a) would be to a Transferee who would be an
Ineligible Person; or (b) would cause the Transferee to be subject to the
reporting, certification and/or information requirements under Reclamation Law,
unless, in the case of this clause (b), the Transferee has previously executed
and delivered to the Corporation a Transferee Undertaking in form and substance
satisfactory to the Corporation; provided, however, nothing in this Article V
shall prohibit the Transfer of any Stock to a Preexisting Reporting Person or
prohibit the Transfer of any interest in any Preexisting Reporting Person.
A3. Board Consent to Certain Transfers. The Board of Directors may
----------------------------------
permit any Transfer of Stock that would otherwise be prohibited pursuant to
subparagraph A2 of this Article V if information relating to a specific proposed
transaction is presented to the Board of Directors and the Board of Directors
determines that, based on the facts in existence at the time of such
determination, such transaction will not jeopardize the ability of the
Corporation or any of its Subsidiaries to receive Irrigation Water. The Board
of Directors may impose any conditions that it deems reasonable and appropriate
in connection with such a Transfer, including without limitation, restrictions
on the ability of any Transferee to Transfer Stock acquired through such
Transfer; provided, however, that any such restrictions shall be consented to by
such Transferee and the certificates representing such Stock shall include an
appropriate legend.
A4. Waiver of Restrictions. Notwithstanding anything herein to the
----------------------
contrary, the Board of Directors may waive any of the restrictions contained in
subparagraph A2 of this Article V in any instance in which the Board of
Directors determines that a waiver would be in the best interests of the
Corporation, notwithstanding the effect of such waiver on the ability of the
Corporation and its Subsidiaries to receive Irrigation Water.
Part B. Purported Transfer in Violation of Transfer Restriction
------ -------------------------------------------------------
Unless the approval or waiver of the Board of Directors is obtained as
provided in subparagraphs A3 and A4 of this Article V, any purported Transfer of
Stock in excess of the Stock that could be Transferred to the Transferee without
restriction under subparagraph A2 of this Article V shall not be effective to
Transfer record, beneficial, legal or any other ownership of such
-5-
<PAGE>
excess Stock (the "Prohibited Shares") to the purported acquiror (the "Purported
----------------- ---------
Acquiror"), who shall not be entitled to any rights as a stockholder of the
- --------
Corporation with respect to the Prohibited Shares (including, without
limitation, the right to vote or to receive dividends with respect thereto). Any
purported record, beneficial, legal or other owner of Prohibited Shares shall be
deemed to be a "Purported Acquiror" of such Prohibited Shares. If there is more
than one Purported Acquiror with respect to certain Prohibited Shares (for
example, if the Purported Acquiror of record ownership of such Prohibited Shares
is not the Purported Acquiror of beneficial ownership of such Prohibited
Shares), then references to "Purported Acquiror" shall include any or all of
such Purported Acquirors, as appropriate. The following provisions, to the
extent permitted by law, shall be applicable to the determination of the status
and rights of Purported Acquirors and to the treatment and administration of
Prohibited Shares.
B1. Transfer of Prohibited Shares and Prohibited Distributions to
-------------------------------------------------------------
Agent. Upon demand by the Corporation, the Purported Acquiror shall transfer or
- ------
cause the transfer of any certificate or other evidence of purported ownership
of the Prohibited Shares within the Purported Acquiror's possession or control,
together with any dividends or other distributions paid by the Corporation with
respect to the Prohibited Shares that were received by the Purported Acquiror
(the "Prohibited Distributions"), to an agent designated by the Corporation (the
------------------------
"Agent"). The Agent shall sell in an arms-length transaction (through the
-----
Nasdaq National Market, if possible, but in any event consistent with applicable
law) any Prohibited Shares transferred to the Agent by the Purported Acquiror.
(The proceeds of such sale shall be referred to as "Sales Proceeds.") If the
--------------
Purported Acquiror has sold the Prohibited Shares to an unrelated party in an
arms-length transaction after purportedly acquiring them, the Purported Acquiror
shall be deemed to have sold the Prohibited Shares for the Agent, and in lieu of
transferring the Prohibited Shares and Prohibited Distributions to the Agent
shall transfer to the Agent the Prohibited Distributions and the proceeds of
such sale (the "Resale Proceeds"), except to the extent that the Agent grants
---------------
written permission to the Purported Acquiror to retain a portion of the Resale
Proceeds not exceeding the amount that would have been payable by the Agent to
the Purported Acquiror pursuant to subparagraph B2 below if the Prohibited
Shares had been sold by the Agent rather than by the Purported Acquiror. Any
purported Transfer of the Prohibited Shares by the Purported Acquiror other than
a transfer which (a) is described in the preceding sentences of this
subparagraph B1 and (b) does not itself violate the provisions of this Article V
shall not be effective to transfer any ownership of the Prohibited Shares.
B2. Allocation of Sale Proceeds, Resale Proceeds and Prohibited
-----------------------------------------------------------
Distributions. The Sale Proceeds or the Resale Proceeds, if applicable, shall,
- --------------
after reimbursing the Agent for the expenses incurred by it in performing its
duties hereunder, be allocated to the Purported Acquiror up to the following
amount: (a) where applicable, the purported purchase price paid or value of
consideration surrendered by the Purported Acquiror for the Prohibited Shares,
or (b) where the purported Transfer of the Prohibited Shares to the Purported
Acquiror was by gift, inheritance, or any similar purported Transfer, the fair
market value of the Prohibited Shares at the time of such purported Transfer.
Any Resale Proceeds or Sales Proceeds in excess of the Agent's expenses incurred
in performing its duties hereunder and the amount allocable to the Purported
Acquiror pursuant to the preceding sentence, together with any Prohibited
Distributions (such excess amount and Prohibited Distributions are collectively
the "Subject Amounts"), shall be disposed of in such manner as shall be
---------------
determined by the Board of Directors in its sole discretion.
-6-
<PAGE>
B3. Prompt Enforcement Against Purported Acquiror. After learning of
----------------------------------------------
a purported Transfer of Prohibited Shares to a Purported Acquiror or a Transfer
of Stock which would cause a Person to become a Prohibited Party (as hereinafter
defined), the Corporation through its Secretary shall demand that the Purported
Acquiror or the Prohibited Party Group (as hereinafter defined) surrender to the
Agent the certificates representing the Prohibited Shares, or any Resale
Proceeds, and any Prohibited Distributions, and if such surrender is not made by
the Purported Acquiror or Prohibited Party Group within thirty (30) business
days from the date of such demand, the Corporation may institute legal
proceedings to compel such transfer; provided, however, that nothing in this
subparagraph B3 shall preclude the Corporation in its discretion from
immediately bringing legal proceedings without a prior demand, and provided
further that any delay in taking action on the part of the Corporation shall not
constitute a waiver of any right of the Corporation to compel any transfer
required by, or take any action permitted by, this Article V.
B4. Other Remedies. In the event that the Board of Directors
--------------
determines that a Person proposes to take any action in violation of
subparagraph A2 of this Article V, or in the event that the Board of Directors
determines after the fact that an action has been taken in violation of
subparagraph A2 of this Article V, the Board of Directors, subject to Part C of
this Article V, may take such action as it deems advisable to prevent or to
refuse to give effect to any purported Transfer or other action which would
result, or has resulted, in such violation, including, but not limited to,
refusing to give effect to such purported Transfer or other action on the books
of the Corporation or instituting proceedings to enjoin such purported Transfer
or other action.
B5. Modification of Remedies For Certain Indirect Transfers. In the
--------------------------------------------------------
event of any Transfer of Stock which does not involve a transfer of "securities"
of the Corporation within the meaning of the Delaware General Corporation Law,
as amended ("Securities"), but which would cause a Person (the "Prohibited
---------- ----------
Party") to violate a restriction provided for in subparagraph A2 of this Article
- -----
V, the application of subparagraphs B1 and B2 shall be modified as described in
this subparagraph B5. In such case, the Prohibited Party and/or any Person
whose ownership of the Corporation's Securities is attributed to the Prohibited
Party pursuant to the attribution provisions under Reclamation Law
(collectively, the "Prohibited-Party Group") shall not be required to dispose of
----------------------
any interest which is not a Security, but shall be deemed to have disposed of,
and shall be required to dispose of, sufficient Securities (which Securities
shall be disposed of in the inverse order in which they were acquired by members
of the Prohibited Party Group), to cause the Prohibited Party, following such
disposition, not to be in violation of subparagraph A2 of this Article V. Such
disposition shall be deemed to occur simultaneously with the Transfer giving
rise to the application of this provision, and such number of Securities which
are deemed to be disposed of shall be considered Prohibited Shares and shall be
disposed of through the Agent as provided in subparagraphs B1 and B2 of this
Article V, except that the maximum aggregate amount payable to the Prohibited
Party Group in connection with such sale shall be the fair market value of the
Prohibited Shares at the time of the Prohibited Transfer.
Part C. No Restriction on Settlement of Nasdaq National Market or
------ ---------------------------------------------------------
Exchange Transactions. Nothing contained in this Article V shall preclude the
- ---------------------
settlement of any transaction involving Stock entered into through the
facilities of the Nasdaq National Market or any national
-7-
<PAGE>
securities exchange. The application of the provisions and remedies described in
Part B of this Article V shall be deemed not to so preclude any such settlement.
Part D. Obligation to Provide Information. The Corporation may
------ ---------------------------------
require as a condition to the registration of the Transfer of any Stock that the
proposed Transferee furnish to the Corporation all information reasonably
requested by the Corporation with respect to all the direct or indirect
beneficial or legal ownership of Stock by the proposed Transferee and by Persons
controlling, or controlled by or under common control with the proposed
Transferee.
Part E. Legends. All certificates issued by the Corporation
------ -------
evidencing ownership of Stock of the Corporation that is subject to the
restrictions on Transfer contained in this Article V shall bear a conspicuous
legend referencing the restrictions set forth in this Article V.
Part F. Further Action. Subject to Part C of this Article V,
------ --------------
nothing contained in this Article V shall limit the authority of the Board of
Directors to take such other action to the extent permitted by law as it deems
necessary or advisable to protect the ability of the Corporation and its
Subsidiaries to receive Irrigation Water. The Board of Directors of the
Corporation shall have the exclusive power and authority to administer this
Article V and to exercise all rights and powers specifically granted to the
Board of Directors or the Corporation, or as may be necessary or advisable in
the administration of this Article V, including without limitation, the right
and power to (a) interpret the provisions of this Article V, and (b) make all
calculations and determinations deemed necessary or advisable for the
administration of this Article V. All such actions, calculations,
interpretations and determinations which are done or made by the Board of
Directors in good faith shall be final, conclusive and binding. In addition,
the Board of Directors may, to the extent permitted by law, from time to time
establish, modify, amend or rescind Bylaws, regulations and procedures of the
Corporation not inconsistent with the express provisions of this Article V for
purposes of determining whether any acquisition of Stock would jeopardize the
ability of the Corporation and its Subsidiaries to receive Irrigation Water, and
for the orderly application, administration and implementation of the provisions
of this Article V. Such procedures and regulations shall be kept on file with
the Secretary of the Corporation and with its transfer agent (if different from
the Corporation) and shall be made available for inspection by the public and,
upon request, shall be mailed to any holder of Stock. Without limiting the
generality of the foregoing, in the event of a change in law (including
applicable regulations), the Board of Directors may, to the extent not
inconsistent with this Article V, adopt Bylaws, regulations and procedures, to
conform the application of the provisions of this Article V to any such change
in law.
Part G. Benefits of this Article V. Nothing in this Article V shall
------ --------------------------
be construed to give to any Person other than the Corporation or the Agent any
legal or equitable right, remedy or claim under this Article V. This Article V
shall be for the sole and exclusive benefit of the Corporation and the Agent.
Part H. Severability. If any provision of this Article V or the
------ ------------
application of any such provision to any Person or under any circumstance shall
be held invalid, illegal, or unenforceable in any respect by a court of
competent jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision of this Article V.
-8-
<PAGE>
ARTICLE VI
----------
EXISTENCE
---------
The Corporation is to have perpetual existence.
ARTICLE VII
-----------
BY-LAWS
-------
In furtherance and not in limitation of the powers conferred by the
Delaware General Corporation Law, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, change, add to or repeal the By-laws
of the Corporation by the affirmative vote of a majority of the total number of
Directors then in office. Any alteration or repeal of the By-laws of the
Corporation by the stockholders of the Corporation shall require the affirmative
vote of at least a majority of the voting power of the then outstanding shares
of capital stock of the Corporation entitled to vote on such alteration or
repeal, subject to Article X hereof and Article VII of the Corporation's By-
laws.
ARTICLE VIII
------------
STOCKHOLDERS AND DIRECTORS
--------------------------
Part A. Stockholder Action. Election of Directors need not be by
------- ------------------
written ballot unless the By-laws of the Corporation so provide. Subject to any
rights of holders of any series of Preferred Stock, from and after the date on
which the Common Stock of the Corporation is registered pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) any action
------------
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected in lieu thereof by any consent in writing by such
stockholders, (ii) special meetings of stockholders of the Corporation may be
called only by either the Board of Directors pursuant to a resolution adopted by
the affirmative vote of the majority of the total number of Directors then in
office or by the chief executive officer of the Corporation and (iii) advance
notice of stockholder nominations of persons for election to the Board of
Directors of the Corporation and of business to be brought before any annual
meeting of the stockholders by the stockholders of the Corporation shall be
given in the manner provided in the By-laws of the Corporation.
Part B. Vacancies and Newly Created Directorships. Subject to any
------- -----------------------------------------
rights of holders of any series of Preferred Stock to fill such newly created
Directorships or vacancies, any newly created Directorships resulting from any
increase in the authorized number of Directors and any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal from
office for cause shall, unless otherwise provided by law or by resolution
approved by the affirmative vote of a majority of the total number of Directors
then in office, be filled only by
-9-
<PAGE>
resolution approved by the affirmative vote of a majority of the total number of
Directors then in office. Any Director so chosen shall hold office until his
successor shall have been duly elected and qualified, unless he shall resign,
die, become disqualified or be removed for cause.
ARTICLE IX
----------
AMENDMENTS
----------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate in the manner now or
hereinafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding anything contained in this Restated Certificate to
the contrary, Parts A, B and C of Article IV, Article VIII, Article X, and this
Article IX of this Restated Certificate shall not be altered, amended or
repealed and no provision inconsistent therewith shall be adopted without the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
then outstanding shares of capital stock of the Corporation entitled to vote in
the election of directors, voting together as a single class (other than any
alteration or amendment to Part A of Article IV that increases the authorized
number of shares of Preferred Stock or Common Stock).
ARTICLE X
---------
LIABILITY
---------
Part A. Limitation of Liability.
------- -----------------------
(1) To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), and except as otherwise provided in the Corporation's By-laws, no
Director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages arising from a breach of fiduciary duty owed
to the Corporation or its stockholders.
(2) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
Part B. Right to Indemnification. Each person who was or is made a
------- ------------------------
party or is threatened to be made a party to or is otherwise involved (including
involvement as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
----------
fact that he or she is or was a Director or officer of the Corporation or, while
a Director or officer of the Corporation, is or was serving at the request of
the Corporation as a Director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (an "indemnitee"), whether the basis of
----------
such proceeding is alleged action in an official capacity as a
-10-
<PAGE>
Director or officer or in any other capacity while serving as a Director or
officer, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than permitted prior thereto), against all expense,
liability and loss (including attorneys' fees, judgments, fines, excise exercise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided in
Part C of this Article X with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Part B of this
Article X shall be a contract right and shall include the obligation of the
Corporation to pay the expenses incurred in defending any such proceeding in
advance of its final disposition (an "advance of expenses"); provided, however,
------------------- -------- -------
that, if and to the extent that the Delaware General Corporation Law requires,
an advance of expenses incurred by an indemnitee in his or her capacity as a
Director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (an "undertaking"), by or on behalf of such indemnitee, to repay all
-----------
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (a "final adjudication")
-------------------
that such indemnitee is not entitled to be indemnified for such expenses under
this Part B or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same or lesser scope and effect as the foregoing indemnification of
Directors and officers.
Part C. Procedure for Indemnification. Any indemnification of a
------- -----------------------------
Director or officer of the Corporation or advance of expenses under Part B of
this Article X shall be made promptly, and in any event within 45 days (or, in
the case of an advance of expenses, twenty days), upon the written request of
the Director or officer. If a determination by the Corporation that the
Director or officer is entitled to indemnification pursuant to this Article X is
required, and the Corporation fails to respond within 60 days to a written
request for indemnity, the Corporation shall be deemed to have approved the
request. If the Corporation denies a written request for indemnification or
advance of expenses, in whole or in part, or if payment in full pursuant to such
request is not made within 45 days (or, in the case of an advance of expenses,
20 days), the right to indemnification or advances as granted by this Article X
shall be enforceable by the Director or officer in any court of competent
jurisdiction. Such person's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be indemnified by the Corporation. It shall
be a defense to any such action (other than an action brought to enforce a claim
for the advance of expenses where the undertaking required pursuant to Part B of
this Article X, if any, has been tendered to the Corporation) that the claimant
has not met the standards of conduct which make it permissible under the
Delaware General Corporation Law for the Corporation to indemnify the claimant
for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination
-11-
<PAGE>
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct. The procedure
for indemnification of other employees and agents for whom indemnification is
provided pursuant to Part B of this Article X shall be the same procedure set
forth in this Part C for Directors or officers, unless otherwise set forth in
the action of the Board of Directors providing indemnification for such employee
or agent.
Part D. Insurance. The Corporation may purchase and maintain
------- ---------
insurance on its own behalf and on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation or was serving at the
request of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss asserted against him or her and incurred by him or
her in any such capacity, whether or not the Corporation would have the power to
indemnify such person against such expenses, liability or loss under the
Delaware General Corporation Law.
Part E. Service for Subsidiaries. Any person serving as a Director,
------------------------
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture or other enterprise, at least 50% of whose
equity interests are owned by the Corporation (a "subsidiary" for this Article
----------
X) shall be conclusively presumed to be serving in such capacity at the request
of the Corporation.
Part F. Reliance. Persons who after the date of the adoption of this
--------
provision become or remain Directors or officers of the Corporation or who,
while a Director or officer of the Corporation, become or remain a Director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity, advance of expenses and other rights
contained in this Article X in entering into or continuing such service. The
rights to indemnification and to the advance of expenses conferred in this
Article X shall apply to claims made against an indemnitee arising out of acts
or omissions which occurred or occur both prior and subsequent to the adoption
hereof.
Part G. Non-Exclusivity of Rights. The rights to indemnification
------- -------------------------
and to the advance of expenses conferred in this Article X shall not be
exclusive of any other right which any person may have or hereafter acquire
under this Restated Certificate or under any statute, by-law, agreement, vote of
stockholders or disinterested Directors or otherwise.
Part H. Merger or Consolidation. For purposes of this Article X,
------- -----------------------
references to the "Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
Directors, officers and employees or agents, so that any person who is or was a
Director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a Director,
officer, employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article X
with
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<PAGE>
respect to the resulting or surviving Corporation as he or she would have
with respect to such constituent Corporation if its separate existence had
continued.
ARTICLE XI
----------
BUSINESS COMBINATIONS
---------------------
The Corporation expressly elects to be governed by Section 203 of the
Delaware General Corporation Law.
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<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
HINES HORTICULTURE, INC.
A Delaware Corporation
(Effective as of June 22, 1998)
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The registered office of Hines
---------- -----------------
Horticulture, Inc. (the "Corporation") in the State of Delaware shall be located
at 9 East Loockerman Street, in the City of Dover, County of Kent, 19901. The
name of the Corporation's registered agent at such address shall be National
Registered Agents, Inc. The registered office and/or registered agent of the
Corporation may be changed from time to time by action of the Board of
Directors.
Section 2. Other Offices. The Corporation may also have offices at such
---------- -------------
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Annual Meeting. An annual meeting of the stockholders shall be
---------- --------------
held each year within 150 days after the close of the immediately preceding
fiscal year of the Corporation or at such other time specified by the Board of
Directors for the purpose of electing Directors and conducting such other proper
business as may come before the annual meeting. At the annual meeting,
stockholders shall elect Directors and transact such other business as properly
may be brought before the annual meeting pursuant to Article II, Section 11
hereof.
Section 2. Special Meetings. Special meetings of the stockholders may
---------- ----------------
only be called in the manner provided in the Restated Certificate of
Incorporation.
Section 3. Place of Meetings. The Board of Directors may designate any
---------- -----------------
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting. If no designation is made,
or if a special meeting be otherwise called, the place of meeting shall be the
principal executive office of the Corporation. If for any reason any annual
meeting shall not be held during any year, the business thereof may be
transacted at any special meeting of the stockholders.
<PAGE>
Section 4. Notice. Whenever stockholders are required or permitted to
---------- ------
take action at a meeting, written or printed notice stating the place, date,
time and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than 10 nor more than 60 days before the date of the meeting. All such
notices shall be delivered, either personally or by mail, by or at the direction
of the Board of Directors, the chairman of the board, the president or the
secretary, and if mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
---------- -----------------
ledger of the Corporation shall make, at least 10 days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares of
---------- ------
capital stock entitled to vote, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders, except as otherwise
provided by the General Corporation Law of the State of Delaware or by the
Restated Certificate of Incorporation. If a quorum is not present, the holders
of a majority of the shares present in person or represented by proxy at the
meeting, and entitled to vote at the meeting, may adjourn the meeting to another
time and/or place. When a specified item of business requires a vote by a class
or series (if the Corporation shall then have outstanding shares of more than
one class or series) voting as a class, the holders of a majority of the shares
of such class or series shall constitute a quorum (as to such class or series)
for the transaction of such item of business.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
---------- ------------------
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. When a quorum is present, the affirmative vote
---------- -------------
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless (i) by express provisions of an applicable law or
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<PAGE>
of the Restated Certificate of Incorporation a different vote is required, in
which case such express provision shall govern and control the decision of such
question, or (ii) the subject matter is the election of Directors, in which case
Section 2 of Article III hereof shall govern and control the approval of such
subject matter.
Section 9. Voting Rights. Except as otherwise provided by the General
---------- -------------
Corporation Law of the State of Delaware, the Restated Certificate of
Incorporation of the Corporation or any amendments thereto or these By-laws,
every stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of common stock held by such
stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
----------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the
stockholders, and before any voting commences, all proxies filed at or before
the meeting shall be submitted to and examined by the secretary or a person
designated by the secretary, and no shares may be represented or voted under a
proxy that has been found to be invalid or irregular.
Section 11. Business Brought Before an Annual Meeting. At an annual
----------- -----------------------------------------
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
brought before the meeting by or at the direction of the Board of Directors or
(iii) otherwise properly brought before the meeting by a stockholder who was a
stockholder of record at the time of giving notice provided for in this By-law.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
- -------- -------
public announcement of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the date on which such notice of the
date of the annual meeting was mailed or such public announcement was made. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares
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<PAGE>
of the Corporation which are beneficially owned by the stockholder and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this section. The
presiding officer of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this section; if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. For purposes of this
section, "public announcement" shall mean disclosure in a press release reported
by Dow Jones News Service, Associated Press or a comparable national news
service. Nothing in this section shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
ARTICLE III
-----------
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the Corporation
---------- --------------
shall be managed by or under the direction of the Board of Directors. In
addition to such powers as are herein and in the Restated Certificate of
Incorporation expressly conferred upon it, the Board of Directors shall have
and may exercise all the powers of the Corporation, subject to the provisions of
the laws of Delaware, the Restated Certificate of Incorporation and these By-
laws.
Section 2. Number, Election and Term of Office. The number of Directors
---------- -----------------------------------
which shall constitute the first Board of Directors shall be six. Thereafter,
subject to any rights of the holders of any series of Preferred Stock to elect
additional Directors under specified circumstances, the number of Directors
which shall constitute the Board of Directors shall be fixed from time to time
by resolution adopted by the affirmative vote of a majority of the total number
of Directors then in office. The Directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy at the annual
meeting of the stockholders and entitled to vote in the election of Directors;
provided that, whenever the holders of any class or series of capital stock of
the Corporation are entitled to elect one or more Directors pursuant to the
provisions of the Restated Certificate of Incorporation of the Corporation
(including, but not limited to, for purposes of these By-laws, pursuant to any
duly authorized certificate of designation), such Directors shall be elected by
a plurality of the votes of such class or series present in person or
represented by proxy at the meeting and entitled to vote in the election of such
Directors. The Directors shall be elected in this manner at the annual meeting
of stockholders, except as provided in Section 4 of this Article III, and each
Director shall hold office until a successor is duly elected and qualified or
until his or her earlier death, resignation or removal as hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire Board of
---------- -----------------------
Directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of Directors.
Whenever the holders of any class or series are entitled to elect one or more
Directors by the provisions of the Corporation's Restated Certificate of
Incorporation,
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<PAGE>
the provisions of this section shall apply, in respect to the removal without
cause of a Director or Directors so elected, to the vote of the holders of the
outstanding shares of that class or series and not to the vote of the
outstanding shares as a whole. Any Director may resign at any time upon written
notice to the corporation.
Section 4. Vacancies. Vacancies and newly created directorships resulting
---------- ---------
from any increase in the total number of Directors may be filled only in the
manner provided in the Restated Certificate of Incorporation.
Section 5. Nominations.
---------- -----------
(a) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible to serve as Directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this By-law, who is
entitled to vote generally in the election of Directors at the meeting and who
shall have complied with the notice procedures set forth below in Section 5(b).
(b) In order for a stockholder to nominate a person for election to
the Board of Directors of the Corporation at a meeting of stockholders, such
stockholder shall have delivered timely notice of such stockholder's intent to
make such nomination in writing to the secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than 60 nor more than 90 days prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
-------- -------
that the date of the annual meeting is changed by more than 30 days from such
anniversary date, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the earlier of the
day on which notice of the date of the meeting was mailed or public disclosure
of the meeting was made, and (ii) in the case of a special meeting at which
Directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public announcement of the meeting was made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election as a Director at such meeting all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a Director
if elected); (ii) as to the stockholder giving the notice (A) the name and
address, as they appear on the Corporation's books, of such stockholder and (B)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder and also which are owned of record by such stockholder; and
(iii) as to the beneficial owner, if any, on whose behalf the nomination is
made, (A) the name and address of such person and (B) the class and number of
shares of the Corporation which are beneficially owned by such person. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director
-5-
<PAGE>
shall furnish to the secretary of the Corporation that information required to
be set forth in a stockholder's notice of nomination which pertains to the
nominee.
(c) No person shall be eligible to serve as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this section, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded. A
stockholder seeking to nominate a person to serve as a Director must also comply
with all applicable requirements of the Exchange Act, and the rules and
regulations thereunder with respect to the matters set forth in this section.
Section 6. Annual Meetings. The annual meeting of the Board of Directors
---------- ---------------
shall be held without other notice than this By-law immediately after, and at
the same place as, the annual meeting of stockholders, unless otherwise provided
by resolution of the Board.
Section 7. Other Meetings and Notice. Regular meetings, other than the
---------- -------------------------
annual meeting, of the Board of Directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the Board of Directors may be called by the
chairman of the board, the president (if the president is a Director) or, upon
the written request of at least a majority of the Directors then in office, the
secretary of the Corporation on at least 24 hours notice to each Director,
either personally, by telephone, by mail or by telecopy.
Section 8. Chairman of the Board, Quorum, Required Vote and Adjournment.
---------- ------------------------------------------------------------
The Board of Directors shall elect, by the affirmative vote of a majority of the
total number of Directors then in office, a chairman of the board, who shall
preside at all meetings of the stockholders and Board of Directors at which he
or she is present and shall have such powers and perform such duties as the
Board of Directors may from time to time prescribe. If the chairman of the
board is not present at a meeting of the stockholders or the Board of Directors,
the president (if the president is a Director and is not also the chairman of
the board) shall preside at such meeting, and, if the president is not present
at such meeting, a majority of the Directors present at such meeting shall elect
one of their members to so preside. A majority of the total number of Directors
then in office shall constitute a quorum for the transaction of business.
Unless by express provision of an applicable law, the Restated Certificate of
Incorporation or these By-laws a different vote is required, the vote of a
majority of Directors present at a meeting at which a quorum is present shall be
the act of the Board of Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the Directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. Committees. The Board of Directors may, by resolution passed
---------- ----------
by a majority of the total number of Directors then in office, designate one or
more committees, each committee to consist of one or more of the Directors of
the Corporation, which to the extent provided in such resolution or these By-
laws shall have, and may exercise, the powers of the Board of Directors in the
management and affairs of the Corporation, except as otherwise limited by law.
The Board of Directors may designate one or more Directors as alternate members
of any committee, who may
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<PAGE>
replace any absent or disqualified member at any meeting of the committee. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 10. Committee Rules. Each committee of the Board of Directors may
----------- ---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. Unless otherwise provided in such a
resolution, in the event that a member and that member's alternate, if
alternates are designated by the Board of Directors, of such committee is or are
absent or disqualified, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
Section 11. Communications Equipment. Members of the Board of Directors
----------- ------------------------
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 12. Waiver of Notice and Presumption of Assent. Any member of the
----------- ------------------------------------------
Board of Directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 13. Action by Written Consent. Unless otherwise restricted by the
----------- -------------------------
Restated Certificate of Incorporation, any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
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<PAGE>
ARTICLE IV
----------
OFFICERS
--------
Section 1. Number. The officers of the Corporation shall be elected by
---------- ------
the Board of Directors and shall consist of a chairman of the board, a chief
executive officer, a president, one or more vice-presidents, a secretary, a
chief financial officer and such other officers and assistant officers as may be
deemed necessary or desirable by the Board of Directors. Any number of offices
may be held by the same person. In its discretion, the Board of Directors may
choose not to fill any office for any period as it may deem advisable, except
that the offices of president and secretary shall be filled as expeditiously as
possible.
Section 2. Election and Term of Office. The officers of the Corporation
---------- ---------------------------
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as convenient.
Vacancies may be filled or new offices created and filled at any meeting of the
Board of Directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the Board of
---------- -------
Directors may be removed by the Board of Directors at its discretion, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
---------- ---------
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors.
Section 5. Compensation. Compensation of all executive officers shall be
---------- ------------
approved by the Board of Directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a Director of the
Corporation.
Section 6. Chairman of the Board. The chairman of the board shall preside
---------- ---------------------
at all meetings of the stockholders and of the Board of Directors and shall have
such other powers and perform such other duties as may be prescribed to him or
her by the Board of Directors or provided in these By-laws.
Section 7. Chief Executive Officer. The chief executive officer shall
---------- -----------------------
have the powers and perform the duties incident to that position. Subject to
the powers of the Board of Directors and the chairman of the board, the chief
executive officer shall be in the general and active charge of the entire
business and affairs of the Corporation, and shall be its chief policy making
officer. The chief executive officer shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or provided in
these By-laws. The chief executive officer is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. Whenever the president is unable to serve, by reason of
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<PAGE>
sickness, absence or otherwise, the chief executive officer shall perform all
the duties and responsibilities and exercise all the powers of the president.
Section 8. The President. The president of the Corporation shall, subject
---------- -------------
to the powers of the Board of Directors, the chairman of the board and the chief
executive officer, have general charge of the business, affairs and property of
the Corporation, and control over its officers, agents and employees. The
president shall see that all orders and resolutions of the Board of Directors
are carried into effect. The president is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. The president shall have such other powers and perform such
other duties as may be prescribed by the chairman of the board, the chief
executive officer, the Board of Directors or as may be provided in these By-
laws.
Section 9. Vice-Presidents. The vice-president, or if there shall be more
---------- ---------------
than one, the vice-presidents in the order determined by the Board of Directors
or the chairman of the board, shall, in the absence or disability of the
president, act with all of the powers and be subject to all the restrictions of
the president. The vice-presidents shall also perform such other duties and
have such other powers as the Board of Directors, the chairman of the board, the
chief executive officer, the president or these By-laws may, from time to time,
prescribe. The vice-presidents may also be designated as executive vice-
presidents or senior vice-presidents, as the Board of Directors may from time to
time prescribe.
Section 10. The Secretary and Assistant Secretaries. The secretary shall
----------- ---------------------------------------
attend all meetings of the Board of Directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose or shall ensure that
his or her designee attends each such meeting to act in such capacity. Under
the chairman of the board's supervision, the secretary shall give, or cause to
be given, all notices required to be given by these By-laws or by law; shall
have such powers and perform such duties as the Board of Directors, the chairman
of the board, the chief executive officer, the president or these By-laws may,
from time to time, prescribe; and shall have custody of the corporate seal of
the Corporation. The secretary, or an assistant secretary, shall have authority
to affix the corporate seal to any instrument requiring it and when so affixed,
it may be attested by his or her signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
or her signature. The assistant secretary, or if there be more than one, any of
the assistant secretaries, shall in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors, the
chairman of the board, the chief executive officer, the president, or secretary
may, from time to time, prescribe.
Section 11. The Chief Financial Officer. The chief financial officer
----------- ---------------------------
shall have the custody of the corporate funds and securities; shall keep full
and accurate all books and accounts of the Corporation as shall be necessary or
desirable in accordance with applicable law or generally accepted accounting
principles; shall deposit all monies and other valuable effects in the name and
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<PAGE>
to the credit of the Corporation as may be ordered by the chairman of the board
or the Board of Directors; shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements; and shall render to the Board of Directors, at
its regular meeting or when the Board of Directors so requires, an account of
the Corporation; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe. If required by the Board of
Directors, the chief financial officer shall give the Corporation a bond (which
shall be rendered every six years) in such sums and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of the office of chief financial officer and for the restoration
to the Corporation, in case of death, resignation, retirement or removal from
office of all books, papers, vouchers, money and other property of whatever kind
in the possession or under the control of the chief financial officer belonging
to the Corporation.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
----------- ---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
Section 13. Absence or Disability of Officers. In the case of the absence
----------- ---------------------------------
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any Director, or to any other
person selected by it.
ARTICLE V
---------
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the Corporation shall be
---------- ----
entitled to have a certificate, signed by, or in the name of the Corporation by
the chairman of the board, the chief executive officer or the president and the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation. If such a certificate is
countersigned (i) by a transfer agent or an assistant transfer agent other than
the Corporation or its employee or (ii) by a registrar, other than the
Corporation or its employee, the signature of any such chairman of the board,
chief executive officer, president, secretary or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers of the Corporation whether because of
death, resignation or otherwise before such certificate or certificates have
been delivered by the Corporation, such certificate or certificates may
nevertheless be issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or signatures have
been used thereon had not ceased to be such officer or officers of the
Corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the books of the
-10-
<PAGE>
Corporation. Shares of stock of the Corporation shall only be transferred on the
books of the Corporation by the holder of record thereof or by such holder's
attorney duly authorized in writing, upon surrender to the Corporation of the
certificate or certificates for such shares endorsed by the appropriate person
or persons, with such evidence of the authenticity of such endorsement,
transfer, authorization and other matters as the Corporation may reasonably
require, and accompanied by all necessary stock transfer stamps. In that event,
it shall be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate or certificates and record the
transaction on its books. The Board of Directors may appoint a bank or trust
company organized under the laws of the United States or any state thereof to
act as its transfer agent or registrar, or both in connection with the transfer
of any class or series of securities of the Corporation.
Section 2. Lost Certificates. The Board of Directors may direct a new
---------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his or her legal representative, to give the Corporation a bond sufficient to
indemnify the Corporation against any claim that may be made against the
Corporation on account of the loss, theft or destruction of any such certificate
or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
---------- ---------------------------------------------
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the next
day preceding the day on which notice is first given. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
---------- ---------------------------------------
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
---------- -----------------------
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such
-11-
<PAGE>
share or shares, the Corporation may treat the registered owner as the person
entitled to receive dividends, to vote, to receive notifications and otherwise
to exercise all the rights and powers of an owner. The Corporation shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof.
Section 6. Subscriptions for Stock. Unless otherwise provided for in the
---------- -----------------------
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
Board of Directors. Any call made by the Board of Directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
ARTICLE VI
----------
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
---------- ---------
Corporation, subject to the provisions of the Restated Certificate of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting, in accordance with applicable law. Dividends may be paid in
cash, in property or in shares of the capital stock, subject to the provisions
of the Restated Certificate of Incorporation. Before payment of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or any other purpose and the Directors may modify or abolish any
such reserve in the manner in which it was created.
Section 2. Issuance of Stock. The shares of all classes of stock of the
---------- -----------------
Corporation may be issued by the Corporation from time to time for such
consideration as from time to time may be fixed by the Board of Directors of the
Corporation, provided that shares of stock having a par value shall not be
issued for a consideration less than such par value, as determined by the Board.
At any time, or from time to time, the Corporation may grant rights or options
to purchase from the Corporation any shares of its stock of any class or classes
to run for such period of time, for such consideration, upon such terms and
conditions, and in such form as the Board of Directors may determine. The Board
of Directors shall have authority, as provided by law, to determine that only a
part of the consideration which shall be received by the Corporation for the
shares of its stock which it shall issue from time to time, shall be capital;
provided, however, that, if all the shares issued shall be shares having a par
- -------- -------
value, the amount of the part of such consideration so determined to be capital
shall be equal to the aggregate par value of such shares. The excess, if any,
at any time, of the total net assets of the Corporation over the amount so
determined to be capital, as aforesaid, shall be surplus. All classes of stock
of the Corporation shall be and remain at all times nonassessable.
-12-
<PAGE>
Section 3. Checks, Drafts or Orders. All checks, drafts or other orders
---------- ------------------------
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the Board of Directors or a duly
authorized committee thereof.
Section 4. Contracts. In addition to the powers otherwise granted to
---------- ---------
officers pursuant to Article IV hereof, the Board of Directors may authorize any
officer or officers, or any agent or agents, of the Corporation to enter into
any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 5. Loans. The Corporation may lend money to, or guarantee any
---------- -----
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
Director of the Corporation or its subsidiaries, whenever, in the judgment of
the Directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
Section 6. Fiscal Year. The fiscal year of the Corporation shall be fixed
---------- -----------
by resolution of the Board of Directors.
Section 7. Corporate Seal. The Board of Directors may provide a corporate
---------- --------------
seal which shall be in the form of a circle and shall have inscribed thereon the
name of the Corporation and the words "Corporate Seal, Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
Section 8. Voting Securities Owned By Corporation. Voting securities in
---------- --------------------------------------
any other corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice-president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the
power to appoint proxies, with general power of substitution.
Section 9. Inspection of Books and Records. The Board of Directors shall
---------- -------------------------------
have power from time to time to determine to what extent and at what times and
places and under what conditions and regulations the accounts and books of the
Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.
-13-
<PAGE>
Section 10. Section Headings. Section headings in these By-laws are for
----------- ----------------
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 11. Inconsistent Provisions. In the event that any provision of
----------- -----------------------
these By-laws is or becomes inconsistent with any provision of the Restated
Certificate of Incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these By-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VII
-----------
AMENDMENTS
----------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter, amend, change, add to or repeal these By-laws by the affirmative vote of
a majority of the total number of Directors then in office. Any alteration or
repeal of these By-laws by the stockholders of the Corporation shall require the
affirmative vote of a majority of the outstanding shares of the Corporation
entitled to vote on such alteration or repeal; provided, however, that Section
-------- -------
11 of Article II and Sections 2, 3, 4 and 5 of Article III and this Article VII
shall not be altered, amended or repealed and no provision inconsistent
therewith shall be adopted without the affirmative vote of the holders of at
least 66% of the outstanding shares of the Corporation entitled to vote in the
election of directors, voting together as a class.
-14-
<PAGE>
EXHIBIT 4.1
[LOGO] HINES [LOGO] [LOGO]
HORTICULTURE, INC.
INCORPORATED UNDER THE SEE REVERSE FOR CERTAIN
LAWS OF THE STATE OF DEFINITIONS
DELAWARE CUSIP 433245 10 7
This Certifies that
is the record holder is
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE OF
============================HINES HORTICULTURE, INC=============================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile signatures of the duly authorized officers of the
Corporation.
Dated:
[SIGNATURE ILLEGIBLE] [SIGNATURE ILLEGIBLE]
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE ARE SUBJECT TO TRANSFER
RESTRICTIONS SET FORTH IN ARTICLE V OF THE CORPORATION'S CERTIFICATE OF
INCORPORATION. ARTICLE V IS INCORPORATED BY REFERENCE HEREIN AS THOUGH FULLY SET
FORTH. REFERENCE IS MADE TO ARTICLE V FOR THE COMPLETE TERMS AND CONDITIONS UPON
WHICH THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED. GENERALLY,
ARTICLE V PROHIBITS ANY RECORD OR BENEFICIAL HOLDER OF THE SHARES REPRESENTED BY
THIS CERTIFICATE FROM TRANSFERRING ALL OR ANY PART OF THE HOLDER'S INTEREST IN
SUCH SHARES TO ANY TRANSFEREE TO THE EXTENT SUCH TRANSFER, IF EFFECTIVE, WOULD,
AS A RESULT OF THE STATUS OF THE TRANSFEREE, RENDER ANY PORTION OF THE
LANDHOLDINGS OF THE CORPORATION OR ANY OF ITS SUBSIDIARIES INELIGIBLE TO RECEIVE
IRRIGATION WATER UNDER APPLICABLE U.S. FEDERAL RECLAMATION LAWS AND REGULATIONS,
OR CAUSE THE TRANSFEREE TO BE SUBJECT TO THE REPORTING, CERTIFICATION OR
INFORMATION REQUIREMENTS UNDER SUCH LAWS AND REGULATIONS. A PURPORTED TRANSFER
OF AN INTEREST IN THE SHARES REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF
ARTICLE V SHALL BE NULL AND VOID, AND THE PURPORTED TRANSFEREE SHALL HAVE NO
RIGHTS WITH RESPECT THERETO. ARTICLE V EMPOWERS THE CORPORATION TO ENFORCE
ARTICLE V IN THE EVENT OF A PURPORTED TRANSFER IN VIOLATION THEREOF. AMONG OTHER
THINGS, THE CORPORATION MAY REQUIRE THE SALE OF SHARES PURPORTEDLY TRANSFERRED
IN VIOLATION OF ARTICLE V (OR OTHER SHARES OF THE CORPORATION), AND THE
PURPORTED TRANSFEREE SHALL NOT BE ENTITLED TO RECEIVE OUT OF THE PROCEEDS OF
SUCH SALE (LESS CERTAIN EXPENSES) MORE THAN THE AMOUNT PAID BY SUCH PURPORTED
TRANSFEREE FOR SUCH SHARES AND SHALL BE REQUIRED TO RETURN ANY DIVIDENDS OR
DISTRIBUTIONS ON SUCH SHARES. THE SECRETARY OF THE CORPORATION WILL PROVIDE A
COPY OF ARTICLE V TO ANY STOCKHOLDER OF THE CORPORATION UPON WRITTEN REQUEST.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION OF THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ..............Custodian................
TEN ENT - as tenants by ???? (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Acts...................................
in common (Signs)
UNIF TRF MIN ACT - ............. Custodian (Until age.....)
(Cust)
................Under Uniform Transfers
(Minor)
to Minors Act..........................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED.___________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________
_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________________
X ________________________________________
X ________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOANS ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17AD-16.
<PAGE>
EXHIBIT 4.3
O'MM DRAFT
06/12/98
================================================================================
AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF JUNE 23, 1998
AMONG
HINES NURSERIES, INC.,
SUN GRO HORTICULTURE CANADA LTD.
AND
LAKELAND CANADA LTD.,
AS BORROWERS,
THE LENDERS LISTED HEREIN,
AS LENDERS,
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
AS SYNDICATION AGENT,
HARRIS TRUST AND SAVINGS BANK,
AS DOCUMENTATION AGENT,
BT BANK OF CANADA,
AS CANADIAN AGENT,
AND
BANKERS TRUST COMPANY,
AS ADMINISTRATIVE AGENT
ARRANGED BY:
BT ALEX. BROWN INCORPORATED
================================================================================
<PAGE>
TABLE OF CONTENTS
AMENDED AND RESTATED CREDIT AGREEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS.......................................................... 3
1.1 Certain Defined Terms................................................ 3
---------------------
1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations
------------------------------------------------------------------
Under Agreement...................................................... 38
---------------
1.3 Other Definitional Provisions and Rules of Construction.............. 38
-------------------------------------------------------
SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS........................... 38
2.1 Commitments; Making of Loans; the Register; Notes.................... 38
-------------------------------------------------
2.2 Interest on the Loans................................................ 48
---------------------
2.3 Fees................................................................. 52
----
2.4 Repayments, Prepayments and Reductions in Revolving Loan
--------------------------------------------------------
Commitments; General Provisions Regarding Payments................... 53
--------------------------------------------------
2.5 Use of Proceeds...................................................... 61
---------------
2.6 Special Provisions Governing Eurodollar Rate Loans and Canadian
---------------------------------------------------------------
Eurodollar Rate Loans................................................ 61
---------------------
2.7 Increased Costs; Taxes; Capital Adequacy............................. 64
----------------------------------------
2.8 Obligation of Lenders and Issuing Lenders to Mitigate................ 68
-----------------------------------------------------
SECTION 3. LETTERS OF CREDIT.................................................... 69
3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations
---------------------------------------------------------------------
Therein.............................................................. 69
-------
3.2 Letter of Credit Fees................................................ 72
---------------------
3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit... 72
------------------------------------------------------------------
3.4 Obligations Absolute................................................. 75
--------------------
3.5 Indemnification; Nature of Issuing Lenders' Duties................... 76
--------------------------------------------------
3.6 Increased Costs and Taxes Relating to Letters of Credit.............. 77
-------------------------------------------------------
SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT............................ 78
4.1 Conditions to Term Loans and Initial Revolving Loans and Swing Line
-------------------------------------------------------------------
Loans................................................................ 78
-----
4.2 Conditions to All Loans.............................................. 86
-----------------------
4.3 Conditions to Acquisition Loans...................................... 88
-------------------------------
4.4 Conditions to Letters of Credit...................................... 88
-------------------------------
SECTION 5. BORROWERS' REPRESENTATIONS AND WARRANTIES............................ 89
5.1 Organization, Powers, Qualification, Good Standing, Business and
----------------------------------------------------------------
Subsidiaries......................................................... 89
------------
5.2 Authorization of Borrowing, etc...................................... 90
-------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.3 Financial Condition................................................... 91
-------------------
5.4 No Material Adverse Change; No Restricted Junior Payments............. 91
---------------------------------------------------------
5.5 Title to Properties; Liens............................................ 92
--------------------------
5.6 Litigation; Adverse Facts............................................. 92
-------------------------
5.7 Payment of Taxes...................................................... 92
----------------
5.8 Performance of Agreements; Materially Adverse Agreements; Material
------------------------------------------------------------------
Contracts............................................................. 93
---------
5.9 Governmental Regulation............................................... 93
-----------------------
5.10 Securities Activities................................................. 93
---------------------
5.11 Employee Benefit Plans................................................ 93
----------------------
5.12 Certain Fees.......................................................... 94
------------
5.13 Environmental Protection.............................................. 94
------------------------
5.14 Employee Matters...................................................... 96
----------------
5.15 Solvency.............................................................. 96
--------
5.16 Disclosure............................................................ 96
----------
5.17 Matters Relating to Collateral........................................ 97
------------------------------
5.18 Year 2000 Compliance.................................................. 98
--------------------
5.19 Water Availability.................................................... 98
------------------
SECTION 6. BORROWERS' AFFIRMATIVE COVENANTS...................................... 98
6.1 Financial Statements and Other Reports................................ 98
--------------------------------------
6.2 Corporate Existence, etc.............................................. 104
------------------------
6.3 Payment of Taxes and Claims; Tax Consolidation........................ 105
----------------------------------------------
6.4 Maintenance of Properties; Insurance.................................. 105
------------------------------------
6.5 Inspection; Lender Meeting............................................ 106
--------------------------
6.6 Compliance with Laws, etc............................................. 106
-------------------------
6.7 Environmental Disclosure and Inspection............................... 107
---------------------------------------
6.8 Company's Remedial Action Regarding Hazardous Materials............... 108
-------------------------------------------------------
6.9 Execution of Guaranties and Collateral Documents by Future............ 109
----------------------------------------------------------
Subsidiaries.........................................................
------------
6.10 Additional Mortgages.................................................. 110
--------------------
6.11 Assignability and Recording of Lease Agreements....................... 111
-----------------------------------------------
SECTION 7. BORROWERS' NEGATIVE COVENANTS......................................... 111
7.1 Indebtedness.......................................................... 111
------------
7.2 Liens and Related Matters............................................. 113
-------------------------
7.3 Investments; Joint Ventures........................................... 114
---------------------------
7.4 Contingent Obligations................................................ 114
----------------------
7.5 Restricted Junior Payments............................................ 115
--------------------------
7.6 Financial Covenants................................................... 116
-------------------
7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions...... 119
----------------------------------------------------------------
7.8 Consolidated Capital Expenditures..................................... 121
---------------------------------
7.9 Restriction on Leases................................................. 122
---------------------
7.10 Sales and Lease-Backs................................................. 122
---------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.11 Sale or Discount of Receivables...................................... 122
-------------------------------
7.12 Transactions with Shareholders and Affiliates........................ 122
---------------------------------------------
7.13 Disposal of Subsidiary Stock......................................... 123
----------------------------
7.14 Conduct of Business.................................................. 123
-------------------
7.15 Amendments of Certain Documents; Designation of Designated Senior
-----------------------------------------------------------------
Debt................................................................. 123
----
7.16 Fiscal Year.......................................................... 124
-----------
SECTION 8. EVENTS OF DEFAULT.................................................... 124
8.1 Failure to Make Payments When Due.................................... 124
---------------------------------
8.2 Default in Other Agreements.......................................... 124
---------------------------
8.3 Breach of Certain Covenants.......................................... 125
---------------------------
8.4 Breach of Warranty................................................... 125
------------------
8.5 Other Defaults Under Loan Documents.................................. 125
-----------------------------------
8.6 Involuntary Bankruptcy; Appointment of Receiver, etc................. 125
----------------------------------------------------
8.7 Voluntary Bankruptcy; Appointment of Receiver, etc................... 125
--------------------------------------------------
8.8 Judgments and Attachments............................................ 126
-------------------------
8.9 Dissolution.......................................................... 126
-----------
8.10 Employee Benefit Plans............................................... 126
----------------------
8.11 Material Adverse Effect.............................................. 126
-----------------------
8.12 Change in Control.................................................... 127
-----------------
8.13 Invalidity of Any Guaranty........................................... 127
--------------------------
8.14 Failure of Security.................................................. 128
------------------
SECTION 9. AGENT................................................................ 129
9.1 Appointment.......................................................... 129
-----------
9.2 Powers and Duties; General Immunity.................................. 129
-----------------------------------
9.3 Representations and Warranties; No Responsibility For Appraisal of
------------------------------------------------------------------
Creditworthiness..................................................... 131
----------------
9.4 Right to Indemnity................................................... 131
------------------
9.5 Successor Agent and Swing Line Lender................................ 131
-------------------------------------
9.6 Collateral Documents and Guaranties.................................. 132
-----------------------------------
SECTION 10. MISCELLANEOUS........................................................ 132
10.1 Assignments and Participations in Loans and Letters of Credit........ 132
-------------------------------------------------------------
10.2 Expenses............................................................. 135
--------
10.3 Indemnity............................................................ 136
---------
10.4 Set-Off; Security Interest in Deposit Accounts....................... 137
----------------------------------------------
10.5 Ratable Sharing...................................................... 137
---------------
10.6 Amendments and Waivers............................................... 139
----------------------
10.7 Independence of Covenants............................................ 140
-------------------------
10.8 Notices.............................................................. 140
-------
10.9 Survival of Representations, Warranties and Agreements............... 140
------------------------------------------------------
10.10 Failure or Indulgence Not Waiver; Remedies Cumulative................ 141
-----------------------------------------------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
10.11 Marshalling; Payments Set Aside...................................... 141
-------------------------------
10.12 Severability......................................................... 141
------------
10.13 Obligations Several; Independent Nature of Lenders' Rights........... 141
----------------------------------------------------------
10.14 Headings............................................................. 142
--------
10.15 Applicable Law....................................................... 142
--------------
10.16 Successors and Assigns............................................... 142
----------------------
10.17 Consent to Jurisdiction and Service of Process....................... 142
----------------------------------------------
10.18 Waiver of Jury Trial................................................. 143
--------------------
10.19 Confidentiality...................................................... 144
---------------
10.20 Judgment Currency.................................................... 144
-----------------
10.21 Counterparts; Effectiveness.......................................... 144
--------------------------
</TABLE>
iv
<PAGE>
EXHIBITS
I FORM OF NOTICE OF BORROWING
II FORM OF NOTICE OF CONVERSION/CONTINUATION
III FORM OF REQUEST FOR ISSUANCE OF LETTER OF CREDIT
IV-A FORM OF DOMESTIC TERM NOTE
IV-B FORM OF ACQUISITION NOTE
IV-C FORM OF WORKING CAPITAL REVOLVING NOTE
IV-D FORM OF CANADIAN TERM NOTE
IV-E FORM OF SWING LINE NOTE
V FORM OF NOTICE OF COMMENCEMENT OF CLEAN DOWN PERIOD
VI FORM OF COMPLIANCE CERTIFICATE
VII FORM OF OPINION OF COUNSEL TO BORROWERS
VIII FORM OF OPINION OF O'MELVENY & MYERS
IX FORM OF ASSIGNMENT AGREEMENT
X FORM OF AUDITOR'S LETTER
XI FORM OF CERTIFICATE RE NON-BANK STATUS
XII FORM OF COLLATERAL ACCOUNT AGREEMENT
XIII FORM OF ACKNOWLEDGEMENT AND CONSENT
XIV FORM OF MASTER ASSIGNMENT AGREEMENT
XV FORM OF HOLDINGS GUARANTY
XVI FORM OF COMPANY GUARANTY
XVII FORM OF CANADIAN SUBSIDIARY GUARANTY
XVIII FORM OF CANADIAN SUBSIDIARY PATENT SECURITY AGREEMENT
XIX FORM OF CANADIAN SUBSIDIARY PLEDGE AGREEMENT
XX FORM OF CANADIAN SUBSIDIARY SECURITY AGREEMENT
XXI FORM OF CANADIAN SUBSIDIARY TRADEMARK SECURITY
AGREEMENT
XXII FORM OF DOMESTIC SUBSIDIARY SECURITY AGREEMENT
XXIII FORM OF DOMESTIC SUBSIDIARY PLEDGE AGREEMENT
XXIV FORM OF DOMESTIC SUBSIDIARY TRADEMARK SECURITY AGREEMENT
XXV FORM OF DOMESTIC SUBSIDIARY PATENT SECURITY
AGREEMENT
XXVI FORM OF DOMESTIC SUBSIDIARY GUARANTY
XXVII FORM OF COLLATERAL ACCESS AGREEMENT
v
<PAGE>
SCHEDULES
2.1 COMMITMENTS AND PRO RATA SHARES
5.1 SUBSIDIARIES OF HOLDINGS
5.5 REAL PROPERTY ASSETS OF HOLDINGS AND ITS SUBSIDIARIES
7.1 PERMITTED EXISTING INDEBTEDNESS
7.2 PERMITTED LIENS
7.3 PERMITTED EXISTING INVESTMENTS
vi
<PAGE>
O'MM Draft 6/12/98
HINES NURSERIES, INC.
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of June 23,
1998 and entered into by and among HINES NURSERIES, INC., a California
corporation ("COMPANY"), SUN GRO HORTICULTURE CANADA LTD., a Canadian
corporation ("SUN GRO CANADA"), LAKELAND CANADA LTD., an Alberta corporation
("LAKELAND CANADA"; together with Sun Gro Canada, the "CANADIAN BORROWERS"; the
Canadian Borrowers and Company shall collectively be referred to herein as
"BORROWERS"), THE FINAN CIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF
(each individually referred to herein as a "LENDER" and collectively as
"LENDERS"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BOFA") as
syndication agent (in such capacity, "SYNDICATION AGENT"), HARRIS TRUST AND
SAVINGS BANK ("HARRIS") as documentation agent (in such capacity, "DOCUMENTATION
AGENT"), BT BANK OF CANADA ("BT CANADA") as Canadian agent (in such capacity,
"CANADIAN AGENT") and BANKERS TRUST COMPANY ("BTCO"), as administrative agent
for Lenders (in such capacity, "AGENT").
R E C I T A L S
---------------
WHEREAS, Company, Sun Gro Canada, Sun Gro Horticulture Inc., a Nevada
corporation, the financial institutions listed on the signature pages of the
Hines I Existing Credit Agreement (hereinafter defined) (the "HINES I LENDERS")
and BT Commercial Corporation, as agent ("BTCC"), are parties to that certain
Credit Agreement dated as of August 4, 1995, as amended by that certain First
Amendment dated as of October 11, 1995, that certain Second Amendment dated as
of October 26, 1995, that certain Third Amendment dated as of March 15, 1996,
that certain Fourth Amendment dated as of August 28, 1996, that certain Fifth
Amendment and Consent dated as of November 14, 1996, that certain Sixth
Amendment dated as of February 14, 1997, that certain Seventh Amendment and
Consent to Credit Agreement dated as of March 26, 1997, that certain Eighth
Amendment and Limited Waiver to Credit Agreement and First Amendment to Holdings
Guaranty and Holdings Pledge Agreement dated as of November 7, 1997, that
certain Ninth Amendment to Credit Agreement and Second Amendment to Holdings
Pledge Agreement dated as of December 16, 1997, and that certain Tenth Amendment
to Credit Agreement and Second Amendment to Holdings
1
<PAGE>
Guaranty dated as of March 9, 1998 (as so amended, the "HINES I EXISTING CREDIT
AGREEMENT");
WHEREAS, Hines II, Inc. ("HINES II"), Lakeland Canada (formerly known
as 763427 Alberta Ltd.), the financial institutions listed on the signature
pages of the Hines II Existing Credit Agreement (hereinafter defined) (the
"HINES II LENDERS") and BTCC, as agent, are parties to that certain Credit
Agreement dated as of December 16, 1997, as amended by that certain First
Amendment to Credit Agreement dated as of February 10, 1998 and that certain
Second Amendment and Consent to Credit Agreement and First Amendment to Holdings
Guaranty dated as of March 9, 1998 (as so amended, the "HINES II EXISTING CREDIT
AGREEMENT"; the Hines I Existing Credit Agreement and the Hines II Existing
Credit Agreement are collectively referred to herein as the "EXISTING CREDIT
AGREEMENTS");
WHEREAS, Company, which was formerly known as "Hines Horticulture,
Inc." or "Hines I" has been renamed "Hines Nurseries, Inc.", and Hines II has
been merged with and into Company, with Company as the surviving entity;
WHEREAS, Hines Holdings, Inc., a Nevada corporation, has merged with
and into Hines Horticulture, Inc., a Delaware corporation ("HOLDINGS"), with
Holdings as the surviving entity;
WHEREAS, Holdings will be offering shares of its common stock to the
public and will apply the proceeds raised by such public offering, in part, to
repay or redeem (i) approximately $15,500,000 in existing mortgage debt of
Company and (ii) approximately $42,000,000 in principal of the Subordinated
Notes;
WHEREAS, Lakeland Canada, the wholly-owned subsidiary of Lakeland
U.S., Inc., a Delaware corporation, has sold all of its stock in Black Gold,
Inc., an Oregon corporation, and Pacific Soil Company, a Nevada corporation, to
Lakeland U.S., Inc.;
WHEREAS, Black Gold, Inc. and Pacific Soil Company have merged with
and into Lakeland U.S., Inc., with Lakeland U.S., Inc. as the surviving entity
and Lakeland U.S., Inc. has merged with and into Sun Gro Horticulture Inc., a
Nevada corporation, with Sun Gro Horticulture Inc. as the surviving entity;
WHEREAS, Sun Gro Horticulture Inc. has contributed all of its stock in
Lakeland Canada to Sun Gro Canada so that Lakeland Canada is a wholly-owned
subsidiary of Sun Gro Canada;
WHEREAS, Sphag Sorb Ltd., an Alberta corporation is a wholly-owned
Subsidiary of Lakeland Canada;
WHEREAS, Borrowers desire to consolidate the Existing Credit
Agreements into a single credit agreement and to make certain amendments to the
terms and provisions of
2
<PAGE>
the Existing Credit Agreements, including increasing the amount of the Loans and
the Commitments, all as more specifically provided for in this Agreement;
WHEREAS, to facilitate such restructuring of the loans and the
commitments, all Lenders under the Existing Credit Agreements have agreed to
assign to BTCo all of their existing loans and commitments pursuant to the
Master Assignment Agreement and BTCo has agreed pursuant to the Master
Assignment Agreement to assign to each Lender under this Agreement the Loans and
Commitments as set forth on Schedule 2.1 to this Agreement;
------------
WHEREAS, to effect the foregoing, Borrowers, Agent and Lenders, have
agreed to amend and restate the Existing Credit Agreements in their entirety,
all as hereinafter set forth in this Agreement;
WHEREAS, Holdings has agreed to continue to guaranty the Obligations
of Borrowers and to continue to secure such guaranty with a pledge to Agent for
the benefit of Lenders of all of the capital stock of Company;
WHEREAS, each of Company and each of Company's Domestic Subsidiaries
has agreed to continue to guaranty the Obligations of Borrowers, and Company has
agreed to continue to secure its Obligations as Borrower hereunder, and each of
Company's Domestic Subsidiaries has agreed to continue to secure its guaranty,
by pledging to Agent for the benefit of Lenders (a) all of the capital stock of
Company's Domestic Subsidiaries, (b) 65% of the capital stock of Company's
Canadian Subsidiaries, (c) substantially all of its personal property and (d)
certain of its interests in real property; and
WHEREAS, each Canadian Borrower and each of Company's Canadian
Subsidiaries has agreed to guaranty the Obligations of Canadian Borrowers, and
each Canadian Borrower has agreed to continue to secure its Obligations as
Borrower hereunder, and each of Company's Canadian Subsidiaries has agreed to
secure its guaranty, by pledging (a) all of the capital stock of the
Subsidiaries owned by it, (b) certain of its personal property and (c) certain
of its interests in real property.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrowers, Lenders, Canadian Agent
and Agent agree as follows:
SECTION 1. DEFINITIONS
1.1 CERTAIN DEFINED TERMS.
---------------------
The following terms used in this Agreement shall have the following
meanings:
3
<PAGE>
"ACQUISITION LOAN CONVERSION DATE" means June 30, 2000.
"ACQUISITION LOAN EXPOSURE" means with respect to any Domestic Lender
as of any date of determination (i) prior to the termination of the Acquisition
Revolving Loan Commitments, that Domestic Lender's Acquisition Revolving Loan
Commitment and (ii) after the termination of the Acquisition Revolving Loan
Commitments, the aggregate outstanding principal amount of the Acquisition Loans
of that Domestic Lender.
"ACQUISITION LOANS" means the Loans made by Domestic Lenders to
Company pursuant to subsection 2.1A(iii).
"ACQUISITION NOTES" means (i) the promissory notes of Company issued
pursuant to subsection 2.1E(i)(b) on the Closing Date and (ii) any promissory
notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in
connection with assignments of the Acquisition Revolving Loan Commitments and
Acquisition Loans of any Domestic Lenders, in each case substantially in the
form of Exhibit IV-B annexed hereto, as they may be amended, supplemented or
------------
otherwise modified from time to time.
"ACQUISITION REVOLVING LOAN COMMITMENT" means the commitment of a
Domestic Lender to make Acquisition Loans to Company pursuant to subsection
2.1A(iii), and "ACQUISITION REVOLVING LOAN COMMITMENTS" means such commitments
of all Domestic Lenders in the aggregate.
"ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination
Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per
annum obtained by dividing (i) the offered quotation (rounded upward to the
--------
nearest 1/16 of one percent) to first class banks in the interbank Eurodollar
market by BTCo for U.S. dollar deposits of amounts in same day funds comparable
to the principal amount of the Eurodollar Rate Loan of BTCo for which the
Adjusted Eurodollar Rate is then being determined with maturities comparable to
such Interest Period as of approximately 10:00 a.m. (New York time) on such
Interest Rate Determination Date by (ii) a percentage equal to 100% minus the
-- -----
stated maximum rate of all reserve requirements (including any marginal,
emergency, supplemental, special or other reserves) applicable on such Interest
Rate Determination Date to any member bank of the Federal Reserve System in
respect of "Eurocurrency liabilities" as defined in Regulation D (or any
successor category of liabilities under Regulation D).
"AFFECTED LENDER" has the meaning assigned to that term in subsection
2.6C.
"AFFILIATE", as applied to any Person, means any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of
4
<PAGE>
the management and policies of that Person, whether through the ownership of
voting securities or by contract or otherwise.
"AGENT" has the meaning assigned to that term in the introduction to
this Agreement and also means any successor Agent appointed pursuant to
subsection 9.5A. For purposes of Section 9 of this Agreement, Agent shall also
mean Canadian Agent. With respect to matters dealing with the Canadian Term
Loans or Canadian Term Loan Commitment, Agent shall mean Canadian Agent.
"AGREEMENT" means this Amended and Restated Credit Agreement dated as
of June 23, 1998, which Agreement consolidates and amends and restates the
Existing Credit Agreements, as it may be further amended, supplemented or
otherwise modified from time to time.
"APPLICABLE BASE RATE MARGIN" means as of any date of determination, a
percentage per annum as set forth below opposite the applicable Consolidated
Leverage Ratio; provided that for the period from the Closing Date through the
--------
date following the six-month anniversary of the Closing Date on which the
Company first delivers a Compliance Certificate pursuant to subsection 6.1(iv)
establishing that, based on Company's Consolidated Leverage Ratio as set forth
in such Compliance Certificate, a different Applicable Base Rate Margin applies,
the Applicable Base Rate Margin shall be 0.25% per annum:
<TABLE>
<CAPTION>
Applicable Base
Consolidated Leverage Ratio Rate Margin
--------------------------- ---------------
<S> <C>
Greater than or equal to 4.00:1.00 1.000%
Greater than or equal to 3.75:1.00 but less 0.750%
than 4.00:1.00
Greater than or equal to 3.50:1.00 but less 0.500%
than 3.75:1.00
Greater than or equal to 3.00:1.00 but less 0.250%
than 3.50:1.00
Less than 3.00:1.00 0.000%
</TABLE>
"APPLICABLE EURODOLLAR RATE MARGIN" means as of any date of
determination, a percentage per annum set forth below opposite the applicable
Consolidated Leverage Ratio; provided that for the period from the Closing Date
--------
through the date following the six-month anniversary of the Closing Date on
which the Company first delivers a Compliance Certificate pursuant to subsection
6.1(iv) establishing that, based on Company's Consolidated Leverage Ratio as set
forth in such Compliance Certificate, a different Applicable Eurodollar Rate
Margin applies, the Applicable Eurodollar Rate Margin shall be 1.25% per annum:
5
<PAGE>
<TABLE>
<CAPTION>
Applicable
Consolidated Leverage Ratio Eurodollar Rate Margin
--------------------------- ----------------------
<S> <C>
Greater than or equal to 4.00:1.00 2.000%
Greater than or equal to 3.75:1.00 but less 1.750%
than 4.00:1.00
Greater than or equal to 3.50:1.00 but less 1.500%
than 3.75:1.00
Greater than or equal to 3.00:1.00 but less 1.250%
than 3.50:1.00
Greater than or equal to 2.75:1.00 but less 1.000%
than 3.00:1.00
Greater than or equal to 2.50:1.00 but less 0.875%
than 2.75:1.00
Less than 2.50:1.00 0.750%
</TABLE>
"ASSET SALE" means the sale by any Borrower or any of its Subsidiaries
to any Person other than such Borrower or any of its wholly-owned Subsidiaries
of (i) any of the stock of any of such Borrower's Subsidiaries, (ii)
substantially all of the assets of any division or line of business of the
Borrower or any of its Subsidiaries, or (iii) any other assets (whether tangible
or intangible) of Company or any of its Subsidiaries (other than (a) inventory
sold in the ordinary course of business and (b) any such other assets to the
extent that the aggregate value of such assets sold in any single transaction or
related series of transactions is equal to $250,000 or less).
"ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially
the form of Exhibit IX annexed hereto.
----------
"AUDITOR'S LETTER" means a letter, substantially in the form of
Exhibit X annexed hereto, acknowledged and agreed to by Company and Price
- ---------
Waterhouse LLP and delivered to Agent pursuant to subsections 4.1N and 6.1(iii).
"BANKRUPTCY CODE" means Title 11 of the United States Code entitled
"Bankruptcy", as now and hereafter in effect, or any successor statute.
"BASE RATE" means, at any time, the higher of (x) the Prime Rate or
(y) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate.
"BASE RATE LOANS" means Domestic Loans bearing interest at rates
determined by reference to the Base Rate as provided in subsection 2.2A.
6
<PAGE>
"BOFA" has the meaning assigned to that term in the introduction to
this Agreement.
"BORROWERS" has the meaning assigned to that term in the introduction
to this Agreement.
"BT CANADA" has the meaning assigned to that term in the introduction
to this Agreement.
"BTCC" means BT Commercial Corporation.
"BTCO" has the meaning assigned to that term in the introduction to
this Agreement.
"BUSINESS DAY" means (i) for all purposes other than as covered by
clause (ii) below, any day excluding Saturday, Sunday and any day which is a
legal holiday under the laws of the State of New York or California or is a day
on which banking institutions located in either such state are authorized or
required by law or other governmental action to close, and (ii) with respect to
all notices, determinations, fundings and payments in connection with any
Canadian Term Loans, any day that is a Business Day described in clause (i)
above but excluding any day which, under the laws of the Province of Ontario,
Canada, is a day on which banking institutions located in such province are
authorized or required by law or other governmental action to close.
"CANADIAN AGENT" means initially BT Canada and any successor Canadian
Agent appointed by Company and Agent.
"CANADIAN BASE RATE" means, as at any date with respect to any
Canadian Term Loan, the rate of interest per annum equal to the greater of (a)
the rate which BT Canada announces in Canada from time to time as the reference
rate of interest for loans in Dollars to its Canadian borrowers, adjusted
automatically with each change in such rates all without the necessity of any
notice to any Borrower or any other Person, and (b) the aggregate of (i) the
Federal Funds Effective Rate for such day and (ii) 1/2 of 1% per annum. As to
any loan, the Canadian Base Rate is a reference rate and does not necessarily
represent the lowest or best rate actually charged to any Canadian customer for
loans denominated in Dollars. BT Canada may make commercial or other loans to
Canadian customers denominated in Dollars at rates of interest at, above or
below the Canadian Base Rate.
"CANADIAN BASE RATE LOANS" means Canadian Term Loans denominated in
Dollars and bearing interest at rates determined by reference to the Canadian
Base Rate as provided in subsection 2.2A.
7
<PAGE>
"CANADIAN BORROWERS" has the meaning assigned to that term in the
introduction to this Agreement.
"CANADIAN DOLLARS" means the lawful money of Canada.
"CANADIAN EURODOLLAR RATE" means, for any Interest Rate Determination
Date with respect to each Interest Period for a Canadian Eurodollar Rate Loan,
the interest rate per annum equal to the arithmetic average (rounded upward to
the nearest whole multiple of 1/16 of 1% per annum) of the rates per annum which
leading banks in the interbank Eurodollar markets shall quote and offer to
Canadian Reference Bank for placing deposits with Canadian Reference Bank in
Dollars, at approximately 10:00 A.M. (Toronto time), two Business Days before
the first day of such Interest Period, for a period comparable to such Interest
Period and in an amount approximately equal to the amount of such Canadian
Eurodollar Rate Loan.
"CANADIAN EURODOLLAR RATE LOANS" means Canadian Term Loans denominated
in Dollars and bearing interest at rates determined by reference to the Canadian
Eurodollar Rate as provided in subsection 2.2A.
"CANADIAN FUNDING AND PAYMENT OFFICE" means (i) the office of BT
Canada located at 200 Bay Street, Suite 1700, Toronto, Canada or (ii) such other
office of Canadian Agent as may from time to time hereafter be designated as
such in a written notice delivered by Canadian Agent to Borrowers and each
Lender.
"CANADIAN LENDERS" means any Lenders having Canadian Term Loan
Commitments or, on and after the termination of the Canadian Term Loan
Commitments, having Canadian Term Loans outstanding.
"CANADIAN REFERENCE BANK" means BT Canada.
"CANADIAN SUBSIDIARY" means a Subsidiary of Company that is
incorporated or organized under the laws of Canada or any of its provinces.
"CANADIAN SUBSIDIARY GUARANTOR" means any Canadian Subsidiary of
Company that executes and delivers a counterpart of the Canadian Subsidiary
Guaranty on the Closing Date or from time to time thereafter pursuant to
subsection 6.9B.
"CANADIAN SUBSIDIARY GUARANTY" means the Amended and Restated Canadian
Subsidiary Guaranty executed and delivered by Sphag Sorb Ltd. on the Closing
Date, or the Canadian Subsidiary Guaranties to be executed and delivered by Sun
Gro Canada and Lakeland Canada on the Closing Date or to be executed and
delivered by Canadian Subsidiaries from time to time after the Closing Date in
accordance with subsection 6.9B, substantially in the form of Exhibit XVII
------------
annexed hereto, as such Canadian Subsidiary Guaranties may be
8
<PAGE>
amended, supplemented or otherwise modified from time to time, and "CANADIAN
SUBSIDIARY GUARANTIES" means all such Canadian Subsidiary Guaranties,
collectively.
"CANADIAN SUBSIDIARY PATENT SECURITY AGREEMENT" means the Canadian
Subsidiary Patent Collateral Assignment and Security Agreement dated as of
December 16, 1997, executed and delivered by Sphag Sorb Ltd., each Amended and
Restated Canadian Subsidiary Patent Collateral Security Agreement and
Conditional Assignment to be executed and delivered by Sun Gro Canada and
Lakeland Canada on the Closing Date, or each Canadian Subsidiary Patent
Collateral Security Agreement and Conditional Assignment to be executed and
delivered by Canadian Subsidiaries from time to time thereafter in accordance
with subsection 6.9B, in each case substantially in the form of Exhibit XVIII
-------------
annexed hereto, as such Canadian Subsidiary Patent Security Agreements may be
amended, supplemented or otherwise modified from time to time, and "CANADIAN
SUBSIDIARY PATENT SECURITY AGREEMENTS" means all such Amended and Restated
Canadian Patent Collateral Security Agreement and Conditional Assignments and
Canadian Subsidiary Patent Collateral Security Agreement and Conditional
Assignments, collectively.
"CANADIAN SUBSIDIARY PLEDGE AGREEMENT" means each Canadian Subsidiary
Pledge Agreement to be executed and delivered by Sun Gro Canada and Lakeland
Canada on the Closing Date or each Canadian Subsidiary Pledge Agreement to be
executed and delivered by Canadian Subsidiaries from time to time thereafter in
accordance with subsection 6.9B, in each case substantially in the form of
Exhibit XIX annexed hereto, as such Canadian Subsidiary Pledge Agreements may be
- -----------
amended, supplemented or otherwise modified from time to time, and "CANADIAN
SUBSIDIARY PLEDGE AGREEMENTS" means all such Canadian Subsidiary Pledge
Agreements, collectively.
"CANADIAN SUBSIDIARY SECURITY AGREEMENT" means the Canadian Subsidiary
Security Agreement dated as of December 16, 1997, executed and delivered by
Sphag Sorb Ltd., each Amended and Restated Canadian Subsidiary Security
Agreement to be executed and delivered by Sun Gro Canada and Lakeland Canada on
the Closing Date, or each Canadian Subsidiary Security Agreement to be executed
and delivered by Canadian Subsidiaries from time to time thereafter in
accordance with subsection 6.9B, in each case substantially in the form of
Exhibit XX annexed hereto, as such Canadian Subsidiary Security Agreements may
- ----------
be amended, supplemented or otherwise modified from time to time, and "CANADIAN
SUBSIDIARY SECURITY AGREEMENTS" means all such Canadian Subsidiary Security
Agreements, collectively.
"CANADIAN SUBSIDIARY TRADEMARK SECURITY AGREEMENT" means the Canadian
Subsidiary Trademark Security Agreement dated as of December 16, 1997, executed
and delivered by Sphag Sorb Ltd., each Amended and Restated Canadian Subsidiary
Trademark Collateral Security Agreement to be executed and delivered by Sun Gro
Canada and Lakeland Canada on the Closing Date, or each Canadian Subsidiary
Trademark Collateral Security Agreement to be executed and delivered by Canadian
Subsidiaries from time to time thereafter in accordance with subsection 6.9B, in
each case substantially in the form of Exhibit XXI
-----------
9
<PAGE>
annexed hereto, as such Canadian Subsidiary Trademark Security Agreements may be
amended, supplemented or otherwise modified from time to time, and "CANADIAN
SUBSIDIARY TRADEMARK SECURITY AGREEMENTS" means all such Amended and Restated
Canadian subsidiary Trademark Collateral Security Agreements and Canadian
Subsidiary Trademark Collateral Security Agreements, collectively.
"CANADIAN TERM LOAN COMMITMENT" means the Sun Gro Canada Term Loan
Commitment or Lakeland Canada Term Loan Commitment or any combination thereof.
"CANADIAN TERM LOAN EXPOSURE" means with respect to any Canadian
Lender as of any date of determination (i) prior to the funding of the Canadian
Term Loans, that Canadian Lender's Canadian Term Loan Commitment and (ii) after
the funding of the Canadian Term Loans, the outstanding principal amount of the
Canadian Term Loans of that Canadian Lender.
"CANADIAN TERM LOANS" means one or more of the Sun Gro Canada Term
Loans and the Lakeland Canada Term Loans purchased or made by Canadian Lenders
to a Canadian Borrower pursuant to subsection 2.1A(ii).
"CANADIAN TERM NOTES" means (i) the promissory notes of a Canadian
Borrower issued pursuant to subsection 2.1E(ii) on the Closing Date and (ii) any
promissory notes issued by a Canadian Borrower pursuant to the last sentence of
subsection 10.1B(i) in connection with assignments of the Canadian Term Loan
Commitments or Canadian Term Loans of any Lenders, in each case substantially in
the form of Exhibit IV-D annexed hereto, as they may be amended, supplemented or
------------
otherwise modified from time to time.
"CAPITAL LEASE", as applied to any Person, means any lease of any
property (whether real, personal or mixed) by that Person as lessee that, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.
"CASH" means money, currency or a credit balance in a Deposit Account.
"CASH EQUIVALENTS" means, as at any date of determination, (i) (a)
marketable securities (1) issued or directly and unconditionally guaranteed as
to interest and principal by the United States Government or (2) issued by any
agency of the United States the obligations of which are backed by the full
faith and credit of the United States, in each case maturing within one year
after such date; (b) marketable direct obligations issued by any state of the
United States of America or any political subdivision of any such state or any
public instrumentality thereof, in each case maturing within one year after such
date and having, at the time of the acquisition thereof, the highest rating
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("MOODY'S"); (c) commercial paper maturing no more than
one year from the date of creation thereof and having, at the time of the
acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from
Moody's;
10
<PAGE>
(d) certificates of deposit or bankers' acceptances maturing within one year
after such date and issued or accepted by any Lender or by any commercial bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia that (1) is at least "adequately capitalized" (as
defined in the regulations of its primary Federal banking regulator) and (2) has
Tier 1 capital (as defined in such regulations) of not less than $100,000,000;
and (e) shares of any money market mutual fund that (1) has at least 95% of its
assets invested continuously in the types of investments referred to in clauses
(a) and (b) above, (2) has net assets of not less than $500,000,000, and (3) has
the highest rating obtainable from either S&P or Moody's, and (ii) comparable
Canadian short term investments.
"CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in
the form of Exhibit XI annexed hereto delivered by a Lender to Agent pursuant to
----------
subsection 2.7B(iii).
"CLASS" means, as applied to Lenders, each of the two classes of
Lenders consisting of (i) Domestic Lenders and (ii) Canadian Lenders.
"CLOSING DATE" means June 23, 1998.
"COLLATERAL" means, collectively, all of the real, personal and mixed
property (including capital stock) in which Liens are purported to be granted
pursuant to the Collateral Documents as security for the Obligations.
"COLLATERAL ACCESS AGREEMENT" means any landlord waiver, mortgagee
waiver, bailee letter or any similar acknowledgement or agreement of any
landlord or mortgagee in respect of any Real Property Asset where any Collateral
is located or any warehouseman or processor in possession of any Inventory of
any Loan Party, substantially in the form of Exhibit XXVII annexed hereto with
-------------
such changes thereto as may be agreed to by Agent in the reasonable exercise of
its discretion.
"COLLATERAL ACCOUNT" has the meaning assigned to that term in the
Collateral Account Agreement.
"COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account Agreement
executed and delivered by Company on the Closing Date, substantially in the form
of Exhibit XII annexed hereto, as such Collateral Account Agreement may be
-----------
amended, supplemented or otherwise modified from time to time.
"COLLATERAL DOCUMENTS" means the Collateral Account Agreement, the
Holdings Pledge Agreement, the Company Security Agreement, the Company Pledge
Agreement, the Company Trademark Security Agreement, the Company Patent Security
Agreement, the Domestic Subsidiary Security Agreements, the Domestic Subsidiary
Pledge Agreements, the Domestic Subsidiary Trademark Security Agreements, the
Domestic Subsidiary Patent Security Agreements, the Canadian Subsidiary Security
Agreements, the Canadian Subsidiary Pledge Agreements, the
11
<PAGE>
Canadian Subsidiary Trademark Security Agreements, the Canadian Subsidiary
Patent Security Agreements, and the Mortgages.
"COMMITMENT FEE PERCENTAGE" means, as at any date of determination, a
percentage per annum set forth below opposite the applicable Consolidated
Leverage Ratio; provided that for the period from the Closing Date through the
date following the six-month anniversary of the Closing Date on which the
Company first delivers a Compliance Certificate pursuant to subsection 6.1(iv),
establishing that, based on Company's Consolidated Leverage Ratio as set forth
in such compliance certificate, a different Commitment Fee Percentage applies,
the Commitment Fee Percentage shall be 0.375% per annum:
Commitment Fee
Consolidated Leverage Ratio Percentage
--------------------------- ----------
Greater than or equal to 3.50:1.00 0.500%
Greater than or equal to 2.50:1.00 but less 0.375%
than 3.50:1.00
Less than 2.50:1.00 0.250%
"COMMITMENTS" means the Domestic Term Loan Commitments, the Revolving
Loan Commitments or the Canadian Term Loan Commitments or any combination
thereof.
"COMPANY" has the meaning assigned to that term in the introduction to
this Agreement.
"COMPANY COMMON STOCK" means the common stock of Company, par value
$.01 per share.
"COMPANY GUARANTY" means the Amended and Restated Company Guaranty
executed and delivered by Company on the Closing Date, substantially in the form
of Exhibit XVI annexed hereto, as such Amended and Restated Company Guaranty may
-----------
be further amended, supplemented or otherwise modified from time to time.
"COMPANY PATENT SECURITY AGREEMENT" means the Company Patent
Collateral Assignment and Security Agreement dated as of August 4, 1995,
executed and delivered by Company, as supplemented by the delivery of additional
schedules relating to Hines II on the Closing Date, as such Company Patent
Collateral Assignment and Security Agreement may be further amended,
supplemented or otherwise modified from time to time.
"COMPANY PLEDGE AGREEMENT" means the Company Pledge Agreement dated as
of August 4, 1995, executed and delivered by Company, as such Company Pledge
Agreement may be amended, supplemented or otherwise modified from time to time.
12
<PAGE>
"COMPANY SECURITY AGREEMENT" means the Company Security Agreement
dated as of August 4, 1995, executed and delivered by Company, as supplemented
by the delivery of additional schedules relating to Hines II on the Closing
Date, as such Company Security Agreement may be further amended or supplemented
or otherwise modified from time to time.
"COMPANY TRADEMARK SECURITY AGREEMENT" means the Company Trademark
Collateral Security Agreement and Conditional Assignment dated as of August 4,
1995, executed and delivered by Company, as supplemented by the delivery of
additional schedules relating to Hines II on the Closing Date, as such Company
Trademark Collateral Security Agreement and Conditional Assignment may be
further amended, supplemented or otherwise modified from time to time.
"COMPLIANCE CERTIFICATE" means a certificate substantially in the form
of Exhibit VI annexed hereto delivered to Agent and Lenders by Company pursuant
----------
to subsection 6.1(iv).
"CONSOLIDATED AVERAGE DEBT" means, as at any date of determination,
the aggregate stated balance sheet amount of all Indebtedness of Company and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP;
provided that for purposes of calculating the amount of such Indebtedness
- --------
derived from Working Capital Revolving Loans, the average of such outstanding
Working Capital Revolving Loans as of the last day of each month over a rolling
twelve-month period shall be used.
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of
the aggregate of all expenditures (whether paid in cash or other consideration
or accrued as a liability and including that portion of Capital Leases which is
capitalized on the consolidated balance sheet of Company and its Subsidiaries)
by Company and its Subsidiaries during that period that, in conformity with
GAAP, are included in "additions to property, plant or equipment" or comparable
items reflected in the consolidated statement of cash flows of Company and its
Subsidiaries; provided that, (a) in connection with the purchase or other
--------
acquisition of any asset (the "REPLACEMENT ASSET") by Company or any of its
Subsidiaries substantially concurrently with the sale of, or pursuant to an
exchange for or trade-in of, any existing asset of Company or such Subsidiary of
like kind and character (which, in the case of a Real Property Asset, shall be
located within a 30-mile radius of the Replacement Asset) (the "REPLACED
ASSET"), there shall be included in Consolidated Capital Expenditures only the
excess, if any, of the gross purchase price of the Replacement Asset over the
credit given by the seller of the Replacement Asset for the trade-in or exchange
of the Replaced Asset or the amount of proceeds received from the sale of the
Replaced Asset, as the case may be, and (b) in connection with the purchase,
repair or other acquisition of any asset by Company or any of its Subsidiaries
with insurance proceeds received by Company or any of its Subsidiaries in
respect of the actual or constructive loss of any similar asset, there shall be
included in
13
<PAGE>
Consolidated Capital Expenditures only the excess of the gross amount of the
purchase price over the amount of such insurance proceeds.
"CONSOLIDATED CASH INTEREST EXPENSE" means, for any period,
Consolidated Interest Expense for such period excluding, however, any interest
--------- -------
expense not payable in Cash (including amortization of discount and amortization
of debt issuance costs).
"CONSOLIDATED CURRENT ASSETS" means, as at any date of determination,
the total assets of Company and its Subsidiaries on a consolidated basis which
may properly be classified as current assets in conformity with GAAP, excluding
Cash and Cash Equivalents.
"CONSOLIDATED CURRENT LIABILITIES" means, as at any date of
determination, the total liabilities of Company and its Subsidiaries on a
consolidated basis which may properly be classified as current liabilities in
conformity with GAAP, excluding the current portion of any Indebtedness,
---------
including without limitation outstanding Working Capital Revolving Loans to the
extent included in Consolidated Current Liabilities.
"CONSOLIDATED EBITDA" means, for any period, the sum of the amounts
for such period of (i) Consolidated Net Income, (ii) Consolidated Interest
Expense, (iii) provisions for taxes based on income, (iv) total depreciation
expense, (v) total amortization expense, and (vi) other non-cash items reducing
Consolidated Net Income less other non-cash items increasing Consolidated Net
----
Income, all of the foregoing as determined on a consolidated basis for Company
and its Subsidiaries in conformity with GAAP.
"CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount equal
to (i) the sum, without duplication, of the amounts for such period of (a) the
sum of Consolidated EBITDA and non-cash extraordinary losses which are expected
to have a cash impact on Company's financial statements during the term of this
Agreement, and (b) the Consolidated Working Capital Adjustment minus (ii) the
-----
sum, without duplication, of the amounts for such period of (a) voluntary and
scheduled repayments of Indebtedness (excluding repayments of Working Capital
Revolving Loans except to the extent the Working Capital Revolving Loan
Commitments are permanently reduced in connection with such repayments and
excluding repayments of the Acquisition Loans prior to the Acquisition Loan
Conversion Date), (b) Consolidated Capital Expenditures (net of any proceeds of
any related financings with respect to such expenditures), (c) Consolidated Cash
Interest Expense, and (d) the provision for current taxes based on income of
Company and its Subsidiaries and payable in cash with respect to such period.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, total interest
expense (including that portion attributable to Capital Leases in accordance
with GAAP and capitalized interest) of Company and its Subsidiaries on a
consolidated basis with respect to all outstanding Indebtedness of Company and
its Subsidiaries, including, without limitation, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
14
<PAGE>
acceptance financing and net costs under Interest Rate Agreements, but
excluding, however, any amounts referred to in subsection 2.3 payable to Agent
- --------- -------
and Lenders on or before the Closing Date.
"CONSOLIDATED LEVERAGE RATIO" means as at any date of determination,
the ratio of Consolidated Average Debt as of the last day of the Fiscal Quarter
immediately preceding the Fiscal Quarter in which such date of determination
occurs to Consolidated EBITDA for the four Fiscal Quarters ending as of such
last day of such immediately preceding Fiscal Quarter; provided that with
--------
respect to the calculation of the Consolidated Leverage Ratio, to the extent
that during the period for which compliance is being determined, Company or any
Subsidiary of Company has made an acquisition permitted under subsection 7.7(v)
or has disposed of any assets or operations in an amount for any such
transaction or series of related transactions exceeding $250,000, such
calculations shall be made as if such acquisition or such disposition took place
on the first day of such period on a pro forma basis (such pro forma adjustments
--- ----- --- -----
being calculated in accordance with Regulation S-X of the Securities and
Exchange Commission), and such calculations shall be made after giving effect to
the incurrence, assumption or repayment of any Indebtedness made in connection
with such acquisition or disposition.
"CONSOLIDATED NET INCOME" means, for any period, the net income (or
loss) of Company and its Subsidiaries on a consolidated basis for such period
taken as a single accounting period determined in conformity with GAAP; provided
--------
that there shall be excluded (i) the income (or loss) of any Person (other than
a Subsidiary of Company) in which any other Person (other than Company or any of
its Subsidiaries) has a joint interest, except to the extent of the amount of
dividends or other distributions actually paid to Company or any of its
Subsidiaries by such Person during such period, (ii) the income (or loss) of any
Person accrued prior to the date it becomes a Subsidiary of Company or is merged
into or consolidated with Company or any of its Subsidiaries or that Person's
assets are acquired by Company or any of its Subsidiaries, (iii) the income of
any Subsidiary of Company to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that income is not at
the time permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary, (iv) any after-tax gains or losses attributable
to Asset Sales or returned surplus assets of any Pension Plan, and (v) (to the
extent not included in clauses (i) through (iv) above) any net extraordinary
gains or net non-cash extraordinary losses which non-cash extraordinary losses
are not expected to have a cash impact on Company's financial statements during
the term of this Agreement.
"CONSOLIDATED NET WORTH" means, as at any date of determination, the
sum of the capital stock and additional paid-in capital plus retained earnings
(or minus accumulated deficits) of Company and its Subsidiaries on a
consolidated basis determined in conformity with GAAP.
15
<PAGE>
"CONSOLIDATED RENTAL PAYMENTS" means, for any period, the aggregate
amount of all rents paid or payable by Company and its Subsidiaries on a
consolidated basis during that period under all Capital Leases and Operating
Leases to which Company or any of its Subsidiaries is a party as lessee.
"CONSOLIDATED WORKING CAPITAL" means, as at any date of determination,
the excess of Consolidated Current Assets over Consolidated Current Liabilities.
"CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any period on a
consolidated basis, the amount (which may be a negative number) by which the
Consolidated Working Capital of Company and its Subsidiaries as of the beginning
of such period exceeds (or is less than) the Consolidated Working Capital of
Company and its Subsidiaries as of the end of such period.
"CONTINGENT OBLIGATION", as applied to any Person, means any direct or
indirect liability, contingent or otherwise, of that Person (i) with respect to
any Indebtedness, lease, dividend or other obligation of another if the primary
purpose or intent thereof by the Person incurring the Contingent Obligation is
to provide assurance to the obligee of such obligation of another that such
obligation of another will be paid or discharged, or that any agreements
relating thereto will be complied with, or that the holders of such obligation
will be protected (in whole or in part) against loss in respect thereof, (ii)
with respect to any letter of credit issued for the account of that Person or as
to which that Person is otherwise liable for reimbursement of drawings, or (iii)
under Hedge Agreements. Contingent Obligations shall include (a) the direct or
indirect guaranty, endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to make
take-or-pay or similar payments if required regardless of non-performance by any
other party or parties to an agreement, and (c) any liability of such Person for
the obligation of another through any agreement (contingent or otherwise) (X) to
purchase, repurchase or otherwise acquire such obligation or any security
therefor, or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise) or (Y) to maintain the solvency or any balance sheet item, level
of income or financial condition of another if, in the case of any agreement
described under subclauses (X) or (Y) of this sentence, the primary purpose or
intent thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the amount of the obligation so
guaranteed or otherwise supported or, if less, the amount to which such
Contingent Obligation is specifically limited.
"CONTRACTUAL OBLIGATION", as applied to any Person, means any
provision of any Security issued by that Person or of any material indenture,
mortgage, deed of trust, contract, undertaking, agreement or other instrument to
which that Person is a party or by which it or any of its properties is bound or
to which it or any of its properties is subject.
16
<PAGE>
"CURRENCY AGREEMENT" means any foreign exchange contract, currency
swap agreement, futures contract, option contract, synthetic cap or other
similar agreement or arrangement.
"DOCUMENTATION AGENT" has the meaning assigned to that term in the
introduction to this Agreement.
"DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like
account with a bank, savings and loan association, credit union or like
organization, other than an account evidenced by a negotiable certificate of
deposit.
"DOLLAR EQUIVALENTS" means Dollars or, with respect to any amount of
Canadian Dollars, an equivalent amount of Dollars determined at the rate of
exchange quoted by Agent in New York City, at 9:00 A.M. (New York time) on the
date of determination, to prime banks in New York City for the spot purchase in
the New York foreign exchange market of Dollars with Canadian Dollars.
"DOLLARS" and the sign "$" mean the lawful money of the United States
of America.
"DOMESTIC COMMITMENTS" means the Revolving Loan Commitments or the
Domestic Term Loan Commitments or both.
"DOMESTIC FUNDING AND PAYMENT OFFICE" means (i) the office of Agent
and Swing Line Lender located at One Bankers Trust Plaza, New York, New York
10006 or (ii) such other office of Agent and Swing Line Lender as may from time
to time hereafter be designated as such in a written notice delivered by Agent
to Borrowers and each Domestic Lender.
"DOMESTIC LENDERS" means any Lenders having Domestic Commitments or,
on and after the termination of the Domestic Commitments, having Domestic Loans
outstanding.
"DOMESTIC LOANS" means the Acquisition Loans, the Working Capital
Revolving Loans or the Domestic Term Loans or any combination thereof.
"DOMESTIC SUBSIDIARY" means a Subsidiary of Company that is
incorporated or organized under the laws of a state of the United States of
America.
"DOMESTIC SUBSIDIARY GUARANTOR" means any Domestic Subsidiary of
Company that executes and delivers a counterpart of the Domestic Subsidiary
Guaranty on the Closing Date or from time to time thereafter pursuant to
subsection 6.9A.
17
<PAGE>
"DOMESTIC SUBSIDIARY GUARANTY" means the Amended and Restated Domestic
Subsidiary Guaranty executed and delivered by Sun Gro Horticulture on the
Closing Date or to be executed and delivered by Domestic Subsidiaries from time
to time after the Closing Date in accordance with subsection 6.9A, substantially
in the form of Exhibit XXVI annexed hereto, as such Domestic Subsidiary Guaranty
------------
may be further amended, supplemented or otherwise modified from time to time,
and "DOMESTIC SUBSIDIARY GUARANTIES" means all such Amended and Restated
Domestic Subsidiary Guaranties, collectively.
"DOMESTIC SUBSIDIARY PATENT SECURITY AGREEMENT" means the Domestic
Subsidiary Patent Collateral Assignment and Security Agreement dated as of
August 4, 1995 executed and delivered by Sun Gro Horticulture, as supplemented
by the delivery of additional schedules relating to Lakeland U.S., Inc., Pacific
Soil Company and Black Gold, Inc. on the Closing Date or each Domestic
Subsidiary Patent Collateral Assignment and Security Agreement to be executed
and delivered by Domestic Subsidiaries from time to time thereafter in
accordance with subsection 6.9A, substantially in the form of Exhibit XXV
-----------
annexed hereto, as such Domestic Subsidiary Patent Collateral Security
Agreements may be amended, supplemented or otherwise modified from time to time,
and "DOMESTIC SUBSIDIARY PATENT SECURITY AGREEMENTS" means all such Domestic
Subsidiary Patent Collateral Assignment and Security Agreements, collectively.
"DOMESTIC SUBSIDIARY PLEDGE AGREEMENT" means the Domestic Subsidiary
Pledge Agreement dated as of August 4, 1995, executed and delivered by Sun Gro
Horticulture or each Domestic Subsidiary Pledge Agreement to be executed and
delivered by Domestic Subsidiaries from time to time thereafter in accordance
with subsection 6.9A, substantially in the form of Exhibit XXIII annexed hereto,
-------------
as such Domestic Subsidiary Pledge Agreements may be amended, supplemented or
otherwise modified from time to time, and "DOMESTIC SUBSIDIARY PLEDGE
AGREEMENTS" means all such Domestic Subsidiary Pledge Agreements, collectively.
"DOMESTIC SUBSIDIARY SECURITY AGREEMENT" means the Domestic Subsidiary
Security Agreement dated as of August 4, 1995, executed and delivered by Sun Gro
Horticulture, as supplemented by the delivery of additional schedules relating
to Lakeland U.S., Inc., Black Gold, Inc. and Pacific Soil Company on the Closing
Date or each Domestic Subsidiary Security Agreement to be executed and delivered
by Domestic Subsidiaries from time to time thereafter in accordance with
subsection 6.9A, substantially in the form of Exhibit XXII annexed hereto, as
------------
such Domestic Subsidiary Security Agreements may be amended, supplemented or
otherwise modified from time to time, and "DOMESTIC SUBSIDIARY SECURITY
AGREEMENTS" means all such Domestic Subsidiary Security Agreements,
collectively.
"DOMESTIC SUBSIDIARY TRADEMARK SECURITY AGREEMENT" means the Domestic
Subsidiary Trademark Collateral Security Agreement and Conditional Assignment
dated as of August 4, 1995, executed and delivered by Sun Gro Horticulture, as
supplemented by the delivery of additional schedules relating to Lakeland U.S.,
Inc., Black Gold, Inc. and Pacific
18
<PAGE>
Soil Company on the Closing Date or each Domestic Subsidiary Trademark
Collateral Security Agreement to be executed and delivered by Domestic
Subsidiaries from time to time thereafter in accordance with subsection 6.9A,
substantially in the form of Exhibit XXIV annexed hereto, as such Domestic
------------
Subsidiary Trademark Collateral Security Agreement may be amended, supplemented
or otherwise modified from time to time, and "DOMESTIC SUBSIDIARY TRADEMARK
SECURITY AGREEMENTS" means all such Domestic Subsidiary Trademark Collateral
Security Agreement and Conditional Assignment and Domestic Subsidiary Trademark
Collateral Security Agreements, collectively.
"DOMESTIC TERM LOAN COMMITMENT" means the commitment of a Domestic
Lender to purchase Domestic Term Loans pursuant to the Master Assignment
Agreement or to make Domestic Term Loans to Company pursuant to subsection
2.1A(i), and "DOMESTIC TERM LOAN COMMITMENTS" means such commitments of all
Domestic Lenders in the aggregate.
"DOMESTIC TERM LOAN EXPOSURE" means, with respect to any Domestic
Lender as of any date of determination (i) prior to the funding of the Domestic
Term Loans, that Lender's Domestic Term Loan Commitment and (ii) after the
funding of the Domestic Term Loans, the outstanding principal amount of the
Domestic Term Loan of that Lender.
"DOMESTIC TERM LOANS" means the Term Loans purchased or made by
Domestic Lenders to Company pursuant to subsection 2.1A(i).
"DOMESTIC TERM NOTES" means (i) the promissory notes of Company issued
pursuant to subsection 2.1E(i)(a) on the Closing Date and (ii) any promissory
notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in
connection with assignments of the Domestic Term Loan Commitments or Domestic
Term Loans of any Lenders, in each case substantially in the form of Exhibit IV-
----------
A annexed hereto, as they may be amended, supplemented or otherwise modified
- -
from time to time.
"ELIGIBLE ASSIGNEE" means (A) (i) a commercial bank organized under
the laws of the United States or any state thereof; (ii) a savings and loan
association or savings bank organized under the laws of the United States or any
state thereof; (iii) a commercial bank organized under the laws of any other
country or a political subdivision thereof; provided that (x) such bank is
--------
acting through a branch or agency located in the United States or (y) such bank
is organized under the laws of a country that is a member of the Organization
for Economic Cooperation and Development or a political subdivision of such
country; and (iv) any other entity which is an "accredited investor" (as defined
in Regulation D under the Securities Act) which extends credit or buys loans as
one of its businesses including insurance companies, mutual funds and lease
financing companies; and (B) any Lender and any Affiliate of any Lender;
provided that no Affiliate of Company shall be an Eligible Assignee.
- --------
19
<PAGE>
"EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined
in Section 3(3) of ERISA which is or was maintained or contributed to by
Company, any of its Subsidiaries or any of their respective ERISA Affiliates.
"ENVIRONMENTAL CLAIM" means any investigation, notice, notice of
violation, claim, action, suit, proceeding, demand, abatement order or other
order or directive (conditional or otherwise), by any governmental authority or
any other Person, arising (i) pursuant to or in connection with any actual or
alleged violation of any Environmental Law, (ii) in connection with any
Hazardous Materials or any actual or alleged Hazardous Materials Activity, or
(iii) in connection with any actual or alleged damage, injury, threat or harm to
health, safety, natural resources or the environment.
"ENVIRONMENTAL LAWS" means any and all current or future statutes,
ordinances, orders, rules, regulations, guidance documents, judgments,
Governmental Authorizations, or any other requirements of governmental
authorities relating to (i) environmental matters, including those relating to
any Hazardous Materials Activity, (ii) the generation, use, storage,
transportation or disposal of Hazardous Materials, or (iii) occupational safety
and health, industrial hygiene, land use or the protection of human, plant or
animal health or welfare, in any manner applicable to Company or any of its
Subsidiaries or any Facility, including the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. (S) 9601 et seq.), the
-- ---
Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the
-- ---
Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq.), the Federal
-- ---
Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42
-- ---
U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S) 2601
-- ---
et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.
- -- ---
(S)136 et seq.), the Occupational Safety and Health Act (29 U.S.C. (S) 651 et
-- --- --
seq.), the Oil Pollution Act (33 U.S.C. (S) 2701 et seq) and the Emergency
- --- ------
Planning and Community Right-to-Know Act (42 U.S.C. (S) 11001 et seq.), each as
-- ---
amended or supplemented, any analogous present or future state or local statutes
or laws, and any regulations promulgated pursuant to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor thereto.
"ERISA AFFILIATE" means, as applied to any Person, (i) any corporation
which is a member of a controlled group of corporations within the meaning of
Section 414(b) of the Internal Revenue Code of which that Person is a member;
(ii) any trade or business (whether or not incorporated) which is a member of a
group of trades or businesses under common control within the meaning of Section
414(c) of the Internal Revenue Code of which that Person is a member; and (iii)
any member of an affiliated service group within the meaning of Section 414(m)
or (o) of the Internal Revenue Code of which that Person, any corporation
described in clause (i) above or any trade or business described in clause (ii)
above is a member. Any former ERISA Affiliate of Company or any of its
Subsidiaries shall continue to
20
<PAGE>
be considered an ERISA Affiliate of Company or such Subsidiary within the
meaning of this definition with respect to the period such entity was an ERISA
Affiliate of Company or such Subsidiary and with respect to liabilities arising
after such period for which Company or such Subsidiary could be liable under the
Internal Revenue Code or ERISA.
"ERISA EVENT" means (i) a "reportable event" within the meaning of
Section 4043 of ERISA and the regulations issued thereunder with respect to any
Pension Plan (excluding those for which the provision for 30-day notice to the
PBGC has been waived by regulation); (ii) the failure to meet the minimum
funding standard of Section 412 of the Internal Revenue Code with respect to any
Pension Plan (whether or not waived in accordance with Section 412(d) of the
Internal Revenue Code) or the failure to make by its due date a required
installment under Section 412(m) of the Internal Revenue Code with respect to
any Pension Plan or the failure to make any required contribution to a
Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan
pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such
plan in a distress termination described in Section 4041(c) of ERISA; (iv) the
withdrawal by Company, any of its Subsidiaries or any of their respective ERISA
Affiliates from any Pension Plan with two or more contributing sponsors or the
termination of any such Pension Plan resulting in liability pursuant to Section
4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to
terminate any Pension Plan, or the occurrence of any event or condition which
might constitute grounds under ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan; (vi) the imposition of liability
on Company, any of its Subsidiaries or any of their respective ERISA Affiliates
pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of
Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its
Subsidiaries or any of their respective ERISA Affiliates in a complete or
partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from
any Multiemployer Plan if there is any potential liability therefor, or the
receipt by Company, any of its Subsidiaries or any of their respective ERISA
Affiliates of notice from any Multiemployer Plan that it is in reorganization or
insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to
terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the
occurrence of an act or omission which could give rise to the imposition on
Company, any of its Subsidiaries or any of their respective ERISA Affiliates of
fines, penalties, taxes or related charges under Chapter 43 of the Internal
Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071
of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a
material claim (other than routine claims for benefits) against any Employee
Benefit Plan other than a Multiemployer Plan or the assets thereof, or against
Company, any of its Subsidiaries or any of their respective ERISA Affiliates in
connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue
Service of notice of the failure of any Pension Plan (or any other Employee
Benefit Plan intended to be qualified under Section 401(a) of the Internal
Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or
the failure of any trust forming part of any Pension Plan to qualify for
exemption from taxation under Section 501(a) of the Internal Revenue Code; or
(xi) the imposition of a Lien pursuant to Section 401(a)(29)
21
<PAGE>
or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any
Pension Plan.
"EURODOLLAR RATE LOANS" means Loans bearing interest at rates
determined by reference to the Adjusted Eurodollar Rate as provided in
subsection 2.2A.
"EVENT OF DEFAULT" means each of the events set forth in Section 8.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor statute.
"FACILITIES" means any and all real property (including all
buildings, fixtures or other improvements located thereon) now, hereafter or
heretofore owned, leased, operated or used by Company or any of its Subsidiaries
or any of their respective predecessors or Affiliates.
"FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating
interest rate equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by Agent from three Federal funds brokers of recognized
standing selected by Agent.
"FEE PROPERTY" means a Real Property Asset consisting of a fee
interest in real property.
"FINANCIAL PLAN" has the meaning assigned to that term in subsection
6.1(xiii).
"FIRST PRIORITY" means, with respect to any Lien purported to be
created in any Collateral pursuant to any Collateral Document, that (i) such
Lien has priority over any other Lien (other than Prior Liens) on such
Collateral and (ii) such Lien is the only Lien (other than Permitted
Encumbrances) to which such Collateral is subject.
"FISCAL QUARTER" means a fiscal quarter of any Fiscal Year.
"FISCAL YEAR" means the fiscal year of Company and its Subsidiaries
ending on December 31 of each calendar year.
"FLOOD HAZARD PROPERTY" means a Mortgaged Property located in an area
designated by the Federal Emergency Management Agency as having special flood or
mud slide hazards.
22
<PAGE>
"FUNDING DATE" means the date of the funding of a Loan.
"GAAP" means, subject to the limitations on the application thereof
set forth in subsection 1.2, generally accepted accounting principles set forth
in opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, in each case as the same are applicable to the
circumstances as of the date of determination.
"GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization,
plan, directive, consent order or consent decree of or from any federal, state
or local governmental authority, agency or court.
"GUARANTIES" means the Holdings Guaranty, the Company Guaranty, the
Domestic Subsidiary Guaranty and the Canadian Subsidiary Guaranty.
"HARRIS" has the meaning assigned to it in the introduction to this
Agreement.
"HAZARDOUS MATERIALS" means (i) any chemical, material or substance at
any time defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous waste", acutely
hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic
pollutant", "contaminant", "restricted hazardous waste", "infectious waste",
"toxic substances", or any other term or expression intended to define, list or
classify substances by reason of properties harmful to health, safety or the
indoor or outdoor environment (including harmful properties such as
ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive
toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any
applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or
petroleum derived substance; (iii) any drilling fluids, produced waters and
other wastes associated with the exploration, development or production of crude
oil, natural gas or geothermal resources; (iv) any flammable substances or
explosives; (v) any radioactive materials; (vi) any asbestos-containing
materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment
which contains any oil or dielectric fluid containing polychlorinated biphenyls;
(ix) pesticides; and (x) any other chemical, material or substance, exposure to
which is prohibited, limited or regulated by any governmental authority or which
may or could pose a hazard to the health and safety of the owners, occupants or
any Persons in the vicinity of any Facility or to the indoor or outdoor
environment.
"HAZARDOUS MATERIALS ACTIVITY" means any past, current, proposed or
threatened activity, event or occurrence involving any Hazardous Materials,
including the use, manufacture, possession, storage, holding, presence,
existence, location, Release, threatened Release, discharge, placement,
generation, transportation, processing, construction, treatment,
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abatement, removal, remediation, disposal, disposition or handling of any
Hazardous Materials, and any corrective action or response action with respect
to any of the foregoing.
"HEDGE AGREEMENTS" means an Interest Rate Agreement or a Currency
Agreement designed to hedge against fluctuations in interest rates or currency
values, respectively.
"HINES I EXISTING CREDIT AGREEMENT" has the meaning assigned to it in
the introduction to this Agreement.
"HINES II EXISTING CREDIT AGREEMENT" has the meaning assigned to it in
the introduction to this Agreement.
"HOLDINGS" means Hines Horticulture, Inc., a Delaware corporation, the
successor by merger to Hines Holdings, Inc., a Nevada corporation.
"HOLDINGS COMMON STOCK" means the common stock of Holdings, par value
$.01 per share.
"HOLDINGS GUARANTY" means the Amended and Restated Holdings Guaranty
executed and delivered by Holdings on the Closing Date, substantially in the
form of Exhibit XV annexed hereto, as such Holdings Guaranty may thereafter be
----------
amended, supplemented or otherwise modified from time to time.
"HOLDINGS PLEDGE AGREEMENT" means the Holdings Pledge Agreement dated
as of August 4, 1995, executed and delivered by Holdings, as amended by a First
Amendment dated as of November 7, 1997, and a Second Amendment dated as of
December 16, 1997, as such Holdings Pledge Agreement may be further amended,
supplemented or otherwise modified from time to time.
"INDEBTEDNESS", as applied to any Person, means (i) all indebtedness
for borrowed money, (ii) that portion of obligations with respect to Capital
Leases that is properly classified as a liability on a balance sheet in
conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money,
(iv) any obligation owed for all or any part of the deferred purchase price of
property or services (excluding any such obligations incurred under ERISA),
which purchase price is (a) due more than six months from the date of incurrence
of the obligation in respect thereof or (b) evidenced by a note or similar
written instrument, and (v) all indebtedness secured by any Lien on any property
or asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is nonrecourse to the
credit of that Person. Obligations under Hedge Agreements constitute Contingent
Obligations and not Indebtedness.
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"INDEMNITEE" has the meaning assigned to that term in subsection 10.3.
"INSOLVENCY EVENT" means, with respect to any Person, the occurrence
of any of the events described in subsection 8.6 or 8.7; provided that, solely
--------
for purposes of this definition, any references to any Borrower or any of its
Subsidiaries in subsection 8.6 or 8.7 shall be deemed to be a reference to such
Person.
"INSOLVENCY LAWS" means the Bankruptcy Code, the Bankruptcy and
Insolvency Act (Canada), the Company Creditors' Arrangement Act (Canada), the
Winding-Up Act (Canada) or any comparable law of Canada or any other applicable
bankruptcy, insolvency or similar law now or hereafter in effect in the United
States of America or any state thereof or Canada or any province thereof.
"INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames,
copyrights, technology, know-how and processes used in or necessary for the
conduct of the business of Company and its Subsidiaries as currently conducted
that are material to the condition (financial or otherwise), business or
operations of Company and its Subsidiaries, taken as a whole.
"INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan
or any Canadian Base Rate Loan, each June 30, September 30, December 31 or March
31, commencing on the first such date to occur after the Closing Date, and (ii)
with respect to any Eurodollar Rate Loan or any Canadian Eurodollar Rate Loan,
the last day of each Interest Period applicable to such Loan; provided that in
--------
the case of each Interest Period of six months "Interest Payment Date" shall
also include the date that is three months after the commencement of such
Interest Period.
"INTEREST PERIOD" has the meaning assigned to that term in subsection
2.2B.
"INTEREST RATE AGREEMENT" means any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement or other similar
agreement or arrangement.
"INTEREST RATE DETERMINATION DATE" means, with respect to any Interest
Period, the second Business Day prior to the first day of such Interest Period.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended to the date hereof and from time to time hereafter, and any successor
statute.
"INVENTORY" means, with respect to any Person as of any date of
determination, all goods, merchandise and other personal property which are then
held by such Person for sale or lease, including raw materials and work in
process.
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<PAGE>
"INVESTMENT" means (i) any direct or indirect purchase or other
acquisition by Company or any of its Subsidiaries of, or of a beneficial
interest in, any Securities of any other Person (other than a Person that prior
to such purchase or acquisition was a wholly-owned Domestic Subsidiary of
Company), (ii) any direct or indirect redemption, retirement, purchase or other
acquisition for value, by any Subsidiary of Company from any Person other than
Company or any of its Subsidiaries, of any equity Securities of such Subsidiary,
or (iii) any direct or indirect loan, advance (other than advances to employees
for moving, entertainment and travel expenses, drawing accounts and similar
expenditures in the ordinary course of business) or capital contribution by
Company or any of its Subsidiaries to any other Person other than a wholly-owned
Domestic Subsidiary of Company, including all indebtedness and accounts receiv
able from that other Person that are not current assets or did not arise from
sales to that other Person in the ordinary course of business. The amount of
any Investment shall be the original cost of such Investment plus the cost of
----
all additions thereto, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
"IP COLLATERAL" means, collectively, the Collateral under the Company
Patent Security Agreement, the Company Trademark Security Agreement, the
Subsidiary Patent Security Agreements and the Subsidiary Trademark Security
Agreements.
"ISSUING LENDER" means, with respect to any Letter of Credit, BTCo or
any other Lender which agrees or is otherwise obligated to issue such Letter of
Credit, determined as provided in subsection 3.1A(v).
"JOINT VENTURE" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided
--------
that in no event shall any corporate Subsidiary of any Person be considered to
be a Joint Venture to which such Person is a party.
"LAKELAND CANADA" has the meaning assigned to that term in the
introduction to this Agreement.
"LAKELAND CANADA TERM LOAN COMMITMENT" means the commitment of a
Canadian Lender to purchase Lakeland Canada Term Loans pursuant to the Master
Assignment Agreement or to make new Lakeland Canada Term Loans to Lakeland
Canada pursuant to subsection 2.1A(ii), and "LAKELAND CANADA TERM LOAN
COMMITMENTS" means such commitments of all Canadian Lenders in the aggregate.
"LAKELAND CANADA TERM LOANS" means the Term Loans purchased or made by
Canadian Lenders to Lakeland Canada pursuant to subsection 2.1A(ii).
"LENDER" and "LENDERS" means the persons identified as "Lenders" and
listed on the signature pages of this Agreement, together with their successors
and permitted assigns
26
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pursuant to subsection 10.1, and the term "Lenders" shall include Swing Line
Lender unless the context otherwise requires; provided that the term "Lenders",
--------
when used in the context of a particular Commitment, shall mean Lenders having
that Commitment.
"LETTER OF CREDIT" or "LETTERS OF CREDIT" means Standby Letters of
Credit issued or to be issued by Issuing Lenders for the account of Company
pursuant to subsection 3.1.
"LETTER OF CREDIT USAGE" means, as at any date of determination, the
sum of (i) the maximum aggregate amount which is or at any time thereafter may
become available for drawing under all Letters of Credit then outstanding plus
----
(ii) the aggregate amount of all drawings under Letters of Credit honored by
Issuing Lenders and not theretofore reimbursed by Company. For purposes of this
definition, any amount described in clause (i) or (ii) of the preceding sentence
which is denominated in Canadian Dollars shall be valued in Dollar Equivalents
as of the applicable date of determination.
"LIEN" means any lien, mortgage, pledge, assignment, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof, and any
agreement to give any security interest) and any option, trust or other
preferential arrangement having the practical effect of any of the foregoing.
"LOAN" or "LOANS" means one or more of the Term Loans, Revolving Loans
or Swing Line Loans or any combination thereof.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Letters of
Credit (and any applications for, or reimbursement agreements or other documents
or certificates executed by Company in favor of an Issuing Lender relating to,
the Letters of Credit), the Guaranties, any Interest Rate Agreements with a
Lender or any of its Affiliates, the Collateral Documents and, solely for
purposes of the use of the term "Loan Documents" in the definition of
"Obligations", the Currency Agreements to which any Lender or any of its
Affiliates is a party.
"LOAN PARTY" means each of the Borrowers and Guarantors and "LOAN
PARTIES" means all such Persons, collectively.
"MARGIN STOCK" has the meaning assigned to that term in Regulation U
of the Board of Governors of the Federal Reserve System as in effect from time
to time.
"MASTER ASSIGNMENT AGREEMENT" means that certain Master Assignment
Agreement substantially in the form of Exhibit XIV annexed hereto, among
-----------
Company, the lenders under the Existing Credit Agreements, BTCC, as agent under
the Existing Credit Agreements, the lenders under this Agreement and the Agent
pursuant to which all lenders
27
<PAGE>
under the Existing Credit Agreements assign their loans and/or revolving loan
commitments to the Agent, and Agent assigns to each Lender under this Agreement,
and each such lender purchases from Agent, the Loans and/or Revolving Loan
Commitments as set forth on Schedule 2.1 attached to this Agreement and BTCC
------------
assigns its rights and responsibilities as agent to the Agent and Canadian
Agent, as the case may be.
"MATERIAL ADVERSE EFFECT" means (i) a material adverse effect upon the
business, operations, properties, assets, condition (financial or otherwise) or
prospects of Company and its Subsidiaries, taken as a whole, (ii) the impairment
of the ability of any Loan Party to perform, or of Agent or Lenders to enforce,
the Obligations, or (iii) a material adverse effect on the value of the
Collateral or the amount which Agent or Lenders would be likely to receive
(after giving consideration to delays in payment and costs of enforcement) in
the liquidation of the Collateral.
"MATERIAL CONTRACT" means any contract or other arrangement to which
Company or any of its Subsidiaries is a party (other than the Loan Documents)
for which breach, nonperformance, cancellation or failure to renew could have a
Material Adverse Effect.
"MATERIAL LEASEHOLD" means a Real Property Asset consisting of a
leasehold interest in an Operating Lease or a Capital Lease which is reasonably
determined by Agent to be of material value as collateral for the Obligations.
"MDCP" means Madison Dearborn Capital Partners, L.P., a Delaware
limited partnership.
"MORTGAGE" means an instrument (whether designated as a deed of trust,
a trust deed or a mortgage or by any similar title) executed and delivered by
any Borrower or any of its Subsidiaries encumbering a Fee Property or a Material
Leasehold, as such instrument may be amended, supplemented or otherwise modified
from time to time, and "MORTGAGES" means all such instruments, including any
Additional Mortgages (as defined in subsection 6.10A), collectively.
"MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a
"multiemployer plan" as defined in Section 3(37) of ERISA.
"NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, Cash
payments (including any Cash received by way of deferred payment pursuant to, or
by monetization of, a note receivable or otherwise, but only as and when so
received) received from such Asset Sale, net of any bona fide direct costs
incurred in connection with such Asset Sale, including (i) income taxes
reasonably estimated to be actually payable within two years of the date of such
Asset Sale as a result of any gain recognized in connection with such Asset Sale
and (ii) payment of the outstanding principal amount of, premium or penalty, if
any, and
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<PAGE>
interest on any Indebtedness (other than the Loans) that is secured by a Lien on
the stock or assets in question and that is required to be repaid under the
terms thereof as a result of such Asset Sale; provided that, in connection with
--------
the sale of any existing asset (the "REPLACED ASSET") by Company or any of its
Subsidiaries substantially concurrently with the purchase of a replacement asset
by Company or such Subsidiary of like kind and character (which, in the case of
a Real Property Asset, shall be located within a 30-mile radius of the
Replacement Asset) (the "REPLACEMENT ASSET"), there shall be included in Net
Cash Proceeds only the excess, if any, of the Net Cash Proceeds received for the
Replaced Asset (calculated without giving effect to this proviso) over the
purchase price of the Replacement Asset.
"NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments or
proceeds received by Company or any of its Subsidiaries (i) under any business
interruption or casualty insurance policy in respect of a covered loss
thereunder or (ii) as a result of the taking of any assets of Company or any of
its Subsidiaries by any Person pursuant to the power of eminent domain,
condemnation or otherwise, or pursuant to a sale of any such assets to a
purchaser with such power under threat of such a taking, in each case net of any
actual and reasonable documented costs incurred by Company or any of its
Subsidiaries in connection with the adjustment or settlement of any claims of
Company or such Subsidiary in respect thereof.
"NOTES" means one or more of the Domestic Term Notes, the Canadian
Term Notes, the Acquisition Notes, the Working Capital Revolving Notes or Swing
Line Note or any combination thereof.
"NOTICE OF BORROWING" means a notice substantially in the form of
Exhibit I annexed hereto delivered by a Borrower to Agent pursuant to subsection
- ---------
2.1B with respect to a proposed borrowing.
"NOTICE OF COMMENCEMENT OF CLEAN DOWN PERIOD" means a notice
substantially in the form of Exhibit V annexed hereto delivered by Company to
---------
Agent pursuant to subsection 2.1A(iv) with respect to the commencement of each
clean down period with respect to outstanding Working Capital Revolving Loans
and Swing Line Loans.
"NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in
the form of Exhibit II annexed hereto delivered by a Borrower to Agent pursuant
----------
to subsection 2.2D with respect to a proposed conversion or continuation of the
applicable basis for determining the interest rate with respect to the Loans
specified therein.
"OBLIGATIONS" means all obligations of every nature of each Loan Party
from time to time owed to Agent, Lenders or any of them under the Loan
Documents, whether for principal, interest (including interest accruing on or
after the occurrence of an Insolvency Event), reimbursement of amounts drawn
under Letters of Credit, fees, expenses, indemnification or otherwise.
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<PAGE>
"OFFICERS' CERTIFICATE" means, as applied to any corporation, a
certificate executed on behalf of such corporation by its chairman of the board
(if an officer) or its president or one of its vice presidents and by its chief
financial officer or its treasurer; provided that every Officers' Certificate
--------
with respect to the compliance with a condition precedent to the making of any
Loans hereunder shall include (i) a statement that the officer or officers
making or giving such Officers' Certificate have read such condition and any
definitions or other provisions contained in this Agreement relating thereto,
(ii) a statement that, in the opinion of the signers, they have made or have
caused to be made such examination or investigation as is necessary to enable
them to express an informed opinion as to whether or not such condition has been
complied with, and (iii) a statement as to whether, in the opinion of the
signers, such condition has been complied with.
"OPERATING LEASE" means, as applied to any Person, any lease
(including leases that may be terminated by the lessee at any time) of any
property (whether real, personal or mixed) that is not a Capital Lease other
than any such lease under which that Person is the lessor.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
thereto.
"PENSION PLAN" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code
or Section 302 of ERISA.
"PERMITTED ENCUMBRANCES" means the following types of Liens (excluding
any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal
Revenue Code or by ERISA, any such Lien relating to or imposed in connection
with any Environmental Claim, and any such Lien expressly prohibited by any
applicable terms of any of the Collateral Documents):
(i) Liens for taxes, assessments or governmental charges or claims
the payment of which is not, at the time, required by subsection 6.3;
(ii) statutory Liens of landlords, statutory Liens of banks and
rights of set-off, statutory Liens of carriers, warehousemen, mechanics,
repairmen, workmen and materialmen, and other Liens imposed by law, in each
case incurred in the ordinary course of business (a) for amounts not yet
overdue or (b) for amounts that are overdue and that (in the case of any
such amounts overdue for a period in excess of 5 days) are being contested
in good faith by appropriate proceedings, so long as (1) such reserves or
other appropriate provisions, if any, as shall be required by GAAP shall
have been made for any such contested amounts, and (2) in the case of a
Lien with respect to any portion of the Collateral, such contest
proceedings conclusively operate to stay the sale of any portion of the
Collateral on account of such Lien;
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<PAGE>
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money), so long as no foreclosure, sale or similar
proceedings have been commenced with respect to any portion of the
Collateral on account thereof;
(iv) any attachment or judgment Lien not constituting an Event of
Default under subsection 8.8;
(v) leases or subleases granted to third parties in accordance with
any applicable terms of the Collateral Documents and not interfering in any
material respect with the ordinary conduct of the business of Company or
any of its Subsidiaries or resulting in a material diminution in the value
of any Collateral as security for the Obligations;
(vi) easements, rights-of-way, restrictions, encroachments, and
other minor defects or irregularities in title, in each case which do not
and will not interfere in any material respect with the ordinary conduct of
the business of Company or any of its Subsidiaries or result in a material
diminution in the value of any Collateral as security for the Obligations;
(vii) any (a) interest or title of a lessor or sublessor under any
lease permitted by subsection 7.9, (b) restriction or encumbrance that the
interest or title of such lessor or sublessor may be subject to, or (c)
subordination of the interest of the lessee or sublessee under such lease
to any restriction or encumbrance referred to in the preceding clause (b),
so long as the holder of such restriction or encumbrance agrees to
recognize the rights of such lessee or sublessee under such lease;
(viii) Liens arising from filing UCC financing statements relating
solely to leases permitted by this Agreement;
(ix) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(x) any zoning or similar law or right reserved to or vested in any
govern mental office or agency to control or regulate the use of any real
property;
(xi) Liens securing obligations (other than obligations representing
Indebted ness for borrowed money) under operating, reciprocal easement or
similar agreements entered into in the ordinary course of business of
Company and its Subsidiaries; and
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<PAGE>
(xii) licenses of patents, trademarks and other intellectual property
rights granted by Company or any of its Subsidiaries in the ordinary course
of business and not interfering in any material respect with the ordinary
conduct of the business of Company or such Subsidiary.
"PERSON" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, Joint Ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments (whether federal,
state or local, domestic or foreign, and including political subdivisions
thereof) and agencies or other administrative or regulatory bodies thereof.
"PLEDGED COLLATERAL" means, collectively, the "Pledged Collateral" as
defined in the Holdings Pledge Agreement, the Company Pledge Agreement and the
Subsidiary Pledge Agreements.
"POTENTIAL EVENT OF DEFAULT" means a condition or event that, after
notice or lapse of time or both, would constitute an Event of Default.
"PPSA" means the Personal Property Security Act or any other statute
pertaining to the creation, perfection or priority of security interests in any
collateral, in each case as in effect in any Canadian province.
"PRIME RATE" means the rate that BTCo announces from time to time as
its prime lending rate in the United States for Dollar denominated loans, as in
effect from time to time. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any customer.
BTCo or any other Lender may make commercial loans or other loans at rates of
interest at, above or below the Prime Rate.
"PRIOR LIENS" means Permitted Encumbrances, but only to the extent
that the law or regulation creating or authorizing such Lien provides that such
Lien must be superior to the Lien and security interest created and evidenced by
the Collateral Documents.
"PRO RATA SHARE" means (i) with respect to all payments, computations
and other matters relating to the Domestic Term Loan Commitment or the Domestic
Term Loan of any Domestic Lender, the percentage obtained by dividing (x) the
--------
Domestic Term Loan Exposure of that Domestic Lender by (y) the aggregate
--
Domestic Term Loan Exposure of all Domestic Lenders, (ii) with respect to all
payments, computations and other matters relating to the Acquisition Revolving
Loan Commitment or the Acquisition Loan Exposure of any Domestic Lender, the
percentage obtained by dividing (x) the Acquisition Loan Exposure of that
--------
Domestic Lender by (y) the aggregate Acquisition Loan Exposure of all Domestic
--
Lenders, (iii) with respect to all payments, computations and other matters
relating to the Working Capital Revolving Loan Commitment or the Working Capital
Revolving Loans of any
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<PAGE>
Domestic Lender or any Letters of Credit issued or participations therein
purchased by any Domestic Lender, the percentage obtained by dividing (x) the
--------
Working Capital Revolving Loan Exposure of that Domestic Lender by (y) the
--
aggregate Working Capital Revolving Loan Exposure of all Domestic Lenders, (iv)
with respect to all payments, computations and other matters relating to the
Canadian Term Loan Commitment or the Canadian Term Loan of any Canadian Lender,
the percentage obtained by dividing (x) the Canadian Term Loan Exposure of that
--------
Lender by (y) the aggregate Canadian Term Loan Exposure of all Canadian Lenders,
--
and (v) for all other purposes with respect to each Lender, the percentage
obtained by dividing (x) the sum of the Domestic Term Loan Exposure of that
--------
Lender plus the Acquisition Loan Exposure of that Lender plus the Working
---- ----
Capital Revolving Loan Exposure of that Lender plus the Canadian Term Loan
----
Exposure of that Lender by (y) the sum of the aggregate Domestic Term Loan
--
Exposure of all Lenders plus the aggregate Acquisition Loan Exposure of all
Lenders plus the aggregate Working Capital Revolving Loan Exposure of all
----
Lenders plus the aggregate Canadian Term Loan Exposure of all Lenders, in any
----
such case as the applicable percentage may be adjusted by assignments permitted
pursuant to subsection 10.1. The initial Pro Rata Share of each Lender for
purposes of each of clauses (i), (ii), (iii), (iv) and (v) of the preceding
sentence is set forth opposite the name of that Lender in Schedule 2.1 annexed
------------
hereto.
"PTO" means the United States Patent and Trademark Office or any
successor or substitute office in which filings are necessary or, in the opinion
of Agent, desirable in order to create or perfect Liens on any IP Collateral.
"REAL PROPERTY ASSETS" means all real property from time to time owned
in fee by any Loan Party and all rights, title and interest in and to any and
all leases of real property as to which any Loan Party has a leasehold interest,
including without limitation any such fee or leasehold interests acquired by any
Loan Party after the date hereof.
"RECORDED LEASEHOLD INTEREST" means a Leasehold Property with respect
to which a Record Document (as hereinafter defined) has been recorded in all
places necessary or desirable, in Agent's reasonable judgment, to give
constructive notice of such Leasehold Property to third-party purchasers and
encumbrancers of the affected real property. For purposes of this definition,
the term "RECORD DOCUMENT" means, with respect to any Leasehold Property, (a)
the lease evidencing such Leasehold Property or a memorandum thereof, executed
and acknowledged by the owner of the affected real property, as lessor, or (b)
if such Leasehold Property was acquired or subleased from the holder of a
Recorded Leasehold Interest, the applicable assignment or sublease document,
executed and acknowledged by such holder, in each case in form sufficient to
give such constructive notice upon recordation and otherwise in form reasonably
satisfactory to Agent.
"REFUNDED SWING LINE LOANS" has the meaning assigned to that term in
subsection 2.1A(v).
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"REGISTER" has the meaning assigned to that term in subsection 2.1D.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"REIMBURSEMENT DATE" has the meaning assigned to that term in
subsection 3.3B.
"RELEASE" means any release, spill, emission, leaking, pumping,
pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping,
leaching or migration of Hazardous Materials into the indoor or outdoor
environment (including the abandonment or disposal of any barrels, containers or
other closed receptacles containing any Hazardous Materials), including the
movement of any Hazardous Materials through the air, soil, surface water or
groundwater.
"REQUEST FOR ISSUANCE OF LETTER OF CREDIT" means a notice
substantially in the form of Exhibit III annexed hereto delivered by Company to
-----------
Agent pursuant to subsection 3.1A(iv) with respect to the proposed issuance of a
Letter of Credit.
"REQUIREMENT OF LAW" means (a) the certificates or articles of
incorporation, by-laws and other organizational or governing documents of a
Person, (b) any law, treaty, rule, regulation or determination of an arbitrator,
court or other governmental authority, or (c) any franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval binding on a Person or any of its property.
"REQUISITE CLASS LENDERS" means, at any time of determination (x) for
the Class of Lenders consisting of Domestic Lenders, Domestic Lenders having or
holding more than 66 2/3% of the sum of (i) the aggregate Domestic Term Loan
Exposure of all Domestic Lenders, (ii) the aggregate Acquisition Loan Exposure
of all Domestic Lenders, plus (iii) the aggregate Working Capital Revolving Loan
----
Exposure of all Domestic Lenders and (y) for the Class of Lenders consisting of
Canadian Lenders, Canadian Lenders having or holding more than 66 2/3% of the
aggregate Canadian Term Loan Exposure of all Canadian Lenders.
"REQUISITE LENDERS" means Lenders having or holding 51% or more of the
sum of the aggregate Term Loan Exposure of all Lenders plus the aggregate
----
Revolving Loan Exposure of all Lenders.
"RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of stock
of Company now or hereafter outstanding, except a dividend payable solely in
shares of that class of stock to the holders of that class, (ii) any redemption,
retirement, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any shares of any class of stock of Company now or
hereafter outstanding, (iii) any payment made to retire, or to obtain the
surrender of, any
34
<PAGE>
outstanding warrants, options or other rights to acquire shares of any class of
stock of Company now or hereafter outstanding, and (iv) any payment or
prepayment of principal of, premium, if any, or interest on, or redemption,
purchase, retirement, defeasance (including in-substance or legal defeasance),
sinking fund or similar payment with respect to, any Subordinated Indebtedness.
"REVOLVING LOAN COMMITMENT" means the Acquisition Revolving Loan
Commitment or Working Capital Revolving Loan Commitment or any combination
thereof.
"REVOLVING LOAN COMMITMENT TERMINATION DATE" means June 30, 2003.
"REVOLVING LOAN EXPOSURE" means the Acquisition Loan Exposure and the
Working Capital Revolving Loan Exposure or any combination thereof.
"REVOLVING LOANS" means Acquisition Loans and Working Capital
Revolving Loans or any combination thereof.
"REVOLVING NOTES" means the Acquisition Notes and the Working Capital
Revolving Notes or any combination thereof.
"SECURITIES" means any stock, shares, partnership interests, voting
trust certificates, certificates of interest or participation in any profit-
sharing agreement or arrangement, options, warrants, bonds, debentures, notes,
or other evidences of indebtedness, secured or unsecured, convertible,
subordinated or otherwise, or in general any instruments commonly known as
"securities" or any certificates of interest, shares or participations in
temporary or interim certificates for the purchase or acquisition of, or any
right to subscribe to, purchase or acquire, any of the foregoing.
"SECURITIES ACT" means the Securities Act of 1933, as amended from
time to time, and any successor statute.
"SOLVENT" means, with respect to any Person, that as of the date of
determination both (A) (i) the then fair saleable value of the property of such
Person is (y) greater than the total amount of liabilities (including contingent
liabilities) of such Person and (z) not less than the amount that will be
required to pay the probable liabilities on such Person's then existing debts as
they become absolute and matured considering all financing alternatives and
potential asset sales reasonably available to such Person; (ii) such Person's
capital is not unreasonably small in relation to its business or any
contemplated or undertaken transaction; and (iii) such Person does not intend to
incur, or believe (nor should it reasonably believe) that it will incur, debts
beyond its ability to pay such debts as they become due; and (B) such Person is
"solvent" within the meaning given that term and similar terms under applicable
laws relating to fraudulent transfers and conveyances. For purposes of this
definition, the amount of any contingent liability at any time shall be computed
as the amount that, in light of all of
35
<PAGE>
the facts and circumstances existing at such time, represents the amount that
can reasonably be expected to become an actual or matured liability.
"STANDBY LETTER OF CREDIT" means any standby letter of credit or
similar instrument issued for the purpose of supporting (i) Indebtedness of
Company or any of its Subsidiaries in respect of industrial revenue or
development bonds or financings, (ii) workers' compensation liabilities of
Company or any of its Subsidiaries, (iii) the obligations of third party
insurers of Company or any of its Subsidiaries arising by virtue of the laws of
any jurisdiction requiring third party insurers, (iv) obligations with respect
to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and
(v) performance, payment, deposit or surety obligations of Company or any of its
Subsidiaries, in any case if required by law or governmental rule or regulation
or in accordance with custom and practice in the industry; provided that Standby
--------
Letters of Credit may not be issued for the purpose of supporting (a) trade
payables or (b) any Indebtedness constituting "antecedent debt" (as that term is
used in Section 547 of the Bankruptcy Code).
"SUBORDINATED INDEBTEDNESS" means (i) the Indebtedness of Company
evidenced by the Subordinated Notes and (ii) any other Indebtedness of Company
subordinated in right of payment to the Obligations pursuant to documentation
containing maturities, amortization schedules, covenants, defaults, remedies,
subordination provisions and other material terms in form and substance
satisfactory to Agent and Requisite Lenders.
"SUBORDINATED NOTE INDENTURE" means the indenture dated as of October
19, 1995 between Company, as issuer, Holdings and Sun Gro Horticulture, Inc.,
and IBJ Schroder Bank & Trust Company, as Trustee.
"SUBORDINATED NOTES" means Company's $120,000,000 in initial aggregate
principal amount of 11-3/4% Senior Subordinated Notes due 2005.
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, limited liability company, association, joint venture or other
business entity of which more than 50% of the total voting power of shares of
stock or other ownership interests entitled (without regard to the occurrence of
any contingency) to vote in the election of the Person or Persons (whether
directors, managers, trustees or other Persons performing similar functions)
having the power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.
"SUN GRO CANADA" has the meaning assigned to that term in the
introduction to this Agreement.
"SUN GRO CANADA TERM LOAN COMMITMENT" means the commitment of a
Canadian Lender to purchase Sun Gro Canada Term Loans pursuant to the Master
Assignment
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<PAGE>
Agreement or to make new Sun Gro Canada Term Loans to Sun Gro Canada pursuant to
subsection 2.1A(ii), and "SUN GRO CANADA TERM LOAN COMMITMENTS" means such
commitments of all Canadian Lenders in the aggregate.
"SUN GRO CANADA TERM LOANS" means the Term Loans purchased or made by
Canadian Lenders to Sun Gro Canada pursuant to subsection 2.1A(ii).
"SUN GRO HORTICULTURE" means Sun Gro Horticulture, Inc., a Nevada
corporation.
"SWING LINE LENDER" means BTCo, or any Person serving as a successor
Agent hereunder, in its capacity as Swing Line Lender hereunder.
"SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender
to make Swing Line Loans to Company pursuant to subsection 2.1A(v).
"SWING LINE LOANS" means the Loans made by Swing Line Lender to
Company pursuant to subsection 2.1A(v).
"SWING LINE NOTE" means (i) the promissory note of Company issued
pursuant to subsection 2.1E(iii) on the Closing Date and (ii) any promissory
note issued by Company to any successor Agent and Swing Line Lender pursuant to
the last sentence of subsection 9.5B, in each case substantially in the form of
Exhibit IV-E annexed hereto, as it may be amended, supplemented or otherwise
- ------------
modified from time to time.
"SYNDICATION AGENT" has the meaning assigned to that term in the
introduction to this Agreement.
"TAX" or "TAXES" means any present or future tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature and whatever called, by
whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or
assessed; provided that "TAX ON THE OVERALL NET INCOME" of a Person shall be
--------
construed as a reference to a tax imposed by the jurisdiction in which that
Person is organized or in which that Person's principal office (and/or, in the
case of a Lender, its lending office) is located or in which that Person
(and/or, in the case of a Lender, its lending office) is deemed to be doing
business on all or part of the net income, profits or gains (whether worldwide,
or only insofar as such income, profits or gains are considered to arise in or
to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in
the case of a Lender, its lending office).
"TERM LOAN EXPOSURE" means the Domestic Term Loan Exposure and the
Canadian Term Loan Exposure or any combination thereof.
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<PAGE>
"TERM LOANS" means the Domestic Term Loans or Canadian Term Loans or
any combination thereof.
"TERM NOTES" means the Domestic Term Notes and the Canadian Term Notes
or any combination thereof.
"TERM LOAN COMMITMENT" means the Domestic Term Loan Commitment and the
Canadian Term Loan Commitment or any combination thereof.
"TOTAL UTILIZATION OF WORKING CAPITAL REVOLVING LOAN COMMITMENTS"
means, as at any date of determination, the sum of (i) the aggregate principal
amount of all outstanding Working Capital Revolving Loans (other than Working
Capital Revolving Loans made for the purpose of repaying any Refunded Swing Line
Loans or reimbursing the applicable Issuing Lender for any amount drawn under
any Letter of Credit but not yet so applied) plus (ii) the aggregate principal
----
amount of all outstanding Swing Line Loans plus (iii) the Letter of Credit
----
Usage.
"TRANSACTIONS" means the repayment of approximately $15,500,000 in
existing mortgage indebtedness of the Company, the redemption of up to
$42,000,000 in aggregate principal amount of the Subordinated Notes and the
reduction in Indebtedness outstanding on the Closing Date under this Agreement
from that outstanding under the Existing Credit Agreements, in each case from
the application of the proceeds of Company's initial public offering and the
increase in Term Loans under this Agreement.
"UCC" means the Uniform Commercial Code (or any similar or equivalent
legislation) as in effect in any applicable jurisdiction.
"WORKING CAPITAL REVOLVING LOAN COMMITMENT" means the commitment of a
Domestic Lender to purchase Working Capital Revolving Loans pursuant to the
Master Assignment Agreement or to make Working Capital Revolving Loans to
Company pursuant to subsection 2.1A(iv), and "WORKING CAPITAL REVOLVING LOAN
COMMITMENTS" means such commitments of all Domestic Lenders in the aggregate.
"WORKING CAPITAL REVOLVING LOAN EXPOSURE" means, with respect to any
Domestic Lender as of any date of determination (i) prior to the termination of
the Working Capital Revolving Loan Commitments, that Domestic Lender's Working
Capital Revolving Loan Commitment and (ii) after the termination of the Working
Capital Revolving Loan Commitments, the aggregate outstanding principal amount
of the Working Capital Revolving Loans of that Domestic Lender.
"WORKING CAPITAL REVOLVING LOANS" means the Loans purchased or made by
Domestic Lenders to Company pursuant to subsection 2.1A(iv).
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<PAGE>
"WORKING CAPITAL REVOLVING NOTES" means (i) the promissory notes of
Company issued pursuant to subsection 2.1E(i)(c) on the Closing Date and (ii)
any promissory notes issued by Company pursuant to the last sentence of
subsection 10.1B(i) in connection with assignments of the Working Capital
Revolving Loan Commitments and Working Capital Revolving Loans of any Domestic
Lenders, in each case substantially in the form of Exhibit IV-C annexed hereto,
------------
as they may be amended, supplemented or otherwise modified from time to time.
1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS UNDER
------------------------------------------------------------------------
AGREEMENT.
---------
Except as otherwise expressly provided in this Agreement, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP. Financial statements and other information
required to be delivered by Company to Lenders pursuant to clauses (i), (ii),
(iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as
in effect at the time of such preparation (and delivered together with the
reconciliation statements provided for in subsection 6.1(v)). Calculations in
connection with the definitions, covenants and other provisions of this
Agreement shall utilize accounting principles and policies in conformity with
those used to prepare the financial statements referred to in subsections 4.1K
and 5.3.
1.3 OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION.
-------------------------------------------------------
A. Any of the terms defined herein may, unless the context otherwise
requires, be used in the singular or the plural, depending on the reference.
B. References to "Sections" and "subsections" shall be to Sections
and subsections, respectively, of this Agreement unless otherwise specifically
provided.
C. The use in any of the Loan Documents of the word "include" or
"including", when following any general statement, term or matter, shall not be
construed to limit such statement, term or matter to the specific items or
matters set forth immediately following such word or to similar items or
matters, whether or not nonlimiting language (such as "without limitation" or
"but not limited to" or words of similar import) is used with reference thereto,
but rather shall be deemed to refer to all other items or matters that fall
within the broadest possible scope of such general statement, term or matter.
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<PAGE>
SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS
2.1 COMMITMENTS; MAKING OF LOANS; THE REGISTER; NOTES.
-------------------------------------------------
A. COMMITMENTS. Subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties of each Borrower herein
set forth, each Domestic Lender hereby severally agrees to purchase or to make
the Loans described in subsections 2.1A(i), 2.1A(iii) and 2.1A(iv), each
Canadian Lender hereby severally agrees to purchase or to make the Loans
described in subsection 2.1A(ii) and Swing Line Lender hereby agrees to make the
Loans described in subsection 2.1A(v).
(i) Domestic Term Loans. Each Domestic Lender severally agrees to
-------------------
purchase under the Master Assignment Agreement or to lend to Company on the
Closing Date an amount not exceeding its Pro Rata Share of the aggregate
amount of the Domestic Term Loan Commitments to be used for the purposes
identified in subsection 2.5A. The amount of each Lender's Domestic Term
Loan Commitment is set forth opposite its name on Schedule 2.1 annexed
------------
hereto and the aggregate amount of the Domestic Term Loan Commitments is
$30,000,000; provided that the Domestic Term Loan Commitments of Domestic
--------
Lenders shall be adjusted to give effect to any assignments of the Domestic
Term Loan Commitments pursuant to subsection 10.1B. Each Lender's Domestic
Term Loan Commitment shall expire immediately and without further action on
July 31, 1998 if the Domestic Term Loans are not purchased or made on or
before that date. Company may make only one borrowing under the Domestic
Term Loan Commitments. Amounts borrowed under this subsection 2.1A(i) and
subsequently repaid or prepaid may not be reborrowed.
(ii) Canadian Term Loans. Each Canadian Lender severally agrees to
-------------------
purchase under the Master Assignment Agreement or to lend to Sun Gro Canada
and to Lakeland Canada, respectively, on the Closing Date an amount in
Dollars not exceeding its Pro Rata Share of the aggregate amount of the Sun
Gro Term Loan Commitment and the Lakeland Canada Term Loan Commitment to be
used for the purposes identified in subsection 2.5A. The amount of each
Canadian Lender's Sun Gro Term Loan Commitment and Lakeland Canada Term
Loan Commitment is set forth opposite its name on Schedule 2.1 annexed
------------
hereto and the aggregate amount of the Sun Gro Term Loan Commitments is
$15,000,000 and of the Lakeland Canada Term Loan Commitments is $5,000,000,
respectively; provided that the Canadian Term Loan Commitments of Canadian
--------
Lenders shall be adjusted to give effect to any assignments of the Canadian
Term Loan Commitments pursuant to subsection 10.1B. Each Canadian Lender's
Canadian Term Loan Commitment shall expire immediately and without further
action on July 31, 1998 if the Canadian Term Loans are not purchased or
made on or before that date. Each Canadian Borrower may make only one
borrowing under the Canadian Term Loan Commitments. Amounts borrowed under
this subsection 2.1A(ii) and subsequently repaid or prepaid may not be
reborrowed.
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<PAGE>
(iii) Acquisition Loans. Each Domestic Lender severally agrees,
-----------------
subject to the limitations set forth below with respect to the maximum
amount of Acquisition Loans permitted to be outstanding from time to time,
to lend to Company from time to time during the period from the Closing
Date to but excluding the Acquisition Loan Conversion Date an aggregate
amount not exceeding its Pro Rata Share of the aggregate amount of the
Acquisition Revolving Loan Commitments to be used for the purposes
identified in subsection 2.5B. The original amount of each Lender's
Acquisition Revolving Loan Commitment is set forth opposite its name on
Schedule 2.1 annexed hereto and the aggregate original amount of the
------------
Acquisition Revolving Loan Commitments is $100,000,000; provided that the
--------
Acquisition Revolving Loan Commitments of Lenders shall be adjusted to give
effect to any assignments of the Acquisition Revolving Loan Commitments
pursuant to subsection 10.1B; and provided, further that the amount of the
-------- -------
Acquisition Revolving Loan Commitments shall be reduced from time to time
by the amount of any reductions thereto made pursuant to subsections
2.4A(ii), 2.4B(ii) and 2.4B(iii). Each Lender's Acquisition Revolving Loan
Commitment shall expire on the Acquisition Loan Conversion Date; provided
--------
that each Lender's Acquisition Revolving Loan Commitment shall expire
immediately and without further action on July 31, 1998 if the Domestic
Term Loans are not purchased or made on or before that date. Amounts
borrowed under this subsection 2.1A(iii) may be repaid and reborrowed to
but excluding the Acquisition Loan Conversion Date.
Anything contained in this Agreement to the contrary notwithstanding,
prior to the Acquisition Loan Conversion Date, the Acquisition Loans shall
in no event exceed the Acquisition Revolving Loan Commitments then in
effect.
(iv) Working Capital Revolving Loans. Each Lender severally agrees,
-------------------------------
subject to the limitations set forth below with respect to the maximum
amount of Working Capital Revolving Loans permitted to be outstanding from
time to time, to lend to Company from time to time during the period from
the Closing Date to but excluding the Revolving Loan Commitment Termination
Date an aggregate amount not exceeding its Pro Rata Share of the aggregate
amount of the Working Capital Revolving Loan Commitments to be used for the
purposes identified in subsection 2.5C. The original amount of each
Lender's Working Capital Revolving Loan Commitment is set forth opposite
its name on Schedule 2.1 annexed hereto and the aggregate original amount
------------
of the Working Capital Revolving Loan Commitments is $100,000,000; provided
--------
that the Working Capital Revolving Loan Commitments of Lenders shall be
adjusted to give effect to any assignments of the Working Capital Revolving
Loan Commitments pursuant to subsection 10.1B; and provided, further that
-------- -------
the amount of the Working Capital Revolving Loan Commitments shall be
reduced from time to time by the amount of any reductions thereto made
pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Lender's Working
Capital Revolving Loan Commitment shall expire on the Revolving Loan
Commitment Termination Date and all Working Capital Revolving Loans and all
other amounts owed hereunder with respect to the Working Capital
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<PAGE>
Revolving Loans and the Working Capital Revolving Loan Commitments shall be
paid in full no later than that date; provided that each Lender's Working
--------
Capital Revolving Loan Commitment shall expire immediately and without
further action on July 31, 1998 if the Domestic Term Loans are not
purchased or made on or before that date. Amounts borrowed under this
subsection 2.1A(iv) may be repaid and reborrowed to but excluding the
Revolving Loan Commitment Termination Date.
Anything contained in this Agreement to the contrary notwithstanding,
the Working Capital Revolving Loans and the Working Capital Revolving Loan
Commitments shall be subject to the limitation that
(a) in no event shall the Total Utilization of Working Capital
Revolving Loan Commitments at any time exceed the Working Capital
Revolving Loan Commitments then in effect; and
(b) for sixty consecutive days commencing with the date
specified by Company for the commencement of such clean down period in
a Notice of Commencement of Clean Down Period delivered to Agent on or
prior to such commencement date, the Company shall not have
outstanding Working Capital Revolving Loans and Swing Line Loans
during any of the periods set forth below in excess of the correlative
amount indicated:
<TABLE>
<S> <C>
Fiscal Year 1998 $15,000,000
Fiscal Year 1999 15,000,000
Fiscal Year 2000 10,000,000
Fiscal Year 2001 and thereafter -0-
</TABLE>
(v) Swing Line Loans. Swing Line Lender hereby agrees, subject to
----------------
the limitations set forth below with respect to the maximum amount of Swing
Line Loans permitted to be outstanding from time to time, to make a portion
of the Working Capital Revolving Loan Commitments available to Company from
time to time during the period from the Closing Date to but excluding the
Revolving Loan Commitment Termination Date by making Swing Line Loans to
Company in an aggregate amount not exceeding the amount of the Swing Line
Loan Commitment to be used for the purposes identified in subsection 2.5C,
notwithstanding the fact that such Swing Line Loans, when aggregated with
Swing Line Lender's outstanding Working Capital Revolving Loans and Swing
Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect,
may exceed Swing Line Lender's Working Capital Revolving Loan Commitment.
The original amount of the Swing Line Loan Commitment is $5,000,000;
provided that any reduction of the Working Capital Revolving Loan
Commitments made pursuant to subsection 2.4B(ii) or 2.4B(iii) which reduces
the aggregate Working Capital Revolving Loan Commitments to an amount less
than the then current amount of the Swing Line Loan Commitment shall result
in an automatic
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<PAGE>
corresponding reduction of the Swing Line Loan Commitment to the amount of
the Working Capital Revolving Loan Commitments, as so reduced, without any
further action on the part of Company, Agent or Swing Line Lender. The
Swing Line Loan Commitment shall expire on the Revolving Loan Commitment
Termination Date and all Swing Line Loans and all other amounts owed
hereunder with respect to the Swing Line Loans shall be paid in full no
later than that date; provided that the Swing Line Loan Commitment shall
--------
expire immediately and without further action on July 31, 1998 if the
Domestic Term Loans are not purchased or made on or before that date.
Amounts borrowed under this subsection 2.1A(v) may be repaid and reborrowed
to but excluding the Revolving Loan Commitment Termination Date.
Anything contained in this Agreement to the contrary notwithstanding,
the Swing Line Loans and the Swing Line Loan Commitment shall be subject to
the limitation that
(a) in no event shall the outstanding Swing Line Loans exceed
the Swing Line Loan Commitment then in effect;
(b) in no event shall the Total Utilization of Working Capital
Revolving Loan Commitments at any time exceed the Working Capital
Revolving Loan Commitments then in effect; and
(c) for sixty consecutive days commencing with the date
specified by Company for the commencement of such clean down period in
a Notice of Commencement of Clean Down Period delivered to Agent on or
prior to such commencement date, the Company shall not have
outstanding Working Capital Revolving Loans and Swing Line Loans
during any of the periods set forth below in excess of the correlative
amount indicated:
<TABLE>
<S> <C>
Fiscal Year 1998 $15,000,000
Fiscal Year 1999 15,000,000
Fiscal Year 2000 10,000,000
Fiscal Year 2001 and thereafter -0-
</TABLE>
With respect to any Swing Line Loans which have not been voluntarily
prepaid by Company pursuant to subsection 2.4B(i), Swing Line Lender may,
at any time in its sole and absolute discretion, deliver to Agent (with a
copy to Company), no later than 10:00 A.M. (New York City time) on the
first Business Day in advance of the proposed Funding Date, a notice (which
shall be deemed to be a Notice of Borrowing given by Company) requesting
Lenders to make Working Capital Revolving Loans that are Base Rate Loans on
such Funding Date in an amount equal to the amount of such Swing Line Loans
(the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is
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<PAGE>
given which Swing Line Lender requests Lenders to prepay. Anything
contained in this Agreement to the contrary notwithstanding, (i) the
proceeds of such Working Capital Revolving Loans made by Lenders other than
Swing Line Lender shall be immediately delivered by Agent to Swing Line
Lender (and not to Company) and applied to repay a corresponding portion of
the Refunded Swing Line Loans and (ii) on the day such Working Capital
Revolving Loans are made, Swing Line Lender's Pro Rata Share of the
Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a
Working Capital Revolving Loan made by Swing Line Lender, and such portion
of the Swing Line Loans deemed to be so paid shall no longer be outstanding
as Swing Line Loans and shall no longer be due under the Swing Line Note of
Swing Line Lender but shall instead constitute part of Swing Line Lender's
outstanding Working Capital Revolving Loans and shall be due under the
Working Capital Revolving Note of Swing Line Lender. Company hereby
authorizes Agent and Swing Line Lender to charge Company's accounts with
Agent and Swing Line Lender (up to the amount available in each such
account) in order to immediately pay Swing Line Lender the amount of the
Refunded Swing Line Loans to the extent the proceeds of such Working
Capital Revolving Loans made by Lenders, including the Working Capital
Revolving Loan deemed to be made by Swing Line Lender, are not sufficient
to repay in full the Refunded Swing Line Loans. If any portion of any such
amount paid (or deemed to be paid) to Swing Line Lender should be recovered
by or on behalf of Company from Swing Line Lender in bankruptcy, by
assignment for the benefit of creditors or otherwise, the loss of the
amount so recovered shall be ratably shared among all Lenders in the manner
contemplated by subsection 10.6.
If for any reason (a) Working Capital Revolving Loans are not made
upon the request of Swing Line Lender as provided in the immediately
preceding paragraph in an amount sufficient to repay any amounts owed to
Swing Line Lender in respect of any outstanding Swing Line Loans or (b) the
Working Capital Revolving Loan Commitments are terminated at a time when
any Swing Line Loans are outstanding, each Lender shall be deemed to, and
hereby agrees to, have purchased a participation in such outstanding Swing
Line Loans in an amount equal to its Pro Rata Share (calculated, in the
case of the foregoing clause (b), immediately prior to such termination of
the Working Capital Revolving Loan Commitments) of the unpaid amount of
such Swing Line Loans together with accrued interest thereon. Upon one
Business Day's notice from Swing Line Lender, each Lender shall deliver to
Swing Line Lender an amount equal to its respective participation in same
day funds at the Funding and Payment Office. In order to further evidence
such participation (and without prejudice to the effectiveness of the
participation provisions set forth above), each Lender agrees to enter into
a separate participation agreement at the request of Swing Line Lender in
form and substance reasonably satisfactory to Swing Line Lender and such
Lender. In the event any Lender fails to make available to Swing Line
Lender the amount of such Lender's participation as provided in this
paragraph, Swing Line Lender shall be entitled to recover such amount on
demand from such Lender together
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<PAGE>
with interest thereon at the rate customarily used by Swing Line Lender for
the correction of errors among banks for three Business Days and thereafter
at the Base Rate. In the event Swing Line Lender receives a payment of any
amount in which other Lenders have purchased participations as provided in
this paragraph, Swing Line Lender shall promptly distribute to each such
other Lender its Pro Rata Share of such payment.
Anything contained herein to the contrary notwithstanding, each
Lender's obligation to make Working Capital Revolving Loans for the purpose
of repaying any Refunded Swing Line Loans pursuant to the second preceding
paragraph and each Lender's obligation to purchase a participation in any
unpaid Swing Line Loans pursuant to the immediately preceding paragraph
shall be absolute and unconditional and shall not be affected by any
circumstance, including (a) any set-off, counterclaim, recoupment, defense
or other right which such Lender may have against Swing Line Lender,
Company or any other Person for any reason whatsoever; (b) the occurrence
or continuation of an Event of Default or a Potential Event of Default; (c)
any adverse change in the business, operations, properties, assets,
condition (financial or otherwise) or prospects of Company or any of its
Subsidiaries; (d) any breach of this Agreement or any other Loan Document
by any party thereto; or (e) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing; provided that
--------
such obligations of each Lender are subject to the condition that (X) Swing
Line Lender believed in good faith that all conditions under Section 4 to
the making of the applicable Refunded Swing Line Loans or other unpaid
Swing Line Loans, as the case may be, were satisfied at the time such
Refunded Swing Line Loans or unpaid Swing Line Loans were made or (Y) the
satisfaction of any such condition not satisfied had been waived in
accordance with subsection 10.6 prior to or at the time such Refunded Swing
Line Loans or other unpaid Swing Line Loans were made.
B. BORROWING MECHANICS. Term Loans or Revolving Loans made on any
Funding Date (other than Working Capital Revolving Loans made pursuant to a
request by Swing Line Lender pursuant to subsection 2.1A(v) for the purpose of
repaying any Refunded Swing Line Loans or Working Capital Revolving Loans made
pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender
for the amount of a drawing under a Letter of Credit issued by it) shall be in
an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in
excess of that amount; provided Revolving Loans made on any Funding Date as
--------
Eurodollar Rate Loans or Term Loans made on any Funding Date as Eurodollar Rate
Loans or Canadian Eurodollar Rate Loans, as the case may be, with a particular
Interest Period shall be in an aggregate minimum amount of $5,000,000 and
integral multiples of $500,000 in excess of that amount. Swing Line Loans made
on any Funding Date shall be in an aggregate minimum amount of $500,000 and
integral multiples of $100,000 in excess of that amount. Whenever any Borrower
desires that Lenders make Term Loans or Revolving Loans it shall deliver to
Agent a Notice of Borrowing no later than 12:00 Noon (New York City time) at
least three Business Days in advance of the proposed Funding Date (in the case
of a Eurodollar
45
<PAGE>
Rate Loan or Canadian Eurodollar Rate Loan, as the case may be) or no later than
12:00 Noon (New York City time) at least one Business Day in advance of the
proposed Funding Date (in the case of a Base Rate Loan) or no later than 12:00
Noon (Toronto time) at least one Business Day in advance of the proposed Funding
Date (in the case of a Canadian Base Rate Loan). Whenever Company desires that
Swing Line Lender make a Swing Line Loan, it shall deliver to Agent a Notice of
Borrowing no later than 12:00 Noon (New York City time) on the proposed Funding
Date. The Notice of Borrowing shall specify (i) the proposed Borrower, (ii) the
proposed Funding Date (which shall be a Business Day), (iii) the amount and type
of Loans requested, (iv) in the case of Loans made on the Closing Date, that
such Loans shall be Base Rate Loans or Canadian Base Rate Loans, as applicable,
(v) in the case of Revolving Loans not made on the Closing Date, whether such
Loans shall be Base Rate Loans or Eurodollar Rate Loans, (vi) in the case of any
Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period
requested therefor, (vii) in the case of Acquisition Loans prior to the
Acquisition Loan Conversion Date, that, after giving effect to the requested
Loans, the Acquisition Loans will not exceed the Acquisition Revolving Loan
Commitments, (viii) in the case of Working Capital Revolving Loans, that, after
giving effect to the requested Loans, the Total Utilization of Working Capital
Revolving Loan Commitments will not exceed the Working Capital Revolving Loan
Commitments and (ix) that after giving effect to the requested Loans, that
Company's Consolidated Fixed Charge Coverage Ratio (as that term is defined in
the Subordinated Note Indenture) will be greater than 2.25 to 1.00. Revolving
Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate
Loans in the manner provided in subsection 2.2D. Canadian Term Loans may be
continued as or converted into Canadian Base Rate Loans and Canadian Eurodollar
Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the
above-described Notice of Borrowing, a Borrower may give Agent telephonic notice
by the required time of any proposed borrowing under this subsection 2.1B;
provided that such notice shall be promptly confirmed in writing by delivery of
- --------
a Notice of Borrowing to Agent on or before the applicable Funding Date.
Neither Agent nor any Lender shall incur any liability to any Borrower
in acting upon any telephonic notice referred to above that Agent believes in
good faith to have been given by a duly authorized officer or other person
authorized to borrow on behalf of such Borrower or for otherwise acting in good
faith under this subsection 2.1B, and upon funding of Loans by Lenders in
accordance with this Agreement pursuant to any such telephonic notice such
Borrower shall have effected Loans hereunder.
The applicable Borrower shall notify Agent prior to the funding of any
Loans in the event that any of the matters to which such Borrower is required to
certify in the applicable Notice of Borrowing is no longer true and correct as
of the applicable Funding Date, and the acceptance by such Borrower of the
proceeds of any Loans shall constitute a re-certification by such Borrower, as
of the applicable Funding Date, as to the matters to which such Borrower is
required to certify in the applicable Notice of Borrowing.
46
<PAGE>
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a
Notice of Borrowing for a Eurodollar Rate Loan or Canadian Eurodollar Rate Loan,
as the case may be, (or telephonic notice in lieu thereof) shall be irrevocable
on and after the related Interest Rate Determination Date, and the applicable
Borrower shall be bound to make a borrowing in accordance therewith.
C. DISBURSEMENT OF FUNDS.
(i) All Loans under this Agreement shall be made by Lenders
simultaneously and proportionately to their respective Pro Rata Shares, it
being understood that no Lender shall be responsible for any default by any
other Lender in that other Lender's obligation to make a Loan requested
hereunder nor shall the Commitment of any Lender to make the particular
type of Loan requested be increased or decreased as a result of a default
by any other Lender in that other Lender's obligation to make a Loan
requested hereunder.
(ii) Promptly after receipt by Agent of a Notice of Borrowing pursuant
to subsection 2.1B (or telephonic notice in lieu thereof) for any Loans,
Agent shall notify each Domestic Lender (in the case of a Domestic Loan) or
each Canadian Lender (in the case of a Canadian Term Loan) of the proposed
borrowing. Each Lender shall make the amount of its Loan available to
Agent (in the case of a Domestic Loan) or Canadian Agent (in the case of a
Canadian Term Loan), in same day funds in Dollars, at the Domestic Funding
and Payment Office, not later than 12:00 Noon (New York City time) (in the
case of a Domestic Loan) or at the Canadian Funding and Payment Office, not
later than 12:00 Noon (Toronto time) (in the case of a Canadian Term Loan)
on the applicable Funding Date. Except as provided in subsection 3.3B with
respect to Working Capital Revolving Loans used to reimburse any Issuing
Lender for the amount of a drawing under a Letter of Credit issued by it,
upon satisfaction or waiver of the conditions precedent specified in
subsections 4.1 (in the case of Loans made on the Closing Date), 4.3 (in
the case of Acquisition Loans) and, subject to the provisions set forth in
the immediately preceding paragraph, 4.2 (in the case of all Loans), Agent
or Canadian Agent, as the case may be, shall make the proceeds of such
Loans available to the applicable Borrower on the applicable Funding Date
by causing an amount of same day funds in Dollars equal to the proceeds of
all such Loans received by Agent or Canadian Agent, as the case may be,
from Lenders to be credited to the account of the applicable Borrower at
the Domestic Funding and Payment Office or at the Canadian Funding and
Payment Office, as applicable.
Unless Agent shall have been notified by any Lender prior to the
Funding Date for any Loans that such Lender does not intend to make
available to Agent the amount of such Lender's Loan requested on such
Funding Date, Agent may assume that such Lender has made such amount
available to Agent on such Funding Date and Agent may, in its sole
discretion, but shall not be obligated to, make available to the
47
<PAGE>
applicable Borrower a corresponding amount on such Funding Date. If such
corresponding amount is not in fact made available to Agent by such Lender,
Agent shall be entitled to recover such corresponding amount on demand from
such Lender together with interest thereon, for each day from such Funding
Date until the date such amount is paid to Agent, at the customary rate set
by Agent for the correction of errors among banks for three Business Days
and thereafter at the Base Rate. If such Lender does not pay such
corresponding amount forthwith upon Agent's demand therefor, Agent shall
promptly notify the applicable Borrower and such Borrower shall immediately
pay such corresponding amount to Agent together with interest thereon, for
each day from such Funding Date until the date such amount is paid to
Agent, at the rate payable under this Agreement for Base Rate Loans.
Nothing in this subsection 2.1C shall be deemed to relieve any Lender from
its obligation to fulfill its Commitments hereunder or to prejudice any
rights that such Borrower may have against any Lender as a result of any
default by such Lender hereunder.
D. THE REGISTER.
(i) Agent shall maintain, at its address referred to in subsection
10.8, a register for the recordation of the names and addresses of Lenders
and the Commitments and Loans of each Lender from time to time (the
"REGISTER"). The Register shall be available for inspection by any
Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(ii) Agent shall record in the Register the Term Loan Commitments and
Revolving Loan Commitments and the Term Loans and Revolving Loans from time
to time of each Lender and each repayment or prepayment in respect of the
principal amount of the Term Loans or Revolving Loans of each Lender. Any
such recordation shall be conclusive and binding on each Borrower and each
Lender, absent manifest error; provided that failure to make any such
--------
recordation, or any error in such recordation, shall not affect Borrower's
Obligations in respect of the applicable Loans.
(iii) Each Lender shall record on its internal records (including,
without limitation, the Notes held by such Lender) the amount of each Loan
made by it and each payment in respect thereof. Any such recordation shall
be conclusive and binding on each Borrower, absent manifest error; provided
--------
that failure to make any such recordation, or any error in such
recordation, shall not affect such Borrower's Obligations in respect of the
applicable Loans; and provided, further that in the event of any
-------- -------
inconsistency between the Register and any Lender's records, the
recordations in the Register shall govern.
(iv) Borrowers, Agent and Lenders shall deem and treat the Persons
listed as Lenders in the Register as the holders and owners of the
corresponding Commitments and Loans listed therein for all purposes hereof,
and no assignment or transfer of any
48
<PAGE>
such Commitment or Loan shall be effective, in each case unless and until
an Assignment Agreement effecting the assignment or transfer thereof shall
have been accepted by Agent and recorded in the Register as provided in
subsection 10.1B(ii). Prior to such recordation, all amounts owed with
respect to the applicable Commitment or Loan shall be owed to the Lender
listed in the Register as the owner thereof, and any request, authority or
consent of any Person who, at the time of making such request or giving
such authority or consent, is listed in the Register as a Lender shall be
conclusive and binding on any subsequent holder, assignee or transferee of
the corresponding Commitments or Loans.
(v) Each Borrower hereby designates BTCo to serve as such Borrower's
agent solely for purposes of maintaining the Register as provided in this
subsection 2.1D, and each Borrower hereby agrees that, to the extent BTCo
serves in such capacity, BTCo and its officers, directors, employees,
agents and affiliates shall constitute Indemnitees for all purposes under
subsection 10.3.
E. NOTES. Company shall execute and deliver (i) to each Domestic Lender
(or to Agent for that Domestic Lender) on the Closing Date (a) a Domestic Term
Note substantially in the form of Exhibit IV-A annexed hereto to evidence that
------------
Domestic Lender's Domestic Term Loan, in the principal amount of that Domestic
Lender's Domestic Term Loan and with other appropriate insertions, (b) an
Acquisition Note substantially in the form of Exhibit IV-B annexed hereto to
------------
evidence that Domestic Lender's Acquisition Loans, in the principal amount of
that Domestic Lender's Acquisition Revolving Loan Commitment and with other
appropriate insertions, (c) a Working Capital Revolving Note substantially in
the form of Exhibit IV-C annexed hereto to evidence that Domestic Lender's
------------
Working Capital Revolving Loans, in the principal amount of that Domestic
Lender's Working Capital Revolving Loan Commitment and with other appropriate
insertions and (ii) to Swing Line Lender (or to Agent for Swing Line Lender) on
the Closing Date a Swing Line Note substantially in the form of Exhibit IV-E
------------
annexed hereto to evidence Swing Line Lender's Swing Line Notes, in the
principal amount of the Swing Line Loan Commitment and with other applicable
insertions. Each Canadian Borrower shall execute and deliver to each Canadian
Lender (or to Agent for that Lender) on the Closing Date, a Canadian Term Note
substantially in the form of Exhibit IV-D annexed hereto to evidence that
------------
Canadian Lender's Canadian Term Loan, in the principal amount of that Canadian
Lender's Canadian Term Loan and with other appropriate insertions.
2.2 INTEREST ON THE LOANS.
---------------------
A. RATE OF INTEREST. Subject to the provisions of subsections 2.6 and
2.7, each Term Loan and each Revolving Loan shall bear interest on the unpaid
principal amount thereof from the date made through maturity (whether by
acceleration or otherwise) at a rate determined by reference to the Base Rate or
Canadian Base Rate or the Adjusted Eurodollar Rate or Canadian Eurodollar Rate,
as the case may be. Subject to the provisions of subsection 2.7, each Swing Line
Loan shall bear interest on the unpaid principal amount thereof from the
49
<PAGE>
date made through maturity (whether by acceleration or otherwise) at a rate
determined by reference to the Base Rate. The applicable basis for determining
the rate of interest with respect to any Term Loan or any Revolving Loan shall
be selected by the applicable Borrower initially at the time a Notice of
Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and
the basis for determining the interest rate with respect to any Term Loan or any
Revolving Loan may be changed from time to time pursuant to subsection 2.2D. If
on any day a Term Loan or Revolving Loan is outstanding with respect to which
notice has not been delivered to Agent in accordance with the terms of this
Agreement specifying the applicable basis for determining the rate of interest,
then for that day that Loan shall bear interest determined by reference to the
Base Rate or Canadian Base Rate, as the case may be.
Subject to the provisions of subsections 2.2E and 2.7, the Term Loans
and the Revolving Loans shall bear interest through maturity as follows:
(i) if a Base Rate Loan, then at the sum of the Base Rate plus the
----
Applicable Base Rate Margin;
(ii) if a Canadian Base Rate Loan, then at the sum of the Canadian
Base Rate plus the Applicable Base Rate Margin;
----
(iii) if a Eurodollar Rate Loan, then at the sum of the Adjusted
Eurodollar Rate plus the Applicable Eurodollar Rate Margin; or
----
(iv) if a Canadian Eurodollar Rate Loan, then at the sum of the
Canadian Eurodollar Rate plus the Applicable Eurodollar Rate Margin.
----
Subject to the provisions of subsections 2.2E and 2.7, the Swing Line
Loans shall bear interest through maturity at the sum of the Base Rate plus the
----
Applicable Base Rate Margin less the applicable Commitment Fee Percentage.
----
The Applicable Base Rate Margin or the Applicable Eurodollar Rate
Margin shall be the Base Rate Margin or the Eurodollar Rate Margin, as the case
may be, set forth in the table above opposite Company's Consolidated Leverage
Ratio for the four fiscal quarters ending as of the last day of the fiscal
quarter immediately preceding the fiscal quarter during which the determination
is being made as set forth in the Compliance Certificate delivered pursuant to
subsection 6.1(iv)(b), any required adjustment to become automatically effective
on the next succeeding Business Day following receipt by the Agent of such
Compliance Certificate. If Company fails to deliver a Compliance Certificate by
the time required by subsection 6.1(iv)(b), from such time the Compliance
Certificate was required to be delivered until delivery of such Compliance
Certificate, the Applicable Base Rate Margin and the Applicable Eurodollar Rate
Margin shall automatically be adjusted to 1.00% per annum and 2.00% per annum,
respectively.
50
<PAGE>
B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan or
Canadian Eurodollar Rate Loan, the applicable Borrower may, pursuant to the
applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case
may be, select an interest period (each an "INTEREST PERIOD") to be applicable
to such Loan, which Interest Period shall be, at such Borrower's option, either
a one, two, three or six month period provided that:
--------
(i) the initial Interest Period for any such Loan shall commence on
the Funding Date in respect of such Loan, in the case of a Loan initially
made as a Eurodollar Rate Loan or a Canadian Eurodollar Rate Loan, as
applicable, or on the date specified in the applicable Notice of
Conversion/Continuation, in the case of a Loan converted to a Eurodollar
Rate Loan or a Canadian Eurodollar Rate Loan, as applicable;
(ii) in the case of immediately successive Interest Periods
applicable to a Eurodollar Rate Loan or a Canadian Eurodollar Rate Loan, as
applicable, continued as such pursuant to a Notice of
Conversion/Continuation, each successive Interest Period shall commence on
the day on which the next preceding Interest Period expires;
(iii) if an Interest Period would otherwise expire on a day that is
not a Business Day, such Interest Period shall expire on the next
succeeding Business Day; provided that, if any Interest Period would
--------
otherwise expire on a day that is not a Business Day but is a day of the
month after which no further Business Day occurs in such month, such
Interest Period shall expire on the next preceding Business Day;
(iv) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall,
subject to clause (v) of this subsection 2.2B, end on the last Business Day
of a calendar month;
(v) no Interest Period with respect to any portion of the Loans
shall extend beyond the Revolving Loan Commitment Termination Date;
(vi) no Interest Period with respect to any portion of the Term Loans
of any Borrower shall extend beyond a date on which such Borrower is
required to make a scheduled payment of principal of the Term Loans of such
Borrower unless the sum of (a) the aggregate principal amount of Term Loans
of such Borrower that are Base Rate Loans or Canadian Base Rate Loans, as
applicable, plus (b) the aggregate principal amount of Term Loans of such
----
Borrower that are Eurodollar Rate Loans or Canadian Eurodollar Rate Loans,
as applicable, with Interest Periods expiring on or before such date equals
or exceeds the principal amount required to be paid on the Term Loans of
such Borrower on such date;
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<PAGE>
(vii) there shall be no more than 15 Interest Periods outstanding at
any time; and
(viii) in the event a Borrower fails to specify an Interest Period
for any Eurodollar Rate Loan or any Canadian Eurodollar Rate Loan, as
applicable, in the applicable Notice of Borrowing or Notice of
Conversion/Continuation, such Borrower shall be deemed to have selected an
Interest Period of one month.
C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E,
interest on each Loan shall be payable in arrears on and to each Interest
Payment Date applicable to that Loan, upon any prepayment of that Loan (to the
extent accrued on the amount being prepaid) and at maturity (including final
maturity); provided that in the event any Swing Line Loans or Revolving Loans
--------
that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i), interest
accrued on such Swing Line Loans or Revolving Loans through the date of such
prepayment shall be payable on the next succeeding Interest Payment Date
applicable to Base Rate Loans (or, if earlier, at final maturity).
D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection
2.6, Borrower shall have the option (i) from and after the earlier to occur of
(a) the date which is 90 days after the Closing Date and (b) the date on which
Agent notifies Borrower that the primary syndication of the Commitments and the
Loans has been completed, to convert at any time all or any part of its
outstanding Term Loans or Revolving Loans equal to $5,000,000 and integral
multiples of $500,000 in excess of that amount from Loans bearing interest at a
rate determined by reference to the Base Rate or Canadian Base Rate to Loans
bearing interest at a rate determined by reference to the Adjusted Eurodollar
Rate or Canadian Eurodollar Rate, as the case may be, or (ii) upon the
expiration of any Interest Period applicable to a Eurodollar Rate Loan or a
Canadian Eurodollar Rate Loan, as applicable, to continue all or any portion of
such Loan equal to $5,000,000 and integral multiples of $500,000 in excess of
that amount as a Eurodollar Rate Loan or a Canadian Eurodollar Rate Loan, as
applicable; provided, however, that a Eurodollar Rate Loan or a Canadian
--------- -------
Eurodollar Rate Loan may only be converted into a Base Rate Loan or a Canadian
Base Rate Loan, as applicable, on the expiration date of an Interest Period
applicable thereto.
The applicable Borrower shall deliver a Notice of
Conversion/Continuation to Agent no later than 12:00 Noon (New York time) of the
proposed conversion date (in the case of a conversion to a Base Rate Loan), at
least one Business Day in advance of the proposed conversion date (in the case
of a conversion into a Canadian Base Rate Loan) and at least three Business Days
in advance of the proposed conversion/continuation date (in the case of a
conversion to, or a continuation of, a Eurodollar Rate Loan or a Canadian
Eurodollar Rate Loan, as applicable). A Notice of Conversion/Continuation shall
specify (i) the proposed conversion/ continuation date (which shall be a
Business Day), (ii) the amount and type of the Loan to be converted/continued,
(iii) the nature of the proposed conversion/continuation, (iv) in the case of a
conversion to, or a continuation of, a Eurodollar Rate Loan or a Canadian
52
<PAGE>
Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a
conversion to, or a continuation of, a Eurodollar Rate Loan or a Canadian
Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has
occurred and is continuing. In lieu of delivering the above-described Notice of
Conversion/Continuation, the applicable Borrower may give Agent telephonic
notice by the required time of any proposed conversion/continuation under this
subsection 2.2D; provided that such notice shall be promptly confirmed in
--------
writing by delivery of a Notice of Conversion/ Continuation to Agent on or
before the proposed conversion/continuation date.
Neither Agent nor any Lender shall incur any liability to any Borrower
in acting upon any telephonic notice referred to above that Agent believes in
good faith to have been given by a duly authorized officer or other person
authorized to act on behalf of such Borrower or for otherwise acting in good
faith under this subsection 2.2D, and upon conversion or continuation of the
applicable basis for determining the interest rate with respect to any Loans in
accordance with this Agreement pursuant to any such telephonic notice Borrower
shall have effected a conversion or continuation, as the case may be, hereunder.
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a
Notice of Conversion/Continuation for conversion to, or continuation of, a
Eurodollar Rate Loan or a Canadian Eurodollar Rate Loan (or telephonic notice in
lieu thereof) shall be irrevocable on and after the related Interest Rate
Determination Date, and the applicable Borrower shall be bound to effect a
conversion or continuation in accordance therewith.
E. DEFAULT RATE. Upon the occurrence and during the continuation of any
Event of Default, the outstanding principal amount of all Loans and, to the
extent permitted by applicable law, any interest payments thereon not paid when
due and any fees and other amounts then due and payable hereunder, shall
thereafter bear interest (including post-petition interest in any proceeding
under the Bankruptcy Code or other applicable Insolvency Laws) payable upon
demand at a rate that is 2% per annum in excess of the interest rate otherwise
payable under this Agreement with respect to Base Rate Loans or Canadian Base
Rate Loans, as applicable. Payment or acceptance of the increased rates of
interest provided for in this subsection 2.2E is not a permitted alternative to
timely payment and shall not constitute a waiver of any Event of Default or
otherwise prejudice or limit any rights or remedies of Agent or any Lender.
F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed on
the basis of a 360-day year, in each case for the actual number of days elapsed
in the period during which it accrues. In computing interest on any Loan, (i)
the date of the making of such Loan or the first day of an Interest Period
applicable to such Loan or, with respect to a Base Rate Loan being converted
from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan
to such Base Rate Loan or, with respect to a Canadian Base Rate Loan being
converted from a Canadian Eurodollar Rate Loan, the date of conversion of such
Canadian Eurodollar Rate Loan to such Canadian Base Rate Loan, as the case may
be, shall be included,
53
<PAGE>
and (ii) the date of payment of such Loan or the expiration date of an Interest
Period applicable to such Loan or, with respect to a Base Rate Loan being
converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate
Loan to such Eurodollar Rate Loan or, with respect to a Canadian Base Rate Loan
being converted to a Canadian Eurodollar Rate Loan, the date of conversion of
such Canadian Base Rate Loan to such Canadian Eurodollar Rate Loan, as the case
may be, shall be excluded; provided that if a Loan is repaid on the same day on
--------
which it is made, one day's interest shall be paid on that Loan.
G. CANADIAN INTEREST PROVISIONS. For purposes of the Interest Act
(Canada) and disclosure thereunder, whenever interest to be paid under this
Agreement is to be calculated on the basis of a year of 360 days, the yearly
rate of interest to which the rate determined pursuant to such calculation is
equivalent to is the rate so determined multiplied by the actual number of days
---------- --
in the calendar year in which the same is to be ascertained divided by 360.
------- --
2.3 FEES.
----
A. COMMITMENT FEES. Company agrees to pay to Agent, for distribution to
each Domestic Lender in proportion to that Domestic Lender's Pro Rata Share,
commitment fees (i) for the period from and including the Closing Date to and
excluding the Revolving Loan Commitment Termination Date equal to the average of
the daily excess of the Working Capital Revolving Loan Commitments over the
Total Utilization of Working Capital Revolving Loan Commitments excluding any
outstanding Swing Line Loans multiplied by the Commitment Fee Percentage, such
-------------
commitment fees to be calculated on the basis of a 360-day year and the actual
number of days elapsed and to be payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year, commencing on the first such
date to occur after the Closing Date, and on the Revolving Loan Commitment
Termination Date and (ii) for the period from and including the Closing Date to
and excluding the Acquisition Loan Conversion Date equal to the average of the
daily excess of the Acquisition Revolving Loan Commitments over the aggregate
principal amount of outstanding Acquisition Loans multiplied by the Commitment
-------------
Fee Percentage, such commitment fees to be calculated on the basis of a 360-day
year and the actual number of days elapsed and to be payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year,
commencing on the first such date to occur after the Closing Date, and on the
Acquisition Loan Conversion Date.
B. OTHER FEES. Borrowers jointly and severally agree to pay to Agent
such other fees in the amounts and at the times separately agreed upon between
Borrowers and Agent.
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<PAGE>
2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN REVOLVING LOAN COMMITMENTS;
---------------------------------------------------------------------
GENERAL PROVISIONS REGARDING PAYMENTS.
-------------------------------------
A. SCHEDULED PAYMENTS OF TERM LOANS AND ACQUISITION LOANS.
(i) Scheduled Payments of Term Loans. The applicable Borrower shall
--------------------------------
make principal payments on the Term Loans in installments on the dates and
in the amounts set forth below:
<TABLE>
<CAPTION>
Scheduled Repayment Scheduled Repayment Scheduled Repayment
of Domestic of Sun Gro Canada of Lakeland Canada
Date Term Loans Term Loans Term Loans
- --------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
9/30/99 $ 750,000 $ 375,000 $ 125,000
12/31/99 750,000 375,000 125,000
6/30/00 1,500,000 750,000 250,000
9/30/00 1,125,000 562,500 187,500
12/31/00 1,125,000 562,500 187,500
6/30/01 2,250,000 1,125,000 375,000
9/30/01 2,250,000 1,125,000 375,000
12/31/01 2,250,000 1,125,000 375,000
6/30/02 4,500,000 2,250,000 750,000
9/30/02 3,375,000 1,687,500 562,500
12/31/02 3,375,000 1,687,500 562,500
6/30/03 6,750,000 3,375,000 1,125,000
</TABLE>
; provided that the scheduled installments of principal of the Term Loans
--------
set forth above shall be reduced in connection with any voluntary or
mandatory prepayments of the applicable Term Loans in accordance with
subsection 2.4B(iv); and provided, further that the Term Loans and all
-------- -------
other amounts owed hereunder with respect to the Term Loans shall be paid
in full no later than June 30, 2003, and the final installment payable by
the applicable Borrower in respect of the Term Loans on such date shall be
in an amount, if such amount is different from that specified above,
sufficient to repay all amounts owing by such Borrower under this Agreement
with respect to the Term Loans.
(ii) Scheduled Payments of Acquisition Loans. The Company shall make
---------------------------------------
principal payments on the Acquisition Loans in installments on the dates
and in the
55
<PAGE>
amounts equal to the percentage set forth below of the aggregate principal
amount of the Acquisition Loans outstanding on the Acquisition Loan
Conversion Date:
<TABLE>
<CAPTION>
Scheduled Repayment of
Date Acquisition Loans
--------- ----------------------
<S> <C>
9/30/00 2.50%
12/31/00 2.50%
6/30/01 5.00%
9/30/01 3.75%
12/31/01 3.75%
6/30/02 7.50%
9/30/02 18.75%
12/31/02 18.75%
6/30/03 37.50%
</TABLE>
; provided that the scheduled installments of principal of the Acquisition
--------
Loans set forth above shall be reduced in connection with any voluntary or
mandatory prepayments of the Acquisition Loans in accordance with
subsection 2.4B(iv); and provided, further that the Acquisition Loans and
-------- -------
all other amounts owed hereunder with respect to the Acquisition Loans
shall be paid in full no later than June 30, 2003, and the final
installment payable by Company in respect of the Acquisition Loans on such
date shall be in an amount, if such amount is different from that specified
above, sufficient to repay all amounts owing by Company under this
Agreement with respect to the Acquisition Loans.
B. PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN REVOLVING LOAN COMMITMENTS.
(i) Voluntary Prepayments. Company may, upon written or telephonic
---------------------
notice to Agent on or prior to 12:00 Noon (New York City time) on the date
of prepayment, which notice, if telephonic, shall be promptly confirmed in
writing, at any time and from time to time prepay any Swing Line Loan on
any Business Day in whole or in part in an aggregate minimum amount of
$500,000 and integral multiples of $100,000 in excess of that amount. The
applicable Borrower may, upon not less than one Business Day's prior
written or telephonic notice, in the case of Base Rate Loans or Canadian
Base Rate Loans, and three Business Days' prior written or telephonic
notice, in the case of Eurodollar Rate Loans or Canadian Eurodollar Rate
Loans, in each case given to Agent by 12:00 Noon (New York City time) on
the date required and, if given
56
<PAGE>
by telephone, promptly confirmed in writing to Agent (which original
written or telephonic notice Agent will promptly transmit by telefacsimile
or telephone to the applicable Lenders), at any time and from time to time
prepay any Term Loans or Revolving Loans on any Business Day in whole or in
part in an aggregate minimum amount of $1,000,000 and integral multiples of
$500,000 in excess of that amount provided, however, that a Eurodollar Rate
-------- -------
Loan or a Canadian Eurodollar Rate Loan may only be prepaid on the
expiration of the Interest Period applicable thereto. Notice of prepayment
having been given as aforesaid, the principal amount of the Loans specified
in such notice shall become due and payable on the prepayment date
specified therein. Any such voluntary prepayment shall be applied as
specified in subsection 2.4B(iv).
(ii) Voluntary Reductions of Revolving Loan Commitments. Company may,
--------------------------------------------------
upon not less than three Business Days' prior written or telephonic notice
confirmed in writing to Agent (which original written or telephonic notice
Agent will promptly transmit by telefacsimile or telephone to each Lender),
at any time and from time to time terminate in whole or permanently reduce
in part, without premium or penalty, (a) the Acquisition Revolving Loan
Commitments in an amount up to the amount by which the Acquisition
Revolving Loan Commitments exceed the aggregate outstanding Acquisition
Loans at the time of such proposed termination or reduction; and (b) the
Working Capital Revolving Loan Commitments in an amount up to the amount by
which the Working Capital Revolving Loan Commitments exceed the Total
Utilization of Working Capital Revolving Loan Commitments at the time of
such proposed termination or reduction, provided that any such partial
--------
reduction of the Revolving Loan Commitments shall be in an aggregate
minimum amount of $1,000,000 and integral multiples of $500,000 in excess
of that amount. Company's notice to Agent shall designate the date (which
shall be a Business Day) of such termination or reduction and the amount of
any partial reduction, and such termination or reduction of the Revolving
Loan Commitments shall be effective on the date specified in Company's
notice and shall reduce the Revolving Loan Commitment of each Lender
proportionately to its Pro Rata Share. Any such voluntary reduction of the
Revolving Loan Commitments shall be applied as specified in subsection
2.4B(iv).
(iii) Mandatory Prepayments and Mandatory Reductions of Revolving Loan
----------------------------------------------------------------
Commitments. The Loans shall be prepaid and/or the Revolving Loan
-----------
Commitments shall be permanently reduced in the amounts and under the
circumstances set forth below, all such prepayments and/or reductions to be
applied as set forth below or as more specifically provided in subsection
2.4B(iv):
(a) Prepayments and Reductions From Net Asset Sale Proceeds. No
-------------------------------------------------------
later than the earlier to occur of (X) the date at which the
applicable Borrower or its Subsidiaries determines such Net Asset Sale
Proceeds shall not be reinvested in property or assets used in the
business of the Borrower or its
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Subsidiaries and (Y) the first Business Day which is nine months after
the date of receipt by any Borrower or any of its Subsidiaries of any
Net Asset Sale Proceeds in respect of any Asset Sale, such Borrower
shall prepay the Loans and/or the Revolving Loan Commitments shall be
permanently reduced in an aggregate amount equal to such Net Asset
Sale Proceeds; provided that so long as no Event of Default shall have
--------
occurred and be continuing, such Net Asset Sale Proceeds, to the
extent reinvested in property or assets used in the business of the
Borrower or its Subsidiaries within the nine-month period, are not
required to be applied to prepay the Loans and/or reduce the Revolving
Loan Commitments under this subsection 2.4A(iii)(a).
(b) Prepayments and Reductions from Net Insurance/ Condemnation
-----------------------------------------------------------
Proceeds. No later than the first Business Day following the date of
--------
receipt by Agent or by any Borrower or any of its Subsidiaries of any
Net Insurance/ Condemnation Proceeds that are required to be applied
to prepay the Loans and/or reduce the Revolving Loan Commitments
pursuant to the provisions of subsection 6.4, such Borrowers shall
prepay the Loans and/or the Revolving Loan Commitments shall be
permanently reduced in an aggregate amount equal to the amount of such
Net Insurance/Condemnation Proceeds.
(c) Prepayments and Reductions Due to Issuance of Debt
--------------------------------------------------
Securities. On the date of receipt by Holdings or any of its
----------
Subsidiaries of the cash proceeds (any such proceeds, net of
underwriting discounts and commissions and other reasonable costs and
expenses associated therewith, including reasonable legal fees and
expenses, being "NET DEBT SECURITIES PROCEEDS") from the issuance of
any debt Securities of Holdings or any of its Subsidiaries other than
Indebtedness permitted under subsection 7.1 as in effect on the
Closing Date, the Borrowers shall prepay the Loans and/or the
Revolving Loan Commitments shall be permanently reduced in an
aggregate amount equal to such Net Debt Securities Proceeds.
(d) Prepayments and Reductions Due to issuance of Holdings
------------------------------------------------------
Equity Securities. On the date of receipt by Holdings or any of its
-----------------
Subsidiaries (other than the cash proceeds from the initial public
offering of Holdings Common Stock or the exercise of any over-
allotment option in connection with such initial public offering) of
the cash proceeds (any such proceeds, net of underwriting discounts,
commissions and other reasonable legal fees and expenses, being "NET
EQUITY SECURITIES PROCEEDS") from the issuance of any equity
securities of Holdings or any of its Subsidiaries, the Borrowers shall
prepay the Loans and/or the Revolving Loan Commitments shall be
permanently reduced in an aggregate amount equal to 75% of such Net
Equity Securities Proceeds.
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<PAGE>
(e) Prepayments and Reductions from Consolidated Excess Cash
--------------------------------------------------------
Flow. In the event that there shall be Consolidated Excess Cash Flow
----
for any Fiscal Year, the applicable Borrower shall, no later than 90
days after the end of such Fiscal Year, prepay the Loans and/or the
Revolving Loan Commitments shall be permanently reduced in an
aggregate amount equal to 50% of such Consolidated Excess Cash Flow.
(f) Prepayments Due to Reductions or Restrictions of Revolving
----------------------------------------------------------
Loan Commitments. Company shall from time to time prepay first the
---------------- -----
Swing Line Loans and second the Working Capital Revolving Loans to the
------
extent necessary (1) so that the Total Utilization of Working Capital
Revolving Loan Commitments shall not at any time exceed the Working
Capital Revolving Loan Commitments then in effect and (2) to give
effect to the limitations set forth in clause (b) of the second
paragraph of subsection 2.1A(iv).
(iv) Application of Prepayments and Unscheduled Reductions of
--------------------------------------------------------
Revolving Loan Commitments.
--------------------------
(a) Application of Voluntary Prepayments by Type of Loans and
---------------------------------------------------------
Order of Maturity. Any voluntary prepayments pursuant to subsection
-----------------
2.4B(i) shall be applied as specified by the Borrower in the
applicable notice of prepayment; provided that in the event Company
--------
fails to specify the Loans to which any such prepayment shall be
applied, such prepayment shall be applied first to repay outstanding
-----
Swing Line Loans to the full extent thereof, second to repay
------
outstanding Working Capital Revolving Loans to the full extent
thereof, third, prior to the Acquisition Loan Conversion Date, to
-----
repay outstanding Acquisition Loans to the full extent thereof, fourth
------
to repay outstanding Domestic Term Loans, fifth to repay outstanding
-----
Sun Gro Canada Term Loans and Lakeland Canada Term Loans on a pro rata
basis, and sixth after the Acquisition Loan Conversion Date, to repay
-----
outstanding the Acquisition Loans. Any voluntary prepayments of the
Term Loans and, after the Acquisition Loan Conversion Date, the
Acquisition Loans, pursuant to subsection 2.4B(i) shall be applied to
reduce the scheduled installments of principal of the Term Loans set
forth in subsection 2.4A(i) in inverse order of maturity.
(b) Application of Mandatory Prepayments by Type of Loans. Any
-----------------------------------------------------
amount (the "APPLIED AMOUNT") required to be applied as a mandatory
prepayment of the Loans and/or a reduction of the Revolving Loan
Commitments pursuant to subsection 2.4B(iii) shall be applied first to
-----
prepay (1) if the applicable Borrower is Company, the Domestic Term
Loans to the full extent thereof and then to prepay the Sun Gro Canada
Term Loans and the Lakeland Canada Term Loans on a pro rata basis to
the full extent thereof, (2) if the applicable Borrower is Sun Gro
Canada, the Sun Gro Canada Term Loans to the full extent thereof, then
to prepay the Lakeland Canada Term Loans to the
59
<PAGE>
full extent thereof and then to prepay the Domestic Term Loans to the
full extent thereof, or (3) if the applicable Borrower is Lakeland
Canada, the Lakeland Canada Term Loans to the full extent thereof,
then to prepay the Sun Gro Canada Term Loans to the full extent
thereof and then to prepay the Domestic Term Loans to the full extent
thereof, second, to prepay the Acquisition Loans to the full extent
------
thereof but before the Acquisition Loan Conversion Date without
permanently reducing the Acquisition Revolving Loan Commitments by the
amount of such prepayment, third, to the extent of any remaining
-----
portion of the Applied Amount, to prepay the Swing Line Loans to the
full extent thereof without permanently reducing the Swing Line Loan
Commitments by the amount of such prepayment, and fourth, to the
------
extent of any remaining portion of the Applied Amount, to prepay the
Working Capital Revolving Loans to the full extent thereof but without
permanently reducing the Working Capital Revolving Loan Commitments by
the amount of such prepayment.
(c) Application of Mandatory Prepayments of Term Loans by Order
-----------------------------------------------------------
of Maturity. Any mandatory prepayments of the Term Loans and of the
-----------
Acquisition Loans after the Acquisition Loan Conversion Date pursuant
to subsection 2.4B(iii) shall be applied to reduce the scheduled
installments of principal of the Term Loans set forth in subsection
2.4A(i) and of the Acquisition Loans set forth in subsection 2.4A(ii)
in inverse order of maturity.
(d) Application of Prepayments to Base Rate Loans and Eurodollar
------------------------------------------------------------
Rate Loans. Considering Term Loans and Revolving Loans being prepaid
----------
separately, any prepayment thereof shall be applied first to Base
Rate Loans to the full extent thereof before application to Eurodollar
Rate Loans, in each case in a manner which minimizes the amount of any
payments required to be made by Company pursuant to subsection 2.6D.
C. GENERAL PROVISIONS REGARDING PAYMENTS.
(i) Manner and Time of Payment. All payments by the applicable
--------------------------
Borrower of principal, interest, fees and other Obligations hereunder and
under the Notes shall be made in Dollars in same day funds, without
defense, setoff or counterclaim, free of any restriction or condition, and
delivered to Agent not later than 12:00 Noon (New York City time) on the
date due at the Domestic Funding and Payment Office or 12:00 Noon (Toronto
Time) on the date due at the Canadian Funding and Payment Office, as the
case may be, for the account of Lenders; funds received by Agent after that
time on such due date shall be deemed to have been paid by such Borrower on
the next succeeding Business Day. Borrowers hereby authorizes Agent to
charge its accounts with Agent in order to cause timely payment to be made
to Agent of all principal, interest,
60
<PAGE>
fees and expenses due hereunder (subject to sufficient funds being
available in its accounts for that purpose).
(ii) Application of Payments to Principal and Interest. Except as
-------------------------------------------------
provided in subsection 2.2C, all payments in respect of the principal
amount of any Loan shall include payment of accrued interest on the
principal amount being repaid or prepaid, and all such payments (and, in
any event, any payments in respect of any Loan on a date when interest is
due and payable with respect to such Loan) shall be applied to the payment
of interest before application to principal.
(iii) Apportionment of Payments. Aggregate principal and interest
-------------------------
payments in respect of Term Loans and Revolving Loans shall be apportioned
among all outstanding Loans to which such payments relate, in each case
proportionately to Lenders' respective Pro Rata Shares. Agent shall
promptly distribute to each Lender, at its primary address set forth below
its name on the appropriate signature page hereof or at such other address
as such Lender may request, its Pro Rata Share of all such payments
received by Agent and the commitment fees of such Lender when received by
Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions
of this subsection 2.4C(iii), if, pursuant to the provisions of subsection
2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected
Lender or if any Affected Lender makes Base Rate Loans or Canadian Base
Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans or
Canadian Eurodollar Rate Loans, as the case may be, Agent shall give effect
thereto in apportioning payments received thereafter.
(iv) Payments on Business Days. Whenever any payment to be made
-------------------------
hereunder shall be stated to be due on a day that is not a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in the computation of the payment of
interest hereunder or of the commitment fees hereunder, as the case may be.
(v) Notation of Payment. Each Lender agrees that before disposing of
-------------------
any Note held by it, or any part thereof (other than by granting
participations therein), that Lender will make a notation thereon of all
Loans evidenced by that Note and all principal payments previously made
thereon and of the date to which interest thereon has been paid; provided
--------
that the failure to make (or any error in the making of) a notation of any
Loan made under such Note shall not limit or otherwise affect the
obligations of Company hereunder or under such Note with respect to any
Loan or any payments of principal or interest on such Note.
D. APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER GUARANTIES.
(i) Application of Proceeds of Collateral. Except as provided in
-------------------------------------
subsection 2.4B(iii)(a) with respect to prepayments from Net Asset Sale
Proceeds, all proceeds
61
<PAGE>
received by Agent in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral under any Collateral
Document may, in the discretion of Agent, be held by Agent as Collateral
for, and/or (then or at any time thereafter) applied in full or in part by
Agent against, the applicable Secured Obligations (as defined in such
Collateral Document) in the following order of priority:
(a) To the payment of all costs and expenses of such sale,
collection or other realization, including reasonable compensation to
Agent and its agents and counsel, and all other expenses, liabilities
and advances made or incurred by Agent in connection therewith, and
all amounts for which Agent is entitled to indemnification under such
Collateral Document and all advances made by Agent thereunder for the
account of the applicable Loan Party, and to the payment of all costs
and expenses paid or incurred by Agent in connection with the exercise
of any right or remedy under such Collateral Document, all in
accordance with the terms of this Agreement and such Collateral
Document;
(b) thereafter, to the extent of any excess such proceeds, to
the payment of all other such Secured Obligations for the ratable
benefit of the holders thereof; and
(c) thereafter, to the extent of any excess such proceeds, to
the payment to or upon the order of such Loan Party or to whosoever
may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct.
(ii) Application of Payments Under Guaranties. All payments received
----------------------------------------
by Agent under the Subsidiary Guaranty shall be applied promptly from time
to time by Agent in the following order of priority:
(a) To the payment of the costs and expenses of any collection
or other realization under such Guaranty, including reasonable
compensation to Agent and its agents and counsel, and all expenses,
liabilities and advances made or incurred by Agent in connection
therewith, all in accordance with the terms of this Agreement and such
Guaranty;
(b) thereafter, to the extent of any excess such payments, to
the payment of all other Guarantied Obligations (as defined in such
Guaranty) for the ratable benefit of the holders thereof; and
(c) thereafter, to the extent of any excess such payments, to
the payment to Holdings or the applicable Subsidiary Guarantor or to
whosoever may be lawfully entitled to receive the same or as a court
of competent jurisdiction may direct.
62
<PAGE>
2.5 USE OF PROCEEDS.
---------------
A. TERM LOANS. The proceeds of any increase in the Term Loans, together
with up to $68,000,000 in net proceeds from the public offering of Holdings
Common Stock, will be used to (i) prepay approximately $15,500,000 in mortgage
debt, (ii) to redeem approximately $42,000,000 in principal amount of
Subordinated Notes, and (iii) to the extent of any excess after the application
of such proceeds in accordance with the foregoing clauses (i) and (ii), to
prepay Working Capital Revolving Loans but without any related commitment
reductions.
B. ACQUISITION LOANS. The proceeds of the Acquisition Loans shall be
utilized to finance the acquisition of companies and/or the assets of operations
of companies, engaged in the nursery business, the peat or potting soil or mix
business or businesses related thereto.
C. WORKING CAPITAL REVOLVING LOANS; SWING LINE LOANS. The proceeds of
the Working Capital Revolving Loans and any Swing Line Loans shall be applied by
Company for working capital and general corporate purposes.
D. MARGIN REGULATIONS. No portion of the proceeds of any borrowing under
this Agreement shall be used by any Borrower or any of its Subsidiaries in any
manner that might cause the borrowing or the application of such proceeds to
violate Regulation U, Regulation T or Regulation X of the Board of Governors of
the Federal Reserve System or any other regulation of such Board or to violate
the Exchange Act, in each case as in effect on the date or dates of such
borrowing and such use of proceeds.
2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS AND CANADIAN EURODOLLAR
--------------------------------------------------------------------------
RATE LOANS.
-----------
Notwithstanding any other provision of this Agreement to the contrary the
following provisions shall govern with respect to Eurodollar Rate Loans and
Canadian Eurodollar Rate Loans as to the matters covered:
A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable
after 10:00 A.M. (New York time or Toronto time, as the case may be) on each
Interest Rate Determination Date, Agent shall determine (which determination
shall, absent manifest error, be final, conclusive and binding upon all parties)
the interest rate that shall apply to the Eurodollar Rate Loans or Canadian
Eurodollar Rate Loans for which an interest rate is then being determined for
the applicable Interest Period and shall promptly give notice thereof (in
writing or by telephone confirmed in writing) to the applicable Borrower and
each Domestic Lender or each Canadian Lender, as applicable.
B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that
Agent shall have determined (which determination shall be final and conclusive
and binding on all parties
63
<PAGE>
hereto), on any Interest Rate Determination Date with respect to any Eurodollar
Rate Loans or any Canadian Eurodollar Rate Loans, that by reason of
circumstances affecting the interbank Eurodollar market adequate and fair means
do not exist for ascertaining the interest rate applicable to such Loans on the
basis provided for in the definition of Adjusted Eurodollar Rate or Canadian
Eurodollar Rate, as applicable, Agent shall on such date give notice (by
telefacsimile or by telephone confirmed in writing) to the applicable Borrower
and each Domestic Lender or each Canadian Lender, as applicable, of such
determination, whereupon (i) no Loans may be made as, or converted to,
Eurodollar Rate Loans or Canadian Eurodollar Rate Loans, as applicable, until
such time as Agent notifies such Borrower and such Lenders that the
circumstances giving rise to such notice no longer exist and (ii) any Notice of
Borrowing or Notice of Conversion/Continuation given by a Borrower with respect
to the Loans in respect of which such determination was made shall be deemed to
be rescinded by such Borrower.
C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS AND CANADIAN
EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have
determined (which determination shall be final and conclusive and binding upon
all parties hereto but shall be made only after consultation with Company and
Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans
or Canadian Eurodollar Rate Loans (i) has become unlawful as a result of
compliance by such Lender in good faith with any law, treaty, governmental rule,
regulation, guideline or order (or would conflict with any such treaty,
governmental rule, regulation, guideline or order not having the force of law
even though the failure to comply therewith would not be unlawful) or (ii) has
become impracticable, or would cause such Lender material hardship, as a result
of contingencies occurring after the date of this Agreement which materially and
adversely affect the interbank Eurodollar market or the position of such Lender
in that market, then, and in any such event, such Lender shall be an "AFFECTED
LENDER" and it shall on that day give notice (by telefacsimile or by telephone
confirmed in writing) to Company and Agent of such determination (which notice
Agent shall promptly transmit to each other Lender). Thereafter (a) the
obligation of the Affected Lender to make Loans as, or to convert Loans to,
Eurodollar Rate Loans or Canadian Eurodollar Rate Loans, as applicable, shall be
suspended until such notice shall be withdrawn by the Affected Lender, (b) to
the extent such determination by the Affected Lender relates to a Eurodollar
Rate Loan or a Canadian Eurodollar Rate Loan then being requested by a Borrower
pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the
Affected Lender shall make such Loan as (or convert such Loan to, as the case
may be) a Base Rate Loan or a Canadian Base Rate Loan, as applicable, (c) the
Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans
or Canadian Eurodollar Rate Loans, as applicable (the "AFFECTED LOANS"), shall
be terminated at the earlier to occur of the expiration of the Interest Period
then in effect with respect to the Affected Loans or when required by law, and
(d) the Affected Loans shall automatically convert into Base Rate Loans or
Canadian Base Rate Loans, as applicable, on the date of such termination.
Notwithstanding the foregoing, to the extent a determination by an Affected
Lender as described above relates to a Eurodollar Rate Loan or a Canadian
Eurodollar Rate Loan then being requested by a Borrower pursuant to a Notice of
64
<PAGE>
Borrowing or a Notice of Conversion/Continuation, such Borrower shall have the
option, subject to the provisions of subsection 2.6D, to rescind such Notice of
Borrowing or Notice of Conversion/Continuation as to all Lenders by giving
notice (by telefacsimile or by telephone confirmed in writing) to Agent of such
rescission on the date on which the Affected Lender gives notice of its
determination as described above (which notice of rescission Agent shall
promptly transmit to each other Lender). Except as provided in the immediately
preceding sentence, nothing in this subsection 2.6C shall affect the obligation
of any Lender other than an Affected Lender to make or maintain Loans as, or to
convert Loans to, Eurodollar Rate Loans or Canadian Eurodollar Rate Loans, as
applicable, in accordance with the terms of this Agreement.
D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. The
applicable Borrower shall compensate each Lender, upon written request by that
Lender (which request shall set forth the basis for requesting such amounts),
for all reasonable losses, expenses and liabilities (including, without
limitation, any interest paid by that Lender to lenders of funds borrowed by it
to make or carry its Eurodollar Rate Loans or Canadian Eurodollar Rate Loans, as
applicable, and any loss, expense or liability sustained by that Lender in
connection with the liquidation or reemployment of such funds) which that Lender
may sustain: (i) if for any reason (other than a default by that Lender) a
borrowing of any Eurodollar Rate Loan or any Canadian Eurodollar Rate Loan does
not occur on a date specified therefor in a Notice of Borrowing or a telephonic
request for borrowing, or a conversion to or continuation of any Eurodollar Rate
Loan or any Canadian Eurodollar Rate Loan does not occur on a date specified
therefor in a Notice of Conversion/Continuation or a telephonic request for
conversion or continuation, (ii) if any prepayment or other principal payment or
any conversion of any of its Eurodollar Rate Loans or Canadian Eurodollar Rate
Loans occurs on a date prior to the last day of an Interest Period applicable to
that Loan, (iii) if any prepayment of any of its Eurodollar Rate Loans or
Canadian Eurodollar Rate Loans is not made on any date specified in a notice of
prepayment given by the applicable Borrower, or (iv) as a consequence of any
other default by Company in the repayment of its Eurodollar Rate Loans or
Canadian Eurodollar Rate Loans when required by the terms of this Agreement.
E. BOOKING OF EURODOLLAR RATE LOANS AND CANADIAN EURODOLLAR RATE LOANS.
Any Lender may make, carry or transfer Eurodollar Rate Loans and Canadian
Eurodollar Rate Loans at, to, or for the account of any of its branch offices or
the office of an Affiliate of that Lender.
F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS AND CANADIAN
EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under
this subsection 2.6 and under subsection 2.7A shall be made as though that
Lender had actually funded each of its relevant Eurodollar Rate Loans and
Canadian Eurodollar Rate Loans through the purchase of a Eurodollar deposit
bearing interest at the rate obtained pursuant to clause (i) of the definition
of Adjusted Eurodollar Rate or pursuant to the definition of Canadian Eurodollar
Rate in an amount equal to the amount of such Eurodollar Rate Loan or Canadian
Eurodollar
65
<PAGE>
Rate Loan, as applicable, and having a maturity comparable to the relevant
Interest Period and through the transfer of such Eurodollar deposit from an
offshore office of that Lender to a domestic office of that Lender in the United
States of America or in Canada, as applicable; provided, however, that each
-----------------
Lender may fund each of its Eurodollar Rate Loans and Canadian Eurodollar Rate
Loans in any manner it sees fit and the foregoing assumptions shall be utilized
only for the purposes of calculating amounts payable under this subsection 2.6
and under subsection 2.7A.
G. EURODOLLAR RATE LOANS AND CANADIAN EURODOLLAR RATE LOANS AFTER
DEFAULT. After the occurrence of and during the continuation of a Potential
Event of Default or an Event of Default, (i) Borrower may not elect to have a
Loan be made or maintained as, or converted to, a Eurodollar Rate Loan or
Canadian Eurodollar Rate Loan, as applicable, after the expiration of any
Interest Period then in effect for that Loan and (ii) subject to the provisions
of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation
given by any Borrower with respect to a requested borrowing or
conversion/continuation that has not yet occurred shall be deemed to be
rescinded by such Borrower.
2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY.
----------------------------------------
A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions
of subsection 2.7B, in the event that any Lender shall determine (which
determination shall, absent manifest error, be final and conclusive and binding
upon all parties hereto) that any law, treaty or governmental rule, regulation
or order, or any change therein or in the interpretation, administration or
application thereof (including the introduction of any new law, treaty or
governmental rule, regulation or order), or any determination of a court or
governmental authority, in each case that becomes effective after the date
hereof, or compliance by such Lender with any guideline, request or directive
issued or made after the date hereof by any central bank or other governmental
or quasi-governmental authority (whether or not having the force of law);
(i) subjects such Lender (or its applicable lending office) to any
additional Tax (other than any Tax on the overall net income of such
Lender) with respect to this Agreement or any of its obligations hereunder
or any payments to such Lender (or its applicable lending office) of
principal, interest, fees or any other amount payable hereunder;
(ii) imposes, modifies or holds applicable any reserve (including
without limitation any marginal, emergency, supplemental, special or other
reserve), special deposit, compulsory loan, FDIC insurance or similar
requirement against assets held by, or deposits or other liabilities in or
for the account of, or advances or loans by, or other credit extended by,
or any other acquisition of funds by, any office of such Lender (other than
any such reserve or other requirements with respect to Eurodollar Rate
Loans that are reflected in the definition of Adjusted Eurodollar Rate); or
66
<PAGE>
(iii) imposes any other condition (other than with respect to a Tax
matter) on or affecting such Lender (or its applicable lending office) or
its obligations hereunder or the interbank Eurodollar market;
and the result of any of the foregoing is to increase the cost to such Lender of
agreeing to make, making or maintaining Loans hereunder or to reduce any amount
received or receivable by such Lender (or its applicable lending office) with
respect thereto; then, in any such case, each Borrower shall promptly pay to
such Lender, upon receipt of the statement referred to in the next sentence,
such additional amount or amounts (in the form of an increased rate of, or a
different method of calculating, interest or otherwise as such Lender in its
sole discretion shall determine) as may be necessary to compensate such Lender
for any such increased cost or reduction in amounts received or receivable
hereunder. Such Lender shall deliver to the applicable Borrower (with a copy to
Agent) a written statement, setting forth in reasonable detail the basis for
calculating the additional amounts owed to such Lender under this subsection
2.7A, which statement shall be conclusive and binding upon all parties hereto
absent manifest error.
B. WITHHOLDING OF TAXES.
(i) Payments to Be Free and Clear. All sums payable by any Borrower
------------------------------
under this Agreement and the other Loan Documents shall (except to the
extent required by law) be paid free and clear of, and without any
deduction or withholding on account of, any Tax (other than a Tax on the
overall net income of any Lender) imposed, levied, collected, withheld or
assessed by or within the United States of America or Canada or any
political subdivision in or of the United States of America or Canada or
any other jurisdiction from or to which a payment is made by or on behalf
of any Borrower or by any federation or organization of which the United
States of America or Canada or any such jurisdiction is a member at the
time of payment.
(ii) Grossing-up of Payments. If any Borrower or any other Person is
------------------------
required by law to make any deduction or withholding on account of any such
Tax from any sum paid or payable by any Borrower to Agent or any Lender
under any of the Loan Documents:
(a) such Borrower shall notify Agent of any such requirement or
any change in any such requirement as soon as such Borrower becomes
aware of it;
(b) such Borrower shall pay any such Tax before the date on
which penalties attach thereto, such payment to be made (if the
liability to pay is imposed on such Borrower) for its own account or
(if that liability is imposed on Agent or such Lender, as the case may
be) on behalf of and in the name of Agent or such Lender;
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(c) the sum payable by such Borrower in respect of which the
relevant deduction, withholding or payment is required shall be
increased to the extent necessary to ensure that, after the making of
that deduction, withholding or payment, Agent or such Lender, as the
case may be, receives on the due date a net sum equal to what it would
have received had no such deduction, withholding or payment been
required or made; and
(d) within 30 days after paying any sum from which it is
required by law to make any deduction or withholding, and within 30
days after the due date of payment of any Tax which it is required by
clause (b) above to pay, such Borrower shall deliver to Agent evidence
satisfactory to the other affected parties of such deduction,
withholding or payment and of the remittance thereof to the relevant
taxing or other authority;
provided that no such additional amount shall be required to be paid to any
- --------
Lender under clause (c) above except to the extent that any change after the
date hereof (in the case of each Lender listed on the signature pages hereof) or
after the date of the Assignment Agreement pursuant to which such Lender became
a Lender (in the case of each other Lender) in any such requirement for a
deduction, withholding or payment as is mentioned therein shall result in an
increase in the rate of such deduction, withholding or payment from that in
effect at the date of this Agreement or at the date of such Assignment
Agreement, as the case may be, in respect of payments to such Lender.
(iii) Evidence of Exemption from Withholding Taxes.
--------------------------------------------
(a) (1) Each Domestic Lender that is organized under the laws of
any jurisdiction other than the United States or any state or other
political subdivision thereof (for purposes of this subsection
2.7B(iii), a "NON-US LENDER") shall deliver to Agent for transmission
to Company, on or prior to the Closing Date (in the case of each
Domestic Lender listed on the signature pages hereof) or on or prior
to the date of the Assignment Agreement pursuant to which it becomes a
Domestic Lender (in the case of each other Domestic Lender), and at
such other times as may be necessary in the determination of Company
or Agent (each in the reasonable exercise of its discretion), (X) two
original copies of Internal Revenue Service Form 1001 or 4224 (or any
successor forms), properly completed and duly executed by such Lender,
together with any other certificate or statement of exemption required
under the Internal Revenue Code or the regulations issued thereunder
to establish that such Lender is not subject to deduction or
withholding of United States federal income tax with respect to any
payments to such Lender of principal, interest, fees or other amounts
payable under any of the Loan Documents or (Y) if such Lender is not a
"bank" or other Person described in Section 881(c)(3) of the Internal
Revenue Code and cannot deliver either Internal Revenue Service Form
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1001 or 4224 pursuant to clause (X) above, a Certificate re Non-Bank
Status together with two original copies of Internal Revenue Service
Form W-8 (or any successor form), properly completed and duly executed
by such Lender, together with any other certificate or statement of
exemption required under the Internal Revenue Code or the regulations
issued thereunder to establish that such Lender is not subject to
deduction or withholding of United States federal income tax with
respect to any payments to such Lender of interest payable under any
of the Loan Documents.
(2) Each Canadian Lender that is organized under the laws of any
jurisdiction other than Canada or any province thereof or is not resident
in Canada agrees to deliver to Canadian Borrowers and Canadian Agent upon
request such certificates, documents or other evidence as may be required
from time to time, properly completed and duly executed by such Canadian
Lender, to establish the basis for any applicable exemption from or
reduction of Taxes with respect to any payments to such Canadian Lender of
principal, interest, fees, commissions or any other amount payable under
this Agreement or the Canadian Term Loans.
(b) Each Lender required to deliver any forms, certificates or
other evidence with respect to United States federal income tax
withholding matters or Canadian income tax withholding matters
pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time
after the initial delivery by such Lender of such forms, certificates
or other evidence, whenever a lapse in time or change in circumstances
renders such forms, certificates or other evidence obsolete or
inaccurate in any material respect, that such Lender shall (1)
promptly deliver to Agent for transmission to Company (X) in the case
of any Domestic Lender, two new original copies of Internal Revenue
Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two
original copies of Internal Revenue Service Form W-8, as the case may
be, or (Y) in the case of any Canadian Lender, such certificates,
documents or other evidence as may be required from time to time under
subsection 2.7B(iii)(a)(2), in each case properly completed and duly
executed by such Lender, together with any other certificate or
statement of exemption required in order to confirm or establish that
such Lender is not subject to deduction or withholding of United
States or Canadian (as applicable) federal income tax with respect to
payments to such Lender under the Loan Documents or (2) notify Agent
and Company of its inability to deliver any such forms, certificates
or other evidence.
(c) The applicable Borrower shall not be required to pay any
additional amount to any Non-US Lender under clause (c) of subsection
2.7B(ii) if such Lender shall have failed to satisfy the requirements
of clause (a) or (b) of this subsection 2.7B(iii); provided that if
--------
such Lender shall have satisfied the requirements of subsection
2.7B(iii)(a) on the Closing Date (in the case of each
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Lender listed on the signature pages hereof) or on the date of the
Assignment Agreement pursuant to which it became a Lender (in the case
of each other Lender), nothing in this subsection 2.7B(iii)(c) shall
relieve the applicable Borrower of its obligation to pay any
additional amounts pursuant to clause (c) of subsection 2.7B(ii) in
the event that, as a result of any change in any applicable law,
treaty or governmental rule, regulation or order, or any change in the
interpretation, administration or application thereof, such Lender is
no longer properly entitled to deliver forms, certificates or other
evidence at a subsequent date establishing the fact that such Lender
is not subject to withholding as described in subsection 2.7B(iii)(a).
C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that
the adoption, effectiveness, phase-in or applicability after the date hereof of
any law, rule or regulation (or any provision thereof) regarding capital
adequacy, or any change therein or in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any Lender
(or its applicable lending office) with any guideline, request or directive
regarding capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on the capital of such Lender or any
corporation controlling such Lender as a consequence of, or with reference to,
such Lender's Loans, Commitments or Letters of Credit or participations therein
or other obligations hereunder to a level below that which such Lender or such
controlling corporation could have achieved but for such adoption,
effectiveness, phase-in, applicability, change or compliance (taking into
consideration the policies of such Lender or such controlling corporation with
regard to capital adequacy), then from time to time, within five Business Days
after receipt by Company from such Lender of the statement referred to in the
next sentence, Borrower shall pay to such Lender such additional amount or
amounts as will compensate such Lender or such controlling corporation on an
after-tax basis for such reduction. Such Lender shall deliver to Company (with a
copy to Agent) a written statement, setting forth in reasonable detail the basis
of the calculation of such additional amounts, which statement shall be
conclusive and binding upon all parties hereto absent manifest error.
2.8 OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE.
-----------------------------------------------------
Each Lender and Issuing Lender agrees that, as promptly as practicable
after the officer of such Lender or Issuing Lender responsible for administering
the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may
be, becomes aware of the occurrence of an event or the existence of a condition
that would cause such Lender to become an Affected Lender or that would entitle
such Lender or Issuing Lender to receive payments under subsection 2.7 or
subsection 3.6, it will, to the extent not inconsistent with the internal
policies of such Lender or Issuing Lender and any applicable legal or regulatory
restrictions, use reasonable efforts (i) to make, issue, fund or maintain the
Commitments of such Lender or the affected Loans or Letters of Credit of such
Lender or Issuing Lender through another lending
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or letter of credit office of such Lender or Issuing Lender, or (ii) take such
other measures as such Lender or Issuing Lender may deem reasonable, if as a
result thereof the circumstances which would cause such Lender to be an Affected
Lender would cease to exist or the additional amounts which would otherwise be
required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7
or subsection 3.6 would be materially reduced and if, as determined by such
Lender or Issuing Lender in its sole discretion, the making, issuing, funding or
maintaining of such Commitments or Loans or Letters of Credit through such other
lending or letter of credit office or in accordance with such other measures, as
the case may be, would not otherwise materially adversely affect such
Commitments or Loans or Letters of Credit or the interests of such Lender or
Issuing Lender; provided that such Lender or Issuing Lender will not be
--------
obligated to utilize such other lending or letter of credit office pursuant to
this subsection 2.8 unless Borrower agrees to pay all incremental expenses
incurred by such Lender or Issuing Lender as a result of utilizing such other
lending or letter of credit office as described in clause (i) above. A
certificate as to the amount of any such expenses payable by Borrower pursuant
to this subsection 2.8 (setting forth in reasonable detail the basis for
requesting such amount) submitted by such Lender or Issuing Lender to Company
(with a copy to Agent) shall be conclusive absent manifest error.
SECTION 3. LETTERS OF CREDIT
3.1 ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS
---------------------------------------------------------------------
THEREIN.
- -------
A. LETTERS OF CREDIT. In addition to Company requesting that Domestic
Lenders make Working Capital Revolving Loans pursuant to subsection 2.1A(iv) and
that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(v),
Company may request, in accordance with the provisions of this subsection 3.1,
from time to time during the period from the Closing Date to but excluding the
Revolving Loan Commitment Termination Date, that one or more Domestic Lenders
issue Letters of Credit for the account of Company for the purposes specified in
the definition of Standby Letters of Credit. Subject to the terms and
conditions of this Agreement and in reliance upon the representations and
warranties of Company herein set forth, any one or more Domestic Lenders may,
but (except as provided in subsection 3.1B(ii)) shall not be obligated to, issue
such Letters of Credit in accordance with the provisions of this subsection 3.1;
provided that Company shall not request that any Domestic Lender issue (and no
- --------
Domestic Lender shall issue):
(i) any Letter of Credit if, after giving effect to such issuance,
the Total Utilization of Working Capital Revolving Loan Commitments
would exceed the Working Capital Revolving Loan Commitments then in
effect;
(ii) any Letter of Credit if, after giving effect to such issuance,
the Letter of Credit Usage would exceed $3,000,000;
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(iii) any Letter of Credit having an expiration date later than the
earlier of (a) the Revolving Loan Commitment Termination Date and (b) the
date which is one year from the date of issuance of such Letter of Credit;
provided that the immediately preceding clause (b) shall not prevent any
--------
Issuing Lender from agreeing that a Letter of Credit will automatically be
extended for one or more successive periods not to exceed one year each
unless such Issuing Lender elects not to extend for any such additional
period; and provided, further that such Issuing Lender shall elect not to
-------- -------
extend such Letter of Credit if it has knowledge that an Event of Default
has occurred and is continuing (and has not been waived in accordance with
subsection 10.6) at the time such Issuing Lender must elect whether or not
to allow such extension; or
(iv) any Letter of Credit denominated in a currency other than
Dollars or Canadian Dollars.
B. MECHANICS FOR ISSUANCE.
(i) Request for Issuance. Whenever Company desires the issuance of
--------------------
a Letter of Credit, it shall deliver to Agent a Request for Issuance of
Letter of Credit substantially in the form of Exhibit III annexed hereto no
-----------
later than 12:00 Noon (New York City time) at least three Business Days or
such shorter period as may be agreed to by the Issuing Lender in any
particular instance, in advance of the proposed date of issuance. The
Request for Issuance of Letter of Credit shall specify (a) the proposed
date of issuance (which shall be a Business Day), (b) the face amount of
the Letter of Credit, (c) whether the Letter of Credit is requested to be
denominated in Dollars or in Canadian Dollars, (d) the expiration date of
the Letter of Credit, (e) the name and address of the beneficiary, and (f)
either the verbatim text of the proposed Letter of Credit or the proposed
terms and conditions thereof, including a precise description of any
documents to be presented by the beneficiary which, if presented by the
beneficiary prior to the expiration date of the Letter of Credit, would
require the Issuing Lender to make payment under the Letter of Credit;
provided that the Issuing Lender, in its reasonable discretion, may require
--------
changes in the text of the proposed Letter of Credit or any such documents;
and provided, further that no Letter of Credit shall require payment
-------- -------
against a conforming draft to be made thereunder on the same business day
(under the laws of the jurisdiction in which the office of the Issuing
Lender to which such draft is required to be presented is located) that
such draft is presented if such presentation is made after 10:00 A.M. (in
the time zone of such office of the Issuing Lender) on such business day.
Company shall notify the applicable Issuing Lender (and Agent,
if Agent is not such Issuing Lender) prior to the issuance of any Letter of
Credit in the event that any of the matters to which Company is required to
certify in the applicable Request for Issuance of Letter of Credit is no
longer true and correct as of the proposed date of issuance of such Letter
of Credit, and upon the issuance of any Letter of Credit
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Company shall be deemed to have re-certified, as of the date of such
issuance, as to the matters to which Company is required to certify in the
applicable Request for Issuance of Letter of Credit.
(ii) Determination of Issuing Lender. Upon receipt by Agent of a
-------------------------------
Request for Issuance of Letter of Credit pursuant to subsection 3.1B(i)
requesting the issuance of a Letter of Credit, in the event Agent elects to
issue such Letter of Credit, Agent shall promptly so notify Company, and
Agent shall be the Issuing Lender with respect thereto. In the event that
Agent, in its sole discretion, elects not to issue such Letter of Credit,
Agent shall promptly so notify Company, whereupon Company may request any
other Domestic Lender to issue such Letter of Credit by delivering to such
Domestic Lender a copy of the applicable Request for Issuance of Letter of
Credit. Any Domestic Lender so requested to issue such Letter of Credit
shall promptly notify Company and Agent whether or not, in its sole
discretion, it has elected to issue such Letter of Credit, and any such
Domestic Lender which so elects to issue such Letter of Credit shall be the
Issuing Lender with respect thereto. In the event that all other Domestic
Lenders shall have declined to issue such Letter of Credit, notwithstanding
the prior election of Agent not to issue such Letter of Credit, Agent shall
be obligated to issue such Letter of Credit and shall be the Issuing Lender
with respect thereto, notwithstanding the fact that the Letter of Credit
Usage with respect to such Letter of Credit and with respect to all other
Letters of Credit issued by Agent, when aggregated with Agent's outstanding
Working Capital Revolving Loans and Swing Line Loans, may exceed Agent's
Working Capital Revolving Loan Commitment then in effect; provided that
--------
Agent shall not be obligated to issue any Letter of Credit denominated in a
foreign currency other than Canadian Dollars.
(iii) Issuance of Letter of Credit. Upon satisfaction or waiver (in
----------------------------
accordance with subsection 10.6) of the conditions set forth in subsection
4.4, the Issuing Lender shall issue the requested Letter of Credit in
accordance with the Issuing Lender's standard operating procedures.
(iv) Notification to Lenders. Upon the issuance of any Letter of
-----------------------
Credit the applicable Issuing Lender shall promptly notify Agent and each
other Domestic Lender of such issuance, which notice shall be accompanied
by a copy of such Letter of Credit. Promptly after receipt of such notice
(or, if Agent is the Issuing Lender, together with such notice), Agent
shall notify each Domestic Lender of the amount of such Domestic Lender's
respective participation in such Letter of Credit, determined in accordance
with subsection 3.1C.
()v Reports to Lenders. Within 15 days after the end of each
------------------
calendar quarter ending after the Closing Date, so long as any Letter of
Credit shall have been outstanding during such calendar quarter, each
Issuing Lender shall deliver to each other Lender a report setting forth
for such calendar quarter the daily aggregate amount
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available to be drawn under the Letters of Credit issued by such Issuing
Lender that were outstanding during such calendar quarter.
C. DOMESTIC LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT.
Immediately upon the issuance of each Letter of Credit, each Domestic Lender
shall be deemed to, and hereby agrees to, have irrevocably purchased from the
Issuing Lender a participation in such Letter of Credit and any drawings honored
thereunder in an amount equal to such Lender's Pro Rata Share of the maximum
amount which is or at any time may become available to be drawn thereunder.
3.2 LETTER OF CREDIT FEES.
---------------------
Company agrees to pay the following amounts with respect to Letters of
Credit issued hereunder:
(i) with respect to each Letter of Credit, (a) a fronting fee,
payable directly to the applicable Issuing Lender for its own account,
equal to the greater of (X) $500 and (Y) 0.25% per annum of the daily
amount available to be drawn under such Letter of Credit and (b) a letter
of credit fee, payable to Agent for the account of Domestic Lenders, equal
to the Applicable Eurodollar Rate Margin for Working Capital Revolving
Loans multiplied by the daily amount available to be drawn under such
----------
Letter of Credit, each such fronting fee or letter of credit fee to be
payable in arrears on and to (but excluding) each March 31, June 30,
September 30 and December 31 of each year and computed on the basis of a
360-day year for the actual number of days elapsed;
(ii) with respect to the issuance, amendment or transfer of each
Letter of Credit and each payment of a drawing made thereunder (without
duplication of the fees payable under clause (i) above), documentary and
processing charges payable directly to the applicable Issuing Lender for
its own account in accordance with such Issuing Lender's standard schedule
for such charges in effect at the time of such issuance, amendment,
transfer or payment, as the case may be.
Promptly upon receipt by Agent of any amount described in clause (i)(b) of this
subsection 3.2, Agent shall distribute to each Domestic Lender its Pro Rata
Share of such amount.
3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT.
------------------------------------------------------------------
A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In
determining whether to honor any drawing under any Letter of Credit by the
beneficiary thereof, the Issuing Lender shall be responsible only to examine the
documents delivered under such Letter of Credit with reasonable care so as to
ascertain whether they appear on their face to be in accordance with the terms
and conditions of such Letter of Credit.
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B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In
the event an Issuing Lender has determined to honor a drawing under a Letter of
Credit issued by it, such Issuing Lender shall immediately notify Company and
Agent, and Company shall reimburse such Issuing Lender on the date on which such
drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars (which
amount, in the case of a drawing under a Letter of Credit which is denominated
in Canadian Dollars, shall be calculated in Dollar Equivalents) and in same day
funds equal to the amount of such drawing; provided that, anything contained in
--------
this Agreement to the contrary notwithstanding, (i) unless Company shall have
notified Agent and such Issuing Lender prior to 10:00 A.M. (New York City time)
on the date such drawing is honored that Company intends to reimburse such
Issuing Lender for the amount of such drawing with funds other than the proceeds
of Working Capital Revolving Loans, Company shall be deemed to have given a
timely Notice of Borrowing to Agent requesting Lenders to make Working Capital
Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount
in Dollars (calculated in Dollar Equivalents in the case of a drawing equal to
the amount of any drawing honored by such Issuing Lender under a Letter of
Credit denominated in Canadian Dollars) equal to the amount of such drawing and
(ii) subject to satisfaction or waiver of the conditions specified in subsection
4.2B, Domestic Lenders shall, on the Reimbursement Date, make Working Capital
Revolving Loans that are Base Rate Loans in the amount of such drawing, the
proceeds of which shall be applied directly by Agent to reimburse such Issuing
Lender for the amount of such drawing; and provided, further that if for any
-------- -------
reason proceeds of Working Capital Revolving Loans are not received by such
Issuing Lender on the Reimbursement Date in an amount equal to the amount of
such drawing, Company shall reimburse such Issuing Lender, on demand, in an
amount in same day funds equal to the excess of the amount of such honored
drawing over the aggregate amount of such Working Capital Revolving Loans, if
any, which are so received. Nothing in this subsection 3.3B shall be deemed to
relieve any Domestic Lender from its obligation to make Working Capital
Revolving Loans on the terms and conditions set forth in this Agreement, and
Company shall retain any and all rights it may have against any Domestic Lender
resulting from the failure of such Domestic Lender to make such Working Capital
Revolving Loans under this subsection 3.3B.
C. PAYMENT BY LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS OF
CREDIT.
(i) Payment by Domestic Lenders. In the event that Company shall
---------------------------
fail for any reason to reimburse any Issuing Lender as provided in
subsection 3.3B in an amount (calculated in Dollar Equivalents in the case
of a drawing equal to the amount of any drawing honored by such Issuing
Lender under a Letter of Credit denominated in Canadian Dollars) equal to
the amount of any drawing honored by such Issuing Lender under a Letter of
Credit issued by it, such Issuing Lender shall promptly notify each other
Domestic Lender of the unreimbursed amount of such drawing and of such
other Domestic Lender's respective participation therein based on such
Domestic Lender's Pro Rata Share. Each Domestic Lender shall make
available to such Issuing
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Lender an amount equal to its respective participation, in Dollars and in
same day funds, at the office of such Issuing Lender specified in such
notice, on the date of such notice by such Issuing Lender. In the event
that any Domestic Lender fails to make available to such Issuing Lender on
such business day the amount of such Domestic Lender's participation in
such Letter of Credit as provided in this subsection 3.3C, such Issuing
Lender shall be entitled to recover such amount on demand from such
Domestic Lender together with interest thereon at the rate customarily used
by such Issuing Lender for the correction of errors among banks for three
Business Days and thereafter at the Base Rate. Nothing in this subsection
3.3C shall be deemed to prejudice the right of any Domestic Lender to
recover from any Issuing Lender any amounts made available by such Domestic
Lender to such Issuing Lender pursuant to this subsection 3.3C in the event
that it is determined by the final judgment of a court of competent
jurisdiction that the payment with respect to a Letter of Credit by such
Issuing Lender in respect of which payment was made by such Domestic Lender
constituted gross negligence or willful misconduct on the part of such
Issuing Lender.
(ii) Distribution to Lenders of Reimbursements Received From
-------------------------------------------------------
Company. In the event any Issuing Lender shall have been reimbursed by
-------
other Domestic Lenders pursuant to subsection 3.3C(i) for all or any
portion of any drawing honored by such Issuing Lender under a Letter of
Credit issued by it, such Issuing Lender shall distribute to each other
Domestic Lender which has paid all amounts payable by it under subsection
3.3C(i) with respect to such drawing such other Domestic Lender's Pro Rata
Share of all payments subsequently received by such Issuing Lender from
Company in reimbursement of such drawing when such payments are received.
Any such distribution shall be made to a Domestic Lender at its primary
address set forth below its name on the appropriate signature page hereof
or at such other address as such Domestic Lender may request.
D. INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT.
(i) Payment of Interest by Company. Company agrees to pay to each
------------------------------
Issuing Lender, with respect to drawings made under any Letters of Credit
issued by it, interest on the amount paid by such Issuing Lender in respect
of each such drawing from the date of such drawing to but excluding the
date such amount is reimbursed by Company (including any such reimbursement
out of the proceeds of Working Capital Revolving Loans pursuant to
subsection 3.3B) at a rate equal to (a) for the period from the date of
such drawing to but excluding the Reimbursement Date, the rate then in
effect under this Agreement with respect to Working Capital Revolving Loans
that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum
in excess of the rate of interest otherwise payable under this Agreement
with respect to Working Capital Revolving Loans that are Base Rate Loans.
Interest payable pursuant to this subsection 3.3D(i) shall be computed on
the basis of a 360-day year for the actual number of days elapsed in the
period during which it accrues and shall be payable on demand or, if no
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demand is made, on the date on which the related drawing under a Letter of
Credit is reimbursed in full.
(ii) Distribution of Interest Payments by Issuing Lender. Promptly
---------------------------------------------------
upon receipt by any Issuing Lender of any payment of interest pursuant to
subsection 3.3D(i) with respect to a drawing honored under a Letter of
Credit issued by it, (a) such Issuing Lender shall distribute to each other
Domestic Lender, out of the interest received by such Issuing Lender in
respect of the period from the date of such drawing to but excluding the
date on which such Issuing Lender is reimbursed for the amount of such
drawing (including any such reimbursement out of the proceeds of Working
Capital Revolving Loans pursuant to subsection 3.3B), the amount that such
other Domestic Lender would have been entitled to receive in respect of the
letter of credit fee that would have been payable in respect of such Letter
of Credit for such period pursuant to subsection 3.2 if no drawing had been
made under such Letter of Credit, and (b) in the event such Issuing Lender
shall have been reimbursed by other Domestic Lenders pursuant to subsection
3.3C(i) for all or any portion of such honored drawing, such Issuing Lender
shall distribute to each other Domestic Lender which has paid all amounts
payable by it under subsection 3.3C(i) with respect to such honored drawing
such other Domestic Lender's Pro Rata Share of any interest received by
such Issuing Lender in respect of that portion of such honored drawing so
reimbursed by other Domestic Lenders for the period from the date on which
such Issuing Lender was so reimbursed by other Domestic Lenders to but
excluding the date on which such portion of such honored drawing is
reimbursed by Company. Any such distribution shall be made to a Domestic
Lender at its primary address set forth below its name on the appropriate
signature page hereof or at such other address as such Domestic Lender may
request.
3.4 OBLIGATIONS ABSOLUTE.
--------------------
The obligation of Company to reimburse each Issuing Lender for
drawings made under the Letters of Credit issued by it and to repay any Working
Capital Revolving Loans made by Lenders pursuant to subsection 3.3B and the
obligations of Lenders under subsection 3.3C(i) shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances including any of the following circumstances:
(i) any lack of validity or enforceability of any Letter of Credit;
(ii) the existence of any claim, set-off, defense or other right
which Company or any Domestic Lender may have at any time against a
beneficiary or any transferee of any Letter of Credit (or any Persons for
whom any such transferee may be acting), any Issuing Lender or other
Domestic Lender or any other Person or, in the case of a Domestic Lender,
against Company, whether in connection with this
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Agreement, the transactions contemplated herein or any unrelated
transaction (including any underlying transaction between Company or one of
its Subsidiaries and the beneficiary for which any Letter of Credit was
procured);
(iii) any draft or other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect;
(iv) payment by the applicable Issuing Lender under any Letter of
Credit against presentation of a draft or other document which does not
substantially comply with the terms of such Letter of Credit;
(v) any adverse change in the business, operations, properties,
assets, condition (financial or otherwise) or prospects of Company or any
of its Subsidiaries;
(vi) any breach of this Agreement or any other Loan Document by any
party thereto;
(vii) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing; or
(viii) the fact that an Event of Default or a Potential Event of
Default shall have occurred and be continuing;
provided, in each case, that payment by the applicable Issuing Lender under the
- --------
applicable Letter of Credit shall not have constituted gross negligence or
willful misconduct of such Issuing Lender under the circumstances in question
(as determined by a final judgment of a court of competent jurisdiction).
3.5 INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES.
--------------------------------------------------
A. INDEMNIFICATION. In addition to amounts payable as provided in
subsection 3.6, Company hereby agrees to protect, indemnify, pay and save
harmless each Issuing Lender from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
fees, expenses and disbursements of counsel and allocated costs of internal
counsel) which such Issuing Lender may incur or be subject to as a consequence,
direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing
Lender, other than as a result of (a) the gross negligence or willful misconduct
of such Issuing Lender as determined by a final judgment of a court of competent
jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor
by such Issuing Lender of a proper demand for payment made under any Letter of
Credit issued by it or (ii) the failure of such Issuing Lender to honor a
drawing under any such Letter of Credit as a result of any act or omission,
whether
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rightful or wrongful, of any present or future de jure or de facto government or
governmental authority (all such acts or omissions herein called "GOVERNMENTAL
ACTS").
B. NATURE OF ISSUING LENDERS' DUTIES. As between Company and any Issuing
Lender, Company assumes all risks of the acts and omissions of, or misuse of the
Letters of Credit issued by such Issuing Lender by, the respective beneficiaries
of such Letters of Credit. In furtherance and not in limitation of the
foregoing, such Issuing Lender shall not be responsible for: (i) the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for and issuance of
any such Letter of Credit, even if it should in fact prove to be in any or all
respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any such Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, which may prove to
be invalid or ineffective for any reason; (iii) failure of the beneficiary of
any such Letter of Credit to comply fully with any conditions required in order
to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in cipher; (v) errors in
interpretation of technical terms; (vi) any loss or delay in the transmission or
otherwise of any document required in order to make a drawing under any such
Letter of Credit or of the proceeds thereof; (vii) the misapplication by the
beneficiary of any such Letter of Credit of the proceeds of any drawing under
such Letter of Credit; or (viii) any consequences arising from causes beyond the
control of such Issuing Lender, including any Governmental Acts, and none of the
above shall affect or impair, or prevent the vesting of, any of such Issuing
Lender's rights or powers hereunder.
In furtherance and extension and not in limitation of the specific
provisions set forth in the first paragraph of this subsection 3.5B, any action
taken or omitted by any Issuing Lender under or in connection with the Letters
of Credit issued by it or any documents and certificates delivered thereunder,
if taken or omitted in good faith, shall not put such Issuing Lender under any
resulting liability to Company.
Notwithstanding anything to the contrary contained in this subsection
3.5, Company shall retain any and all rights it may have against any Issuing
Lender for any liability arising solely out of the gross negligence or willful
misconduct of such Issuing Lender, as determined by a final judgment of a court
of competent jurisdiction.
3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT.
-------------------------------------------------------
Subject to the provisions of subsection 2.7B (which shall be
controlling with respect to the matters covered thereby), in the event that any
Issuing Lender or Domestic Lender shall determine (which determination shall,
absent manifest error, be final and conclusive and binding upon all parties
hereto) that any law, treaty or governmental rule, regulation or order, or any
change therein or in the interpretation, administration or application
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thereof (including the introduction of any new law, treaty or governmental rule,
regulation or order), or any determination of a court or governmental authority,
in each case that becomes effective after the date hereof, or compliance by any
Issuing Lender or Domestic Lender with any guideline, request or directive
issued or made after the date hereof by any central bank or other governmental
or quasi-governmental authority (whether or not having the force of law):
(i) subjects such Issuing Lender or Domestic Lender (or its
applicable lending or letter of credit office) to any additional Tax (other
than any Tax on the overall net income of such Issuing Lender or Lender)
with respect to the issuing or maintaining of any Letters of Credit or the
purchasing or maintaining of any participations therein or any other
obligations under this Section 3, whether directly or by such being imposed
on or suffered by any particular Issuing Lender;
(ii) imposes, modifies or holds applicable any reserve (including
any marginal, emergency, supplemental, special or other reserve), special
deposit, compulsory loan, FDIC insurance or similar requirement in respect
of any Letters of Credit issued by any Issuing Lender or participations
therein purchased by any Domestic Lender; or
(iii) imposes any other condition (other than with respect to a Tax
matter) on or affecting such Issuing Lender or Domestic Lender (or its
applicable lending or letter of credit office) regarding this Section 3 or
any Letter of Credit or any participation therein;
and the result of any of the foregoing is to increase the cost to such Issuing
Lender or Lender of agreeing to issue, issuing or maintaining any Letter of
Credit or agreeing to purchase, purchasing or maintaining any participation
therein or to reduce any amount received or receivable by such Issuing Lender or
Domestic Lender (or its applicable lending or letter of credit office) with
respect thereto; then, in any case, Company shall promptly pay to such Issuing
Lender or Domestic Lender, upon receipt of the statement referred to in the next
sentence, such additional amount or amounts as may be necessary to compensate
such Issuing Lender or Domestic Lender for any such increased cost or reduction
in amounts received or receivable hereunder. Such Issuing Lender or Lender
shall deliver to Company a written statement, setting forth in reasonable detail
the basis for calculating the additional amounts owed to such Issuing Lender or
Domestic Lender under this subsection 3.6, which statement shall be conclusive
and binding upon all parties hereto absent manifest error.
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SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT
The obligations of Lenders to make Loans and the issuance of Letters
of Credit hereunder are subject to the satisfaction of the following conditions.
4.1 CONDITIONS TO TERM LOANS AND INITIAL REVOLVING LOANS AND SWING LINE LOANS.
-------------------------------------------------------------------------
The obligations of Lenders to make the Term Loans and any Revolving
Loans and Swing Line Loans to be made on the Closing Date are, in addition to
the conditions precedent specified in subsection 4.2, subject to prior or
concurrent satisfaction of the following conditions:
A. LOAN PARTY DOCUMENTS. On or before the Closing Date, Company shall,
and shall cause each other Loan Party to, deliver to Lenders (or to Agent with
sufficient originally executed copies, where appropriate, for each Lender and
its counsel) the following with respect to Company or such Loan Party, as the
case may be, each, unless otherwise noted, dated the Closing Date:
(i) Certified copies of the Certificate or Articles of
Incorporation of such Person, together with a good standing certificate
from the Secretary of State of its jurisdiction of incorporation and each
other state in which such Person is qualified as a foreign corporation to
do business and, to the extent generally available, a certificate or other
evidence of good standing as to payment of any applicable franchise or
similar taxes from the appropriate taxing authority of each of such
jurisdictions, each dated a recent date prior to the Closing Date;
(ii) Copies of the Bylaws of such Person, certified as of the
Closing Date by such Person's corporate secretary or an assistant
secretary;
(iii) Resolutions of the Board of Directors of such Person approving
and authorizing the execution, delivery and performance of the Loan
Documents to which it is a party, certified as of the Closing Date by the
corporate secretary or an assistant secretary of such Person as being in
full force and effect without modification or amendment;
(iv) Signature and incumbency certificates of the officers of such
Person executing the Loan Documents to which it is a party;
(v) Executed originals of this Agreement, the Notes (duly executed
in accordance with subsection 2.1E, drawn to the order of each Lender and
Swing Line Lender and with appropriate insertions) and the other Loan
Documents to be executed on the Closing Date, including without limitation
the Master Assignment Agreement, substantially in the form of Exhibit XIV
-----------
annexed hereto, executed by the Company and
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the Acknowledgement and Consent, substantially in the form of Exhibit XIII
------------
annexed hereto, executed by the Company and each of the other Loan Parties;
and
(vi) Such other documents as Agent may reasonably request.
B. NO MATERIAL ADVERSE EFFECT. Since December 31, 1997, no Material
Adverse Effect (in the collective opinion of Agent and Syndication Agent) shall
have occurred.
C. EXISTING CREDIT AGREEMENTS PAYMENTS AND ASSIGNMENTS.
(1) With respect to the Existing Credit Agreements, Company shall
have paid to BTCC, as agent under the Existing Credit Agreements, for
distribution to lenders and issuing lenders, as applicable, under the Existing
Credit Agreements all unpaid accrued interest on all loans, all unpaid accrued
commitment fees and all unpaid accrued fees on all Letters of Credit, in each
case through but excluding the Closing Date.
(2) On or before the Effective Date, Company, Hines I Lenders, Hines
II Lenders, BTCC, as agent under the Existing Credit Agreements, each Lender and
Agent under this Agreement shall have executed and delivered the Master
Assignment Agreement, substantially in the form of Exhibit XIV annexed hereto,
-----------
and on the Effective Date, each such lender, BTCC, Lenders and Agent shall have
sold, purchased and/or assigned such loans and/or revolving loan commitments
pursuant to the Master Assignment Agreement such that each Lender's Pro Rata
Share of the Loans and/or Revolving Loan Commitments upon consummation of the
closing shall be as set forth on Schedule 2.1 annexed hereto.
------------
D. REPAYMENT OF CERTAIN EXISTING INDEBTEDNESS. On the Closing Date,
Company and its Subsidiaries shall have repaid in full approximately $15,500,000
of the Company's existing mortgages and irrevocably called for redemption not
less than 35% of the outstanding Subordinated Notes, and delivered to Agent all
documents or instruments necessary to release all Liens securing such
Indebtedness or other obligations of Company and its Subsidiaries thereunder.
E. CAPITALIZATION, ETC.
(i) The organizational and ownership structure of Company and of
Holdings (and their respective Subsidiaries) shall be as set forth in
Schedule 5.1 annexed hereto and satisfactory to the Agent and the Lenders
------------
for all respects. Agent shall have received copies and shall be satisfied
with the form and substance of any and all employment contracts with senior
management of Holdings and of Company;
(ii) On or before the Closing Date, Holdings shall have provided
evidence satisfactory to Agent regarding its payment to Company of the Net
Equity Securities
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Proceeds (as defined in subsection 2.4B(iii)(d)) in an amount not less than
$68,000,000; and
(iii) On the Closing Date, Company shall have delivered to Agent an
Officers' Certificate demonstrating that after giving effect to the Loans
made under this Agreement, Company's Consolidated Fixed Charge Coverage
Ratio (as defined in the Subordinated Note Indenture) will be greater than
2.25 to 1.00.
F. NO DISRUPTION OF FINANCIAL AND CAPITAL MARKETS. There shall have been
no material adverse change after May 8, 1998, to the syndication markets for
credit facilities similar in nature to the credit facilities provided herein and
there shall not have occurred and be continuing a material disruption of or
material adverse change in financial, banking or capital markets that would have
an adverse effect on such syndication market, in each case as determined by
Agent and Syndication Agent in their sole discretion.
G. CLOSING DATE MORTGAGES; CLOSING DATE MORTGAGE POLICIES; ETC. Agent
and Syndication Agent shall have received from Company and each applicable
Subsidiary Guarantor:
(i) Closing Date Mortgages. To the extent not received by BTCC under
----------------------
the Existing Credit Agreements, fully executed and notarized Mortgages
(each a "CLOSING DATE MORTGAGE" and, collectively, the "CLOSING DATE
MORTGAGES"), in proper form for recording in all appropriate places in all
applicable jurisdictions, encumbering each Real Property Asset so
identified in Schedule 5.5 annexed hereto (each a "CLOSING DATE MORTGAGED
------------
PROPERTY" and, collectively, the "CLOSING DATE MORTGAGED PROPERTIES");
(ii) Opinions of Local Counsel. An opinion of counsel (which counsel
-------------------------
shall be reasonably satisfactory to Agent) in each state in which a Closing
Date Mortgaged Property is located with respect to the enforceability of
the form(s) of Closing Date Mortgages to be recorded in such state and such
other matters as Agent may reasonably request, in each case in form and
substance reasonably satisfactory to Agent;
(iii) Title Insurance. (a) ALTA mortgagee title insurance policies or
---------------
unconditional commitments therefor (the "CLOSING DATE MORTGAGE POLICIES")
issued by the title company with respect to the Closing Date Mortgaged
Properties so identified in Schedule 5.5 annexed hereto, in amounts not
------------
less than the respective amounts designated therein with respect to any
particular Closing Date Mortgaged Properties, insuring fee simple title to,
or a valid leasehold interest in, each such Closing Date Mortgaged Property
vested in such Loan Party and assuring Agent that the applicable Closing
Date Mortgages create valid and enforceable First Priority mortgage Liens
on the respective Closing Date Mortgaged Properties encumbered thereby,
subject only to a standard survey exception, which Closing Date Mortgage
Policies (1) shall include an endorsement for mechanics' liens, for future
advances under this Agreement and for
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any other matters reasonably requested by Agent and (2) shall provide for
affirmative insurance and such reinsurance as Agent may reasonably request,
all of the foregoing in form and substance reasonably satisfactory to
Agent; and (b) evidence satisfactory to Agent that such Loan Party has (i)
delivered to the title company all certificates and affidavits required by
the title company in connection with the issuance of the Closing Date
Mortgage Policies and (ii) paid to the title company or to the appropriate
governmental authorities all expenses and premiums of the title company in
connection with the issuance of the Closing Date Mortgage Policies and all
recording and stamp taxes (including mortgage recording and intangible
taxes) payable in connection with recording the Closing Date Mortgages in
the appropriate real estate records;
(iv) Title Reports. With respect to each Closing Date Mortgaged
-------------
Property so identified in Schedule 5.5 annexed hereto, a title report
------------
issued by the title company with respect thereto, dated not more than 30
days prior to the Closing Date and satisfactory in form and substance to
Agent;
(v) Copies of Documents Relating to Title Exceptions. Copies of all
------------------------------------------------
recorded documents listed as exceptions to title or otherwise referred to
in the Closing Date Mortgage Policies or in the title reports delivered
pursuant to subsection 4.1G(iv);
(vi) Matters Relating to Flood Hazard Properties. (a) Evidence, which
-------------------------------------------
may be in the form of a letter from an insurance broker or a municipal
engineer, as to whether (1) any Closing Date Mortgaged Property is a Flood
Hazard Property and (2) the community in which any such Flood Hazard
Property is located is participating in the National Flood Insurance
Program, (b) if there are any such Flood Hazard Properties, such Loan
Party's written acknowledgement of receipt of written notification from
Agent (1) as to the existence of each such Flood Hazard Property and (2) as
to whether the community in which each such Flood Hazard Property is
located is participating in the National Flood Insurance Program, and (c)
in the event any such Flood Hazard Property is located in a community that
participates in the National Flood Insurance Program, evidence that Company
has obtained flood insurance in respect of such Flood Hazard Property to
the extent required under the applicable regulations of the Board of
Governors of the Federal Reserve System; and
(vii) Environmental Indemnity. If requested by Agent or Syndication
-----------------------
Agent, an environmental indemnity agreement, satisfactory in form and
substance to Agent and Syndication Agent and their counsel, with respect to
the indemnification of Agent and Lenders for any liabilities that may be
imposed on or incurred by any of them as a result of any Hazardous
Materials Activity.
H. EXISTING MORTGAGES; ENDORSEMENTS; ETC. Agent and Syndication Agent
shall have received from Company and each applicable Subsidiary Guarantor:
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(i) Existing Mortgages. Fully executed and notarized amendments to
------------------
each existing mortgage delivered pursuant to the Existing Credit Agreements
(each an "EXISTING MORTGAGE" and, collectively, the "EXISTING MORTGAGES"),
in proper form for recording in all appropriate places in all applicable
jurisdictions, encumbering each Real Property Asset so identified in
Schedule 5.5 annexed hereto (each an "EXISTING MORTGAGED PROPERTY" and,
------------
collectively, the "EXISTING MORTGAGED PROPERTIES");
(ii) Opinions of Local Counsel. An opinion of counsel (which counsel
-------------------------
shall be reasonably satisfactory to Agent) in each state in which an
Existing Mortgaged Property is located with respect to the enforceability
of the form(s) of amendments to the Existing Mortgages to be recorded in
such state and such other matters as Agent may reasonably request, in each
case in form and substance reasonably satisfactory to Agent;
(iii) Title Insurance. (a) CLTA 110.5 (or local state equivalents
---------------
satisfactory to Agent and Syndication Agent) endorsements or unconditional
commitments therefor along with such additional title endorsements, in form
and substance satisfactory to Agent and Syndication Agent, as they may
require (the "ENDORSEMENTS"), insuring fee simple title to, or a valid
leasehold interest in, each such Existing Mortgaged Property, as amended by
the amendments, are vested in such Loan Party and assuring Agent that the
applicable Existing Mortgages, as amended, are valid and enforceable First
Priority Mortgage Liens on the respective Closing Date Mortgaged Properties
encumbered thereby; and (b) evidence satisfactory to Agent that such Loan
Party has (i) delivered to the title company all certificates and
affidavits required by the title company in connection with the issuance of
the Endorsements and (ii) paid to the title company or to the appropriate
governmental authorities all expenses and premiums of the title company in
connection with the issuance of the Endorsements and all recording and
stamp taxes (including mortgage recording and intangible taxes) payable in
connection with recording the amendments to the Existing Mortgages in the
appropriate real estate records;
(iv) Title Reports. With respect to each Existing Mortgaged Property
-------------
so identified in Schedule 5.5 annexed hereto, a title report issued by the
------------
title company with respect thereto, dated not more than 30 days prior to
the Closing Date and satisfactory in form and substance to Agent;
(v) Copies of Documents Relating to Title Exceptions. Copies of all
------------------------------------------------
recorded documents listed as exceptions to title or otherwise referred to
in the Endorsements or in the title reports delivered pursuant to
subsection 4.1H(iv);
(vi) Matters Relating to Flood Hazard Properties. (a) Evidence, which
-------------------------------------------
may be in the form of a letter from an insurance broker or a municipal
engineer, as to whether (1) any Existing Mortgaged Property is a Flood
Hazard Property and (2) the
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community in which any such Flood Hazard Property is located is
participating in the National Flood Insurance Program, (b) if there are any
such Flood Hazard Properties, such Loan Party's written acknowledgement of
receipt of written notification from Agent (1) as to the existence of each
such Flood Hazard Property and (2) as to whether the community in which
each such Flood Hazard Property is located is participating in the National
Flood Insurance Program, and (c) in the event any such Flood Hazard
Property is located in a community that participates in the National Flood
Insurance Program, evidence that Company has obtained flood insurance in
respect of such Flood Hazard Property to the extent required under the
applicable regulations of the Board of Governors of the Federal Reserve
System; and
(vii) Environmental Indemnity. If requested by Agent, an
-----------------------
environmental indemnity agreement, satisfactory in form and substance to
Agent and its counsel, with respect to the indemnification of Agent and
Lenders for any liabilities that may be imposed on or incurred by any of
them as a result of any Hazardous Materials Activity.
(viii) Landlord Consents. With respect to each Material Leasehold, the
-----------------
consent of the landlord to the amendment of the Existing Mortgages.
I. SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. To the extent not
otherwise satisfied pursuant to subsection 4.1G or 4.1H or under any of the
Existing Credit Agreements, Agent shall have received evidence satisfactory to
it that Holdings, Company and Subsidiary Guarantors shall have taken or caused
to be taken all such actions, executed and delivered or caused to be executed
and delivered all such agreements, documents and instruments, and made or caused
to be made all such filings and recordings (other than the filing or recording
of items described in clauses (iii), (iv) and (v) below) that may be necessary
or, in the opinion of Agent, desirable in order to create in favor of Agent, for
the benefit of Lenders, a valid and (upon such filing and recording) perfected
First Priority security interest in the entire personal and mixed property
Collateral. Such actions shall include the following:
(i) Schedules to Collateral Documents. Delivery to Agent of
---------------------------------
accurate and complete schedules to all of the applicable Collateral
Documents.
(ii) Stock Certificates and Instruments. Delivery to Agent of (a)
----------------------------------
certificates (which certificates shall be accompanied by irrevocable
undated stock powers, duly endorsed in blank and otherwise satisfactory in
form and substance to Agent) representing all capital stock pledged
pursuant to the Holdings Pledge Agreement, the Company Pledge Agreement and
the Subsidiary Pledge Agreements and (b) all promissory notes or other
instruments (duly endorsed, where appropriate, in a manner satisfactory to
Agent) evidencing any Collateral;
(iii) Lien Searches and UCC Termination Statements. Delivery to Agent
--------------------------------------------
of (a) the results of a recent search, by a Person satisfactory to Agent,
of all effective
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UCC or PPSA financing statements and fixture filings and all judgment and
tax lien filings which may have been made with respect to any personal or
mixed property of any Loan Party, together with copies of all such filings
disclosed by such search, and (b) UCC or PPSA termination statements duly
executed by all applicable Persons for filing in all applicable
jurisdictions as may be necessary to terminate any effective UCC or PPSA
financing statements or fixture filings disclosed in such search (other
than any such financing statements or fixture filings in respect of Liens
permitted to remain outstanding pursuant to the terms of this Agreement).
(iv) UCC Financing Statements and Fixture Filings. Delivery to Agent
--------------------------------------------
of UCC or PPSA financing statements and, where appropriate, fixture
filings, duly executed by each applicable Loan Party with respect to all
personal and mixed property Collateral of such Loan Party, for filing in
all jurisdictions as may be necessary or, in the opinion of Agent,
desirable to perfect the security interests created in such Collateral
pursuant to the Collateral Documents;
(v) PTO Cover Sheets, Etc. Delivery to Agent of all cover sheets or
---------------------
other documents or instruments required to be filed with the PTO in order
to create or perfect Liens in respect of any IP Collateral;
(vi) Certificates of Title, Etc. Delivery to Agent of certificates of
--------------------------
title with respect to all motor vehicles and other rolling stock of Loan
Parties and the taking of all actions necessary to cause Agent to be noted
as lienholder thereon or otherwise necessary to perfect the First Priority
Lien granted to Agent on behalf of Lenders in such rolling stock; and
(vii) Opinions of Local Counsel. Delivery to Agent of an opinion of
-------------------------
counsel (which counsel shall be reasonably satisfactory to Agent) under the
laws of each jurisdiction in which any Loan Party or any personal or mixed
property Collateral is located with respect to the creation and perfection
of the security interests in favor of Agent in such Collateral and such
other matters governed by the laws of such jurisdiction regarding such
security interests as Agent may reasonably request, in each case in form
and substance reasonably satisfactory to Agent.
J. EVIDENCE OF INSURANCE. Agent shall have received a certificate from
Company's insurance broker satisfactory in form and substance to Agent outlining
all material insurance coverage maintained by Company, including without
limitation directors and officers insurance coverages and all insurance required
to be maintained pursuant to subsection 6.4. Agent on behalf of Lenders shall
have been named as additional insured and/or loss payee thereunder to the extent
required under subsection 6.4.
J. FINANCIAL STATEMENTS. Agent and Syndication Agent shall have received
on behalf of Lenders (a) audited financial statements of Company and its
Subsidiaries for the fiscal
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years ended December 31, 1997, 1996 and 1995, all in reasonable detail and
certified by the chief financial officer of Company that they fairly present the
financial condition of Company and its Subsidiaries as at the dates indicated
and the results of their operations and their cash flows for the periods
indicated, subject to changes resulting from audit and normal year-end
adjustments, (b) unaudited financial statements of Company and its Subsidiaries
for the fiscal periods most recently ended prior to the Closing Date (including
without limitation monthly financial statements for any such period of less than
three months), (c) a pro forma balance sheet as of the Closing Date for Company
and its Subsidiaries, prepared in accordance with GAAP (except as otherwise
noted therein) and giving effect to the transactions contemplated by this
Agreement, and (d) projected financial statements (including balance sheets and
statements of operations and cash flows) of Company and its Subsidiaries for the
five-year period after the Closing Date prepared on a monthly basis through
December 31, 1999, all of the foregoing to be (x) substantially consistent with
any financial statements for the same periods delivered to the Agent prior to
December 31, 1997, and in the case of any such financial statements for
subsequent periods, substantially consistent with any projected financial
results for such periods delivered to the Agent prior to such date and (y)
otherwise in form and substance satisfactory to the Agent and Syndication Agent
and the Lenders.
L. OPINIONS OF BORROWER'S COUNSEL. Lenders shall have received
originally executed copies of one or more favorable written opinions of Kirkland
& Ellis, U.S. counsel for Borrowers, and of Canadian counsel for Borrowers, in
form and substance reasonably satisfactory to Agent and its counsel, dated as of
the Closing Date and setting forth substantially the matters in the opinions
designated in Exhibit VII annexed hereto and as to such other matters as Agent
-----------
acting on behalf of Lenders may reasonably request.
M. OPINIONS OF AGENT'S COUNSEL. Lenders shall have received originally
executed copies of one or more favorable written opinions of O'Melveny & Myers
LLP, counsel to Agent, dated as of the Closing Date, substantially in the form
of Exhibit VIII annexed hereto and as to such other matters as Agent acting on
------------
behalf of Lenders may reasonably request.
N. AUDITOR'S LETTER. Agent shall have received an executed Auditor's
Letter.
O. FEES. Company shall have paid to Agent, for distribution (as
appropriate) to Agent and Lenders, the fees payable on the Closing Date referred
to in subsection 2.3.
P. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company
shall have delivered to Agent an Officers' Certificate, in form and substance
satisfactory to Agent, to the effect that the representations and warranties in
Section 5 hereof are true, correct and complete in all material respects on and
as of the Closing Date to the same extent as though made on and as of that date
(or, to the extent such representations and warranties specifically relate to an
earlier date, that such representations and warranties were true, correct and
complete in all material respects on and as of such earlier date) and that
Company shall have performed in all material respects all agreements and
satisfied all conditions which this
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Agreement provides shall be performed or satisfied by it on or before the
Closing Date except as otherwise disclosed to and agreed to in writing by Agent
and Requisite Lenders.
Q. COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken
or to be taken in connection with the transactions contemplated hereby and all
documents incidental thereto not previously found acceptable by Agent, acting on
behalf of Lenders, and its counsel shall be satisfactory in form and substance
to Agent and such counsel, and Agent and such counsel shall have received all
such counterpart originals or certified copies of such documents as Agent may
reasonably request.
[R. COMPLETION OF PRICE WATERHOUSE YEAR 2000 COMPLIANCE CERTIFICATE.]
Language to come].
4.2 CONDITIONS TO ALL LOANS.
-----------------------
The obligations of Lenders to make Loans on each Funding Date are
subject to the following further conditions precedent:
A. Agent shall have received before that Funding Date, in
accordance with the provisions of subsection 2.1B, an originally executed Notice
of Borrowing, in each case signed by the chief executive officer, the chief
financial officer or the treasurer of Company or by any executive officer of
Company designated by any of the above-described officers on behalf of Company
in a writing delivered to Agent.
B. As of that Funding Date:
(i) The representations and warranties contained herein and in the
other Loan Documents shall be true, correct and complete in all material
respects on and as of that Funding Date to the same extent as though made
on and as of that date, except to the extent such representations and
warranties specifically relate to an earlier date, in which case such
representations and warranties shall have been true, correct and complete
in all material respects on and as of such earlier date;
(ii) No event shall have occurred and be continuing or would result
from the consummation of the borrowing contemplated by such Notice of
Borrowing that would constitute an Event of Default or a Potential Event of
Default;
(iii) Each Loan Party shall have performed in all material respects
all agreements and satisfied all conditions which this Agreement provides
shall be performed or satisfied by it on or before that Funding Date;
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(iv) No order, judgment or decree of any court, arbitrator or
governmental authority shall purport to enjoin or restrain any Lender from
making the Loans to be made by it on that Funding Date;
(v) The making of the Loans requested on such Funding Date shall not
violate any law including Regulation T, Regulation U or Regulation X of the
Board of Governors of the Federal Reserve System; and
(vi) There shall not be pending or, to the knowledge of Company,
threatened, any action, suit, proceeding, governmental investigation or
arbitration against or affecting Company or any of its Subsidiaries or any
property of Company or any of its Subsidiaries that has not been disclosed
by Company in writing pursuant to subsection 5.6 or 6.1(x) prior to the
making of the last preceding Loans (or, in the case of the initial Loans,
prior to the execution of this Agreement), and there shall have occurred no
development not so disclosed in any such action, suit, proceeding,
governmental investigation or arbitration so disclosed, that, in either
event, in the opinion of Agent or of Requisite Lenders, would be expected
to have a Material Adverse Effect; and no injunction or other restraining
order shall have been issued and no hearing to cause an injunction or other
restraining order to be issued shall be pending or noticed with respect to
any action, suit or proceeding seeking to enjoin or otherwise prevent the
consummation of, or to recover any damages or obtain relief as a result of,
the transactions contemplated by this Agreement or the making of Loans
hereunder.
4.3 CONDITIONS TO ACQUISITION LOANS.
-------------------------------
The obligations of Lenders to make the Acquisition Loans on each
Funding Date are, in addition to the conditions precedent specified in
subsections 4.1 and 4.2, subject to prior or concurrent satisfaction of the
following conditions:
Agent shall have received prior to that Funding Date an Officers'
Certificate certifying that:
(i) The contemplated acquisition shall neither be contested nor
hostile nor opposed by the board of directors of the targeted company or
business;
(ii) After giving effect to such acquisition and Indebtedness
incurred in connection therewith, Company is in pro forma compliance with
its financial covenants as set forth on a Compliance Certificate attached
to such Officers' Certificate;
(iii) Upon consummation of such acquisition, Company will be in
compliance with the provisions of subsections 6.9 and 6.10 with respect to
any Subsidiary so acquired;
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(iv) In the event such acquisition or series of related acquisitions
involves a total consideration in excess of $25,000,000, Company has
obtained Agent's and Requisite Lenders' consents thereto and has delivered
to Agent and Lenders such historical and pro forma projected financial
statements, sources and uses analysis, pro forma covenant calculations and
such other due diligence information as was requested by Agent or Lenders;
and
(v) Company and its Subsidiaries will not incur or assume in
connection with any such contemplated acquisition any material
environmental or other material contingent liability.
4.4 CONDITIONS TO LETTERS OF CREDIT.
-------------------------------
The issuance of any Letter of Credit hereunder (whether or not the
applicable Issuing Lender is obligated to issue such Letter of Credit) is
subject to the following conditions precedent:
A. On or before the date of issuance of the initial Letter of Credit
pursuant to this Agreement, the initial Loans shall have been made.
B. On or before the date of issuance of such Letter of Credit, Agent
shall have received, in accordance with the provisions of subsection 3.1B(i), an
originally executed Request for Issuance of Letter of Credit, in each case
signed by the chief executive officer, the chief financial officer or the
treasurer of Company or by any executive officer of Company designated by any of
the above-described officers on behalf of Company in a writing delivered to
Agent, together with all other information specified in subsection 3.1B(i) and
such other documents or information as the applicable Issuing Lender may
reasonably require in connection with the issuance of such Letter of Credit.
C. On the date of issuance of such Letter of Credit, all conditions
precedent described in subsection 4.2B shall be satisfied to the same extent as
if the issuance of such Letter of Credit were the making of a Loan and the date
of issuance of such Letter of Credit were a Funding Date.
SECTION 5. BORROWERS' REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Agreement and to make
the Loans, to induce Issuing Lenders to issue Letters of Credit and to induce
other Lenders to purchase participations therein, each Borrower represents and
warrants to each Lender, on the date of this Agreement, on each Funding Date and
on the date of issuance of each Letter of Credit, that the following statements
are true, correct and complete:
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5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND
----------------------------------------------------------------
SUBSIDIARIES.
------------
A. ORGANIZATION AND POWERS. Each Loan Party is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each Loan Party has all requisite corporate power
and authority to own and operate its properties, to carry on its business as now
conducted and as proposed to be conducted, to enter into the Loan Documents to
which it is a party and to carry out the transactions contemplated thereby.
B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified to do
business and in good standing in every jurisdiction where its assets are located
and wherever necessary to carry out its business and operations, except in
jurisdictions where the failure to be so qualified or in good standing has not
had and will not have a Material Adverse Effect.
C. CONDUCT OF BUSINESS. Holdings and Company and their respective
Subsidiaries are engaged only in the businesses permitted to be engaged in
pursuant to subsection 7.14.
D. SUBSIDIARIES. All of the Subsidiaries of Company are identified in
Schedule 5.1 annexed hereto, as said Schedule 5.1 may be supplemented from time
- ------------ ------------
to time pursuant to the provisions of subsection 6.1(xvii). The capital stock
of each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto
------------
(as so supplemented) is duly authorized, validly issued, fully paid and
nonassessable and none of such capital stock constitutes Margin Stock. Each of
the Subsidiaries of Company identified in Schedule 5.1 annexed hereto (as so
------------
supplemented) is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation set
forth therein, has all requisite corporate power and authority to own and
operate its properties and to carry on its business as now conducted and as
proposed to be conducted, and is qualified to do business and in good standing
in every jurisdiction where its assets are located and wherever necessary to
carry out its business and operations, in each case except where failure to be
so qualified or in good standing or a lack of such corporate power and authority
has not had and will not have a Material Adverse Effect. Schedule 5.1 annexed
------------
hereto (as so supplemented) correctly sets forth the ownership interest of
Holdings in Company and of Company in each of the Subsidiaries of Company
identified therein.
5.2 AUTHORIZATION OF BORROWING, ETC.
--------------------------------
A. AUTHORIZATION OF BORROWING. The execution, delivery and performance
of the Loan Documents have been duly authorized by all necessary corporate
action on the part of each Loan Party that is a party thereto.
B. NO CONFLICT. The execution, delivery and performance by any Loan
Party of the Loan Documents to which it is a party and the consummation of the
transactions contemplated by the Loan Documents do not and will not (i) violate
any provision of any law or any governmental rule or regulation applicable to
any Loan Party, the Certificate or Articles
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of Incorporation or Bylaws of any Loan Party or any order, judgment or decree of
any court or other agency of government binding on any Loan Party, (ii) conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any Contractual Obligation of any Loan Party, (iii) result
in or require the creation or imposition of any Lien upon any of the properties
or assets of any Loan Party (other than any Liens created under any of the Loan
Documents in favor of Agent on behalf of Lenders), or (iv) require any approval
of stockholders or any approval or consent of any Person under any Contractual
Obligation of any Loan Party, except for such approvals or consents which will
be obtained on or before the Closing Date.
C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by any
Loan Party of the Loan Documents to which it is a party and the consummation of
the transactions contemplated by the Loan Documents do not and will not require
any registration with, consent or approval of, or notice to, or other action to,
with or by, any federal, state or other governmental authority or regulatory
body, except for (i) filings which have been made, obtained, given or taken on
or before the Closing Date or such later date as may be required by federal or
state securities laws and (ii) such other registrations, consents, approvals,
notices or other actions which have been made, obtained, given or taken on or
before the Closing Date or such later date as may be required by the applicable
governmental authority or regulatory body.
D. BINDING OBLIGATION. Each of the Loan Documents has been duly executed
and delivered by each Loan Party that is a party thereto and is the legally
valid and binding obligation of such Loan Party, enforceable against such Loan
Party in accordance with its respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
E. VALID ISSUANCE OF COMPANY COMMON STOCK AND HOLDINGS COMMON STOCK.
(i) Company Common Stock. The Company Common Stock is duly and
--------------------
validly issued, fully paid and nonassessable. No stockholder of Company
has or will have any preemptive rights to subscribe for any additional
equity Securities of Company. The issuance and sale of Company Common
Stock has been registered or qualified under applicable federal and state
securities laws or is exempt therefrom.
(ii) Holdings Common Stock. All issued and outstanding shares of
---------------------
Holdings Common Stock have been duly and validly issued, fully paid and
nonassessable. Except as provided in the Stockholders Agreement, no
stockholder of Holdings has or will have any preemptive rights to subscribe
for any additional equity Securities of Holdings. Any issuance and sale of
Holdings Common Stock, upon such issuance and sale, will either (a) have
been registered or qualified under applicable federal and state securities
laws or (b) be exempt therefrom.
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5.3 FINANCIAL CONDITION.
-------------------
Company has heretofore delivered to Lenders, at Lenders' request, the
financial statements and information described in subsection 4.1K. All such
statements were prepared in conformity with GAAP and fairly present, in all
material respects, the financial position (on a consolidated and, where
applicable, consolidating basis) of the entities described in such financial
statements as at the respective dates thereof and the results of operations and
cash flows (on a consolidated and, where applicable, consolidating basis) of the
entities described therein for each of the periods then ended, subject, in the
case of any such unaudited financial statements, to changes resulting from audit
and normal year-end adjustments. None of the Loan Parties has (and none of the
Loan Parties will have following the funding of the initial Loans) any
Contingent Obligation, contingent liability or liability for taxes, long-term
lease or unusual forward or long-term commitment that is not reflected in the
foregoing financial statements or the most recent financial statements delivered
pursuant to subsection 6.1 or the notes thereto and which in any such case is
material in relation to the business, operations, properties, assets, condition
(financial or otherwise) or prospects of Company and its Subsidiaries, taken as
a whole.
5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS.
---------------------------------------------------------
Since December 31, 1997, no event or change has occurred that has
caused or evidences, either in any case or in the aggregate, a Material Adverse
Effect. Neither Company nor any of its Subsidiaries has directly or indirectly
declared, ordered, paid or made, or set apart any sum or property for, any
Restricted Junior Payment or agreed to do so except as permitted by subsection
7.5.
5.5 TITLE TO PROPERTIES; LIENS.
--------------------------
Holdings, Company and Company's Subsidiaries have (i) good, sufficient
and legal title to (in the case of fee interests in real property), (ii) valid
leasehold interests in (in the case of leasehold interests in real or personal
property), or (iii) good title to (in the case of all other personal property),
all of their respective properties and assets reflected in the financial
statements referred to in subsection 5.3 or in the most recent financial
statements delivered pursuant to subsection 6.1 in each case, except for assets
disposed of since the date of such financial statements in the ordinary course
of business or as otherwise permitted under subsection 7.7. Except as permitted
by this Agreement, all such properties and assets are free and clear of Liens.
Schedule 5.5 annexed hereto sets forth all of the Real Property Assets of
- ------------
Company and its Subsidiaries as of the Closing Date.
5.6 LITIGATION; ADVERSE FACTS.
-------------------------
There are no actions, suits, proceedings, arbitrations or governmental
investigations (whether or not purportedly on behalf of Holdings, Company or
any of Company's
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Subsidiaries) at law or in equity or before or by any federal, state, municipal
or other govern mental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, pending or, to the knowledge of any
Borrower, threatened against or affecting Holdings, Company or any of Company's
Subsidiaries or any property of Holdings, Company or any of Company's
Subsidiaries that, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect. Neither Holdings nor Company
nor any of Company's Subsidiaries is (i) in violation of any applicable laws
that, individually or in the aggregate, could reasonably be expected to result
in a Material Adverse Effect or (ii) subject to or in default with respect to
any final judgments, writs, injunctions, decrees, rules or regulations of any
court or any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect.
5.7 PAYMENT OF TAXES.
----------------
Except to the extent permitted by subsection 6.4, all tax returns and
reports of Holdings, Company and Company's Subsidiaries required to be filed by
any of them have been timely filed, and all taxes, assessments, fees and other
governmental charges upon Holdings, Company and Company's Subsidiaries and upon
their respective properties, assets, income, businesses and franchises which are
due and payable have been paid when due and payable. None of the Borrowers
knows of any proposed tax assessment against Holdings, Company or any of
Company's Subsidiaries which is not being actively contested by Company or such
Subsidiary in good faith and by appropriate proceedings; provided that such
--------
reserves or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made or provided therefor.
5.8 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS; MATERIAL
------------------------------------------------------------------
CONTRACTS.
---------
A. Neither Holdings nor Company nor any of Company's Subsidiaries is
in default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any of its Contractual
Obligations, and no condition exists that, with the giving of notice or the
lapse of time or both, would constitute such a default, except where the
consequences, direct or indirect, of such default or defaults, if any, would not
have a Material Adverse Effect.
B. Neither Holdings nor Company nor any of Company's Subsidiaries is
a party to or is otherwise subject to any agreements or instruments or any
charter or other internal restrictions which, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse Effect.
C. All Material Contracts are in full force and effect and no
material defaults currently exist thereunder.
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5.9 GOVERNMENTAL REGULATION.
-----------------------
Neither Holdings nor Company nor any of Company's Subsidiaries is
subject to regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act, the Interstate Commerce Act or the Investment Company Act of
1940 or under any other federal or state statute or regulation which may limit
its ability to incur Indebtedness or which may otherwise render all or any
portion of the Obligations unenforceable.
5.10 SECURITIES ACTIVITIES.
---------------------
A. Neither Holdings nor Company nor any of Company's Subsidiaries is
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any Margin Stock.
B. Following application of the proceeds of each Loan, not more than
25% of the value of the assets (either of any Borrower only or of Company and
its Subsidiaries on a consolidated basis) subject to the provisions of
subsection 7.2 or 7.7 or subject to any restriction contained in any agreement
or instrument, between any Borrower and any Lender or any Affiliate of any
Lender, relating to Indebtedness and within the scope of subsection 8.2, will be
Margin Stock.
5.11 EMPLOYEE BENEFIT PLANS.
----------------------
A. Company and each of its ERISA Affiliates are in compliance in all
material respects with all applicable provisions and requirements of ERISA and
the regulations and published interpretations thereunder and the terms of each
Employee Benefit Plan, and have performed all their material obligations under
each Employee Benefit Plan.
B. No ERISA Event has occurred or is reasonably expected to occur
which could result in any material liability to Company or any of its ERISA
Affiliates.
C. Except to the extent required under Section 4980B of the Internal
Revenue Code, no Employee Benefit Plan provides health or welfare benefits
(through the purchase of insurance or otherwise) for any retired or former
employees of Company or any of its ERISA Affiliates.
D. In accordance with the most recent actuarial valuation for any
Pension Plan, the amount of unfunded benefit liabilities (as defined in Section
4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans
(excluding for purposes of such computation any Pension Plans with respect to
which assets exceed benefit liabilities), does not exceed $250,000.
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5.12 CERTAIN FEES.
------------
No broker's or finder's fee or commission will be payable with respect
to this Agreement or any of the transactions contemplated hereby, and each
Borrower hereby indemnifies Lenders against, and agrees that it will hold
Lenders harmless from, any claim, demand or liability for any such broker's or
finder's fees alleged to have been incurred in connection herewith or therewith
and any expenses (including reasonable fees, expenses and disbursements of
counsel) arising in connection with any such claim, demand or liability.
5.13 ENVIRONMENTAL PROTECTION.
------------------------
(i) The operations of Company and each of its Subsidiaries
(including, without limitation, all operations and conditions at or in the
Facilities) comply with all Environmental Laws except for any such
noncompliance which would not reasonably be expected to have a Material
Adverse Effect;
(ii) Company and each of its Subsidiaries have obtained all
Governmental Authorizations under Environmental Laws necessary to their
respective operations, and all such Governmental Authorizations are being
maintained in good standing, and Company and each of its Subsidiaries are
in compliance with such Governmental Authorizations except for any such
failure to obtain, maintain or comply which would not reasonably be
expected to have a Material Adverse Effect;
(iii) neither Company nor any of its Subsidiaries has received (a) any
notice or claim to the effect that it is or may be liable to any Person as
a result of or in connection with any Hazardous Materials or (b) any letter
or request for information under Section 104 of the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. (S)
9604) or comparable state laws, and, to the best of the Borrower's
knowledge, none of the operations of Company or any of its Subsidiaries is
the subject of any federal or state investigation relating to or in
connection with any Hazardous Materials at any Facility or at any other
location except for such of the foregoing which would not reasonably be
expected to have a Material Adverse Effect;
(iv) none of the operations of Company or any of its Subsidiaries is
subject to any judicial or administrative proceeding alleging the violation
of or liability under any Environmental Laws which if adversely determined
could reasonably be expected to have a Material Adverse Effect;
(v) neither Company nor any of its Subsidiaries nor any of their
respective Facilities or operations are subject to any outstanding written
order or agreement with any governmental authority or private party
relating to (a) any actual or potential violation of or liability under
Environmental Laws or (b) any Environmental Claims
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except for such of the foregoing which would not reasonably be expected to
have a Material Adverse Effect;
(vi) neither Company nor any of its Subsidiaries has any contingent
liability in connection with any Release of any Hazardous Materials by
Company or any of its Subsidiaries except for such of the foregoing which
would not reasonably be expected to have a Material Adverse Effect;
(vii) neither Company nor any of its Subsidiaries nor, to the best
knowledge of the Borrower, any predecessor of Company or any of its
Subsidiaries has filed any notice under any Environmental Law indicating
past or present treatment, storage or disposal of hazardous waste, as
defined under 40 C.F.R. Parts 260-270 or any state equivalent except for
such of the foregoing which would not reasonably be expected to have a
Material Adverse Effect;
(viii) no Hazardous Materials exist on, under or about any Facility in
a manner that would reasonably be expected to give rise to an Environmental
Claim having a Material Adverse Effect, and neither Company nor any of its
Subsidiaries has filed any notice or report of a Release of any Hazardous
Materials that would reasonably be expected to give rise to an
Environmental Claim having a Material Adverse Effect;
(ix) neither Company nor any of its Subsidiaries nor, to the best
knowledge of Company, any of their respective predecessors has disposed of
any Hazardous Materials in a manner that would reasonably be expected to
give rise to an Environmental Claim having a Material Adverse Effect;
(x) to the best knowledge of Company, no underground storage tanks
or surface impoundments are on or at any Facility that would reasonably be
expected to give rise to an Environmental Claim having a Material Adverse
Effect; and
(xi) no Lien in favor of any Person relating to or in connection
with any Environmental Claim has been filed or has been attached to any
Facility except for any such Lien which would not reasonably be expected to
have a Material Adverse Effect.
Notwithstanding anything in this subsection 5.13 to the contrary, no
event or condition has occurred with respect to the Loan Parties relating to any
Environmental Laws or any Release of Hazardous Materials at any Facility or any
other location which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect.
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5.14 EMPLOYEE MATTERS.
----------------
There is no strike or work stoppage in existence or threatened
involving Company or any of its Subsidiaries that could reasonably be expected
to have a Material Adverse Effect.
5.15 SOLVENCY.
--------
Company and each of its Subsidiaries is and, upon the incurrence of
any Obligations by any Borrower on any date on which this representation is
made, will be, Solvent.
5.16 DISCLOSURE.
----------
No representation or warranty of Company or any of its Subsidiaries
contained in any Loan Document or in any other document, certificate or written
statement furnished to Lenders by or on behalf of Company or any of its
Subsidiaries for use in connection with the transactions contemplated by this
Agreement contains any untrue statement of a material fact or omits to state a
material fact (known to any Borrower, in the case of any document not furnished
by it) necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances in which the same were made. Any
projections and pro forma financial information contained in such materials are
based upon good faith estimates and assumptions believed by the Borrower to be
reasonable at the time made, it being recognized by Lenders that such
projections as to future events are not to be viewed as facts and that actual
results during the period or periods covered by any such projections may differ
from the projected results. There are no facts known (or which should upon the
reasonable exercise of diligence be known) to the Borrower (other than matters
of a general economic nature) that, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect and that have not
been disclosed herein or in such other documents, certificates and statements
furnished to Lenders for use in connection with the transactions contemplated
hereby.
5.17 MATTERS RELATING TO COLLATERAL.
------------------------------
A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and
delivery of the Collateral Documents by Loan Parties, together with (i) the
actions taken on or prior to the date hereof pursuant to subsections 4.1G-I and
(ii) the delivery to Agent of any Pledged Collateral not delivered to Agent at
the time of execution and delivery of the applicable Collateral Document (all of
which Pledged Collateral has been so delivered) are effective to create in favor
of Agent for the benefit of Lenders, as security for the respective Secured
Obligations (as defined in the applicable Collateral Document in respect of any
Collateral), a valid and perfected First Priority Lien on all of the Collateral,
and all filings and other actions necessary or desirable to perfect and maintain
the perfection and First Priority status of such
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Liens have been duly made or taken and remain in full force and effect, other
than the filing of any UCC or PPSA financing statements delivered to Agent for
filing (but not yet filed) and the periodic filing of UCC or PPSA continuation
statements in respect of UCC or PPSA financing statements filed by or on behalf
of Agent.
B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required for either (i) the pledge or grant by any Loan Party
of the Liens purported to be created in favor of Agent pursuant to any of the
Collateral Documents or (ii) the exercise by Agent of any rights or remedies in
respect of any Collateral (whether specifically granted or created pursuant to
any of the Collateral Documents or created or provided for by applicable law),
except for filings or recordings contemplated by subsection 5.17A and except as
may be required, in connection with the disposition of any Pledged Collateral,
by laws generally affecting the offering and sale of securities.
C. ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been filed in
favor of Agent as contemplated by subsection 5.17A and as set forth on Schedule
--------
7.2 annexed hereto, (i) no effective UCC or PPSA financing statement, fixture
- ---
filing or other instrument similar in effect covering all or any part of the
Collateral is on file in any filing or recording office and (ii) no effective
filing covering all or any part of the IP Collateral is on file in the PTO.
D. MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to
the Collateral Documents does not violate Regulation T, U or X of the Board of
Governors of the Federal Reserve System.
E. INFORMATION REGARDING COLLATERAL. All information supplied to Agent
by or on behalf of any Loan Party with respect to any of the Collateral (in each
case taken as a whole with respect to any particular Collateral) is accurate and
complete in all material respects.
[5.18 YEAR 2000 COMPLIANCE.
--------------------
On the basis of a comprehensive review and assessment of the systems
and equipment of Company and its Subsidiaries and inquiry made of their material
suppliers, vendors and customers, Company's management is of the view that the
"Year 2000 problem" (that is, the inability of computers, as well as embedded
microchips in non-computing devices, to perform properly date-sensitive
functions with respect to certain dates prior to and after December 31, 1999),
including costs of remediation, will not result in a Material Adverse Effect in
the operations, business, properties, condition (financial or otherwise) or
prospects of Company or its Subsidiaries. Company has developed feasible
contingency plans that adequately ensure uninterrupted and unimpaired business
operation in the event of failure of its own or a third party's systems or
equipment due to the Year 2000 problem, including those of
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vendors, customers, and suppliers, as well as a general failure of or
interruption in its communications and delivery infrastructure.]
5.19 WATER AVAILABILITY.
------------------
Sufficient water is available and is projected to be available, from
verifiable surface and ground water sources sufficient to conduct operations as
described in the most recent financial plan submitted by the Company to Agent.
SECTION 6. BORROWERS' AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that, so long as any of the
Commitments hereunder shall remain in effect and until payment in full of all of
the Loans and other Obligations and the cancellation or expiration of all
Letters of Credit, unless Requisite Lenders shall otherwise give prior written
consent, such Borrower shall perform, and shall cause each of its Subsidiaries
to perform, all covenants in this Section 6.
6.1 FINANCIAL STATEMENTS AND OTHER REPORTS.
--------------------------------------
Each Borrower will maintain, and cause each of its Subsidiaries to
maintain, a system of accounting established and administered in accordance with
sound business practices to permit preparation of financial statements in
conformity with GAAP. Company will deliver to Agent and Lenders:
(i) Monthly Financials: as soon as available and in any event within
------------------
30 days after the end of each month ending after the Closing Date, (a) the
consolidated and consolidating balance sheets of Company and its
Subsidiaries and of Canadian Borrowers and their Subsidiaries as at the end
of such month and the related consolidated and consolidating statements of
income, stockholders' equity and cash flows of Company and its Subsidiaries
and of Canadian Borrowers and their Subsidiaries for such month and for the
period from the beginning of the then current Fiscal Year to the end of
such month, setting forth in each case in comparative form the
corresponding figures for the corresponding periods of the previous Fiscal
Year and the corresponding figures from the Financial Plan for the current
Fiscal Year, to the extent prepared on a monthly basis, all in reasonable
detail and certified by the chief financial officer of Company that they
fairly present, in all material respects, the financial condition of
Company and its Subsidiaries and of Canadian Borrowers and their
Subsidiaries as at the dates indicated and the results of their operations
and their cash flows for the periods indicated, subject to changes
resulting from audit and normal year-end adjustments, and (b) a narrative
report describing the operations of Company and its Subsidiaries and of
Canadian Borrowers and their Subsidiaries in the form prepared for
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presentation to senior management for such month and for the period from
the beginning of the then current Fiscal Year to the end of such month;
(ii) Quarterly Financials: as soon as available and in any event
--------------------
within 45 days after the end of each Fiscal Quarter, (a) the consolidated
and consolidating balance sheets of Company and its Subsidiaries and of
Canadian Borrowers and their Subsidiaries as at the end of such Fiscal
Quarter and the related consolidated and consolidating statements of
income, stockholders' equity and cash flows of Company and its Subsidiaries
and of Canadian Borrowers and their Subsidiaries for such Fiscal Quarter
and for the period from the beginning of the then current Fiscal Year to
the end of such Fiscal Quarter, setting forth in each case in comparative
form the corresponding figures for the corresponding periods of the
previous Fiscal Year and the corresponding figures from the Financial Plan
for the current Fiscal Year, all in reasonable detail and certified by the
chief financial officer of Company that they fairly present, in all
material respects, the financial condition of Company and its Subsidiaries
and of Canadian Borrowers and their Subsidiaries as at the dates indicated
and the results of their operations and their cash flows for the periods
indicated, subject to changes resulting from audit and normal year-end
adjustments, and (b) a narrative report describing the operations of
Company and its Subsidiaries and of Canadian Borrowers and their
Subsidiaries in the form prepared for presentation to senior management for
such Fiscal Quarter and for the period from the beginning of the then
current Fiscal Year to the end of such Fiscal Quarter;
(iii) Year-End Financials: as soon as available and in any event
-------------------
within 90 days after the end of each Fiscal Year, (a) the consolidated and
consolidating balance sheets of Company and its Subsidiaries and of
Canadian Borrowers and their Subsidiaries as at the end of such Fiscal Year
and the related consolidated and consolidating statements of income,
stockholders' equity and cash flows of Company and its Subsidiaries and of
Canadian Borrowers and their Subsidiaries for such Fiscal Year, setting
forth in each case in comparative form the corresponding figures for the
previous Fiscal Year and the corresponding figures from the Financial Plan
for the Fiscal Year covered by such financial statements, all in reasonable
detail and certified by the chief financial officer of Company that they
fairly present, in all material respects, the financial condition of
Company and its Subsidiaries and of Canadian Borrowers and their
Subsidiaries as at the dates indicated and the results of their operations
and their cash flows for the periods indicated, (b) a narrative report
describing the operations of Company and its Subsidiaries and of Canadian
Borrowers and their Subsidiaries in the form prepared for presentation to
senior management for such Fiscal Year, and (c) in the case of such
consolidated financial statements of Company and its Subsidiaries, (1) a
report thereon of a nationally recognized independent accounting firm,
which report shall be unqualified as to the scope of the audit, shall
express no doubts about the ability of Company and its Subsidiaries to
continue as a going concern, and shall state that such consolidated
financial statements
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fairly present, in all material respects, the consolidated financial
position of Company and its Subsidiaries as at the dates indicated and the
results of their operations and their cash flows for the periods indicated
in conformity with GAAP applied on a basis consistent with prior years
(except as otherwise disclosed in such financial statements) and that the
examination by such accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards and (2) a letter from such accounting firm,
substantially in the form of Exhibit X annexed hereto with such changes as
---------
are approved by Agent, acknowledging that Lenders will receive such
consolidated financial statements in such report and will use such
financial statements and report in their credit analyses of Company and its
Subsidiaries;
(iv) Officers' and Compliance Certificates: together with each
-------------------------------------
delivery of financial statements of Company and its Subsidiaries pursuant
to subdivisions (ii) and (iii) above, (a) an Officers' Certificate of
Company stating that the signers have reviewed the terms of this Agreement
and have made, or caused to be made under their supervision, a review in
reasonable detail of the transactions and condition of Company and its
Subsidiaries during the accounting period covered by such financial
statements and that such review has not disclosed the existence during or
at the end of such accounting period, and that the signers do not have
knowledge of the existence as at the date of such Officers' Certificate, of
any condition or event that constitutes an Event of Default or Potential
Event of Default, or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action
Borrower has taken, is taking and proposes to take with respect thereto;
and (b) a Compliance Certificate demonstrating in reasonable detail
compliance during and at the end of the applicable accounting periods with
the restrictions contained in Section 7 and calculating the Consolidated
Leverage Ratio as of the last day such immediately preceding Fiscal Quarter
for purposes of determining the Applicable Base Rate Margin and the
Applicable Eurodollar Rate Margin;
(v) Reconciliation Statements: if, as a result of any change in
-------------------------
accounting principles and policies from those in effect on the Closing
date, the consolidated financial statements of Company and its Subsidiaries
delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this
subsection 6.1 will differ in any material respect from the consolidated
financial statements that would have been delivered pursuant to such
subdivisions had no such change in accounting principles and policies been
made, then (a) together with the first delivery of financial statements
pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1
following such change, consolidated financial statements of Company and its
Subsidiaries for (y) the current Fiscal Year to the effective date of such
change and (z) the two full Fiscal Years immediately preceding the Fiscal
Year in which such change is made, in each case prepared on a pro forma
basis as if such change had been in effect during such periods, and (b)
together with each delivery of financial statements pursuant to subdivision
(i), (ii), (iii) or (xiii) of
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this subsection 6.1 following such change, a written statement of the chief
accounting officer or chief financial officer of Company setting forth the
differences (including without limitation any differences that would affect
any calculations relating to the financial covenants set forth in
subsection 7.6) which would have resulted if such financial statements had
been prepared without giving effect to such change;
(vi) Accountants' Certification: together with each delivery of
--------------------------
consolidated financial statements of Company and its Subsidiaries pursuant
to subdivision (iii) above, a written statement by the independent
certified public accountants giving the report thereon (a) stating that
their audit examination has included a review of the terms of this
Agreement and the other Loan Documents as they relate to accounting
matters, (b) stating whether, in connection with their audit examination,
any condition or event that constitutes an Event of Default or Potential
Event of Default has come to their attention and, if such a condition or
event has come to their attention, specifying the nature and period of
existence thereof; provided that such accountants shall not be liable by
--------
reason of any failure to obtain knowledge of any such Event of Default or
Potential Event of Default that would not be disclosed in the course of
their audit examination, and (c) stating that based on their audit
examination nothing has come to their attention that causes them to believe
either or both that the information contained in the certificates delivered
therewith pursuant to subdivision (iv) above is not correct or that the
matters set forth in the Compliance Certificates delivered therewith
pursuant to clause (b) of subdivision (iv) above for the applicable Fiscal
Year are not stated in accordance with the terms of this Agreement;
(vii) Accountants' Reports: promptly upon receipt thereof, copies of
--------------------
all reports submitted to Company by independent certified public
accountants in connection with each annual, interim or special audit of the
financial statements of Company and its Subsidiaries made by such
accountants, including, without limitation, any comment letter submitted by
such accountants to management in connection with their annual audit;
(viii) SEC Filings and Press Releases: promptly upon their becoming
------------------------------
available, copies of (a) all financial statements, reports, notices and
proxy statements sent or made available generally by Company to its
security holders or by any Subsidiary of Company to its security holders
other than Company or another Subsidiary of Company, (b) all regular and
periodic reports and all registration statements (other than on Form S-8 or
a similar form) and prospectuses, if any, filed by Company or any of its
Subsidiaries with any securities exchange or with the Securities and
Exchange Commission or any governmental or private regulatory authority,
and (c) all press releases and other statements made available generally by
Company or any of its Subsidiaries to the public concerning material
developments in the business of Company or any of its Subsidiaries;
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(ix) Events of Default, etc.: promptly upon any officer of any
-----------------------
Borrower obtaining knowledge (a) of any condition or event that constitutes
an Event of Default or Potential Event of Default, or becoming aware that
any Lender has given any notice (other than to Agent) or taken any other
action with respect to a claimed Event of Default or Potential Event of
Default, (b) that any Person has given any notice to Company or any
of its Subsidiaries or taken any other action with respect to a claimed
default or event or condition of the type referred to in subsection 8.2,
(c) of any condition or event that would be required to be disclosed in a
current report filed by Company with the Securities and Exchange Commission
on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date
hereof) if Company were required to file such reports under the Exchange
Act, and (d) of the occurrence of any event or change that has caused or
evidences, either in any case or in the aggregate, a Material Adverse
Effect, an Officers' Certificate specifying the nature and period of
existence of such condition, event or change, or specifying the notice
given or action taken by any such Person and the nature of such claimed
Event of Default, Potential Event of Default, default, event or condition,
and what action Borrower has taken, is taking and proposes to take with
respect thereto;
(x) Litigation or Other Proceedings: (a) promptly upon any officer
-------------------------------
of any Borrower obtaining knowledge of (X) the institution of, or non-
frivolous threat of, any action, suit, proceeding (whether administrative,
judicial or otherwise), governmental investigation or arbitration against
or affecting Company or any of its Subsidiaries or any property of Company
or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously
disclosed in writing by Company to Lenders or (Y) any material development
in any Proceeding that, in any case:
(1) if adversely determined, has a reasonable possibility of
giving rise to a Material Adverse Effect; or
(2) seeks to enjoin or otherwise prevent the consummation of, or
to recover any damages or obtain relief as a result of, the
transactions contemplated hereby;
written notice thereof together with such other information as may be
reasonably available to any Borrower to enable Lenders and their counsel to
evaluate such matters; and (b) within twenty days after the end of each
Fiscal Quarter, a schedule of all Proceedings involving an alleged
liability of, or claims against or affecting, Company or any of its
Subsidiaries equal to or greater than $500,000, and promptly after request
by Agent such other information as may be reasonably requested by Agent to
enable Agent and its counsel to evaluate any of such Proceedings;
(xi) ERISA Events: promptly upon becoming aware of the occurrence of
------------
or forthcoming occurrence of any ERISA Event, a written notice specifying
the nature
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thereof, what action Company or any of its ERISA Affiliates has taken, is
taking or proposes to take with respect thereto and, when known, any action
taken or threatened by the Internal Revenue Service, the Department of
Labor or the PBGC with respect thereto;
(xii) ERISA Notices: with reasonable promptness, copies of (a) each
-------------
Schedule B (Actuarial Information) to the annual report (Form 5500 Series)
----------
filed by Company or any of its ERISA Affiliates with the Internal Revenue
Service with respect to each Pension Plan; (b) all notices received by
Company or any of its ERISA Affiliates from a Multiemployer Plan sponsor
concerning an ERISA Event; and (c) such other documents or governmental
reports or filings relating to any Employee Benefit Plan as Agent shall
reasonably request;
(xiv) Financial Plans: as soon as practicable and in any event no
---------------
later than 30 days after the beginning of each Fiscal Year, a consolidated
and consolidating plan and financial forecast for such Fiscal Year (the
"FINANCIAL PLAN" for such Fiscal Year) and a consolidated and consolidating
plan and financial forecast for each succeeding Fiscal Year through the
term of this Agreement, including without limitation (a) a forecasted
consolidated and consolidating balance sheet and forecasted consolidated
and consolidating statements of income and cash flows of Company and its
Subsidiaries for such Fiscal Years, together with a pro forma Compliance
--- -----
Certificate for such Fiscal Years and an explanation of the assumptions on
which such forecasts are based, and (b) forecasted consolidated and
consolidating statements of income and cash flows of Company and its
Subsidiaries for each month of the first such Fiscal Year, together with an
explanation of the assumptions on which such forecasts are based;
(xiv) Insurance: as soon as practicable and in any event by the last
---------
day of each Fiscal Year, a report in form and substance satisfactory to
Agent outlining all material insurance coverage maintained as of the date
of such report by Company and its Subsidiaries including without limitation
directors and officers insurance and all material insurance coverage
planned to be maintained by Company and its Subsidiaries in the immediately
succeeding Fiscal Year and confirming the status of Agent as loss payee
under all such insurance to the extent required by subsection 6.4;
(xv) Environmental Audits and Reports: as soon as practicable
--------------------------------
following receipt thereof, copies of all environmental audits and reports,
whether prepared by personnel of Company or any of its Subsidiaries or by
independent consultants, with respect to significant environmental matters
at any Facility or which relate to an Environmental Claim in either case
which could reasonably be expected to result in a Material Adverse Effect;
(xvi) Board of Directors: with reasonable promptness, written notice
------------------
of any change in the Board of Directors of Company;
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(xvii) New Subsidiaries: promptly upon any Person becoming a
----------------
Subsidiary of Company, a written notice setting forth with respect to such
Person (a) the date on which such Person became a Subsidiary of Company and
(b) all of the data required to be set forth in Schedule 5.1 annexed hereto
------------
with respect to all Subsidiaries of Company (it being understood that such
written notice shall be deemed to supplement Schedule 5.1 annexed hereto
------------
for all purposes of this Agreement);
(xviii) Material Contracts: promptly, and in any event within 10
------------------
Business Days after any Material Contract of any Borrower or any of its
Subsidiaries is terminated or amended in a manner that is materially
adverse to Borrower or such Subsidiary, as the case may be, or any new
Material Contract is entered into, a written statement describing such
event with copies of such material amendments or new contracts, and an
explanation of any actions being taken with respect thereto; and
(xix) UCC Search Report: As promptly as practicable after the date
-----------------
of delivery to Agent of any UCC (or PPSA) financing statement executed by
any Loan Party pursuant to subsection 4.1I(iv), copies of completed UCC (or
PPSA) searches evidencing the proper filing, recording and indexing of all
such UCC (or PPSA) financing statement and listing all other effective
financing statements that name such Loan Party as debtor, together with
copies of all such other financing statements not previously delivered to
Agent by or on behalf of Company or such Loan Party; and
(xx) Other Information: with reasonable promptness, such other
-----------------
information and data with respect to Company or any of its Subsidiaries as
from time to time may be reasonably requested by any Lender, [including
without limitation a copy of Company's plan, timetable and budget to
address the Year 2000 problem, together with quarterly updates thereof, as
well as expenses incurred to date, any third party assessment of Company's
Year 2000 remediation efforts, and any year 2000 contingency plans] and, at
such times as Agent may request, to deliver to Agent a certificate stating
that the amount of water available and projected to be available is
sufficient to conduct operations as described in the Company's most recent
financial plan submitted by the Company to Agent.
6.2 CORPORATE EXISTENCE, ETC.
-------------------------
Except as permitted under subsection 7.7, each Borrower will, and will
cause each of its Subsidiaries to, at all times preserve and keep in full force
and effect its corporate existence and all rights and franchises material to its
business.
6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION.
----------------------------------------------
A. Each Borrower will, and will cause each of its Subsidiaries to,
pay all taxes, assessments and other governmental charges imposed upon it or any
of its properties or
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assets or in respect of any of its income, businesses or franchises before any
penalty accrues thereon, and all claims (including, without limitation, claims
for labor, services, materials and supplies) for sums that have become due and
payable and that by law have or may become a Lien upon any of its properties or
assets, prior to the time when any material penalty or fine shall be incurred
with respect thereto; provided that no such charge or claim need be paid if
--------
being contested in good faith by appropriate proceedings promptly instituted and
diligently conducted and if such reserve or other appropriate provision, if any,
as shall be required in conformity with GAAP shall have been made therefor.
B. None of the Borrowers will and will not permit any of its
Subsidiaries to, file or consent to the filing of any consolidated income tax
return with any Person (other than Company or any of its Subsidiaries).
6.4 MAINTENANCE OF PROPERTIES; INSURANCE.
------------------------------------
Each Borrower will, and will cause each of its Subsidiaries to,
maintain or cause to be maintained in good repair, working order and condition,
ordinary wear and tear excepted, all of their respective material properties
used or useful in the business of Company and its Subsidiaries (including,
without limitation, Intellectual Property) and from time to time will make or
cause to be made all appropriate repairs, renewals and replacements thereof.
Each Borrower will maintain or cause to be maintained, with financially sound
and reputable insurers, insurance with respect to its properties and business
and the properties and businesses of its Subsidiaries against loss or damage of
the kinds customarily carried or maintained under similar circumstances by
corporations of established reputation engaged in similar businesses. Without
limiting the generality of the foregoing, each Borrower will maintain or cause
to be maintained (i) flood insurance with respect to each Additional Flood
Hazard Property (as defined in subsection 6.10A), in each case to the extent
such Initial Flood Hazard Property or Additional Flood Hazard Property is
located in a community that participates in the National Flood Insurance Program
and (ii) public liability insurance, third party property damage insurance and
replacement value insurance on the Collateral (other than growing crops) under
such policies of insurance, with such insurance companies, in such amounts and
covering such risks as are at all times satisfactory to Agent in its
commercially reasonable judgment. Each such policy of insurance that insures
against loss or damage with respect to any Collateral or against losses due to
business interruption shall name Agent for the benefit of Lenders as the loss
payee thereunder for any covered loss in excess of $500,000 and shall provide
for at least 30 days (15 days in the event of non-payment of premium) prior
written notice to Agent of any modification or cancellation of such policy.
Upon receipt by Agent of any insurance proceeds as loss payee (i) in respect of
any such business interruption insurance, (a) Agent shall, so long as no Event
of Default or Potential Event of Default shall have occurred and be continuing,
deliver such insurance proceeds to Company, and (b) if an Event of Default or
Potential Event of Default shall have occurred and be continuing, Agent shall,
and each Borrower hereby authorizes Agent to, apply such Net
Insurance/Condemnation Proceeds to prepay the Loans as provided in subsection
2.4B(iii)(b) and (ii) in respect of any such insurance against loss or
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damage with respect to any Collateral, (a) to the extent that any Borrower or
any of its Subsidiaries intends to use any such insurance proceeds to repair,
restore or replace the assets of such Borrower or Subsidiary in respect of which
such insurance proceeds were received, Agent shall, so long as no Event of
Default or Potential Event of Default shall have occurred and be continuing, (A)
in the event the aggregate amount of such insurance proceeds in respect of any
covered loss does not exceed $1,000,000, deliver such insurance proceeds to such
Borrower, and such Borrower shall, or shall cause such Subsidiary to, use such
insurance proceeds to effect such repair, restoration or replacement, and (B) in
the event the aggregate amount of such insurance proceeds exceeds $1,000,000,
hold such proceeds in a cash collateral account and so long as Company or any of
its Subsidiaries proceeds to repair, restore or replace the assets of Company or
such Subsidiary in respect of which such insurance proceeds were received, Agent
shall from time to time disburse to Company or such Subsidiary amounts necessary
to pay the cost of such repair, restoration or replacement after the receipt by
Agent of invoices or other documentation reasonably satisfactory to Agent
describing the amount of costs so incurred; provided however that if in the
-------- -------
reasonable good faith belief of Agent, Company or such Subsidiary is not
proceeding diligently with the repair, restoration or replacement, Agent shall,
and each Borrower hereby authorizes Agent to, apply such Net
Insurance/Condemnation Proceeds to prepay the Loans as provided in subsection
2.4B(iii)(b) and (b) if an Event of Default or Potential Event of Default shall
have occurred and be continuing or to the extent that neither Company nor any of
its Subsidiaries intends to use any such insurance proceeds to repair, restore
or replace assets of Company or any of its Subsidiaries as described above,
Agent shall, and each Borrower hereby authorizes Agent to, apply such Net
Insurance/Condemnation Proceeds to prepay the Loans as provided in subsection
2.4B(iii)(b).
6.5 INSPECTION; LENDER MEETING.
--------------------------
Each Borrower shall, and shall cause each of its Subsidiaries to,
permit any authorized representatives designated by any Lender to visit and
inspect any of the properties of Company or any of its Subsidiaries, including
its and their financial and accounting records, and to make copies and take
extracts therefrom, and to discuss its and their affairs, finances and accounts
with its and their officers and independent public accountants (provided that
Company may, if it so chooses, be present at or participate in any such
discussion). Without in any way limiting the foregoing, Company will, upon the
request of Agent or Requisite Lenders, participate in a meeting of Agent and
Lenders once during each Fiscal Year to be held at Company's corporate offices
(or such other location as may be agreed to by Company and Agent) at such time
as may be agreed to by Company and Agent.
6.6 COMPLIANCE WITH LAWS, ETC.
--------------------------
Each Borrower shall, and shall cause each of its Subsidiaries to,
comply with the requirements of all applicable laws, rules, regulations and
orders of any governmental
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authority, noncompliance with which could reasonably be expected to cause,
individually or in the aggregate at any time, a Material Adverse Effect.
6.7 ENVIRONMENTAL DISCLOSURE AND INSPECTION.
---------------------------------------
A. Each Borrower shall, and shall cause each of its Subsidiaries to,
exercise all due diligence in order to comply in all material respects and cause
(i) all tenants under any leases or occupancy agreements affecting any portion
of the Facilities and (ii) all other Persons on or occupying such property, to
comply in all material respects with all Environmental Laws.
B. Each Borrower agrees that Agent may, from time to time and in its
reasonable discretion, retain, at Company's expense, an independent professional
consultant to review any report relating to Hazardous Materials prepared by or
for Company and, upon a reasonable belief that any Borrower has breached any
covenant or representation with respect to environmental matters or that there
has been a material violation of Environmental Laws at any Facility or by any
Borrower, to conduct its own reasonable investigation of such matter at any
Facility currently owned, leased, operated or used by Company or any of its
Subsidiaries, and Company agrees to use its best efforts to obtain permission
for Agent's professional consultant to conduct its own investigation of any such
matter at any Facility previously owned, leased, operated or used by Company or
any of its Subsidiaries. Company hereby grants to Agent and its agents,
employees, consultants and contractors the right to enter into or on to the
Facilities currently owned, leased, operated or used by Company or any of its
Subsidiaries upon reasonable notice to Borrower to perform such assessments on
such property as are reasonably necessary to conduct such a review and/or
investigation. Any such investigation of any Facility shall be conducted,
unless otherwise agreed to by Company and Agent, during normal business hours
and, to the extent reasonably practicable, shall be conducted so as not to
interfere with the ongoing operations at any such Facility or to cause any
damage or loss to any property at such Facility. Borrower and Agent hereby
acknowledge and agree that any report of any investigation conducted at the
request of Agent pursuant to this subsection 6.7B will be obtained and shall be
used by Agent and Lenders for the purposes of Lenders' internal credit
decisions, to monitor and police the Loans and to protect Lenders' security
interests, if any, created by the Loan Documents. Agent agrees to deliver a
copy of any such report to Company with the understanding that each Borrower
acknowledges and agrees that (i) it will indemnify and hold harmless Agent and
each Lender from any costs, losses or liabilities relating to such Borrower's
use of or reliance on such report, (ii) neither Agent nor any Lender makes any
representation or warranty with respect to such report, and (iii) by delivering
such report to Company, neither Agent nor any Lender is requiring or
recommending the implementation of any suggestions or recommendations contained
in such report.
C. Each Borrower shall promptly advise Lenders in writing and in
reasonable detail of (i) any material Release of any Hazardous Materials
required to be reported to any federal, state or local governmental or
regulatory agency under any applicable Environmental Laws, (ii) any and all
written communications with respect to any Environmental Claims that have a
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reasonable possibility of giving rise to a Material Adverse Effect or with
respect to any material Release of Hazardous Materials required to be reported
to any federal, state or local governmental or regulatory agency, (iii) any
remedial action taken by such Borrower or any other Person in response to (x)
any Hazardous Materials on, under or about any Facility, the existence of which
has a reasonable possibility of resulting in an Environmental Claim having a
Material Adverse Effect, or (y) any Environmental Claim that could have a
Material Adverse Effect, (iv) such Borrower's discovery of any occurrence or
condition on any real property adjoining or in the vicinity of any Facility that
could cause such Facility or any part thereof to be subject to any material
restrictions on the ownership, occupancy, transferability or use thereof under
any Environmental Laws, and (v) any request for information from any
governmental agency that suggests such agency is investigating whether such
Borrower or any of its Subsidiaries may be potentially responsible for a Release
of Hazardous Materials.
D. Each Borrower shall promptly notify Lenders of (i) any proposed
acquisition of stock, assets, or property by Company or any of its Subsidiaries
that could reasonably be expected to expose Company or any of its Subsidiaries
to, or result in, Environmental Claims that could reasonably be expected to have
a Material Adverse Effect or that could reasonably be expected to have a
material adverse effect on any Governmental Authorization then held by Company
or any of its Subsidiaries and (ii) any proposed action to be taken by Company
or any of its Subsidiaries to commence manufacturing, industrial or other
operations that could reasonably be expected to subject Company or any of its
Subsidiaries to material additional obligations or requirements under
Environmental Laws.
E. Each Borrower shall, at its own expense, provide copies of such
documents or information as Agent may reasonably request in relation to any
matters disclosed pursuant to this subsection 6.7.
6.8 COMPANY'S REMEDIAL ACTION REGARDING HAZARDOUS MATERIALS.
-------------------------------------------------------
Company shall promptly take, and shall cause each of its Subsidiaries
promptly to take, any and all remedial action in connection with the presence,
storage, use, disposal, transportation or Release of any Hazardous Materials on,
under or about any Facility in order to comply in all material respects with all
applicable Environmental Laws and Governmental Authorizations. In the event
Company or any of its Subsidiaries undertakes any remedial action with respect
to any Hazardous Materials on, under or about any Facility, Company or such
Subsidiary shall conduct and complete such remedial action in compliance in all
material respects with all applicable Environmental Laws, and in accordance with
the policies, orders and directives of all federal, state and local governmental
authorities except when, and only to the extent that, Company's or such
Subsidiary's liability for such presence, storage, use, disposal, transportation
or discharge of any Hazardous Materials is being contested in good faith by
Company or such Subsidiary.
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6.9 EXECUTION OF GUARANTIES AND COLLATERAL DOCUMENTS BY FUTURE SUBSIDIARIES.
-----------------------------------------------------------------------
A. EXECUTION OF DOMESTIC SUBSIDIARY GUARANTY AND COLLATERAL
DOCUMENTS. In the event that any Person becomes a Domestic Subsidiary of Company
after the date hereof, Company will promptly notify Agent of that fact and cause
such Subsidiary to execute and deliver to Agent a counterpart of the Domestic
Subsidiary Guaranty and a Domestic Subsidiary Pledge Agreement, a Domestic
Subsidiary Security Agreement, a Domestic Subsidiary Trademark Security
Agreement (if required by Agent), a Domestic Subsidiary Patent Security
Agreement (if required by Agent) and (if applicable) Additional Mortgages and to
take all such further action and execute all such further documents and
instruments as may be reasonably required to grant and perfect in favor of
Agent, for the benefit of Lenders, a first-priority security interest in all of
the shares of capital stock of such Subsidiary and all of the Real Property
Assets and all of the personal property assets of such Subsidiary described in
the applicable Collateral Documents.
B. EXECUTION OF CANADIAN SUBSIDIARY GUARANTY AND COLLATERAL
DOCUMENTS. In the event that any Person becomes a Canadian Subsidiary of Company
after the date hereof, Company will promptly notify Agent of that fact and cause
such Subsidiary to execute and deliver to Agent a counterpart of the Canadian
Subsidiary Guaranty and a Canadian Subsidiary Pledge Agreement, a Canadian
Subsidiary Security Agreement, a Canadian Subsidiary Trademark Security
Agreement, a Canadian Subsidiary Patent Security Agreement and (if applicable)
Additional Mortgages and to take all such further action and execute all such
further documents and instruments as may be reasonably required to grant and
perfect in favor of Agent, for the benefit of Lenders, a first-priority security
interest in all (if such Canadian Subsidiary is owned by a Canadian Subsidiary)
or not less than two-thirds (if such Canadian Subsidiary is owned by a Domestic
Subsidiary) of the shares of capital stock of such Subsidiary and all of the
Real Property Assets and all of the personal property assets of such Subsidiary
described in the applicable Collateral Documents. After the Closing Date, any
Canadian Subsidiary acquired by Company shall be a direct Subsidiary of Company
or a Domestic Subsidiary.
C. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company shall
deliver to Agent, together with the applicable Guaranty and such Collateral
Documents, (i) certified copies of such Subsidiary's Articles or Certificate of
Incorporation, together with a good standing certificate from the Secretary of
State of the jurisdiction of its incorporation, each to be dated a recent date
prior to their delivery to Agent, (ii) a copy of such Subsidiary's Bylaws,
certified by its corporate secretary or an assistant corporate secretary as of a
recent date prior to their delivery to Agent, (iii) a certificate executed by
the secretary or an assistant secretary of such Subsidiary as to (a) the
incumbency and signatures of the officers of such Subsidiary executing such
Guaranty and the Collateral Documents to which such Subsidiary is a party and
(b) the fact that the attached resolutions of the Board of Directors of such
Subsidiary authorizing the execution, delivery and performance of such Guaranty
and such Collateral Documents are in full force and effect and have not been
modified or rescinded, and
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(iv) a favorable opinion of counsel to such Subsidiary, in form and substance
satisfactory to Agent and its counsel, as to (a) the due organization and good
standing of such Subsidiary, (b) the due authorization, execution and delivery
by such Subsidiary of such Guaranty and such Collateral Documents, (c) the
enforceability of such Guaranty and such Collateral Documents against such
Subsidiary, and (d) such other matters as Agent may reasonably request, all of
the foregoing to be satisfactory in form and substance to Agent and its counsel.
6.10 ADDITIONAL MORTGAGES.
--------------------
A. From and after the Closing Date, in the event that (i) any
Borrower or any of its Subsidiaries acquires any Fee Property or any Material
Leasehold (each a "COVERED REAL PROPERTY ASSET") or (ii) at the time any Person
becomes a Subsidiary of any Borrower, such Person owns or holds any Covered Real
Property Asset, such Borrower or such Subsidiary shall, as soon as practicable
after the acquisition of such Covered Real Property Asset or such Person's
becoming a Subsidiary of any Borrower, as the case may be, deliver (a) fully
executed counterparts of Mortgages (each an "ADDITIONAL MORTGAGE" and
collectively, the "ADDITIONAL MORTGAGES") encumbering such Covered Real Property
Asset, together with evidence that counterparts of such Additional Mortgages
have been recorded in all places to the extent necessary or desirable, in the
reasonable judgment of Agent, so as to effectively create a valid and
enforceable first priority lien (or such other priority lien as may be specified
in the applicable Additional Mortgage), subject to Permitted Encumbrances, on
such Covered Real Property Asset in favor of Agent (or such other trustee as may
be required or desired under local law) for the benefit of Lenders; (b) a title
report obtained by Company in respect of any such Covered Real Property Asset
located in the United States (a "U.S. COVERED REAL PROPERTY ASSET"); (c) with
respect to U.S. Covered Real Property Assets only, if required by Agent, an
opinion of counsel (which counsel shall be reasonably satisfactory to Agent) in
the state in which such U.S. Covered Real Property Asset is located with respect
to the enforceability of the form of Additional Mortgage recorded in such state
and such other matters as Agent may reasonably request, in form and substance
reasonably satisfactory to Agent; (d) in the case of each such Covered Real
Property Asset consisting of a Material Leasehold, Borrower or its Subsidiary
shall use reasonable best efforts to obtain such estoppel letters from the
landlord on such Material Leasehold as may be reasonably requested by Agent, in
form and substance reasonably satisfactory to Agent; (e) unless waived by Agent,
in the case of each such Covered Real Property Asset consisting of a Fee
Property or a Material Leasehold, environmental audits prepared by professional
consultants mutually acceptable to Company and Agent, in form, scope and
substance satisfactory to Agent in its reasonable discretion; (f) with respect
to U.S. Covered Real Property Assets only, if required by Agent, in the case of
each such U.S. Covered Real Property Asset consisting of a Fee Property or a
Material Leasehold, a Title Policy; (g) with respect to U.S. Covered Real
Property Assets only, evidence, which may be in the form of a letter from an
insurance broker, a municipal engineer, title company or national flood
certification form, as to whether (1) such U.S. Covered Real Property Asset (an
"ADDITIONAL FLOOD HAZARD PROPERTY") is in an area designated by the Federal
Emergency Management Agency as having special flood or mud
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slide hazards and (2) the community in which such U.S. Covered Real Property
Asset (if it is an Additional Flood Hazard Property) is located is participating
in the National Flood Insurance Program; and (h) if such U.S. Covered Real
Property Asset is an Additional Flood Hazard Property, Company's written
acknowledgement of receipt of written notification from Agent (1) as to the
existence of such Additional Flood Hazard Property and (2) as to whether the
community in which such Flood Hazard Property is located is participating in the
National Flood Insurance Program.
B. Each Borrower shall, and shall cause each of its Subsidiaries
to, permit any authorized representatives designated by Agent, upon reasonable
notice, to visit and inspect any Covered Real Property Asset for the purpose of
obtaining an appraisal of value, conducted by consultants retained by Agent in
compliance with all applicable banking regulations, with respect to such Covered
Real Property Asset.
6.11 ASSIGNABILITY AND RECORDING OF LEASE AGREEMENTS.
-----------------------------------------------
From and after the Closing Date, in the event that any Borrower or
any of its Subsidiaries enters into any lease that is a Material Leasehold, such
Borrower shall, or shall cause such Subsidiary to, (i) obtain lease terms
permitting (or not expressly prohibiting) the encumbrancing of such Material
Leasehold pursuant to an Additional Mortgage and the assignment of such Material
Leasehold interest to the successful bidder at a foreclosure or similar sale
(and to a subsequent third party assignee by Agent or any Lender to the extent
Agent or such Lender is the successful bidder at such sale) in the event of a
foreclosure or similar action pursuant to such Additional Mortgage and (ii)
cause a memorandum of lease with respect thereto, or other evidence of such
lease in form and substance reasonably satisfactory to Agent, to be recorded in
all places to the extent necessary or desirable, in the reasonable judgment of
Agent, so as to enable an Additional Mortgage encumbering such Material
Leasehold to effectively create a valid and enforceable first priority lien
(subject to Permitted Encumbrances) on such Material Leasehold in favor of Agent
(or such other Person as may be required or desired under local law) for the
benefit of Lenders.
SECTION 7. BORROWERS' NEGATIVE COVENANTS
Each Borrower covenants and agrees that, so long as any of the
Commitments hereunder shall remain in effect and until payment in full of all of
the Loans and other Obligations and the cancellation or expiration of all
Letters of Credit, unless Requisite Lenders shall otherwise give prior written
consent, such Borrower shall perform, and shall cause each of its Subsidiaries
to perform, all covenants in this Section 7.
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7.1 INDEBTEDNESS.
------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, assume or guaranty, or otherwise
become or remain directly or indirectly liable with respect to, any
Indebtedness, except:
(i) Borrower may become and remain liable with respect to the
Obligations;
(ii) Company and its Subsidiaries may become and remain liable with
respect to Contingent Obligations permitted by subsection 7.4 and, upon any
matured obligations actually arising pursuant thereto, the Indebtedness
corresponding to the Contingent Obligations so extinguished;
(iii) Company and its Subsidiaries may become and remain liable with
respect to Indebtedness in respect of Capital Leases; provided that such
--------
Capital Leases are permitted under the terms of subsection 7.9;
[(iv) Company may become and remain liable with respect to
Indebtedness to any of its wholly-owned Subsidiaries, and any wholly-owned
Subsidiary of Company may become and remain liable with respect to
Indebtedness to Company or any other wholly-owned Subsidiary of Company;
provided that (a) all such intercompany Indebtedness shall be evidenced by
--------
promissory notes that are pledged to Agent pursuant to the terms of the
applicable Collateral Document, (b) all such intercompany Indebtedness owed
by any Borrower to any of its Subsidiaries shall be subordinated in right
of payment to the payment in full of the Obligations pursuant to the terms
of the applicable promissory notes or an intercompany subordination
agreement, and (c) any payment by any Subsidiary of any Borrower under any
guaranty of the Obligations shall result in a pro tanto reduction of the
--- -----
amount of any intercompany Indebtedness owed by such Subsidiary to such
Borrower or to any of its Subsidiaries for whose benefit such payment is
made; provided, further, that the aggregate amount of all such intercompany
-------- -------
Indebtedness owing at any time from all Canadian Subsidiaries to Company or
any Domestic Subsidiary shall not exceed [$__________];]
(v) Company and its Subsidiaries, as applicable, may remain liable
with respect to Indebtedness described in Schedule 7.1 annexed hereto;
------------
(vi) Company may become and remain liable with respect to
Indebtedness evidenced by the Subordinated Notes;
(vii) Company and its Subsidiaries may become and remain liable with
respect to Indebtedness acquired or assumed in connection with an
acquisition permitted under subsection 7.7(v) in an aggregate amount not to
exceed $5,000,000 for all such
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<PAGE>
assumed or acquired Indebtedness at any time outstanding; provided that
--------
such Indebtedness was not incurred in connection with such acquisition; and
(viii) Company and its Subsidiaries may become and remain liable with
respect to other Indebtedness in an aggregate principal amount not to
exceed $5,000,000 at any time outstanding.
7.2 LIENS AND RELATED MATTERS.
-------------------------
A. PROHIBITION ON LIENS. Each Borrower shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
permit to exist any Lien on or with respect to any property or asset of any kind
(including any document or instrument in respect of goods or accounts
receivable) of such Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired, or any income or profits therefrom, or file or permit the
filing of, or permit to remain in effect, any financing statement or other
similar notice of any Lien with respect to any such property, asset, income or
profits under the Uniform Commercial Code of any State or under the Personal
Property Security Act of any province in Canada or under any similar recording
or notice statute, except:
(i) Permitted Encumbrances;
(ii) Liens granted pursuant to the Collateral Documents;
(iii) Liens described in Schedule 7.2 annexed hereto;
------------
(iv) Liens securing Indebtedness permitted under subsection 7.1(vii)
which Liens existed prior to the time such acquisition was made; provided
--------
that such Liens were not incurred in connection with, or in contemplation
of, such acquisition and such Liens extend to or cover only the property
and assets or covered by such Liens prior to such acquisition; and
(v) Other Liens securing Indebtedness in an aggregate amount not to
exceed $5,000,000 at any time outstanding.
B. EQUITABLE LIEN IN FAVOR OF LENDERS. If any Borrower or any of its
Subsidiaries shall create or assume any Lien upon any of its properties or
assets, whether now owned or hereafter acquired, other than Liens excepted by
the provisions of subsection 7.2A, it shall make or cause to be made effective
provision whereby the Obligations will be secured by such Lien equally and
ratably with any and all other Indebtedness secured thereby as long as any such
Indebtedness shall be so secured; provided that, notwithstanding the foregoing,
--------
this covenant shall not be construed as a consent by Requisite Lenders to the
creation or assumption of any such Lien not permitted by the provisions of
subsection 7.2A.
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<PAGE>
C. NO FURTHER NEGATIVE PLEDGES. Except with respect to specific property
encumbered to secure payment of particular Indebtedness or to be sold pursuant
to an executed agreement with respect to an Asset Sale, none of the Borrowers or
any of their respective Subsidiaries shall enter into any agreement (other than
the Subordinated Note Indenture) prohibiting the creation or assumption of any
Lien upon any of its properties or assets, whether now owned or hereafter
acquired.
D. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO BORROWERS OR OTHER
SUBSIDIARIES. Except as provided herein, each Borrower will not, and will not
permit any of its Subsidiaries to, create or otherwise cause or suffer to exist
or become effective any consensual encumbrance or restriction of any kind on the
ability of any such Subsidiary to (i) pay dividends or make any other
distributions on any of such Subsidiary's capital stock owned by such Borrower
or any other Subsidiary of such Borrower, (ii) repay or prepay any Indebtedness
owed by such Subsidiary to such Borrower or any other Subsidiary of such
Borrower, (iii) make loans or advances to such Borrower or any other Subsidiary
of such Borrower, or (iv) transfer any of its property or assets to such
Borrower or any other Subsidiary of such Borrower.
7.3 INVESTMENTS; JOINT VENTURES.
---------------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, make or own any Investment in any Person, including
any Joint Venture, except:
(i) Company and its Subsidiaries may make and own Investments in
Cash Equivalents;
(ii) Company and its Subsidiaries may continue to own the
Investments owned by them as of the Closing Date in any Subsidiaries of
Company;
(iii) Company and its Subsidiaries may make intercompany loans to the
extent permitted under subsection 7.1(iv);
(iv) Company and its Subsidiaries may make Consolidated Capital
Expenditures permitted by subsection 7.8;
(v) Company and its Subsidiaries may make acquisitions to the
extent permitted under 7.7(v);
(vi) Company and its Subsidiaries may continue to own the
Investments owned by them and described in Schedule 7.3 annexed hereto;
------------
and
(vii) Company and its Subsidiaries may make and own other Investments
in an aggregate amount not to exceed at any time $5,000,000.
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<PAGE>
7.4 CONTINGENT OBLIGATIONS.
----------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create or become or remain liable with respect to
any Contingent Obligation, except:
(i) Company may become and remain liable with respect to Contingent
Obligations in respect of Letters of Credit;
(ii) Company and its Subsidiaries may become and remain liable with
respect to Contingent Obligations arising under their respective
Guaranties;
(iii) Company and its Subsidiaries may become and remain liable with
respect to Contingent Obligations in respect of customary indemnification
and purchase price adjustment obligations incurred in connection with Asset
Sales or other sales of assets;
(iv) Company may become and remain liable with respect to Contingent
Obligations arising under Interest Rate Agreements;
(v) Company and its Subsidiaries may become and remain liable with
respect to Contingent Obligations in respect of any Indebtedness of Company
or any of its Subsidiaries permitted by subsection 7.1;
(vi) Company may become and remain liable with respect to Contingent
Obligations under Currency Agreements pursuant to which Company obtains
foreign currency from another Person (the "COUNTERPARTY") in exchange for
Dollars; provided that (a) the aggregate notional amount for all such
--------
Currency Agreements outstanding at any one time shall not exceed the
equivalent of $20,000,000, (b) the aggregate amount of foreign currency
required to be delivered on any one day by one or more Counterparties under
all such Currency Agreements outstanding at any one time shall not exceed
the equivalent of $5,000,000; (c) the tenor of any such Currency Agreement
shall not exceed twenty-four (24) months, and (d) the expiration date of
any such Currency Agreement under which any Lender or any Lender or any of
its Affiliates is the counterparty shall not be later than the date of
termination of the Working Capital Revolving Loan Commitments;
(vii) Company's Subsidiaries may become and remain liable with
respect to Contingent Obligations in respect of guaranties under the
Subordinated Note Indenture; and
(viii) Company and its Subsidiaries may become and remain liable with
respect to other Contingent Obligations; provided that the maximum
--------
aggregate liability,
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<PAGE>
contingent or otherwise, of Company and its Subsidiaries in respect of all
such Contingent Obligations shall at no time exceed $2,500,000.
7.5 RESTRICTED JUNIOR PAYMENTS.
--------------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, declare, order, pay, make or set apart any sum for
any Restricted Junior Payment; provided that (i) Company may make payments of
--------
regularly scheduled interest in respect of the Subordinated Note Indenture in
accordance with the terms of and to the extent required by (and subject to the
subordination provisions contained in) the Subordinated Note Indenture, and (ii)
Company may redeem or prepay the Subordinated Notes in an aggregate principal
amount not exceeding $42,000,000 and may pay a redemption premium not exceeding
109.2% of the principal amount thereof plus accrued and unpaid interest thereon;
and provided, further that, so long as no Event of Default or Potential Event of
-------- -------
Default shall have occurred and be continuing or shall be caused thereby,
Company may make Restricted Junior Payments to Holdings (X) in an aggregate
principal amount not to exceed $500,000 in any Fiscal Year in order to permit
Holdings to pay customary and usual general administrative costs and expenses,
(Y) in an aggregate principal amount not to exceed in the aggregate $1,000,000
in any Fiscal Year or $3,000,000 during the term of this Agreement in order to
permit Holdings to purchase Holdings Common Stock from management officers and
employees of Company and its Subsidiaries in accordance with the terms of any
subscription or employment agreements or other stock option, stock incentive,
purchase, retirement, savings or similar plans, and (Z) in an amount necessary
to permit Holdings to discharge the consolidated tax liabilities of Holdings and
its Subsidiaries.
7.6 FINANCIAL COVENANTS.
-------------------
A. MINIMUM INTEREST COVERAGE RATIO. Company shall not permit the ratio
of (i) Consolidated EBITDA to (ii) Consolidated Interest Expense (which ratio
shall be calculated on a pro forma basis as if the Transactions had occurred on
the first day of such period) for any four-Fiscal Quarter period ending during
any of the periods set forth below to be less than the correlative ratio
indicated:
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<PAGE>
<TABLE>
<CAPTION>
MINIMUM
PERIOD INTEREST COVERAGE RATIO
------------------ -----------------------
<S> <C>
3rd Fiscal Quarter, 1998 2.50:1.00
4th Fiscal Quarter, 1998 2.50:1.00
1st Fiscal Quarter, 1999 2.50:1.00
2nd Fiscal Quarter, 1999 2.50:1.00
3rd Fiscal Quarter, 1999 2.50:1.00
4th Fiscal Quarter, 1999 2.50:1.00
1st Fiscal Quarter, 2000 2.50:1.00
2nd Fiscal Quarter, 2000 2.75:1.00
3rd Fiscal Quarter, 2000 2.75:1.00
4th Fiscal Quarter, 2000 2.75:1.00
1st Fiscal Quarter, 2001 2.75:1.00
2nd Fiscal Quarter, 2001 3.00:1.00
3rd Fiscal Quarter, 2001 3.00:1.00
4th Fiscal Quarter, 2001 3.00:1.00
1st Fiscal Quarter, 2002 3.25:1.00
2nd Fiscal Quarter, 2002 3.25:1.00
3rd Fiscal Quarter, 2002 3.25:1.00
4th Fiscal Quarter, 2002 3.25:1.00
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
1st Fiscal Quarter, 2003 3.75:1.00
2nd Fiscal Quarter, 2003 3.75:1.00
</TABLE>
B. MAXIMUM CONSOLIDATED LEVERAGE RATIO. Company shall not permit its
Consolidated Leverage Ratio as of the last day of any Fiscal Quarter ending
during any of the periods set forth below to exceed the correlative ratio
indicated:
<TABLE>
<CAPTION>
PERIOD CONSOLIDATED LEVERAGE RATIO
---------------------------- -------------------------------
<S> <C>
3rd Fiscal Quarter, 1998 4.00:1.00
4th Fiscal Quarter, 1998 4.00:1.00
1st Fiscal Quarter, 1999 4.00:1.00
2nd Fiscal Quarter, 1999 3.90:1.00
3rd Fiscal Quarter, 1999 3.80:1.00
4th Fiscal Quarter, 1999 3.75:1.00
1st Fiscal Quarter, 2000 3.75:1.00
2nd Fiscal Quarter, 2000 3.75:1.00
3rd Fiscal Quarter, 2000 3.50:1.00
4th Fiscal Quarter, 2000 3.50:1.00
1st Fiscal Quarter, 2001 3.50:1.00
2nd Fiscal Quarter, 2001 3.25:1.00
3rd Fiscal Quarter, 2001 3.25:1.00
4th Fiscal Quarter, 2001 3.00:1.00
1st Fiscal Quarter, 2002 3.00:1.00
2nd Fiscal Quarter, 2002 2.75:1.00
3rd Fiscal Quarter, 2002 2.75:1.00
4th Fiscal Quarter, 2002 2.75:1.00
1st Fiscal Quarter, 2003 2.75:1.00
2nd Fiscal Quarter, 2003 2.75:1.00
</TABLE>
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C. MINIMUM CONSOLIDATED NET WORTH. Company shall not permit Consolidated
Net Worth at any time during any of the periods set forth below to be less than
the correlative amount indicated:
<TABLE>
<CAPTION>
MINIMUM
CONSOLIDATED
PERIOD NET WORTH
-------------------------------------- ------------
<S> <C>
One day after the Closing Date through
3rd Fiscal Quarter, 1998 $ 80,000,000
3rd Fiscal Quarter, 1998 through
4th Fiscal Quarter, 1998 $ 77,500,000
4th Fiscal Quarter, 1998 through
1st Fiscal Quarter, 1999 $ 75,000,000
1st Fiscal Quarter, 1999 through
2nd Fiscal Quarter, 1999 $ 85,000,000
2nd Fiscal Quarter, 1999 through
3rd Fiscal Quarter, 1999 $ 85,000,000
3rd Fiscal Quarter, 1999 through
4th Fiscal Quarter, 1999 $ 85,000,000
4th Fiscal Quarter, 1999 through
1st Fiscal Quarter, 2000 $ 85,000,000
1st Fiscal Quarter, 2000 through
2nd Fiscal Quarter, 2000 $ 90,000,000
2nd Fiscal Quarter, 2000 through
3rd Fiscal Quarter, 2000 $ 95,000,000
3rd Fiscal Quarter, 2000 through
4th Fiscal Quarter, 2000 $100,000,000
4th Fiscal Quarter, 2000 through
1st Fiscal Quarter, 2001 $100,000,000
1st Fiscal Quarter, 2001 through
2nd Fiscal Quarter, 2001 $115,000,000
2nd Fiscal Quarter, 2001 through
3rd Fiscal Quarter, 2001 $115,000,000
3rd Fiscal Quarter, 2001 through
4th Fiscal Quarter, 2001 $115,000,000
4th Fiscal Quarter, 2001 through
1st Fiscal Quarter, 2002 $115,000,000
1st Fiscal Quarter, 2002 through
2nd Fiscal Quarter, 2002 $130,000,000
2nd Fiscal Quarter, 2002 through
3rd Fiscal Quarter, 2002 $130,000,000
3rd Fiscal Quarter, 2002 through
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
4th Fiscal Quarter, 2002 $130,000,000
4th Fiscal Quarter, 2002 through
1st Fiscal Quarter, 2003 $130,000,000
1st Fiscal Quarter, 2003 through
2nd Fiscal Quarter, 2003 $150,000,000
</TABLE>
7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS.
----------------------------------------------------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, alter the corporate, capital or legal structure of Company or any of its
Subsidiaries, or enter into any transaction of merger or consolidation, or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, lease or sub-lease (as lessor or sub-lessor),
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any part of its business, property or fixed assets, whether
now owned or hereafter acquired, or acquire by purchase or otherwise all or
substantially all the business, property or fixed assets of, or stock or other
evidence of beneficial ownership of, any Person or any division or line of
business of any Person, except:
(i) any Subsidiary of Company may be merged with or into Company
or any wholly-owned Subsidiary of Company, or may be liquidated, wound up
or dissolved, or all or any part of its business, property or assets may be
conveyed, sold, leased, transferred or otherwise disposed of, in one
transaction or a series of transactions, to Company or any wholly-owned
Subsidiary of Company;
(ii) Company and its Subsidiaries may make Consolidated Capital
Expenditures permitted under subsection 7.8;
(iii) Company and its Subsidiaries may sell or otherwise dispose of
assets in transactions that do not constitute Asset Sales; provided that
--------
the consideration received for such assets shall be in an amount at least
equal to the fair market value thereof (as reasonably determined by the
Board of Directors of Company);
(iv) subject to subsection 7.13, Company and its Subsidiaries may
make Asset Sales of assets having a fair market value not in excess of
$1,000,000; provided that (x) the consideration received for such assets
--------
shall be in an amount at least equal to the fair market value thereof (as
reasonably determined by the Board of Directors of Company); (y) the sole
consideration received shall be cash; and (z) the proceeds of such Asset
Sales shall be applied as required by subsection 2.4B(iii)(a); and Company
and its Subsidiaries may make transfers of any of their properties or
assets to another Person in transactions in which the Company or its
Subsidiaries receive in exchange therefor like properties or assets that
will be used in the business of the Company or its Subsidiaries; provided
--------
that (i) the aggregate fair market value (as determined in good
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faith by the Board of Directors of Company) of the property or assets being
transferred by Company or such Subsidiary is not greater than the aggregate
fair market value (as determined in good faith by the Board of Directors of
Company), of the like property or assets received by Company or such
Subsidiary in such exchange and (ii) such aggregate fair market value of
all property or assets transferred by Company and any of its Subsidiaries
in connection with such exchanges shall not exceed $5,000,000; and
(v) Company and its Subsidiaries may acquire the business,
property or fixed assets of, or all of the stock or other evidence of
beneficial ownership of any Person engaged in the nursery business, the
peat or potting soil or mix business or businesses reasonably related
thereto; provided that (a) the contemplated acquisition is neither
--------
contested nor hostile nor opposed by the board of directors of the targeted
company or business; (b) no Event of Default or Potential Event of Default
has occurred and is then continuing; (c) after giving effect (including,
without limitation, any limitation on any assumed or acquired Indebtedness)
to such acquisition and Indebtedness incurred in connection therewith,
Company is in pro forma compliance with its financial covenants; provided
--------
that for purposes of calculating the Consolidated Leverage Ratio, the
aggregate earnings attributable to acquired businesses or companies whose
financials are unreviewed and unaudited shall not exceed 20% of
Consolidated EBITDA before giving effect to the consolidation with such
acquired businesses or companies and that Company delivers to Agent and
Lenders prior to the consummation of such acquisition a Compliance
Certificate demonstrating such pro forma covenant compliance; (d) the
provisions of subsections 6.9 and 6.10 of this Agreement are complied with
with respect to any Subsidiary so acquired; (e) Company obtains Agent's and
Requisite Lenders' consents to any acquisition or series of related
acquisitions in excess of $25,000,000 and, to the extent such consent is
required, shall have delivered to Agent and Lenders, on a timely basis
prior to the consummation of such acquisition, such historical and pro
forma projected financial statements (which projected financial statements
shall be prepared on a quarterly basis for the succeeding twelve-month
period and on an annual basis for the period commencing after such twelve-
month period and concluding on the date of the final maturity of the
Loans), sources and uses analysis, pro forma covenant calculations and such
other due diligence information as may be reasonably requested by Agent or
Lenders. Subject to completion of such due diligence to the reasonable
satisfaction of Agent and Requisite Lenders, Agent and Requisite Lenders
hereby agree to approve or disapprove acquisitions as soon as reasonably
practicable but in any event within ten Business Days of receipt of such
information; and (f) Company and its Subsidiaries will not incur or assume
in connection with any such contemplated acquisition any material
environmental or other material contingent liability.
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<PAGE>
7.8 CONSOLIDATED CAPITAL EXPENDITURES.
---------------------------------
Each Borrower shall not, and shall not permit its Subsidiaries to,
make or incur Consolidated Capital Expenditures, in any period indicated below,
in an aggregate amount in excess of the corresponding amount (the "MAXIMUM
CONSOLIDATED CAPITAL EXPENDITURES AMOUNT") set forth below opposite such period;
provided that the Maximum Consolidated Capital Expenditures Amount for any
- --------
period shall be increased by an amount equal to the excess (the "CARRY FORWARD
AMOUNT"), if any, (provided however, that in no event shall the Carry Forward
--------
Amount exceed 10% of the Maximum Consolidated Capital Expenditures Amount for
such previous period) of the Maximum Consolidated Capital Expenditures Amount
for the previous period over the actual amount of Consolidated Capital
Expenditures for such previous period:
<TABLE>
<CAPTION>
MAXIMUM CONSOLIDATED
PERIOD CAPITAL EXPENDITURES
-------------------------------------- --------------------
<S> <C>
Fiscal Year, 1998 $19,000,000
Fiscal Year, 1999 $29,100,000
Fiscal Year, 2000 $21,200,000
Fiscal Year, 2001 $21,100,000
Fiscal Year, 2002 $17,400,000
Fiscal Year, 2003 (1st Fiscal Quarter) $21,700,000
Fiscal Year, 2003 (2nd Fiscal Quarter) $17,500,000
</TABLE>
; provided, however, that the Maximum Consolidated Capital Expenditures Amount
-------- -------
set forth above for any period shall be increased by an amount (the "INCREMENTAL
ACQUISITION CAPITAL EXPENDITURE AMOUNT") equal to 5% of the revenues
attributable to permitted acquisitions made pursuant to subsection 7.7(v) for
the consecutive twelve-month period immediately preceding the date of such
acquisition; provided further that with respect to the Fiscal Year in which such
-------- -------
acquisition is made, the Incremental Acquisition Capital Expenditure Amount
shall be pro-rated for the remaining portion of such Fiscal Year.
7.9 RESTRICTION ON LEASES.
---------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, (i) become liable in any way, whether directly or by assignment or as a
guarantor or other surety, for the obligations of the lessee under any lease,
whether an Operating Lease or a Capital Lease (other than intercompany leases
between or among Company and its wholly-owned Subsidiaries), or (ii) cause or
permit the liability of such Borrower or Subsidiary under or in respect of such
lease to increase by any material amount, in each case unless, immediately after
giving effect to such incurrence of or increase in liability with respect to
such lease, the Consolidated Rental Payments at the time in effect during the
then current or any future period of 12 consecutive calendar months shall not
exceed $10,000,000.
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<PAGE>
7.10 SALES AND LEASE-BACKS
---------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, become or remain liable as lessee or as a guarantor
or other surety with respect to any lease, whether an Operating Lease or a
Capital Lease, of any property (whether real, personal or mixed), whether now
owned or hereafter acquired, (i) which Company or any of its Subsidiaries has
sold or transferred or is to sell or transfer to any other Person (other than
Company or any of its Subsidiaries) or (ii) which Company or any of its
Subsidiaries intends to use for substantially the same purpose as any other
property which has been or is to be sold or transferred by Company or any of its
Subsidiaries to any Person (other than Company or any of its Subsidiaries) in
connection with such lease; provided that Company and its Subsidiaries may
--------
become and remain liable as lessee, guarantor or other surety with respect to
any such lease if and to the extent that Company or any of its Subsidiaries
would be permitted to enter into, and remain liable under, such lease under
subsection 7.9.
7.11 SALE OR DISCOUNT OF RECEIVABLES.
-------------------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, sell with recourse, or discount or otherwise sell
for less than the face value thereof, any of its notes or accounts receivable.
7.12 TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES.
---------------------------------------------
Each Borrower shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with any holder of 5% or more of any
class of equity Securities of Company or with any Affiliate of Company or of any
such holder, on terms that are less favorable to Company or that Subsidiary, as
the case may be, than those that might be obtained at the time from Persons who
are not such a holder or Affiliate; provided that the foregoing restriction
--------
shall not apply to (i) any transaction between Company and any of its wholly-
owned Subsidiaries or between any of its wholly-owned Subsidiaries, or (ii)
reasonable and customary fees paid to members of the Boards of Directors of
Company and its Subsidiaries.
7.13 DISPOSAL OF SUBSIDIARY STOCK.
----------------------------
Except pursuant to the Collateral Documents and except for any sale of
all of the capital stock or other equity Securities of any of its Subsidiaries
owned by any Borrower and its Subsidiaries in compliance with the provisions of
subsection 7.7(iv), each Borrower shall not:
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(i) directly or indirectly sell, assign, pledge or otherwise
encumber or dispose of any shares of capital stock or other equity
Securities of any of its Subsidiaries, except to qualify directors if
required by applicable law; or
(ii) permit any of its Subsidiaries directly or indirectly to
sell, assign, pledge or otherwise encumber or dispose of any shares of
capital stock or other equity Securities of any of its Subsidiaries
(including such Subsidiary), except to Company, another Subsidiary of
Company, or to qualify directors if required by applicable law.
7.14 CONDUCT OF BUSINESS.
-------------------
From and after the Closing Date, each Borrower shall not, and shall
not permit any of its Subsidiaries to, engage in any business other than (i) the
businesses engaged in by such Borrower and its Subsidiaries on the Closing Date
and similar or related businesses and (ii) such other lines of business as may
be consented to by Requisite Lenders. Holdings shall not engage in any business
other than owning the capital stock of Company and its Subsidiaries and entering
into and performing its obligations under and in accordance with the Loan
Documents to which it is a party. Holdings shall not directly engage in any
business or activities other than those activities necessary to discharge its
obligations as a holding company for Company.
7.15 AMENDMENTS OF CERTAIN DOCUMENTS; DESIGNATION OF DESIGNATED SENIOR DEBT.
----------------------------------------------------------------------
A. Each Borrower shall not, and shall not permit any of its Subsidiaries
to, amend or otherwise change the terms of any Subordinated Indebtedness or any
agreement related thereto or any guaranty entered into by any Loan Party in
connection with any Subordinated Indebtedness (collectively, the "RESTRICTED
AGREEMENTS"), or make any payment consistent with an amendment thereof or change
thereto, if the effect of such amendment or change is to increase the interest
rate on such Subordinated Indebtedness or any such Restricted Agreement, change
any dates upon which payments of principal or interest are due thereon, change
any of the covenants with respect thereto in a manner which is more restrictive
to Company or any of its Subsidiaries, change any event of default or condition
to an event of default with respect thereto, change the redemption, prepayment
or defeasance provisions thereof, change the subordination provisions thereof
(or of any guaranty thereof), or change any collateral therefor (other than to
release such collateral), or if the effect of such amendment or change, together
with all other amendments or changes made, is to increase the obligations of the
obligor thereunder or to confer any additional rights on the holders of such
Subordinated Indebtedness or any such Restricted Agreement (or a trustee or
other representative on their behalf) which would be adverse to any Loan Party
or Lenders.
B. Each Borrower shall not, and shall not permit any of its Subsidiaries
to, designate any Indebtedness as "Designated Senior Debt" (as defined in the
Subordinated Note Indenture) without the prior written consent of Requisite
Lenders.
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<PAGE>
7.16 FISCAL YEAR.
-----------
Each Borrower shall not change its Fiscal Year-end from December 31.
SECTION 8. EVENTS OF DEFAULT
If any of the following conditions or events ("Events of Default")
shall occur:
8.1 FAILURE TO MAKE PAYMENTS WHEN DUE.
---------------------------------
Failure by any Borrower to pay any installment of principal of or
interest on any Loan when due, whether at stated maturity, by acceleration, by
notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by
any Borrower to pay when due any amount payable to an Issuing Lender in
reimbursement of any drawing under a Letter of Credit; or failure by any
Borrower to pay any fee or any other amount due under this Agreement within five
days after the date due; or
8.2 DEFAULT IN OTHER AGREEMENTS.
---------------------------
Failure of any Borrower or any of its Subsidiaries to pay when due
any principal of or interest on one or more items of Indebtedness (other
than Indebtedness referred to in subsection 8.1) or Contingent Obligations
in an individual principal amount of $1,000,000 or more or with an
aggregate principal amount of $2,000,000 or more, in each case beyond the
end of any grace period provided therefor; or (ii) breach or default by any
Borrower or any of its Subsidiaries with respect to any other material term
of (a) one or more items of Indebtedness or Contingent Obligations in the
individual or aggregate principal amounts referred to in clause (i) above
or (b) any loan agreement, mortgage, indenture or other agreement relating
to such item(s) of Indebtedness or Contingent Obligation(s), if the effect
of such breach or default is to cause, or to permit the holder or holders
of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of
such holder or holders) to cause, that Indebtedness or Contingent
Obligation(s) to become or be declared due and payable prior to its stated
maturity or the stated maturity of any underlying obligation, as the case
may be (upon the giving or receiving of notice, lapse of time, both, or
otherwise); or
8.3 BREACH OF CERTAIN COVENANTS.
---------------------------
Failure of any Borrower to perform or comply with any term or
condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or
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<PAGE>
8.4 BREACH OF WARRANTY.
------------------
Any representation, warranty, certification or other statement made
by any Borrower or any of its Subsidiaries in any Loan Document or in any
statement or certificate at any time given by any Borrower or any of its
Subsidiaries in writing pursuant hereto or thereto or in connection herewith or
therewith shall be false in any material respect on the date as of which made;
or
8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS.
-----------------------------------
Any Borrower or any of its Subsidiaries shall default in the
performance of or compliance with any term contained in this Agreement or any of
the other Loan Documents, other than any such term referred to in any other
subsection of this Section 8, and such default shall not have been remedied or
waived within 15 days after the earlier of (i) an officer of any Borrower
becoming aware of such default or (ii) receipt by any Borrower of notice from
Agent or any Lender of such default; or
8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.
-----------------------------------------------------
(i) A court having jurisdiction in the premises shall enter a decree
or order for relief in respect of any Borrower or any of its Subsidiaries
in an involuntary case under the Bankruptcy Code or under any other
Insolvency Laws which decree or order is not stayed; or any other similar
relief shall be granted under any applicable Insolvency Laws; or (ii) an
involuntary case shall be commenced against any Borrower or any of its
Subsidiaries under the Bankruptcy Code or under any other Insolvency Laws;
or a decree or order of a court having jurisdiction in the premises for the
appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over any Borrower or any of its
Subsidiaries, or over all or a substantial part of its property, shall have
been entered; or there shall have occurred the involuntary appointment of
an interim receiver, trustee or other custodian of any Borrower or any of
its Subsidiaries for all or a substantial part of its property; or a
warrant of attachment, execution or similar process shall have been issued
against any substantial part of the property of any Borrower or any of its
Subsidiaries, and any such event described in this clause (ii) shall
continue for 60 days unless dismissed, bonded or discharged; or
8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.
---------------------------------------------------
(i) Any Borrower or any of its Subsidiaries shall have an order for
relief entered with respect to it or commence a voluntary case under the
Bankruptcy Code or under any other Insolvency Laws, or shall consent to the
entry of an order for relief in an involuntary case, or to the conversion
of an involuntary case to a voluntary case, under any such law, or shall
consent to the appointment of or taking possession by a
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<PAGE>
receiver, trustee or other custodian for all or a substantial part of its
property; or Company or any of its Subsidiaries shall make any assignment
for the benefit of creditors; or (ii) any Borrower or any of its
Subsidiaries shall be unable, or shall fail generally, or shall admit in
writing its inability, to pay its debts as such debts become due; or the
Board of Directors of any Borrower or any of its Subsidiaries (or any
committee thereof) shall adopt any resolution or otherwise authorize any
action to approve any of the actions referred to in clause (i) above or
this clause (ii); or
8.8 JUDGMENTS AND ATTACHMENTS.
-------------------------
Any money judgment, writ or warrant of attachment or similar process
involving (i) in any individual case an amount in excess of $1,000,000 or (ii)
in the aggregate at any time an amount in excess of $2,000,000 (in either case
not adequately covered by insurance as to which a solvent and unaffiliated
insurance company has acknowledged coverage) shall be entered or filed against
any Borrower or any of its Subsidiaries or any of their respective assets and
shall remain undischarged, unvacated, unbonded or unstayed for a period of 60
days (or in any event later than five days prior to the date of any proposed
sale thereunder); or
8.9 DISSOLUTION.
-----------
Any order, judgment or decree shall be entered against any Borrower
or any of its Subsidiaries decreeing the dissolution or split up of any Borrower
or that Subsidiary and such order shall remain undischarged or unstayed for a
period in excess of 30 days; or
8.10 EMPLOYEE BENEFIT PLANS.
----------------------
There shall occur one or more ERISA Events which individually or in
the aggregate results in or might reasonably be expected to result in liability
of any Borrower or any of its ERISA Affiliates in excess of $1,000,000 during
the term of this Agreement; or there shall exist an amount of unfunded benefit
liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the
aggregate for all Pension Plans (excluding for purposes of such computation any
Pension Plans with respect to which assets exceed benefit liabilities), which
exceeds $2,000,000; or
8.11 MATERIAL ADVERSE EFFECT.
-----------------------
Any event or change shall occur that has caused or evidences, either
in any case or in the aggregate, a Material Adverse Effect; or
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<PAGE>
8.12 CHANGE IN CONTROL.
-----------------
(i) A change shall occur in the Board of Directors of Holdings so
that a majority of the Board of Directors of Holdings ceases to consist of
the individuals who constituted the Board of Directors of Holdings on the
Closing Date (or individuals whose election or nomination for election was
approved by a vote of at least 75% of the directors then in office who
either were directors of Holdings on the Closing Date or whose election or
nomination for election previously was so approved); or
(ii) any Person or Group (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission), other than MDCP and its Affiliates,
shall become or be the owner, directly or indirectly, beneficially or of
record, of shares representing more than 30% of the aggregate ordinary
voting power represented by the issued and outstanding capital stock of
Holdings on a fully diluted basis, unless MDCP and its Affiliates shall own
and continue to so own capital stock representing not less than a majority
of such aggregate ordinary voting power; or
(iii) MDCP shall cease to own, directly or indirectly, beneficially
or of record, at least 30% of each of the Holdings Common Stock and any
other class of voting stock of Holdings; or
(iv) Holdings shall cease to beneficially own and control 100% of
the issued and outstanding shares of capital stock of Company or shall
cease to have the ability to elect all of the Board of Directors of
Company; or
(v) Company shall cease to beneficially own and control, directly
or indirectly, 100% of the issued and outstanding shares of capital stock
of any other Borrower or Company shall cease to have the ability to elect
all of the Board of Directors of any other Borrower; or
(vi) any "Change of Control" (as defined in the Subordinated Note
Indenture) shall occur; or
8.13 INVALIDITY OF ANY GUARANTY.
--------------------------
Any Guaranty for any reason, other than the satisfaction in full of
all Obligations, ceases to be in full force and effect (other than in accordance
with its terms) or is declared to be null and void, or any Loan Party denies
that it has any further liability, including without limitation with respect to
future advances by Lenders, under any Loan Document to which it is a party, or
gives notice to such effect; or
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<PAGE>
8.14 FAILURE OF SECURITY.
-------------------
Any Collateral Document shall, at any time, cease to be in full force
and effect (other than by reason of a release of Collateral in accordance with
the terms thereof) or shall be declared null and void, or the validity or
enforceability thereof shall be contested by any Loan Party, or Agent shall not
have or cease to have a valid and perfected first priority security interest in
the Collateral purported to be covered (excluding Collateral having a fair
market value in the aggregate of up to $100,000);
THEN (i) upon the occurrence of any Event of Default described in
subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued
interest on the Loans, (b) an amount equal to the maximum amount that may at any
time be drawn under all Letters of Credit then outstanding (whether or not any
beneficiary under any such Letter of Credit shall have presented, or shall be
entitled at such time to present, the drafts or other documents or certificates
required to draw under such Letter of Credit), and (c) all other Obligations
shall automatically become immediately due and payable, without presentment,
demand, protest or other requirements of any kind, all of which are hereby
expressly waived by each Borrower, and the obligation of each Lender to make any
Loan, the obligation of Agent to issue any Letter of Credit and the right of any
Lender to issue any Letter of Credit hereunder shall thereupon terminate, and
(ii) upon the occurrence and during the continuation of any other Event of
Default, Agent shall, upon the written request or with the written consent of
Requisite Lenders, by written notice to each Borrower, declare all or any
portion of the amounts described in clauses (a) through (c) above to be, and the
same shall forthwith become, immediately due and payable, and the obligation of
each Lender to make any Loan, the obligation of Agent to issue any Letter of
Credit and the right of any Lender to issue any Letter of Credit hereunder shall
thereupon terminate; provided that the foregoing shall not affect in any way the
--------
obligations of Lenders under subsection 3.3C(i) or the obligations of Lenders to
purchase participations in any unpaid Swing Line Loans as provided in subsection
2.1A(v).
Any amounts described in clause (b) above, when received by Agent,
shall be held by Agent pursuant to the terms of the Collateral Account Agreement
and shall be applied as therein provided.
Notwithstanding anything contained in the second preceding paragraph,
if at any time within 60 days after an acceleration of the Loans pursuant to
such paragraph each Borrower shall pay all arrears of interest and all payments
on account of principal which shall have become due otherwise than as a result
of such acceleration (with interest on principal and, to the extent permitted by
law, on overdue interest, at the rates specified in this Agreement) and all
Events of Default and Potential Events of Default (other than non-payment of the
principal of and accrued interest on the Loans, in each case which is due and
payable solely by virtue of acceleration) shall be remedied or waived pursuant
to subsection 10.6, then Requisite Lenders, by written notice to each Borrower,
may at their option rescind and annul such acceleration and its consequences;
but such action shall not affect any subsequent Event of
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Default or Potential Event of Default or impair any right consequent thereon.
The provisions of this paragraph are intended merely to bind Lenders to a
decision which may be made at the election of Requisite Lenders and are not
intended to benefit any Borrower and do not grant any Borrower the right to
require Lenders to rescind or annul any acceleration hereunder, even if the
conditions set forth herein are met.
SECTION 9. AGENT
9.1 APPOINTMENT.
-----------
BTCo and BT Canada are hereby appointed Agent and Canadian Agent
hereunder and under the other Loan Documents and each Lender hereby authorizes
Agent and Canadian Agent, as the case may be, to act as its agent in accordance
with the terms of this Agreement and the other Loan Documents. Agent agrees to
act upon the express conditions contained in this Agreement and the other Loan
Documents, as applicable. The provisions of this Section 9 are solely for the
benefit of Agent, Syndication Agent and Lenders and Borrowers shall have no
rights as a third party beneficiary of any of the provisions thereof. In
performing its functions and duties under this Agreement, Agent shall act solely
as an agent of Lenders and does not assume and shall not be deemed to have
assumed any obligation towards or relationship of agency or trust with or for
any Borrower or any of its Subsidiaries. None of Agent, Syndication Agent or
Documentation Agent shall have any duties or responsibilities under this
Agreement or any other Loan Document to any Person, other than as a Lender
hereunder or thereunder.
9.2 POWERS AND DUTIES; GENERAL IMMUNITY.
-----------------------------------
A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes Agent to
take such action on such Lender's behalf and to exercise such powers, rights and
remedies hereunder and under the other Loan Documents as are specifically
delegated or granted to Agent by the terms hereof and thereof, together with
such powers, rights and remedies as are reasonably incidental thereto. Agent
shall have only those duties and responsibilities that are expressly specified
in this Agreement and the other Loan Documents. Agent may exercise such powers,
rights and remedies and perform such duties by or through its agents or
employees. Agent shall not have, by reason of this Agreement or any of the
other Loan Documents, a fiduciary relationship in respect of any Lender; and
nothing in this Agreement or any of the other Loan Documents, expressed or
implied, is intended to or shall be so construed as to impose upon Agent any
obligations in respect of this Agreement or any of the other Loan Documents
except as expressly set forth herein or therein.
B. NO RESPONSIBILITY FOR CERTAIN MATTERS. Agent shall not be responsible
to any Lender for the execution, effectiveness, genuineness, validity,
enforceability, collectibility or sufficiency of this Agreement or any other
Loan Document or for any representations,
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warranties, recitals or statements made herein or therein or made in any written
or oral statements or in any financial or other statements, instruments, reports
or certificates or any other documents furnished or made by Agent to Lenders or
by or on behalf of any Borrower to Agent or any Lender in connection with the
Loan Documents and the transactions contemplated thereby or for the financial
condition or business affairs of any Borrower or any other Person liable for the
payment of any Obligations, nor shall Agent be required to ascertain or inquire
as to the performance or observance of any of the terms, conditions,
provisions, covenants or agreements contained in any of the Loan Documents or as
to the use of the proceeds of the Loans or the use of the Letters of Credit or
as to the existence or possible existence of any Event of Default or Potential
Event of Default. Anything contained in this Agreement to the contrary not
withstanding, Agent shall not have any liability arising from confirmations of
the amount of outstanding Loans or the Letter of Credit Usage or the component
amounts thereof.
C. EXCULPATORY PROVISIONS. Neither Agent nor any of its officers,
directors, employees or agents shall be liable to Lenders for any action taken
or omitted by Agent under or in connection with any of the Loan Documents except
to the extent caused by Agent's gross negligence or willful misconduct. If
Agent shall request instructions from Lenders with respect to any act or action
(including the failure to take an action) in connection with this Agreement or
any of the other Loan Documents, Agent shall be entitled to refrain from such
act or taking such action unless and until Agent shall have received
instructions from Requisite Lenders. Without prejudice to the generality of the
foregoing, (i) Agent shall be entitled to rely, and shall be fully protected in
relying, upon any communication, instrument or document believed by it to be
genuine and correct and to have been signed or sent by the proper person or
persons, and shall be entitled to rely and shall be protected in relying on
opinions and judgments of attorneys (who may be attorneys for Company and its
Subsidiaries), accountants, experts and other professional advisors selected by
it; and (ii) no Lender shall have any right of action whatsoever against Agent
as a result of Agent acting or (where so instructed) refraining from acting
under this Agreement or any of the other Loan Documents in accordance with the
instructions of Requisite Lenders. Agent shall be entitled to refrain from
exercising any power, discretion or authority vested in it under this Agreement
or any of the other Loan Documents unless and until it has obtained the
instructions of Requisite Lenders.
D. AGENT ENTITLED TO ACT AS LENDER. The agency hereby created shall in
no way impair or affect any of the rights and powers of, or impose any duties or
obligations upon, Agent in its individual capacity as a Lender hereunder. With
respect to its participation in the Loans and the Letters of Credit, Agent shall
have the same rights and powers hereunder as any other Lender and may exercise
the same as though it were not performing the duties and functions delegated to
it hereunder, and the term "Lender" or "Lenders" or any similar term shall,
unless the context clearly otherwise indicates, include Agent in its individual
capacity. Agent and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of banking, trust, financial advisory or other
business with any Borrower or any of its Affiliates as if it were not performing
the duties specified herein, and may accept fees and
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other consideration from any Borrower for services in connection with this
Agreement and otherwise without having to account for the same to Lenders.
9.3 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF CREDIT
--------------------------------------------------------------------------
WORTHINESS.
----------
Each Lender represents and warrants that it has made its own
independent investigation of the financial condition and affairs of each
Borrower and its Subsidiaries in connection with the making of the Loans and the
issuance of Letters of Credit hereunder and that it has made and shall continue
to make its own appraisal of the creditworthiness of each Borrower and its
Subsidiaries. Agent shall not have any duty or responsibility, either initially
or on a continuing basis, to make any such investigation or any such appraisal
on behalf of Lenders or to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter, and Agent shall not have
any responsibility with respect to the accuracy of or the completeness of any
information provided to Lenders.
9.4 RIGHT TO INDEMNITY.
------------------
Each Lender, in proportion to its Pro Rata Share, severally agrees to
indemnify Agent, to the extent that Agent shall not have been reimbursed by
Borrowers, for and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including,
without limitation, counsel fees and disbursements) or disbursements of any kind
or nature whatsoever which may be imposed on, incurred by or asserted against
Agent in exercising its powers, rights and remedies or performing its duties
hereunder or under the other Loan Documents or otherwise in its capacity as
Agent in any way relating to or arising out of this Agreement or the other Loan
Documents; provided that no Lender shall be liable for any portion of such
--------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from Agent's gross negligence or
willful misconduct. If any indemnity furnished to Agent for any purpose shall,
in the opinion of Agent, be insufficient or become impaired, Agent may call for
additional indemnity and cease, or not commence, to do the acts indemnified
against until such additional indemnity is furnished.
9.5 SUCCESSOR AGENT AND SWING LINE LENDER.
-------------------------------------
A. SUCCESSOR AGENT. Agent may resign at any time by giving 30 days'
prior written notice thereof to Lenders and each Borrower, and Agent may be
removed at any time with or without cause by an instrument or concurrent
instruments in writing delivered to each Borrower and Agent and signed by
Requisite Lenders. Upon any such notice of resignation or any such removal,
Requisite Lenders shall have the right, upon five Business Days' notice to each
Borrower, to appoint a successor Agent. Upon the acceptance of any
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appointment as Agent hereunder by a successor Agent, that successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring or removed Agent and the retiring or removed Agent
shall be discharged from its duties and obligations under this Agreement. After
any retiring or removed Agent's resignation or removal hereunder as Agent, the
provisions of this Section 9 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.
B. SUCCESSOR SWING LINE LENDER. Any resignation or removal of Agent
pursuant to subsection 9.5A shall also constitute the resignation or removal of
BTCo or its successor as Swing Line Lender, and any successor Agent appointed
pursuant to subsection 9.5A shall, upon its acceptance of such appointment,
become the successor Swing Line Lender for all purposes hereunder. In such event
(i) Company shall prepay any outstanding Swing Line Loans made by the retiring
or removed Agent in its capacity as Swing Line Lender, (ii) upon such
prepayment, the retiring or removed Agent and Swing Line Lender shall surrender
any Swing Line Note held by it to Company for cancellation, and (iii) if so
requested by the successor Agent and Swing Line Lender in accordance with
subsection 2.1E, Company shall issue a new Swing Line Note to the successor
Agent and Swing Line Lender substantially in the form of Exhibit IV-E annexed
------------
hereto, in the principal amount of the Swing Line Loan Commitment then in effect
and with other appropriate insertions.
9.6 COLLATERAL DOCUMENTS AND GUARANTIES.
-----------------------------------
Each Lender hereby further authorizes Agent to enter into each
Collateral Document as secured party on behalf of and for the benefit of Lenders
and agrees to be bound by the terms of each Collateral Document; provided that,
--------
subject to any provision of subsection 10.6 requiring the consent of any
additional Lenders, Agent shall not enter into or consent to any amendment,
modification, termination or waiver of any provision contained in any Collateral
Document or any Guaranty without the prior consent of Requisite Lenders, but
Agent may (i) release any Lien covering any items of Collateral that are the
subject of a sale or other disposition of assets permitted by this Agreement or
to which Requisite Lenders have consented and (ii) release any Guarantor (other
than any Borrower or Holdings) from its Guaranty if all of the capital stock of
such Guarantor is sold to a Person that is not any Affiliate of Company pursuant
to a sale or other disposition permitted hereunder or to which Requisite Lenders
have consented. Anything contained in any of the Loan Documents to the contrary
notwithstanding, each Lender agrees that no Lender shall have any right
individually to realize upon any of the Collateral under any Collateral Document
or to enforce any of the Guaranties, it being understood and agreed that all
rights and remedies under the Collateral Documents and the Guaranties may be
exercised solely by Agent for the benefit of Lenders in accordance with the
terms thereof.
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SECTION 10. MISCELLANEOUS
10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT.
-------------------------------------------------------------
A. GENERAL. Subject to subsection 10.1B, each Lender shall have the
right at any time to (i) sell, assign or transfer to any Eligible Assignee, or
(ii) sell participations to any Person in, all or any part of its Commitments or
any Loan or Loans made by it or its Letters of Credit or participations therein
or any other interest herein or in any other Obligations owed to it; provided
--------
that no such sale, assignment, transfer or participation shall, without the
consent of Company, require Company to file a registration statement with the
Securities and Exchange Commission or apply to qualify such sale, assignment,
transfer or participation under the securities laws of any state; provided,
--------
further that no such sale, assignment or transfer described in clause (i) above
- -------
shall be effective unless and until an Assignment Agreement effecting such sale,
assignment or transfer shall have been accepted by Agent and recorded in the
Register as provided in subsection 10.1B(ii); and provided, further that no such
-------- -------
sale, assignment, transfer or participation of any Letter of Credit or any
participation therein may be made separately from a sale, assignment, transfer
or participation of a corresponding interest in the Working Capital Revolving
Loan Commitment and the Working Capital Revolving Loans of the Lender effecting
such sale, assignment, transfer or participation. Except as otherwise provided
in this subsection 10.1, no Lender shall, as between Borrowers and such Lender,
be relieved of any of its obligations hereunder as a result of any sale,
assignment or transfer of, or any granting of participations in, all or any part
of its Commitments or the Loans, the Letters of Credit or participations
therein, or the other Obligations owed to such Lender.
B. ASSIGNMENTS.
(i) Amounts and Terms of Assignments. Each Commitment, Loan, Letter
--------------------------------
of Credit or participation therein, or other Obligation may (a) be assigned
in any amount to another Lender, or to an Affiliate of the assigning Lender
or another Lender, with the giving of notice to Company and Agent or (b) be
assigned in an aggregate amount of not less than $5,000,000 (or such lesser
amount as shall constitute the aggregate amount of the Commitments, Loans,
Letters of Credit and participations therein, and other Obligations of the
assigning Lender) to any other Eligible Assignee with the consent of
Company and Agent (which consent of Company and Agent shall not be
unreasonably withheld); provided that any such assignment (x) by a Domestic
--------
Lender in accordance with either clause (a) or (b) above shall effect a pro
rata assignment (based on the respective principal amounts thereof then
outstanding or in effect) of each of the Domestic Term Loan Commitment and
the Domestic Term Loans, the Acquisition Revolving Loan Commitment and the
Acquisition Loans, the Working Capital Revolving Loan Commitment and the
Working Capital Revolving Loans of the assigning Domestic Lender, and (y)
by a Canadian Lender in accordance with either clause (a) or (b) above
shall effect a pro rata assignment (based on the respective
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principal amounts thereof then outstanding or in effect) of both the Sun
Gro Canada Term Loan Commitment and the Sun Gro Canada Term Loans and the
Lakeland Canada Term Loan Commitment and the Lakeland Canada Term Loans. To
the extent of any such assignment in accordance with either clause (a) or
(b) above, the assigning Lender shall be relieved of its obligations with
respect to its Commitments, Loans, Letters of Credit or participations
therein, or other Obligations or the portion thereof so assigned. The
parties to each such assignment shall execute and deliver to Agent, for its
acceptance and recording in the Register, an Assignment Agreement, together
with, except in connection with an assignment pursuant to subsection 2.8B,
a processing and recordation fee of $3,500 and such forms, certificates or
other evidence, if any, with respect to United States federal income tax
withholding matters as the assignee under such Assignment Agreement may be
required to deliver to Agent pursuant to subsection 2.7B(iii)(a). Upon such
execution, delivery, acceptance and recordation, from and after the
effective date specified in such Assignment Agreement, (y) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment
Agreement, shall have the rights and obligations of a Lender hereunder and
(z) the assigning Lender thereunder shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such Assignment
Agreement, relinquish its rights and be released from its obligations under
this Agreement (and, in the case of an Assignment Agreement covering all or
the remaining portion of an assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto; provided
--------
that, anything contained in any of the Loan Documents to the contrary
notwithstanding, if such Lender is the Issuing Lender with respect to any
outstanding Letters of Credit such Lender shall continue to have all rights
and obligations of an Issuing Lender with respect to such Letters of Credit
until the cancellation or expiration of such Letters of Credit and the
reimbursement of any amounts drawn thereunder). The Commitments hereunder
shall be modified to reflect the Commitment of such assignee and any
remaining Commitment of such assigning Lender and, if any such assignment
occurs after the issuance of the Notes hereunder, the assigning Lender
shall, upon the effectiveness of such assignment or as promptly thereafter
as practicable, surrender its applicable Notes to Agent for cancellation,
and thereupon new Notes shall be issued to the assignee and/or to the
assigning Lender, substantially in the form of Exhibit IV-A, Exhibit IV-B,
------------ ------------
Exhibit IV-C, Exhibit IV-D or Exhibit IV-E annexed hereto, as the case may
------------ ------------ ------------
be, with appropriate insertions, to reflect the new Commitments and/or
outstanding Term Loans, as the case may be, of the assignee and/or the
assigning Lender.
(ii) Acceptance by Agent; Recordation in Register. Upon its receipt
--------------------------------------------
of an Assignment Agreement executed by an assigning Lender and an assignee
representing that it is an Eligible Assignee, together with the processing
and recordation fee referred to in subsection 10.1B(i) and any forms,
certificates or other evidence with respect to United States federal income
tax withholding matters that such assignee may be
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required to deliver to Agent pursuant to subsection 2.7B(iii)(a), Agent
shall, if Agent and Company have consented to the assignment evidenced
thereby (in each case to the extent such consent is required pursuant to
subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a
counterpart thereof as provided therein (which acceptance shall evidence
any required consent of Agent to such assignment), (b) record the
information contained therein in the Register, and (c) give prompt notice
thereof to Company. Agent shall maintain a copy of each Assignment
Agreement delivered to and accepted by it as provided in this subsection
10.1B(ii).
C. PARTICIPATIONS. The holder of any participation, other than an
Affiliate of the Lender granting such participation, shall not be entitled to
require such Lender to take or omit to take any action hereunder except action
directly affecting (i) the extension of the scheduled final maturity date of any
Loan allocated to such participation or (ii) a reduction of the principal amount
of or the rate of interest payable on any Loan allocated to such participation,
and all amounts payable by Borrowers hereunder (including without limitation
amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall
be determined as if such Lender had not sold such participation. Each Borrower
and each Lender hereby acknowledges and agrees that, solely for purposes of
subsections 10.4 and 10.5, (a) any participation will give rise to a direct
obligation of such Borrower to the participant and (b) the participant shall be
considered to be a "Lender".
D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the assignments
and participations permitted under the foregoing provisions of this subsection
10.1, any Lender may assign and pledge all or any portion of its Loans, the
other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank
as collateral security pursuant to Regulation A of the Board of Governors of the
Federal Reserve System and any operating circular issued by such Federal Reserve
Bank; provided that (i) no Lender shall, as between any Borrower and such
--------
Lender, be relieved of any of its obligations hereunder as a result of any such
assignment and pledge and (ii) in no event shall such Federal Reserve Bank be
considered to be a "Lender" or be entitled to require the assigning Lender to
take or omit to take any action hereunder.
E. INFORMATION. Each Lender may furnish any information concerning
Company and its Subsidiaries in the possession of that Lender from time to time
to assignees and participants (including prospective assignees and
participants), subject to subsection 10.19.
10.2 EXPENSES.
--------
Whether or not the transactions contemplated hereby shall be
consummated, each Borrower agrees to pay promptly (i) all the actual and
reasonable costs and expenses of preparation of the Loan Documents and any
consents, amendments, waivers or other modifications thereto; (ii) all the costs
of furnishing all opinions by counsel for any Borrower (including any opinions
requested by Lenders as to any legal matters arising hereunder) and of
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any Borrower's performance of and compliance with all agreements and conditions
on its part to be performed or complied with under this Agreement and the other
Loan Documents including with respect to confirming compliance with
environmental, insurance and solvency requirements; (iii) the reasonable fees,
expenses and disbursements of counsel to Agent (including allocated costs of
internal counsel) in connection with the negotiation, preparation, execution and
administration of the Loan Documents and any consents, amendments, waivers or
other modifications thereto and any other documents or matters requested by any
Borrower; (iv) all the actual costs and reasonable expenses of creating and
perfecting Liens in favor of Agent on behalf of Lenders pursuant to any
Collateral Document, including filing and recording fees, expenses and taxes,
stamp or documentary taxes, search fees, title insurance premiums, and
reasonable fees, expenses and disbursements of counsel to Agent and of counsel
providing any opinions that Agent or Requisite Lenders may request in respect of
the Collateral Documents or the Liens created pursuant thereto; (v) all the
actual costs and reasonable expenses of obtaining and reviewing any appraisals
provided for under this Agreement and any environmental audits or reports
provided for under this Agreement; (vi) the custody or preservation of any of
the Collateral; (vii) all other actual and reasonable costs and expenses
incurred by Agent in connection with the syndication of the Commitments and the
negotiation, preparation and execution of the Loan Documents and any consents,
amendments, waivers or other modifications thereto and the transactions
contemplated thereby; and (viii) after the occurrence of an Event of Default,
all costs and expenses, including reasonable attorneys' fees (including
allocated costs of internal counsel) and costs of settlement, incurred by Agent
and Lenders in enforcing any Obligations of or in collecting any payments due
from any Loan Party hereunder or under the other Loan Documents by reason of
such Event of Default (including in connection with the sale of, collection
from, or other realization upon any of the Collateral or the enforcement of the
Guaranties) or in connection with any refinancing or restructuring of the credit
arrangements provided under this Agreement in the nature of a "work-out" or
pursuant to any insolvency or bankruptcy proceedings.
10.3 INDEMNITY.
---------
In addition to the payment of expenses pursuant to subsection 10.2,
whether or not the transactions contemplated hereby shall be consummated, each
Borrower agrees to defend, indemnify, pay and hold harmless Agent and Lenders,
and the officers, directors, employees, agents and affiliates of Agent and
Lenders (collectively called the "INDEMNITEES"), from and against any and all
Indemnified Liabilities (as hereinafter defined); provided that each Borrower
--------
shall not have any obligation to any Indemnitee hereunder with respect to any
Indemnified Liabilities to the extent such Indemnified Liabilities arise solely
from the gross negligence or willful misconduct of that Indemnitee as determined
by a final judgment of a court of competent jurisdiction.
As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and
all liabilities, obligations, losses, damages (including natural resource
damages), penalties, actions, judgments, suits, claims (including Environmental
Claims), costs (including the costs
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of any investigation, study, sampling, testing, abatement, cleanup, removal,
remediation or other response action necessary to remove, remediate, clean up or
abate any Hazardous Materials Activity), expenses and disbursements of any kind
or nature whatsoever (including the reasonable fees and disbursements of counsel
for Indemnitees in connection with any investigative, administrative or
judicial proceeding commenced or threatened by any Person, whether or not any
such Indemnitee shall be designated as a party or a potential party thereto, and
any fees or expenses incurred by Indemnitees in enforcing this indemnity),
whether direct, indirect or consequential and whether based on any federal,
state or foreign laws, statutes, rules or regulations (including securities and
commercial laws, statutes, rules or regulations and Environmental Laws), on
common law or equitable cause or on contract or otherwise, that may be imposed
on, incurred by, or asserted against any such Indemnitee, in any manner relating
to or arising out of (i) this Agreement or the other Loan Documents or the
transactions contemplated hereby or thereby (including Lenders' agreement to
make the Loans hereunder or the use or intended use of the proceeds thereof or
the issuance of Letters of Credit hereunder or the use or intended use of any
thereof, or any enforcement of any of the Loan Documents (including any sale of,
collection from, or other realization upon any of the Collateral or the
enforcement of the Guaranties), (ii) the statements contained in the commitment
letter delivered by any Lender to any Borrower with respect thereto, or (iii)
any Environmental Claim or any Hazardous Materials Activity relating to or
arising from, directly or indirectly, any past or present activity, operation,
land ownership, or practice of any Borrower or any of its Subsidiaries.
To the extent that the undertakings to defend, indemnify, pay and hold
harmless set forth in this subsection 10.3 may be unenforceable in whole or in
part because they are violative of any law or public policy, each Borrower shall
contribute the maximum portion that it is permitted to pay and satisfy under
applicable law to the payment and satisfaction of all Indemnified Liabilities
incurred by Indemnitees or any of them.
10.4 SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS.
----------------------------------------------
In addition to any rights now or hereafter granted under applicable
law and not by way of limitation of any such rights, upon the occurrence of any
Event of Default each Lender is hereby authorized by each Borrower at any time
or from time to time, without notice to any Borrower or to any other Person, any
such notice being hereby expressly waived, to set off and to appropriate and to
apply any and all deposits (general or special, including Indebtedness
evidenced by certificates of deposit, whether matured or unmatured, but not
including trust accounts) and any other Indebtedness at any time held or owing
by that Lender to or for the credit or the account of such Borrower against and
on account of the obligations and liabilities of such Borrower to that Lender
under this Agreement, the Letters of Credit and participations therein and the
other Loan Documents, including all claims of any nature or description arising
out of or connected with this Agreement, the Letters of Credit and
participations therein or any other Loan Document, irrespective of whether or
not (i) that Lender shall have made any demand hereunder or (ii) the principal
of or the interest on the
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Loans or any amounts in respect of the Letters of Credit or any other amounts
due hereunder shall have become due and payable pursuant to Section 8 and
although said obligations and liabilities, or any of them, may be contingent or
unmatured. Each Borrower hereby further grants to Agent and each Lender a
security interest in all deposits and accounts maintained with Agent or such
Lender as security for the Obligations.
10.5 RATABLE SHARING.
---------------
A. AMOUNTS OWED BY COMPANY. Domestic Lenders hereby agree among
themselves that if any of them shall, whether by voluntary payment (other than a
voluntary prepayment of Loans made and applied in accordance with the terms of
this Agreement), by realization upon security, through the exercise of any right
of set-off or banker's lien, by counterclaim or cross action or by the
enforcement of any right under the Loan Documents or otherwise, or as adequate
protection of a deposit treated as cash collateral under the Bankruptcy Code,
receive payment or reduction of a proportion of the aggregate amount of
principal, interest, amounts payable in respect of Letters of Credit, fees and
other amounts then due and owing to that Domestic Lender hereunder or under the
other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such
Domestic Lender) which is greater than the proportion received by any other
Domestic Lender in respect of the Aggregate Amounts Due to such other Domestic
Lender, then the Domestic Lender receiving such proportionately greater payment
shall (i) notify Agent and each other Domestic Lender of the receipt of such
payment and (ii) apply a portion of such payment to purchase participations
(which it shall be deemed to have purchased from each seller of a participation
simultaneously upon the receipt by such seller of its portion of such payment)
in the Aggregate Amounts Due to the other Domestic Lenders so that all such
recoveries of Aggregate Amounts Due shall be shared by all Domestic Lenders in
proportion to the Aggregate Amounts Due to them; provided that if all or part of
--------
such proportionately greater payment received by such purchasing Domestic Lender
is thereafter recovered from such Domestic Lender upon the bankruptcy or
reorganization of Company or otherwise, those purchases shall be rescinded and
the purchase prices paid for such participations shall be returned to such
purchasing Domestic Lender ratably to the extent of such recovery, but without
interest. Company expressly consents to the foregoing arrangement and agrees
that any holder of a participation so purchased may exercise any and all rights
of banker's lien, set-off or counterclaim with respect to any and all monies
owing by Company to that holder with respect thereto as fully as if that holder
were owed the amount of the participation held by that holder.
B. AMOUNTS OWED BY CANADIAN BORROWERS. Canadian Lenders hereby agree
among themselves that if any of them shall, whether by voluntary payment, by
realization upon security, through the exercise of any right of set-off or
banker's lien, by counterclaim or cross action or by the enforcement of any
right under the Loan Documents or otherwise, or as adequate protection of a
deposit treated as cash collateral under any applicable Insolvency Laws, receive
payment or reduction of a proportion of the aggregate amount of principal,
interest, fees and other amounts then due and owing to that Lender hereunder or
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under the other Loan Documents from Canadian Borrowers (collectively, the
"AGGREGATE AMOUNTS DUE FROM CANADIAN BORROWERS" to such Lender) which is greater
than the proportion received by any other Canadian Lender in respect of the
Aggregate Amounts Due From Canadian Borrowers to such other Canadian Lender,
then the Canadian Lender receiving such proportionately greater payment shall
(i) notify Agent and each other Canadian Lender of the receipt of such payment
and (ii) apply a portion of such payment to purchase participations (which it
shall be deemed to have purchased from each seller of a participation
simultaneously upon the receipt by such seller of its portion of such payment)
in the Aggregate Amounts Due From Canadian Borrowers to the other Lenders so
that all such recoveries of Aggregate Amounts Due From Canadian Borrowers shall
be shared by all Canadian Lenders in proportion to the Aggregate Amounts Due
From Canadian Borrowers to them (as calculated prior to such recovery); provided
--------
that if all or part of such proportionately greater payment received by such
purchasing Lender is thereafter recovered from such Canadian Lender upon the
bankruptcy or reorganization of a Canadian Borrower or otherwise, those
purchases shall be rescinded and the purchase prices paid for such
participations shall be returned to such purchasing Lender ratably to the extent
of such recovery, but without interest. Each Canadian Borrower expressly
consents to the foregoing arrangement and agrees that any holder of a
participation so purchased may exercise any and all rights of banker's lien,
set-off or counterclaim with respect to any and all monies owing by such
Canadian Borrower to that holder with respect thereto as fully as if that holder
were owed the amount of the partic ipation held by that holder.
10.6 AMENDMENTS AND WAIVERS.
----------------------
No amendment, modification, termination or waiver of any provision of
this Agreement or of the Notes, and no consent to any departure by any Borrower
therefrom, shall in any event be effective without the written concurrence of
Requisite Lenders; provided that any such amendment, modification, termination,
--------
waiver or consent which: increases the amount of any of the Commitments or
reduces the principal amount of any of the Loans; changes in any manner the
definition of "Pro Rata Share" or the definition of "Requisite Lenders"; changes
in any manner any provision of this Agreement which, by its terms, expressly
requires the approval or concurrence of all Lenders; postpones the scheduled
final maturity date (but not the date of any scheduled installment of principal)
of any of the Loans; postpones the date on which any interest or any fees are
payable; decreases the interest rate borne by any of the Loans (other than any
waiver of any increase in the interest rate applicable to any of the Loans
pursuant to subsection 2.2E) or the amount of any fees payable hereunder;
increases the maximum duration of Interest Periods permitted hereunder; reduces
the amount or postpones the due date of any amount payable in respect of, or
extends the required expiration date of, any Letter of Credit; changes in any
manner the obligations of Lenders relating to the purchase of participations in
Letters of Credit; releases any Lien granted in favor of Agent with respect to
all or substantially all of the Collateral; releases Holdings from its
obligations under the Holdings Guaranty or releases any Subsidiary Guarantor
from its obligations under the Subsidiary Guaranty, in each case other than in
accordance with the terms of the Loan
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Documents; or changes in any manner the provisions contained in subsection 8.1
or this subsection 10.6 shall be effective only if evidenced by a writing signed
by or on behalf of all Lenders. In addition, (i) any amendment, modification,
termination or waiver of any of the provisions contained in Section 4 shall be
effective only if evidenced by a writing signed by or on behalf of Agent and
Requisite Lenders, (ii) no amendment, modification, termination or waiver of any
provision of any Note shall be effective without the written concurrence of the
Lender which is the holder of that Note, (iii) no amendment, modification,
termination or waiver of any provision of subsection 2.1A(v) or of any other
provision of this Agreement relating to the Swing Line Loan Commitment or the
Swing Line Loans shall be effective without the written concurrence of Swing
Line Lender, (iv) no amendment, modification, termination or waiver of any
provision of Section 9 or of any other provision of this Agreement which, by its
terms, expressly requires the approval or concurrence of Agent shall be
effective without the written concurrence of Agent, and (v) no amendment,
modification, termination or waiver of any provision of subsection 2.4 which has
the effect of changing any interim scheduled payments, voluntary or mandatory
prepayments, or Commitment reductions applicable to either Class (the "AFFECTED
CLASS") in a manner that disproportionately disadvantages such Class relative to
the other Class shall be effective without the written concurrence of Requisite
Class Lenders of the Affected Class (it being understood and agreed that any
amendment, modification, termination or waiver of any such provision which only
postpones or reduces any interim scheduled payment, voluntary or mandatory
prepayment, or Commitment reduction from those set forth in subsection 2.4 with
respect to one Class but not the other Class shall be deemed to
disproportionately disadvantage such one Class but not to disproportionately
disadvantage such other Class for purposes of this clause (v)). Agent may, but
shall have no obligation to, with the concurrence of any Lender, execute
amendments, modifications, waivers or consents on behalf of that Lender. Any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which it was given. No notice to or demand on any Borrower
in any case shall entitle such Borrower to any other or further notice or demand
in similar or other circumstances. Any amendment, modification, termination,
waiver or consent effected in accordance with this subsection 10.6 shall be
binding upon each Lender at the time outstanding, each future Lender and, if
signed by any Borrower, on such Borrower.
10.7 INDEPENDENCE OF COVENANTS.
-------------------------
All covenants hereunder shall be given independent effect so that
if a particular action or condition is not permitted by any of such covenants,
the fact that it would be permitted by an exception to, or would otherwise be
within the limitations of, another covenant shall not avoid the occurrence of an
Event of Default or Potential Event of Default if such action is taken or
condition exists.
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10.8 NOTICES.
-------
Unless otherwise specifically provided herein, any notice or other
communication herein required or permitted to be given shall be in writing and
may be personally served, telexed or sent by telefacsimile or United States or
Canadian mail or courier service and shall be deemed to have been given when
delivered in person or by courier service, upon receipt of telefacsimile or
telex, or three Business Days after depositing it in the United States or
Canadian mail with postage prepaid and properly addressed; provided that notices
--------
to Agent shall not be effective until received. For the purposes hereof, the
address of each party hereto shall be as set forth under such party's name on
the signature pages hereof or (i) as to Borrowers and Agent, such other address
as shall be designated by such Person in a written notice delivered to the other
parties hereto and (ii) as to each other party, such other address as shall be
designated by such party in a written notice delivered to Agent.
10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
------------------------------------------------------
A. All representations, warranties and agreements made herein shall
survive the execution and delivery of this Agreement and the making of the Loans
and the issuance of the Letters of Credit hereunder.
B. Notwithstanding anything in this Agreement or implied by law to
the contrary, the agreements of Borrowers set forth in subsections 2.6D, 2.7,
3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in
subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the
cancellation or expiration of the Letters of Credit and the reimbursement of any
amounts drawn thereunder, and the termination of this Agreement.
10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.
-----------------------------------------------------
No failure or delay on the part of Agent or any Lender in the exercise
of any power, right or privilege hereunder or under any other Loan Document
shall impair such power, right or privilege or be construed to be a waiver of
any default or acquiescence therein, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other power, right or privilege. All rights and remedies existing under
this Agreement and the other Loan Documents are cumulative to, and not exclusive
of, any rights or remedies otherwise available.
10.11 MARSHALLING; PAYMENTS SET ASIDE.
-------------------------------
Neither Agent nor any Lender shall be under any obligation to marshal
any assets in favor of any Borrower or any other party or against or in payment
of any or all of the Obligations. To the extent that any Borrower makes a
payment or payments to Agent or Lenders (or to Agent for the benefit of
Lenders), or Agent or Lenders enforce any security interests or exercise their
rights of setoff, and such payment or payments or the proceeds of
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such enforcement or setoff or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law, any
other state or federal law, common law or any equitable cause, then, to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied, and all Liens, rights and remedies therefor or related thereto,
shall be revived and continued in full force and effect as if such payment or
payments had not been made or such enforcement or setoff had not occurred.
10.12 SEVERABILITY.
------------
In case any provision in or obligation under this Agreement or the
Notes shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction, shall
not in any way be affected or impaired thereby.
10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS.
----------------------------------------------------------
The obligations of Lenders hereunder are several and no Lender shall
be responsible for the obligations or Commitments of any other Lender hereunder.
Nothing contained herein or in any other Loan Document, and no action taken by
Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a
partnership, an association, a joint venture or any other kind of entity. The
amounts payable at any time hereunder to each Lender shall be a separate and
independent debt, and each Lender shall be entitled to protect and enforce its
rights arising out of this Agreement and it shall not be necessary for any other
Lender to be joined as an additional party in any proceeding for such purpose.
10.14 HEADINGS.
--------
Section and subsection headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
10.15 APPLICABLE LAW.
--------------
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS
OF LAWS PRINCIPLES.
146
<PAGE>
10.16 SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall be binding upon the parties hereto and their
respective successors and assigns and shall inure to the benefit of the parties
hereto and the successors and assigns of Lenders (it being understood that
Lenders' rights of assignment are subject to subsection 10.1). None of the
Borrowers' rights or obligations hereunder nor any interest therein may be
assigned or delegated by any Borrower without the prior written consent of all
Lenders.
10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
----------------------------------------------
ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY BORROWER ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS
THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND
DELIVERING THIS AGREEMENT, EACH BORROWER, FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, IRREVOCABLY
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE
JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY
SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH
SUBSECTION 10.8;
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS
SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH
PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT;
(V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN
THE COURTS OF ANY OTHER JURISDICTION; AND
(VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO
JURISDICTION AND VENUE SHALL BE BINDING AND
147
<PAGE>
ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL
OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE.
10.18 WAIVER OF JURY TRIAL.
--------------------
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS
BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE
LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver
is intended to be all-encompassing of any and all disputes that may be filed in
any court and that relate to the subject matter of this transaction, including
contract claims, tort claims, breach of duty claims and all other common law and
statutory claims. Each party hereto acknowledges that this waiver is a material
inducement to enter into a business relationship, that each has already relied
on this waiver in entering into this Agreement, and that each will continue to
rely on this waiver in their related future dealings. Each party hereto further
warrants and represents that it has reviewed this waiver with its legal counsel
and that it knowingly and voluntarily waives its jury trial rights following
consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY
NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN
WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF
THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS
MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a
written consent to a trial by the court.
10.19 CONFIDENTIALITY.
---------------
Each Lender shall hold all non-public information obtained pursuant to
the requirements of this Agreement which has been identified as confidential by
any Borrower in accordance with such Lender's customary procedures for handling
confidential information of this nature and in accordance with safe and sound
banking practices, it being understood and agreed by each Borrower that in any
event a Lender may make disclosures to Affiliates of such Lender or disclosures
reasonably required by any bona fide assignee, transferee or participant in
connection with the contemplated assignment or transfer by such Lender of any
Loans or any participations therein or disclosures required or requested by any
governmental agency or representative thereof or pursuant to legal process;
provided that, unless specifically prohibited by applicable law or court order,
- --------
each Lender shall notify Company of any request by any governmental agency or
representative thereof (other than any such request in connection with any
examination of the financial condition of such Lender by such governmental
agency) for
148
<PAGE>
disclosure of any such non-public information prior to disclosure of such
information; and provided, further that in no event shall any Lender be
-------- -------
obligated or required to return any materials furnished by Company or any of its
Subsidiaries.
10.20 JUDGMENT CURRENCY.
-----------------
(a) If, for the purposes of obtaining judgment in any court, it is
necessary to convert a sum due hereunder in any currency (the "ORIGINAL
CURRENCY") into another currency (the "OTHER CURRENCY"), the parties hereto
agree, to the fullest extent permitted by law, that the rate of exchange used
shall be that at which in accordance with normal banking procedures the Agent
could purchase the Original Currency with the Other Currency on the Business Day
immediately preceding the day on which any such judgment, or any relevant part
thereof, is paid or otherwise satisfied.
(b) The obligations of each Borrower in respect of any sum due from it
to the Lenders hereunder shall, notwithstanding any judgment in such Other
Currency, be discharged only to the extent that on the Business Day following
receipt by the Agent of any sum adjudged to be so due in the Other Currency the
Agent may in accordance with normal banking procedures purchase the Original
Currency with the Other Currency; if the Original Currency so purchased is less
than the sum originally due to the Lenders in the Original Currency, such
Borrower agrees, as a separate obligation and notwithstanding any such judgment,
to indemnify the Lenders against such loss, and if the amount of the Original
Currency so purchased exceeds the sum originally due to the Lenders in the
Original Currency, the Lenders shall remit such excess to such Borrower.
10.21 COUNTERPARTS; EFFECTIVENESS.
---------------------------
This Agreement and any amendments, waivers, consents or supplements
hereto or in connection herewith may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document. This Agreement shall become effective upon the execution of a
counterpart hereof by each of the parties hereto and receipt by each Borrower
and Agent of written or telephonic notification of such execution and
authorization of delivery thereof.
[Remainder of page intentionally left blank]
149
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
BORROWERS:
HINES NURSERIES, INC.
By: _______________________________________
Title: _______________________________________
Notice Address:
Hines Nurseries, Inc.
12621 Jeffrey Road
Irvine, California 92620
Attention:
Telecopy No.:
SUN GRO HORTICULTURE CANADA LTD.
By: _______________________________________
Title: _______________________________________
Notice Address:
Sun Gro Horticulture Canada Ltd.
110 110th Avenue N.E.
Suite 490
Bellevue, Washington 98004
Attention:
Telecopy No.:
S-1
<PAGE>
LAKELAND CANADA LTD.
By: _______________________________________
Title: _______________________________________
Notice Address:
Lakeland Canada Ltd.
_____________________
_____________________
_____________________
Attention:
Telecopy No.:
S-2
<PAGE>
LENDERS:
BANKERS TRUST COMPANY,
as a Domestic Lender, Administrative Agent
and Issuing Lender
By: ____________________________________________
Title: ____________________________________________
Notice Address:
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Gaelle Vaval
Telecopy No.: 212-250-6029
With a copy to:
Bankers Trust Company
300 South Grand Avenue
41st Floor
Los Angeles, California 90071
Attention: Wade T. Winter
Telephone No.: 213-620-8200
Telecopy No.: 213-620-8484
S-3
<PAGE>
BT BANK OF CANADA,
as a Canadian Lender and Canadian Agent
By: _____________________________________________
Title: _____________________________________________
Notice Address:
BT Bank of Canada
200 Bay Street
Suite 1700
Royal Bank Plaza, North Tower
Toronto, Ontario M5J 2J2
Attention: Marcellus Leung
Telecopy No.: 416-865-9931
S-4
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION,
as a Domestic Lender and Syndication Agent
By: _____________________________________________
Title: _____________________________________________
Notice Address:
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
Attention:
Telecopy No.:
HARRIS TRUST AND SAVINGS BANK,
as a Domestic Lender and Documentation Agent
By: _____________________________________________
Title: _____________________________________________
Notice Address:
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
Attention:
S-5
<PAGE>
Telecopy No.:
______________________________
By: _____________________________________________
Title: _____________________________________________
Notice Address:
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
Attention:
Telecopy No.:
S-6
<PAGE>
EXHIBIT 4.4
HINES HOLDINGS, INC.
REGISTRATION AGREEMENT
----------------------
THIS AGREEMENT is made as of June 11, 1998, between Hines Holdings,
Inc., a Nevada corporation (the "Company"), and Madison Dearborn Capital
Partners, L.P., a Delaware limited partnership ("MDCP").
The parties hereto agree as follows:
1. Demand Registrations.
--------------------
(a) Requests for Registration. At any time 181 days after the Company
-------------------------
has completed a public offering of its Common Stock under the Securities Act of
1933, as amended (the "Securities Act"), the holders of a majority of the
Registrable Securities may request registration under the Securities Act of all
or any portion of their Registrable Securities on Form S-1 or any similar long-
form registration ("Long-Form Registrations"), and the holders of a majority of
the Registrable Securities may request registration under the Securities Act of
all or any portion of their Registrable Securities on Form S-2 or S-3 or any
similar short-form registration ("Short-Form Registrations") if available. All
Long-Form Registrations and Short-Form Registrations are referred to herein as
"Demand Registrations." Any Demand Registration may provide for offerings to be
made on a continuous or delayed basis under Rule 415 under the Securities Act,
if permitted by applicable rules and regulations under the Securities Act. Each
request for a Demand Registration shall specify the approximate number of
Registrable Securities requested to be registered. Within ten days after receipt
of any such request, the Company shall give written notice of such requested
registration to all other holders of Registrable Securities, if any, and shall
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice. The holders of a majority of the
Registrable Securities included in any Demand Registration shall have the right
to request that any Demand Registration be an underwritten registration.
(b) Long-Form Registrations. The holders of a majority of the
-----------------------
Registrable Securities shall be entitled to request up to three Long-Fom
Registrations in which the Company shall pay all Registration Expenses ("Long-
Form Registrations") in any year; provided that the aggregate offering value of
the Registrable Securities requested to be registered in any Long-Form
Registration must equal at least $10,000,000. A registration shall not count as
one of the permitted Long-Form Registrations until it has become effective and
unless the holders of Registrable Securities are able to register and sell at
least 80% of the Registrable Securities requested to be included in such
registration; provided that in any event the Company shall pay all Registration
Expenses in connection with any registration initiated as a Long-Form
Registration whether or not it has become effective and whether or not such
registration has counted as one of the permitted Long-Form Registrations.
<PAGE>
(c) Short-Form Registrations. In addition to the Long-Form
------------------------
Registrations provided pursuant to paragraph 1(b), the holders of a majority of
the Registrable Securities shall be entitled to request up to two Short-Form
Registrations in which the Company shall pay all Registration Expenses in any
year. Demand Registrations shall be Short-Form Registrations whenever the
Company is permitted to use any applicable short form. The Company shall use
its best efforts to make Short-Form Registrations on Form S-3 available for the
sale of Registrable Securities.
(d) Priority on Demand Registrations. If a Demand Registration is an
--------------------------------
underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold in such offering, the Company shall include in such registration
prior to the inclusion of any securities which are not Registrable Securities
the number of Registrable Securities requested to be included which in the
opinion of such underwriters can be sold, pro rata among the respective holders
thereof on the basis of the amount of Registrable Securities owned by each such
holder. Any Persons other than holders of Registrable Securities who participate
in Demand Registrations which are not at the Company's expense must pay their
share of the Registration Expenses as provided in paragraph 4 hereof.
(e) Restrictions on Demand Registration. The Company shall not be
-----------------------------------
obligated to effect any Demand Registration within 180 days after the effective
date of a previous Demand Registration. The Company may postpone for up to 60
days the filing or the effectiveness of a registration statement for a Demand
Registration or suspend the use of any prospectus included in a registration
statement if the Company's board of directors determines in its reasonable good
faith judgment that such Demand Registration would reasonably be expected to
have a material adverse effect on any proposal or plan by the Company or any of
its subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer,
reorganization or similar transaction; provided that in the event of such a
delay or suspension, the holders of a majority of the Registrable Securities
included in such Demand Registration shall be entitled to withdraw such request
and, if such request is withdrawn by such holders, such Demand Registration
shall not count as one of the permitted Demand Registrations hereunder and the
Company shall pay all Registration Expenses in connection with such
registration. The Company may delay or suspend a Demand Registration hereunder
only once in any twelve-month period.
(f) Selection of Underwriters. In the case of a Demand Registration,
-------------------------
the holders of a majority of the Registrable Securities included in such Demand
Registration shall have the right to select the investment banker(s) and
manager(s) to administer the offering, subject to the Company's approval, which
shall not be unreasonably withheld.
2. Holdback Agreements.
-------------------
(a) The holders of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 120-day
period beginning on the effective date of any underwritten Demand
-2-
<PAGE>
Registration (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree.
(b) The Company agrees not effect any public sale or distribution of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Demand
Registration (except as part of such underwritten registration or pursuant to
registrations on Form S-4 or Form S-8 or any successor form), unless the
underwriters managing the registered public offering otherwise agree.
3. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company shall
as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of Registrable Securities all such documents proposed to be filed, which
documents shall be subject to the review and comment of such counsel);
(b) notify the holders of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 180 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as the holders of Registrable
Securities may reasonably request in order to facilitate the disposition of the
Registrable Securities owned by the holders of Registrable Securities;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
the holders of Registrable Securities reasonably requests and do any and all
other acts and things which may be reasonably necessary or advisable to enable
the holders of Registrable Securities to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such seller (provided that
the Company shall not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction);
-3-
<PAGE>
(e) notify the holders of Registrable Securities, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of the holders of Registrable Securities, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the Nasdaq National Market;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
Registrable Securities or the underwriters, if any, reasonably request in order
to expedite or facilitate the disposition of such Registrable Securities
(including effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
the holders of Registrable Securities or any such underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested by any such seller or any such
underwriter, attorney, accountant or agent in connection with such registration
statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit the holders of Registrable Securities to participate in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of such holder and its counsel should be included; and
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order.
-4-
<PAGE>
4. Registration Expenses.
---------------------
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other Persons retained by the Company (all such expenses being
herein called "Registration Expenses"), shall be borne as provided in this
Agreement, except that the Company shall, in any event, pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on the Nasdaq National Market. Registration Expenses shall not
include underwriting discounts and commissions and in no event shall the Company
be required to pay any such underwriting discounts or commissions.
(b) In connection with each Demand Registration in respect of which
the Company is obligated to pay all Registration Expenses of the holders of
Registrable Securities, the Company shall reimburse the holders of Registrable
Securities for the reasonable fees and disbursements of one counsel chosen by
the holders of Registrable Securities.
(c) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
5. Indemnification.
---------------
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by the holders of Registrable
Securities expressly for use therein or by the holders of Registrable
Securities's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished the holders of Registrable Securities with a sufficient number of
copies of the same. In connection with an underwritten offering, the Company
shall indemnify such underwriters, their officers and directors and each Person
who controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
-5-
<PAGE>
(b) In connection with any registration statement in which the holders
of Registrable Securities is participating, the holders of Registrable
Securities shall furnish to the Company in writing such information and
affidavits as the Company reasonably requests for use in connection with any
such registration statement or prospectus and, to the extent permitted by law,
shall indemnify the Company, its directors and officers and each Person who
controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities and expenses resulting from any untrue or
alleged untrue statement of material fact contained in the registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission is
contained in any information or affidavit so furnished in writing by the holders
of Registrable Securities; provided that the obligation to indemnify shall be
limited to the net amount of proceeds received by the holders of Registrable
Securities from the sale of Registrable Securities pursuant to such registration
statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party) and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement shall remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and shall survive the transfer of securities. The Company
also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
6. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that the
holders of Registrable Securities shall not be required to make any
representations or warranties to the Company or the underwriters (other than
representations and warranties regarding the holders of Registrable Securities
and its intended
-6-
<PAGE>
method of distribution) or to undertake any indemnification obligations to the
Company or the underwriters with respect thereto, except as otherwise provided
in paragraph 5 hereof.
7. Definitions.
-----------
(a) "Person" means on individual, a partnership, a corporation, a
------
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
(b) "Registrable Securities" means (i) the Common Stock, par value
----------------------
$.01 per share (the "Common Stock"), of the Company held by MDCP as of the date
hereof, (ii) any Common Stock issued upon conversion of the 12% Cumulative
Redeemable Senior Preferred of the Company held by MDCP as of the date hereof,
(iii) any Comon Stock issued upon conversion of the 12% Cumulative Redeemable
Junior Preferred of the Company held by MDCP as of the date hereof, (iv) any
Common issued upon exercise of any warrants of the Company held by MDCP as of
the date hereof, (v) any Common Stock acquired by MDCP from any officer of the
Company, and (vi) any Common Stock issued or issuable with respect to the
securities referred to in clauses (i) through (v) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when they have been distributed to the public pursuant to a offering
registered under the Securities Act or sold to the public through a broker,
dealer or market maker in compliance with Rule 144 under the Securities Act (or
any similar rule then in force) or repurchased by the Company or any Subsidiary.
For purposes of this Agreement, a Person shall be deemed to be a holder of
Registrable Securities, and the Registrable Securities shall be deemed to be in
existence, whenever such Person has the right to acquire directly or indirectly
such Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected, and such Person shall be entitled to exercise the
rights of a holder of Registrable Securities hereunder.
8. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The rights granted hereunder are in
--------------------------
addition to, and not in limitation of, any registration rights granted to MDCP
under any prior agreement with the Company. The Company shall not hereafter
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the holders of Registrable Securities in
this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
--------------------------------------------
not take any action, or permit any change to occur, with respect to its
securities which would materially and adversely affect the ability of the
holders of Registrable Securities to include its Registrable Securities in a
registration undertaken pursuant to this Agreement or which would materially and
adversely affect the marketability of such Registrable Securities in any such
registration (including, without limitation, effecting a stock split or a
combination of shares).
-7-
<PAGE>
(c) Remedies. Any Person having rights under any provision of this
--------
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and the holders of a majority of the Registrable
Securities.
(e) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(g) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(i) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
-------------
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE
EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO ANY CHOICE OF
LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE OF DELAWARE OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE.
(j) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
-8-
<PAGE>
communications shall be sent to the Company and to the holders of Registrable
Securities at the addresses indicated below:
If to the Company:
-----------------
Hines Holdings, Inc.
12621 Jeffrey Road
Irvine, California 92720
Attention: President
If to the holders of Registrable Securities:
-------------------------------------------
Madison Dearborn Partners, Inc.
Three First National Plaza
Suite 3800
Chicago, Illinois 60602
Attention: Paul R. Wood
Thomas R. Reusche
With a copy (which shall not constitute notice to the holders of
----------------------------------------------------------------
Registrable Securities) to:
---------------------------
Kirkland & Ellis
200 E. Randolph Dr.
Chicago, Illinois 60601
Attention: Michael H. Kerr, P.C.
James S. Rowe
or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HINES HOLDINGS, INC.
By /s/ Thomas Reusche
--------------------------
Its__________________________
MADISON DEARBORN CAPITAL
PARTNERS, L.P.
By: Madison Dearborn Partners, L.P.
Its: General Partner
By: Madison Dearborn Partners, Inc.
Its: General Partner
By /s/ Thomas Reusche
--------------------------
Its__________________________
-10-
<PAGE>
KIRKLAND & ELLIS EXHIBIT 5.1
PARTNERSHIPS INCLUDING PROFESSIONAL CORPORATIONS
200 East Randolph Drive
Chicago, Illinois 60601
To Call Writer Direct: Facsimile:
312 861-2000 312 861-2200
June 16, 1998
Hines Horticulture, Inc.
12621 Jeffrey Road
Irvine, California 92620
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Hines Horticulture, Inc., a Delaware
corporation (the "Company"), in connection with the proposed registration by the
Company of 6,206,608 shares of its Common Stock, par value $.01 per share (the
"Common Stock"), including 809,557 shares of its Common Stock to cover over-
allotments, if any, pursuant to a Registration Statement on Form S-1 (File No.
333-51943), originally filed with the Securities and Exchange Commission (the
"Commission") on May 6, 1998 under the Securities Act of 1933, as amended (the
"Act") (such Registration Statement, as amended or supplemented, is hereinafter
referred to as the "Registration Statement"). Of the shares of Common Stock to
be registered pursuant to the Registration Statement, up to 5,809,557 are being
offered by the Company (the "Primary Shares") and 397,051 shares are being
offered by certain selling stockholders (the "Secondary Shares").
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the legal capacity of
all natural persons, the genuineness of the signatures of persons signing all
documents in connection with which this opinion is rendered, the authority of
such persons signing on behalf of the parties thereto other than the Company and
the due authorization, execution and delivery of all documents by the parties
thereto other than the Company. As to any facts material to the opinions
expressed herein, we have relied upon the statements and representations of
officers and other representations of the Company and others.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the internal laws of the State of
Illinois, the General
<PAGE>
Corporation law of the State of Delaware and the federal law of the United
States of America.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we hereby advise you
that in our opinion:
(1) The Primary Shares have been duly authorized and, when the
Registration Statement becomes effective under the Act, the Board of Directors
of the Company has taken all necessary action to approve the issuance and sale
of the Primary Shares, the Primary Shares have been issued in accordance with
the terms of the Underwriting Agreement, upon receipt of the consideration
contemplated thereby, and certificates representing the Primary Shares have been
duly executed and delivered on behalf of the Company and duly registered by the
Company's Registrar, the Primary Shares will be validly issued, fully paid and
nonassessable.
(2) The Secondary Shares are validly issued, fully paid and nonassessable.
For purposes of the foregoing opinion, we have relied on the opinion of Schreck
Morris, dated as June 15, 1998, attached hereto as Exhibit A, that any of the
Secondary Shares that were outstanding as of August 4, 1995 were validly issued,
fully paid and nonassessable as of such date.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission. This opinion and consent may be incorporated by
reference in a subsequent registration statement on Form S-1 filed pursuant to
Rule 462(b) under the Act with respect to the registration of additional
securities for sale in the offering contemplated by the Registration Statement.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Primary
Shares and the sale of the Secondary Shares.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
statutes be changed by legislative action, judicial decision or otherwise.
Very truly yours,
/s/ Kirkland & Ellis
KIRKLAND & ELLIS
<PAGE>
SCHRECK MORRIS EXHIBIT A
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
June 16, 1998
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Ladies and Gentlemen:
We have acted as special Nevada counsel to Hines Holdings, Inc., a Nevada
corporation (formerly known as Macluan Capital (Nevada) Inc., a Nevada
corporation) (the "Company"), and its subsidiary, Sun Gro Horticulture Inc., a
Nevada corporation ("Sun Gro") in connection with the merger of the Company with
and into Hines Horticulture, Inc., a Delaware corporation ("Hines Delaware")
and, thereafter, the issue and sale by Hines Delaware and the sale by certain
Selling Stockholders of Hines Delaware of an aggregate of up to 6,206,608 shares
of Common Stock, par value $.01 per share, including 809,557 shares to cover
over-allotments, pursuant to Hines Delaware's Registration Statement on Form S-1
(File No. 333-51943) (the "Registration Statement") to be filed with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act"). You have requested that our firm issue this
opinion in connection with the opinion your firm is issuing which will be
attached to the Registration Statement as Exhibit 5.1 thereto.
For the purpose of rendering this opinion, we have examined (i) that
certain opinion dated August 4, 1995 issued by Schreck, Jones, Bernhard, Woloson
& Godfrey, Chtd., special Nevada counsel to the Company and Sun Gro (the "Prior
Opinion"), a copy of which is attached hereto, which Prior Opinion was addressed
to Hines Horticulture, Inc., a Nevada corporation ("Hines Horticulture") in
connection with the acquisition by Madison Dearborn Capital Partners, L.P. and
Hines Horticulture of the Company by way of the merger of Hines Horticulture
into the Company, (ii) all records, documents and instruments referenced in the
Prior Opinion, and (iii) originals, or copies identified to our satisfaction as
being true copies, of such other records, documents and instruments as we have
deemed in our judgment as necessary or appropriate to enable us to render the
opinions expressed below. We have been furnished with, and with your consent
have relied
<PAGE>
Kirkland & Ellis
June 15, 1998
Page -2-
upon, (x) the Officer's Certificates dated August 4, 1995 described in
subparagraph (g) on page 2 of the Prior Opinion, (y) an Officer's Certificate of
the Company of even date herewith with respect to certain factual matters as of
August 4, 1995, and (z) the statements of fact and the representations and
warranties as to factual matters contained in the documents referenced in the
Prior Opinion; however, we have not been requested to conduct, nor have we
undertaken, any independent investigation to verify the content or veracity
thereof or to determine the accuracy of any statement, and no inference as to
our knowledge of any matters should be drawn from the fact of our representation
of the Company and Sun Gro.
Based upon the foregoing, and subject to all of the assumptions,
exceptions, limitations and qualifications set forth in the Prior Opinion, all
of which are incorporated herein by this reference, we are of the opinion that
paragraph 4 of the Prior Opinion, as and to the extent it applies to the Company
and Sun Gro only, was true and accurate as of the date of the Prior Opinion.
We are qualified to practice law in the State of Nevada. The opinions set
forth herein are expressly limited to the internal laws of the State of Nevada
and we do not purport to be experts on, or to express any opinion with respect
to the applicability thereto of, the laws of any other jurisdiction. We express
no opinion herein concerning, and we assume no responsibility as to laws or
judicial decisions related to, or any orders, consents or other authorizations
or approvals as may be required by, any federal law, including any federal
securities law, or any state securities or Blue Sky laws.
The opinions expressed herein are based upon the applicable laws, rules and
regulations in effect and the facts in existence as of the date of the Prior
Opinion. In delivering this letter to you, we have assumed no obligation, and we
advise you that, other than as described herein, we have made no effort, to
update the opinions set forth in the Prior Opinion, to conduct any inquiry into
the continued accuracy of such opinions, or to apprise you of any facts,
matters, transactions, events or occurrences that have taken place after the
date of the Prior Opinion, which may have affected the opinions set forth
therein. No opinions are offered or implied as to any matter, and no inference
may be drawn, beyond the strict scope of the specific issues expressly addressed
by the opinions herein.
This opinion is rendered only to you in your capacity as counsel to the
Company and its subsidiaries for the limited purpose of rendering your opinion
as described above. Neither this opinion nor the Prior Opinion may be relied
upon for any other purpose, or relied upon by any other person, firm or entity
for any purpose, without our prior written consent.
<PAGE>
Kirkland & Ellis
June 15, 1998
Page -3-
We hereby consent to the filing of this opinion with the Commission as an
exhibit to Exhibit 5.1 of the Registration Statement. In giving this consent, we
do not admit that we are in the category of persons whose consent is required
under Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
SCHRECK MORRIS
<PAGE>
SCHRECK, JONES, BERNHARD, WOLOSON & GODFREY
600 East Charleston Boulevard
Las Vegas, Nevada 89104
August 4, 1995
Hines Horticulture, Inc.
c/o Madison Dearborn Capital Partners, L.P.
Three First National Plaza, Suite 1330
Chicago, Illinois 60602
Re: Sale of Macluan Capital (Nevada) Inc.
Ladies and Gentlemen:
We have acted as special Nevada counsel to Macluan Capital (Nevada)
Inc., a Nevada corporation (the "Company"), and its subsidiaries, Agri Holdings
Inc., a Nevada corporation ("Agri Holdings"), Sun Gro Horticulture Inc., a
Nevada corporation ("Sun Gro") and Oregon Garden Products Inc., a Nevada
corporation ("OGP", and, together with Agri Holdings, and Sun Gro, the "Nevada
Subsidiaries") in connection with the acquisition by Madison Dearborn Capital
Partners, L.P., an Illinois limited partnership ("MDCP") and Hines Horticulture,
Inc., a Nevada corporation ("Buyer") of the Company by way of the merger of
Buyer into the Company, as set forth in that certain Acquisition Agreement dated
as of July 20, 1995 by and among the Company, MDCP and Buyer, as amended by
Amendment No. 1 to Acquisition Agreement dated as of August 4, 1995
(collectively, the "Acquisition Agreement"). Capitalized terms not otherwise
defined herein shall have the meanings ascribed to them in the Acquisition
Agreement.
In our capacity as such counsel, we have examined originals, or copies
identified to our satisfaction as being true copies of such records, documents
or other instruments as in our judgment are necessary or appropriate to enable
us to render the opinions expressed below, including:
a. The Articles of Incorporation of each of the Company and the
Nevada Subsidiaries, as amended to date;
b. The Bylaws of each of the Company and the Nevada Subsidiaries, as
amended to date;
<PAGE>
Hines Horticulture, Inc.
August 4, 1995
Page 2
c. All records of proceedings and actions of the Boards of Directors
of the Company and the Nevada Subsidiaries relating to the
Acquisition Agreement and the transactions contemplated thereby;
d. The Acquisition Agreement;
e. Good standing certificates with respect to the good standing of
the Company, Agri Holdings and OGP issued by the office of the
Secretary of State of Nevada dated August 1, 1995, and with
respect to the good standing of Sun Gro, the certificate dated
August 3, 1995;
f. Letter from the Nevada Department of Taxation dated August 2,
1995, responding to our inquiries regarding the tax and business
license status of each of the Company and the Nevada Subsidiaries
in the State of Nevada, and written confirmation of the
Department of Taxation of the filing of business registration
applications for Agri Holdings and Sun Gro on August 3, 1995; and
g. Officer's Certificates dated August 4, 1995, of the Company and
each of the Nevada Subsidiaries, and all other certificates of
secretaries and other officers of the Company and each Nevada
Subsidiary required by or delivered in connection with the
Acquisition Agreement (collectively, "Officer's Certificates");
We have also examined such questions of law as we consider necessary or
appropriate for the purpose of such opinions.
Without limiting the generality of the foregoing, in rendering these
opinions, we have, with your permission, assumed without independent
verification (i) the genuineness of all signatures, (ii) that each party other
than the Company and the Nevada Subsidiaries is duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, (iii) the power and authority of each party other than the
Company and the Nevada Subsidiaries signing such documents to execute, deliver
and perform such instruments, documents and agreements to which such party is a
signatory, (iv) that each of the parties has duly and validly executed and
delivered each instrument, document, and agreement to which such party is a
signatory, and such party's obligations set forth therein are its legal, valid,
and binding obligations, enforceable in accordance with its respective terms,
(v) that each natural person executing any such instrument, document, or
agreement has sufficient legal capacity to do so, (vi)
<PAGE>
Hines Horticulture, Inc.
August 4, 1995
Page 3
that all documents submitted to us as originals are authentic, and all documents
submitted to us as certified, conformed, photostatic or facsimile copies conform
to the original document, (vii) that there are no oral or written modifications
of or amendments to the documents we have examined, or which would constitute a
waiver of any of the provisions thereof by actions or conduct of the parties or
otherwise, and (viii) the accuracy and completeness of all corporate records
made available to us by each of the Company and the Nevada Subsidiaries.
In our examination of documents, we have assumed the truthfulness of
all statements of fact contained therein. When relevant facts were not
independently established, we have relied on representations made in or pursuant
to certificates of the officers of each of the Company and the Nevada
Subsidiaries.
We are qualified to practice law in the State of Nevada. The opinions
set forth herein are expressly limited to the laws of the State of Nevada and we
do not purport to be experts on, or to express any opinion herein concerning,
any law other than the law of the State of Nevada. We express no opinion herein
concerning any federal law, including any federal securities law, or any state
securities law.
Based on the foregoing, and limited as aforesaid, we are of the
opinion that:
(1) The Company and each of the Nevada Subsidiaries are corporations
validly existing and in good standing under the laws of the State of Nevada.
(2) The Company and each of the Nevada Subsidiaries have all
necessary corporate power and authority to own and operate their respective
properties and to carry on their respective businesses as presently conducted.
(3) The Company and each of the Nevada Subsidiaries have all
necessary power and authority to execute, deliver and perform its obligations
under the Acquisition Agreement and all other agreements that are exhibits
thereto to which they are a party (collectively, the "Transaction Documents").
(4) Based on a review of the corporate records of the Company and
each of the Nevada Subsidiaries, immediately (a) prior to the consummation of
any of the transactions contemplated by the Transaction Documents and (b) after
the Merger has become effective, all of the outstanding shares of capital stock
of the Company and each of the Nevada Subsidiaries will be duly authorized,
validly issued, fully paid and nonassessable.
<PAGE>
Hines Horticulture, Inc.
August 4, 1995
Page 4
(5) The Transaction Documents have been duly authorized by the
Company and each of the Nevada Subsidiaries. Upon execution by any officer of
the Company and the Nevada Subsidiaries, the Transaction Documents to which the
Company and such Nevada Subsidiaries are parties will have been duly executed.
This opinion is being furnished only to you and is solely for your
benefit in connection with the Acquisition Agreement. This opinion may not be
relied upon or used by you for any other purpose, or otherwise circulated or
furnished to, quoted from, referred to or relied upon by any other person, firm
or corporation for any purpose, without our prior written consent, except that
Bankers Trust Company, BT Commercial Corporation and the other lenders to the
initial Credit Agreement dated as of August 4, 1995, may each rely on this
opinion to the same extent as if it were addressed directly to it.
Yours very truly,
SCHRECK, JONES, BERNHARD,
WOLOSON & GODFREY
<PAGE>
EXHIBIT 10.24
HINES HOLDINGS, INC.
AMENDMENT NUMBER 1 TO PURCHASE AGREEMENT
----------------------------------------
This Amendment Number 1 to Purchase Agreement (this "Amendment"), is
---------
made as of June 11, 1998, by and among Hines Holdings, Inc., a Nevada
corporation (the "Company"), and the Persons listed on the signature pages
-------
hereto as Purchasers (collectively, the "Purchasers").
----------
Reference is made to (i) that certain Purchase Agreement dated
December 16, 1997, by and among the Company and the Purchasers (the "Purchase
--------
Agreement"), (ii) that certain Notice to Purchasers of Subsequent Closing dated
- ---------
March 16, 1998, by and among the Company and the Purchasers (the "First
-----
Subsequent Closing Notice") and (iii) that certain Notice to Purchasers of
- -------------------------
Subsequent Closing dated April 2, 1998, by and among the Company and the
Purchasers (the "Second Subsequent Closing Notice"). The Company and the
--------------------------------
Purchasers desire to amend the Purchase Agreement, the First Subsequent Closing
Notice and the Second Subsequent Closing Notice, on the terms and subject to the
conditions set forth herein. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Purchase Agreement.
Now therefore, the parties intending to be legally bound hereby agree
as follows.
1. Section 7P of the Purchase Agreement is hereby amended in its entirety
to read as follows:
"Consideration for Warrants. The Purchasers and the Company
--------------------------
acknowledge and agree that as of the date hereof the fair market
value of the maximum number of shares of Class A Preferred which
may be issued hereunder is $19,404,105 and the fair market value
of the maximum number of shares of Common Stock issuable upon
exercise of the Warrants which may be issued hereunder is
$595,895 and that, for all purposes (including tax and
accounting), the consideration for the issuance of the Warrants
shall be allocated by each Purchaser and the Company as set forth
on the Schedule of Purchasers attached hereto. Each Purchaser and
the Company shall file their respective federal, state and local
tax returns in a manner which is consistent with such valuation
and allocation and shall not take any contrary position with any
taxing authority."
2. The Schedule of Purchasers attached to the Purchase Agreement is
hereby amended in its entirety to read as set forth on Annex A attached hereto.
-------
3. The Subsequent Closing Schedule attached to the Purchase Agreement is
hereby amended in its entirety to read as set forth on Annex B attached hereto.
-------
4. The Schedule of Purchasers attached to the First Subsequent Closing
Notice is hereby amended in its entirety to read as set forth on Annex C
-------
attached hereto.
<PAGE>
5. The Schedule of Securities Available for Purchase After March 18, 1998
Closing attached to the First Subsequent Closing Notice is hereby amended in its
entirety to read as set forth on Annex D attached hereto.
-------
6. The Schedule of Purchasers attached to the Second Subsequent Closing
Notice is hereby amended in its entirety to read as set forth on Annex E
-------
attached hereto.
7. The Schedule of Securities Available for Purchase After April 2, 1998
Closing attached to the Second Subsequent Closing Notice is hereby amended in
its entirety to read as set forth on Annex F attached hereto.
-------
8. Except as set forth herein, no provision of the Purchase Agreement,
First Subsequent Closing Notice or Second Subsequent Closing Notice shall be
deemed to be amended or modified in any respect.
9. This Amendment may be executed in any number of separate counterparts
(including by means of facsimile transmission), each of which shall be deemed an
original and all of which when taken together shall constitute one and the same
agreement.
* * * *
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
HINES HOLDINGS, INC.
By: /s/ Paul R. Wood
Its: President
PURCHASERS
ABBOTT CAPITAL 1330
INVESTORS I, LP
By: ABBOTT CAPITAL 1330
GENPAR I, LLC
Its. General Partner
By: /s/ Thomas Hallagan
Its: Manager
MADISON DEARBORN CAPITAL PARTNERS, L.P.
By: MADISON DEARBORN PARTNERS,
L.P.
Its: General Partner
By: MADISON DEARBORN PARTNERS,
INC.
Its: General Partner
By: /s/ Paul R. Wood
Its: Vice President
<PAGE>
ANNEX A
SCHEDULE OF PURCHASERS
----------------------
<TABLE>
<CAPTION>
Total No. of
No. of Purchase Shares
Shares Price issuable
of for upon Purchase
Names and Class A Class A Exercise of Price for
Addresses Preferred Preferred Warrant Warrant
--------- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. 3,500 $3,395,718 104,282 $104,282
Three First National Plaza
Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 6,000 $5,821,231 178,769 $178,769
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite 2800
Attn: Thomas W. Hallagan
________ __________ ________ ________
TOTAL 9,500 $9,216,949 283,051 $283,051
</TABLE>
<PAGE>
ANNEX B
SUBSEQUENT CLOSING SCHEDULE
---------------------------
<TABLE>
<CAPTION>
Total No. of
No. of Purchase Shares
Shares Price issuable
of for upon Purchase
Names and Class A Class A Exercise of Price for
Addresses Preferred Preferred Warrant Warrant
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. 1,500 $ 1,455,308 44,692 $ 44,692
Three First National Plaza
Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 9,000 $ 8,731,848 268,152 $268,152
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite 2800
Attn: Thomas W. Hallagan
------- ------------ -------- --------
TOTAL 10,500 $10,187,156 312,844 $312,844
</TABLE>
<PAGE>
ANNEX C
SCHEDULE OF PURCHASERS
----------------------
MARCH 18, 1998
--------------
<TABLE>
<CAPTION>
Total No. of
No. of Purchase Shares
Shares Price issuable
of for upon Purchase
Names and Class A Class A Exercise of Price for
Addresses Preferred Preferred Warrant Warrant
---------- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. -0- -0- -0- -0-
Three First National Plaza, Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 4,250 $4,123,373 126,627 $126,627
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite
2800
Attn: Thomas W. Hallagan
------- ---------- ------- --------
TOTAL 4,250 $4,123,373 126,627 $126,627
</TABLE>
<PAGE>
ANNEX D
SCHEDULE OF SECURITIES AVAILABLE
--------------------------------
FOR PURCHASE AFTER MARCH 18, 1998 CLOSING
-----------------------------------------
<TABLE>
<CAPTION>
No. of
Total Shares
No. of Purchase issuable
Shares Price upon
of for Exercise Purchase
Names and Class A Class A of Price for
Addresses Preferred Preferred Warrant Warrant
- ---------------------------------------- --------- --------- ------- --------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. 1,500 $1,455,308 44,692 $ 44,692
Three First National Plaza
Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 4,750 $4,608,475 141,525 $141,525
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite 2800
Attn: Thomas W. Hallagan
------ ---------- -------- --------
TOTAL 6,250 $6,063,783 186,217 $186,217
</TABLE>
<PAGE>
ANNEX E
SCHEDULE OF PURCHASERS
----------------------
APRIL 2, 1998
-------------
<TABLE>
<CAPTION>
Total No. of
No. of Purchase Shares
Shares Price issuable
of for upon Purchase
Names and Class A Class A Exercise of Price for
Addresses Preferred Preferred Warrant Warrant
- ----------------------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. -0- -0- -0- -0-
Three First National Plaza, Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 250 $242,551 7,449 $7,449
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite
2800
Attn: Thomas W. Hallagan
------ --------- ------- --------
TOTAL 250 $242,551 7,449 $7,449
</TABLE>
<PAGE>
ANNEX F
SCHEDULE OF SECURITIES AVAILABLE
--------------------------------
FOR PURCHASE AFTER APRIL 2, 1998 CLOSING
----------------------------------------
<TABLE>
<CAPTION> No. of
Total Shares
No. of Purchase issuable
Shares Price upon
of for Exercise Purchase
Names and Class A Class A of Price for
Addresses Preferred Preferred Warrant Warrant
- ----------------------------------------- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. 1,500 $1,455,308 44,692 $ 44,692
Three First National Plaza
Suite 3800
Chicago, IL 60602
Attention: Paul R. Wood
Abbott Capital 1330 Investors I, LP 4,500 $4,365,924 134,076 $134,076
c/o Abbott Capital Management, LLC
1330 Avenue of the Americas, Suite 2800
Attn: Thomas W. Hallagan
------ --------- -------- --------
TOTAL 6,000 $5,821,232 178,768 $178,768
</TABLE>
<PAGE>
EXHIBIT 10.26
HINES HORTICULTURE, INC.
1998 LONG-TERM EQUITY INCENTIVE PLAN
------------------------------------
1. Purpose.
-------
This plan shall be known as the Hines Horticulture, Inc. 1998 Long-
Term Equity Incentive Plan (the "Plan"). The purpose of the Plan shall be to
promote the long-term growth and profitability of Hines Horticulture, Inc. (the
"Company") and its Subsidiaries by (i) providing certain directors, officers and
employees of the Company and its Subsidiaries with incentives to maximize
stockholder value and otherwise contribute to the success of the Company and
(ii) enabling the Company to attract, retain and reward the best available
persons for positions of responsibility. Grants of incentive or nonqualified
stock options, stock appreciation rights ("SARs"), either alone or in tandem
with options, restricted stock, performance awards, or any combination of the
foregoing may be made under the Plan.
2. Definitions.
-----------
(a) "Board of Directors" and "Board" mean the board of directors of
------------------ -----
Hines Horticulture, Inc.
(b) "Cause" means the occurrence of one of the following events:
-----
(i) Conviction of a felony or any crime or offense lesser than
a felony involving the property of the Company or a Subsidiary; or
(ii) Conduct that has caused demonstrable and serious injury
to the Company or a Subsidiary, monetary or otherwise; or
(iii) Willful refusal to perform or substantial disregard of
duties properly assigned, as determined by the Company; or
(iv) Breach of duty of loyalty to the Company or a Subsidiary
or other act of fraud or dishonesty with respect to the Company or a Subsidiary.
(c) "Change in Control" means the occurrence of one of the following
-----------------
events:
(i) if any "person" or "group" as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act, other than an Exempt Person, is or
becomes the "beneficial owner "
<PAGE>
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; or
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board and any new directors
whose election by the Board or nomination for election by the Company's
stockholders was approved by at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election was previously so approved, cease for any reason to constitute a
majority thereof; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) by which the corporate
existence of the Company is not affected and following which the Company's chief
executive officer and directors retain their positions with the Company (and
constitute at least a majority of the Board); or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets, other than a sale to
an Exempt Person.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Compensation Committee of the Board. The
---------
membership of the Committee shall be constituted so as to comply at all times
with the applicable requirements of Rule 16b-3 under the Exchange Act.
(f) "Common Stock" means the Common Stock, par value $.01 per share,
------------
of the Company, and any other shares into which such stock may be changed by
reason of a recapitalization, reorganization, merger, consolidation or any other
change in the corporate structure or capital stock of the Company.
(g) "Competition" is deemed to occur if a person whose employment
-----------
with the Company or its Subsidiaries has terminated obtains a position as a
full-time or part-time employee of, as a member of the board of directors of, or
as a consultant or advisor with or to, or acquires an ownership interest in
excess of 5% of, a corporation, partnership, firm or other entity that engages
in any of the businesses of the Company or any Subsidiary with which the person
was involved in a management role at any time during his or her last five years
of employment with or other service for the Company or any Subsidiaries.
-2-
<PAGE>
(h) "Disability" means a disability that would entitle an eligible
----------
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Exempt Person" means (i) Madison Dearborn Capital Partners,
-------------
L.P., (ii) any person, entity or group under the control of any party included
in clause (i), or (iii) any employee benefit plan of the Company or a trustee or
other administrator or fiduciary holding securities under an employee benefit
plan of the Company.
(k) "Fair Market Value" of a share of Common Stock of the Company
-----------------
means, as of the date in question, the officially-quoted opening selling price
of the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for the
date in question or, if the Common Stock is not then listed or quoted in the
Market, the Fair Market Value shall be the fair value of the Common Stock
determined in good faith by the Board; provided, however, that when shares
received upon exercise of an option are immediately sold in the open market, the
net sale price received may be used to determine the Fair Market Value of any
shares used to pay the exercise price or withholding taxes and to compute the
withholding taxes.
(l) "Incentive Stock Option" means an option conforming to the
----------------------
requirements of Section 422 of the Code and any successor thereto.
(m) "Non-Employee Director" has the meaning given to such term in
---------------------
Rule 16b-3 under the Exchange Act.
(n) "Nonqualified Stock Option" means any stock option other than an
-------------------------
Incentive Stock Option.
(o) "Other Company Securities" mean securities of the Company other
------------------------
than Common Stock, which may include, without limitation, unbundled stock units
or components thereof, debentures, preferred stock, warrants and securities
convertible into or exchangeable for Common Stock or other property.
(p) "Retirement" means retirement as defined under any Company
----------
pension plan or retirement program or termination of one's employment on
retirement with the approval of the Committee.
(q) "Subsidiary" means a corporation or other entity of which
----------
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
-3-
<PAGE>
3. Administration.
--------------
The Plan shall be administered by the Committee; provided that the
Board may, in its discretion, at any time and from time to time, resolve to
administer the Plan, in which case the term "Committee" shall be deemed to mean
the Board for all purposes herein. The Committee shall consist of at least two
directors. Subject to the provisions of the Plan, the Committee shall be
authorized to (i) select persons to participate in the Plan, (ii) determine the
form and substance of grants made under the Plan to each participant, and the
conditions and restrictions, if any, subject to which such grants will be made,
(iii) modify the terms of grants made under the Plan, (iv) interpret the Plan
and grants made thereunder, (v) make any adjustments necessary or desirable in
connection with grants made under the Plan to eligible participants located
outside the United States and (vi) adopt, amend, or rescind such rules and
regulations, and make such other determinations, for carrying out the Plan as it
may deem appropriate. Decisions of the Committee on all matters relating to the
Plan shall be in the Committee's sole discretion and shall be conclusive and
binding on all parties. The validity, construction and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in accordance
with applicable federal and state laws and rules and regulations promulgated
pursuant thereto. No member of the Committee and no officer of the Company
shall be liable for any action taken or omitted to be taken by such member, by
any other member of the Committee or by any officer of the Company in connection
with the performance of duties under the Plan, except for such person's own
willful misconduct or as expressly provided by statute.
The expenses of the Plan shall be borne by the Company. The Plan
shall not be required to establish any special or separate fund or make any
other segregation of assets to assume the payment of any award under the Plan,
and rights to the payment of such awards shall be no greater than the rights of
the Company's general creditors.
4. Shares Available for the Plan.
-----------------------------
Subject to adjustments as provided in Section 15, an aggregate of
_____________ shares of Common Stock (the "Shares") may be issued pursuant to
the Plan. Such Shares may be in whole or in part authorized and unissued, or
shares which are held by the Company as treasury shares. If any grant under the
Plan expires or terminates unexercised, becomes unexercisable or is forfeited as
to any Shares, such unpurchased or forfeited Shares shall thereafter be
available for further grants under the Plan unless, in the case of options
granted under the Plan, related SARs are exercised.
Without limiting the generality of the foregoing provisions of this
Section 4 or the generality of the provisions of Sections 3, 6 or 17 or any
other section of this Plan, the Committee may, at any time or from time to time,
and on such terms and conditions (that are consistent with and not in
contravention of the other provisions of this Plan) as the Committee may, in its
sole discretion, determine, enter into agreements (or take other actions with
respect to the options) for new options containing terms (including exercise
prices) more (or less) favorable than the outstanding options.
-4-
<PAGE>
5. Participation.
-------------
Participation in the Plan shall be limited to those directors
(including Non-Employee Directors), officers (including non-employee officers)
and employees of the Company and its Subsidiaries selected by the Committee
(including participants located outside the United States). Nothing in the Plan
or in any grant thereunder shall confer any right on a participant to continue
in the employ of or the performance of services for the Company or shall
interfere in any way with the right of the Company to terminate the employment
or performance of services of a participant at any time. By accepting any award
under the Plan, each participant and each person claiming under or through him
or her shall be conclusively deemed to have indicated his or her acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee.
Incentive Stock Options or Nonqualified Stock Options, SARs, alone or
in tandem with options, restricted stock awards, performance awards, or any
combination thereof, may be granted to such persons and for such number of
Shares as the Committee shall determine (such individuals to whom grants are
made being sometimes herein called "optionees" or "grantees," as the case may
be). Determinations made by the Committee under the Plan need not be uniform
and may be made selectively among eligible individuals under the Plan, whether
or not such individuals are similarly situated. A grant of any type made
hereunder in any one year to an eligible participant shall neither guarantee nor
preclude a further grant of that or any other type to such participant in that
year or subsequent years.
6. Incentive and Nonqualified Options.
----------------------------------
The Committee may from time to time grant to eligible participants
Incentive Stock Options, Nonqualified Stock Options, or any combination thereof;
provided that the Committee may grant Incentive Stock Options only to eligible
employees of the Company or its subsidiaries (as defined for this purpose in
Section 424(f) of the Code). In any one calendar year, the Committee shall not
grant to any one participant, options or SARs to purchase a number of shares of
Common Stock in excess of 20% of the shares authorized under the Plan. The
options granted shall take such form as the Committee shall determine, subject
to the following terms and conditions.
It is the Company's intent that Nonqualified Stock Options granted
under the Plan not be classified as Incentive Stock Options, that Incentive
Stock Options be consistent with and contain or be deemed to contain all
provisions required under Section 422 of the Code and any successor thereto, and
that any ambiguities in construction be interpreted in order to effectuate such
intent. If an Incentive Stock Option granted under the Plan does not qualify as
such for any reason, then to the extent of such nonqualification, the stock
option represented thereby shall be regarded as a Nonqualified Stock Option duly
granted under the Plan, provided that such stock option otherwise meets the
Plan's requirements for Nonqualified Stock Options.
(a) Price. The price per Share deliverable upon the exercise of each
-----
option ("exercise price") shall be established by the Committee, except that the
exercise price of any option may not be less than 100% of the Fair Market Value
of a share of Common Stock as of the date of
-5-
<PAGE>
grant of the option, and in the case of the grant of any Incentive Stock Option
to an employee who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of stock of the Company or any of its
Subsidiaries, the exercise price may not be less that 110% of the Fair Market
Value of a share of Common Stock as of the date of grant of the option, in each
case unless otherwise permitted by Section 422 of the Code.
(b) Payment. Options may be exercised, in whole or in part, upon
-------
payment of the exercise price of the Shares to be acquired. Unless otherwise
determined by the Committee, payment shall be made (i) in cash (including check,
bank draft or money order), (ii) by delivery of outstanding shares of Common
Stock with a Fair Market Value on the date of exercise equal to the aggregate
exercise price payable with respect to the options' exercise, (iii) by
simultaneous sale through a broker reasonably acceptable to the Committee of
Shares acquired on exercise, as permitted under Regulation T of the Federal
Reserve Board, (iv) by authorizing the Company to withhold from issuance a
number of Shares issuable upon exercise of the options which, when multiplied by
the Fair Market Value of a share of Common Stock on the date of exercise is
equal to the aggregate exercise price payable with respect to the options so
exercised or (v) by any combination of the foregoing. Options may also be
exercised upon payment of the exercise price of the Shares to be acquired by
delivery of the optionee's promissory note, but only to the extent specifically
approved by and in accordance with the policies of the Committee.
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Common Stock (and not fractional shares of Common Stock) may be
tendered in payment, (B) such grantee must present evidence acceptable to the
Company that he or she has owned any such shares of Common Stock tendered in
payment of the exercise price (and that such tendered shares of Common Stock
have not been subject to any substantial risk of forfeiture) for at least six
months prior to the date of exercise, and (C) Common Stock must be delivered to
the Company. Delivery for this purpose may, at the election of the grantee, be
made either by (A) physical delivery of the certificate(s) for all such shares
of Common Stock tendered in payment of the price, accompanied by duly executed
instruments of transfer in a form acceptable to the Company, or (B) direction to
the grantee's broker to transfer, by book entry, such shares of Common Stock
from a brokerage account of the grantee to a brokerage account specified by the
Company. When payment of the exercise price is made by delivery of Common
Stock, the difference, if any, between the aggregate exercise price payable with
respect to the option being exercised and the Fair Market Value of the share(s)
of Common Stock tendered in payment (plus any applicable taxes) shall be paid in
cash. No grantee may tender shares of Common Stock having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the option being
exercised (plus any applicable taxes).
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (iv) above, (A) only a whole number of
Share(s) (and not fractional Shares) may be withheld in payment and (B) such
grantee must present evidence acceptable to the Company that he or she has owned
a number of shares of Common Stock at least equal to the number of Shares to be
withheld in payment of the exercise price (and that such owned shares of Common
Stock have not been subject to any substantial risk of forfeiture) for at least
six months prior to the date of exercise. When payment of the exercise price is
made by withholding of Shares, the difference, if
-6-
<PAGE>
any, between the aggregate exercise price payable with respect to the option
being exercised and the Fair Market Value of the Share(s) withheld in payment
(plus any applicable taxes) shall be paid in cash. No grantee may authorize the
withholding of Shares having a Fair Market Value exceeding the aggregate
exercise price payable with respect to the option being exercised (plus any
applicable taxes). Any withheld Shares shall no longer be issuable under such
option.
(c) Terms of Options. The term during which each option may be
----------------
exercised shall be determined by the Committee, but, except as otherwise
provided herein, in no event shall an option be exercisable in whole or in part,
in the case of a Nonqualified Stock Option or an Incentive Stock Option (other
than as described below), more than ten years from the date it is granted or, in
the case of an Incentive Stock Option granted to an employee who at the time of
the grant owns more than 10% of the total combined voting power of all classes
of stock of the Company or any of its Subsidiaries, if required by the Code,
more than five years from the date it is granted. All rights to purchase Shares
pursuant to an option shall, unless sooner terminated, expire at the date
designated by the Committee. The Committee shall determine the date on which
each option shall become exercisable and may provide that an option shall become
exercisable in installments. The Shares constituting each installment may be
purchased in whole or in part at any time after such installment becomes
exercisable, subject to such minimum exercise requirements as may be designated
by the Committee. Unless otherwise provided herein or in the terms of the
related grant, an optionee may exercise an option only if he or she is, and has
continuously since the date the option was granted, been a director, officer or
employee of the Company or a Subsidiary. Prior to the exercise of an option and
delivery of the Shares represented thereby, the optionee shall have no rights as
a stockholder with respect to any Shares covered by such outstanding option
(including any dividend or voting rights).
(d) Limitations on Grants. If required by the Code, the aggregate
---------------------
Fair Market Value (determined as of the grant date) of Shares for which an
Incentive Stock Option is exercisable for the first time during any calendar
year under all equity incentive plans of the Company and its subsidiaries (as
defined in Section 422 of the Code) may not exceed $100,000.
(e) Termination; Change in Control.
------------------------------
(i) If a participant ceases to be a director, officer or
employee of the Company or any Subsidiary due to death or Disability, all of the
participant's options and SARs shall become fully vested and exercisable and
shall remain so for a period of one year from the date of such death or
Disability, but in no event after the expiration date of the options or SARs.
Notwithstanding the foregoing, if the Disability giving rise to the termination
of employment is not a disability within the meaning of Section 22(e)(3) of the
Code, Incentive Stock Options not exercised by such participant within 90 days
after the date of termination of employment will cease to qualify as Incentive
Stock Options and will be treated as Nonqualified Stock Options under the Plan
if required to be so treated under the Code.
(ii) If a participant ceases to be a director, officer or
employee of the Company or any Subsidiary upon the occurrence of his or her
Retirement, (A) all of the participant's options and SARs that were exercisable
on the date of Retirement shall remain exercisable for, and
-7-
<PAGE>
shall otherwise terminate at the end of, a period of up to three years after the
date of Retirement, but in no event after the expiration date of the options or
SARs ; provided that the participant does not engage in Competition during such
three-year period unless he or she receives written consent to do so from the
Board or the Committee, and (B) all of the participant's options and SARs that
were not exercisable on the date of Retirement shall be forfeited immediately
upon such Retirement, provided, however, that such options may become fully
vested and exercisable in the discretion of the Committee. Notwithstanding the
foregoing, Incentive Stock Options not exercised by such participant within 90
days after Retirement will cease to qualify as Incentive Stock Options and will
be treated as Nonqualified Stock Options under the Plan if required to be so
treated under the Code.
(iii) If a participant ceases to be a director, officer or
employee of the Company or a Subsidiary due to Cause, all of the participant's
options and SARs shall be forfeited immediately upon such cessation, whether or
not then exercisable.
(iv) Unless otherwise determined by the Committee, if a
participant ceases to be a director, officer or employee of the Company or a
Subsidiary for any reason other than death, Disability, Retirement or Cause, (A)
all of the participant's options and SARs that were exercisable on the date of
such cessation shall remain exercisable for, and shall otherwise terminate at
the end of, a period of 90 days after the date of such cessation, but in no
event after the expiration date of the options or SARs; provided that the
participant does not engage in Competition during such 90-day period unless he
or she receives written consent to do so from the Board or the Committee, and
(B) all of the participant's options and SARs that were not exercisable on the
date of such cessation shall be forfeited immediately upon such cessation.
(v) If there is a Change in Control of the Company and a
grantee is terminated from being a director, officer or employee of the Company
or its Subsidiaries within one year thereafter, all of the participant's options
and SARs shall become fully vested and exercisable immediately prior to such
termination and shall remain so for one year after the date of termination. In
addition, the Committee shall have the authority to grant options that become
fully vested and exercisable automatically upon a Change in Control, whether or
not the grantee is subsequently terminated thereafter.
(f) Grant of Reload Options. The Committee may provide (either at the
-----------------------
time of grant or exercise of an option), in its discretion, for the grant to a
grantee who exercises all or any portion of an option ("Exercised Options") and
who pays all or part of such exercise price with shares of Common Stock, of an
additional option (a "Reload Option") for a number of shares of Common Stock
equal to the sum (the "Reload Number") of the number of shares of Common Stock
tendered or withheld in payment of such exercise price for the Exercised Options
plus, if so provided by the Committee, the number of shares of Common Stock, if
any, tendered or withheld by the grantee or withheld by the Company in
connection with the exercise of the Exercised Options to satisfy any federal,
state or local tax withholding requirements. The terms of each Reload Option,
including the date of its expiration and the terms and conditions of its
exercisability and transferability, shall be the same as the terms of the
Exercised Option to which it relates, except that (i) the grant date for each
Reload Option shall be the date of exercise of the Exercised Option to
-8-
<PAGE>
which it relates and (ii) the exercise price for each Reload Option shall be the
Fair Market Value of the Common Stock on the grant date of the Reload Option.
7. Stock Appreciation Rights.
-------------------------
The Committee shall have the authority to grant SARs under this Plan,
either alone or to any optionee in tandem with options (either at the time of
grant of the related option or thereafter by amendment to an outstanding
option). SARs shall be subject to such terms and conditions as the Committee
may specify.
No SAR may be exercised unless the Fair Market Value of a share of
Common Stock of the Company on the date of exercise exceeds the exercise price
of the SAR or, in the case of SARs granted in tandem with options, the exercise
price of any options to which the SARs correspond. Prior to the exercise of the
SAR and delivery of the cash and/or Shares represented thereby, the participant
shall have no rights as a stockholder with respect to Shares covered by such
outstanding SAR (including any dividend or voting rights).
SARs granted in tandem with options shall be exercisable only when, to
the extent and on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of any related SAR
to the extent the option is exercised, and the exercise of an SAR shall cause an
immediate forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of an SAR, the participant shall be entitled to a
distribution in an amount equal to the difference between the Fair Market Value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, the exercise price
of any option to which the SAR is related, multiplied by the number of Shares as
to which the SAR is exercised. The Committee shall decide whether such
distribution shall be in cash, in Shares having a Fair Market Value equal to
such amount, in Other Company Securities having a Fair Market Value equal to
such amount or in a combination thereof.
All SARs will be exercised automatically on the last day prior to the
expiration date of the SAR or, in the case of SARs granted in tandem with
options, the expiration date of any related option, so long as the Fair Market
Value of a share of Common Stock on that date exceeds the exercise price of the
SAR or any related option, as applicable. An SAR granted in tandem with options
shall expire at the same time as any related option expires and shall be
transferable only when, and under the same conditions as, any related option is
transferable.
8. Restricted Stock.
----------------
The Committee may at any time and from time to time grant Shares of
restricted stock under the Plan to such participants and in such amounts as it
determines. Each grant of restricted stock shall specify the applicable
restrictions on such Shares, the duration of such restrictions (which shall be
at least six months except as otherwise provided in the third paragraph of this
Section 8),
-9-
<PAGE>
and the time or times at which such restrictions shall lapse with respect to all
or a specified number of Shares that are part of the grant.
The participant will be required to pay the Company the aggregate par
value of any Shares of restricted stock (or such larger amount as the Board may
determine to constitute capital under Section 154 of the Delaware General
Corporation Law, as amended) within ten days of the date of grant, unless such
Shares of restricted stock are treasury shares. Unless otherwise determined by
the Committee, certificates representing Shares of restricted stock granted
under the Plan will be held in escrow by the Company on the participant's behalf
during any period of restriction thereon and will bear an appropriate legend
specifying the applicable restrictions thereon, and the participant will be
required to execute a blank stock power therefor. Except as otherwise provided
by the Committee, during such period of restriction the participant shall have
all of the rights of a holder of Common Stock, including but not limited to the
rights to receive dividends and to vote, and any stock or other securities
received as a distribution with respect to such participant's restricted stock
shall be subject to the same restrictions as then in effect for the restricted
stock.
Except as otherwise provided by the Committee, all restrictions on a
grantee's restricted stock will lapse at such time as the grantee ceases to be a
director, officer or employee of the Company or a Subsidiary, if such cessation
occurs due to a termination within one year after a Change in Control or due to
death, Disability or (in the discretion of the Committee) Retirement. At such
time as a participant ceases to be a director, officer or employee of the
Company or its Subsidiaries for any other reason, all Shares of restricted stock
granted to such participant on which the restrictions have not lapsed shall be
immediately forfeited to the Company.
9. Performance Awards.
------------------
Performance awards may be granted to participants at any time and from
time to time as determined by the Committee. The Committee shall have complete
discretion in determining the size and composition of performance awards so
granted to a participant and the appropriate period over which performance is to
be measured (a "performance cycle"). Performance awards may include (i)
specific dollar-value target awards (ii) performance units, the value of each
such unit being determined by the Committee at the time of issuance, and/or
(iii) performance Shares, the value of each such Share being equal to the Fair
Market Value of a share of Common Stock.
The value of each performance award may be fixed or it may be
permitted to fluctuate based on a performance factor (e.g., return on equity)
selected by the Committee.
The Committee shall establish performance goals and objectives for
each performance cycle on the basis of such criteria and objectives as the
Committee may select from time to time, including, without limitation, the
performance of the participant, the Company, one or more of its Subsidiaries or
divisions or any combination of the foregoing. During any performance cycle,
the Committee shall have the authority to adjust the performance goals and
objectives for such cycle for such reasons as it deems equitable.
-10-
<PAGE>
The Committee shall determine the portion of each performance award
that is earned by a participant on the basis of the Company's performance over
the performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in Shares, cash, Other
Company Securities, or any combination thereof, as the Committee may determine.
A participant must be a director, officer or employee of the Company
or its Subsidiaries at the end of the performance cycle in order to be entitled
to payment of a performance award issued in respect of such cycle; provided,
however, that, except as otherwise determined by the Committee, if a participant
ceases to be a director, officer or employee of the Company and its Subsidiaries
prior to the end of the performance cycle and if such cessation occurs due to
termination within one year after a Change in Control or due to death,
Disability or Retirement, the participant shall earn a proportionate portion of
the performance award based upon the elapsed portion of the performance cycle
and the Company's performance over that portion of such cycle.
10. Withholding Taxes.
-----------------
(a) Participant Election. Unless otherwise determined by the Committee, a
--------------------
participant may elect to deliver shares of Common Stock (or have the Company
withhold shares acquired upon exercise of an option or SAR or deliverable upon
grant or vesting of restricted stock, as the case may be) to satisfy, in whole
or in part, the amount the Company is required to withhold for taxes in
connection with the exercise of an option or SAR or the delivery of restricted
stock upon grant or vesting, as the case may be. Such election must be made on
or before the date the amount of tax to be withheld is determined. Once made,
the election shall be irrevocable. The fair market value of the shares to be
withheld or delivered will be the Fair Market Value as of the date the amount of
tax to be withheld is determined. In the event a participant elects to deliver
shares of Common Stock pursuant to this Section 10(a), such delivery must be
made subject to the conditions and pursuant to the procedures set forth in
Section 6(b) with respect to the delivery of Common Stock in payment of the
exercise price of options.
(b) Company Requirement. The Company may require, as a condition to any
-------------------
grant or exercise under the Plan or to the delivery of certificates for Shares
issued hereunder, that the grantee make provision for the payment to the
Company, either pursuant to Section 10(a) or this Section 10(b), of any foreign,
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant or any delivery of Shares. The Company, to the extent
permitted or required by law, shall have the right to deduct from any payment of
any kind (including salary or bonus) otherwise due to a grantee, an amount equal
to any foreign, federal, state or local taxes of any kind required by law to be
withheld with respect to any grant or to the delivery of Shares under the Plan,
or to retain or sell without notice a sufficient number of the Shares to be
issued to such grantee to cover any such taxes, the payment of which has not
otherwise been provided for in accordance with the terms of the Plan, provided
that the Company shall not sell any such Shares if such sale would be considered
a sale by such grantee for purposes of Section 16 of the Exchange Act that is
not exempt from matching thereunder.
-11-
<PAGE>
11. Written Agreement; Vesting.
--------------------------
Each employee to whom a grant is made under the Plan shall enter into
a written agreement with the Company that shall contain such provisions,
including, without limitation, vesting requirements, consistent with the
provisions of the Plan, as may be approved by the Committee. Unless the
Committee determines otherwise and except as otherwise provided in Sections 6,
7, 8 and 9 in connection with a Change in Control or certain occurrences of
termination, no grant under this Plan may be exercised, and no restrictions
relating thereto may lapse, within six months of the date such grant is made.
12. Transferability.
---------------
Unless the Committee determines otherwise, no option, SAR, performance
award, or restricted stock granted under the Plan shall be transferable by a
participant otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code. Unless
the Committee determines otherwise, an option, SAR or performance award may be
exercised only by the optionee or grantee thereof or his guardian or legal
representative; provided that Incentive Stock Options may be exercised by such
guardian or legal representative only if permitted by the Code and any
regulations promulgated thereunder.
13. Listing, Registration and Qualification.
---------------------------------------
If the Committee determines that the listing, registration or
qualification upon any securities exchange or under any law of Shares subject to
any option, SAR, performance award or restricted stock grant is necessary or
desirable as a condition of, or in connection with, the granting of same or the
issue or purchase of Shares thereunder, no such option or SAR may be exercised
in whole or in part, no such performance award may be paid out and no Shares may
be issued unless such listing, registration or qualification is effected free of
any conditions not acceptable to the Committee.
It is the intent of the Company that awards made hereunder comply in
all respects with Rule 16b-3 under the Exchange Act, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect to
such intention.
14. Transfer of Employee.
--------------------
The transfer of an employee from the Company to a Subsidiary, from a
Subsidiary to the Company, or from one Subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a termination
of employment if an employee is placed on military or sick leave or such other
leave of absence which is considered by the Committee as continuing intact the
employment relationship.
-12-
<PAGE>
15. Adjustments.
-----------
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other change in the corporate structure or shares of the Company, the
Committee shall make such adjustment as it deems appropriate in the number and
kind of Shares or other property reserved for issuance under the Plan, in the
number and kind of Shares or other property covered by grants previously made
under the Plan, and in the exercise price of outstanding options and SARs. Any
such adjustment shall be final, conclusive and binding for all purposes of the
Plan. In the event of any merger, consolidation or other reorganization in
which the Company is not the surviving or continuing corporation or in which a
Change in Control is to occur, all of the Company's obligations regarding
options, SARs performance awards and restricted stock that were granted
hereunder and that are outstanding on the date of such event shall, on such
terms as may be approved by the Committee prior to such event, be assumed by the
surviving or continuing corporation or canceled in exchange for property
(including cash).
Without limitation of the foregoing, in connection with any
transaction of the type specified by clause (iii) of the definition of a Change
in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any
or all outstanding options under the Plan in consideration for payment to the
holders thereof of an amount equal to the portion of the consideration that
would have been payable to such holders pursuant to such transaction if their
options had been fully exercised immediately prior to such transaction, less the
aggregate exercise price that would have been payable therefor, or (ii) if the
amount that would have been payable to the option holders pursuant to such
transaction if their options had been fully exercised immediately prior thereto
would be less than the aggregate exercise price that would have been payable
therefor, cancel any or all such options for no consideration or payment of any
kind. Payment of any amount payable pursuant to the preceding sentence may be
made in cash or, in the event that the consideration to be received in such
transaction includes securities or other property, in cash and/or securities or
other property in the Committee's discretion.
16. Termination and Modification of the Plan.
----------------------------------------
The Board of Directors or the Committee, without approval of the
stockholders, may modify or terminate the Plan, except that no modification
shall become effective without prior approval of the stockholders of the Company
if stockholder approval would be required for any listing requirement of the
principal stock exchange on which the Common Stock is then listed.
17. Amendment or Substitution of Awards under the Plan.
--------------------------------------------------
The terms of any outstanding award under the Plan may be amended from
time to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of exercise
of any award and/or payments thereunder or of the date of lapse of restrictions
on Shares); provided that, except as otherwise provided in Section 15, no such
amendment shall adversely affect in a material manner any right of a participant
under the award without his or her written consent. The Committee may, in its
discretion, permit holders of
-13-
<PAGE>
awards under the Plan to surrender outstanding awards in order to exercise or
realize rights under other awards, or in exchange for the grant of new awards,
or require holders of awards to surrender outstanding awards as a condition
precedent to the grant of new awards under the Plan.
18. Commencement Date; Termination Date.
-----------------------------------
The date of commencement of the Plan shall be _______ __, 1998,
subject to approval by the shareholders of the Company. Unless previously
terminated upon the adoption of a resolution of the Board terminating the Plan,
the Plan shall terminate at the close of business on June __, 2008; provided
that the Board may, prior to such termination, extend the term of the Plan for
up to five years for the grant of awards other than Incentive Stock Options. No
termination of the Plan shall materially and adversely affect any of the rights
or obligations of any person, without his or her consent, under any grant of
options or other incentives theretofore granted under the Plan.
19. Governing Law. The Plan shall be governed by the corporate laws of the
-------------
State of Delaware without giving effect to any choice of law provisions.
-14-
<PAGE>
EXHIBIT 10.27
FORM OF
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION)
This Stock Option Agreement (this "Agreement"), is dated as of
_______________, by and between Hines Horticulture, Inc., a Delaware corporation
(the "Company"), and the officer or employee of the Company listed on the
-------
signature page hereto (the "Optionee").
--------
Pursuant to the Company's 1998 Long-Term Equity Incentive Plan (the
"Plan"), the Company and the Optionee desire to enter into an agreement to
----
evidence the grant by the Company to the Optionee of an option (the "Option") to
------
acquire that number of shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), listed on the signature page hereto (the "Option
------------ ------
Shares"). Certain terms used herein are defined in paragraph 9 below.
- ------
The parties hereto hereby agree as follows:
1. Option.
------
(a) Term. Subject to the terms and conditions set forth herein, the
----
Company hereby grants to the Optionee (or such other persons as permitted by
paragraph 5) an Option to purchase the Option Shares at a price per share equal
to that amount listed on the signature page hereto (the "Exercise Price"),
--------------
payable upon exercise as set forth in paragraph 1(b) below. The Option shall
expire at the close of business on the tenth anniversary of the Grant Date (the
"Expiration Date"), subject to earlier expiration as provided in paragraph 3(b)
---------------
below should the Optionee cease to be an officer or employee of the Company or a
Subsidiary. The Exercise Price and the number and kind of shares of Common
Stock or other property for which the Option may be exercised shall be subject
to adjustment as provided in paragraph 10 below. The Option is intended to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Code.
(b) Payment of Option Price. Subject to paragraph 2 below, the Option
-----------------------
may be exercised in whole or in part upon payment of an amount (the "Option
------
Price") equal to the product of (i) the Exercise Price and (ii) the number of
- -----
Option Shares to be acquired. Payment of the Option Price shall be made (i) in
cash (including check, bank draft or money order), (ii) by delivery of
outstanding shares of Common Stock with a Fair Market Value on the date of
exercise equal to the Option Price, (iii) by simultaneous sale through a broker
reasonably acceptable to the Committee of Option Shares acquired on exercise, as
permitted under Regulation T of the Federal Reserve Board, (iv) by authorizing
the Company to withhold from issuance a number of Option Shares issuable upon
exercise of the Option which, when multiplied by the Fair Market Value of a
share of Common Stock on the date of exercise, is equal to the Option Price or
(v) by any combination of the foregoing.
2. Exercisability/Vesting.
----------------------
(a) Normal Vesting. The Option granted hereunder may be exercised
--------------
only to the extent it has become vested. The Option shall vest daily from the
Grant Date for so long as the
<PAGE>
Optionee is an officer or employee of the Company or a Subsidiary, and shall
become fully vested on the fourth anniversary of the Grant Date.
(b) Effect on Vesting in Case of Employment Termination.
---------------------------------------------------
Notwithstanding paragraph 2(a) above, the following special vesting rules shall
apply if the Optionee's employment with the Company terminates prior to the
Option becoming fully vested:
(i) Death or Disability. If the Optionee dies or becomes
-------------------
subject to a Disability while an officer or employee of the Company or a
Subsidiary, then the Option shall be vested and become fully exercisable as
to all of the Option Shares.
(ii) Retirement. If an Optionee ceases to be an officer or
----------
employee of the Company or a Subsidiary upon the occurrence of his or her
Retirement, then any portion of the Option which has not yet vested or
become exercisable shall be forfeited immediately upon such Retirement;
provided, however, that such options may become fully vested and
exercisable in the discretion of the Committee.
(iii) Discharge for Cause. If an Optionee ceases to be an
-------------------
officer or employee of the Company or a Subsidiary due to Cause, all of the
participant's options and SARs shall be forfeited immediately upon such
cessation, whether or not then exercisable.
(iv) Other Termination of Employment. Unless otherwise
-------------------------------
determined by the Committee, if the Optionee ceases to be an officer or
employee of the Company or a Subsidiary other than by death, Disability,
Retirement or discharge for Cause, the Option shall be vested and fully
exercisable with respect to that portion of the Option that was vested and
exercisable on the date the Optionee ceased to be an officer or employee of
the Company or a Subsidiary and any portion of the Option that was not
vested and exercisable on such date shall expire and be forfeited.
(c) Change in Control. If there is a Change in Control and an
-----------------
Optionee is terminated from being an officer or employee of the Company or a
Subsidiary within one year thereafter other than for Cause, the Option shall be
vested and become fully exercisable as to all of the Option Shares immediately
prior to such termination and shall remain so for one year after the date of
termination.
3. Expiration of Option.
--------------------
(a) Normal Expiration. In no event shall any part of the Option be
-----------------
exercisable after the Expiration Date set forth in paragraph 1(a) above.
(b) Early Expiration Upon Termination of Employment. Any portion of
-----------------------------------------------
the Option that was not vested and exercisable on the date the Optionee ceased
to be an officer or employee of the Company or a Subsidiary shall expire and be
forfeited on such date (after giving effect to the vesting provisions of
paragraphs 2(b) and 2(c) above), and any portion of the Option that was vested
and exercisable on the date the Optionee ceased to be an officer or employee of
the Company or a Subsidiary shall also expire and be forfeited; provided that
(i) if the Optionee dies or
2
<PAGE>
becomes subject to a Disability, the Option shall expire one year from the date
of such death or Disability, but in no event after the Expiration Date; provided
that, notwithstanding the foregoing, if the Disability giving rise to the
termination of employment is not a disability within the meaning of Section
22(e)(3) of the Code and the Option is not exercised by the Optionee within 90
days after the date of termination of employment, the Option will cease to
qualify as Incentive Stock Option and will be treated as Nonqualified Stock
Options under the Plan if required to be so treated under the Code, (ii) if the
Optionee ceases to be an officer or employee of the Company or a Subsidiary due
to Retirement, the portion of the Option that is vested and exercisable shall
expire at the end of a period of up to three years from the date of such
Retirement, but in no event after the Expiration Date; provided that the
participant does not engage in Competition during such three-year period unless
she or he receives written consent to do so from the Board or the Committee, and
(iii) if the Optionee is discharged other than for Cause, the portion of the
Option that is vested and exercisable shall expire 90 days from the date of such
discharge, but in no event after the Expiration Date; provided that the Optionee
does not engage in Competition during such 90-day period unless he or she
receives written consent to do so from the Board or the Committee. If the
Optionee is discharged for Cause, all of the Option not previously exercised
shall expire and be forfeited whether exercisable or not.
4. Procedure for Exercise. The Optionee may exercise all or any
----------------------
portion of the Option, to the extent it has vested and is outstanding, at any
time and from time to time prior to the Expiration Date, by delivering written
notice to the Company in the form attached hereto as Exhibit A together with
---------
payment of the Option Price in accordance with the provisions of paragraph 1(b)
above. The Option may not be exercised for a fraction of an Option Share.
5. Transferability of Option. The Option granted hereunder may be
-------------------------
transferred by the Optionee only by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code.
Unless the context otherwise requires, references herein to the Optionee are
deemed to include any permitted transferee under this paragraph 5. Unless the
Committee determines otherwise, during the Optionee's lifetime, only the
Optionee (or his or her guardian or legal representative) or his or her
permitted transferee may exercise the Option. In the event of the Optionee's
death, the Option (to the extent still held by the Optionee at such time) may be
exercised only (i) by the executor or administrator of the Optionee's estate or
the person or persons to whom his or her rights under the Option shall pass by
will or the laws of descent and distribution and (ii) to the extent that the
Optionee was entitled hereunder at the date of the Optionee's death.
6. Conformity with Plan. The Option is intended to conform in all
--------------------
respects with, and is subject to all applicable provisions of, the Plan (which
is incorporated herein by reference). Inconsistencies between this Agreement and
the Plan shall be resolved in accordance with the terms of the Plan. By
executing and returning the enclosed copy of this Agreement, the Optionee
acknowledges his or her receipt of this Agreement and the Plan and agrees to be
bound by all of the terms of this Agreement and the Plan.
7. Rights of Participants. Nothing in this Agreement shall
----------------------
interfere with or limit in any way the right of the Company to terminate the
Optionee's employment at any time (with or without Cause), nor confer upon the
Optionee any right to continue in the employ of the Company
3
<PAGE>
or a Subsidiary for any period of time or to continue his or her present (or any
other) rate of compensation, and in the event of termination of employment
(including, but not limited to, termination by the Company without Cause) any
portion of the Option that was not previously vested and exercisable shall
expire and be forfeited (other than termination due to death, Disability or
Retirement). Nothing in this Agreement shall confer upon the Optionee any right
to be selected again as a Plan participant, and nothing in the Plan or this
Agreement shall provide for any adjustment to the number of Option Shares
subject to the Option upon the occurrence of subsequent events except as
provided in paragraph 10 below.
8. Withholding of Taxes.
--------------------
(a) Participant Election. A participant may elect to deliver shares of
--------------------
Common Stock (or have the Company withhold Option Shares acquired upon exercise
of the Option to satisfy, in whole or in part, the amount the Company is
required to withhold for taxes in connection with the exercise of the Option.
Such election must be made on or before the date the amount of tax to be
withheld is determined. Once made, the election shall be irrevocable. The fair
market value of the shares to be withheld or delivered will be the Fair Market
Value as of the date the amount of tax to be withheld is determined.
(b) Company Requirement. The Company, to the extent permitted or
-------------------
required by law, shall have the right to deduct from any payment of any kind
(including salary or bonus) otherwise due to the Optionee, an amount equal to
any foreign, federal, state or local taxes of any kind required by law to be
withheld with respect to the delivery of Option Shares under this Agreement, or
to retain or sell without notice a sufficient number of the Option Shares to be
issued to the Optionee to cover any such taxes, the payment of which has not
otherwise been provided for in accordance with the terms of the Plan, provided
that the Company shall not sell any such Option Shares if such sale would be
considered a sale by such Optionee for purposes of Section 16 of the Exchange
Act that is not exempt from matching thereunder.
9. Certain Definitions. For the purposes of this Agreement, the
-------------------
following terms shall have the meanings set forth below:
"Board" means the Board of Directors of the Company.
-----
"Cause" shall mean the occurrence of one of the following events:
-----
(i) Conviction of a felony or any crime or offense lesser than
a felony involving the property of the Company or a Subsidiary; or
(ii) Conduct that has caused demonstrable and serious injury to
the Company or a Subsidiary, monetary or otherwise; or
(iii) Willful refusal to perform or substantial disregard of
duties properly assigned, as determined by the Company; or
4
<PAGE>
(iv) Breach of duty of loyalty to the Company or a Subsidiary
or other act of fraud or dishonesty with respect to the Company or a Subsidiary.
"Change in Control" means the occurrence of one of the following
-----------------
events:
(i) if any "person" or "group" as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act, other than an Exempt Person, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding securities;
or
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board and any new directors
whose election by the Board or nomination for election by the Company's
stockholders was approved by at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election was previously so approved, cease for any reason to constitute a
majority thereof;
or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) by which the corporate
existence of the Company is not affected and following which the Company's chief
executive officer and directors retain their positions with the Company (and
constitute at least a majority of the Board); or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets, other than a
sale to an Exempt Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
any successor statute.
"Committee" shall mean the Compensation Committee of the Board.
---------
"Common Stock" shall mean the Common Stock, par value $.01 per share,
------------
of the Company, and any other shares into which such stock may be changed by
reason of a recapitalization, reorganization, merger, consolidation or any other
change in the corporate structure or capital stock of the Company.
"Company" shall mean Hines Horticulture, Inc., a Delaware corporation,
-------
and (except to the extent the context requires otherwise) any subsidiary
corporation of the Company as such term is defined in Section 424(f) of the
Code.
5
<PAGE>
"Competition" shall be deemed to occur if a person whose employment
-----------
with the Company or a Subsidiary has terminated obtains a position as a full-
time or part-time officer or employee of, as a member of the board of directors
of, or as a consultant or advisor with or to, or acquires an ownership interest
in excess of 5% of, a corporation, partnership, firm or other entity that
engages in any of the businesses of the Company or any Subsidiary with which the
person was involved in a management role at any time during his or her last five
years of employment with or other service for the Company or any Subsidiary.
"Disability" shall mean a disability that would entitle an eligible
----------
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and any successor statute.
"Fair Market Value" of a share of Common Stock of the Company shall
-----------------
mean, as of the date in question, the officially-quoted opening selling price of
the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for the
date in question or, if the Common Stock is not then listed or quoted in the
Market, the Fair Market Value shall be the fair value of the Common Stock
determined in good faith by the Board; provided, however, that when shares
received upon exercise of an option are immediately sold in the open market, the
net sale price received may be used to determine the Fair Market Value of any
shares used to pay the exercise price or withholding taxes and to compute the
withholding taxes.
"Grant Date" shall mean the date of this Agreement.
----------
"Incentive Stock Option" shall mean an option conforming to the
----------------------
requirements of Section 422 of the Code and any successor thereto.
"Nonqualified Stock Option" shall mean any stock option other than an
-------------------------
Incentive Stock Option.
"Option Shares" shall mean (i) all shares of Common Stock issued or
-------------
issuable upon the exercise of the Option and (ii) all shares of Common Stock
issued with respect to the Common Stock referred to in clause (i) above by way
of stock dividend or stock split or in connection with any conversion, merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock.
"Retirement" shall mean retirement as defined under any Company
----------
pension plan or retirement program or termination of one's employment on
retirement with the approval of the Committee.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and any successor statute.
6
<PAGE>
"Subsidiary" shall mean a corporation or other entity of which
----------
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
10. Adjustments. In the event of a reorganization, recapitalization,
-----------
stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee shall, in order to prevent the dilution
or enlargement of rights under the Option, make such adjustments in the number
and type of shares authorized by the Plan, the number and type of shares covered
by the Option and the Exercise Price specified herein as may be determined to be
appropriate and equitable.
11. Termination and Modification of the Plan. The Board of Directors
----------------------------------------
or the Committee, without approval of the stockholders, may modify or terminate
the Plan, except that no modification shall become effective without prior
approval of the stockholders of the Company if stockholder approval would be
required for continued compliance with any listing requirement of the principal
stock exchange on which the Common Stock is then listed.
12. Remedies. The parties hereto shall be entitled to enforce their
--------
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto acknowledge and agree that money
damages would not be an adequate remedy for any breach of the provisions of this
Agreement and that any party hereto may, in its sole discretion, apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.
13. Amendment. Except as otherwise provided in the Plan, any
---------
provision of this Agreement may be amended or waived only with the prior written
consent of the Optionee and the Committee.
14. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and permitted assigns of the parties hereto whether so
expressed or not.
15. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
16. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, each of which shall constitute an original, but all of
which taken together shall constitute one and the same Agreement.
7
<PAGE>
17. Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
18. Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION,
-------------
ADMINISTRATION AND EFFECT OF THE PLAN, AND OF ITS RULES AND REGULATIONS, AND
RIGHTS RELATING TO THE PLAN AND TO THIS AGREEMENT, SHALL BE GOVERNED BY THE
SUBSTANTIVE LAWS, BUT NOT THE CHOICE OF LAW RULES, OF THE STATE OF DELAWARE.
19. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
or mailed by certified or registered mail, return receipt requested and postage
prepaid, to the recipient. Such notices, demands and other communications shall
be sent to the Optionee at the address appearing on the signature page to this
Agreement and to the Company at Hines Horticulture, Inc., 12621 Jeffrey Road,
Irvine, California 92620, Attn: Chief Financial Officer, or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
20. Entire Agreement. This Agreement and the terms of the Plan
----------------
constitute the entire understanding between the Optionee and the Company, and
supersede all other agreements, whether written or oral, with respect to the
acquisition by the Optionee of the Option Shares.
* * * * *
8
<PAGE>
SIGNATURE PAGE TO STOCK OPTION AGREEMENT
IN WITNESS WHEREOF, the parties have executed this Agreement on ___________
to reflect the grant which was authorized on the day as first above written.
HINES HORTICULTURE, INC.
By:__________________________________
Name:_______________________________
Title:______________________________
OPTIONEE:
_____________________________________
Name:
Address (please print):
_____________________________________
_____________________________________
Number of Option Shares:_____________
Exercise Price:______________________
<PAGE>
EXHIBIT A
FORM OF LETTER TO BE USED TO EXERCISE INCENTIVE STOCK OPTION
___________
Date
Hines Horticulture, Inc.
12621 Jeffrey Road
Irvine, California 92620
Attention: Chief Financial Officer
I wish to exercise the stock option granted on ___________ and evidenced by
a Stock Option Agreement dated as of _________________, to acquire __________
shares of Common Stock of Hines Horticulture, Inc., at an option price of
$_______ per share. In accordance with the provisions of paragraph 1 of the
Stock Option Agreement, I wish to make payment of the exercise price (please
check all that apply):
[_] in cash
[_] by delivery of shares of Common Stock held by me
[_] by simultaneous sale through a broker of Option Shares
[_] by authorizing the Company to withhold Option Shares
Please issue a certificate for these shares in the following name:
______________________________
Name
______________________________
Address
______________________________
Very truly yours,
____________________________
Signature
____________________________
Typed or Printed Name
____________________________
Social Security Number
<PAGE>
EXHIBIT 10.28
FORM OF
STOCK OPTION AGREEMENT
(NONQUALIFIED STOCK OPTION)
This Stock Option Agreement (this "Agreement), is dated as of
________________, by and between Hines Horticulture, Inc., a Delaware
corporation (the "Company"), and the employee, director or officer of the
-------
Company listed on the signature page hereto (the "Optionee").
--------
Pursuant to the Company's 1998 Long-Term Equity Incentive Plan (the
"Plan"), the Company and the Optionee desire to enter into an agreement to
----
evidence the grant by the Company to the Optionee of an option (the "Option") to
------
acquire that number of shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), listed on the signature page hereto (the "Option
------------ ------
Shares"). Certain terms used herein are defined in paragraph 9 below.
- ------
The parties hereto hereby agree as follows:
1. Option.
------
(a) Term. Subject to the terms and conditions set forth herein, the
----
Company hereby grants to the Optionee (or such other persons as permitted by
paragraph 5) an Option to purchase the Option Shares at a price per share equal
to that amount listed on the signature page hereto (the "Exercise Price"),
--------------
payable upon exercise as set forth in paragraph 1(b) below. The Option shall
expire at the close of business on the tenth anniversary of the Grant Date (the
"Expiration Date"), subject to earlier expiration as provided in paragraph 3(b)
---------------
below should the Optionee cease to be an employee, officer or director of the
Company or a Subsidiary. The Exercise Price and the number and kind of shares
of Common Stock or other property for which the Option may be exercised shall be
subject to adjustment as provided in paragraph 10 below. The Option is not
intended to be an "incentive stock option" within the meaning of Section 422 of
the Code.
(b) Payment of Option Price. Subject to paragraph 2 below, the Option
-----------------------
may be exercised in whole or in part upon payment of an amount (the "Option
------
Price") equal to the product of (i) the Exercise Price and (ii) the number of
- -----
Option Shares to be acquired. Payment of the Option Price shall be made (i) in
cash (including check, bank draft or money order), (ii) by delivery of
outstanding shares of Common Stock with a Fair Market Value on the date of
exercise equal to the Option Price, (iii) by simultaneous sale through a broker
reasonably acceptable to the Committee of Option Shares acquired on exercise, as
permitted under Regulation T of the Federal Reserve Board, (iv) by authorizing
the Company to withhold from issuance a number of Option Shares issuable upon
exercise of the Option which, when multiplied by the Fair Market Value of a
share of Common Stock on the date of exercise, is equal to the Option Price or
(v) by any combination of the foregoing.
2. Exercisability/Vesting.
----------------------
(a) Normal Vesting. The Option granted hereunder may be exercised
--------------
only to the extent it has become vested. The Option shall vest daily from the
Grant Date for so long as the
<PAGE>
Optionee is an employee, director or officer of the Company or a Subsidiary, and
shall become fully vested on the fourth anniversary of the Grant Date.
(b) Effect on Vesting in Case of Employment Termination.
---------------------------------------------------
Notwithstanding paragraph 2(a) above, the following special vesting rules shall
apply if the Optionee's employment with the Company terminates prior to the
Option becoming fully vested:
(i) Death or Disability. If the Optionee dies or becomes
-------------------
subject to a Disability while an employee, director or officer of the
Company or a Subsidiary, then the Option shall be vested and become fully
exercisable as to all of the Option Shares.
(ii) Retirement. If an Optionee ceases to be an employee,
----------
director or officer of the Company or a Subsidiary upon the occurrence of
his or her Retirement, then any portion of the Option which has not yet
vested or become exercisable shall be forfeited immediately upon such
Retirement; provided, however, that such options may become fully vested
and exercisable in the discretion of the Committee.
(iii) Discharge for Cause. If an Optionee ceases to be a
-------------------
director, officer or employee of the Company or a Subsidiary due to Cause,
all of the participant's options and SARs shall be forfeited immediately
upon such cessation, whether or not then exercisable.
(iv) Other Termination of Employment. Unless otherwise
-------------------------------
determined by the Committee, if the Optionee ceases to be an employee,
director or officer of the Company or a Subsidiary other than by death,
Disability, Retirement or discharge for Cause, the Option shall be vested
and fully exercisable with respect to that portion of the Option that was
vested and exercisable on the date the Optionee ceased to be an employee,
director or officer of the Company or a Subsidiary and any portion of the
Option that was not vested and exercisable on such date shall expire and be
forfeited.
(c) Change in Control. If there is a Change in Control and an
-----------------
Optionee is terminated from being a director, officer or employee of the Company
or a Subsidiary within one year thereafter other than for Cause, the Option
shall be vested and become fully exercisable as to all of the Option Shares
immediately prior to such termination and shall remain so for one year after the
date of termination.
3. Expiration of Option.
--------------------
(a) Normal Expiration. In no event shall any part of the Option be
-----------------
exercisable after the Expiration Date set forth in paragraph 1(a) above.
(b) Early Expiration Upon Termination of Employment. Any portion of
-----------------------------------------------
the Option that was not vested and exercisable on the date the Optionee ceased
to be an employee, officer or director of the Company or a Subsidiary shall
expire and be forfeited on such date (after giving effect to the vesting
provisions of paragraphs 2(b) and 2(c) above), and any portion of the Option
that was vested and exercisable on the date the Optionee ceased to be an
employee, officer or director of the Company or a Subsidiary shall also expire
and be forfeited; provided that (i) if the
2
<PAGE>
Optionee dies or becomes subject to a Disability, the Option shall expire one
year from the date of such death or Disability, but in no event after the
Expiration Date, (ii) if the Optionee ceases to be an employee, officer or
director of the Company or a Subsidiary due to Retirement, the portion of the
Option that is vested and exercisable shall expire at the end of a period of up
to three years from the date of such Retirement, but in each case in no event
after the Expiration Date; provided that the participant does not engage in
Competition during such three-year period unless she or he receives written
consent to do so from the Board or the Committee, and (iii) if the Optionee is
discharged other than for Cause, the portion of the Option that is vested and
exercisable shall expire 90 days from the date of such discharge, but in no
event after the Expiration Date; provided that the Optionee does not engage in
Competition during such 90-day period unless he or she receives written consent
to do so from the Board or the Committee. If the Optionee is discharged for
Cause, all of the Option not previously exercised shall expire and be forfeited
whether exercisable or not.
4. Procedure for Exercise. The Optionee may exercise all or any
----------------------
portion of the Option, to the extent it has vested and is outstanding, at any
time and from time to time prior to the Expiration Date, by delivering written
notice to the Company in the form attached hereto as Exhibit A together with
---------
payment of the Option Price in accordance with the provisions of paragraph 1(b)
above. The Option may not be exercised for a fraction of an Option Share.
5. Transferability of Option. The Option granted hereunder may be
-------------------------
transferred by the Optionee only by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code.
Unless the context otherwise requires, references herein to the Optionee are
deemed to include any permitted transferee under this paragraph 5. Unless the
Committee determines otherwise, during the Optionee's lifetime, only the
Optionee (or his or her guardian or legal representative) or his or her
permitted transferee may exercise the Option. In the event of the Optionee's
death, the Option (to the extent still held by the Optionee at such time) may be
exercised only (i) by the executor or administrator of the Optionee's estate or
the person or persons to whom his or her rights under the Option shall pass by
will or the laws of descent and distribution and (ii) to the extent that the
Optionee was entitled hereunder at the date of the Optionee's death.
6. Conformity with Plan. The Option is intended to conform in all
--------------------
respects with, and is subject to all applicable provisions of, the Plan (which
is incorporated herein by reference). Inconsistencies between this Agreement and
the Plan shall be resolved in accordance with the terms of the Plan. By
executing and returning the enclosed copy of this Agreement, the Optionee
acknowledges his or her receipt of this Agreement and the Plan and agrees to be
bound by all of the terms of this Agreement and the Plan.
7. Rights of Participants. Nothing in this Agreement shall
----------------------
interfere with or limit in any way the right of the Company to terminate the
Optionee's employment at any time (with or without Cause), nor confer upon the
Optionee any right to continue in the employ, or as a director or officer, of
the Company or a Subsidiary for any period of time or to continue his or her
present (or any other) rate of compensation, and in the event of termination of
employment (including, but not limited to, termination by the Company without
Cause) any portion of the Option that was not previously vested and exercisable
shall expire and be forfeited (other than termination due to death, Disability
or Retirement). Nothing in this Agreement shall confer upon the Optionee any
right to
3
<PAGE>
be selected again as a Plan participant, and nothing in the Plan or this
Agreement shall provide for any adjustment to the number of Option Shares
subject to the Option upon the occurrence of subsequent events except as
provided in paragraph 10 below.
8. Withholding of Taxes.
--------------------
(a) Participant Election. A participant may elect to deliver shares
--------------------
of Common Stock (or have the Company withhold Option Shares acquired upon
exercise of the Option to satisfy, in whole or in part, the amount the Company
is required to withhold for taxes in connection with the exercise of the Option.
Such election must be made on or before the date the amount of tax to be
withheld is determined. Once made, the election shall be irrevocable. The fair
market value of the shares to be withheld or delivered will be the Fair Market
Value as of the date the amount of tax to be withheld is determined.
(b) Company Requirement. The Company, to the extent permitted or
-------------------
required by law, shall have the right to deduct from any payment of any kind
(including salary or bonus) otherwise due to the Optionee, an amount equal to
any foreign, federal, state or local taxes of any kind required by law to be
withheld with respect to the delivery of Option Shares under this Agreement, or
to retain or sell without notice a sufficient number of the Option Shares to be
issued to the Optionee to cover any such taxes, the payment of which has not
otherwise been provided for in accordance with the terms of the Plan, provided
that the Company shall not sell any such Option Shares if such sale would be
considered a sale by such Optionee for purposes of Section 16 of the Exchange
Act that is not exempt from matching thereunder.
9. Certain Definitions. For the purposes of this Agreement, the
-------------------
following terms shall have the meanings set forth below:
"Board" means the Board of Directors of the Company.
-----
"Cause" shall mean the occurrence of one of the following events:
-----
(i) Conviction of a felony or any crime or offense lesser than
a felony involving the property of the Company or a Subsidiary; or
(ii) Conduct that has caused demonstrable and serious injury to
the Company or a Subsidiary, monetary or otherwise; or
(iii) Willful refusal to perform or substantial disregard of
duties properly assigned, as determined by the Company; or
(iv) Breach of duty of loyalty to the Company or a Subsidiary
or other act of fraud or dishonesty with respect to the Company or a Subsidiary.
"Change in Control" means the occurrence of one of the following
-----------------
events:
4
<PAGE>
(i) if any "person" or "group" as those terms are used in Sections
13(d) and 14(d) of the Exchange Act, other than an Exempt Person, is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board and any new directors whose
election by the Board or nomination for election by the Company's stockholders
was approved by at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose election was
previously so approved, cease for any reason to constitute a majority thereof;
or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) by which the corporate
existence of the Company is not affected and following which the Company's chief
executive officer and directors retain their positions with the Company (and
constitute at least a majority of the Board); or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets, other than a sale to
an Exempt Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
any successor statute.
"Committee" shall mean the Compensation Committee of the Board.
---------
"Common Stock" shall mean the Common Stock, par value $.01 per share,
------------
of the Company, and any other shares into which such stock may be changed by
reason of a recapitalization, reorganization, merger, consolidation or any other
change in the corporate structure or capital stock of the Company.
"Company" shall mean Hines Horticulture, Inc., a Delaware corporation,
-------
and (except to the extent the context requires otherwise) any subsidiary
corporation of the Company as such term is defined in Section 424(f) of the
Code.
"Competition" shall be deemed to occur if a person whose employment
-----------
with the Company or a Subsidiary has terminated obtains a position as a full-
time or part-time employee of, as a member of the board of directors of, or as a
consultant or advisor with or to, or acquires an ownership interest in excess of
5% of, a corporation, partnership, firm or other entity that engages in any of
the businesses of the Company or any Subsidiary with which the person was
involved in
5
<PAGE>
a management role at any time during his or her last five years of employment
with or other service for the Company or any Subsidiary.
"Disability" shall mean a disability that would entitle an eligible
----------
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and any successor statute.
"Fair Market Value" of a share of Common Stock of the Company shall
-----------------
mean, as of the date in question, the officially-quoted opening selling price of
the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for the
date in question or, if the Common Stock is not then listed or quoted in the
Market, the Fair Market Value shall be the fair value of the Common Stock
determined in good faith by the Board; provided, however, that when shares
received upon exercise of an option are immediately sold in the open market, the
net sale price received may be used to determine the Fair Market Value of any
shares used to pay the exercise price or withholding taxes and to compute the
withholding taxes.
"Grant Date" shall mean the date of this Agreement.
----------
"Option Shares" shall mean (i) all shares of Common Stock issued or
-------------
issuable upon the exercise of the Option and (ii) all shares of Common Stock
issued with respect to the Common Stock referred to in clause (i) above by way
of stock dividend or stock split or in connection with any conversion, merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock.
"Retirement" shall mean retirement as defined under any Company
----------
pension plan or retirement program or termination of one's employment on
retirement with the approval of the Committee.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and any successor statute.
"Subsidiary" shall mean a corporation or other entity of which
----------
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
10. Adjustments. In the event of a reorganization, recapitalization,
-----------
stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee shall, in order to prevent the dilution
or enlargement of rights under the Option, make such adjustments in the number
and type of shares authorized by the Plan, the number and type of shares covered
by the Option and the Exercise Price specified herein as may be determined to be
appropriate and equitable.
6
<PAGE>
11. Termination and Modification of the Plan. The Board of Directors
----------------------------------------
or the Committee, without approval of the stockholders, may modify or terminate
the Plan, except that no modification shall become effective without prior
approval of the stockholders of the Company if stockholder approval would be
required for continued compliance with any listing requirement of the principal
stock exchange on which the Common Stock is then listed.
12. Remedies. The parties hereto shall be entitled to enforce their
--------
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto acknowledge and agree that money
damages would not be an adequate remedy for any breach of the provisions of this
Agreement and that any party hereto may, in its sole discretion, apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.
13. Amendment. Except as otherwise provided in the Plan, any
---------
provision of this Agreement may be amended or waived only with the prior written
consent of the Optionee and the Committee.
14. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and permitted assigns of the parties hereto whether so
expressed or not.
15. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
16. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, each of which shall constitute an original, but all of
which taken together shall constitute one and the same Agreement.
17. Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
18. Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION,
-------------
ADMINISTRATION AND EFFECT OF THE PLAN, AND OF ITS RULES AND REGULATIONS, AND
RIGHTS RELATING TO THE PLAN AND TO THIS AGREEMENT, SHALL BE GOVERNED BY THE
SUBSTANTIVE LAWS, BUT NOT THE CHOICE OF LAW RULES, OF THE STATE OF DELAWARE.
19. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
or mailed by certified or registered mail,
7
<PAGE>
return receipt requested and postage prepaid, to the recipient. Such notices,
demands and other communications shall be sent to the Optionee at the address
appearing on the signature page to this Agreement and to the Company at Hines
Horticulture, Inc., 12621 Jeffrey Road, Irvine, California 92620, Attn: Chief
Financial Officer, or to such other address or to the attention of such other
person as the recipient party has specified by prior written notice to the
sending party.
20. Entire Agreement. This Agreement and the terms of the Plan
----------------
constitute the entire understanding between the Optionee and the Company, and
supersede all other agreements, whether written or oral, with respect to the
acquisition by the Optionee of the Option Shares.
* * * * *
8
<PAGE>
SIGNATURE PAGE TO STOCK OPTION AGREEMENT
IN WITNESS WHEREOF, the parties have executed this Agreement on ___________
to reflect the grant which was authorized on the day as first above written.
HINES HORTICULTURE, INC.
By:________________________________
Name:_____________________________
Title:____________________________
OPTIONEE:
___________________________________
Name:
Address (please print):
___________________________________
___________________________________
Number of Option Shares:___________
Exercise Price:____________________
<PAGE>
EXHIBIT A
FORM OF LETTER TO BE USED TO EXERCISE NONQUALIFIED STOCK OPTION
___________
Date
Hines Horticulture, Inc.
12621 Jeffrey Road
Irvine, California 92620
Attention: Chief Financial Officer
I wish to exercise the stock option granted on ________ and evidenced by a
Stock Option Agreement dated as of ____________, to acquire __________ shares of
Common Stock of Hines Horticulture, Inc., at an option price of $_______ per
share. In accordance with the provisions of paragraph 1 of the Stock Option
Agreement, I wish to make payment of the exercise price (please check all that
apply):
[_] in cash
[_] by delivery of shares of Common Stock held by me
[_] by simultaneous sale through a broker of Option Shares
[_] by authorizing the Company to withhold Option Shares
Please issue a certificate for these shares in the following name:
______________________________
Name
______________________________
Address
______________________________
Very truly yours,
____________________________
Signature
____________________________
Typed or Printed Name
____________________________
Social Security Number
<PAGE>
EXHIBIT 21.1
------------
LIST OF SUBSIDIARIES OF HINES HORTICULTURE, INC.
The following is a list of subsidiaries of Hines Horticulture, Inc. (the
"Company"). The common stock of all the corporations listed below are wholly
owned, directly or indirectly, by the Company. If indented, the corporation is a
wholly-owned subsidiary of the corporation under which it is listed.
NAME OF CORPORATION JURISDICTION OF INCORPORATION
- ------------------- -----------------------------
Hines Horticulture, Inc. Delaware
Hines II, Inc. Delaware
Lakeland U.S., Inc. Delaware
Lakeland Canada Ltd. Alberta, Canada
Black Gold, Inc. Oregon
Pacific Soil Company Nevada
Sphag Sorb Ltd. Alberta, Canada
Hines Horticulture, Inc. California
Sun Gro Horticulture Inc. Nevada
Sun Gro Horticulture Canada Ltd. Canada
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 16, 1998, except
as to Notes 2 and 22, which are as of May 8, 1998, relating to the financial
statements of Hines Horticulture, Inc. (formerly Hines Holdings, Inc.), which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Price Waterhouse LLP
Costa Mesa, California
June 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 5, 1996 included in Hines Horticulture, Inc.'s (formerly
Hines Holdings, Inc.) financial statements for the year ended December 31,
1995 and to all references to our Firm included in this registration
statement.
Arthur Andersen LLP
Orange County, California
June 12, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 4, 1996 relating
to the financial statements of Sun Gro Horticulture, Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Price Waterhouse LLP
Seattle, Washington
June 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-30-1998
<CASH> 1,816
<SECURITIES> 0
<RECEIVABLES> 102,892
<ALLOWANCES> 1,345
<INVENTORY> 100,662
<CURRENT-ASSETS> 205,937
<PP&E> 139,594
<DEPRECIATION> 22,887
<TOTAL-ASSETS> 367,155
<CURRENT-LIABILITIES> 161,278
<BONDS> 177,317
0
81,245
<COMMON> 105
<OTHER-SE> (65,135)
<TOTAL-LIABILITY-AND-EQUITY> 367,155
<SALES> 108,088
<TOTAL-REVENUES> 108,088
<CGS> 53,531
<TOTAL-COSTS> 29,369
<OTHER-EXPENSES> 8,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,998
<INCOME-PRETAX> 16,758
<INCOME-TAX> 6,777
<INCOME-CONTINUING> 9,981
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,981
<EPS-PRIMARY> .81
<EPS-DILUTED> .73
</TABLE>
