<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998
REGISTRATION NO. 333-51943
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per share..... $99,796,411 $29,440(2)
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) A registration fee in the amount of $27,140 was previously paid by the
registrant in connection with its initial filing on May 6, 1998.
--------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 May 26, 1998
PROSPECTUS
5,423,718 SHARES
[LOGO OF HINES HORTICULTURE, INC.]
COMMON STOCK
-------------
Of the 5,423,718 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 423,718 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.
Application has been made for inclusion of the Company's Common Stock 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>
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- --------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
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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 813,558 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 ALEX. 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 $108.1
</TABLE>
Sales growth is a result of both internal growth and acquisitions.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
[16 Photos of selected products and map showing locations of the Company's
facilities]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise noted or where the context otherwise requires, all information herein
(i) assumes the Underwriters' over-allotment option is not exercised, (ii) has
been adjusted to give effect to the Equity Recapitalization (as defined)
assuming the Equity Recapitalization occurs on June 22, 1998 and (iii) reflects
the planned reincorporation of the Company from Nevada to Delaware and certain
changes to the Company's charter and bylaws to be made in connection therewith
(the "Reincorporation"). References to "Hines" or the "Company" refer to Hines
Horticulture, Inc. and its direct and indirect subsidiaries unless otherwise
stated or the context otherwise requires. References to "Hines Nurseries" refer
to the Company's nursery division, which conducts its operations through Hines
Nurseries, Inc., a wholly-owned subsidiary of the Company ("Hines Nurseries").
References to "Sun Gro" refer to the Company's peat-based products division,
which conducts its operations through Sun Gro Horticulture Inc., a wholly-owned
subsidiary of Hines Nurseries ("Sun Gro-U.S."), and its Canadian subsidiaries.
All references to "dollars" or "$" 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. As part
of the Reincorporation, Hines will become 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................................ 423,718 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."
Proposed 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 ineligible holders of irrigation land from owning the Common Stock,
and thereby protect the Company's ability to receive reclamation water, there
can be no assurance that such provisions will be effective in protecting the
Company's right to continue to use reclamation water. 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, 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 6% 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." Immediately following 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.
As a result of the Reincorporation, which will occur prior to consummation
of the Offering, the Company will become the successor to the business of
Holdings, a company currently subject to the periodic reporting and disclosure
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In the Reincorporation, Holdings will merge with and into the Company,
in order to change the Company's name and jurisdiction of incorporation and to
make certain other changes to the Company's capitalization. See "Description
of Capital Stock."
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
($80.1 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."
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<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 is experiencing some recovery
of sales of both nursery and 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 $5.0 million in 2000,
$7.5 million in 2001, $15.0 million in 2002 and $22.5 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 66% 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 ineligible holders of irrigation land from owning the Common Stock,
and thereby protect the Company's ability to receive reclamation water, there
can be no assurance that such provisions will be effective to protect the
Company's right to continue to use reclamation water. 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
47
<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.
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<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
54
<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.
55
<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 the performance-based compensation exception of Section 162(m) of the
Code or 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
56
<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.
57
<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 amortizing promissory note to OGP in the amount of $826,865
secured by, among other things, a lease on the land. Blooming Farm and OGP
then entered into a five-year agricultural 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
security instruments 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 in the past. As this
additional land caused Hines Nurseries to be over the 640 net irrigable acre
limit for owned land, on June 21,
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<PAGE>
1996, Hines Nurseries sold the 53 acres of agricultural land to Blooming Farm
in exchange for a five-year amortizing Promissory Note in the amount of
$151,050 secured by, among other things, a lease on the land. Blooming Farm
and Hines Nurseries then entered into a five-year agricultural lease pursuant
to which Blooming Farm currently leases the property to Hines Nurseries. Hines
Nurseries subsequently pledged the lease, the note and security instruments as
security under the Existing Senior Credit Facilities.
In connection with Hines Nurseries' acquisition of certain real property in
Allendale, California in July, 1995, 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.
61
<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 * 136,714 -- --
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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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
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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, 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 6% 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.
Application has been made for inclusion of the Common Stock 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 to amend, alter, change or repeal certain of
their respective provisions. This requirement of a super-majority vote to
approve amendments to the Restated Certificate and By-laws could enable a
minority of the Company's stockholders to exercise veto power over any such
amendments.
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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 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
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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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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 813,558 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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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.
Application has been made for inclusion of the Common Stock 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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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 and certain of its
affiliates own a portion of the Senior Subordinated Notes. The Existing Senior
Credit Facility will be repaid and a portion of the Senior Subordinated Notes
will be redeemed with more than 10% of the proceeds from the Offering and the
New Senior Credit Facility. As a result, 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.
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<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 May 22, 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
May 22, 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,423,718 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.......................................... $ 27,140
NASD filing fee............................................... 9,700
Nasdaq National Market fees................................... 58,725
Blue sky fees and expenses (including attorneys' fees and
expenses) ................................................... 10,000
Printing and engraving expenses............................... 200,000
Transfer agent's fees and expenses............................ 15,000
Accounting fees and expenses.................................. 175,000
Legal fees and expenses....................................... 475,000
Miscellaneous expenses........................................ 29,435
----------
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 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 New Senior Credit Facility*
4.4 Registration Rights Agreement 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 Securities Purchase Agreement dated as of February 5, 1998 by
and between the Company and MDCP. (5)
10.25 1998 Long-Term Equity Incentive Plan.*
10.26 Form of Incentive 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).
24.1 Power of Attorney.**
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** 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. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
IRVINE, STATE OF CALIFORNIA ON MAY 25, 1998.
Hines Horticulture, Inc.
/s/ Paul R. Wood
By: _________________________________
Paul R. Wood
President
* * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 TO
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED ON MAY 25, 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. 1 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>
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
May 22, 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
May 22, 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
May 22, 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>
